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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 June 30, 2020

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 July 15, 2020 was:

Series A

Series B

Series C

Liberty Broadband Corporation Common Stock

26,495,123

2,451,119

152,983,879

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-18

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)

June 30,

December 31,

 

2020

2019

 

(amounts in thousands)

 

Assets

    

    

    

    

Current assets:

Cash and cash equivalents

$

17,162

 

49,724

Other current assets

 

2,544

 

2,409

Total current assets

 

19,706

 

52,133

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

 

12,306,593

 

12,194,674

Other assets

 

9,100

 

9,535

Total assets

$

12,335,399

 

12,256,342

Liabilities and Equity

Current liabilities:

Accounts payable and accrued liabilities

$

8,562

 

6,168

Deferred revenue and other current liabilities

 

11,544

 

5,971

Total current liabilities

 

20,106

 

12,139

Debt (note 5)

573,593

572,944

Deferred income tax liabilities

1,017,921

999,757

Other liabilities

3,045

3,556

Total liabilities

1,614,665

 

1,588,396

Equity

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 26,495,123 shares at June 30, 2020 and 26,493,197 shares at December 31, 2019

265

265

Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,451,119 shares at June 30, 2020 and 2,451,920 shares at December 31, 2019

25

25

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 152,983,879 shares at June 30, 2020 and 152,956,316 shares at December 31, 2019

1,530

1,529

Additional paid-in capital

7,878,499

7,890,084

Accumulated other comprehensive earnings, net of taxes

 

8,158

 

8,158

Retained earnings

 

2,832,257

 

2,767,885

Total equity

 

10,720,734

 

10,667,946

Commitments and contingencies (note 7)

Total liabilities and equity

$

12,335,399

 

12,256,342

See accompanying notes to the condensed consolidated financial statements.

I-2

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

Three months ended 

Six months ended

 

June 30,

June 30,

 

2020

    

2019

    

2020

2019

 

(amounts in thousands, except per share amounts)

Revenue:

Software sales

$

4,114

3,747

8,108

7,205

Service

110

Total revenue

4,114

3,747

8,218

7,205

Operating costs and expenses

Operating, including stock-based compensation (note 6)

2,524

2,227

4,992

 

4,480

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

10,930

8,217

19,348

 

15,155

Depreciation and amortization

492

469

985

 

937

13,946

10,913

25,325

 

20,572

Operating income (loss)

(9,832)

(7,166)

(17,107)

 

(13,367)

Other income (expense):

Interest expense

(5,131)

(6,342)

(10,992)

(12,885)

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

158,128

45,400

219,810

 

80,249

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

(46,001)

(16,322)

(105,326)

 

(57,725)

Other, net

28

406

191

 

829

Net earnings (loss) before income taxes

97,192

15,976

86,576

 

(2,899)

Income tax benefit (expense)

(24,978)

(3,924)

(22,204)

 

650

Net earnings (loss) attributable to Liberty Broadband shareholders

$

72,214

12,052

64,372

 

(2,249)

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

$

0.40

0.07

0.35

(0.01)

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

$

0.39

0.07

0.35

(0.01)

See accompanying notes to the condensed consolidated financial statements.

I-3

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

Six months ended

June 30,

 

2020

2019

 

(amounts in thousands)

 

Cash flows from operating activities:

    

    

    

    

Net earnings (loss)

$

64,372

 

(2,249)

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

Depreciation and amortization

 

985

 

937

Stock-based compensation

 

3,734

 

5,139

Share of (earnings) losses of affiliates, net

 

(219,810)

 

(80,249)

(Gain) loss on dilution of investment in affiliate

 

105,326

 

57,725

Deferred income tax expense (benefit)

 

22,204

 

(650)

Other, net

 

625

 

576

Changes in operating assets and liabilities:

Current and other assets

 

(72)

 

(5,764)

Payables and other liabilities

 

6,938

 

4,461

Net cash provided (used) by operating activities

 

(15,698)

 

(20,074)

Cash flows from investing activities:

Capital expended for property and equipment

 

(35)

 

(50)

Exercise of preemptive right to purchase Charter shares

(14,910)

Net cash provided (used) by investing activities

 

(14,945)

 

(50)

Cash flows from financing activities:

Taxes paid in lieu of shares issued for stock-based compensation

(1,945)

Other financing activities, net

26

4,155

Net cash provided (used) by financing activities

 

(1,919)

 

4,155

Net increase (decrease) in cash

 

(32,562)

 

(15,969)

Cash, cash equivalents and restricted cash, beginning of period

 

49,724

 

83,103

Cash, cash equivalents and restricted cash, end of period

$

17,162

 

67,134

See accompanying notes to the condensed consolidated financial statements.

