Liberty Broadband Corporation
Liberty Broadband Corp (Form: 10-Q, Received: 11/04/2016 16:17:30)

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, 2016

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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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 ☐

 

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 31, 2016 was:

 

 

 

 

Series A common stock

 

26,216,022

Series B common stock

 

2,467,509

Series C common stock

 

153,000,247

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

 

 

 

 

 

    

Page No

 

    

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  

 

I-7

 

 

 

 

 

 

 

 

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

 

I-24

 

 

Item 3 .   Quantitative and Qualitative Disclosures about Market Risk

 

I-34

 

 

Item 4 .   Controls and Procedures

 

I-34

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURE  

 

II-3

 

EXHIBIT INDEX  

 

II-4

 

 

 

 

 

 

 

 

 

I-1


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(amounts in thousands)

 

Assets

    

 

    

    

    

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

259,041

 

655,079

 

Trade and other receivables, net

 

 

1,466

 

2,462

 

Short-term marketable securities

 

 

 —

 

9,014

 

Other current assets

 

 

3,318

 

11,692

 

Total current assets

 

 

263,825

 

678,247

 

Investments in available-for-sale securities (note 4)

 

 

 —

 

439,560

 

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

 

 

9,233,197

 

2,372,699

 

Property and equipment, net

 

 

868

 

1,248

 

Goodwill (note 6)

 

 

6,497

 

6,497

 

Intangible assets subject to amortization, net (note 6)

 

 

9,436

 

11,887

 

Deferred income tax assets

 

 

 —

 

55,368

 

Other assets, at cost, net of accumulated amortization

 

 

1,577

 

235

 

Total assets

 

$

9,515,400

 

3,565,741

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

6,635

 

10,493

 

Deferred revenue

 

 

3,902

 

2,629

 

Other current liabilities

 

 

2,289

 

2,254

 

Total current liabilities

 

 

12,826

 

15,376

 

Debt (note 7)

 

 

598,178

 

399,703

 

Deferred income tax liabilities

 

 

477,492

 

 —

 

Deferred revenue

 

 

2,326

 

2,443

 

Total liabilities

 

 

1,090,822

 

417,522

 

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 26,212,441 shares at September 30, 2016 and 26,163,206 shares at December 31, 2015

 

 

262

 

262

 

Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,467,509 shares at September 30, 2016 and 2,467,547 shares at December 31, 2015

 

 

25

 

25

 

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 152,998,895 shares at September 30, 2016 and 74,643,546 shares at December 31, 2015

 

 

1,530

 

746

 

Additional paid-in capital

 

 

7,942,970

 

3,537,848

 

Accumulated other comprehensive earnings, net of taxes

 

 

7,656

 

8,905

 

Retained earnings (accumulated deficit)

 

 

472,135

 

(399,567)

 

Total equity

 

 

8,424,578

 

3,148,219

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

Total liabilities and equity

 

$

9,515,400

 

3,565,741

 

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,

 

 

 

2016

    

2015

    

2016

 

2015

 

 

 

(amounts in thousands, except per share amounts)

 

Revenue

 

$

20,616

 

15,225

 

27,413

 

41,186

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

Operating, including stock-based compensation (note 9)

 

 

782

 

1,090

 

2,099

 

4,447

 

Selling, general and administrative, including stock-based compensation (note 9)

 

 

9,855

 

9,515

 

27,792

 

32,091

 

Research and development, including stock-based compensation (note 9)

 

 

2,384

 

3,512

 

8,040

 

12,888

 

Net gain on legal settlement (note 10)

 

 

 —

 

 —

 

 —

 

(60,505)

 

Depreciation and amortization

 

 

971

 

820

 

2,935

 

4,920

 

 

 

 

13,992

 

14,937

 

40,866

 

(6,159)

 

Operating income (loss)

 

 

6,624

 

288

 

(13,453)

 

47,345

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,090)

 

(1,816)

 

(10,547)

 

(5,496)

 

Dividend and interest income

 

 

190

 

605

 

4,697

 

1,871

 

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

 

 

19,046

 

(3,999)

 

570,178

 

(65,747)

 

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

 

 

 —

 

(23,116)

 

92,990

 

(12,091)

 

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

 

 

(16,331)

 

(851)

 

760,074

 

(2,113)

 

Other, net

 

 

5

 

10

 

112

 

34

 

Net earnings (loss) before income taxes

 

 

5,444

 

(28,879)

 

1,404,051

 

(36,197)

 

Income tax benefit (expense)

 

 

(1,655)

 

9,584

 

(532,349)

 

14,411

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

3,789

 

(19,295)

 

871,702

 

(21,786)

 

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

 

$

0.02

 

(0.19)

 

6.13

 

(0.21)

 

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

 

$

0.02

 

(0.19)

 

6.10

 

(0.21)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-3


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

    

2015

    

2016

 

2015

 

 

 

(amounts in thousands)

 

Net earnings (loss)

    

$

3,789

 

(19,295)

 

871,702

    

(21,786)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

 —

 

(114)

 

