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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 October 31, 2020 was:

Series A

Series B

Series C

Liberty Broadband Corporation Common Stock

26,495,183

2,451,119

149,548,921

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 Comprehensive Earnings (Loss) (unaudited)

I-4

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

I-5

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements of Equity (unaudited)

I-6

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

I-8

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

I-21

Item 3. Quantitative and Qualitative Disclosures about Market Risk

I-29

Item 4. Controls and Procedures

I-29

Part II - Other Information

Item 1. Legal Proceedings

II-1

Item 1A. Risk Factors

II-2

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

II-3

Item 6. Exhibits

II-5

SIGNATURES

II-6

I-1

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

September 30,

December 31,

 

2020

2019

 

(amounts in thousands)

 

Assets

    

    

    

    

Current assets:

Cash and cash equivalents

$

400,268

 

49,724

Other current assets

 

2,224

 

2,409

Total current assets

 

402,492

 

52,133

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

 

12,450,425

 

12,194,674

Other assets

 

8,772

 

9,535

Total assets

$

12,861,689

 

12,256,342

Liabilities and Equity

Current liabilities:

Accounts payable and accrued liabilities

$

7,699

 

6,168

Deferred revenue and other current liabilities

 

8,640

 

5,971

Total current liabilities

 

16,339

 

12,139

Debt, including $621,000 and $0 measured at fair value, respectively (note 5)

1,318,664

572,944

Deferred income tax liabilities

1,036,672

999,757

Other liabilities

2,764

3,556

Total liabilities

2,374,439

 

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 26,495,183 shares at September 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 September 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 150,952,521 shares at September 30, 2020 and 152,956,316 shares at December 31, 2019

1,510

1,529

Additional paid-in capital

7,587,627

7,890,084

Accumulated other comprehensive earnings, net of taxes

 

(3,394)

 

8,158

Retained earnings

 

2,901,217

 

2,767,885

Total equity

 

10,487,250

 

10,667,946

Commitments and contingencies (note 7)

Total liabilities and equity

$

12,861,689

 

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 

Nine months ended

 

September 30,

September 30,

 

2020

    

2019

    

2020

2019

 

(amounts in thousands, except per share amounts)

Revenue:

Software sales

$

4,209

3,713

12,317

10,918

Service

10

120

Total revenue

4,219

3,713

12,437

10,918

Operating costs and expenses

Operating, including stock-based compensation (note 6)

2,523

2,323

7,515

 

6,803

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

17,968

8,507

37,316

 

23,662

Depreciation and amortization

56

471

1,041

 

1,408

20,547

11,301

45,872

 

31,873

Operating income (loss)

(16,328)

(7,588)

(33,435)

 

(20,955)

Other income (expense):

Interest expense

(3,719)

(6,123)

(14,711)

(19,008)

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

188,586

61,633

408,396

 

141,882

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

(35,284)

(11,219)

(140,610)

 

(68,944)

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

(39,324)

(433)

(39,324)

 

(433)

Other, net

8

350

199

 

1,179

Net earnings (loss) before income taxes

93,939

36,620

180,515

 

33,721

Income tax benefit (expense)

(24,979)

(9,124)

(47,183)

 

(8,474)

Net earnings (loss) attributable to Liberty Broadband shareholders

$

68,960

27,496

133,332

 

25,247

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

$

0.38

0.15

0.73

0.14

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

$

0.38

0.15

0.73

0.14

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,

 

2020

    

2019

    

2020

2019

 

(amounts in thousands)

 

Net earnings (loss)

    

$

68,960

27,496

133,332

    

25,247

Other comprehensive earnings (loss), net of taxes:

Comprehensive earnings (loss) attributable to debt credit risk adjustments

(11,552)

(11,552)

 

Other comprehensive earnings (loss), net of taxes

(11,552)

(11,552)

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

$

57,408

27,496

121,780

 

25,247

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,

 

2020

2019

 

(amounts in thousands)

 

Cash flows from operating activities:

    

    

    

    

Net earnings (loss)

$

133,332

 

25,247

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

Depreciation and amortization

 

1,041

 

1,408

Stock-based compensation

 

5,736

 

7,670

Share of (earnings) losses of affiliates, net

 

(408,396)

 

(141,882)

(Gain) loss on dilution of investment in affiliate

 

140,610

 

68,944

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

 

39,324

 

433

Deferred income tax expense (benefit)

 

47,183

 

8,474

Other, net

 

1,070

 

1,016

Changes in operating assets and liabilities:

Current and other assets

 

244

 

(927)

Payables and other liabilities

 

3,044

 

2,385

Net cash provided (used) by operating activities

 

(36,812)

 

(27,232)

Cash flows from investing activities:

Capital expended for property and equipment

 