I-4

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, 2020

    

$

265

25

1,529

7,890,084

    

8,158

    

2,767,885

    

10,667,946

Net earnings (loss)

 

 

 

64,372

 

64,372

Stock-based compensation

3,705

3,705

Issuance of common stock upon exercise of stock options

1

25

26

Withholding taxes on net share settlements of stock-based compensation

(2,121)

(2,121)

Noncontrolling interest activity at Charter

(13,194)

(13,194)

Balance at June 30, 2020

$

265

25

1,530

7,878,499

 

8,158

 

2,832,257

 

10,720,734

Accumulated

 

Additional

other

 

Preferred

Common stock

paid-in

comprehensive

Retained

 

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

 

(amounts in thousands)

 

Balance at March 31, 2020

$

265

25

1,530

7,876,950

 

8,158

 

2,760,043

 

10,646,971

Net earnings (loss)

72,214

72,214

Stock-based compensation

1,900

1,900

Issuance of common stock upon exercise of stock options

23

23

Withholding taxes on net share settlements of stock-based compensation

(177)

(177)

Noncontrolling interest activity at Charter

(197)

(197)

Balance at June 30, 2020

$

265

25

1,530

7,878,499

8,158

2,832,257

10,720,734

See accompanying notes to the condensed consolidated financial statements.

I-5

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, 2019

$

263

25

1,526

7,938,357

7,778

2,650,669

10,598,618

Net earnings (loss)

(2,249)

(2,249)

Stock-based compensation

5,010

5,010

Issuance of common stock upon exercise of stock options

1

1

4,153

4,155

Tax sharing arrangement with former parent

(16,090)

(16,090)

Noncontrolling interest activity at Charter

(2,384)

(2,384)

Balance at June 30, 2019

$

264

25

1,527

7,929,046

7,778

2,648,420

10,587,060

Accumulated

 

Additional

other

 

Preferred

Common stock

paid-in

comprehensive

Retained

 

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

 

(amounts in thousands)

 

Balance at March 31, 2019

    

$

263

25

1,526

7,943,795

    

7,778

    

2,636,368

    

10,589,755

Net earnings (loss)

 

 

 

12,052

 

12,052

Stock-based compensation

2,487

2,487

Issuance of common stock upon exercise of stock options

1

1

2,500

2,502

Tax sharing arrangement with former parent

(16,090)

(16,090)

Noncontrolling interest activity at Charter

(3,646)

(3,646)

Balance at June 30, 2019

$

264

25

1,527

7,929,046

 

7,778

 

2,648,420

 

10,587,060

See accompanying notes to the condensed consolidated financial statements.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

During May 2014, the board of directors of Liberty Media Corporation and its subsidiaries (“Liberty”) authorized management to pursue a plan to spin-off to its stockholders common stock of a wholly-owned subsidiary, Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to distribute subscription rights to acquire shares of Liberty Broadband’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, 2019, which has been derived from audited financial statements, and (b) interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty Broadband's Annual Report on Form 10-K for the year ended December 31, 2019. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the application of the equity method of accounting for investments in affiliates and accounting for income taxes to be its most significant estimates.

In December 2019, Chinese officials reported a novel coronavirus outbreak (“COVID-19”). COVID-19 has since spread through China and internationally. On March 11, 2020, the World Health Organization assessed COVID-19 as a global pandemic, causing many countries throughout the world to take aggressive actions, including imposing travel restrictions and stay-at-home orders, closing public attractions and restaurants, and mandating social distancing practices.

We are not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities.  Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our financial statements.

Liberty Broadband holds an investment in Charter that is accounted for using the equity method. Liberty Broadband does not control the decision making process or business management practices of this affiliate. Accordingly, Liberty Broadband relies on the management of this affiliate to provide it with accurate financial information prepared in accordance with GAAP that the Company uses in the application of the equity method. In addition, Liberty Broadband relies on audit

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

reports that are provided by the affiliate's independent auditor on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliate that would have a material effect on Liberty Broadband's condensed consolidated financial statements.

On June 29, 2020, Liberty Broadband announced that a special committee of independent and disinterested directors formed by its board of directors, and a special committee of independent and disinterested directors formed by the board of directors of GCI Liberty, have informed Liberty Broadband and GCI Liberty that the special committees have reached a preliminary understanding regarding a possible exchange ratio (“Possible Exchange Ratio”) for a potential business combination transaction between Liberty Broadband and GCI Liberty (the “Potential Combination”), in which Liberty Broadband would acquire all of the outstanding shares of Series A common stock, Series B common stock, and Series A Cumulative Redeemable Preferred Stock of GCI Liberty in a stock-for-stock merger. The special committees of each of GCI Liberty and Liberty Broadband also reached a preliminary understanding with John C. Malone, Chairman of the Board of each of GCI Liberty and Liberty Broadband relating to the Potential Combination. Prior to any negotiations, including any discussions regarding a Possible Exchange Ratio or regarding any arrangements with Mr. Malone, the special committees of GCI Liberty and Liberty Broadband were formed and agreed with each other and with Mr. Malone that any Potential Combination would be subject to and conditioned upon (i) the negotiation by, and approval of, each special committee and (ii) approval by a non-waivable vote of the holders of a majority of the voting power of the outstanding shares of each company not held by Mr. Malone or any other interested parties.

The Company expects that there will be continued discussions between and among the special committees and Mr. Malone regarding a Potential Combination and related matters, including the negotiation of mutually acceptable transaction agreements.  There can be no assurance, however, that any discussions that occur hereafter will result in the entry into definitive agreements concerning a Potential Combination or, if such definitive agreements are reached, that such definitive agreements will contain transaction terms consistent with those described above, nor can there be any assurance that a Potential Combination will ultimately be consummated.  Discussions concerning a Potential Combination may be terminated at any time and without prior notice.  Liberty Broadband does not intend to disclose developments with respect to the foregoing unless and until the special committees and the boards of directors of each of GCI Liberty and Liberty Broadband have approved a specific transaction, if any, except as may be required by law.

Spin-Off Arrangements

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

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.  See below for a description of an amendment to the services agreement in December 2019.  Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services which will be negotiated semi-annually. Under these various agreements, amounts reimbursable to Liberty were approximately $1.0 million and $17.0 million for the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $17.9 million for the six months ended June 30, 2020 and 2019, respectively.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

In December 2019, the Company entered into an amendment to the services agreement with Liberty in connection with Liberty’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s President and Chief Executive Officer. Under the amended services agreement, components of his compensation will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., GCI Liberty, and Qurate Retail, Inc. (collectively, the “Service Companies”) or reimbursed to Liberty, in each case, based on allocations among Liberty and the Service Companies set forth in the amended services agreement, currently set at 18% for the Company. 

(2) Earnings (Loss) per Share

Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) attributable to Liberty Broadband shareholders by the weighted average number of common shares outstanding (“WASO”) for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. The basic and diluted EPS calculations are based on the following weighted average number of shares of outstanding common stock.

Liberty Broadband Common Stock

Three months

Three months

Six months

Six months

 

ended

ended

ended

ended

    

June 30, 2020

    

June 30, 2019

    

June 30, 2020

    

June 30, 2019

 

(numbers of shares in thousands)

Basic WASO

 

181,925

 

181,450

 

181,914

 

181,409

Potentially dilutive shares (1)

 

921

 

1,382

 

913

 

1,340

Diluted WASO

 

182,846

 

182,832

 

182,827

 

182,749

(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 3.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

June 30, 2020

December 31, 2019

 

Quoted prices

Significant

Quoted prices

Significant

 

in active

other

in active

other

 

markets for

observable

markets for

observable

 

identical assets

inputs

identical assets

inputs

 

Description

Total

(Level 1)

(Level 2)

Total

(Level 1)

(Level 2)

 

(amounts in thousands)

 

Cash equivalents

$

11,598

11,598

48,174

48,174

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.

(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 June 30, 2020, the carrying and market value of Liberty Broadband’s ownership in Charter was approximately $12,307 million and $27,597 million, respectively.  Liberty Broadband’s ownership in Charter is 26.4% of the outstanding equity of Charter as of June 30, 2020.  

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 (23.4% at June 30, 2020) 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.

Liberty’s equity ownership in Charter (on a fully diluted basis) is capped at the greater of 26% or the cap on its voting interest.  Liberty’s voting interest in Charter is capped at the greater of (x) 25.01% (or 0.01% above the person or group holding the highest voting percentage of Charter) and (y) 23.5% increased one-for-one to a maximum of 35% for each permanent reduction in A/N’s equity interest in Charter below 15%. As of June 30, 2020, Liberty does not believe it has exceeded the cap on its equity ownership in Charter.

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

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

purchase price per share for any securities sold to Liberty Broadband pursuant to the ROFR will be the volume-weighted average price of Charter shares for the two trading day period before the notice of a proposed sale by A/N, payable in cash. Certain transfers are permitted to affiliates of A/N, subject to the transferee entity entering into an agreement assuming the transferor’s obligations under the A/N Proxy.

During the six months ended June 30, 2020, Liberty Broadband exercised its preemptive right to purchase an aggregate of approximately 35 thousand shares of Charter’s Class A common stock for an aggregate purchase price of $14.9 million.

Investment in Charter

The excess basis in our investment in Charter of $4,555 million as of June 30, 2020 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

June 30,

December 31,

2020

2019

Property and equipment

    

$

236

225

Customer relationships

 

1,180

1,043

Franchise fees

 

2,182

1,996

Trademarks

 

29

29

Goodwill

 

1,883

1,630

Debt

 

(70)

(9)

Deferred income tax liability

 

(885)

(817)

$

4,555

4,097

Property and equipment 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 six months ended June 30, was primarily due to Charter’s share buyback program. The Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $41.7 million and $30.4 million, net of related taxes, for the three months ended June 30, 2020 and 2019, respectively, and expenses of $81.8 million and $56.0 million, net of related taxes, for the six months ended June 30, 2020 and 2019, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt.  

The Company had a dilution loss of $46.0 million and $16.3 million during the three months ended June 30, 2020 and 2019, respectively, and a dilution loss of $105.3 million and $57.7 million during the six months ended June 30, 2020 and 2019, 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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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

    

June 30, 2020

December 31, 2019

 

Current assets

$

4,770

6,537

Property and equipment, net

 

34,074

34,591

Goodwill

 

29,554

29,554

Intangible assets, net

 

73,808

74,775

Other assets

 

2,930

2,731

Total assets

$

145,136

148,188

Current liabilities

9,142

12,385

Deferred income taxes

 

17,789

17,711

Long-term debt

 

77,663

75,578

Other liabilities

 

4,141

3,703

Equity

 

36,401

38,811

Total liabilities and shareholders’ equity

$

145,136

148,188

Charter condensed consolidated statements of operations

Three months ended

    

Six months ended

June 30,

June 30,

2020

2019

2020

2019

Revenue

$

11,696

11,347

23,434

22,553

Cost and expenses:

Operating costs and expenses (excluding depreciation and amortization)

 

7,297

7,244

14,729

14,480

Depreciation and amortization

 

2,428

2,500

4,925

5,050

Other operating (income) expenses, net

 

2

62

9

57

9,727

9,806

19,663

19,587

Operating income

1,969

1,541

3,771

2,966

Interest expense, net

 

(957)

(945)

(1,937)

(1,870)

Other income (expense), net

30

(126)

(296)

(190)

Income tax benefit (expense)

 

(166)

(84)

(195)

(203)

Net income (loss)

876

386

1,343

703

Less: Net income attributable to noncontrolling interests

(110)

(72)

(181)

(136)

Net income (loss) attributable to Charter shareholders

$

766

314

1,162

567

(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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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. Outstanding borrowings under the facility were $575 million as of June 30, 2020 and December 31, 2019. As of June 30, 2020, SPV was permitted to borrow an additional $425 million, which may be drawn through 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 1.81% per annum at June 30, 2020 and is payable quarterly in arrears.

The Amended 2017 Margin Loan Agreement contains various affirmative and negative covenants that restrict the activities of the SPV (and, in some cases, the Company and its subsidiaries with respect to shares of Charter owned by the Company and its 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 June 30, 2020, 6.8 million shares of Charter with a value of $3.5 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, restricted stock units (“RSUs”) and stock options to purchase shares of its common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):

Three months

Six months

 

ended

ended

 

June 30,

June 30,

 

2020

2019

2020

2019

 

Operating expense

    

$

12

    

11

    

13

    

48

Selling, general and administrative

 

1,921

2,512

3,721

 

5,091

$

1,933

2,523

3,734

 

5,139

Liberty Broadband – Grants of Awards

During the six months ended June 30, 2020, Liberty Broadband granted 100 thousand options to purchase shares of Series C Liberty Broadband common stock to our CEO. Such options had a GDFV of $27.39 per share and vest on December 31, 2020.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

There were no options to purchase shares of Series A or Series B common stock granted during the six months ended June 30, 2020.

During the six months ended June 30, 2020, Liberty Broadband granted 2 thousand time-based RSUs of Series C Liberty Broadband common stock to our CEO. The RSUs had a GDFV of $120.71 per share and cliff vest on December 10, 2020.  This RSU grant was issued in lieu of our CEO receiving 50% of his remaining base salary for the last three quarters of calendar year 2020, and he has waived his right to receive the other 50%, in each case, in light of the ongoing financial impact of COVID-19.

The Company calculates the GDFV for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Liberty Broadband common stock. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

Liberty Broadband – Outstanding Awards

The following tables present the number and weighted average exercise price (“WAEP”) of Awards to purchase Liberty Broadband common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.

    

    

    

    

    

Weighted

    

    

average

remaining

Aggregate

contractual

intrinsic

Series A

WAEP

life

value

(in thousands)

(in years)

(in millions)

Outstanding at January 1, 2020

 

4

$

47.92

Granted

 

$

Exercised

 

(3)

$

51.83

Forfeited/cancelled

$

Outstanding at June 30, 2020

 

1

$

40.92

 

1.8

$

Exercisable at June 30, 2020

 

1

$

40.92

 

1.8

$

    

    

    

    

    

Weighted

    

    

average

remaining