(221)

 

(484)

 

Share of other comprehensive earnings (loss) of equity method affiliates

 

 

247

 

327

 

811

 

980

 

Other

 

 

 —

 

 —

 

(1,839)

 

 —

 

Other comprehensive earnings (loss), net of taxes

 

 

247

 

213

 

(1,249)

 

496

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

 

$

4,036

 

(19,082)

 

870,453

 

(21,290)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-4


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2016

 

2015

 

 

 

(amounts in thousands)

 

Cash flows from operating activities:

    

 

    

    

    

 

Net earnings (loss)

 

$

871,702

 

(21,786)

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,935

 

4,920

 

Stock-based compensation

 

 

4,582

 

4,782

 

Share of (earnings) losses of affiliates

 

 

(570,178)

 

65,747

 

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

 

 

(92,990)

 

12,091

 

(Gain) loss on dilution of investment in affiliate

 

 

(760,074)

 

2,113

 

Deferred income tax expense (benefit)

 

 

533,626

 

(26,406)

 

Other, net

 

 

112

 

(2,565)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Current and other assets

 

 

7,954

 

904

 

Payables and other liabilities

 

 

(2,702)

 

11,826

 

Net cash provided by operating activities

 

 

(5,033)

 

51,626

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(154)

 

(2,616)

 

Purchases of short term investments and other marketable securities

 

 

(155,444)

 

 —

 

Sales of short term investments and other marketable securities

 

 

164,458

 

 —

 

Investment in equity method affiliate

 

 

(5,000,000)

 

 —

 

Other investing activities, net

 

 

453

 

112

 

Net cash used in investing activities

 

 

(4,990,687)

 

(2,504)

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash received from rights offering

 

 

 —

 

697,309

 

Borrowings of debt

 

 

200,000

 

40,000

 

Repayments of debt

 

 

 —

 

(40,000)

 

Cash received from issuance of Series C Liberty Broadband common stock

 

 

4,400,000

 

 —

 

Proceeds from issuance of financial instruments

 

 

 —

 

30,158

 

Payments from settlements of financial instruments

 

 

 —

 

(182,192)

 

Other financing activities, net

 

 

(318)

 

4,178

 

Net cash provided by financing activities

 

 

4,599,682

 

549,453

 

Net increase in cash

 

 

(396,038)

 

598,575

 

Cash and cash equivalents, beginning of period

 

 

655,079

 

44,809

 

Cash and cash equivalents, end of period

 

$

259,041

 

643,384

 

 

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

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

earnings

 

 

 

 

 

Preferred

 

Common   stock

 

paid-in

 

comprehensive

 

(accumulated)

 

 

 

 

 

Stock

 

Series A

  

Series B

  

Series C

  

capital

 

earnings

 

deficit

 

Total equity

 

 

 

(amounts in thousands)

 

Balance at January 1, 2016

    

$

 —

 

262

 

25

 

746

 

3,537,848

    

8,905

    

(399,567)

    

3,148,219

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

871,702

 

871,702

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(1,249)

 

 —

 

(1,249)

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

4,002

 

 —

 

 —

 

4,002

 

Issuance of common stock upon exercise of stock options

 

 

 —

 

 —

 

 —

 

1

 

1,976

 

 —

 

 —

 

1,977

 

Issuance of common stock (note 5)

 

 

 —

 

 —

 

 —

 

783

 

4,399,217

 

 —

 

 —

 

4,400,000

 

Other

 

 

 —

 

 —

 

 —

 

 —

 

(73)

 

 —

 

 —

 

(73)

 

Balance at September 30, 2016

 

$

 —

 

262

 

25

 

1,530

 

7,942,970

 

7,656

 

472,135

 

8,424,578

 

 

See accompanying notes to the condensed consolidated financial statements.

 

I-6


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

(1) Basis of Presentation

During May 2014, the board of Liberty Media Corporation and its subsidiaries (“Liberty”) authorized management to pursue a plan to spin-off to its stockholders common stock of a newly formed company to be called Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to distribute subscription rights to acquire shares of Liberty Broadband Series C common stock (the “Broadband Spin-Off”). Liberty Broadband is comprised of, among other things, (i) Liberty’s former interest in Charter Communications, Inc. (“Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc. (“TruePosition”), (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner Cable”), (iv) certain deferred tax liabilities, as well as liabilities related to Time Warner Cable written call options and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off. These financial statements refer to the combination of the aforementioned subsidiary, investments, and financial instruments as “Liberty Broadband,” “the Company,” “us,” “we” and “our” in the notes to the condensed consolidated financial statements.

In the Broadband Spin-Off record holders of Liberty’s former Series A, Series B and Series C common stock received one-fourth of a share of the corresponding series of Liberty Broadband common stock for each share of Liberty common stock held by them, with cash paid in lieu of fractional shares. In addition, following the completion of the Broadband Spin-Off, stockholders received a subscription right to acquire one share of Liberty Broadband Series C common stock for every five shares of Liberty Broadband common stock they held at a per share subscription price of $40.36, which was a 20% discount to the 20-trading day volume weighted average trading price of the Liberty Broadband Series C common stock following the completion of the Broadband Spin-Off. The rights offering was fully subscribed on January 9, 2015, with 17,277,224 shares of Series C common stock issued to those rightsholders exercising basic and, as applicable, oversubscription privileges for total proceeds of $697 million. The subscription rights were issued to raise capital for general corporate purposes of Liberty Broadband. The Broadband Spin-Off and rights offering were intended to be tax-free to stockholders of Liberty and Liberty Broadband, respectively. During September 2015, Liberty entered into a closing agreement with the IRS which provided that the Broadband Spin-Off qualified for tax-free treatment. 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.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2015, 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, 2015. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers (i) the application of the equity method of accounting for investments in affiliates, (ii) the fair value

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

of non-financial instruments, (iii) the fair value of financial instruments, (iv) revenue recognition and (v) accounting for income taxes to be its most significant estimates .

In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The Company adopted this guidance in the third quarter of 2016 .   In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the condensed consolidated statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. Based on the Company’s analysis, no cumulative effect adjustment to retained earnings was necessary for tax benefits that were not previously recognized and for adjustments to compensation cost based on actual forfeitures. The presentation changes for excess tax benefits have been applied retrospectively in the condensed consolidated statements of cash flows, resulting in the reclassification of $1.2 million of excess tax benefits for the nine months ended September 30, 2015, from cash flows from financing activities to cash flows from operating activities. There were no excess tax benefits reclassified for the nine months ended September 30, 2016.

In February 2016, the FASB issued new accounting guidance on lease accounting. This guidance requires a company to recognize lease assets and lease liabilities arising from operating leases in the statement of financial position.  This guidance does not significantly change the previous lease guidance for how a lessee should account for a lease.  Additionally, the criteria for classifying a lease as a finance lease versus an operating lease are substantially the same as the previous guidance.  The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.  We plan to adopt this guidance on January 1, 2019.  Companies are required to use a modified retrospective approach to adopt this guidance.  We are currently evaluating the impact of the adoption of this new guidance on our consolidated financial statements and expect it to have an impact on our consolidated balance sheets.

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company currently does not plan to early adopt this new guidance, is evaluating the effect that the updated standard will have on its revenue recognition, and has not yet selected a transition method.

Liberty Broadband holds an investment 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  

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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.

During 2015, Liberty Broadband entered into certain agreements with Charter, Liberty Interactive Corporation (“Liberty Interactive”) and Time Warner Cable in connection with certain proposed transactions among these companies, which closed during May 2016. See note 5 for additional detail regarding these transactions and corresponding agreements.

Spin-Off Arrangements

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

The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Broadband Spin-Off, certain conditions to the Broadband Spin-Off and provisions governing the relationship between Liberty Broadband and Liberty with respect to and resulting from the Broadband Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and Liberty Broadband and other agreements related to tax matters. Among other things, pursuant to the tax sharing agreement, Liberty Broadband has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the Broadband Spin-Off to the extent such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by Liberty Broadband (applicable to actions or failures to act by Liberty Broadband and its subsidiaries following the completion of the Broadband Spin-Off). Pursuant to the services agreement, Liberty provides Liberty Broadband with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for costs that will be negotiated semi-annually. Under these various agreements, approximately $661 thousand and $656 thousand was reimbursable to Liberty for the three months ended September 30, 2016 and 2015, respectively, and $2.4 million and $1.8 million was reimbursable to Liberty for the nine months ended September 30, 2016 and 2015, respectively. 

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

 

(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 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, 2016

    

September 30, 2015

    

September 30, 2016

    

September 30, 2015

 

 

 

(numbers of shares in thousands)

 

Basic EPS

 

181,621

 

103,024

 

142,170

 

102,140

 

Potentially dilutive shares (1)

 

970

 

662

 

666

 

630

 

Diluted EPS

 

182,591

 

103,686

 

142,836

 

102,770

 

(1)

Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.

 

 

 

 

(3) Assets and Liabilities Measured at Fair Value

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 2 or Level 3.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

 

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

 

$

251,225

 

251,225

 

 —

 

639,956

 

639,956

 

 —

 

Short-term marketable securities

 

$

 —

 

 —

 

 —

 

9,014

 

9,014

 

 —

 

Available-for-sale securities

    

$

 —

    

 —

    

 —

    

439,560

    

439,560

    

 —

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Other Financial Instruments

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

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(amounts in thousands)

 

Time Warner Cable investment and financial instruments (1)(2)(3)

 

$

 —

 

(23,116)

 

 

92,990

 

(12,091)

 

 

 

$

 —

 

(23,116)

 

 

92,990

 

(12,091)

 


(1)

During the period ended September 30, 2015 the Company had an outstanding written call option on 625,000 Time Warner Cable shares which was cash settled during June 2015 for $48.3 million. Also during the period ended September 30, 2015 the Company had an additional outstanding written call option on 625,000 Time Warner Cable shares which was cash settled during April 2015 for $36.7 million. No written call options on Time Warner Cable shares were outstanding as of September 30, 2016 or December 31, 2015. The unrealized gain during the nine months ended September 30, 2016 is due to an increase in the Time Warner Cable stock price during the period.

(2)

On March 27, 2015, Liberty Broadband entered into a cashless collar agreement with a financial institution on 1.7 million Time Warner Cable shares held by the Company. The collar was originally scheduled to expire during March 2017. The Company unwound the agreement during July 2015 for $67.1 million cash paid to the counterparty. In connection with this collar agreement, the Company also entered into a revolving loan agreement with an availability of $234 million, which was terminated upon unwinding of the collar agreement during July 2015 (note 7).

(3)

As discussed in note 5, Time Warner Cable merged with Charter on May 18, 2016.  Therefore the Company no longer has an investment in Time Warner Cable as of May 18, 2016 , and the unrealized gain (loss) related to our investment in Time Warner Cable is recorded through this date. In connection with the merger, the Company exchanged, in a tax-free transaction, its shares of Time Warner Cable for shares of New Charter (as defined in note 5) Class A common stock .

 

 

(4) Investments in Available-for-Sale Securities

All marketable equity and debt securities held by the Company are classified as available-for-sale (“AFS”) and are carried at fair value generally based on quoted market prices. GAAP permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity’s statements of operations. The Company has elected to account for those of its AFS securities which it considers to be nonstrategic (“Fair Value Option Securities”) at fair value. Accordingly, changes

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

in the fair value of Fair Value Option Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statements of operations.

Investments in AFS securities, including our formerly held interest in Time Warner Cable which was our only Fair Value Option Security, are summarized as follows:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(amounts in thousands)

 

Time Warner Cable (1)

 

$

 —

 

438,912

 

Other equity securities

 

 

 —

 

648

 

Total investments in available-for-sale securities

 

$

 —

 

439,560

 


(1)

As discussed in note 5, Time Warner Cable merged with Charter on May 18, 2016.  Therefore the Company no longer has an investment in Time Warner Cable as of this date.

Unrealized Holding Gains and Losses

As of December 31, 2015, the gross unrealized holding gain related to investments in AFS securities was $357 thousand. There were no gross unrealized holding gains related to investments in AFS securities as of September 30, 2016. There were no gross unrealized holding losses related to investments in AFS securities for the periods presented.

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

In May 2013, Liberty acquired approximately 26.9 million shares of common stock and approximately 1.1 million warrants to purchase shares of Charter common stock for approximately $2.6 billion, which represented an approximate 27% beneficial ownership (including the warrants on an as if converted basis) in Charter at the time of purchase and price per share of $95.50. Liberty funded the purchase with a combination of cash on hand of approximately $1.2 billion and new margin loan arrangements. Liberty allocated the purchase price between the shares of common stock and the warrants acquired in the transaction by determining the fair value of the publicly traded warrants and allocating the remaining balance to the shares acquired, which resulted in an initial excess basis in the investment of $2,532 million. The investment in Charter is accounted for as an equity method affiliate based on the ownership interest obtained and the board seats held by individuals appointed by Liberty.

During May 2014, Liberty purchased 897 thousand Charter shares for approximately $124.5 million. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband exercised all of its outstanding warrants to purchase shares of Charter common stock for approximately $52 million.

On May 18, 2016, the previously announced merger of Time Warner Cable and Charter (the “Time Warner Cable Merger”) was completed, which resulted in Charter and Time Warner Cable becoming wholly owned subsidiaries of CCH I, LLC (“New Charter”), which was a subsidiary of Charter at the time. Also on May 18, 2016, the previously announced acquisition of Bright House Networks, LLC (“Bright House”) from Advance/Newhouse Partnership (“A/N”) by New Charter (the “Bright House Transaction”) was completed. In connection with these transactions, Charter underwent a corporate reorganization, resulting in New Charter, a former subsidiary of Charter, becoming the new publicly traded parent company. In connection with the Time Warner Cable Merger and the Bright House Transaction, Liberty Broadband completed the previously announced transactions described below:

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Transactions completed in connection with the Time Warner Cable Merger

Charter Investment Agreement

On May 18, 2016, Liberty Broadband completed its previously announced investment in New Charter in accordance with the investment agreement dated May 23, 2015 by and among Liberty Broadband, Charter and New Charter (the “Charter Investment Agreement”). Pursuant to the Charter Investment Agreement, immediately following the consummation of the Time Warner Cable Merger, Liberty Broadband purchased from New Charter $4.3 billion of shares of New Charter Class A common stock, par value $0.001 per share, at a price per share of $195.70 following adjustment by the applicable exchange ratio. As a result, Liberty Broadband received approximately 22.0 million shares of New Charter Class A common stock. Liberty Broadband funded its purchase of these shares of New Charter Class A common stock with proceeds from the issuance of Liberty Broadband Series C common stock (note 8).  

Charter Contribution Agreement

Also on May 18, 2016, Time Warner Cable common stock held by Liberty Broadband and Liberty Interactive were exchanged, in a tax-free transaction, for shares of New Charter Class A common stock which resulted in each of Liberty Broadband and Liberty Interactive receiving one share of New Charter Class A common stock for each share of Time Warner Cable common stock so exchanged. In the exchange, Liberty Broadband received approximately 2.4 million shares of New Charter Class A common stock, with a fair value of $531.9 million.

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

Transactions Completed in connection with the Bright House Transactions

Second Amended and Restated Stockholders Agreement

On May 18, 2016, pursuant to the Amended and Restated Stockholders Agreement, dated May 23, 2015, as amended (the “Second Amended and Restated Stockholders Agreement”), by and among Liberty Broadband, Charter, New Charter and A/N, upon the closing of the Bright House Transaction, Liberty Broadband purchased from New Charter approximately 3.7 million additional shares of New Charter Class A common stock at a price per share of $191.33 following adjustment by the applicable exchange ratios, for an aggregate purchase price of $700 million. Liberty Broadband funded its $700 million purchase in shares of New Charter through cash on hand and margin loan draws (note 7).

Proxy and Right of First Refusal Agreement

In connection with the Bright House Transaction, on May 18, 2016, A/N and Liberty Broadband entered into a proxy agreement, pursuant to which A/N granted Liberty Broadband a five-year proxy to vote shares of New Charter held by A/N, capped at 7% of New Charter’s outstanding shares. As a result, Liberty Broadband controls 25.01% of the

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

aggregate voting power of New Charter following the completion of the Time Warner Cable Merger and the Bright House Transaction and is New Charter’s largest stockholder.

So long as the proxy is in effect, if A/N proposes to transfer common units of Charter Communications Holdings, LLC (which units are exchangeable into New Charter shares and which will, under certain circumstances, result in the conversion of certain shares of Class B Common Stock into New Charter shares) or New Charter shares, in each case, constituting either (i) shares representing the first 7.0% of the outstanding voting power of New 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 New 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 Proxy Agreement.

Investment in Charter

For discussion purposes the term “Charter” will be used to discuss both our previous and current holdings in Charter and New Charter.  It is noted that the ticker symbol for Charter and New Charter are the same, and that Charter (as it existed before the Time Warner Cable Merger was completed) merged into New Charter.

As of September 30, 2016, the carrying value of Liberty Broadband’s ownership in Charter was approximately $9,233 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2016 was approximately $14,598 million, which represented an approximate economic ownership of 20% of the outstanding equity of Charter as of that date.

The excess basis is $1,187 million as of September 30, 2016 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

Property and equipment

    

$

238

 

Customer relationships

 

 

403

 

Franchise fees

 

 

1,170

 

Trademarks

 

 

29

 

Goodwill

 

 

70

 

Debt

 

 

(40)

 

Deferred income tax liability

 

 

(683)

 

 

 

$

1,187

 

 

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 Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $18.5 million and $17.8 million, net of related taxes, for the three months ended September 30, 2016 and 2015, respectively, and expenses of $23.2 million and $27.6 million, net of related taxes, for the nine months ended September 30, 2016 and 2015, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt.  The excess basis amortization during the three and nine months ended September 30, 2015 was offset by the write-off of the excess basis related to debt instruments which Charter repaid during the second quarter of 2015 prior to their contractual maturity.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

The Company had a dilution loss of $16.3 million during the three months ended September 30, 2016, and a dilution gain of $760.1 million during the nine months ended September 30, 2016. The Company had dilution losses of $851 thousand and $2.1 million for the three and nine months ended September 30, 2015, respectively. The dilution gain for the nine months ended September 30, 2016 is primarily attributable to Liberty Broadband’s investment basis in Charter at a price per share below the new equity issued in the Time Warner Cable Merger. The dilution losses during the other periods presented are attributable to dilution from Charter warrant and stock option exercises by outside investors (employees and other third parties) at prices below Liberty Broadband’s book basis per share.

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

Charter condensed consolidated balance sheet

 

 

 

 

 

 

 

 

 

    

September 30, 2016

 

December 31, 2015

 

Current assets

 

$

2,781

 

345

 

Property and equipment, net

 

 

32,881

 

8,345

 

Goodwill

 

 

30,165

 

1,168

 

Intangible assets, net

 

 

81,684

 

6,862

 

Other assets

 

 

1,386

 

22,596

 

Total assets

 

$

148,897

 

39,316

 

Current liabilities

 

 

8,647

 

1,972

 

Deferred income taxes

 

 

26,260

 

1,590

 

Long-term debt

 

 

59,946

 

35,723

 

Other liabilities

 

 

2,969

 

77

 

Equity

 

 

51,075

 

(46)

 

Total liabilities and shareholders’ equity

 

$

148,897

 

39,316

 

Charter condensed consolidated statement of operations

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

    

Nine months ended

 

September 30,

 

September 30,

 

2016

 

2015

 

2016

 

2015

Revenue

$

10,037

 

2,450

 

18,728

 

7,242

Cost and expenses:

 

 

 

 

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

(6,482)

 

(1,620)

 

(12,157)

 

(4,802)

Depreciation and amortization

 

(2,437)

 

(538)

 

(4,412)

 

(1,580)

Other operating expenses, net

 

(194)

 

(19)

 

(243)

 

(69)

 

 

(9,113)

 

(2,177)

 

(16,812)

 

(6,451)

Operating income

 

924

 

273

 

1,916

 

791

Interest expense, net

 

(724)

 

(353)

 

(1,771)

 

(871)

Other income (expense), net

 

66

 

(8)

 

(104)

 

(141)

Income tax benefit (expense)

 

(16)

 

142

 

3,135

 

72

Net income (loss)

 

250

 

54

 

3,176

 

(149)

Less: Net income attributable to noncontrolling interests

 

61

 

 —

 

108

 

 —

Net income (loss) attributable to Charter shareholders

$

189

 

54

 

3,068

 

(149)

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

 

 

 

(6) Goodwill and Other Intangible Assets

There were no changes in the carrying amount of goodwill during the nine months ended September 30, 2016.

 

Intangible assets subject to amortization are comprised of the following (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Acquired patents

    

$

10,823

    

(8,055)

    

2,768

    

10,823

    

(6,872)

    

3,951

 

Customer relationships

 

 

10,212

 

(5,099)

 

5,113

 

10,212

 

(4,076)

 

6,136

 

Tradename

 

 

2,838

 

(1,435)

 

1,403

 

2,838

 

(1,154)

 

1,684

 

Capitalized software

 

 

11,084

 

(10,932)

 

152

 

10,973

 

(10,857)

 

116

 

 

 

$

34,957

 

(25,521)

 

9,436

 

34,846

 

(22,959)

 

11,887

 

 

Effective January 1, 2015, TruePosition’s patents are amortized straight-line over three and a half years and TruePosition’s tradename and customer relationship are amortized straight-line over five and a half years. Capitalized software intangible assets are amortized over three to five years. Amortization expense was $850 thousand and $707 thousand for the three months ended September 30, 2016 and 2015, respectively, and $2.6 million and $2.2 million for the nine months ended September 30, 2016 and 2015, respectively.

The estimated future amortization expense for the next five years related to intangible assets with definite lives as of September 30, 2016 is as follows (amounts in thousands):

 

 

 

 

 

Remainder of 2016

    

$

862

 

2017

 

$

3,372

 

2018

 

$

2,566

 

2019

 

$

1,768

 

2020

 

$

869

 

 

 

 

 

 

 

(7) Debt

On October 30, 2014, in connection with and prior to the effectiveness of the Broadband Spin-Off, a wholly-owned special purpose subsidiary of the Company (“BroadbandSPV”) entered into two margin loan agreements (the “2014 Margin Loan Agreements”) with each of the lenders party thereto. The 2014 Margin Loan Agreements permit BroadbandSPV, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $400 million (the “2014 Margin Loans”), of which BroadbandSPV borrowed $320 million on October 31, 2014. Approximately $300 million of the amount borrowed pursuant to the 2014 Margin Loan Agreements (less certain expenses incurred in connection with the 2014 Margin Loans) was distributed to Liberty prior to the Broadband Spin-Off. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband borrowed an additional $52 million to fund the exercise of the warrants to purchase shares of Charter common stock. As of September 30, 2016, Liberty Broadband had drawn $400 million under the 2014 Margin Loan Agreements, with no additional availability. The maturity date of the 2014 Margin Loans is October 30, 2017. Borrowings under the 2014 Margin Loan Agreements bear interest at the

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

three-month LIBOR rate plus 1.55%, and have an unused commitment fee of 0.25% per annum based on the average daily unused portion of the 2014 Margin Loans. Borrowings outstanding under these margin loans bore interest at a rate of 2.18% per annum at September 30, 2016. Interest is payable quarterly in arrears beginning on December 31, 2014. The 2014 Margin Loan Agreements contain various affirmative and negative covenants that restrict the activities of BroadbandSPV. The 2014 Margin Loan Agreements do not include any financial covenants. The 2014 Margin Loan Agreements also contain restrictions related to additional indebtedness. In connection with Cheetah 5’s (as defined below) execution of the 2016 Margin Loan Agreements (as defined below), the 2014 Margin Loan Agreements were amended to, among other things, permit the transactions under the 2016 Margin Loan Agreements and conform certain of the terms in the 2014 Margin Loan Agreements to the 2016 Margin Loan Agreements.

 

On March 21, 2016, a wholly-owned special purpose subsidiary of the Company (“Cheetah 5”), entered into two margin loan agreements (the “2016 Margin Loan Agreements”) with each of the lenders thereto. The 2016 Margin Loan Agreements permit Cheetah 5, subject to certain funding conditions, to borrow initial term loans up to an aggregate principal amount equal to $200 million and delayed draw loans (the “Draw Loans”) up to an aggregate principal amount equal to $100 million, for an aggregate total of $300 million (collectively the “2016 Margin Loans”). Cheetah 5 has borrowed $200 million as of September 30, 2016 and had $100 million available to be drawn until March 21, 2017.  The maturity date of the 2016 Margin Loans is March 21, 2018. Borrowings under the 2016 Margin Loans bear interest at the applicable LIBOR rate plus 2.10% per annum and have an unused commitment fee of 0.5% per annum based on the average daily unused portion of the Draw Loans. Borrowings outstanding under these margin loans bore interest at a rate of 2.73% per annum at September 30, 2016.  Interest is payable quarterly in arrears beginning on March 31, 2016. The proceeds of the 2016 Margin Loans were used for the Company’s additional investment in New Charter during May 2016 (note 5). 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 2016 Margin Loan Agreements contain various affirmative and negative covenants that restrict the activities of Cheetah 5. The 2016 Margin Loan Agreements do not include any financial covenants. The 2016 Margin Loan Agreements also contain restrictions related to additional indebtedness.

 

BroadbandSPV and Cheetah 5’s obligations under the 2014 Margin Loan Agreements and 2016 Margin Loan Agreements, respectively, are guaranteed by the Company. In addition, BroadbandSPV and Cheetah 5’s obligations are secured by first priority liens on a portion of the Company’s ownership interest in Charter, sufficient for BroadbandSPV and Cheetah 5 to meet the loan to value requirements under the 2014 Margin Loan Agreements and 2016 Margin Loan Agreements, respectively. Each agreement contains language that indicates that Liberty Broadband, transferor of underlying shares as collateral, has the right to exercise all voting, consensual and other powers of ownership pertaining to the transferred shares for all purposes, provided that Liberty Broadband agrees that it will not vote the shares in any manner that would reasonably be expected to give rise to transfer or other certain restrictions. Similarly, the loan agreements indicate 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, 2016, 9.5 million shares of Charter with a value of $2.6 billion were pledged as collateral pursuant to the 2014 Margin Loans and the 2016 Margin Loans.

 

In connection with the collar agreement on shares of Time Warner Cable entered into on March 27, 2015, as discussed in note 3, the Company also entered into a $234 million revolving loan agreement. On April 7, 2015, Liberty Broadband drew $40 million on this loan, which was the amount used to match the outstanding call liability. The shares of Time Warner Cable underlying the collar served as collateral for borrowings under the revolving loan agreement. Borrowings outstanding under the revolving loan agreement bore interest at the three-month LIBOR rate plus 0.64%, payable quarterly in arrears beginning on March 31, 2015. The interest rate on the unused portion of the revolving loan agreement was 0.12% per annum. The Company repaid the $40 million drawn on the loan during July 2015 and the agreement was terminated upon unwinding of the Time Warner Cable collar agreement. 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

(8) Stockholder’s Equity

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, par value $0.01 per share (the “Series C Shares”), at a price per share of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum-of-the parts basis at the time the Investment Agreement was executed. The purchasers of the Series C Shares were Liberty Interactive through its Liberty Ventures Group and certain other third party investors, which all invested on substantially similar terms. One of the third party investors also held a position in Time Warner Cable and agreed to vote its Time Warner Cable shares in favor of the Time Warner Cable Merger. Each of Charter and Liberty Broadband obtained stockholder approval during September 2015 for the issuance of the Charter shares and the Series C Shares, respectively, in accordance with the rules and requirements of the Nasdaq Stock Market. The issuance of the Series C Shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

(9) 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 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, 2016 and 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Operating expense

    

$

4

    

(12)

    

2

    

4

 

Selling, general and administrative

 

 

1,596

 

1,292

 

4,363

 

4,534

 

Research and development

 

 

136

 

171

 

217

 

244

 

 

 

$

1,736

 

1,451

 

4,582

 

4,782

 

 

Liberty Broadband – Grants of Stock Options

There were no options to purchase shares of Series A or Series C common stock granted during the nine months ended September 30, 2016.

The Company calculates the grant-date fair value for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. Since Liberty Broadband common stock has not traded on the stock market for a significant length of time, the volatility used in the calculation for Awards is based on the historical volatility of Charter common stock and the implied volatility of publicly traded Charter options; as the most significant

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

asset within Liberty Broadband, the volatility of Charter served as a proxy for the expected volatility of Liberty Broadband.  The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject option.

Liberty Broadband – Outstanding Awards

The following table presents 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, 2016

 

630

 

$

32.36

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(121)

 

$

31.91

 

 

 

 

 

Forfeited/cancelled

 

 —

 

$

 —

 

 

 

 

 

Outstanding at September 30, 2016

 

509

 

$

32.46

 

2.4

 

$

19

Exercisable at September 30, 2016

 

489

 

$

32.31

 

2.3

 

$

18

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

remaining

 

Aggregate

 

 

 

 

 

 

 

contractual

 

intrinsic

 

 

Series C

 

WAEP

 

life

 

value

 

 

(in thousands)

 

 

 

 

(in years)

 

(in millions)

Outstanding at January 1, 2016

 

2,761

 

$

41.09

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(276)

 

$

32.04

 

 

 

 

 

Forfeited/cancelled

 

 —

 

$

 —

 

 

 

 

 

Outstanding at September 30, 2016

 

2,485

 

$

42.09

 

6.0

 

$

73

Exercisable at September 30, 2016

 

915

 

$

32.25

 

2.3

 

$

36

As of September 30, 2016 , the total unrecognized compensation cost related to unvested Awards was approximately $16 million . Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.8  years.  As of September 30, 2016, Liberty Broadband reserved 3.0 million shares of Series A and Series C common stock for issuance under exercise privileges of outstanding stock Awards.

TruePosition Equity Incentive Plans

On July 29, 2016, all Skyhook Wireless Inc. (“Skyhook”), a wholly owned subsidiary of TruePosition, phantom stock appreciation rights (“PARs”) were converted into PARs granted under the TruePosition Long Term Incentive Plan (“LTIP”) and future awards under the Skyhook LTIP were suspended. Concurrent with the conversion, TruePosition made certain adjustments to the outstanding TruePosition PARs and phantom stock units (“PSUs”) to standardize and simplify the valuation of awards granted under the TruePosition LTIP.  TruePosition issued 4.1 million PARs during the nine months ended September 30, 2016. As of September 30, 2016, the fair value of outstanding PARs and PSUs was approximately

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

$3.5 million. As of September 30, 2016, $1.7 million (Level 3) is included in Other current liabilities in the accompanying condensed consolidated balance sheet for the fair value of TruePosition’s vested long-term incentive plan obligations.

(10) Commitments and Contingencies

Leases

TruePosition leases various properties under operating leases expiring at various times through 2018. TruePosition’s principal facility is under lease through December 2017. Including amounts due to Liberty under the facilities sharing agreement, the Company’s total rental expense was $452 thousand and $622 thousand for each of the three months ended September 30, 2016 and 2015, respectively, and $1.0 million and $2.0 million for each of the nine months ended September 30, 2016 and 2015, respectively.

General Litigation

In the ordinary course of business, the Company and its consolidated subsidiaries are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims, including infringement of the intellectual property rights of the Company and its consolidated subsidiaries by third parties. Although it is reasonably possible that the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.

Litigation

On September 10, 2010, Skyhook filed a patent infringement lawsuit in the U.S. District Court for the District of Massachusetts against Google, Inc. (“Google”). In March 2013, Skyhook amended its lawsuit to add additional claims. In total, at the time the case was to be tried, Skyhook alleged that Google infringed on eight Skyhook patents involving location technology and sought an injunction and/or award of damages in an amount to be determined at trial. The case had been scheduled to be tried before a jury commencing March 9, 2015. However, on March 5, 2015, the parties advised the District Court that the case had been settled and thereby dismissed the action without costs and without prejudice to the right, upon good cause shown within 45 days, to reopen the action if the settlement was not consummated. On March 27, 2015, the parties consummated a final settlement agreement and on April 24, 2015, Google paid Skyhook settlement consideration of $90 million. In return for payment of the settlement consideration, Google received dismissal of the action with prejudice, a license to the existing Skyhook patents and patent applications (and their continuations, divisionals, continuations-in-part), a three-year covenant not to sue (subject to limited exceptions) and a mutual release of claims. The settlement amount of $90 million is recorded net of approximately $29.5 million for legal fees in the statement of operations for the nine months ended September 30, 2015.

Indemnification Claims

In the normal course of business, TruePosition provides indemnification to certain customers against specified claims that might arise against those customers from the use of TruePosition’s products. To date, TruePosition has not made any significant reimbursements to any of its customers for any losses related to these indemnification provisions. However, four such claims are currently pending. TruePosition is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations, although TruePosition’s liabilities in certain of those

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

arrangements are customarily limited in various respects, including monetarily. Accordingly, no accrual was recorded related to indemnification claims as of September 30, 2016 or December 31, 2015.

Certain Risks and Concentrations

The TruePosition business is subject to certain risks and concentrations including dependence on relationships with its customers. Historically, TruePosition had one significant customer whose contract expired on December 31, 2015. The loss of this customer is expected to have a material adverse effect on TruePosition’s business unless TruePosition is able to generate significant new business to replace the financial impact of this customer. For the three and nine months ended September 30, 2015, this customer accounted for 84% and 79%, respectively, of TruePosition’s total revenue.

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.

(11) Segment Information

Liberty Broadband identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty Broadband’s annual pre-tax earnings.

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

Liberty Broadband defines Adjusted OIBDA as revenue less operating expenses and selling, general and administrative expenses (excluding stock-based compensation). Liberty Broadband believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net earnings, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty Broadband generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

For the nine months ended September 30, 2016, Liberty Broadband has identified the following consolidated subsidiary and equity method investment as its reportable segments:

·

TruePosition—a wholly-owned subsidiary of the Company that, together with its subsidiary Skyhook, provides a WiFi based location platform focused on providing positioning technology, contextual location intelligence solutions, and 911 services domestically. 

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