(42)

 

(75)

Exercise of preemptive right to purchase Charter shares

(14,910)

Net cash provided (used) by investing activities

 

(14,952)

 

(75)

Cash flows from financing activities:

Borrowings of debt

700,000

50,000

Repurchases of Liberty Broadband common stock

(285,722)

Payments from issuances of financial instruments

(46,330)

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

(16,090)

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

(2,121)

Other financing activities, net

(9,849)

3,170

Net cash provided (used) by financing activities

 

402,308

 

(9,250)

Net increase (decrease) in cash

 

350,544

 

(36,557)

Cash, cash equivalents and restricted cash, beginning of period

 

49,724

 

83,103

Cash, cash equivalents and restricted cash, end of period

$

400,268

 

46,546

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Equity

(unaudited)

Accumulated

Additional

other

Preferred

Common stock

paid-in

comprehensive

Retained

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

(amounts in thousands)

Balance at January 1, 2020

    

$

265

25

1,529

7,890,084

    

8,158

    

2,767,885

    

10,667,946

Net earnings (loss)

 

 

 

133,332

 

133,332

Other comprehensive loss

(11,552)

(11,552)

Stock-based compensation

5,684

5,684

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)

Series C Liberty Broadband stock repurchases

(20)

(285,702)

(285,722)

Noncontrolling interest activity at Charter

(20,343)

(20,343)

Balance at September 30, 2020

$

265

25

1,510

7,587,627

 

(3,394)

 

2,901,217

 

10,487,250

Accumulated

 

Additional

other

 

Preferred

Common stock

paid-in

comprehensive

Retained

 

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

 

(amounts in thousands)

 

Balance at June 30, 2020

$

265

25

1,530

7,878,499

8,158

2,832,257

10,720,734

Net earnings (loss)

68,960

68,960

Other comprehensive loss

(11,552)

(11,552)

Stock-based compensation

1,979

1,979

Series C Liberty Broadband stock repurchases

(20)

(285,702)

(285,722)

Noncontrolling interest activity at Charter

(7,149)

(7,149)

Balance at September 30, 2020

$

265

25

1,510

7,587,627

(3,394)

2,901,217

10,487,250

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Equity (continued)

(unaudited)

Accumulated

Additional

other

Preferred

Common stock

paid-in

comprehensive

Retained

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

(amounts in thousands)

Balance at January 1, 2019

$

263

25

1,526

7,938,357

7,778

2,650,669

10,598,618

Net earnings (loss)

25,247

25,247

Stock-based compensation

7,515

7,515

Issuance of common stock upon exercise of stock options

1

1

4,418

4,420

Tax sharing arrangement with former parent

(16,090)

(16,090)

Noncontrolling interest activity at Charter

(7,538)

(7,538)

Balance at September 30, 2019

$

264

25

1,527

7,926,662

7,778

2,675,916

10,612,172

Accumulated

 

Additional

other

 

Preferred

Common stock

paid-in

comprehensive

Retained

 

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

 

(amounts in thousands)

 

Balance at June 30, 2019

$

264

25

1,527

7,929,046

 

7,778

 

2,648,420

 

10,587,060

Net earnings (loss)

27,496

27,496

Stock-based compensation

2,505

2,505

Issuance of common stock upon exercise of stock options

265

265

Noncontrolling interest activity at Charter

(5,154)

(5,154)

Balance at September 30, 2019

$

264

25

1,527

7,926,662

7,778

2,675,916

10,612,172

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

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, and 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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Table of Contents

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 August 6, 2020, Liberty Broadband and GCI Liberty entered into a definitive merger agreement under which Liberty Broadband agreed to acquire all of the outstanding shares of GCI Liberty in a stock-for-stock merger (the “Combination”).  Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common stock, respectively, of Liberty Broadband. Additionally, holders of a share of Series A Cumulative Redeemable Preferred Stock of GCI Liberty will receive one share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband.  The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors.  The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (ii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present in person or by proxy at the stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals.  Liberty Broadband and GCI Liberty expect the Combination to close no later than the first quarter of 2021, subject to potential COVID-19 related delays.  

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 $0.7 million for the three months ended September 30, 2020 and 2019, respectively, and $3.2 million and $18.6 million for the nine months ended September 30, 2020 and 2019, respectively.

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. 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(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 (“WASO”) for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. The basic and diluted EPS calculations are based on the following weighted average number of shares of outstanding common stock.

Liberty Broadband Common Stock

Three months

Three months

Nine months

Nine months

 

ended

ended

ended

ended

    

September 30, 2020

    

September 30, 2019

    

September 30, 2020

    

September 30, 2019

 

(numbers of shares in thousands)

Basic WASO

 

181,472

 

181,522

 

181,765

 

181,409

Potentially dilutive shares (1)

 

1,031

 

1,451

 

953

 

1,377

Diluted WASO

 

182,503

 

182,973

 

182,718

 

182,786

(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.

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

September 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

$

375,615

375,615

48,174

48,174

Exchangeable senior debentures

$

621,000

 

 

621,000

 

 

 

The Company’s exchangeable senior debentures are debt instruments with quoted market value prices that are not considered to be traded on “active markets”, as defined in GAAP, and are reported in the foregoing table as Level 2 fair value.

Other Financial Instruments

The carrying amounts of other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, and accrued and other current liabilities, which approximate fair value due to the short maturity

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

of these instruments as reported on our condensed consolidated balance sheets. The carrying value of our long-term debt under the Margin Loan Facility (as defined in note 5 to the accompanying condensed consolidated financial statements) 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,

 

2020

2019

2020

2019

 

(amounts in thousands)

 

Derivative instruments (1)

$

(433)

(433)

Exchangeable senior debentures (2)

(39,324)

NA

(39,324)

NA

$

(39,324)

(433)

(39,324)

 

(433)

(1)In September 2019, the Company entered into a zero-strike call option on 460,675 shares of Liberty Broadband Series C common stock and prepaid a premium of $46.3 million.
(2)The Company has elected to account for its exchangeable senior debentures entered into in August 2020 using the fair value option.  Changes in the fair value of the exchangeable senior debentures recognized in the condensed consolidated statements of operations are primarily due to market factors driven by changes in the fair value of the underlying shares into which debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) attributable to the change in the instrument specific credit risk and recognizes such amount in other comprehensive income. The change in the fair value of the exchangeable senior debentures attributable to changes in the instrument specific credit risk before tax was a loss of $15.3 million for the three and nine months ended September 30, 2020.

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

Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter. The investment in Charter is accounted for as an equity method affiliate based on our voting and ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of September 30, 2020, the carrying and market value of Liberty Broadband’s ownership in Charter was approximately $12,450 million and $33,781 million, respectively.  Liberty Broadband’s ownership in Charter is 27.1% of the outstanding equity of Charter as of September 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 (24.0% at September 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 Broadband’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 Broadband’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

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

35% for each permanent reduction in A/N’s equity interest in Charter below 15%. As of September 30, 2020, Liberty Broadband 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 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 nine months ended September 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 $5,167 million as of September 30, 2020 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

September 30,

December 31,

2020

2019

Property and equipment

    

$

307

225

Customer relationships

 

1,381

1,043

Franchise fees

 

2,402

1,996

Trademarks

 

29

29

Goodwill

 

2,182

1,630

Debt

 

(144)

(9)

Deferred income tax liability

 

(990)

(817)

$

5,167

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 nine months ended September 30, 2020 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 $25.5 million and $32.7 million, net of related taxes, for the three months ended September 30, 2020 and 2019, respectively, and expenses of $107.3 million and $88.7 million, net of related taxes, for the nine months ended September 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 $35.3 million and $11.2 million during the three months ended September 30, 2020 and 2019, respectively, and a dilution loss of $140.6 million and $68.9 million during the nine months ended September 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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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Charter condensed consolidated balance sheets

    

September 30, 2020

December 31, 2019

 

Current assets

$

4,063

6,537

Property and equipment, net

 

34,196

34,591

Goodwill

 

29,554

29,554

Intangible assets, net

 

73,372

74,775

Other assets

 

3,008

2,731

Total assets

$

144,193

148,188

Current liabilities

10,256

12,385

Deferred income taxes

 

17,929

17,711

Long-term debt

 

77,947

75,578

Other liabilities

 

4,349

3,703

Equity

 

33,712

38,811

Total liabilities and shareholders’ equity

$

144,193

148,188

Charter condensed consolidated statements of operations

Three months ended

    

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

Revenue

$

12,039

11,450

35,473

34,003

Cost and expenses:

Operating costs and expenses (excluding depreciation and amortization)

 

7,483

7,435

22,212

21,915

Depreciation and amortization

 

2,370

2,415

7,295

7,465

Other operating (income) expenses, net

 

14

14

23

71

9,867

9,864

29,530

29,451

Operating income

2,172

1,586

5,943

4,552

Interest expense, net

 

(946)

(963)

(2,883)

(2,833)

Other income (expense), net

(117)

(30)

(413)

(220)

Income tax benefit (expense)

 

(177)

(126)

(372)

(329)

Net income (loss)

932

467

2,275

1,170

Less: Net income attributable to noncontrolling interests

(118)

(80)

(299)

(216)

Net income (loss) attributable to Charter shareholders

$

814

387

1,976

954

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(5) Debt

Debt is summarized as follows: