|
||||||||||||||||||||||||||
| SEC Info℠ | | | Home | | | Search | | | My Interests | | | Help | | | Sign In | | | Please Sign In | |||||||
|
||||||||||||||||||||||||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/06/20 DISH Network Corp. 10-Q 9/30/20 92:19M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 2.53M
2: EX-10.1 Material Contract HTML 136K
3: EX-10.2 Material Contract HTML 128K
4: EX-10.3 Material Contract HTML 121K
5: EX-10.4 Material Contract HTML 184K
6: EX-10.5 Material Contract HTML 214K
7: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
8: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
9: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
10: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
17: R1 Document and Entity Information HTML 82K
18: R2 Condensed Consolidated Balance Sheets HTML 154K
19: R3 Condensed Consolidated Balance Sheets HTML 41K
(Parenthetical)
20: R4 Condensed Consolidated Statements of Operations HTML 148K
and Comprehensive Income (Loss)
21: R5 Condensed Consolidated Statements of Changes in HTML 108K
Stockholders' Equity (Deficit)
22: R6 Consolidated Statements of Changes in HTML 28K
Stockholders' Equity (Deficit) (Parenthetical)
23: R7 Condensed Consolidated Statements of Cash Flows HTML 101K
24: R8 Condensed Consolidated Statements of Cash Flows HTML 28K
(Parenthetical)
25: R9 Organization and Business Activities HTML 48K
26: R10 Summary of Significant Accounting Policies HTML 108K
27: R11 Basic and Diluted Net Income (Loss) Per Share HTML 112K
28: R12 Supplemental Data - Statements of Cash Flows HTML 52K
29: R13 Acquisitions HTML 130K
30: R14 Marketable Investment Securities, Restricted Cash HTML 260K
and Cash Equivalents, and Other Investment
Securities
31: R15 Inventory HTML 45K
32: R16 Property and Equipment and Intangible Assets HTML 216K
33: R17 Leases HTML 207K
34: R18 Long-Term Debt and Finance Lease Obligations HTML 106K
35: R19 Commitments and Contingencies HTML 234K
36: R20 Segment Reporting HTML 165K
37: R21 Contract Balances HTML 58K
38: R22 Related Party Transactions HTML 208K
39: R23 Summary of Significant Accounting Policies HTML 143K
(Policies)
40: R24 Summary of Significant Accounting Policies HTML 39K
(Tables)
41: R25 Basic and Diluted Net Income (Loss) Per Share HTML 111K
(Tables)
42: R26 Supplemental Data - Statements of Cash Flows HTML 51K
(Tables)
43: R27 Acquisitions (Tables) HTML 85K
44: R28 Marketable Investment Securities, Restricted Cash HTML 253K
and Cash Equivalents, and Other Investment
Securities (Tables)
45: R29 Inventory (Tables) HTML 45K
46: R30 Property and Equipment and Intangible Assets HTML 220K
(Tables)
47: R31 Leases (Tables) HTML 254K
48: R32 Long-Term Debt and Finance Lease Obligations HTML 97K
(Tables)
49: R33 Commitments and Contingencies (Tables) HTML 98K
50: R34 Segment Reporting (Tables) HTML 164K
51: R35 Contract Balances (Tables) HTML 55K
52: R36 Related Party Transactions (Tables) HTML 126K
53: R37 Organization and Business Activities (Details) HTML 63K
54: R38 Organization and Business Activities - Asset HTML 36K
Purchase Agreement (Details)
55: R39 Summary of Significant Accounting Policies HTML 129K
(Details)
56: R40 Summary of Significant Accounting Policies - HTML 35K
Impairment of Long-lived assets (Details)
57: R41 Basic and Diluted Net Income (Loss) Per Share HTML 74K
(Details)
58: R42 Basic and Diluted Net Income (Loss) Per Share - HTML 40K
Performance based stock (Details)
59: R43 Supplemental Data - Statements of Cash Flows HTML 43K
(Details)
60: R44 Acquisitions (Details) HTML 161K
61: R45 Acquisitions - Fair Value of Consideration HTML 36K
(Details)
62: R46 Acquisitions - Purchase Price Allocation (Details) HTML 58K
63: R47 Acquisitions - Pro Forma Results (Details) HTML 30K
64: R48 Marketable Investment Securities, Restricted Cash HTML 47K
and Cash Equivalents, and Other Investment
Securities (Details)
65: R49 Marketable Investment Securities, Restricted Cash HTML 38K
and Cash Equivalents, and Other Investment
Securities - Narrative (Details)
66: R50 Marketable Investment Securities, Restricted Cash HTML 60K
and Cash Equivalents, and Other Investment
Securities - Unrealized Gain (Losses) On
Marketable Investment Securities (Details)
67: R51 Marketable Investment Securities, Restricted Cash HTML 62K
and Cash Equivalents, and Other Investment
Securities - Investments Measured at Fair Value On
A Recurring Basis (Details)
68: R52 Marketable Investment Securities, Restricted Cash HTML 39K
and Cash Equivalents, and Other Investment
Securities - Other Income Expense (Details)
69: R53 Inventory (Details) HTML 34K
70: R54 Property and Equipment and Intangible Assets HTML 90K
(Details)
71: R55 Property and Equipment and Intangible Assets - HTML 37K
Depreciation and Amortization (Details)
72: R56 Property and Equipment and Intangible Assets - HTML 34K
Additional Information (Details)
73: R57 Property and Equipment and Intangible Assets - HTML 72K
Estimated Future Amortization (Details)
74: R58 Leases (Details) HTML 45K
75: R59 Leases - Components of Lease Expense (Details) HTML 44K
76: R60 Leases - Supplemental Cash Flow Information HTML 38K
(Details)
77: R61 Leases - Supplemental Balance Sheet Information HTML 74K
(Details)
78: R62 Leases - Maturities of Lease Liabilities (Details) HTML 94K
79: R63 Long-Term Debt and Finance Lease Obligations - HTML 69K
Fair Value of Long-Term Debt (Details)
80: R64 Long-Term Debt and Finance Lease Obligations HTML 41K
(Details)
81: R65 Commitments and Contingencies (Details) HTML 378K
82: R66 Commitments and Contingencies - Part 2 (Details) HTML 132K
83: R67 Segment Reporting (Details) HTML 76K
84: R68 Contract Balances - Valuation And Qualifying HTML 32K
Accounts Activity (Details)
85: R69 Contract Balances - Deferred Revenues (Details) HTML 31K
86: R70 Related Party Transactions (Details) HTML 278K
87: R71 Related Party Transactions - Part 2 (Details) HTML 51K
88: R9999 Uncategorized Items - dish-20200930x10q.htm HTML 33K
90: XML IDEA XML File -- Filing Summary XML 166K
16: XML XBRL Instance -- dish-20200930x10q_htm XML 5.16M
89: EXCEL IDEA Workbook of Financial Reports XLSX 157K
12: EX-101.CAL XBRL Calculations -- dish-20200930_cal XML 260K
13: EX-101.DEF XBRL Definitions -- dish-20200930_def XML 1.08M
14: EX-101.LAB XBRL Labels -- dish-20200930_lab XML 2.10M
15: EX-101.PRE XBRL Presentations -- dish-20200930_pre XML 1.49M
11: EX-101.SCH XBRL Schema -- dish-20200930 XSD 319K
91: JSON XBRL Instance as JSON Data -- MetaLinks 512± 769K
92: ZIP XBRL Zipped Folder -- 0001558370-20-013008-xbrl Zip 642K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form i 10-Q
(Mark One)
i ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED i SEPTEMBER 30, 2020.
OR
i ☐ 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: i 001-39144
i DISH Network Corporation
(Exact name of registrant as specified in its charter)
| | |
i Nevada | | i 88-0336997 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
i 9601 South Meridian Boulevard | | |
i Englewood, i Colorado | | i 80112 |
(Address of principal executive offices) | | (Zip code) |
( i 303) i 723-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |||
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
i Class A common stock, $0.01 par value | | i DISH | | The i Nasdaq Stock Market L.L.C. |
Securities registered pursuant to Section 12(g) of the Act: None
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. i 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). i 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.
| | |
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ Emerging growth company i ☐ |
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 i ☐ No ☒
As of October 22, 2020, the registrant’s outstanding common stock consisted of i 287,530,751 shares of Class A common stock and i 238,435,208 shares of Class B common stock.
TABLE OF CONTENTS
| | |
| i | |
| | |
| ||
| | |
| Condensed
Consolidated Balance Sheets — | 1 |
| | |
| 2 | |
| | |
| 3 | |
| | |
| 5 | |
| | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 |
| | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 78 | |
| | |
120 | ||
| | |
120 | ||
| | |
| | |
120 | ||
| | |
120 | ||
| | |
121 | ||
| | |
Item 3. | Defaults Upon Senior Securities | None |
| | |
Item 4. | Mine Safety Disclosures | None |
| | |
121 | ||
| | |
124 | ||
| | |
| 125 | |
PART I — FINANCIAL INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries and “DISH DBS” refers to DISH DBS Corporation, a wholly-owned, indirect subsidiary of DISH Network, and its subsidiaries.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our plans, objectives and strategies, growth opportunities in our industries and businesses, our expectations regarding future results, financial condition, liquidity and capital requirements, our estimates regarding the impact of regulatory developments and legal proceedings, and other trends and projections. Forward-looking statements are not historical facts and may be identified by words such as “future,” “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “will,” “would,” “could,” “can,” “may,” and similar terms. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve known and unknown risks, uncertainties and other factors, which may be beyond our control. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including, but not limited to, the following:
Competition and Economic Risks
| ● | As the pay-TV industry has matured and bundled offers combining video, broadband and/or wireless services have become more prevalent and competitive, we face intense and increasing competition from providers of video, broadband and/or wireless services, which may require us to further increase subscriber acquisition and retention spending or accept lower subscriber activations and higher subscriber churn. |
| ● | Changing consumer behavior and competition from digital media companies that provide or facilitate the delivery of video content via the Internet may reduce our subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us. |
| ● | Economic weakness and uncertainty may adversely affect our ability to grow or maintain our business. |
| ● | The COVID-19 pandemic and its impact on the economic environment generally, and on us specifically, have adversely impacted our business. Furthermore, any continuation or worsening of the pandemic and economic environment could have a material adverse effect on our business, financial condition and results of operations. |
| ● | Our competitors may be able to leverage their relationships with programmers to reduce their programming costs and/or offer exclusive content that will place them at a competitive advantage to us. |
| ● | Our over-the-top (“OTT”) SLING TV Internet-based services face certain risks, including, among others, significant competition. |
| ● | If government regulations relating to the Internet change, we may need to alter the manner in which we conduct our SLING TV business, and/or incur greater operating expenses to comply with those regulations. |
| ● | Changes in how network operators handle and charge for access to data that travels across their networks could adversely impact our business. |
| ● | We face increasing competition from other distributors of unique programming services such as foreign language, sports programming and original content that may limit our ability to maintain subscribers that desire these unique programming services. |
i
Operational and Service Delivery Risks
| ● | If our operational performance and customer satisfaction were to deteriorate, our subscriber activations and our subscriber churn rate may be negatively impacted, which could in turn adversely affect our revenue. |
| ● | If our subscriber activations decrease, or if our subscriber churn rate, subscriber acquisition costs or retention costs increase, our financial performance will be adversely affected. |
| ● | Programming expenses are increasing and may adversely affect our future financial condition and results of operations. |
| ● | We depend on others to provide the programming that we offer to our subscribers and, if we fail to obtain or lose access to certain programming, our subscriber activations and our subscriber churn rate may be negatively impacted. |
| ● | We may not be able to obtain necessary retransmission consent agreements at acceptable rates, or at all, from local network stations. |
| ● | We may be required to make substantial additional investments to maintain competitive programming offerings. |
| ● | Any failure or inadequacy of our information technology infrastructure and communications systems or those of third parties that we use in our operations, including, without limitation, those caused by cyber-attacks or other malicious activities, could disrupt or harm our business. |
| ● | Through the MNSA, we depend on NTM to provide services to our retail wireless customers, and any system failure related to NTM’s wireless network, interruption in the services provided by NTM and/or the termination of the MNSA could negatively impact our subscriber activations and our subscriber churn rate, which in turn could have a material adverse effect on our business, financial condition and results of operations. |
| ● | Technology in the pay-TV industry changes rapidly, and our success may depend in part on our timely introduction and implementation of, and effective investment in, new competitive products and services, and our failure to do so could cause our products and services to become obsolete and could negatively impact our business. |
| ● | We rely on a single vendor or a limited number of vendors to provide certain key products or services to us such as information technology support, billing systems and security access devices, and the inability of these key vendors to meet our needs could have a material adverse effect on our business. |
| ● | We rely on a few suppliers and in some cases a single supplier for many components of our new set-top boxes, and any reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business. |
| ● | Our programming signals are subject to theft, and we are vulnerable to other forms of fraud that could require us to make significant expenditures to remedy. |
| ● | We depend on independent third parties to solicit orders for our DISH TV services that represent a meaningful percentage of our total gross new DISH TV subscriber activations. |
| ● | We have limited satellite capacity and failures or reduced capacity could adversely affect our DISH TV services. |
| ● | Our owned and leased satellites are subject to construction, launch, operational and environmental risks that could limit our ability to utilize these satellites. |
ii
| ● | Satellite anomalies or technological failures could adversely affect the value of a particular satellite or result in a complete loss. Some of the satellites acquired pursuant to the Master Transaction Agreement have experienced anomalies that may affect their useful lives or prohibit us from operating them to their currently expected capacity, and one or more of the satellites may suffer a technological failure, either of which could have an adverse effect on our business, financial condition and results of operations. |
| ● | We generally do not carry commercial in-orbit insurance on any of the satellites that we own and could face significant impairment charges if any of our owned satellites fail. |
| ● | We may have potential conflicts of interest with EchoStar Corporation (“EchoStar”) due to our common ownership and management. |
| ● | We rely on key personnel and the loss of their services may negatively affect our business. |
Acquisition and Capital Structure Risks
| ● | We have made substantial investments to acquire certain wireless spectrum licenses and other related assets. In addition, we have made substantial non-controlling investments in the Northstar Entities and the SNR Entities related to AWS-3 wireless spectrum licenses. |
| ● | We face certain risks related to our non-controlling investments in the Northstar Entities and the SNR Entities, which may have a material adverse effect on our business, results of operations and financial condition. |
| ● | To the extent that we commercialize our wireless spectrum licenses, we will face certain risks entering and competing in the wireless services industry and operating a facilities-based wireless services business. |
| ● | Our wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The failure to meet such build-out and/or renewal requirements may have a material adverse effect on our business, results of operations and financial condition. |
| ● | We rely on highly skilled personnel for our wireless business, including without limitation our ability to meet build-out requirements, and if we are unable to hire and retain key personnel or hire qualified personnel then our wireless business may be adversely affected. |
| ● | We may fail to realize all of the anticipated benefits of the Boost Mobile Acquisition. |
| ● | The integration of the BSS Business may not be as successful as anticipated. |
| ● | We may fail to realize all of the anticipated benefits of the Master Transaction Agreement. |
| ● | Despite the acquisition of additional satellites acquired pursuant to the Master Transaction Agreement, we continue to have limited satellite capacity, and failures or reduced capacity could adversely affect our DISH TV services. |
| ● | Current DISH Network stockholders have reduced ownership and voting interest in and exercise less influence over management of DISH Network following the closing of the Master Transaction Agreement. |
| ● | If we were to take certain actions that could cause the Distribution to become taxable to EchoStar, we may be required to indemnify EchoStar for any resulting tax liability, and the indemnity amounts could be substantial. |
| ● | We may pursue acquisitions and other strategic transactions to complement or expand our business that may not be successful, and we may lose up to the entire value of our investment in these acquisitions and transactions. |
iii
| ● | We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in our business and to finance acquisitions and other strategic transactions. |
| ● | We have substantial debt outstanding and may incur additional debt. |
| ● | The conditional conversion features of our 3 3/8% Convertible Notes due 2026 (the “Convertible Notes due 2026”) and our 2 3/8% Convertible Notes due 2024 (the “Convertible Notes due 2024,” and collectively with the Convertible Notes due 2026, the “Convertible Notes”), if triggered, may adversely affect our financial condition. |
| ● | The convertible note hedge and warrant transactions that we entered into in connection with the offering of the Convertible Notes due 2026 may affect the value of the Convertible Notes due 2026 and our Class A common stock. |
| ● | We are subject to counterparty risk with respect to the convertible note hedge transactions. |
| ● | From time to time a portion of our investment portfolio may be invested in securities that have limited liquidity and may not be immediately accessible to support our financing needs, including investments in public companies that are highly speculative and have experienced and continue to experience volatility. |
| ● | It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our ownership structure. |
| ● | We are controlled by one principal stockholder who is also our Chairman. |
Legal and Regulatory Risks
| ● | The rulings in the Telemarketing litigation requiring us to pay up to an aggregate amount of $280 million and imposing certain injunctive relief against us, if upheld, would have a material adverse effect on our cash, cash equivalents and marketable investment securities balances and our business operations. |
| ● | Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. |
| ● | We are, and may become, party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property. |
| ● | Our ability to distribute video content via the Internet, including our SLING TV services, involves regulatory risk. |
| ● | Changes in the Cable Act of 1992 (“Cable Act”), and/or the rules of the Federal Communications Commission (“FCC”) that implement the Cable Act, may limit our ability to access programming from cable-affiliated programmers at nondiscriminatory rates. |
| ● | The injunction against our retransmission of distant networks, which is currently waived, may be reinstated. |
| ● | We are subject to significant regulatory oversight, and changes in applicable regulatory requirements, including any adoption or modification of laws or regulations relating to the Internet, could adversely affect our business. |
| ● | Our DISH TV services depend on FCC licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted. |
iv
| ● | We are subject to digital high-definition (“HD”) “carry-one, carry-all” requirements that cause capacity constraints. |
| ● | Our business, investor confidence in our financial results and stock price may be adversely affected if our internal controls are not effective. |
| ● | We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”). |
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and June 30, 2020, and in Part I, Item 1A of our most recent Annual Report on Form 10-K (the “10-K”) filed with the SEC, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC. All cautionary statements made or referred to herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described or referred to herein and should not place undue reliance on any forward-looking statements. The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation to update these forward-looking statements.
v
Item 1. FINANCIAL STATEMENTS
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2020 |
| 2019 |
| ||
Assets | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | i 1,811,308 | | $ | i 2,443,643 | |
Marketable investment securities | | | i 983,859 | | | i 416,704 | |
Trade accounts receivable, net of allowance for credit losses and allowance for doubtful accounts of $ i 64,614 and $ i 19,280, respectively | | | i 1,143,500 | | | i 588,358 | |
Inventory | | | i 516,216 | | | i 322,898 | |
Other current assets | | | i 550,588 | | | i 243,497 | |
Total current assets | | | i 5,005,471 | | | i 4,015,100 | |
| | | | | | | |
Noncurrent Assets: | | | | | | | |
Restricted cash, cash equivalents and marketable investment securities | | | i 108,388 | | | i 61,067 | |
Property and equipment, net | | | i 2,226,423 | | | i 2,706,182 | |
FCC authorizations | | | i 26,665,485 | | | i 25,779,503 | |
Other investment securities | | | i 148,246 | | | i 160,074 | |
Operating lease assets | | | i 112,922 | | | i 144,330 | |
Other noncurrent assets, net | | | i 1,031,216 | | | i 228,264 | |
Intangible assets, net (Note 8) | | | i 802,286 | | | i 136,415 | |
Total noncurrent assets | | | i 31,094,966 | | | i 29,215,835 | |
Total assets | | $ | i 36,100,437 | | $ | i 33,230,935 | |
| | | | | | | |
Liabilities and Stockholders' Equity (Deficit) | | | | | | | |
Current Liabilities: | | | | | | | |
Trade accounts payable | | $ | i 747,533 | | $ | i 280,645 | |
Deferred revenue and other | | | i 861,843 | | | i 681,484 | |
Accrued programming | | | i 1,330,687 | | | i 1,308,531 | |
Accrued interest | | | i 189,762 | | | i 236,087 | |
Other accrued expenses | | | i 1,307,666 | | | i 817,978 | |
Current portion of long-term debt and finance lease obligations | | | i 2,092,638 | | | i 1,171,366 | |
Total current liabilities | | | i 6,530,129 | | | i 4,496,091 | |
| | | | | | | |
Long-Term Obligations, Net of Current Portion: | | | | | | | |
Long-term debt and finance lease obligations, net of current portion | | | i 11,989,762 | | | i 12,968,229 | |
Deferred tax liabilities | | | i 3,635,500 | | | i 2,870,655 | |
Operating lease liabilities | | | i 73,057 | | | i 84,795 | |
Long-term deferred revenue and other long-term liabilities | | | i 546,527 | | | i 695,018 | |
Total long-term obligations, net of current portion | | | i 16,244,846 | | | i 16,618,697 | |
Total liabilities | | | i 22,774,975 | | | i 21,114,788 | |
| | | | | | | |
Commitments and Contingencies (Note 11) | | | | | | | |
| | | | | | | |
Redeemable noncontrolling interests (Note 2) | | | i 633,949 | | | i 552,075 | |
| | | | | | | |
Stockholders’ Equity (Deficit): | | | | | | | |
Class A common stock, $ i i .01 / par value, i i 1,600,000,000 / shares authorized, i 287,530,751 and i 284,603,818 shares issued and outstanding, respectively | | | i 2,875 | | | i 2,846 | |
Class B common stock, $ i i .01 / par value, i i 800,000,000 / shares authorized, i i 238,435,208 / shares issued and outstanding | | | i 2,384 | | | i 2,384 | |
Additional paid-in capital | | | i 5,045,237 | | | i 4,947,007 | |
Accumulated other comprehensive income (loss) | | | ( i 1,583) | | | ( i 18) | |
Accumulated earnings (deficit) | | | i 7,642,343 | | | i 6,612,302 | |
Total DISH Network stockholders’ equity (deficit) | | | i 12,691,256 | | | i 11,564,521 | |
Noncontrolling interests | | | i 257 | | | ( i 449) | |
Total stockholders’ equity (deficit) | | | i 12,691,513 | | | i 11,564,072 | |
Total liabilities and stockholders’ equity (deficit) | | $ | i 36,100,437 | | $ | i 33,230,935 | |
| | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| September 30, | | | |||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Revenue: | | | | | | | | | | | | |
Service revenue | $ | i 4,222,145 | | $ | i 3,117,191 | | $ | i 10,537,999 | | $ | i 9,427,533 | |
Equipment sales and other revenue | | i 309,446 | | | i 51,172 | | | i 398,071 | | | i 139,286 | |
Total revenue | | i 4,531,591 | | | i 3,168,363 | | | i 10,936,070 | | | i 9,566,819 | |
| | | | | | | | | | | | |
Costs and Expenses (exclusive of depreciation): | | | | | | | | | | | | |
Cost of services | | i 2,488,969 | | | i 2,041,578 | | | i 6,505,116 | | | i 6,354,770 | |
Cost of sales - equipment and other | | i 515,643 | | | i 55,753 | | | i 586,672 | | | i 147,210 | |
Selling, general and administrative expenses | | i 516,648 | | | i 447,959 | | | i 1,376,861 | | | i 1,251,893 | |
Impairment of long-lived assets (Note 2) | | - | | | - | | | i 356,418 | | | - | |
Depreciation and amortization | | i 199,083 | | | i 154,181 | | | i 518,027 | | | i 457,022 | |
Total costs and expenses | | i 3,720,343 | | | i 2,699,471 | | | i 9,343,094 | | | i 8,210,895 | |
| | | | | | | | | | | | |
Operating income (loss) | | i 811,248 | | | i 468,892 | | | i 1,592,976 | | | i 1,355,924 | |
| | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | |
Interest income | | i 1,647 | | | i 32,301 | | | i 21,440 | | | i 65,944 | |
Interest expense, net of amounts capitalized | | i 6,778 | | | ( i 6,027) | | | ( i 20,322) | | | ( i 17,598) | |
Other, net | | ( i 13,200) | | | ( i 1,796) | | | ( i 11,592) | | | i 10,124 | |
Total other income (expense) | | ( i 4,775) | | | i 24,478 | | | ( i 10,474) | | | i 58,470 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | i 806,473 | | | i 493,370 | | | i 1,582,502 | | | i 1,414,394 | |
Income tax (provision) benefit, net | | ( i 273,514) | | | ( i 116,213) | | | ( i 469,864) | | | ( i 335,372) | |
Net income (loss) | | i 532,959 | | | i 377,157 | | | i 1,112,638 | | | i 1,079,022 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | i 28,360 | | | i 23,853 | | | i 82,597 | | | i 68,914 | |
Net income (loss) attributable to DISH Network | $ | i 504,599 | | $ | i 353,304 | | $ | i 1,030,041 | | $ | i 1,010,108 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding - Class A and B common stock: | | | | | | | | | | | | |
Basic | | i 525,532 | | | i 477,495 | | | i 524,329 | | | i 471,736 | |
Diluted | | i 583,957 | | | i 535,746 | | | i 582,595 | | | i 530,041 | |
| | | | | | | | | | | | |
Earnings per share - Class A and B common stock: | | | | | | | | | | | | |
Basic net income (loss) per share attributable to DISH Network | $ | i 0.96 | | $ | i 0.74 | | $ | i 1.96 | | $ | i 2.14 | |
Diluted net income (loss) per share attributable to DISH Network | $ | i 0.86 | | $ | i 0.66 | | $ | i 1.77 | | $ | i 1.91 | |
| | | | | | | | | | | | |
Comprehensive Income (Loss): | | | | | | | | | | | | |
Net income (loss) | $ | i 532,959 | | $ | i 377,157 | | $ | i 1,112,638 | | $ | i 1,079,022 | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustments | | i 1,411 | | | ( i 237) | | | ( i 1,735) | | | ( i 52) | |
Unrealized holding gains (losses) on available-for-sale debt securities | | ( i 21) | | | ( i 211) | | | ( i 62) | | | i 1,180 | |
Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss) | | i 43 | | | ( i 2) | | | ( i 11) | | | ( i 298) | |
Deferred income tax (expense) benefit, net | | ( i 352) | | | i 49 | | | i 243 | | | ( i 208) | |
Total other comprehensive income (loss), net of tax | | i 1,081 | | | ( i 401) | | | ( i 1,565) | | | i 622 | |
Comprehensive income (loss) | | i 534,040 | | | i 376,756 | | | i 1,111,073 | | | i 1,079,644 | |
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax | | i 28,360 | | | i 23,853 | | | i 82,597 | | | i 68,914 | |
Comprehensive income (loss) attributable to DISH Network | $ | i 505,680 | | $ | i 352,903 | | $ | i 1,028,476 | | $ | i 1,010,730 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | | | | | | | | | | |
| | Class A and B | | Additional | | Other | | Accumulated | | | | | | | | Redeemable | | |||||
| | Common | | Paid-In | | Comprehensive | | Earnings | | Noncontrolling | | | | | Noncontrolling | | ||||||
| | Stock | | Capital | | Income (Loss) | | (Deficit) | | Interests | | Total | | Interests | | |||||||
Balance, December 31, 2018 | | $ | i 4,679 | | $ | i 3,379,093 | | $ | ( i 874) | | $ | i 5,212,790 | | $ | ( i 1,499) | | $ | i 8,594,189 | | $ | i 460,068 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | — | | | i 227 | | | — | | | — | | | — | | | i 227 | | | — | |
Employee Stock Purchase Plan | | | i 2 | | | i 4,520 | | | — | | | — | | | — | | | i 4,522 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 11,537 | | | — | | | — | | | — | | | i 11,537 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 1,006 | | | — | | | — | | | i 1,006 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 236) | | | — | | | — | | | ( i 236) | | | — | |
Foreign currency translation | | | — | | | — | | | i 47 | | | — | | | — | | | i 47 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 164 | | | i 164 | | | i 21,374 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 339,761 | | | — | | | i 339,761 | | | — | |
Balance, March 31, 2019 | | $ | i 4,681 | | $ | i 3,395,377 | | $ | ( i 57) | | $ | i 5,552,551 | | $ | ( i 1,335) | | $ | i 8,951,217 | | $ | i 481,442 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 6 | | | i 18,620 | | | — | | | — | | | — | | | i 18,626 | | | — | |
Employee benefits | | | i 11 | | | i 26,993 | | | — | | | — | | | — | | | i 27,004 | | | — | |
Employee Stock Purchase Plan | | | i 1 | | | i 4,040 | | | — | | | — | | | — | | | i 4,041 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 12,105 | | | — | | | — | | | — | | | i 12,105 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 89 | | | — | | | — | | | i 89 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 21) | | | — | | | — | | | ( i 21) | | | — | |
Foreign currency translation | | | — | | | — | | | i 138 | | | — | | | — | | | i 138 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 269 | | | i 269 | | | i 23,254 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 317,043 | | | — | | | i 317,043 | | | — | |
Balance, June 30, 2019 | | $ | i 4,699 | | $ | i 3,457,135 | | $ | i 149 | | $ | i 5,869,594 | | $ | ( i 1,066) | | $ | i 9,330,511 | | $ | i 504,696 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 1 | | | i 77 | | | — | | | — | | | — | | | i 78 | | | — | |
Employee Stock Purchase Plan | | | i 1 | | | i 4,536 | | | — | | | — | | | — | | | i 4,537 | | | — | |
Non-cash, stock-based compensation | | | — | | | ( i 15,348) | | | — | | | — | | | — | | | ( i 15,348) | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | ( i 213) | | | — | | | — | | | ( i 213) | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | i 49 | | | — | | | — | | | i 49 | | | — | |
Foreign currency translation | | | — | | | — | | | ( i 237) | | | — | | | — | | | ( i 237) | | | — | |
Master Transaction Agreement, net of deferred tax of $ i 166,161 | | | i 229 | | | i 496,916 | | | — | | | — | | | — | | | i 497,145 | | | — | |
Other | | | — | | | ( i 1,142) | | | — | | | — | | | — | | | ( i 1,142) | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 344 | | | i 344 | | | i 23,509 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 353,304 | | | — | | | i 353,304 | | | — | |
Balance, September 30, 2019 | | $ | i 4,930 | | $ | i 3,942,174 | | $ | ( i 252) | | $ | i 6,222,898 | | $ | ( i 722) | | $ | i 10,169,028 | | $ | i 528,205 | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | | | | | | | | | | |
| | Class A and B | | Additional | | Other | | Accumulated | | | | | | | | Redeemable | | |||||
| | Common | | Paid-In | | Comprehensive | | Earnings | | Noncontrolling | | | | | Noncontrolling | | ||||||
| | Stock | | Capital | | Income (Loss) | | (Deficit) | | Interests | | Total | | Interests | | |||||||
Balance, December 31, 2019 | | $ | i 5,230 | | $ | i 4,947,007 | | $ | ( i 18) | | $ | i 6,612,302 | | $ | ( i 449) | | $ | i 11,564,072 | | $ | i 552,075 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | — | | | i 395 | | | — | | | — | | | — | | | i 395 | | | — | |
Employee Stock Purchase Plan | | | i 3 | | | i 5,127 | | | — | | | — | | | — | | | i 5,130 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 16,418 | | | — | | | — | | | — | | | i 16,418 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | ( i 208) | | | — | | | — | | | ( i 208) | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | i 49 | | | — | | | — | | | i 49 | | | — | |
Foreign currency translation | | | — | | | — | | | i 375 | | | — | | | — | | | i 375 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 263 | | | i 263 | | | — | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 73,099 | | | — | | | i 73,099 | | | i 25,912 | |
Balance, March 31, 2020 | | $ | i 5,233 | | $ | i 4,968,947 | | $ | i 198 | | $ | i 6,685,401 | | $ | ( i 186) | | $ | i 11,659,593 | | $ | i 577,987 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 3 | | | ( i 663) | | | — | | | — | | | — | | | ( i 660) | | | — | |
Employee benefits | | | i 8 | | | i 28,293 | | | | | | | | | | | | i 28,301 | | | | |
Employee Stock Purchase Plan | | | i 2 | | | i 4,209 | | | — | | | — | | | — | | | i 4,211 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 18,393 | | | — | | | — | | | — | | | i 18,393 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 113 | | | — | | | — | | | i 113 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | i 546 | | | — | | | — | | | i 546 | | | — | |
Foreign currency translation | | | — | | | — | | | ( i 3,521) | | | — | | | — | | | ( i 3,521) | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 235 | | | i 235 | | | — | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 452,343 | | | — | | | i 452,343 | | | i 27,828 | |
Other | | | — | | | — | | | — | | | — | | | ( i 17) | | | ( i 17) | | | — | |
Balance, June 30, 2020 | | $ | i 5,246 | | $ | i 5,019,179 | | $ | ( i 2,664) | | $ | i 7,137,744 | | $ | i 32 | | $ | i 12,159,537 | | $ | i 605,815 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 12 | | | i 8,353 | | | — | | | — | | | — | | | i 8,365 | | | — | |
Employee Stock Purchase Plan | | | i 1 | | | i 4,570 | | | — | | | — | | | — | | | i 4,571 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 13,135 | | | — | | | — | | | — | | | i 13,135 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 22 | | | — | | | — | | | i 22 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 352) | | | — | | | — | | | ( i 352) | | | — | |
Foreign currency translation | | | — | | | — | | | i 1,411 | | | — | | | — | | | i 1,411 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 225 | | | i 225 | | | — | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 504,599 | | | — | | | i 504,599 | | | i 28,134 | |
Balance, September 30, 2020 | | $ | i 5,259 | | $ | i 5,045,237 | | $ | ( i 1,583) | | $ | i 7,642,343 | | $ | i 257 | | $ | i 12,691,513 | | $ | i 633,949 | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2020 |
| 2019 |
| ||
Cash Flows From Operating Activities: | | | | | | | |
Net income (loss) |
| $ | i 1,112,638 | | $ | i 1,079,022 | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | | | i 518,027 | | | i 457,022 | |
Impairment of long-lived assets (Note 2) | | | i 356,418 | | | — | |
Realized and unrealized losses (gains) on investments and derivatives | | | i 12,273 | | | ( i 4,757) | |
Non-cash, stock-based compensation | | | i 47,946 | | | i 8,294 | |
Deferred tax expense (benefit) | | | i 765,088 | | | i 174,842 | |
Allowance for credit losses and allowance for doubtful accounts, respectively | | | i 24,648 | | | i 6,155 | |
Change in long-term deferred revenue and other long-term liabilities | | | ( i 240,302) | | | i 170,257 | |
Other, net | | | ( i 3,828) | | | i 101,828 | |
Changes in current assets and current liabilities, net | | | i 124,783 | | | i 35,966 | |
Net cash flows from operating activities | | | i 2,717,691 | | | i 2,028,629 | |
| | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
Purchases of marketable investment securities | | | ( i 1,549,857) | | | ( i 631,236) | |
Sales and maturities of marketable investment securities | | | i 968,976 | | | i 1,624,451 | |
Purchases of property and equipment | | | ( i 309,549) | | | ( i 461,402) | |
Capitalized interest related to FCC authorizations (Note 2) | | | ( i 646,265) | | | ( i 734,631) | |
Purchases of FCC authorizations, including deposits (Note 11) | | | ( i 317,190) | | | ( i 12,155) | |
Sprint asset acquisition (Note 5) | | | ( i 1,312,500) | | | — | |
Other, net | | | ( i 14,108) | | | i 72,764 | |
Net cash flows from investing activities | | | ( i 3,180,493) | | | ( i 142,209) | |
| | | | | | | |
Cash Flows From Financing Activities: | | | | | | | |
Redemption and repurchases of senior notes | | | ( i 1,100,000) | | | ( i 1,317,372) | |
Repayment of long-term debt and finance lease obligations | | | ( i 77,280) | | | ( i 21,112) | |
Proceeds from issuance of 7 3/8% Senior Notes due 2028 | | | i 1,000,000 | | | — | |
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan | | | i 22,012 | | | i 32,031 | |
Debt issuance costs | | | ( i 1,670) | | | — | |
Other, net | | | i 1 | | | ( i 4,072) | |
Net cash flows from financing activities | | | ( i 156,937) | | | ( i 1,310,525) | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash and cash equivalents | | | ( i 619,739) | | | i 575,895 | |
Cash, cash equivalents, restricted cash and cash equivalents, beginning of period (Note 6) | | | i 2,504,320 | | | i 887,924 | |
Cash, cash equivalents, restricted cash and cash equivalents, end of period (Note 6) | | $ | i 1,884,581 | | $ | i 1,463,819 | |
| | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Organization and Business Activities
Principal Business
DISH Network Corporation is a holding company. Its subsidiaries (which together with DISH Network Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our,” unless otherwise required by the context) operate i two primary business segments, Pay-TV and Wireless. Our wireless business segment operates in i two business units, Retail Wireless and 5G Network Deployment.
Pay-TV
We offer pay-TV services under the DISH® brand and the SLING® brand (collectively “Pay-TV” services). The DISH branded pay-TV service consists of, among other things, FCC licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in our operations (“DISH TV”). We also design, develop and distribute receiver systems and provide digital broadcast operations, including satellite uplinking/downlinking, transmission and other services to third-party pay-TV providers. The SLING branded pay-TV services consist of, among other things, multichannel, live-linear streaming OTT Internet-based domestic, international and Latino video programming services (“SLING TV”). As of September 30, 2020, we had i 11.423 million Pay-TV subscribers in the United States, including i 8.965 million DISH TV subscribers and i 2.458 million SLING TV subscribers.
Wireless – Retail Wireless
As a result of the Boost Mobile Acquisition and the Ting Mobile Acquisition (as defined below), we have entered the retail wireless business. See Note 5 for further information. We offer nationwide prepaid and postpaid retail wireless services to subscribers under our Boost Mobile and Ting Mobile brands, as well as a competitive portfolio of wireless devices. Prepaid wireless subscribers generally include customers who pay in advance for monthly access to wireless talk, text, and data services. Postpaid wireless subscribers generally include subscribers who are qualified to pay after receiving wireless talk, text, and data services. We currently operate our retail wireless business unit as a mobile virtual network operator (“MVNO”) while we build our 5G broadband network. We acquired over i 9 million subscribers as a result of the Boost Mobile Acquisition and acquired over i 200,000 subscribers as a result of the Ting Mobile Acquisition. Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition from July 1, 2020 and Ting Mobile Acquisition from August 1, 2020. As of September 30, 2020, we had i 9.418 million retail wireless subscribers.
Wireless – 5G Network Deployment
Since 2008, we have directly invested over $ i 11 billion to acquire certain wireless spectrum licenses and related assets and made over $ i 10 billion in non-controlling investments in certain entities, for a total of over $ i 21 billion. The $ i 21 billion of investments related to wireless spectrum licenses does not include $ i 5 billion of capitalized interest related to the carrying value of such licenses. See Note 2 for further information on capitalized interest.
/6
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
DISH Network Spectrum
We have directly invested over $ i 11 billion to acquire certain wireless spectrum licenses and related assets. These wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. In March 2017, we notified the FCC that we planned to deploy a narrowband IoT network on certain of these wireless licenses, which was to be the first phase of our network deployment (“First Phase”). We expected to complete the First Phase by March 2020, with subsequent phases to be completed thereafter. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines was probable and, therefore, we no longer intended to complete our narrowband IoT deployment. The FCC issued an Order effectuating the build-out deadline changes contemplated above on September 11, 2020. During the first quarter 2020, we impaired certain assets that would not be utilized in our 5G broadband network deployment (“5G Network Deployment”), resulting in a $ i 253 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We have issued requests for information and proposals (“RFI/Ps”) to various vendors in the wireless industry and are in the process of selecting certain vendors as we move forward with our 5G Network Deployment. We currently expect expenditures for our 5G Network Deployment to be approximately $ i 10 billion, excluding capitalized interest. We will need to make significant additional investments or partner with others to, among other things, commercialize, build-out, and integrate these licenses and related assets, and any additional acquired licenses and related assets; and comply with regulations applicable to such licenses. Depending on the nature and scope of such commercialization, build-out, integration efforts, and regulatory compliance, any such investments or partnerships could vary significantly.
In addition, as we consider our options for the commercialization of our wireless spectrum, we will incur significant additional expenses and will have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure. We may also determine that additional wireless spectrum licenses may be required to commercialize our wireless business and to compete with other wireless service providers. See Note 2 and Note 11 for further information.
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American AWS-3 Wireless II L.L.C. (“American II”) and American AWS-3 Wireless III L.L.C. (“American III”), we initially made over $ i 10 billion in certain non-controlling investments in Northstar Spectrum, LLC (“Northstar Spectrum”), the parent company of Northstar Wireless, L.L.C. (“Northstar Wireless,” and collectively with Northstar Spectrum, the “Northstar Entities”), and in SNR Wireless HoldCo, LLC (“SNR HoldCo”), the parent company of SNR Wireless LicenseCo, LLC (“SNR Wireless,” and collectively with SNR HoldCo, the “SNR Entities”), respectively. On October 27, 2015, the FCC granted certain AWS-3 wireless spectrum licenses (the “AWS-3 Licenses”) to Northstar Wireless and to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. Under the applicable accounting guidance in Accounting Standards Codification 810, Consolidation (“ASC 810”), Northstar Spectrum and SNR HoldCo are considered variable interest entities and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 for further information.
7
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out, integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our non-controlling investments in the Northstar Entities and the SNR Entities. See Note 11 for further information.
Recent Developments
We accounted for the Boost Mobile Acquisition and Ting Mobile Acquisition (as defined below) as business combinations. The identifiable assets acquired and liabilities assumed were recorded at their preliminary fair values as of the acquisition date and are consolidated into our financial statements. Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition from July 1, 2020 and the Ting Mobile Acquisition from August 1, 2020. See Note 5 for further information.
Sprint Asset Acquisition
Asset Purchase Agreement
On July 26, 2019, we entered into an Asset Purchase Agreement (the “APA”) with T-Mobile US, Inc. (“TMUS”) and Sprint Corporation (“Sprint” and together with TMUS, the “Sellers” and given the consummation of the Sprint-TMUS merger, sometimes referred to as “NTM”) to acquire from NTM certain assets and liabilities associated with Sprint’s Boost Mobile and Sprint-branded prepaid mobile services businesses (the “Prepaid Business”) for an aggregate purchase price of $ i 1.4 billion as adjusted for specific categories of net working capital on the Closing Date (the “Boost Mobile Acquisition”). Effective July 1, 2020 (the “Closing Date”), upon the terms and subject to the conditions set forth in the APA and in accordance with the Final Judgment (as defined below), we and NTM completed the Boost Mobile Acquisition.
In connection with the Boost Mobile Acquisition and the consummation of the Sprint-TMUS merger, we, TMUS, Sprint, Deutsche Telekom AG (“DT”) and SoftBank Group Corporation (“SoftBank”) came to an agreement with the United States Department of Justice (the “DOJ”) on key terms and approval of the Transaction Agreements (as defined below) and our wireless service business and spectrum. On July 26, 2019, we, TMUS, Sprint, DT and SoftBank (collectively, the “Defendants”) entered into a Stipulation and Order (the “Stipulation and Order”) with the DOJ binding the Defendants to a Proposed Final Judgment (the “Proposed Final Judgment”) which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the United States District Court for the District of Columbia (the “District Court”) on July 26, 2019 and on April 1, 2020, the Proposed Final Judgment was entered with the District Court (the Proposed Final Judgment as so entered with the District Court, the “Final Judgment”) and the Sellers consummated the Sprint-TMUS merger.
The term of the Final Judgment is i seven years from the date of its entry with the District Court or i five years if the DOJ gives notice that the divestitures, build-outs and other requirements have been completed to its satisfaction. A Monitoring Trustee has been appointed by the District Court that has the power and authority to monitor the Defendants’ compliance with the Final Judgment and settle disputes among the Defendants regarding compliance with the provisions of the Final Judgment and may recommend action to the DOJ in the event a party fails to comply with the Final Judgment. See Note 5 for further information on the Stipulation and Order and the Final Judgment, and our build-out commitments.
8
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Also in connection with the closing of the Boost Mobile Acquisition, we and NTM entered into a transition services agreement under which we will receive certain transitional services (the “TSA”), a master network services agreement for the provision of network services by NTM to us (the “MNSA”), an option agreement entitling us to acquire certain decommissioned cell sites and retail stores of NTM (the “Option Agreement”) and an agreement under which we would purchase all of Sprint’s 800 MHz spectrum licenses, totaling approximately 13.5 MHz of nationwide wireless spectrum for an additional approximately $ i 3.59 billion (the “Spectrum Purchase Agreement” and together with the APA, the TSA, the MNSA and the Option Agreement, the “Transaction Agreements”). See Note 5 for further information on the Transaction Agreements.
Ting Mobile Acquisition
On August 1, 2020, we entered into an asset purchase agreement with Tucows Inc. (“Tucows”) pursuant to which we purchased the assets of Ting Mobile, including over i 200,000 Ting Mobile subscribers (the “Ting Mobile Acquisition”). In addition, we entered into a services agreement pursuant to which Tucows will act as a mobile virtual network enabler for certain of our retail wireless subscribers. The consideration for the Ting Mobile Acquisition is an earn out provision and the fair value of the earn out provision has been assigned to a customer relationship intangible that is recorded in “Intangible assets” on our Condensed Consolidated Balance Sheets. See Note 5 for further information.
i2.Summary of Significant Accounting Policies
iBasis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Certain prior period amounts have been reclassified to conform to the current period presentation.
Specifically, as a result of our entrance into the retail wireless industry, we have reclassified certain items on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The reclassifications include:
(a) “Subscriber-related revenue” has been retitled “Service revenue.”
(b) “Subscriber-related expenses” has been retitled “Cost of services.”
(c) “Satellite and transmission expenses” has been reclassified to “Cost of services.”
(d) A new caption entitled “Selling, general and administrative expenses” has been created that includes historical “General and administrative expenses,” as well as “Subscriber acquisition costs.”
All prior periods have been reclassified to conform to the current period presentation for these changes.
/9
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iPrinciples of Consolidation
We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary. Minority interests are recorded as noncontrolling interests or redeemable noncontrolling interests. See below for further information. Non-consolidated investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee. When we do not have the ability to significantly influence the operating decisions of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at fair value with changes recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
iRedeemable Noncontrolling Interests
Northstar Wireless. Northstar Wireless is a wholly-owned subsidiary of Northstar Spectrum, which is an entity owned by Northstar Manager, LLC (“Northstar Manager”) and us. Under the applicable accounting guidance in ASC 810, Northstar Spectrum is considered a variable interest entity and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate Northstar Spectrum into our financial statements. The Northstar Operative Agreements, as amended, provide for, among other things, that after the fifth and sixth anniversaries of the grant of the AWS-3 Licenses to Northstar Wireless (and in certain circumstances, prior to the fifth anniversary of the grant of the AWS-3 Licenses to Northstar Wireless), Northstar Manager has the ability, but not the obligation, to require Northstar Spectrum to purchase Northstar Manager’s ownership interests in Northstar Spectrum (the “Northstar Put Right”) for a purchase price that equals its equity contribution to Northstar Spectrum plus a fixed annual rate of return. The fifth and sixth anniversaries of the grant of the AWS-3 Licenses to Northstar Wireless are in the fourth quarter 2020 and fourth quarter 2021, respectively.
In the event that the Northstar Put Right is exercised by Northstar Manager, the consummation of the sale will be subject to FCC approval. Northstar Spectrum does not have a call right with respect to Northstar Manager’s ownership interests in Northstar Spectrum. Although Northstar Manager is the sole manager of Northstar Spectrum, Northstar Manager’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. Northstar Manager’s ownership interest in Northstar Spectrum was initially accounted for at fair value. Subsequently, Northstar Manager’s ownership interest in Northstar Spectrum is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of Northstar Spectrum attributable to Northstar Manager are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 11 for further information.
SNR Wireless. SNR Wireless is a wholly-owned subsidiary of SNR HoldCo, which is an entity owned by SNR Wireless Management, LLC (“SNR Management”) and us. Under the applicable accounting guidance in ASC 810, SNR HoldCo is considered a variable interest entity and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate SNR HoldCo into our financial statements. The SNR Operative Agreements, as amended, provide for, among other things, that after the fifth and sixth anniversaries of the grant of the AWS-3 Licenses to SNR Wireless (and in certain circumstances, prior to the fifth anniversary of the grant of the AWS-3 Licenses to SNR Wireless), SNR Management has the ability, but not the obligation, to require SNR HoldCo to purchase SNR Management’s ownership interests in SNR HoldCo (the “SNR Put Right”) for a purchase price that equals its equity contribution to SNR HoldCo plus a fixed annual rate of return. The fifth and sixth anniversaries of the grant of the AWS-3 Licenses to SNR Wireless are in the fourth quarter 2020 and fourth quarter 2021, respectively.
10
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In the event that the SNR Put Right is exercised by SNR Management, the consummation of the sale will be subject to FCC approval. SNR HoldCo does not have a call right with respect to SNR Management’s ownership interests in SNR HoldCo. Although SNR Management is the sole manager of SNR HoldCo, SNR Management’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. SNR Management’s ownership interest in SNR HoldCo was initially accounted for at fair value. Subsequently, SNR Management’s ownership interest in SNR HoldCo is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of SNR HoldCo attributable to SNR Management are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 11 for further information.
As of September 30, 2020 and December 31, 2019, Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $ i 634 million and $ i 552 million, respectively, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets.
iUse of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for credit losses (including those related to our installment billing programs), self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, the fair value of our option to purchase TMUS’s 800 MHz spectrum, relative standalone selling prices of performance obligations, finance leases, asset impairments, estimates of future cash flows used to evaluate and recognize impairments, useful lives of property, equipment and intangible assets, independent third-party retailer incentives, programming expenses and subscriber lives. Economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
iMarketable Investment Securities
All equity securities are carried at fair value, with changes in fair value recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
All debt securities are classified as available-for-sale and are recorded at fair value. Historically, we reported temporary unrealized gains and losses as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. Subsequent to the adoption of ASU 2016-13 Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) during the first quarter of 2020, we report the temporary unrealized gains and losses related to changes in market conditions of marketable debt securities as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. The corresponding changes in the fair value of marketable debt securities, which are determined to be company specific credit losses are recorded in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
11
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We evaluate our debt investment portfolio to determine whether declines in the fair value of these securities are related to credit loss. Management estimates credit losses on marketable debt securities utilizing a credit loss impairment model on a quarterly basis. We estimate the expected credit losses, measured over the contractual life of marketable debt securities considering relevant issuer specific factors, including, but not limited to, a decrease in credit ratings or an entities ability to pay.
iTrade Accounts Receivable
General Accounts Receivable
Prior to January 1, 2020, management estimated the amount of allowance for doubtful accounts for potential non-collectability of accounts receivable based upon past collection experience and consideration of other relevant factors.
Subsequent to January 1, 2020 due to the adoption of ASU 2016-13, trade accounts receivable are recorded at amortized cost less an allowance for expected credit losses that are not expected to be recovered. We maintain allowances for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for expected credit losses at inception and reassess quarterly based on management’s expectation of the asset’s collectability. Management estimates credit losses on financial assets, including our trade accounts receivable, utilizing a current expected credit loss impairment model. We estimate the expected credit losses, measured over the contractual life of an asset considering relevant historical loss information, credit quality of the customer base, current economic conditions and forecasts of future economic conditions.
In determining the allowance for credit losses, management groups similar types of financial assets with consistent risk characteristics. Pools identified by management include but are not limited to residential customers, commercial customers and advertising services. The risk characteristics of the financial asset portfolios are monitored by management and reviewed periodically. The forecasts for future economic conditions are based on several factors including, but not limited to, changes in the unemployment rate, external economic forecasts and current collection rates. Our estimates of the allowance for credit losses may not be indicative of our actual credit losses requiring additional charges to be incurred to reflect the actual amount collected.
BoostUP! Receivable
We offer certain long term customers of Boost Mobile the option to pay for their devices under an installment plan (“BoostUP!”), which is generally over a period of i 18 months. The BoostUP! receivable is presented in our Condensed Consolidated Balance Sheets at its net realizable value, which is net of an allowance for credit losses. The allowance for credit losses is estimated based on among other factors, historical loss information and current economic conditions as well as forecasts of future economic conditions. As of September 30, 2020, “Trade accounts receivable, net” on our Condensed Consolidated Balance Sheets includes $ i 148 million of BoostUP! receivables, net of allowance for credit losses of $ i 21 million.
Customers that participate in the BoostUP! program typically make a down payment and satisfy their obligation by providing equal monthly payments during the duration of their financing arrangement. As Boost customers are on a month to month contract for service with Boost and the BoostUP! arrangement provides that upon an installment plan customer’s termination of the service the installment balance becomes due and payable immediately, we do not impute interest on these instruments as the financial instruments are short term in nature.
/
12
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iInventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The cost of manufactured inventory includes the cost of materials, labor, freight-in, royalties and manufacturing overhead. Net realizable value is calculated as the estimated selling price less reasonable costs necessary to complete, sell, transport and dispose of the inventory.
iDerivative Instrument
We have the option to purchase certain TMUS 800 MHz spectrum licenses from TMUS at a fixed price in the future. See Note 5 for further information. This instrument meets the definition of a derivative and was valued as part of the business combination at fair value in the Condensed Consolidated Balance Sheets. All subsequent changes in the derivative’s fair value are recorded in “Other, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
iImpairment of Long-Lived Assets
We review our long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the asset would be impaired if the carrying amount of the asset (or asset group) exceeded its undiscounted future net cash flows. Once an impairment is determined, the actual impairment recognized is the difference between the carrying amount and the fair value as estimated using one of the following approaches: income, cost and/or market. Assets which are to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The carrying amount of a long-lived asset or asset group is considered impaired when the anticipated undiscounted cash flows from such asset or asset group is less than its carrying amount. In that event, a loss is recorded in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) based on the amount by which the carrying amount exceeds the fair value of the long-lived asset or asset group. Fair value, using the income approach, is determined primarily using a discounted cash flow model that uses the estimated cash flows associated with the asset or asset group under review, discounted at a rate commensurate with the risk involved. Fair value, utilizing the cost approach, is determined based on the replacement cost of the asset reduced for, among other things, depreciation and obsolescence. Fair value, utilizing the market approach, benchmarks the fair value against the carrying amount. See Note 8 for further information.
DBS Satellites. We currently evaluate our DBS satellite fleet for impairment as one asset group whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We do not believe any triggering event has occurred which would indicate impairment as of September 30, 2020 or December 31, 2019. We will continue to monitor the DBS satellite fleet for indicators of impairment, including monitoring the impact of the COVID-19 pandemic on all aspects of our business.
AWS-4 Satellites. We historically have evaluated our AWS-4 satellite fleet for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that revisions to the AWS-4 build-out deadlines were probable, which we determined to be a triggering event. Accordingly, we quantitatively assessed the value of the AWS-4 satellites (T1 and D1) and wrote down the fair value of the satellites to their estimated fair value of i zero, resulting in a $ i 103 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We did not believe any triggering event occurred which would indicate impairment as of December 31, 2019. See Note 8 for further information.
/13
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Narrowband IoT network. As discussed in Note 11 we were in the process of deploying a narrowband IoT network. We paused work on the narrowband IoT deployment in October 2019. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines were probable. Based on this, we no longer intended to complete our narrowband IoT deployment, which we considered a triggering event. As such, during the first quarter 2020, we reviewed the capitalized costs of equipment, labor and other assets related to the narrowband IoT deployment, including our operating lease assets, and impaired those items that would not be utilized in our ongoing 5G Network Deployment, resulting in a $ i 253 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 8 and Note 9 for further information.
Impairment of long-lived assets recorded during the nine months ended September 30, 2020 consisted of the following:
i
| | | | |
| | For the Nine Months Ended | | |
|
| | ||
| | (In thousands) | | |
T1 satellite | | $ | i 48,120 | |
D1 satellite | | | i 55,000 | |
Construction in progress related to narrowband IoT deployment | | | i 226,742 | |
Operating lease assets related to narrowband IoT deployment | | | i 26,556 | |
Impairment of long-lived assets | | $ | i 356,418 | |
| | | | |
Boost Mobile Intangible Assets and Goodwill. Intangible assets include subscriber relationships, the Boost Mobile tradename and certain below market contracts. The intangible assets will be amortized over their respective useful lives which range from one to i 10 years. Goodwill represents the excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed.
Ting Mobile Intangible Assets. The preliminary fair value of the customer relationships and the trade name at the acquisition date of Ting Mobile were recorded in “Intangible assets” on our Condensed Consolidated Balance Sheets. These assets will be amortized over their respective useful lives which range from two to i 10 years.
iCapitalized Interest
We capitalize interest associated with the acquisition or construction of certain assets, including, among other things, our wireless spectrum licenses, build-out costs associated with our network deployment and satellites. Capitalization of interest begins when, among other things, steps are taken to prepare the asset for its intended use and ceases when the asset is ready for its intended use or when these activities are substantially suspended.
We are currently preparing for the commercialization of our AWS-4, H Block, 700 MHz, 600 MHz and MVDDS wireless spectrum licenses, and interest expense related to their carrying amount is being capitalized. In addition, the FCC has granted certain AWS-3 Licenses to Northstar Wireless and to SNR Wireless, respectively, in which we have made certain non-controlling investments. Northstar Wireless and SNR Wireless are preparing for the commercialization of their AWS-3 Licenses and interest expense related to their carrying amount is also being capitalized. As the carrying amount of the licenses, discussed above, exceeded the carrying value of our long-term debt and finance lease obligations, materially all of our interest expense is being capitalized.
14
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Business Combinations
When we acquire a business, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component using various valuation techniques, including the market approach, income approach and/or cost approach. The accounting standard for business combinations requires identifiable assets, liabilities, noncontrolling interests and goodwill acquired to be recorded at fair value. Transaction costs related to the acquisition of the business are expensed as incurred. Costs associated with the issuance of debt associated with a business combination are capitalized and included as a yield adjustment to the underlying debt’s stated rate. Acquired intangible assets other than goodwill are amortized over their estimated useful lives unless the lives are determined to be indefinite. Amortization of these intangible assets in general are recorded on a straight-line basis over an average finite useful life primarily ranging from approximately one to i 20 years or in relation to the estimated discounted cash flows over the life of the intangible asset. See Note 5 for further information on the Sprint Asset Acquisition and Ting Mobile Acquisition.
/
iFair Value Measurements
We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We apply the following hierarchy in determining fair value:
| ● | Level 1, defined as observable inputs being quoted prices in active markets for identical assets; |
| ● | Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and derivative financial instruments indexed to marketable investment securities; and |
| ● | Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available. |
As of September 30, 2020 and December 31, 2019, the carrying amount for cash and cash equivalents, trade accounts receivable (net of allowance for credit losses or net of allowance for doubtful accounts) and current liabilities (excluding the “Current portion of long-term debt and finance lease obligations”) was equal to or approximated fair value due to their short-term nature or proximity to current market rates. See Note 6 for the fair value of our marketable investment securities and derivative instruments.
Fair values for our publicly traded debt securities are based on quoted market prices, when available. The fair values of private debt are based on, among other things, available trade information, and/or an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information.
In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the debt securities. See Note 10 for the fair value of our long-term debt.
15
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iRevenue Recognition
Pay-TV Segment
Our Pay-TV segment revenue is primarily derived from Pay-TV programming services that we provide to our subscribers. We also generate revenue from equipment rental fees and other hardware related fees, including DVRs and fees from subscribers with multiple receivers; advertising services; fees earned from our in-home service operations; broadband services; warranty services; sales of digital receivers and related equipment to third-party pay-TV providers; satellite uplink and telemetry, tracking and control (“TT&C”) services; and revenue from in-home services. See Note 13 for further information, including revenue disaggregated by major source.
Our residential video subscribers contract for individual services or combinations of services, as discussed above, the majority of which are generally distinct and are accounted for as separate performance obligations. We consider our installations for first time DISH TV subscribers to be a service. However, since we provide a significant integration service combining the installation with programming services, we have concluded that the installation is not distinct from programming and thus the installation and programming services are accounted for as a single performance obligation. We generally satisfy these performance obligations and recognize revenue as the services are provided, for example as the programming is broadcast to subscribers, as this best represents the transfer of control of the services to the subscriber.
In cases where a subscriber is charged certain nonrefundable upfront fees, those fees are generally considered to be material rights to the subscriber related to the subscriber’s option to renew without having to pay an additional fee upon renewal. These fees are deferred and recognized over the estimated period of time during which the fee remains material to the customer, which we estimate to be less than one year. Revenues arising from our in-home services that are separate from the initial installation, such as mounting a TV on a subscriber’s wall, are generally recognized when these services are performed.
For our residential video subscribers, we have concluded that the contract term under Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), is one month and as a result the revenue recognized for these subscribers for a given month is equal to the amount billed in that month, except for certain nonrefundable upfront fees that are accounted for as material rights, as discussed above.
Revenues from our advertising services are typically recognized as the advertisements are broadcast. Sales of equipment to subscribers or other third parties are recognized when control is transferred under the contract. Revenue from our commercial video subscribers typically follows the residential model described above, with the exception that the contract term for most of our commercial subscribers exceeds one month and can be multiple years in length. However, commercial subscribers typically do not receive time-limited discounts or free service periods and accordingly, while they may have multiple performance obligations, revenue is equal to the amount billed in a given month.
Wireless Segment
Our Wireless segment revenue is primarily derived from providing wireless services and selling wireless devices to prepaid and postpaid subscribers. The majority of our subscribers are prepaid under the Boost brand with a smaller subset of postpaid subscribers serviced under the Ting Mobile brand. Prepaid customers prepay for their monthly service on a month-to-month contract. Postpaid customers are those for which the individual is qualified to pay for their service after it has been provided. For both our prepaid and postpaid customers the contract term was determined to be one month.
16
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We have both an indirect sales channel, which includes third-party owned retail stores and big box stores, as well as a direct sales channel, which services customers online. Through the indirect sales channel, we utilize direct distribution partners to facilitate product delivery to the third party Boost retailers. Although our wireless business offers both products and services, we have determined that no bundled arrangements exist as the wireless device and service sold are sold at different times, and in the case of the indirect sales channel, have different customers. In the indirect channel, the customer for the wireless device is the direct distribution partner whereas for the service the customer is the end consumer. Service revenues may also include other value added services to customers, which may be recorded either gross or net within our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) depending on whether DISH is deemed to be the principal or agent in the relationship with the customer. Service revenues are recognized when the service has been provided and no further obligation exists. Concessions given to customers are recorded as a reduction to revenue.
Equipment revenues are primarily related to the sale of wireless devices. Equipment revenue is recognized when control of the product is transferred to our customer, either the direct distribution partner for the indirect sales channel or the end user in the direct sales channel. Sales of equipment in the indirect sales channel often include credits subsequently paid to the direct distribution partner as a reimbursement for any discount promotions offered to the end consumer. These credits (payments to a customer) are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealers and are estimated based on historical experience and other factors, such as expected promotional activity. For wireless devices sold with a right of return, we defer a portion of equipment revenue and cost of sales to reflect this variable consideration.
Contract Balances
The timing of revenue recognition generally differs from the timing of invoicing to customers. When revenue is recognized prior to invoicing, we record a receivable. When revenue is recognized subsequent to invoicing, we record deferred revenue. Our residential video subscribers are typically billed monthly, and the contract balances for those customers arise from the timing of the monthly billing cycle. Our current wireless subscribers, the majority of which are prepaid, generate deferred revenue. We do not adjust the amount of consideration for financing impacts as we apply a practical expedient when we anticipate that the period between transfer of goods and services and eventual payment for those goods and services will be less than i one year. See Note 13 for further information, including balance and activity detail about our allowance for credit losses and deferred revenue related to contracts with subscribers.
Assets Recognized Related to the Costs to Obtain a Contract with a Subscriber
We recognize an asset for the incremental costs of obtaining a contract with a subscriber if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs in both our Pay-TV and Wireless segments, including those with our independent third-party retailers, meet the requirements to be capitalized, and payments made under these programs are capitalized and amortized to expense over the estimated subscriber life. During the three months ended September 30, 2020 and 2019, we capitalized $ i 131 million and $ i 67 million, respectively, under these programs. The amortization expense related to these programs was $ i 43 million and $ i 21 million for the three months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020 and 2019, we capitalized $ i 213 million and $ i 159 million, respectively, under these programs. The amortization expense related to these programs was $ i 99 million and $ i 52 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and December 31, 2019, we had a total of $ i 414 million and $ i 300 million, respectively, capitalized on our Condensed Consolidated Balance Sheets. These amounts are capitalized in “Other current assets” and “Other noncurrent assets, net” on our Condensed Consolidated Balance Sheets, and then amortized in “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
17
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Leases
Lessee
We enter into operating and finance leases for, among other things, satellites, office space, warehouses and distribution centers, vehicles, wireless towers and other equipment. Our leases have remaining lease terms from one to i seven years, some of which include i renewal i options, and some of which include i options to i terminate the leases within i one year.
We determine if an arrangement is a lease and classify that lease as either an operating or finance lease at inception. Operating leases are included in “Operating lease assets,” “Other accrued expenses” and “Operating lease liabilities” on our Condensed Consolidated Balance Sheets. Finance leases are included in “Property and equipment, net,” “Current portion of long-term debt and finance lease obligations” and “Long-term debt and finance lease obligations, net of current portion” on our Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 8 for further information on our lease expenses.
Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent the present value of our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. When our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes the impact of prepaid or deferred lease payments. The length of our lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
We currently lease and historically have leased certain assets from EchoStar, including, among other things, satellites, office space and data centers. See Note 14 for further information on our Related Party Transactions with EchoStar. On May 19, 2019, we entered into a Master Transaction Agreement with EchoStar and effective September 10, 2019, certain satellites and real estate assets leased from EchoStar were transferred to us. See Note 14 for further information on the Master Transaction Agreement.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. Our variable lease payments are immaterial and our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
DISH TV subscribers have the choice of leasing or purchasing the satellite receiver and other equipment necessary to receive our DISH TV services. Most of our new DISH TV subscribers choose to lease equipment and thus we retain title to such equipment. Equipment leased to new and existing DISH TV subscribers is capitalized and depreciated over their estimated useful lives.
/18
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
For equipment leased to new and existing DISH TV subscribers, we made an accounting policy election to combine the equipment with our programming services as a single performance obligation in accordance with the revenue recognition guidance as the programming services are the predominant component. The revenue related to equipment leased to new and existing DISH TV subscribers would have otherwise been accounted for as an operating lease.
Impact of Adoption of ASU 2016-02
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 Leases (“ASU 2016-02”) and has modified the standard thereafter. We adopted ASU 2016-02, as modified, on January 1, 2019 using the modified retrospective method. Under the modified retrospective method, we applied the new guidance to all leases that commenced before and were existing as of January 1, 2019.
The adoption of ASU 2016-02 had no impact on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and cash flows from operating, investing and financing activities on our Condensed Consolidated Statements of Cash Flows.
Cost of Services
“Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) principally include Pay-TV programming expenses and other operating costs related to our Pay-TV segment, costs of wireless services (including costs incurred under the MNSA), as well as costs associated with our SLING TV services.
The cost of television programming distribution rights is generally incurred on a per subscriber basis and various upfront carriage payments are recognized when the related programming is distributed to subscribers. Long-term flat rate programming contracts are generally charged to expense using the straight-line method over the term of the agreement. The cost of television programming rights to distribute live sporting events for a season or tournament is charged to expense using the straight-line method over the course of the season or tournament. Costs incurred under the MNSA are recognized as the services are performed or as incurred. The cost of broadband services is expensed monthly and generally incurred on a per subscriber basis.
Cost of Sales – Equipment and Other
“Cost of sales – equipment and other” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) principally includes the cost of wireless devices and other related items as well as costs related to the non-subsidized sales of Pay-TV equipment. Costs are generally recognized as products are delivered to customers and the related revenue is recognized.
iAdvertising Costs
We recognize advertising expense when incurred as selling, general and administrative expense. Advertising expenses totaled $ i 160 million and $ i 141 million for each of the three months ended September 30, 2020 and 2019, respectively. Advertising expenses totaled $ i 381 million and $ i 375 million for each of the nine months ended September 30, 2020 and 2019, respectively.
/
iResearch and Development
Research and development costs are expensed as incurred. Research and development costs totaled $ i 6 million and $ i 4 million for the three months ended September 30, 2020 and 2019, respectively. Research and development costs totaled $ i 17 million and $ i 15 million for the nine months ended September 30, 2020 and 2019, respectively.
/19
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
i3.Basic and Diluted Net Income (Loss) Per Share
We present both basic earnings per share (“EPS”) and diluted EPS. Basic EPS excludes potential dilution and is computed by dividing “Net income (loss) attributable to DISH Network” by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock awards were exercised and if our Convertible Notes were converted. The potential dilution from stock awards is accounted for using the treasury stock method based on the average market value of our Class A common stock. The potential dilution from conversion of the Convertible Notes is accounted for using the if-converted method, which requires that all of the shares of our Class A common stock issuable upon conversion of the Convertible Notes will be included in the calculation of diluted EPS assuming conversion of the Convertible Notes at the beginning of the reporting period (or at time of issuance, if later).
The following table presents EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (In thousands, except per share amounts) | | ||||||||||
Net income (loss) |
| $ | i 532,959 |
| $ | i 377,157 |
| $ | i 1,112,638 |
| $ | i 1,079,022 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | |
| i 28,360 | |
| i 23,853 | |
| i 82,597 | |
| i 68,914 | |
Net income (loss) attributable to DISH Network - Basic |
| | i 504,599 |
| | i 353,304 |
| | i 1,030,041 |
| | i 1,010,108 | |
Interest on dilutive Convertible Notes, net of tax (1) | | | — | | | — | | | — | | | — | |
Net income (loss) attributable to DISH Network - Diluted | | $ | i 504,599 | | $ | i 353,304 | | $ | i 1,030,041 | | $ | i 1,010,108 | |
| | | | | | | | | | | | | |
Weighted-average common shares outstanding - Class A and B common stock: | | | | | | | | | | | | | |
Basic (2) | |
| i 525,532 | |
| i 477,495 | |
| i 524,329 | |
| i 471,736 | |
Dilutive impact of Convertible Notes | | | i 58,192 | | | i 58,192 | | | i 58,192 | | | i 58,192 | |
Dilutive impact of stock awards outstanding | |
| i 233 | |
| i 59 | |
| i 74 | |
| i 113 | |
Diluted | |
| i 583,957 | |
| i 535,746 | |
| i 582,595 | |
| i 530,041 | |
| | | | | | | | | | | | | |
Earnings per share - Class A and B common stock: | | | | | | | | | | | | | |
Basic net income (loss) per share attributable to DISH Network |
| $ | i 0.96 |
| $ | i 0.74 |
| $ | i 1.96 |
| $ | i 2.14 | |
Diluted net income (loss) per share attributable to DISH Network |
| $ | i 0.86 |
| $ | i 0.66 |
| $ | i 1.77 |
| $ | i 1.91 | |
| | | | | | | | | | | | | |
| (1) | For both the three and nine months ended September 30, 2020 and 2019, materially all of our interest expense was capitalized. See Note 2 for further information. |
| (2) | The increase resulted from the Master Transaction Agreement, as discussed in Note 14, and the stock rights offering as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. |
/Certain stock awards to acquire our Class A common stock are not included in the weighted-average common shares outstanding above, as their effect is anti-dilutive. In addition, vesting of performance based options and rights to acquire shares of our Class A common stock granted pursuant to our performance based stock incentive plans (“Restricted Performance Units”) are both contingent upon meeting certain goals, some of which are not yet probable of being achieved. Furthermore, the warrants that we issued to certain option counterparties in connection with the Convertible Notes due 2026 are only exercisable at their expiration if the market price per share of our Class A common stock is greater than the strike price of the warrants, which is approximately $ i 86.08 per share, subject to adjustments. As a consequence, the following are not included in the diluted EPS calculation.
/20
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | | | | |
| | As of September 30, | | ||
|
| 2020 |
| 2019 | |
| | (In thousands) | | ||
Anti-dilutive stock awards | | i 8,761 | | i 5,181 | |
Performance based options (1) |
| i 5,317 | | i 8,418 | |
Restricted Performance Units/Awards | | i 1,787 | | i 1,516 | |
Common stock warrants | | i 46,029 | | i 46,029 | |
Total | | i 61,894 | | i 61,144 | |
| | | | | |
| (1) | The decrease primarily resulted from certain performance based options that vested during the three months ended September 30, 2020. |
i4.Supplemental Data - Statements of Cash Flows
The following table presents certain supplemental cash flow and other non-cash data. See Note 9 for supplemental cash flow and non-cash data related to leases.
i
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2020 |
| 2019 | | ||
| | (In thousands) | | ||||
Cash paid for interest (including capitalized interest) |
| $ | i 647,572 | | $ | i 737,311 | |
Cash received for interest | | | i 5,512 | | | i 38,101 | |
Cash paid for income taxes | | | i 22,939 | | | i 26,304 | |
Capitalized interest (1) | | | i 685,749 | | | i 743,864 | |
Master Transaction Agreement, net of deferred tax of $ i 166,161 (2) | | | — | | | i 497,145 | |
Employee benefits paid in Class A common stock | | | i 28,301 | | | i 27,004 | |
Vendor financing | | | 74,895 | | | — | |
| | | | | | | |
| (1) | See Note 2 for further information. |
| (2) | See Note 14 for further information. |
21
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
i5.Acquisitions
When we acquire a business we recognize the assets acquired, liabilities assumed and any noncontrolling interests at fair value. We expense all transaction costs related to the acquisition as incurred.
Sprint Asset Acquisition
Asset Purchase Agreement
Effective on July 1, 2020, upon the terms and subject to the conditions set forth in the APA and in accordance with the Final Judgment, we completed the Boost Mobile Acquisition. The completion of the Boost Mobile Acquisition means that, among other things, DISH Network officially entered into the retail wireless market, serving more than i 9 million customers under the Boost Mobile brand.
Consideration Transferred
The acquisition date fair value of consideration transferred in the Boost Mobile Acquisition totaled $ i 1.346 billion, summarized in the following table:
i
| | | | |
| | As of July 1, 2020 | | |
| | | (In thousands) | |
Cash consideration (1) | | $ | i 1,400,000 | |
Net working capital (2) | | | i 33,524 | |
Other funding (3) | | | ( i 87,500) | |
Total consideration transferred | | $ | i 1,346,024 | |
| | | | |
| (1) | Represents agreed upon purchase price pursuant to the APA paid to TMUS on July 1, 2020. |
| (2) | Represents estimated net working capital acquired under the APA. We have not settled the net working capital under the APA as certain amounts are currently in dispute and could ultimately change the net working capital settlement. |
| (3) | Represents receipt of payment from Softbank in connection with the Boost Mobile Acquisition on July 1, 2020. |
Fair Value of Assets Acquired and Liabilities Assumed
We accounted for the Boost Mobile Acquisition as a business combination. The identifiable assets acquired and liabilities assumed were recorded at their preliminary fair values as of the acquisition date and are consolidated into our financial statements. The assignment of fair market value requires significant judgments regarding the estimates and assumptions used to value the acquired assets and liabilities assumed. For the preliminary fair values of the assets acquired and liabilities assumed, we utilized the cost, income and market approaches from the perspective of a market participant.
The following table summarizes the preliminary fair values for each major class of assets acquired and liabilities assumed at the acquisition date. We used third party valuation professionals to aid in the determination of the estimated fair value of certain assets acquired and liabilities assumed. We are in the process of finalizing the purchase price allocation associated with this transaction, including income tax related amounts. As such, the preliminary purchase allocation set forth below are subject to revision as additional information is obtained and the valuation process is completed.
/22
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | | | |
| | As of July 1, 2020 | | |
| | | (In thousands) | |
Trade accounts receivable | | $ | i 518,476 | |
Inventory | | | i 141,718 | |
Other current assets | | | i 3,000 | |
Intangibles | | | i 591,000 | |
Goodwill | | | i 87,530 | |
Other noncurrent assets | | | i 713,000 | |
Total assets | | | i 2,054,724 | |
Trade accounts payable | | | i 451,967 | |
Deferred revenue and other | | | i 174,733 | |
Other accrued expenses | | | i 82,000 | |
Total liabilities | | | i 708,700 | |
Total purchase price | | $ | i 1,346,024 | |
| | | | |
Acquired Receivables. The fair value of assets acquired, which represents the gross contractual amount, include accounts receivable of $ i 539 million, with an associated allowance for credit losses of $ i 21 million. Accounts receivable is comprised of receivables due from master agents, BoostUp! receivables and other receivables. See Note 2 for further discussion of BoostUP! receivables.
Inventory. Inventory assets include $ i 142 million of wireless devices.
Intangible Assets and Goodwill. Intangible assets includes $ i 458 million of subscriber relationships, the Boost tradename of $ i 96 million and certain below market contracts for $ i 37 million. The intangible assets will be amortized over their respective useful lives which range from one to i ten years. Goodwill has an assigned value of $ i 88 million, which represents the excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed. The preliminary goodwill recognized includes, among other things, the assembled workforce of Boost Mobile and intangible assets that do not qualify for separate recognition. The goodwill resulting from the Boost Mobile Acquisition included in the wireless segment is expected to be deductible for tax purposes. All of the goodwill acquired is allocated to the Retail Wireless reporting unit.
Other Noncurrent Assets. Other noncurrent assets includes our option to purchase certain TMUS’s 800 MHz spectrum licenses with an assigned fair value of $ i 713 million. This instrument meets the definition of a derivative and all subsequent changes in the derivative’s fair value are recorded in “Other, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until the option is either exercised or expires.
Liabilities. Liabilities include accounts payable, deferred revenue and accrued expenses.
Indemnification Assets and Contingent Liabilities. Pursuant to the APA, TMUS agreed to indemnify us against certain specified matters and losses. As of the closing of the transaction and September 30, 2020, we have not recorded either an indemnification asset or liability as the potential liabilities and associated reimbursement by TMUS cannot be reasonably estimated. We expect that any liability incurred related to these indemnified matters would be indemnified and reimbursed by TMUS. See Note 11 for further information.
23
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Sales of equipment to indirect dealers often include credits subsequently paid to the dealer as a reimbursement for promotions offered to the end consumer. These credits are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealers. At acquisition, we recorded a contingent obligation related to these credits, based upon historical experience and other factors, such as expected promotional activity. This amounts is recorded in “Other accrued expenses” on our Condensed Consolidated Balance Sheets.
Transaction Costs
We recognized transaction costs of $ i 1 million and $ i 11 million for the three and nine months ended September 30, 2020, respectively. These costs are primarily related to professional service costs which are recorded in “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Ting Mobile Acquisition
On August 1, 2020, we completed the Ting Mobile Acquisition. In addition, we entered into a services agreement pursuant to which Tucows will act as a mobile virtual network enabler for certain of our retail wireless subscribers. The consideration for the Ting Mobile Acquisition is an earn out provision and the fair value of the earn out provision has been assigned to a customer relationship intangible that is recorded in “Intangible assets” on our Condensed Consolidated Balance Sheets. See Note 5 for further information.
Pro Forma Information
The following pro forma financial information gives effect to the transactions as if they had been completed as of January 1, 2019. The unaudited pro forma information was based on the historical results of DISH Network and the estimated Boost Mobile Acquisition and the Ting Mobile Acquisition results. The results of the Boost Mobile Acquisition were adjusted to include the estimated expense associated with an MNSA arrangement and certain selling, general and administrative expenses that historically were not recorded within the Prepaid Business’ financial statements. The results of the Ting Mobile Acquisition were adjusted for the consideration given for the earn out provision. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions.
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (In thousands) | | ||||||||||
Total revenue |
| $ | i 4,537,708 |
| $ | i 4,410,580 |
| $ | i 13,484,804 |
| $ | i 13,403,813 | |
Net income (loss) attributable to DISH Network | | $ | i 515,183 | | $ | i 293,514 | | $ | i 849,744 | | $ | i 808,825 | |
| | | | | | | | | | | | | |
Assumptions and nonrecurring pro forma adjustments include:
| ● | Boost network costs were estimated based on the forecasted costs on a per subscriber basis that DISH expects to incur prospectively to utilize the TMUS network. |
| ● | Boost selling, general and administrative expenses were estimated based on the costs to be incurred by DISH per the TSA arrangement with TMUS. |
| ● | Transaction costs of $ i 1 million and $ i 11 million for the three and nine months ended September 30, 2020, respectively, were recorded in “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and are not recurring. |
24
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The selective unaudited pro forma condensed financial information is provided for informational purposes and does not represent the actual results from operation had the transaction occurred on January 1, 2019.
Agreements in Connection with the APA
In connection with the Boost Mobile Acquisition and the consummation of the Sprint-TMUS merger, we, TMUS, Sprint, DT and SoftBank came to an agreement with the DOJ on key terms and approval of the Transaction Agreements and our wireless service business and spectrum. On July 26, 2019, the Defendants entered into the Stipulation and Order with the DOJ binding the Defendants to the Proposed Final Judgment, which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the District Court on July 26, 2019 and on April 1, 2020, the Final Judgment was entered with the District Court.
The term of the Final Judgment is i seven years from the date of its entry with the District Court or i five years if the DOJ gives notice that the divestitures, build-outs and other requirements have been completed to its satisfaction. A Monitoring Trustee has been appointed by the District Court that has the power and authority to monitor the Defendants’ compliance with the Final Judgment and settle disputes among the Defendants regarding compliance with the provisions of the Final Judgment and may recommend action to the DOJ in the event a party fails to comply with the Final Judgment.
Also in connection with the closing of the Boost Mobile Acquisition, we and NTM entered into the TSA, the MNSA, the Option Agreement, and the Spectrum Purchase Agreement for an additional approximately $ i 3.59 billion.
Transition Services Agreement
TMUS and DISH Network entered into a TSA upon the Closing Date of the Boost Mobile Acquisition, pursuant to which TMUS provides certain transition services to us for the Prepaid Business for a period of i two years from July 1, 2020. Additionally, under the Final Judgment, we may apply to the DOJ for one or more extensions of the term of the TSA, which the DOJ can approve or deny in its sole discretion, and the TSA contemplates the option to renew the TSA for a third or additional years. The transition services are provided at cost, which shall not exceed a specific amount in the first year, plus certain pass-through costs and out-of-pocket expenses, during the first i two years. If any transition services are renewed for a third year, the transition services will be provided at cost plus a certain mark-up, plus certain additional costs.
Master Network Services Agreement
TMUS and DISH Network entered into an MNSA upon the Closing Date of the Boost Mobile Acquisition, pursuant to which we also receive network services from NTM for a period of i seven years. As set forth in the MNSA, NTM provides to us, among other things, (i) legacy network services for Boost Mobile and certain other prepaid end users on the Sprint network, (ii) NTM network services for certain end users that have been migrated to the NTM network or provisioned on the NTM network by or on behalf of us and (iii) infrastructure mobile network operator services to assist in the access and integration of our network.
Pursuant to the terms of the MNSA, we face certain restrictions on making offerings that may combine the access to services provided under the MNSA with access to the facilities or services provided by certain third parties, subject to certain exceptions and carve-outs. We have the right to offer differentiated pricing, products and features to our end users under our brands in conjunction with the services provided under the MNSA, subject to certain qualifications and restrictions. We have certain restrictions on our ability to wholesale, sub-distribute or resell the services provided under the MNSA to third parties. During and after the term of the MNSA, NTM has agreed to certain restrictions with respect to the use of certain information in the targeting of customers.
25
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In the event of a “change of control” of DISH Network, the MNSA will terminate upon the earlier of i two years following the consummation of the change of control or the date on which the MNSA would have otherwise terminated or expired in accordance with its terms. However, we would remain able to provision new users for i six months after the change of control and also retain access to roaming services on the NTM network for both new and existing users for the remainder of the original term of the MNSA. Generally, a change of control would occur in the first i 36 months of the term of the MNSA if (A) certain “permitted owners” no longer own i 50% or more of our voting power or a person or group of persons who are not permitted owners beneficially owns more than i 50% of our aggregate economic value or (B) we sell more than i 50% of our wireless communications business assets (excluding our wireless terrestrial spectrum licenses and entities that own our wireless terrestrial spectrum licenses). A permitted owner generally includes Charles W. Ergen (including his family and certain related trusts and entities) and certain financial investors. Following the first i 36 months of the term of the MNSA (or earlier in certain circumstances), a change of control would generally occur if any restricted persons own (1) more than i 50% of our voting power or economic value or (2) a majority of our wireless communications business assets (excluding our wireless terrestrial spectrum licenses and entities that own our wireless terrestrial spectrum licenses). A “restricted person” generally includes certain U.S. wireless providers and U.S. cable companies (with certain exceptions), as well as any other entities that do not enter into a network usage agreement with NTM restricting such person from generally engaging in certain activities that are detrimental to the NTM network.
Spectrum Purchase Agreement
Pursuant to the Spectrum Purchase Agreement that was entered into upon the Closing Date of the Boost Mobile Acquisition, we are expected to purchase all of Sprint’s 800 MHz spectrum (approximately 13.5 MHz of nationwide spectrum). The covered spectrum must be divested within the later of i three years from the Closing Date and i five days after receipt of FCC approval for the transfer, following an application for FCC approval to be filed i three years following the closing of the Sprint-TMUS merger. The DOJ may in its sole discretion agree to extend the deadline for the spectrum divestiture for up to i 60 days pursuant to the Final Judgment. NTM may exercise an option to lease back 4 MHz (2 MHz downlink + 2 MHz uplink) of the spectrum for i two years following the closing of the 800 MHz spectrum sale at the same per-Pop rate used to calculate the purchase price paid by us to NTM – a rate of approximately $ i 68 million per year.
We and NTM have made customary representations, warranties and covenants pursuant to the Spectrum Purchase Agreement, including representations by NTM regarding the validity of the licenses for the purchased spectrum. Pursuant to the Spectrum Purchase Agreement, we and NTM each indemnify the other against losses suffered as a result of breaches of the other’s representations and warranties or covenants. The indemnification provisions are subject to certain deductible and cap limitations and time limitations with respect to recovery for losses.
If we breach the Spectrum Purchase Agreement prior to the closing or fail to deliver the purchase price following the satisfaction or waiver of all closing conditions, our sole liability to NTM will be to pay NTM a fee of approximately $ i 72 million. If NTM fails to sell the spectrum to us following the satisfaction or waiver of all closing conditions, our sole recourse will be to seek specific performance, and if (and only if) specific performance is unavailable, to seek damages of up to approximately $ i 72 million.
26
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Option Agreement
The Option Agreement, which was entered into upon the Closing Date of the Boost Mobile Acquisition, provides us an exclusive option to assume certain assets and liabilities under certain circumstances for any of the cell sites and retail stores that NTM decommissions during the term of the Option Agreement. NTM must make a minimum of i 20,000 cell sites and i 400 retail stores available to us pursuant to the Final Judgment. With respect to each decommissioned site, we may choose to acquire: (a) only the lease for such site, (b) the lease and a predetermined list of equipment at the site or (c) the lease and all of the equipment at the site. Under the Final Judgment, NTM must provide a detailed schedule which identifies each cell site that is scheduled to be decommissioned within i five years of the Closing Date. The Option Agreement will remain in place for i five years following the Closing Date.
Agreement with the DOJ: The Stipulation and Order and the Final Judgment
Certain of the provisions of the Stipulation and Order and the Final Judgment are also reflected in the terms of the Transaction Agreements. In addition to the terms reflected in the Transaction Agreements, the Stipulation and Order and the Final Judgment provide for other rights and obligations of the Sellers and us, including the following:
| ● | For a period of i one year after the Closing Date, if we determine that certain assets not included in the divestiture were previously used by the Prepaid Business and are reasonably necessary for the continued competitiveness of the Prepaid Business, subject to certain carve-outs, we may request that such assets be transferred to us, which the DOJ can approve or deny in its sole discretion. |
| ● | Within i one year of the Closing Date, we are required to offer nationwide postpaid retail mobile wireless service. |
| ● | If we elect not to purchase the 800 MHz licenses pursuant to the Spectrum Purchase Agreement, we must pay $ i 360 million (equal to i 10% of the Spectrum Purchase Agreement purchase price) to the United States. However, we will not be required to make such payment if we have deployed a core network and offered 5G service to at least i 20% of the U.S. population within i three years of the Closing Date. |
| ● | If we buy the 800 MHz spectrum pursuant to the Spectrum Purchase Agreement but fail to deploy all of the 800 MHz spectrum licenses for use in the provision of retail mobile wireless services by the expiration of the Final Judgment, the DOJ may require us to forfeit to the FCC any of the 800 MHz licenses for spectrum that are not being used to provide retail mobile wireless services, unless we are already providing nationwide retail wireless service. |
| ● | We and NTM were required to negotiate in good faith to reach an agreement for NTM to lease some or all of our 600 MHz spectrum licenses for deployment to retail consumers by NTM. On September 11, 2020, we and T-Mobile entered into an agreement to lease a portion of our 600 MHz spectrum licenses for an annual lease payment of approximately $ i 56 million. |
| ● | We and NTM must agree to support eSIM technology on smartphones. |
| ● | The Sellers must introduce the suppliers and distributors of the Prepaid Business to us and the Sellers may not interfere in our negotiations with such suppliers and distributors. |
27
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| ● | On the first day of the fiscal quarter following the entry of the Final Judgment and of each 180-day period thereafter, we are obligated to provide the DOJ with a description of our deployment efforts over the prior quarter including: (i) the number of towers and small cells deployed, (ii) the spectrum bands on which we have deployed equipment, (iii) progress in obtaining devices that operate on our spectrum frequencies, (iv) POPs coverage of our network, (v) the number of our mobile wireless subscriptions, (vi) the amount of traffic transmitted to our subscribers using our network and using NTM’s network, and (vii) whether there are or have been any efforts by NTM to interfere with our efforts to deploy and operate our network. |
| ● | We cannot sell, lease or otherwise provide the right to use any of the divested assets to any national facilities-based mobile wireless provider and may not sell any of the divested assets or similar assets back to TMUS during the term of the Final Judgment, except that we may lease back to NTM up to 4 MHz of the 800 MHz spectrum we will acquire (as discussed above). |
| ● | We must comply with the June 14, 2023 AWS-4, Lower 700 MHz E Block, AWS H Block, and nationwide 5G broadband network build-out commitments made to the FCC, subject to verification by the FCC (as described below). If we fail to comply with such build-out commitments, we may be subject to civil contempt in addition to the substantial voluntary contributions and license forfeitures described below if we fail to meet these commitments (as described below). |
FCC Build-Out Commitments
In a letter filed with the FCC on July 26, 2019, we voluntarily committed to deploy a nationwide 5G broadband network and meet revised timelines relating to the build-out of our AWS-4, Lower 700 MHz E Block, AWS H Block and 600 MHz spectrum assets, subject to certain penalties. Pursuant to these commitments, we requested multi-year extensions to deploy our AWS-4, Lower 700 MHz E Block, and AWS H Block spectrum, and we have committed to build-out our 600 MHz licenses on an accelerated schedule to better align with our 5G deployment. We have also committed to offer 5G broadband service to certain population coverage targets, along with minimum core network, tower and spectrum use targets, and have waived our right to deploy any technology of our choice under the FCC’s “flexible use” rules with respect to these spectrum bands. Failure to meet the various commitments would require us to pay voluntary contributions totaling up to $ i 2.2 billion to the FCC and would subject certain licenses in the AWS-4, Lower 700 MHz E Block, and AWS H Block spectrum to forfeiture. We have also agreed not to sell our AWS-4 and 600 MHz spectrum for i six years without prior DOJ and FCC approval (unless such sale is part of a change of control of DISH Network). Additionally, we have agreed not to lease a certain percentage of network capacity on our AWS-4 and 600 MHz spectrum for i six years to the three largest U.S. wireless carriers (i.e., AT&T, Verizon and NTM), without prior FCC approval. On November 5, 2019, the FCC released an Order that, among other things, approved the Sprint-TMUS merger, tolled our existing March 7, 2020 build-out deadline for our AWS-4 and Lower 700 MHz E Block Licenses, and directed the FCC’s Wireless Telecommunications Bureau to adopt our commitments after a 30 day review period (the “FCC Merger Order”).
On September 11, 2020, the FCC’s Wireless Telecommunications Bureau issued an Order adopting these commitments. Our 5G deployment obligations for each of the four spectrum bands are generally set forth below.
| ● | With respect to the 600 MHz licenses, we must offer 5G broadband service to at least i 70% of the U.S. population and have deployed a core network no later than June 14, 2023, and offer 5G broadband service to at least i 75% of the population in each Partial Economic Area (which are service areas established by the FCC) no later than June 14, 2025. Note that these commitments are earlier than the current 600 MHz Final Build-Out Requirement date of June 2029. See below for further information. |
| ● | With respect to the AWS-4 licenses, we must offer 5G broadband service to at least i 20% of the U.S. population and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least i 70% of the U.S. population no later than June 14, 2023. |
28
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| ● | With respect to the Lower 700 MHz E Block licenses, we must offer 5G broadband service to at least i 20% of the U.S. population who are covered by such licenses and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least i 70% of the U.S. population who are covered by such licenses no later than June 14, 2023. |
| ● | With respect to the AWS H Block licenses, we must offer 5G broadband service to at least i 20% of the U.S. population and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least i 70% of the U.S. population no later than June 14, 2023. |
i6. | Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investment Securities |
Our marketable investment securities, restricted cash and cash equivalents, and other investment securities consisted of the following:
i
| | | | | | |
| As of | | ||||
| September 30, | | | |||
| 2020 |
| 2019 |
| ||
| (In thousands) | | ||||
Marketable investment securities: | | | | | | |
Current marketable investment securities: | | | | | | |
Strategic - available-for-sale | $ | i 195 | | $ | i 196 | |
Other | | i 983,664 | | | i 416,508 | |
Total current marketable investment securities | | i 983,859 | | | i 416,704 | |
Restricted marketable investment securities (1) | | i 35,115 | | | i 390 | |
Total marketable investment securities | | i 1,018,974 | | | i 417,094 | |
| | | | | | |
Restricted cash and cash equivalents (1) | | i 73,273 | | | i 60,677 | |
| | | | | | |
Other investment securities: | | | | | | |
Other investment securities | | i 148,246 | | | i 160,074 | |
Total other investment securities | | i 148,246 | | | i 160,074 | |
| | | | | | |
Total marketable investment securities, restricted cash and cash equivalents, and other investment securities | $ | i 1,240,493 | | $ | i 637,845 | |
| | | | | | |
| (1) | Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash, cash equivalents and marketable investment securities” on our Condensed Consolidated Balance Sheets. |
Marketable Investment Securities
Our marketable investment securities portfolio may consist of debt and equity instruments. All equity securities are carried at fair value, with changes in fair value recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All debt securities are classified as available-for-sale and are recorded at fair value. We report the temporary unrealized gains and losses related to changes in market conditions of marketable debt securities as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. The corresponding changes in the fair value of marketable debt securities, which are determined to be company specific credit losses are recorded in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 2 for further information.
/29
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Current Marketable Investment Securities – Strategic
Our current strategic marketable investment securities portfolio includes and may include strategic and financial debt and/or equity investments in private and public companies that are highly speculative and have experienced and continue to experience volatility. As of September 30, 2020, this portfolio consisted of securities of a small number of issuers, and as a result the value of that portfolio depends, among other things, on the performance of those issuers. The fair value of certain of the debt and equity securities in this portfolio can be adversely impacted by, among other things, the issuers’ respective performance and ability to obtain any necessary additional financing on acceptable terms, or at all.
Current Marketable Investment Securities - Other
Our current other marketable investment securities portfolio includes investments in various debt instruments including, among others, commercial paper, corporate securities and United States treasury and/or agency securities.
Commercial paper consists mainly of unsecured short-term, promissory notes issued primarily by corporations with maturities ranging up to i 365 days. Corporate securities consist of debt instruments issued by corporations with various maturities normally less than i 18 months. U.S. Treasury and agency securities consist of debt instruments issued by the federal government and other government agencies.
Restricted Cash, Cash Equivalents and Marketable Investment Securities
As of September 30, 2020 and December 31, 2019, our restricted marketable investment securities, together with our restricted cash and cash equivalents, included amounts required as collateral for our letters of credit and trusts.
Other Investment Securities
We have strategic investments in certain debt and/or equity securities that are included in noncurrent “Other investment securities” on our Condensed Consolidated Balance Sheets. Our debt securities are classified as available-for-sale and our equity securities are accounted for using the equity method of accounting or recorded at fair value. Certain of our equity method investments are detailed below.
NagraStar L.L.C. As a result of the completion of the share exchange on February 28, 2017, we own a i 50% interest in NagraStar L.L.C. (“NagraStar”), a joint venture that is our primary provider of encryption and related security systems intended to assure that only authorized customers have access to our programming.
Invidi Technologies Corporation. In November 2016, we, DIRECTV, LLC, a wholly-owned indirect subsidiary of AT&T Inc., and Cavendish Square Holding B.V., an affiliate of WPP plc, entered into a series of agreements to acquire Invidi Technologies Corporation (“Invidi”), an entity that provides proprietary software for the addressable advertising market. The transaction closed in January 2017.
TerreStar Solutions, Inc. In March 2019, we closed a transaction with TerreStar Solutions, Inc. (“TSI”) to acquire additional equity securities of TSI, an entity that holds certain 2 GHz wireless spectrum licenses in Canada, in exchange for certain Canadian assets, including, among other things, a portion of the satellite capacity on our T1 satellite, which we had acquired from TerreStar Networks, Inc. in 2012.
30
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Our ability to realize value from our strategic investments in securities that are not publicly traded depends on the success of the issuers’ businesses and their ability to obtain sufficient capital, on acceptable terms or at all, and to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
Unrealized Gains (Losses) on Marketable Investment Securities
As of September 30, 2020 and December 31, 2019, we had accumulated net unrealized gains of less than $ i i 1 / million. These amounts, net of related tax effect, were accumulated net unrealized gains of less than $ i i 1 / million. All of these amounts are included in “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).” The components of our available-for-sale investments are summarized in the table below.
i
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, | | As of December 31, | | ||||||||||||||||||||
| | 2020 | | 2019 | | ||||||||||||||||||||
| | Marketable | | | | | | | | | | | Marketable | | | | | | | | | | | ||
| | Investment | | Unrealized | | Investment | | Unrealized | | ||||||||||||||||
|
| Securities |
| Gains |
| Losses |
| Net |
| Securities |
| Gains |
| Losses |
| Net |
| ||||||||
| | (In thousands) | | ||||||||||||||||||||||
Debt securities (including restricted): | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | | $ | i 302,754 | | $ | i 18 | | $ | — | | $ | i 18 | | $ | i 10,016 | | $ | i 32 | | $ | — | | $ | i 32 | |
Commercial paper | | | i 652,953 | | | — | | | — | | | — | | | i 369,397 | | | i 2 | | | — | | | i 2 | |
Corporate securities | | | i 62,748 | | | i 5 | | | ( i 1) | | | i 4 | | | i 28,796 | | | i 4 | | | ( i 1) | | | i 3 | |
Other | | | i 519 | | | — | | | — | | | — | | | i 8,885 | | | i 58 | | | — | | | i 58 | |
Total | | $ | i 1,018,974 | | $ | i 23 | | $ | ( i 1) | | $ | i 22 | | $ | i 417,094 | | $ | i 96 | | $ | ( i 1) | | $ | i 95 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2020, restricted and non-restricted marketable investment securities included debt securities of $ i 1.019 billion with contractual maturities within one year. Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.
Fair Value Measurements
Our investments measured at fair value on a recurring basis were as follows:
i
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of | | ||||||||||||||||||||||
| | | | ||||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
| | (In thousands) | | ||||||||||||||||||||||
Cash equivalents (including restricted) | | $ | i 1,750,477 | | $ | i 963,274 | | $ | i 787,203 | | $ | — | | $ | i 2,436,545 | | $ | i 246,876 | | $ | i 2,189,669 | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities (including restricted): | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | | $ | i 302,754 | | $ | i 302,754 | | $ | — | | $ | — | | $ | i 10,016 | | $ | i 10,016 | | $ | — | | $ | — | |
Commercial paper | | | i 652,953 | | | — | | | i 652,953 | | | — | | | i 369,397 | | | — | | | i 369,397 | | | — | |
Corporate securities | | | i 62,748 | | | — | | | i 62,748 | | | — | | | i 28,796 | | | — | | | i 28,796 | | | — | |
Other | | | i 519 | | | — | | | i 324 | | | i 195 | | | i 8,885 | | | — | | | i 8,689 | | | i 196 | |
Total | | $ | i 1,018,974 | | $ | i 302,754 | | $ | i 716,025 | | $ | i 195 | | $ | i 417,094 | | $ | i 10,016 | | $ | i 406,882 | | $ | i 196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
31
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Derivative Instruments
We have the option to purchase certain TMUS’s 800 MHz spectrum licenses from TMUS at a fixed price in the future. See Note 5 for further information. This instrument meets the definition of a derivative and was valued as part of the business combination at fair value in the Condensed Consolidated Balance Sheets. All subsequent changes in the derivative’s fair value are recorded in “Other, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until the option is either exercised or expires. We account for our option to purchase certain TMUS’s 800 MHz spectrum licenses under the Spectrum Purchase Agreement as a Level 3 derivative.
Gains and Losses on Sales and Changes in Carrying Amounts of Investments
“Other, net” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Other, net: |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (In thousands) | | ||||||||||
Marketable investment securities - realized and unrealized gains (losses) | | $ | i 87 | | $ | i 1,346 | | $ | i 177 | | $ | i 5,240 | |
Derivative instruments - net realized and/or unrealized gains (losses) | | | ( i 12,450) | | | — | | | ( i 12,450) | | | — | |
Costs related to early redemption of debt | | | — | | | ( i 44) | | | — | | | ( i 483) | |
Equity in earnings (losses) of affiliates | | | ( i 824) | | | ( i 5,467) | | | ( i 221) | | | ( i 4,476) | |
Other | | | ( i 13) | | | i 2,369 | | | i 902 | | | i 9,843 | |
Total | | $ | ( i 13,200) | | $ | ( i 1,796) | | $ | ( i 11,592) | | $ | i 10,124 | |
| | | | | | | | | | | | | |
i7.Inventory
Inventory consisted of the following:
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
|
| 2020 |
| 2019 |
| ||
| | (In thousands) | | ||||
Finished goods | | $ | i 470,980 | | $ | i 255,155 | |
Work-in-process and service repairs | | | i 29,000 | | | i 34,120 | |
Raw materials | | | i 16,236 | | | i 33,623 | |
Total inventory | | $ | i 516,216 | | $ | i 322,898 | |
| | | | | | | |
/
i
32
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
8.Property and Equipment and Intangible Assets
Property and equipment consisted of the following:
i
| | | | | | | | | | |
| | | | | | | | | | |
| | Depreciable | | As of | ||||||
| | Life | | September 30, | | December 31, | ||||
|
| (In Years) |
| 2020 |
| 2019 | ||||
| | | | | | (In thousands) | ||||
Equipment leased to customers | | i 2 | - | i 5 | | $ | i 1,772,000 | | $ | i 1,861,668 |
Satellites (1) | | i 2 | - | i 15 | | | i 1,734,025 | | | i 1,855,096 |
Satellites acquired under finance lease agreements | | i 10 | - | i 15 | | | i 888,940 | | | i 888,940 |
Furniture, fixtures, equipment and other | | i 2 | - | i 20 | | | i 2,073,041 | | | i 2,010,094 |
Buildings and improvements | | i 5 | - | i 40 | | | i 354,739 | | | i 349,347 |
Land | | | - | | | | i 17,810 | | | i 17,810 |
Construction in progress (1) | | | - | | | | i 109,018 | | | i 278,083 |
Total property and equipment | | | | | | | i 6,949,573 | | | i 7,261,038 |
Accumulated depreciation | | | | | | | ( i 4,723,150) | | | ( i 4,554,856) |
Property and equipment, net | | | | | | $ | i 2,226,423 | | $ | i 2,706,182 |
| | | | | | | | | | |
| (1) | During the nine months ended September 30, 2020, we wrote down the T1 satellite net book value of $ i 48 million (net of accumulated depreciation of $ i 18 million) and the D1 satellite net book value of $ i 55 million to their estimated fair value of i zero. In addition, during the nine months ended September 30, 2020, we impaired $ i 227 million for capitalized costs of equipment, labor and other assets related to the narrowband IoT deployment that would not be utilized in our 5G Network Deployment. As a result, we recorded a $ i 330 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 2 for further information. |
/Construction in progress consisted of the following:
i
| | | | | | |
| | As of | ||||
| | September 30, | | |||
|
| 2020 |
| 2019 | ||
| | (In thousands) | ||||
Software | | $ | i 43,011 | | $ | i 51,493 |
Wireless (1) | | | i 40,952 | | | i 207,814 |
Other | | | i 25,055 | | | i 18,776 |
Total construction in progress | | $ | i 109,018 | | $ | i 278,083 |
| | | | | | |
| (1) | During the nine months ended September 30, 2020, we impaired the capitalized costs of equipment, labor and other assets related to the narrowband IoT deployment that would not be utilized in our 5G Network Deployment, resulting in a $ i 227 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 2 for further information. |
/33
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Depreciation and amortization expense consisted of the following:
i
| | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| September 30, | | | |||||||||
| 2020 |
| 2019 | | 2020 |
| 2019 |
| ||||
| (In thousands) | | ||||||||||
Equipment leased to customers | $ | i 71,568 | | $ | i 91,090 | | $ | i 220,797 | | $ | i 287,109 | |
Satellites (1) | | i 50,193 | | | i 25,321 | | | i 152,530 | | | i 62,956 | |
Buildings, furniture, fixtures, equipment and other | | i 32,303 | | | i 36,239 | | | i 97,679 | | | i 100,713 | |
Intangible assets | | i 45,019 | | | i 1,531 | | | i 47,021 | | | i 6,244 | |
Total depreciation and amortization | $ | i 199,083 | | $ | i 154,181 | | $ | i 518,027 | | $ | i 457,022 | |
| | | | | | | | | | | | |
| (1) | The increase resulted from the Master Transaction Agreement pursuant to which, on September 10, 2019, certain satellites were transferred to us. See Note 14 for further information. |
Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense related to satellites or equipment leased to customers.
Pay-TV Satellites. We currently utilize i 13 satellites in geostationary orbit approximately 22,300 miles above the equator, i eight of which we own and depreciate over their estimated useful life. We currently utilize certain capacity on i one satellite that we lease from EchoStar, which is accounted for as an operating lease. We also lease i four satellites from third parties: Ciel II, which is accounted for as an operating lease, and Anik F3, Nimiq 5 and QuetzSat-1, which are accounted for as financing leases and are depreciated over their economic life.
As of September 30, 2020, our pay-TV satellite fleet consisted of the following:
i
| | | | | | | |
| | | | Degree | | Lease | |
| | Launch | | Orbital | | Termination | |
Satellites |
| Date |
| Location |
| Date | |
Owned: | | | | | | | |
EchoStar VII (1) | | February 2002 | | 119 | | N/A | |
EchoStar X (1) | | February 2006 | | 110 | | N/A | |
EchoStar XI (1) | | July 2008 | | 110 | | N/A | |
EchoStar XIV (1) | | March 2010 | | 119 | | N/A | |
EchoStar XV | | July 2010 | | 61.5 | | N/A | |
EchoStar XVI (1) | | November 2012 | | 61.5 | | N/A | |
EchoStar XVIII | | June 2016 | | 61.5 | | N/A | |
EchoStar XXIII (1) | | March 2017 | | 67.9 | | N/A | |
| | | | | | | |
Leased from EchoStar (2): | | | | | | | |
EchoStar IX | | August 2003 | | 121 | | Month to month | |
| | | | | | | |
Leased from Other Third Party: | | | | | | | |
Anik F3 | | April 2007 | | 118.7 | | April 2022 | |
Ciel II | | December 2008 | | 129 | | January 2022 | |
Nimiq 5 (1) | | September 2009 | | 72.7 | | September 2024 | |
QuetzSat-1 (1) | | September 2011 | | 77 | | November 2021 | |
| | | | | | | |
| (1) | Pursuant to the Master Transaction Agreement, on September 10, 2019, these satellites and satellite service agreements were transferred to us. See Note 14 for further information. |
| (2) | See Note 14 for further information on our Related Party Transactions with EchoStar. |
34
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Effective September 10, 2019, pursuant to the Master Transaction Agreement, the EchoStar XII satellite was transferred to us. During October 2019, the EchoStar XII satellite was de-orbited.
Intangible Assets
As of September 30, 2020 and December 31, 2019, our identifiable intangibles subject to amortization consisted of the following:
i
| | | | | | | | | | | | | |
| | As of | | ||||||||||
| | | | ||||||||||
| | Intangible | | Accumulated | | Intangible | | Accumulated | | ||||
|
| Assets |
| Amortization |
| Assets |
| Amortization |
| ||||
| | (In thousands) | | ||||||||||
Technology-based |
| $ | i 63,078 | | $ | ( i 58,194) | | $ | i 63,077 | | $ | ( i 57,414) | |
Trademarks | | | i 133,428 | | | ( i 37,259) | | | i 37,010 | | | ( i 32,619) | |
Contract-based | | | i 41,500 | | | ( i 13,750) | | | i 4,500 | | | ( i 4,500) | |
Customer relationships | | | i 515,576 | | | ( i 55,984) | | | i 23,633 | | | ( i 23,633) | |
Total | | $ | i 753,582 | | $ | ( i 165,187) | | $ | i 128,220 | | $ | ( i 118,166) | |
| | | | | | | | | | | | | |
| (1) | The increase in intangible assets resulted from the completion of the Boost Mobile Acquisition and the Ting Mobile Acquisition. See Note 5 for further information. |
These identifiable intangibles are included in “Intangible assets” on our Consolidated Balance Sheets. Amortization expense of these intangible assets in general is recorded on a straight-line basis over an average finite useful life primarily ranging from approximately one to i 20 years. Amortization expense was $ i 45 million and $ i 2 million, for the three months ended September 30, 2020 and 2019, respectively. Amortization expense was $ i 47 million and $ i 6 million, for the nine months ended September 30, 2020 and 2019, respectively. The increase in amortization expense primarily resulted from the Boost Mobile Acquisition and the Ting Mobile Acquisition.
iEstimated future amortization of our identifiable intangible assets as of September 30, 2020 is as follows (in thousands):
| | | |
For the Years Ended December 31, | |||
| | (In thousands) | |
2020 (for the remaining three months) | | $ | i 45,850 |
2021 |
| | i 157,105 |
2022 | | | i 130,198 |
2023 | | | i 127,809 |
2024 | | | i 69,512 |
Thereafter | | | i 57,921 |
Total | | $ | i 588,395 |
35
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Goodwill
Goodwill represents the excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed and is not subject to amortization but is subject to impairment testing annually or whenever indicators of impairment arise. The non-recurring measurement of fair value of this asset is classified as Level 3 in the fair value hierarchy. As of September 30, 2020 and December 31, 2019, our goodwill was $ i 214 million and $ i 126 million, respectively, which primarily relates to our wireless segment. The increase in goodwill resulted from the completion of the Boost Mobile Acquisition. See Note 5 for further information.
i9.Leases
Lessee
We enter into operating and finance leases for, among other things, satellites, office space, warehouses and distribution centers, vehicles, wireless towers and other equipment. Our leases have remaining lease terms from one to i seven years, some of which include i renewal i options, and some of which include i options to i terminate the leases within i one year.
Our Anik F3, Nimiq 5 and QuetzSat-1 satellites are accounted for as financing leases. Substantially all of our remaining leases are accounted for as operating leases.
The components of lease expense were as follows:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
|
| 2020 | | 2019 | | 2020 | | 2019 | | ||||
| | (In thousands) | | ||||||||||
Operating lease cost (1) | | $ | i 18,281 | | $ | i 40,831 | | $ | i 54,130 | | $ | i 205,815 | |
| | | | | | | | | | | | | |
Short-term lease cost (2) | | | i 2,726 | | | i 2,915 | | | i 8,284 | | | i 9,141 | |
| | | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | | |
Amortization of right-of-use assets | | | i 17,829 | | | i 7,187 | | | i 53,488 | | | i 17,100 | |
Interest on lease liabilities | | | i 5,070 | | | i 2,352 | | | i 16,326 | | | i 4,632 | |
Total finance lease cost | | | i 22,899 | | | i 9,539 | | | i 69,814 | | | i 21,732 | |
Total lease costs | | $ | i 43,906 | | $ | i 53,285 | | $ | i 132,228 | | $ | i 236,688 | |
| | | | | | | | | | | | | |
| (1) | Pursuant to the Master Transaction Agreement, effective September 10, 2019, approximately $ i 495 million of previously reported operating lease assets and the related liabilities for satellites and real estate assets were transferred to us. See Note 14 for further information. These satellite and real estate assets are no longer included in “Operating lease assets,” “Other current liabilities” and “Operating lease liabilities,” but rather in “Property and equipment, net” on our Condensed Consolidated Balance Sheets. Lease expense related to these satellites and real estate assets for the three and nine months ended September 30, 2019 was $ i 25 million and $ i 159 million, respectively. |
| (2) | Leases that have terms of 12 months or less. |
/36
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Supplemental
cash flow information related to leases was as follows:
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2020 | | 2019 | | ||
| | (In thousands) | | ||||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | | $ | i 54,611 | | $ | i 209,435 | |
Operating cash flows from finance leases | | $ | i 16,326 | | $ | i 4,637 | |
Financing cash flows from finance leases | | $ | i 47,301 | | $ | i 17,681 | |
| | | | | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases | | $ | i 41,665 | | $ | i 110,235 | |
Finance leases | | $ | — | | $ | i 187,339 | |
| | | | | | | |
Right-of-use assets and liabilities recognized at January 1, 2019 upon adoption of ASC 842 | | | — | | $ | i 733,584 | |
| | | | | | | |
Supplemental balance sheet information related to leases was as follows:
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2020 | | 2019 | | ||
| | (In thousands) | | ||||
Operating Leases: | | | | | | | |
Operating lease assets (1) | | $ | i 112,922 | | $ | i 144,330 | |
| | | | | | | |
Other current liabilities | | $ | i 59,228 | | $ | i 57,910 | |
Operating lease liabilities | | | i 73,057 | | | i 84,795 | |
Total operating lease liabilities | | $ | i 132,285 | | $ | i 142,705 | |
| | | | | | | |
Finance Leases: | | | | | | | |
Property and equipment, gross | | $ | i 889,708 | | $ | i 890,598 | |
Accumulated depreciation | | | ( i 736,462) | | | ( i 683,271) | |
Property and equipment, net | | $ | i 153,246 | | $ | i 207,327 | |
| | | | | | | |
Other current liabilities | | $ | i 66,075 | | $ | i 61,493 | |
Other long-term liabilities | | | i 118,318 | | | i 171,706 | |
Total finance lease liabilities | | $ | i 184,393 | | $ | i 233,199 | |
| | | | | | | |
Weighted Average Remaining Lease Term: | | | | | | | |
Operating leases | | | i 2.9 years | | | i 3.1 years | |
Finance leases | | | i 3.2 years | | | i 3.8 years | |
| | | | | | | |
Weighted Average Discount Rate: | | | | | | | |
Operating leases | | | i 4.3% | | | i 5.0% | |
Finance leases | | | i 10.4% | | | i 10.2% | |
| | | | | | | |
| (1) | During the nine months ended September 30, 2020, we impaired the operating lease assets related to the narrowband IoT deployment that would not be utilized in our 5G Network Deployment, resulting in a $ i 27 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 2 for further information. |
37
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iMaturities of lease liabilities as of September 30, 2020 were as follows:
i
| | | | | | | | | | |
| | Maturities of Lease Liabilities | | |||||||
| | Operating | | Finance | | | | | ||
For the Years Ending December 31, | | Leases | | Leases | | Total | | |||
| | (In thousands) | | |||||||
2020 (remaining three months) | | $ | i 17,461 | | $ | i 15,961 | | $ | i 33,422 | |
2021 | | | i 58,963 | | | i 82,610 | | | i 141,573 | |
2022 | | | i 33,785 | | | i 48,306 | | | i 82,091 | |
2023 | | | i 15,723 | | | i 40,942 | | | i 56,665 | |
2024 | | | i 9,337 | | | i 30,707 | | | i 40,044 | |
Thereafter | | | i 4,523 | | | — | | | i 4,523 | |
Total lease payments | | | i 139,792 | | | i 218,526 | | | i 358,318 | |
Less: Imputed interest | | | ( i 7,507) | | | ( i 34,133) | | | ( i 41,640) | |
Total | | | i 132,285 | | | i 184,393 | | | i 316,678 | |
Less: Current portion | | | ( i 59,228) | | | ( i 66,075) | | | ( i 125,303) | |
Long-term portion of lease obligations | | $ | i 73,057 | | $ | i 118,318 | | $ | i 191,375 | |
| | | | | | | | | | |
i10.Long-Term Debt and Finance Lease Obligations
Fair Value of our Long-Term Debt
The following table summarizes the carrying amount and fair value of our debt facilities as of September 30, 2020 and December 31, 2019:
i
| | | | | | | | | | | | | |
| | As of | | ||||||||||
| | | | ||||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||
| | (In thousands) | | ||||||||||
5 1/8% Senior Notes due 2020 (1) | | $ | — | | $ | — | | $ | i 1,100,000 | | $ | i 1,110,208 | |
6 3/4% Senior Notes due 2021 (2) | | | i 2,000,000 | | | i 2,055,660 | | | i 2,000,000 | | | i 2,109,420 | |
5 7/8% Senior Notes due 2022 | | | i 2,000,000 | | | i 2,090,160 | | | i 2,000,000 | | | i 2,129,580 | |
i i 5 / % Senior Notes due 2023 | | | i 1,500,000 | | | i 1,533,990 | | | i 1,500,000 | | | i 1,543,770 | |
5 7/8% Senior Notes due 2024 | | | i 2,000,000 | | | i 2,064,700 | | | i 2,000,000 | | | i 2,049,080 | |
2 3/8% Convertible Notes due 2024 | | | i 1,000,000 | | | i 910,700 | | | i 1,000,000 | | | i 918,720 | |
7 3/4% Senior Notes due 2026 | | | i 2,000,000 | | | i 2,202,920 | | | i 2,000,000 | | | i 2,128,900 | |
3 3/8% Convertible Notes due 2026 | | | i 3,000,000 | | | i 2,757,390 | | | i 3,000,000 | | | i 2,907,870 | |
7 3/8% Senior Notes due 2028 | | | i 1,000,000 | | | i 1,032,270 | | | — | | | — | |
Other notes payable | | | i 80,718 | | | i 80,718 | | | i 70,946 | | | i 70,946 | |
Subtotal | | | i 14,580,718 | | $ | i 14,728,508 | | | i 14,670,946 | | $ | i 14,968,494 | |
Unamortized debt discount on the Convertible Notes | | | ( i 657,591) | | | | | | ( i 735,811) | | | | |
Unamortized deferred financing costs and other debt discounts, net | | | ( i 25,120) | | | | | | ( i 28,739) | | | | |
Finance lease obligations (3) | | | i 184,393 | | | | | | i 233,199 | | | | |
Total long-term debt and finance lease obligations (including current portion) | | $ | i 14,082,400 | | | | | $ | i 14,139,595 | | | | |
| | | | | | | | | | | | | |
| (1) | On May 1, 2020, we redeemed the principal balance of our 5 1/8% Senior Notes due 2020. |
| (2) | Our 6 3/4% Senior Notes due 2021 mature on June 1, 2021 and have been reclassified to “Current portion of long-term debt and finance lease obligations” on our Condensed Consolidated Balance Sheets as of September 30, 2020. |
| (3) | Disclosure regarding fair value of finance leases is not required. |
/38
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).
7 3/8% Senior Notes due 2028
On July 1, 2020, we issued $ i 1.0 billion aggregate principal amount of our 7 3/8% Senior Notes due July 1, 2028. Interest accrues at an annual rate of 7 3/8% and is payable semi-annually in cash, in arrears on January 1 and July 1 of each year, commencing on January 1, 2021.
The 7 3/8% Senior Notes are redeemable, in whole or in part, at any time prior to July 1, 2023 at a redemption price equal to i 100% of the principal amount plus a “make-whole” premium, as defined in the related indenture, together with accrued and unpaid interest. On or after July 1, 2023, we may redeem the Notes, in whole or in part, at any time at the redemption prices specified under the related indenture, together with accrued and unpaid interest. Prior to July 1, 2023, we may also redeem up to i 35% of the 7 3/8% Senior Notes at a specified premium with the net cash proceeds from certain equity offerings or capital contributions.
Our 7 3/8% Senior Notes are:
| ● | general unsecured senior obligations of DISH DBS Corporation (“DISH DBS”); |
| ● | ranked equally in right of payment with all of DISH DBS’ and the guarantors’ existing and future unsecured senior debt; and |
| ● | ranked effectively junior to our and the guarantors’ current and future secured senior indebtedness up to the value of the collateral securing such indebtedness. |
The indenture related to our 7 3/8% Senior Notes contains restrictive covenants that, among other things, impose limitations on the ability of DISH DBS and its restricted subsidiaries to:
| ● | incur additional debt; |
| ● | pay dividends or make distributions on DISH DBS’ capital stock or repurchase DISH DBS’ capital stock; |
| ● | make certain investments; |
| ● | create liens or enter into sale and leaseback transactions; |
| ● | enter into transactions with affiliates; |
| ● | merge or consolidate with another company; and |
| ● | transfer or sell assets. |
In the event of a change of control, as defined in the related indenture, we would be required to make an offer to repurchase all or any part of a holder’s 7 3/8% Senior Notes at a purchase price equal to i 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon, to the date of repurchase.
i11.Commitments and Contingencies
Commitments
Our purchase obligations increased during the third quarter 2020 as a result of the Boost Mobile Acquisition and the Ting Mobile Acquisition.
As of September 30, 2020 our future purchase obligations were $ i 1.959 billion for the remaining three months of 2020, $ i 61 million for 2021, $ i 27 million for 2022, $ i 9 million for 2023, for a total of $ i 2.056 billion.
/39
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Purchase Obligations
Our 2020 purchase obligations primarily consist of binding purchase orders for certain fixed contractual commitments to purchase programming content, receiver systems and related equipment, broadband equipment, digital broadcast operations, transmission costs, streaming delivery technology and infrastructure, engineering services, and other products and services related to the operation of our Pay-TV services. In addition, our 2020 purchase obligations also include wireless devices related to our retail wireless business as well as transition services. Furthermore, our 2020 purchase obligations include equipment related to our 5G Network Deployment, such as software and hardware necessary to complete our wireless broadband network. Our purchase obligations may fluctuate significantly from period to period due to, among other things, management’s timing of payments and inventory purchases as well as expenditures related to our wireless projects and 5G Network Deployment, and can materially impact our future operating asset and liability balances, and our future working capital requirements.
Wireless – 5G Network Deployment
Since 2008, we have directly invested over $ i 11 billion to acquire certain wireless spectrum licenses and related assets and made over $ i 10 billion in non-controlling investments in certain entities, for a total of over $ i 21 billion. The $ i 21 billion of investments related to wireless spectrum licenses does not include $ i 5 billion of capitalized interest related to the carrying value of such licenses. See Note 2 for further information on capitalized interest.
Recent Wireless Spectrum Acquisitions
37 GHz, 39 GHz and 47 GHz. The auction for the Upper Microwave Flexible Use Service licenses in the 37 GHz, 39 GHz and 47 GHz bands (“Auction 103”) began on December 10, 2019 and ended January 30, 2020. On March 12, 2020, the FCC announced that Window Wireless L.L.C. (“Window”), a wholly-owned subsidiary of DISH Network, was the winning bidder of i 50 wireless spectrum licenses in the 37-39 GHz band and i 2,601 wireless spectrum licenses in the 47 GHz band, for a total of i 2,651 wireless spectrum licenses, with Window’s aggregate winning bids totaling approximately $ i 203 million. On October 22, 2019, we paid $ i 68 million to the FCC as a deposit for Auction 103. On April 9, 2020, we paid the remaining balance of our winning bids of approximately $ i 135 million. On June 4, 2020, the FCC issued an order granting Window’s application to acquire the 37 GHz, 39 GHz and 47 GHz licenses (the “37 GHz, 39 GHz and 47 GHz Licenses”).
3550-3650 MHz. The auction for the Priority Access Licenses for the 3550-3650 MHz band (“Auction 105”) began on July 23, 2020 and ended on August 25, 2020. On September 2, 2020, the FCC announced that Wetterhorn Wireless L.L.C. (“Wetterhorn”), a wholly-owned subsidiary of DISH Network, was the winning bidder of i 5,492 Priority Access Licenses in the 3550-3650 MHz band, with Wetterhorn’s aggregate winning bids totaling approximately $ i 913 million. During the second and third quarters 2020, we paid $ i 83 million and $ i 100 million, respectively, to the FCC for our winning bids. These amounts are included in “Other current assets” on our Condensed Consolidated Balance Sheets as of September 30, 2020. On October 1, 2020, we paid the remaining balance of our winning bids of approximately $ i 730 million. The FCC has not yet issued the licenses to Wetterhorn.
40
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Wireless Spectrum Licenses
These wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements that are summarized in the table below:
i
| | | | | | | | | | |
| | As of | | | | | | | | |
|
| | Build-Out Deadlines | | | | ||||
| | Carrying | | | | | | Expiration | | |
| | Amount | | Interim | | Final | | Date | | |
| | (In thousands) | | | | | | | | |
Owned: | | | | | | | | | | |
DBS Licenses (1) | | $ | i 677,409 | | | | | | | |
700 MHz Licenses | | | i 711,871 | | June 14, 2022 (2) | | June 14, 2023 (5) | | June 2023 | |
AWS-4 Licenses | | | i 1,940,000 | | June 14, 2022 (2) | | June 14, 2023 (5) | | June 2023 | |
H Block Licenses | | | i 1,671,506 | | June 14, 2022 (2) | | June 14, 2023 (5) | | June 2023 | |
600 MHz Licenses | | | i 6,211,154 | | June 14, 2023 (3) | | June 14, 2025 (6) | | June 2029 | |
MVDDS Licenses (1) | | | i 24,000 | | | | | | August 2024 | |
LMDS Licenses (1) | | | — | | | | | | September 2028 | |
28 GHz Licenses | | | i 2,883 | | | | October 2, 2029 (7) | | October 2029 | |
24 GHz Licenses | | | i 11,772 | | | | | December 2029 | | |
37 GHz, 30 GHz and 47 GHz Licenses | | | i 202,533 | | | | June 4, 2030 (7) | | June 2030 | |
Subtotal | | | i 11,453,128 | | | | | | | |
Non-controlling Investments: | | | | | | | | | | |
AWS-3 Licenses | | | i 9,890,389 | | October 2021 (4) | | October 2027 (8) | | October 2027 (8) | |
Capitalized Interest | | | i 5,321,968 | | | | | | | |
Total | | $ | i 26,665,485 | | | | | | | |
| | | | | | | | | | |
| (1) | The build-out deadlines for these licenses have been met. |
| (2) | For these licenses, we must offer 5G broadband service to at least i 20% of the U.S. population and have developed a core network by this date. |
| (3) | For these licenses, we must offer 5G broadband service to at least i 70% of the U.S. population and have developed a core network by this date. |
| (4) | For these licenses, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 40% of the population of each license area by this date. |
| (5) | For these licenses, we must offer 5G broadband service to i 70% of the U.S. population by this date. |
| (6) | For these licenses, we must offer 5G broadband service to at least i 75% of the population in each Partial Economic Area (which are service areas established by the FCC) by this date. |
| (7) | There are a variety of build-out options and associated build-out metrics associated with these licenses. |
| (8) | For these licenses, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 75% of the population of each license area by this date. If the AWS-3 interim build-out requirement is not met, the AWS-3 expiration date and the AWS-3 final build-out requirement may be accelerated by i two years (from October 2027 to October 2025) for each AWS-3 License area in which Northstar Wireless and SNR Wireless do not meet the requirement. |
41
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Commercialization of Our Wireless Spectrum Licenses and Related Assets. In March 2017, we notified the FCC that we planned to deploy a narrowband IoT network on certain of these wireless licenses, which was to be the First Phase. We expected to complete the First Phase by March 2020, with subsequent phases to be completed thereafter. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines was probable and, therefore, we no longer intended to complete our narrowband IoT deployment. The FCC issued an Order effectuating the build-out deadline changes contemplated above on September 11, 2020. During the first quarter 2020, we impaired certain assets that would not be utilized in our 5G Network Deployment, resulting in a $ i 253 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We have issued RFI/Ps to various vendors in the wireless industry and are in the process of selecting certain vendors as we move forward with our 5G Network Deployment. We currently expect expenditures for our 5G Network Deployment to be approximately $ i 10 billion, excluding capitalized interest. See Note 2 for further information.
We will need to make significant additional investments or partner with others to, among other things, commercialize, build-out, and integrate these licenses and related assets, and any additional acquired licenses and related assets; and comply with regulations applicable to such licenses. Depending on the nature and scope of such commercialization, build-out, integration efforts, and regulatory compliance, any such investments or partnerships could vary significantly. In addition, as we consider our options for the commercialization of our wireless spectrum, we will incur significant additional expenses and will have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure. We may also determine that additional wireless spectrum licenses may be required to commercialize our wireless business and to compete with other wireless service providers. For example, on September 22, 2020, we filed an application with the FCC to participate as a potential bidder in the upcoming wireless spectrum auction for the Flexible-Use Service Licenses in the 3.7-3.98 GHz Band (“Auction 107”). The auction is scheduled to commence on December 8, 2020. The FCC determined that bidding in this auction will be “anonymous,” which means that prior to and during the course of the auction the FCC will not make public any information about a specific applicant’s upfront deposit or its bids. In addition, FCC rules restrict information that bidders may disclose about their participation in the auction.
We may need to raise significant additional capital in the future to fund the efforts described above, which may not be available on acceptable terms or at all. There can be no assurance that we will be able to develop and implement a business model that will realize a return on these wireless spectrum licenses or that we will be able to profitably deploy the assets represented by these wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations.
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
Non-Controlling Investments
During 2015, through our wholly-owned subsidiaries American II and American III, we initially made over $ i 10 billion in certain non-controlling investments in Northstar Spectrum, the parent company of Northstar Wireless, and in SNR HoldCo, the parent company of SNR Wireless, respectively. Under the applicable accounting guidance in ASC 810, Northstar Spectrum and SNR HoldCo are considered variable interest entities and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 for further information.
42
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Northstar Investment. Through American II, we own a non-controlling interest in Northstar Spectrum, which is comprised of i 85% of the Class B Common Interests and i 100% of the Class A Preferred Interests of Northstar Spectrum. Northstar Manager is the sole manager of Northstar Spectrum and owns a controlling interest in Northstar Spectrum, which is comprised of i 15% of the Class B Common Interests of Northstar Spectrum. As of March 31, 2018, the total equity contributions from American II and Northstar Manager to Northstar Spectrum were approximately $ i 7.621 billion and $ i 133 million, respectively.
As of March 31, 2018, the total loans from American II to Northstar Wireless under the Northstar Credit Agreement (as defined below) for payments to the FCC related to the Northstar Licenses (as defined below) were approximately $ i 500 million. See below for further information.
SNR Investment. Through American III, we own a non-controlling interest in SNR HoldCo, which is comprised of i 85% of the Class B Common Interests and i 100% of the Class A Preferred Interests of SNR HoldCo. SNR Management is the sole manager of SNR HoldCo and owns a controlling interest in SNR HoldCo, which is comprised of i 15% of the Class B Common Interests of SNR HoldCo. As of March 31, 2018, the total equity contributions from American III and SNR Management to SNR HoldCo were approximately $ i 5.590 billion and $ i 93 million, respectively. As of March 31, 2018, the total loans from American III to SNR Wireless under the SNR Credit Agreement (as defined below) for payments to the FCC related to the SNR Licenses (as defined below) were approximately $ i 500 million. See below for further information.
AWS-3 Auction
Northstar Wireless and SNR Wireless each filed applications with the FCC to participate in Auction 97 (the “AWS-3 Auction”) for the purpose of acquiring certain AWS-3 Licenses. Each of Northstar Wireless and SNR Wireless applied to receive bidding credits of i 25% as designated entities under applicable FCC rules.
Northstar Wireless was the winning bidder for AWS-3 Licenses with gross winning bid amounts totaling approximately $ i 7.845 billion, which after taking into account a i 25% bidding credit, was approximately $ i 5.884 billion. SNR Wireless was the winning bidder for AWS-3 Licenses with gross winning bid amounts totaling approximately $ i 5.482 billion, which after taking into account a i 25% bidding credit, was approximately $ i 4.112 billion. In addition to the net winning bids, SNR Wireless made a bid withdrawal payment of approximately $ i 8 million.
FCC Order and October 2015 Arrangements. On August 18, 2015, the FCC released a Memorandum Opinion and Order, FCC 15-104 (the “Order”) in which the FCC determined, among other things, that DISH Network has a controlling interest in, and is an affiliate of, Northstar Wireless and SNR Wireless, and therefore DISH Network’s revenues should be attributed to them, which in turn makes Northstar Wireless and SNR Wireless ineligible to receive the i 25% bidding credits (approximately $ i 1.961 billion for Northstar Wireless and $ i 1.370 billion for SNR Wireless).
Letters Exchanged between Northstar Wireless and the FCC Wireless Bureau. As outlined in letters exchanged between Northstar Wireless and the Wireless Telecommunications Bureau of the FCC (the “FCC Wireless Bureau”), Northstar Wireless paid the gross winning bid amounts for i 261 AWS-3 Licenses (the “Northstar Licenses”) totaling approximately $ i 5.619 billion through the application of funds already on deposit with the FCC. Northstar Wireless also notified the FCC that it would not be paying the gross winning bid amounts for i 84 AWS-3 Licenses totaling approximately $ i 2.226 billion.
43
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
As a result of the nonpayment of those gross winning bid amounts, the FCC retained those licenses and Northstar Wireless owed the FCC an additional interim payment of approximately $ i 334 million (the “Northstar Interim Payment”), which is equal to i 15% of $ i 2.226 billion. The Northstar Interim Payment was recorded as an expense during the fourth quarter 2015. Northstar Wireless immediately satisfied the Northstar Interim Payment through the application of funds already on deposit with the FCC and an additional loan from American II of approximately $ i 69 million. As a result, the FCC will not deem Northstar Wireless to be a “current defaulter” under applicable FCC rules.
In addition, the FCC Wireless Bureau acknowledged that Northstar Wireless’ nonpayment of those gross winning bid amounts does not constitute action involving gross misconduct, misrepresentation or bad faith. Therefore, the FCC concluded that such nonpayment will not affect the eligibility of Northstar Wireless, its investors (including DISH Network) or their respective affiliates to participate in future spectrum auctions (including Auction 1000 and any re-auction of the AWS-3 licenses retained by the FCC). At this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction of those AWS-3 licenses.
If the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are greater than or equal to the winning bids of Northstar Wireless, no additional amounts will be owed to the FCC. However, if those winning bids are less than the winning bids of Northstar Wireless, then Northstar Wireless will be responsible for the difference less any overpayment of the Northstar Interim Payment (which will be recalculated as i 15% of the winning bids from re-auction or other award) (the “Northstar Re-Auction Payment”). For example, if the winning bids in a re-auction are $1, the Northstar Re-Auction Payment would be approximately $ i 1.892 billion, which is calculated as the difference between $ i 2.226 billion (the Northstar winning bid amounts) and $1 (the winning bids from re-auction) less the resulting $ i 334 million overpayment of the Northstar Interim Payment. As discussed above, at this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction. We cannot predict with any degree of certainty the timing or outcome of any re-auction or the amount of any Northstar Re-Auction Payment.
DISH Network Guaranty in Favor of the FCC for Certain Northstar Wireless Obligations. On October 1, 2015, DISH Network entered into a guaranty in favor of the FCC (the “FCC Northstar Guaranty”) with respect to the Northstar Interim Payment (which was satisfied on October 1, 2015) and any Northstar Re-Auction Payment. The FCC Northstar Guaranty provides, among other things, that during the period between the due date for the payments guaranteed under the FCC Northstar Guaranty and the date such guaranteed payments are paid: (i) Northstar Wireless’ payment obligations to American II under the Northstar Credit Agreement will be subordinated to such guaranteed payments; and (ii) DISH Network or American II will withhold exercising certain rights as a creditor of Northstar Wireless.
Letters Exchanged between SNR Wireless and the FCC Wireless Bureau. As outlined in letters exchanged between SNR Wireless and the FCC Wireless Bureau, SNR Wireless paid the gross winning bid amounts for i 244 AWS-3 Licenses (the “SNR Licenses”) totaling approximately $ i 4.271 billion through the application of funds already on deposit with the FCC and a portion of an additional loan from American III in an aggregate amount of approximately $ i 344 million (which included an additional bid withdrawal payment of approximately $ i 3 million). SNR Wireless also notified the FCC that it would not be paying the gross winning bid amounts for i 113 AWS-3 Licenses totaling approximately $ i 1.211 billion.
As a result of the nonpayment of those gross winning bid amounts, the FCC retained those licenses and SNR Wireless owed the FCC an additional interim payment of approximately $ i 182 million (the “SNR Interim Payment”), which is equal to i 15% of $ i 1.211 billion. The SNR Interim Payment was recorded as an expense during the fourth quarter 2015. SNR Wireless immediately satisfied the SNR Interim Payment through a portion of an additional loan from American III in an aggregate amount of approximately $ i 344 million. As a result, the FCC will not deem SNR Wireless to be a “current defaulter” under applicable FCC rules.
44
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In addition, the FCC Wireless Bureau acknowledged that SNR Wireless’ nonpayment of those gross winning bid amounts does not constitute action involving gross misconduct, misrepresentation or bad faith. Therefore, the FCC concluded that such nonpayment will not affect the eligibility of SNR Wireless, its investors (including DISH Network) or their respective affiliates to participate in future spectrum auctions (including Auction 1000 and any re-auction of the AWS-3 licenses retained by the FCC). At this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction of those AWS-3 licenses.
If the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are greater than or equal to the winning bids of SNR Wireless, no additional amounts will be owed to the FCC. However, if those winning bids are less than the winning bids of SNR Wireless, then SNR Wireless will be responsible for the difference less any overpayment of the SNR Interim Payment (which will be recalculated as i 15% of the winning bids from re-auction or other award) (the “SNR Re-Auction Payment”). For example, if the winning bids in a re-auction are $1, the SNR Re-Auction Payment would be approximately $ i 1.029 billion, which is calculated as the difference between $ i 1.211 billion (the SNR winning bid amounts) and $1 (the winning bids from re-auction) less the resulting $ i 182 million overpayment of the SNR Interim Payment. As discussed above, at this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction. We cannot predict with any degree of certainty the timing or outcome of any re-auction or the amount of any SNR Re-Auction Payment.
DISH Network Guaranty in Favor of the FCC for Certain SNR Wireless Obligations. On October 1, 2015, DISH Network entered into a guaranty in favor of the FCC (the “FCC SNR Guaranty”) with respect to the SNR Interim Payment (which was satisfied on October 1, 2015) and any SNR Re-Auction Payment. The FCC SNR Guaranty provides, among other things, that during the period between the due date for the payments guaranteed under the FCC SNR Guaranty and the date such guaranteed payments are paid: (i) SNR Wireless’ payment obligations to American III under the SNR Credit Agreement will be subordinated to such guaranteed payments; and (ii) DISH Network or American III will withhold exercising certain rights as a creditor of SNR Wireless.
FCC Licenses. On October 27, 2015, the FCC granted the Northstar Licenses to Northstar Wireless and the SNR Licenses to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. The AWS-3 Licenses are subject to certain interim and final build-out requirements. By October 2021, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 40% of the population in each area covered by an individual AWS-3 License (the “AWS-3 Interim Build-Out Requirement”). By October 2027, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 75% of the population in each area covered by an individual AWS-3 License (the “AWS-3 Final Build-Out Requirement”). If the AWS-3 Interim Build-Out Requirement is not met, the AWS-3 License term and the AWS-3 Final Build-Out Requirement may be accelerated by i two years (from October 2027 to October 2025) for each AWS-3 License area in which Northstar Wireless and SNR Wireless do not meet the requirement.
If the AWS-3 Final Build-Out Requirement is not met, the authorization for each AWS-3 License area in which Northstar Wireless and SNR Wireless do not meet the requirement may terminate. These wireless spectrum licenses expire in October 2027 unless they are renewed by the FCC. There can be no assurances that the FCC will renew these wireless spectrum licenses.
Qui Tam. On September 23, 2016, the United States District Court for the District of Columbia unsealed a qui tam complaint that was filed by Vermont National Telephone Company (“Vermont National”) against us; our wholly-owned subsidiaries, American AWS-3 Wireless I L.L.C., American II, American III, and DISH Wireless Holding L.L.C.; Charles W. Ergen (our Chairman) and Cantey M. Ergen (a member of our board of directors); Northstar Wireless; Northstar Spectrum; Northstar Manager; SNR Wireless; SNR HoldCo; SNR Management; and certain other parties. See “Contingencies – Litigation – Vermont National Telephone Company” for further information.
45
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
D.C. Circuit Court Opinion. On August 29, 2017, the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) in SNR Wireless LicenseCo, LLC, et al. v. Federal Communications Commission, 868 F.3d 1021 (D.C. Cir. 2017) (the “Appellate Decision”) affirmed the Order in part, and remanded the matter to the FCC to give Northstar Wireless and SNR Wireless an opportunity to seek to negotiate a cure of the issues identified by the FCC in the Order (a “Cure”). On January 26, 2018, SNR Wireless and Northstar Wireless filed a petition for a writ of certiorari, asking the United States Supreme Court to hear an appeal from the Appellate Decision, which the United States Supreme Court denied on June 25, 2018.
Order on Remand. On January 24, 2018, the FCC released an Order on Remand, DA 18-70 (the “Order on Remand”) purporting to establish a procedure to afford Northstar Wireless and SNR Wireless the opportunity to implement a Cure pursuant to the Appellate Decision. The Order on Remand provided that Northstar Wireless and SNR Wireless each had until April 24, 2018 to file the necessary documentation to demonstrate that, in light of such changes, each of Northstar Wireless and SNR Wireless qualifies for the very small business bidding credit that it sought in the AWS-3 Auction. Additionally, the Order on Remand provides that if either Northstar Wireless or SNR Wireless needs additional time to negotiate new or amended agreements, it may request to extend the deadline for such negotiations for an additional 45 days (extending the deadline to June 8, 2018). On April 16, 2018, the FCC approved Northstar Wireless’ and SNR Wireless’ requests to extend the deadline for such negotiations for an additional 45 days to June 8, 2018. On June 8, 2018, Northstar Wireless and SNR Wireless each filed amended agreements to demonstrate that, in light of such changes, each of Northstar Wireless and SNR Wireless qualifies for the very small business bidding credit that it sought in the AWS-3 Auction. The Order on Remand also provided, among other things, until July 23, 2018 for certain third-parties to file comments about any changes to the agreements proposed by Northstar Wireless and SNR Wireless and several third-parties filed comments (with one opposition). On October 22, 2018, Northstar Wireless and SNR Wireless filed a response to the third-party comments.
Northstar Wireless and SNR Wireless have filed a Joint Application for Review of the Order on Remand requesting, among other things, an iterative negotiation process with the FCC regarding a Cure, which was denied on July 12, 2018.
Northstar Operative Agreements
Northstar LLC Agreement. Northstar Spectrum is governed by a limited liability company agreement by and between American II and Northstar Manager (the “Northstar Spectrum LLC Agreement”). Pursuant to the Northstar Spectrum LLC Agreement, American II and Northstar Manager made pro-rata equity contributions in Northstar Spectrum.
On March 31, 2018, American II, Northstar Spectrum, and Northstar Manager amended and restated the Northstar Spectrum LLC Agreement, to, among other things: (i) exchange $ i 6.870 billion of the amounts outstanding and owed by Northstar Wireless to American II pursuant to the Northstar Credit Agreement (as defined below) for i 6,870,493 Class A Preferred Interests in Northstar Spectrum (the “Northstar Preferred Interests”); (ii) replace the existing investor protection provisions with the investor protections described by the FCC in Baker Creek Communications, LLC, Memorandum Opinion and Order, 13 FCC Rcd 18709, 18715 (1998); (iii) delete the obligation of Northstar Manager to consult with American II regarding budgets and business plans; and (iv) remove the requirement that Northstar Spectrum’s systems be interoperable with ours.
46
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Northstar Preferred Interests: (a) are non-voting; (b) have a i 12 percent mandatory quarterly distribution, which can be paid in cash or additional face amount of Northstar Preferred Interests at the sole discretion of Northstar Manager; and (c) have a liquidation preference equal to the then-current face amount of the Northstar Preferred Interests plus accrued and unpaid mandatory quarterly distributions in the event of certain liquidation events or deemed liquidation events (e.g., a merger or dissolution of Northstar Spectrum, or a sale of substantially all of Northstar Spectrum’s assets). As a result of the exchange noted in (i) above, a principal amount of $ i 500 million of debt remains under the Northstar Credit Agreement, as described below.
On June 7, 2018, American II, Northstar Spectrum, and Northstar Manager amended and restated the Second Amended and Restated Limited Liability Company Agreement, dated March 31, 2018, by and among American II, Northstar Spectrum, and Northstar Manager, to, among other things: (i) reduce the mandatory quarterly distribution for the Northstar Preferred Interests from i 12 percent to i eight percent from and after June 7, 2018; (ii) increase the window for Northstar Manager to “put” its interest in Northstar Spectrum to Northstar Spectrum after October 27, 2020 from i 30 days to i 90 days; (iii) provide an additional i 90-day window for Northstar Manager to put its interest in Northstar Spectrum to Northstar Spectrum commencing on October 27, 2021; (iv) provide a right for Northstar Manager to require an appraisal of the fair market value of its interest in Northstar Spectrum at any time from October 27, 2022 through October 27, 2024, coupled with American II having the right to accept the offer to sell from Northstar Manager; (v) allow Northstar Manager to sell its interest in Northstar Spectrum without American II’s consent any time after October 27, 2020 (previously October 27, 2025); (vi) allow Northstar Spectrum to conduct an initial public offering without American II’s consent any time after October 27, 2022 (previously October 27, 2029); (vii) remove American II’s rights of first refusal with respect to Northstar Manager’s sale of its interest in Northstar Spectrum or Northstar Spectrum’s sale of any AWS-3 Licenses; and (viii) remove American II’s tag along rights with respect to Northstar Manager’s sale of its interest in Northstar Spectrum.
Northstar Wireless Credit Agreement. On October 1, 2015, American II, Northstar Wireless and Northstar Spectrum amended the First Amended and Restated Credit Agreement dated October 13, 2014, by and among American II, as Lender, Northstar Wireless, as Borrower, and Northstar Spectrum, as Guarantor (as amended, the “Northstar Credit Agreement”), to provide, among other things, that: (i) the Northstar Interim Payment and any Northstar Re-Auction Payment will be made by American II directly to the FCC and will be deemed as loans under the Northstar Credit Agreement; (ii) the FCC is a third-party beneficiary with respect to American II’s obligation to pay the Northstar Interim Payment and any Northstar Re-Auction Payment; (iii) in the event that the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are less than the winning bids of Northstar Wireless, the purchaser, assignee or transferee of any AWS-3 Licenses from Northstar Wireless is obligated to pay its pro-rata share of the difference (and Northstar Wireless remains jointly and severally liable for such pro-rata share); and (iv) during the period between the due date for the payments guaranteed under the FCC Northstar Guaranty (as discussed below) and the date such guaranteed payments are paid, Northstar Wireless’ payment obligations to American II under the Northstar Credit Agreement will be subordinated to such guaranteed payments.
On March 31, 2018, American II, Northstar Wireless, and Northstar Spectrum amended and restated the Northstar Credit Agreement, to, among other things: (i) lower the interest rate on the remaining $ i 500 million principal balance under the Northstar Credit Agreement from i 12 percent per annum to i six percent per annum; (ii) eliminate the higher interest rate that would apply in the case of an event of default; and (iii) modify and/or remove certain obligations of Northstar Wireless to prepay the outstanding loan amounts.
On June 7, 2018, American II, Northstar Wireless, and Northstar Spectrum amended and restated the Northstar Credit Agreement to, among other things: (i) extend the maturity date on the remaining loan balance from i seven years to i ten years; and (ii) remove the obligation of Northstar Wireless to obtain American II’s consent for unsecured financing and equipment financing in excess of $ i 25 million.
47
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
SNR Operative Agreements
SNR LLC Agreement. SNR HoldCo is governed by a limited liability company agreement by and between American III and SNR Management (the “SNR HoldCo LLC Agreement”). Pursuant to the SNR HoldCo LLC Agreement, American III and SNR Management made pro-rata equity contributions in SNR HoldCo.
On March 31, 2018, American III, SNR Holdco, SNR Wireless Management, and John Muleta amended and restated the SNR HoldCo LLC Agreement, to, among other things: (i) exchange $ i 5.065 billion of the amounts outstanding and owed by SNR Wireless to American III pursuant to the SNR Credit Agreement (as defined below) for i 5,065,415 Class A Preferred Interests in SNR Holdco (the “SNR Preferred Interests”); (ii) replace the existing investor protection provisions with the investor protections described by the FCC in Baker Creek Communications, LLC, Memorandum Opinion and Order, 13 FCC Rcd 18709, 18715 (1998); (iii) delete the obligation of SNR Management to consult with American III regarding budgets and business plans; and (iv) remove the requirement that SNR Management’s systems be interoperable with ours. The SNR Preferred Interests: (a) are non-voting; (b) have a i 12 percent mandatory quarterly distribution, which can be paid in cash or additional face amount of SNR Preferred Interests at the sole discretion of SNR Management; and (c) have a liquidation preference equal to the then-current face amount of the SNR Preferred Interests plus accrued and unpaid mandatory quarterly distributions in the event of certain liquidation events or deemed liquidation events (e.g., a merger or dissolution of SNR Holdco, or a sale of substantially all of SNR Holdco’s assets). As a result of the exchange noted in (i) above, a principal amount of $ i 500 million of debt remains under the SNR Credit Agreement, as described below.
On June 7, 2018, American III, SNR Holdco, SNR Management, and John Muleta amended and restated the Second Amended and Restated Limited Liability Company Agreement, dated March 31, 2018, by and among American III, SNR Holdco, SNR Management and John Muleta, to, among other things: (i) reduce the mandatory quarterly distribution for the SNR Preferred Interests from i 12 percent to i eight percent from and after June 7, 2018; (ii) increase the window for SNR Management to “put” its interest in SNR Holdco to SNR Holdco after October 27, 2020 from i 30 days to i 90 days; (iii) provide an additional i 90-day window for SNR Management to put its interest in SNR Holdco to SNR Holdco commencing on October 27, 2021; (iv) provide a right for SNR Management to require an appraisal of the fair market value of its interest in SNR Holdco at any time from October 27, 2022 through October 27, 2024, coupled with American III having the right to accept the offer to sell from SNR Management; (v) allow SNR Management to sell its interest in SNR Holdco without American III’s consent any time after October 27, 2020 (previously October 27, 2025); (vi) allow SNR Holdco to conduct an initial public offering without American III’s consent any time after October 27, 2022 (previously October 27, 2029); (vii) remove American III’s rights of first refusal with respect to SNR Management’s sale of its interest in SNR Holdco or SNR Holdco’s sale of any AWS-3 Licenses; and (viii) remove American III’s tag along rights with respect to SNR Management’s sale of its interest in SNR Holdco.
SNR Credit Agreement. On October 1, 2015, American III, SNR Wireless and SNR HoldCo amended the First Amended and Restated Credit Agreement dated October 13, 2014, by and among American III, as Lender, SNR Wireless, as Borrower, and SNR HoldCo, as Guarantor (as amended, the “SNR Credit Agreement”), to provide, among other things, that: (i) the SNR Interim Payment and any SNR Re-Auction Payment will be made by American III directly to the FCC and will be deemed as loans under the SNR Credit Agreement; (ii) the FCC is a third-party beneficiary with respect to American III’s obligation to pay the SNR Interim Payment and any SNR Re-Auction Payment; (iii) in the event that the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are less than the winning bids of SNR Wireless, the purchaser, assignee or transferee of any AWS-3 Licenses from SNR Wireless is obligated to pay its pro-rata share of the difference (and SNR Wireless remains jointly and severally liable for such pro-rata share); and (iv) during the period between the due date for the payments guaranteed under the FCC SNR Guaranty (as discussed below) and the date such guaranteed payments are paid, SNR Wireless’ payment obligations to American III under the SNR Credit Agreement will be subordinated to such guaranteed payments.
48
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On March 31, 2018, American III, SNR Wireless, and SNR Holdco amended and restated the SNR Credit Agreement, to, among other things: (i) lower the interest rate on the remaining $ i 500 million principal balance under the SNR Credit Agreement from i 12 percent per annum to i six percent per annum; (ii) eliminate the higher interest rate that would apply in the case of an event of default; and (iii) modify and/or remove certain obligations of SNR Wireless to prepay the outstanding loan amounts.
On June 7, 2018, American III, SNR Wireless, and SNR Holdco amended and restated the SNR Credit Agreement to, among other things: (i) extend the maturity date on the remaining loan balance from i seven years to i ten years; and (ii) remove the obligation of SNR Wireless to obtain American III’s consent for unsecured financing and equipment financing in excess of $ i 25 million.
As of September 30, 2020 and December 31, 2019, Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $ i 634 million and $ i 552 million, respectively, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets.
The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out, integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our non-controlling investments in the Northstar Entities and the SNR Entities.
Contingencies
Separation Agreement
On January 1, 2008, we completed the distribution of our technology and set-top box business and certain infrastructure assets (the “Spin-off”) into a separate publicly-traded company, EchoStar. In connection with the Spin-off, we entered into a separation agreement with EchoStar that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, EchoStar has assumed certain liabilities that relate to its business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which, generally, EchoStar will only be liable for its acts or omissions following the Spin-off and we will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off, as well as our acts or omissions following the Spin-off. On February 28, 2017, we and EchoStar and certain of our respective subsidiaries completed the transactions contemplated by the Share Exchange Agreement (the “Share Exchange Agreement”) that was previously entered into on January 31, 2017 (the “Share Exchange”), pursuant to which certain assets that were transferred to EchoStar in the Spin-off were transferred back to us. On September 10, 2019, we and EchoStar and certain of our respective subsidiaries completed the transactions contemplated by the Master Transaction Agreement (the “Master Transaction Agreement”) that was previously entered into on May 19, 2019, pursuant to which certain assets that were transferred to EchoStar in the Spin-off were transferred back to us. The Share Exchange Agreement and the Master Transaction Agreement contain additional indemnification provisions between us and EchoStar for certain liabilities and legal proceedings.
49
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Litigation
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.
For certain cases described on the following pages, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Broadband iTV
On December 19, 2019, Broadband iTV, Inc. filed a complaint against our wholly-owned subsidiary DISH Network L.L.C. in the United States District Court for the Western District of Texas. The complaint alleges infringement of United States Patent No. 10,028,026 (the “026 patent”), entitled “System for addressing on-demand TV program content on TV services platform of a digital TV services provider”; United States Patent No. 10,506,269 (the “269 patent”), entitled “System for addressing on-demand TV program content on TV services platform of a digital TV services provider”; United States Patent No. 9,998,791 (“the 791 patent”), entitled “Video-on-demand content delivery method for providing video-on-demand services to TV service subscribers”; and United States Patent No. 9,648,388 (the “388 patent”), entitled “Video-on-demand content delivery system for providing video-on-demand services to TV services subscribers.” Generally, the asserted patents relate to providing video on demand content to subscribers.
On July 10, 2020, July 20, 2020, July 24, 2020 and July 31, 2020, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of, respectively, the 026 patent, the 791 patent, the 269 patent and the 388 patent.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. Each of the plaintiffs is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
50
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Cedar Lane
On October 13, 2020, Cedar Lane Technologies filed a complaint against our wholly owned subsidiary, DISH Network L.L.C., in the United States District Court for the Western District of Texas. The complaint alleges infringement of United States Patent No. 6,502,194 (the “194 patent”), entitled “System for playback of network audio material on demand”; United States Patent No. 6,526,411 (the “411 patent”), entitled “System and method for creating dynamic playlists”; United States Patent No. 6,721,489 (the “489 patent”), entitled “Play list manager”; United States Patent No. 7,173,177 (the “177 patent”), entitled “User interface for simultaneous management of owned and unowned inventory”; United States Patent No. 7,642,443 (the “443 patent”), entitled “User interface for simultaneous management of owned and unowned inventory”; and United States Patent No. 8,165,867 (the “867 patent”), entitled “Methods for translating a device command.” Generally, the asserted patents relate to streaming digital audio to a home audio system; aspects of play lists and purchased content; and voice control. Cedar Lane Technologies is a non-practicing entity that has filed more than 75 patent infringement lawsuits.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. Each of the plaintiffs is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust
On July 2, 2019, a putative class action lawsuit was filed by a purported EchoStar stockholder in the District Court of Clark County, Nevada under the caption City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust v. Ergen, et al., Case No. A-19-797799-B. The lawsuit named as defendants Mr. Ergen, the other members of the EchoStar Board, as well as EchoStar, certain of its officers, DISH Network and certain of DISH Network’s and EchoStar’s affiliates. Plaintiff alleges, among other things, breach of fiduciary duties in approving the transactions contemplated under the Master Transaction Agreement for inadequate consideration and pursuant to an unfair and conflicted process, and that EchoStar, DISH Network and certain other defendants aided and abetted such breaches. In the operative First Amended Complaint, filed on October 11, 2019, the plaintiff dropped as defendants the EchoStar board members other than Mr. Ergen. The trial of this matter is scheduled to start sometime during the five-week “stack” beginning September 7, 2021. See Note 14 for further information on the Master Transaction Agreement. Plaintiff seeks equitable relief, including the issuance of additional DISH Network Class A Common Stock, monetary relief and other costs and disbursements, including attorneys’ fees.
We intend to vigorously defend this case, but cannot predict with any degree of certainty the outcome of this suit or determine the extent of any potential liability or damages.
ClearPlay, Inc.
On March 13, 2014, ClearPlay, Inc. (“ClearPlay”) filed a complaint against us, our wholly-owned subsidiary DISH Network L.L.C., EchoStar, and its then wholly-owned subsidiary EchoStar Technologies L.L.C., in the United States District Court for the District of Utah. The complaint alleges willful infringement of United States Patent Nos. 6,898,799 (the “799 patent”), entitled “Multimedia Content Navigation and Playback”; 7,526,784 (the “784 patent”), entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,543,318 (the “318 patent”), entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,577,970 (the “970 patent”), entitled “Multimedia Content Navigation and Playback”; and 8,117,282 (the “282 patent”), entitled “Media Player Configured to Receive Playback Filters From Alternative Storage Mediums.” ClearPlay alleges that the AutoHop™ feature of our Hopper set-top box infringes the asserted patents. On February 11, 2015, the case was stayed pending various third-party challenges before the United States Patent and Trademark Office regarding the validity of certain of the patents asserted in the action.
51
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In those third-party challenges, the United States Patent and Trademark Office found that all claims of the 282 patent are unpatentable, and that certain claims of the 784 patent and 318 patent are unpatentable. ClearPlay appealed as to the 784 patent and the 318 patent, and on August 23, 2016, the United States Court of Appeals for the Federal Circuit affirmed the findings of the United States Patent and Trademark Office. On October 31, 2016, the stay was lifted. On October 16, October 21 and November 2, 2020, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office requesting ex parte reexamination of the validity of, respectively, the 784 patent, the 799 patent and the 318 patent; and on November 3, 2020, the United States Patent and Trademark Office granted the request for reexamination of the 784 patent. The trial has been reset for July 26, 2021. The report issued by ClearPlay’s damages expert contends that ClearPlay is entitled to $ i 543 million in damages.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Contemporary Display LLC
On June 4, 2018, Contemporary Display LLC (“Contemporary”) filed a complaint against us and DISH Network L.L.C. in the United States District Court for the Western District of Texas. The complaint alleges infringement of United States Patent No. 6,028,643 (the “643 patent”), entitled “Multiple-Screen Video Adapter with Television Tuner”; United States Patent No. 6,429,903 (the “903 patent”), entitled “Video Adapter for Supporting at Least One Television Monitor”; United States Patent No. 6,492,997 (the “997 patent”), entitled “Method and System for Providing Selectable Programming in a Multi-Screen Mode”; United States Patent No. 7,500,202 (the “202 patent”), “Remote Control for Navigating Through Content in an Organized and Categorized Fashion”; and United States Patent No. 7,809,842 (the “842 patent”), entitled “Transferring Sessions Between Devices.” The 643 patent and the 903 patent are directed to video adapters for use with multiple displays. The 997 patent is directed to a system for presenting multiple video programs on a display device simultaneously. The 202 patent is directed to a remote control for interacting with a set-top box having programmable features and “operational controls” on at least three sides of the remote control. The 842 patent is directed to a system for managing online communication sessions between multiple devices. Contemporary is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
In a First Amended Complaint filed on August 6, 2018, Contemporary added our wholly-owned subsidiary DISH Network L.L.C. as a defendant. In a Second Amended Complaint filed on October 9, 2018, Contemporary named only our wholly-owned subsidiary DISH Network L.L.C. as a defendant and dropped certain indirect infringement allegations. On June 10, 2019, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of the asserted claims of the 842 patent, the 903 patent, the 643 patent and the 997 patent. On December 13, 2019 and January 7, 2020, the United States Patent and Trademark Office agreed to institute proceedings on each of our petitions. Following Contemporary’s decision not to file Patent Owner Responses to DISH Network L.L.C.’s petitions on the 842 patent and the 903 patent, on April 24, 2020, the United States Patent and Trademark Office entered judgments granting those petitions and canceling the challenged claims of those patents. On July 11, 2019, the Court entered an order staying the case pending resolution of the petitions. On January 31, 2020, pursuant to the parties’ joint motion, the Court dismissed all claims arising from the 202 patent, and extended its stay of the litigation pending non-appealable determinations on all of the petitions before the United States Patent and Trademark Office.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
52
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Customedia Technologies, L.L.C.
On February 10, 2016, Customedia Technologies, L.L.C. (“Customedia”) filed a complaint against us and our wholly-owned subsidiary DISH Network L.L.C. in the United States District Court for the Eastern District of Texas. The complaint alleges infringement of four patents: United States Patent No. 8,719,090 (the “090 patent”); United States Patent No. 9,053,494 (the “494 patent”); United States Patent No. 7,840,437 (the “437 patent”); and United States Patent No. 8,955,029 (the “029 patent”). Each patent is entitled “System for Data Management And On-Demand Rental And Purchase Of Digital Data Products.” Customedia alleges infringement in connection with our addressable advertising services, our DISH Anywhere feature, and our Pay-Per-View and video-on-demand offerings. Customedia is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
In December 2016 and January 2017, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of the asserted claims of each of the asserted patents. On June 12, 2017, the United States Patent and Trademark Office agreed to institute proceedings on our petitions challenging the 090 patent and the 437 patent; on July 18, 2017, it agreed to institute proceedings on our petitions challenging the 029 patent; and on July 28, 2017, it agreed to institute proceedings on our petitions challenging the 494 patent. These instituted proceedings cover all asserted claims of each of the asserted patents. The litigation in the District Court has been stayed since August 8, 2017 pending resolution of the proceedings at the United States Patent and Trademark Office.
Pursuant to an agreement between the parties, on December 20, 2017, DISH Network L.L.C. dismissed its petitions challenging the 029 patent in the United States Patent and Trademark Office, and on January 9, 2018, the parties dismissed their claims, counterclaims and defenses as to that patent in the litigation. On March 5, 2018, the United States Patent and Trademark Office conducted a trial on the remaining petitions. On June 11, 2018, the United States Patent and Trademark Office issued final written decisions on DISH Network L.L.C.’s petitions challenging the 090 patent and it invalidated all of the asserted claims. On July 25, 2018, the United States Patent and Trademark Office issued final written decisions on DISH Network L.L.C.’s petitions challenging the 437 patent and the 494 patent and it invalidated all of the asserted claims. Customedia appealed its losses before the United States Patent and Trademark Office. The Court of Appeals for the Federal Circuit heard oral argument on November 6, 2019 on the appeal involving the 437 patent, and summarily affirmed the patent’s invalidity on November 8, 2019. On January 7, 2020, Customedia petitioned the Court of Appeals for rehearing or rehearing en banc, raising issues about the constitutionality of the appointment of the administrative patent judges that heard the petition before the Patent and Trademark Office, but the Court of Appeals denied rehearing on March 5, 2020. On July 31, 2020, Customedia filed a petition with the United States Supreme Court asking it to hear a further appeal, but its petition was denied on October 13, 2020.
The Court of Appeals heard oral argument on the appeal involving the 090 patent and the 494 patent on December 3, 2019, and affirmed those patents’ invalidity on March 6, 2020. On May 5, 2020, Customedia filed petitions in the Federal Circuit for rehearing and rehearing en banc, seeking to reverse our appellate victories on the 090 and 494 patents, but those petitions were denied on June 9, 2020.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
53
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Innovative Foundry Technologies LLC
On December 20, 2019, Innovative Foundry Technologies LLC filed a complaint against us (as well as Semiconductor Manufacturing International Corporation; Broadcom Incorporated; Broadcom Corporation; and Cypress Semiconductor Corporation) in the United States District Court for the Western District of Texas. The complaint alleges infringement of United States Patent No. 6,580,122 (the “122 patent”), entitled “Transistor Device Having an Enhanced Width Dimension and a Method of Making Same”; United States Patent No. 6,806,126 (the “126 patent”), entitled “Method of Manufacturing a Semiconductor Component”; United States Patent No. 6,933,620 (the “620 patent”), entitled “Semiconductor Component and Method of Manufacture”; and United States Patent No. 7,009,226 (the “226 patent”), entitled “In-Situ Nitride/Oxynitride Processing with Reduced Deposition Surface Pattern Sensitivity.” On April 9, 2020, Semiconductor Manufacturing International Corporation filed a petition with the United States Patent and Trademark Office challenging the validity of the asserted claims of the 226 patent, and on April 14, 2020, it filed petitions challenging the validity of the asserted claims of the 126 patent and 620 patent.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. Each of the plaintiffs is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
Mobile Networking Solutions
On August 12, 2019, Mobile Networking Solutions, LLC (“Mobile Networking Solutions”) filed a complaint against our wholly-owned subsidiary Sling Media L.L.C. for infringement of i two patents: United States Patent No. 7,543,177 (the “177 patent”) and United States Patent No. 7,958,388 (the “388 patent”), each entitled “Methods and Systems for a Storage System.” Mobile Networking Solutions alleges infringement in connection with Sling Media L.L.C.’s use of a Hadoop Distributed File System for storage and processing of large data files. Pursuant to a stipulation of the parties, on December 16, 2019, the Court entered an order staying the case for six months so the parties may discuss settling the case. On May 12, 2020, pursuant to the parties’ joint request, the Court ordered dismissal of the case with prejudice. This matter is now concluded.
Multimedia Content Management LLC
On July 25, 2018, Multimedia Content Management LLC (“Multimedia”) filed a complaint against us in the United States District Court for the Western District of Texas. Multimedia alleges that we infringe United States Patent No. 8,799,468 (the “468 patent”), entitled “System for Regulating Access to and Distributing Content in a Network,” and United States Patent No. 9,465,925 (the “925 patent”), entitled “System for Regulating Access to and Distributing Content in a Network,” in connection with impulse pay per view content offerings on certain set-top boxes. Multimedia is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein. On March 7, 2019, pursuant to stipulation, the Court substituted our wholly-owned subsidiary DISH Network L.L.C. as the defendant in our place. On April 23, 2019, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of the asserted claims of each of the asserted patents. On November 13, 2019, the United States Patent and Trademark Office denied institution on both of the petitions. On December 13, 2019, DISH Network L.L.C. filed a motion for reconsideration, which the United States Patent and Trademark Office denied on March 10, 2020. On March 26, 2020, pursuant to the parties’ joint request, the Court dismissed the matter with prejudice. This matter is now concluded.
54
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Realtime Data LLC and Realtime Adaptive Streaming LLC
On June 6, 2017, Realtime Data LLC d/b/a IXO (“Realtime”) filed an amended complaint in the United States District Court for the Eastern District of Texas (the “Original Texas Action”) against us; our wholly-owned subsidiaries DISH Network L.L.C., DISH Technologies L.L.C. (then known as EchoStar Technologies L.L.C.), Sling TV L.L.C. and Sling Media L.L.C.; EchoStar, and EchoStar’s wholly-owned subsidiary Hughes Network Systems, L.L.C. (“HNS”); and Arris Group, Inc. Realtime’s initial complaint in the Original Texas Action, filed on February 14, 2017, had named only EchoStar and HNS as defendants.
The amended complaint in the Original Texas Action alleges infringement of United States Patent No. 8,717,204 (the “204 patent”), entitled “Methods for encoding and decoding data”; United States Patent No. 9,054,728 (the “728 patent”), entitled “Data compression systems and methods”; United States Patent No. 7,358,867 (the “867 patent”), entitled “Content independent data compression method and system”; United States Patent No. 8,502,707 (the “707 patent”), entitled “Data compression systems and methods”; United States Patent No. 8,275,897 (the “897 patent”), entitled “System and methods for accelerated data storage and retrieval”; United States Patent No. 8,867,610 (the “610 patent”), entitled “System and methods for video and audio data distribution”; United States Patent No. 8,934,535 (the “535 patent”), entitled “Systems and methods for video and audio data storage and distribution”; and United States Patent No. 8,553,759 (the “759 patent”), entitled “Bandwidth sensitive data compression and decompression.” Realtime alleges that we, Sling TV, Sling Media and Arris streaming video products and services compliant with various versions of the H.264 video compression standard infringe the 897 patent, the 610 patent and the 535 patent, and that the data compression system in Hughes’ products and services infringe the 204 patent, the 728 patent, the 867 patent, the 707 patent and the 759 patent.
On July 19, 2017, the Court severed Realtime’s claims against us, DISH Network L.L.C., Sling TV L.L.C., Sling Media L.L.C. and Arris Group, Inc. (alleging infringement of the 897 patent, the 610 patent and the 535 patent) from the Original Texas Action into a separate action in the United States District Court for the Eastern District of Texas (the “Second Texas Action”). On August 31, 2017, Realtime dismissed the claims against us, Sling TV L.L.C., Sling Media Inc., and Sling Media L.L.C. from the Second Texas Action and refiled these claims (alleging infringement of the 897 patent, the 610 patent and the 535 patent) against Sling TV L.L.C., Sling Media Inc., and Sling Media L.L.C. in a new action in the United States District Court for the District of Colorado (the “Colorado Action”). Also on August 31, 2017, Realtime dismissed DISH Technologies L.L.C. from the Original Texas Action, and on September 12, 2017, added it as a defendant in an amended complaint in the Second Texas Action. On November 6, 2017, Realtime filed a joint motion to dismiss the Second Texas Action without prejudice, which the Court entered on November 8, 2017.
On October 10, 2017, Realtime Adaptive Streaming LLC (“Realtime Adaptive Streaming”) filed suit against our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C., as well as Arris Group, Inc., in a new action in the United States District Court for the Eastern District of Texas (the “Third Texas Action”), alleging infringement of the 610 patent and the 535 patent. Also on October 10, 2017, an amended complaint was filed in the Colorado Action, substituting Realtime Adaptive Streaming as the plaintiff instead of Realtime, and alleging infringement of only the 610 patent and the 535 patent, but not the 897 patent. On November 6, 2017, Realtime Adaptive Streaming filed a joint motion to dismiss the Third Texas Action without prejudice, which the court entered on November 8, 2017. Also on November 6, 2017, Realtime Adaptive Streaming filed a second amended complaint in the Colorado Action, adding our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C., as well as Arris Group, Inc., as defendants.
As a result, neither we nor any of our subsidiaries is a defendant in the Original Texas Action; the Court has dismissed without prejudice the Second Texas Action and the Third Texas Action; and our wholly-owned subsidiaries DISH Network L.L.C., DISH Technologies L.L.C., Sling TV L.L.C. and Sling Media L.L.C. as well as Arris Group, Inc., are defendants in the Colorado Action, which now has Realtime Adaptive Streaming as the named plaintiff.
55
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On July 3, 2018, Sling TV L.L.C., Sling Media L.L.C., DISH Network L.L.C., and DISH Technologies L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of each of the asserted patents. On January 31, 2019, the United States Patent and Trademark Office agreed to institute proceedings on our petitions challenging all asserted claims of each of the asserted patents, and it held trial on the petitions on December 5, 2019. On January 17, 2020, the United States Patent and Trademark Office terminated the petitions as time-barred, but issued a final written decision invalidating the 535 patent to third parties that had timely joined in our petition (and, on January 10, 2020, issued a final written decision invalidating the 535 patent in connection with a third party’s independent petition). On March 16, 2020, Sling TV L.L.C., Sling Media L.L.C., DISH Network L.L.C., and DISH Technologies L.L.C. filed a notice of appeal from the terminated petitions to the United States Court of Appeals for the Federal Circuit. On June 29, 2020, the United States Patent and Trademark Office filed a notice of intervention in the appeal. The appeal has been fully briefed since September 9, 2020. The Colorado Action in the district court has been stayed since February 26, 2019, pending resolution of the petitions. On August 7, 2020, the United States Patent and Trademark Office granted a request for ex parte reexamination of the validity of the 610 patent.
Realtime Adaptive Streaming is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Sound View Innovations, LLC
On December 30, 2019, Sound View Innovations, LLC filed one complaint against our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C. and a second complaint against our wholly-owned subsidiary Sling TV L.L.C. in the United States District Court for the District of Colorado. The complaint against DISH Network L.L.C. and DISH Technologies L.L.C. alleges infringement of United States Patent No 6,502,133 (the “133 patent”), entitled Real-Time Event Processing System with Analysis Engine Using Recovery Information” and both complaints allege infringement of United States Patent No. 6,708,213 (the “213 patent), entitled “Method for Streaming Multimedia Information Over Public Networks”; United States Patent No. 6,757,796 (the “796 patent”), entitled “Method and System for Caching Streaming Live Broadcasts transmitted Over a Network”; and United States Patent No. 6,725,456 (the “456 patent”), entitled “Methods and Apparatus for Ensuring Quality of Service in an Operating System.”
On May 21, 2020, June 3, 2020, June 5, 2020 and July 10, 2020, DISH Network L.L.C., DISH Technologies L.L.C. and Sling TV L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of, respectively, the 213 patent, the 133 patent, the 456 patent and the 796 patent.
We intend to vigorously defend these cases. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. Each of the plaintiffs is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
56
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Telemarketing Litigation
On March 25, 2009, our wholly-owned subsidiary DISH Network L.L.C. was sued in a civil action by the United States Attorney General and several states in the United States District Court for the Central District of Illinois (the “FTC Action”), alleging violations of the Telephone Consumer Protection Act (“TCPA”) and the Telemarketing Sales Rule (“TSR”), as well as analogous state statutes and state consumer protection laws. The plaintiffs alleged that we, directly and through certain independent third-party retailers and their affiliates, committed certain telemarketing violations.
On December 23, 2013, the plaintiffs filed a motion for summary judgment, which indicated for the first time that the state plaintiffs were seeking civil penalties and damages of approximately $ i 270 million and that the federal plaintiff was seeking an unspecified amount of civil penalties (which could substantially exceed the civil penalties and damages being sought by the state plaintiffs). The plaintiffs were also seeking injunctive relief that if granted would, among other things, enjoin DISH Network L.L.C., whether acting directly or indirectly through authorized telemarketers or independent third-party retailers, from placing any outbound telemarketing calls to market or promote its goods or services for i five years, and enjoin DISH Network L.L.C. from accepting activations or sales from certain existing independent third-party retailers and from certain new independent third-party retailers, except under certain circumstances. We also filed a motion for summary judgment, seeking dismissal of all claims. On December 12, 2014, the Court issued its opinion with respect to the parties’ summary judgment motions. The Court found that DISH Network L.L.C. was entitled to partial summary judgment with respect to one claim in the action. In addition, the Court found that the plaintiffs were entitled to partial summary judgment with respect to ten claims in the action, which included, among other things, findings by the Court establishing DISH Network L.L.C.’s liability for a substantial amount of the alleged outbound telemarketing calls by DISH Network L.L.C. and certain of its independent third-party retailers that were the subject of the plaintiffs’ motion. The Court did not issue any injunctive relief and did not make any determination on civil penalties or damages, ruling instead that the scope of any injunctive relief and the amount of any civil penalties or damages were questions for trial.
The first phase of the bench trial took place January 19, 2016 through February 11, 2016, and the second phase took place October 25, 2016 through November 2, 2016.
On June 5, 2017, the Court issued Findings of Fact and Conclusions of Law and entered Judgment ordering DISH Network L.L.C. to pay an aggregate amount of $ i 280 million to the federal and state plaintiffs. The Court also issued a Permanent Injunction (the “Injunction”) against DISH Network L.L.C. that imposes certain ongoing compliance requirements on DISH Network L.L.C., which include, among other things: (i) the retention of a telemarketing-compliance expert to prepare a plan to ensure that DISH Network L.L.C. and certain independent third-party retailers will continue to comply with telemarketing laws and the Injunction; (ii) certain telemarketing records retention and production requirements; and (iii) certain compliance reporting and monitoring requirements. In addition to the compliance requirements under the Injunction, within ninety (90) days after the effective date of the Injunction, DISH Network L.L.C. is required to demonstrate that it and certain independent third-party retailers are in compliance with the Safe Harbor Provisions of the TSR and TCPA and have made no prerecorded telemarketing calls during the five (5) years prior to the effective date of the Injunction (collectively, the “Demonstration Requirements”). If DISH Network L.L.C. fails to prove that it meets the Demonstration Requirements, it will be barred from conducting any outbound telemarketing for two (2) years. If DISH Network L.L.C. fails to prove that a particular independent third-party retailer meets the Demonstration Requirements, DISH Network L.L.C. will be barred from accepting orders from that independent third-party retailer for two (2) years. On July 3, 2017, DISH Network L.L.C. filed two motions with the Court: (1) to alter or amend the Judgment or in the alternative to amend the Findings of Fact and Conclusions of Law; and (2) to clarify, alter and amend the Injunction. On August 10, 2017, the Court: (a) denied the motion to alter or amend the Judgment or in the alternative to amend the Findings of Fact and Conclusions of Law; and (b) allowed, in part, the motion to clarify, alter and amend the Injunction, and entered an Amended Permanent Injunction (the “Amended Injunction”).
57
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Among other things, the Amended Injunction provided DISH Network L.L.C. a thirty (30) day extension to meet the Demonstration Requirements, expanded the exclusion of certain independent third-party retailers from the Demonstration Requirements, and clarified that, with regard to independent third-party retailers, the Amended Injunction only applied to their telemarketing of DISH TV goods and services. On October 10, 2017, DISH Network L.L.C. filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit, which heard oral argument on September 17, 2018. On March 26, 2020, the United States Court of Appeals for the Seventh Circuit issued an opinion largely affirming DISH Network L.L.C.’s liability, but vacating and remanding the damages award. On June 25, 2020, the United States Court of Appeals for the Seventh Circuit denied DISH Network L.L.C.’s petition for rehearing and/or rehearing en banc. Pursuant to the parties’ stipulation, on July 13, 2020, the Court entered a schedule for additional briefing on the remanded damages issue, which schedule has been extended at the parties’ requests to accommodate settlement discussions.
Our total accrual at September 30, 2020 and December 31, 2019 related to the FTC Action was $ i i 280 / million, which was recorded in prior periods and is included in “Other accrued expenses” on our Condensed Consolidated Balance Sheets. Any eventual payments made with respect to the FTC Action may not be deductible for tax purposes, which had a negative impact on our effective tax rate for the year ended December 31, 2017. The tax deductibility of any eventual payments made with respect to the FTC Action may change, based upon, among other things, further developments in the FTC Action, including final adjudication of the FTC Action.
We may also from time to time be subject to private civil litigation alleging telemarketing violations. For example, a portion of the alleged telemarketing violations by an independent third-party retailer at issue in the FTC Action are also the subject of a certified class action filed against DISH Network L.L.C. in the United States District Court for the Middle District of North Carolina (the “Krakauer Action”). Following a five-day trial, on January 19, 2017, a jury in that case found that the independent third-party retailer was acting as DISH Network L.L.C.’s agent when it made the i 51,119 calls at issue in that case, and that class members are eligible to recover $ i 400 in damages for each call made in violation of the TCPA. On May 22, 2017, the Court ruled that the violations were willful and knowing, and trebled the damages award to $ i 1,200 for each call made in violation of TCPA. On April 5, 2018, the Court entered a $ i 61 million judgment in favor of the class. DISH Network L.L.C. appealed and on May 30, 2019, the United States Court of Appeals for the Fourth Circuit affirmed. On October 15, 2019, DISH Network L.L.C. filed a petition for writ of certiorari, requesting that the United States Supreme Court agree to hear a further appeal but it denied the petition on December 16, 2019. On January 21, 2020, DISH Network L.L.C. filed a second notice of appeal relating to the district court’s orders on the claims administration process to identify, and disburse funds to, individual class members. On June 29, 2020, Krakauer filed a motion to dismiss the appeal for lack of jurisdiction. The district court currently is deciding how to handle the $ i 10.76 million in disbursable judgment funds for which no corresponding class member was identified, but has indicated that it will not refund those monies to DISH Network L.L.C. During the third quarter 2019, the judgment was paid to the court.
We intend to vigorously defend these cases. We cannot predict with any degree of certainty the outcome of these suits.
Telemarketing Shareholder Derivative Litigation
On October 19, 2017, Plumbers Local Union No. 519 Pension Trust Fund (“Plumbers Local 519”), a purported shareholder of the Company, filed a putative shareholder derivative action in the District Court for Clark County, Nevada alleging, among other things, breach of fiduciary duty claims against the following current and former members of the Company’s Board of Directors: Charles W. Ergen; James DeFranco; Cantey M. Ergen; Steven R. Goodbarn; David K. Moskowitz; Tom A. Ortolf; Carl E. Vogel; George R. Brokaw; and Gary S. Howard (collectively, the “Director Defendants”). In its complaint, Plumbers Local 519 contends that, by virtue of their alleged failure to appropriately ensure the Company’s compliance with telemarketing laws, the Director Defendants exposed the Company to liability for telemarketing violations, including those in the Krakauer Action. It also contends that the Director Defendants caused the Company to pay improper compensation and benefits to themselves and others who allegedly breached their fiduciary duties to the Company.
58
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Plumbers Local 519 alleges causes of action for breach of fiduciary duties of loyalty and good faith, gross mismanagement, abuse of control, corporate waste and unjust enrichment. Plumbers Local 519 is seeking an unspecified amount of damages.
On November 13, 2017, City of Sterling Heights Police and Fire Retirement System (“Sterling Heights”), a purported shareholder of the Company, filed a putative shareholder derivative action in the District Court for Clark County, Nevada. Sterling Heights makes substantially the same allegations as Plumbers Union 519, and alleges causes of action against the Director Defendants for breach of fiduciary duty, waste of corporate assets and unjust enrichment. Sterling Heights is seeking an unspecified amount of damages. Pursuant to a stipulation of the parties, on January 4, 2018, the District Court agreed to consolidate the Sterling Heights action with the Plumbers Local 519 action, and on January 12, 2018, the derivative plaintiffs filed an amended consolidated complaint that largely duplicates the original Plumbers Local 519 complaint. Our Board of Directors has established a Special Litigation Committee to review the factual allegations and legal claims in this action. On May 15, 2018, the District Court granted the Special Litigation Committee’s motion to stay the case pending its investigation. The Special Litigation Committee’s report was filed on November 27, 2018, and recommended that the Company not pursue the claims asserted by the derivative plaintiffs. On December 20, 2018, the Special Litigation Committee filed a motion seeking deferral to its determination that the claims should be dismissed. Following a two-day evidentiary hearing on July 6-7, 2020, on July 17, 2020, the District Court entered an order granting the Special Litigation Committee’s motion. On August 25, 2020, the derivative plaintiffs filed a notice of appeal to the Nevada Supreme Court.
We cannot predict with any degree of certainty the outcome of these suits or determine the extent of any potential liability or damages.
TQ Delta, LLC
On July 17, 2015, TQ Delta, LLC (“TQ Delta”) filed a complaint against us and our wholly-owned subsidiaries DISH DBS Corporation and DISH Network L.L.C. in the United States District Court for the District of Delaware. The Complaint alleges infringement of United States Patent No. 6,961,369 (the “369 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 8,718,158 (the “158 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 9,014,243 (the “243 patent”), which is entitled “System and Method for Scrambling Using a Bit Scrambler and a Phase Scrambler”; United States Patent No.7,835,430 (the “430 patent”), which is entitled “Multicarrier Modulation Messaging for Frequency Domain Received Idle Channel Noise Information”; United States Patent No. 8,238,412 (the “412 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; United States Patent No. 8,432,956 (the “956 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; and United States Patent No. 8,611,404 (the “404 patent”), which is entitled “Multicarrier Transmission System with Low Power Sleep Mode and Rapid-On Capability.” On September 9, 2015, TQ Delta filed a first amended complaint that added allegations of infringement of United States Patent No. 9,094,268 (the “268 patent”), which is entitled “Multicarrier Transmission System With Low Power Sleep Mode and Rapid-On Capability.” On May 16, 2016, TQ Delta filed a second amended complaint that added EchoStar Corporation and its then wholly-owned subsidiary EchoStar Technologies L.L.C. as defendants. TQ Delta alleges that our satellite TV service, Internet service, set-top boxes, gateways, routers, modems, adapters and networks that operate in accordance with one or more Multimedia over Coax Alliance Standards infringe the asserted patents. TQ Delta has filed actions in the same court alleging infringement of the same patents against Comcast Corp., Cox Communications, Inc., DirecTV, Time Warner Cable Inc. and Verizon Communications, Inc. TQ Delta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
59
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On July 14, 2016, TQ Delta stipulated to dismiss with prejudice all claims related to the 369 patent and the 956 patent. On July 20, 2016, we filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims of the 404 patent and the 268 patent that have been asserted against us. Third parties have filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims that have been asserted against us in the action. On November 4, 2016, the United States Patent and Trademark Office agreed to institute proceedings on the third-party petitions related to the 158 patent, the 243 patent, the 412 patent and the 430 patent.
On December 20, 2016, pursuant to a stipulation of the parties, the Court stayed the case until the resolution of all petitions to the United States Patent and Trademark Office challenging the validity of all of the patent claims at issue. On January 19, 2017, the United States Patent and Trademark Office granted our motions to join the instituted petitions on the 430 and 158 patents.
On February 9, 2017, the United States Patent and Trademark Office agreed to institute proceedings on our petition related to the 404 patent, and on February 13, 2017, the United States Patent and Trademark Office agreed to institute proceedings on our petition related to the 268 patent. On February 27, 2017, the United States Patent and Trademark Office granted our motions to join the instituted petitions on the 243 and 412 patents. On October 26, 2017, the United States Patent and Trademark Office issued final written decisions on the petitions challenging the 158 patent, the 243 patent, the 412 patent and the 430 patent, and it invalidated all of the asserted claims of those patents. On February 7, 2018, the United States Patent and Trademark Office issued final written decisions on the petitions challenging the 404 patent, and it invalidated all of the asserted claims of that patent on the basis of our petition. On February 10, 2018, the United States Patent and Trademark Office issued a final written decision on our petition challenging the 268 patent, and it invalidated all of the asserted claims. On March 12, 2018, the United States Patent and Trademark Office issued a final written decision on a third-party petition challenging the 268 patent, and it invalidated all of the asserted claims. All asserted claims have now been invalidated by the United States Patent and Trademark Office. TQ Delta has filed notices of appeal from the final written decisions adverse to it. On May 9, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the 430 patent and the 412 patent. On July 10, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the asserted claims of the 404 patent. On July 15, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the asserted claims of the 268 patent. On November 22, 2019, the United States Court of Appeals for the Federal Circuit reversed the invalidity finding on the 243 patent and the 158 patent, and then, on March 29, 2020, denied a petition for panel rehearing as to those findings.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
60
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Turner Network Sales
On October 6, 2017, Turner Network Sales, Inc. (“Turner”) filed a complaint against our wholly-owned subsidiary DISH Network L.L.C. in the United States District Court for the Southern District of New York. The operative First Amended Complaint alleges that DISH Network L.L.C. improperly calculated and withheld licensing fees owing to Turner in connection with its carriage of CNN and other networks. On December 14, 2017, DISH Network L.L.C. filed its operative first amended counterclaims against Turner. In the counterclaims, DISH Network L.L.C. seeks a declaratory judgment that it properly calculated the licensing fees owed to Turner for carriage of CNN, and also alleges claims for unrelated breaches of the parties’ affiliation agreement. In its October 1, 2018 damage expert’s report, Turner claimed damages of $ i 159 million, plus $ i 24 million in interest. On September 27, 2019, the Court granted, in part, Turner’s motion for summary judgment, holding, in part, that Turner was entitled to recover approximately $ i 20 million in license fee payments that DISH Network L.L.C. had withheld after it discovered previous over-payments. On February 12, 2020, the parties filed a stipulation to dismiss certain of their respective claims. Trial on the remaining claims in this matter has been re-set for March 1, 2021, where DISH Network L.L.C.’s incremental exposure (per Turner’s damages expert’s amended report) is approximately $ i 206 million.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Uniloc
On January 31, 2019, Uniloc 2017 LLC (“Uniloc”) filed a complaint against our wholly-owned subsidiary Sling TV L.L.C. in the United States District Court for the District of Colorado. The Complaint alleges infringement of United States Patent No. 6,519,005 (the “005 patent”), which is entitled “Method of Concurrent Multiple-Mode Motion Estimation for Digital Video”; United States Patent No. 6,895,118 (the “118 patent”), which is entitled “Method of Coding Digital Image Based on Error Concealment”; United States Patent No. 9,721,273 (the “273 patent”), which is entitled “System and Method for Aggregating and Providing Audio and Visual Presentations Via a Computer Network”); and United States Patent No. 8,407,609 (the “609 patent”), which is entitled “System and Method for Providing and Tracking the Provision of Audio and Visual Presentations Via a Computer Network.” Uniloc is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
On June 25, 2019, Sling TV L.L.C. filed a petition with the United States Patent and Trademark Office challenging the validity of all of the asserted claims of the 005 patent. On July 19, 2019 and July 22, 2019, respectively, Sling TV L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of all asserted claims of the 273 patent and the 609 patent. On August 12, 2019, Sling TV L.L.C. filed a petition with the United States Patent and Trademark Office challenging the validity of all of the asserted claims of the 118 patent. On October 18, 2019, pursuant to a stipulation of the parties, the Court entered a stay of the trial proceedings. On January 9, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 005 patent. On January 15, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 273 patent. On February 4, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 609 patent. On February 25, 2020, the United States Patent and Trademark Office declined to institute proceedings on the petition challenging the 118 patent.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
61
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Vermont National Telephone Company
On September 23, 2016, the United States District Court for the District of Columbia unsealed a qui tam complaint that was filed by Vermont National against us; our wholly-owned subsidiaries, American AWS-3 Wireless I L.L.C., American II, American III, and DISH Wireless Holding L.L.C.; Charles W. Ergen (our Chairman) and Cantey M. Ergen (a member of our board of directors); Northstar Wireless; Northstar Spectrum; Northstar Manager; SNR Wireless; SNR HoldCo; SNR Management; and certain other parties. The complaint was unsealed after the United States Department of Justice notified the Court that it had declined to intervene in the action. The complaint is a civil action that was filed under seal on May 13, 2015 by Vermont National, which participated in the AWS-3 Auction through its wholly-owned subsidiary, VTel Wireless. The complaint alleges violations of the federal civil False Claims Act (the “FCA”) based on, among other things, allegations that Northstar Wireless and SNR Wireless falsely claimed bidding credits of i 25% in the AWS-3 Auction when they were allegedly under the de facto control of DISH Network and, therefore, were not entitled to the bidding credits as designated entities under applicable FCC rules. Vermont National seeks to recover on behalf of the United States government approximately $ i 10 billion, which reflects the $ i 3.3 billion in bidding credits that Northstar Wireless and SNR Wireless claimed in the AWS-3 Auction, trebled under the FCA. Vermont National also seeks civil penalties of not less than $ i 5,500 and not more than $ i 11,000 for each violation of the FCA. On March 2, 2017, the United States District Court for the District of Columbia entered a stay of the litigation until such time as the United States Court of Appeals for the District of Columbia (the “D.C. Circuit”) issued its opinion in SNR Wireless LicenseCo, LLC, et al. v. F.C.C. The D.C. Circuit issued its opinion on August 29, 2017 and remanded the matter to the FCC for further proceedings. See “Commitments – DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses” above for further information.
Thereafter, the Court maintained the stay until October 26, 2018. On February 11, 2019, the Court granted Vermont National’s unopposed motion for leave to file an amended complaint. On March 28, 2019, the defendants filed a motion to dismiss Vermont National’s amended complaint, which has been fully briefed since June 3, 2019.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of this proceeding or determine the extent of any potential liability or damages.
Waste Disposal Inquiry
The California Attorney General and the Alameda County (California) District Attorney are investigating whether certain of our waste disposal policies, procedures and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. We expect that these entities will seek injunctive and monetary relief. The investigation appears to be part of a broader effort to investigate waste handling and disposal processes of a number of industries. While we are unable to predict the outcome of this investigation, we do not believe that the outcome will have a material effect on our results of operations, financial condition or cash flows.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims that arise in the ordinary course of business, including, among other things, disputes with programmers regarding fees. In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial condition, results of operations or liquidity, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
62
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
12.Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. Operating income is the primary measure used by our chief operating decision maker to evaluate segment operating performance. We currently operate i two primary business segments: (1) Pay-TV; and (2) Wireless. See Note 1 for further information.
All other and eliminations primarily include intersegment eliminations related to intercompany debt and the related interest income and interest expense, which are eliminated in consolidation.
The total assets, revenue and operating income by segment were as follows:
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2020 |
| 2019 |
| ||
| | (In thousands) | | ||||
Total assets: | | | | | | | |
Pay-TV | | $ | i 33,706,649 | | $ | i 31,531,612 | |
Wireless | | | i 28,717,584 | | | i 25,686,381 | |
Eliminations | | | ( i 26,323,796) | | | ( i 23,987,058) | |
Total assets | | $ | i 36,100,437 | | $ | i 33,230,935 | |
| | | | | | | |
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (In thousands) | | ||||||||||
Revenue: | | | | | | | | | | | | | |
Pay-TV | | $ | i 3,190,664 | | $ | i 3,169,967 | | $ | i 9,595,131 | | $ | i 9,569,972 | |
Wireless | | | i 1,341,512 | | | i 64 | | | i 1,343,893 | | | i 187 | |
Eliminations | | | ( i 585) | | | ( i 1,668) | | | ( i 2,954) | | | ( i 3,340) | |
Total revenue | | $ | i 4,531,591 | | $ | i 3,168,363 | | $ | i 10,936,070 | | $ | i 9,566,819 | |
| | | | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | |
Pay-TV | | $ | i 803,817 | | $ | i 491,696 | | $ | i 2,040,970 | | $ | i 1,406,179 | |
Wireless (1) | | | i 7,431 | | | ( i 22,804) | | | ( i 447,994) | | | ( i 50,255) | |
Eliminations | | | — | | | — | | | — | | | — | |
Total operating income (loss) | | $ | i 811,248 | | $ | i 468,892 | | $ | i 1,592,976 | | $ | i 1,355,924 | |
| | | | | | | | | | | | | |
| (1) | The nine months ended September 30, 2020 were negatively impacted by “Impairment of long-lived assets” of $ i 356 million, resulting from non-cash impairments of the T1 satellite and D1 satellites, as well as capitalized costs of equipment, labor and other assets and operating lease assets related to the narrowband IoT deployment that would not be utilized in our 5G Network Deployment. See Note 2 for further information. |
/63
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Geographic Information. Revenue is attributed to geographic regions based upon the location where the goods and services are provided. All service revenue was derived from the United States. Substantially all of our long-lived assets reside in the United States.
The following table summarizes revenue by geographic region:
i
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
|
| September 30, | | September 30, | ||||||||
Revenue: | | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
United States | | $ | i 4,516,475 | | $ | i 3,156,853 | | $ | i 10,899,922 | | $ | i 9,533,647 |
Canada and Mexico | | | i 15,116 | | | i 11,510 | | | i 36,148 | | | i 33,172 |
Total revenue | | $ | i 4,531,591 | | $ | i 3,168,363 | | $ | i 10,936,070 | | $ | i 9,566,819 |
| | | | | | | | | | | | |
The revenue from external customers disaggregated by major revenue source was as follows:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Category: |
| 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
| | (In thousands) | | ||||||||||
Pay-TV video and related revenue | | $ | i 3,139,575 | | $ | i 3,117,191 | | $ | i 9,455,429 | | $ | i 9,427,533 | |
Wireless services and related revenue | | | i 1,082,570 | | | — | | | i 1,082,570 | | | — | |
Pay-TV equipment sales and other revenue | | | i 51,089 | | | i 52,776 | | | i 139,702 | | | i 142,439 | |
Wireless equipment sales and other revenue | | | i 258,942 | | | i 64 | | | i 261,323 | | | i 187 | |
Eliminations equipment sales and other revenue | | | ( i 585) | | | ( i 1,668) | | | ( i 2,954) | | | ( i 3,340) | |
Total | | $ | i 4,531,591 | | $ | i 3,168,363 | | $ | i 10,936,070 | | $ | i 9,566,819 | |
| | | | | | | | | | | | | |
All revenues during the three and nine months ended September 30, 2020 and 2019 were primarily derived from our Pay-TV segment.
i
64
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
13.Contract Balances
Our valuation and qualifying accounts as of September 30, 2020 were as follows:
i
| | | | | | | | | | | | | |
Allowance for credit losses |
| Balance at |
| Current Period Provision for Expected Credit Losses |
| Write-offs Charged Against Allowance |
| Balance at |
| ||||
| | (In thousands) | | ||||||||||
For the nine months ended September 30, 2020 | | $ | i 19,280 | | $ | i 60,964 | | $ | ( i 15,630) | | $ | i 64,614 | |
| | | | | | | | | | | | | |
Deferred revenue related to contracts with our customers is recorded in “Deferred revenue and other” and “Long-term deferred revenue and other long-term liabilities” on our Condensed Consolidated Balance Sheets. Changes in deferred revenue related to contracts with our customers were as follows:
i
| | | | |
| | | ||
| | Liabilities | | |
| | (In thousands) | | |
Balance as of December 31, 2019 | | $ | i 613,272 | |
Recognition of unearned revenue | | | ( i 6,457,508) | |
Deferral of revenue | | | i 6,627,478 | |
Balance as of September 30, 2020 | | $ | i 783,242 | |
| | | | |
We apply a practical expedient and do not disclose the value of the remaining performance obligations for contracts that are less than one year in duration, which represent a substantial majority of our revenue. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of our future revenue.
i14.Related Party Transactions
Master Transaction Agreement
On May 19, 2019, we entered into the Master Transaction Agreement with EchoStar.
Pursuant to the Master Transaction Agreement, among other things: (i) EchoStar carried out an internal reorganization in which certain assets and liabilities of the EchoStar Satellite Services segment, the business segment of EchoStar that provides broadcast satellite operations and satellite services, as well as certain related licenses, real estate properties and employees (together, the “BSS Business”) were transferred to Newco (the “Pre-Closing Restructuring”); (ii) EchoStar distributed all outstanding shares of common stock, par value $ i 0.001 per share, of Newco (such stock, “Newco Common Stock”) on a pro rata basis (the “Distribution”), to the holders of record of Class A common stock, par value $ i 0.001 per share, of EchoStar and Class B common stock, par value $ i 0.001 per share, of EchoStar; and (iii) upon the consummation of the Pre-Closing Restructuring and the Distribution, Merger Sub merged with and into Newco (the “Merger”) such that, upon consummation of the Merger, Merger Sub ceased to exist and Newco continued as our wholly-owned subsidiary.
Effective September 10, 2019, pursuant to the terms and subject to the conditions set forth in the Master Transaction Agreement, in consideration for the Merger, we issued i 22,937,188 shares of our Class A common stock to the holders of Newco Common Stock at a ratio of i 0.23523769 of our Class A common stock for each outstanding share of Newco Common Stock. The transaction was structured as a tax-free spin-off and merger.
/65
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In addition, as the result of the Merger, we, EchoStar and, as relevant, certain of our or their respective subsidiaries, entered into ancillary agreements involving tax, employment and intellectual property matters, which set forth certain rights and obligations of us and EchoStar and our and their respective subsidiaries related to the Merger with respect to, among other things: (i) the payment of tax liability refunds, and the filing of tax returns related to Newco and the BSS Business; (ii) the allocation of employment-related assets and liabilities between us and EchoStar; (iii) certain employee compensation, equity awards, benefit plans, programs and arrangements relating to employees who are expected to be transferred to us pursuant to the Merger; (iv) a cross-license between us and EchoStar for certain intellectual property either transferred to us as part of the Merger or retained by EchoStar that is also used in the BSS Business; and (v) the provision of certain telemetry, tracking and control services by us and our subsidiaries to EchoStar and its subsidiaries.
The description of the Master Transaction Agreement in this section is qualified in its entirety by reference to the complete text of the Master Transaction Agreement, a copy of which is filed as Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
The Merger was accounted for as an asset purchase, as substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets. As the Merger was between entities that were under common control, we recorded the assets and liabilities received under the Merger at EchoStar’s historical cost basis, with the offsetting amount recorded in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets. A significant portion of the assets received under the Merger were historically leased to us by EchoStar. As these assets and the related liabilities have been transferred to us pursuant to the Master Transaction Agreement, they are no longer be included in “Operating lease assets,” “Other current liabilities” and “Operating lease liabilities,” but rather in “Property and equipment, net” on our Condensed Consolidated Balance Sheets.
Spin-off from EchoStar
Following the Spin-off, we and EchoStar have operated as separate publicly-traded companies and neither entity has any ownership interest in the other. However, a substantial majority of the voting power of the shares of both companies is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established by Mr. Ergen for the benefit of his family.
Related Party Transactions with EchoStar
In connection with and following the Spin-off, we and EchoStar have entered into certain agreements pursuant to which we obtain certain products, services and rights from EchoStar, EchoStar obtains certain products, services and rights from us, and we and EchoStar have indemnified each other against certain liabilities arising from our respective businesses. Pursuant to the Share Exchange Agreement, among other things, EchoStar transferred to us certain assets and liabilities of the EchoStar technologies and EchoStar broadcasting businesses. Pursuant to the Master Transaction Agreement, among other things, EchoStar transferred to us certain assets and liabilities of its EchoStar Satellite Services segment. In connection with the Share Exchange and the Master Transaction Agreement, we and EchoStar and certain of their subsidiaries entered into certain agreements covering, among other things, tax matters, employee matters, intellectual property matters and the provision of transitional services. In addition, certain agreements that we had with EchoStar have terminated, and we entered into certain new agreements with EchoStar. We also may enter into additional agreements with EchoStar in the future. The following is a summary of the terms of our principal agreements with EchoStar that may have an impact on our financial condition and results of operations.
“Trade accounts receivable”
As of September 30, 2020 and December 31, 2019, trade accounts receivable from EchoStar was $ i 4 million and $ i 1 million, respectively. These amounts are recorded in “Trade accounts receivable” on our Condensed Consolidated Balance Sheets.
66
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
“Trade accounts payable”
As of September 30, 2020 and December 31, 2019, trade accounts payable to EchoStar was $ i i 10 / million. These amounts are recorded in “Trade accounts payable” on our Condensed Consolidated Balance Sheets.
“Equipment sales and other revenue”
During both of the three months ended September 30, 2020 and 2019, we received $ i i 2 / million for services provided to EchoStar. During the nine months ended September 30, 2020 and 2019, we received $ i 6 million and $ i 5 million, respectively, for services provided to EchoStar. These amounts are recorded in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these revenues are discussed below.
Real Estate Lease Agreements. We have entered into lease agreements pursuant to which we lease certain real estate to EchoStar. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic areas, and EchoStar is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. The term of each lease is set forth below:
| ● | El Paso Lease Agreement. During 2012, we began leasing certain space at 1285 Joe Battle Blvd., El Paso, Texas to EchoStar for an initial period ending on August 1, 2015, which also provides EchoStar with renewal options for i four consecutive i three-year terms. During the second quarter 2015, EchoStar exercised its first renewal option for a period ending on August 1, 2018 and in April 2018 EchoStar exercised its second renewal option for a period ending in August 2021. |
| ● | 90 Inverness Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, EchoStar leases certain space from us at 90 Inverness Circle East, Englewood, Colorado for a period ending in February 2022. EchoStar has the option to renew this lease for i four i three-year periods. |
| ● | Cheyenne Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, EchoStar leases certain space from us at 530 EchoStar Drive, Cheyenne, Wyoming for a period ending in February 2019. In August 2018, EchoStar exercised its option to renew this lease for a i one-year period ending in February 2020. EchoStar has the option to renew this lease for i 12 i one-year periods. In connection with the Master Transaction Agreement, we and EchoStar amended this lease to provide EchoStar with certain space for a period ending in September 2021, with the option for EchoStar to renew for a i one-year period upon i 180 days’ written notice prior to the end of the term. |
| ● | Gilbert Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, EchoStar leased certain space from us at 801 N. DISH Dr., Gilbert, Arizona for a period ending in March 2019. EchoStar exercised its option to renew this lease for a i one-year period ending in February 2020. This lease was terminated effective September 10, 2019. |
| ● | American Fork Occupancy License Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, we acquired the lease for certain space at 796 East Utah Valley Drive, American Fork, Utah, and we sublease certain space at this location to EchoStar for a period ending in August 2017. In June 2017, EchoStar exercised its i five-year renewal option for a period ending in August 2022. This lease was terminated effective March 2019. |
67
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Collocation and Antenna Space Agreements. In connection with the completion of the Share Exchange, effective March 1, 2017, we entered into certain agreements pursuant to which we will provide certain collocation and antenna space to HNS through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Englewood, Colorado; and Spokane, Washington. During August 2017, we entered into certain other agreements pursuant to which we will provide certain collocation and antenna space to HNS through August 2022 at the following locations: Monee, Illinois and Spokane, Washington. HNS has the option to renew each of these agreements for i four i three-year periods. HNS may terminate certain of these agreements with i 180 days’ prior written notice to us at the following locations: New Braunfels, Texas; Englewood, Colorado; and Spokane, Washington. In September 2019, in connection with the Master Transaction Agreement, we entered into an agreement pursuant to which we provide HNS with certain additional collocation space in Cheyenne, Wyoming for a period ending in September 2020, with the option for HNS to renew for a i one-year period, with prior written notice no more than i 120 days but no less than i 90 days prior to the end of the term. In October 2019, HNS provided a termination notice for its New Braunfels, Texas agreement to be effective May 2020. The fees for the services provided under these agreements depend, among other things, on the number of racks leased and/or antennas present at the location.
Also in connection with the Master Transaction Agreement, in September 2019, we entered into an agreement pursuant to which we will provide HNS with antenna space and power in Cheyenne, Wyoming for a period of i five years commencing no later than October 2020, with i four i three-year renewal terms, with prior written notice no more than i 120 days but no less than i 90 days prior to the end of the then-current term.
TT&C Agreement – Master Transaction Agreement. In September 2019, in connection with the Master Transaction Agreement, we entered into an agreement pursuant to which we provide TT&C services to EchoStar for a period ending in September 2021, with the option for EchoStar to renew for a i one-year period upon written notice at least i 90 days prior to the initial expiration (the “MTA TT&C Agreement”). The fees for services provided under the MTA TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Either party is able to terminate the MTA TT&C Agreement for any reason upon i 12 months’ notice.
“Cost of services”
During the three months ended September 30, 2020 and 2019, we incurred $ i 5 million and $ i 31 million, respectively, of costs for services provided to us by EchoStar. During the nine months ended September 30, 2020 and 2019, we incurred $ i 15 million and $ i 191 million, respectively, of costs for services provided to us by EchoStar. EchoStar was the supplier of the vast majority of our transponder capacity. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, certain of these satellites were transferred to us (see below). See above for further information on the Master Transaction Agreement. These amounts are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
Hughes Broadband Distribution Agreement. Effective October 1, 2012, dishNET Satellite Broadband L.L.C. (“dishNET Satellite Broadband”), our indirect wholly-owned subsidiary, and HNS entered into a Distribution Agreement (the “Distribution Agreement”) pursuant to which dishNET Satellite Broadband has the right, but not the obligation, to market, sell and distribute the HNS satellite Internet service (the “Service”). dishNET Satellite Broadband pays HNS a monthly per subscriber wholesale service fee for the Service based upon the subscriber’s service level, and, beginning January 1, 2014, certain volume subscription thresholds. The Distribution Agreement also provides that dishNET Satellite Broadband has the right, but not the obligation, to purchase certain broadband equipment from HNS to support the sale of the Service. On February 20, 2014, dishNET Satellite Broadband and HNS amended the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement through March 1, 2024.
68
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Thereafter, the Distribution Agreement automatically renews for successive i one year terms unless either party gives written notice of its intent not to renew to the other party at least i 180 days before the expiration of the then-current term. Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.
During the first quarter 2017, we transitioned our wholesale arrangement with Hughes under the Distribution Agreement to an authorized representative arrangement and entered into the MSA with HNS. See “Hughes Broadband Master Services Agreement” below for further information.
Satellite Capacity Leased from EchoStar. We have entered into certain satellite capacity agreements pursuant to which we lease certain capacity on certain satellites owned or leased by EchoStar. The fees for the services provided under these satellite capacity agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are leased on the applicable satellite and the length of the lease. See “Pay-TV Satellites” in Note 8 for further information. The term of each lease is set forth below:
| ● | EchoStar VII, X, XI and XIV. On March 1, 2014, we began leasing all available capacity from EchoStar on the EchoStar VII, X, XI and XIV satellites. The term of each satellite capacity agreement generally terminates upon the earlier of: (i) the end-of-life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite. We generally have the option to renew each satellite capacity agreement on a year-to-year basis through the end of the respective satellite’s life. There can be no assurance that any options to renew such agreements will be exercised. The satellite capacity agreement for EchoStar VII expired on June 30, 2018. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, these satellites were transferred to us. See above for further information on the Master Transaction Agreement. |
| ● | EchoStar IX. We lease certain satellite capacity from EchoStar on EchoStar IX. Subject to availability, we generally have the right to continue to lease satellite capacity from EchoStar on EchoStar IX on a month-to-month basis. |
| ● | EchoStar XVI. In December 2009, we entered into a transponder service agreement with EchoStar to lease all of the capacity on EchoStar XVI, a DBS satellite, after its service commencement date. EchoStar XVI was launched in November 2012 to replace EchoStar XV at the 61.5 degree orbital location and is currently in service. Effective December 21, 2012, we and EchoStar amended the transponder service agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) i four years following the actual service commencement date. In July 2016, we and EchoStar amended the transponder service agreement to, among other things, extend the initial term by one additional year and to reduce the term of the first renewal option by i one year. Prior to expiration of the initial term, we had the option to renew for an additional i five-year period. In May 2017, we exercised our first renewal option for an additional i five-year period ending in January 2023. We also have the option to renew for an additional i five-year period prior to expiration of the first renewal period in January 2023. There can be no assurance that the option to renew this agreement will be exercised. During 2018, we and EchoStar further amended the agreement to, among other things, allow us to place and use certain satellites at the 61.5 degree orbital location. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, this satellite was transferred to us. See above for further information on the Master Transaction Agreement. |
69
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Nimiq 5 Agreement. During 2009, EchoStar entered into a i fifteen-year satellite service agreement with Telesat Canada (“Telesat”) to receive service on all i 32 DBS transponders on the Nimiq 5 satellite at the 72.7 degree orbital location (the “Telesat Transponder Agreement”). During 2009, EchoStar also entered into a satellite service agreement (the “DISH Nimiq 5 Agreement”) with us, pursuant to which we received service from EchoStar on all i 32 of the DBS transponders covered by the Telesat Transponder Agreement.
Under the terms of the DISH Nimiq 5 Agreement, we made certain monthly payments to EchoStar that commenced in 2009 when the Nimiq 5 satellite was placed into service and continued through the service term, which expired i ten years following the date the Nimiq 5 satellite was placed into service. Upon expiration of the initial term, we have the option to renew on a year-to-year basis through the end-of-life of the Nimiq 5 satellite. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, the Telesat Transponder Agreement was transferred to us. In September 2019, we and EchoStar entered into an agreement whereby we compensate EchoStar for retaining certain obligations to Telesat related to our performance under the Telesat Transponder Agreement. See above for further information on the Master Transaction Agreement.
QuetzSat-1 Lease Agreement. During 2008, EchoStar entered into a i ten-year satellite service agreement with SES Latin America S.A. (“SES”), which provided, among other things, for the provision by SES to EchoStar of service on i 32 DBS transponders on the QuetzSat-1 satellite (“SES Transponder Agreement”). During 2008, EchoStar also entered into a transponder service agreement (“QuetzSat-1 Transponder Agreement”) with us pursuant to which we received service from EchoStar on i 24 DBS transponders. QuetzSat-1 was launched on September 29, 2011 and was placed into service during the fourth quarter 2011 at the 67.1 degree orbital location. In January 2013, QuetzSat-1 was moved to the 77 degree orbital location and we commenced commercial operations at that location in February 2013. During the first quarter 2013, we and EchoStar entered into an agreement pursuant to which we subleased i five DBS transponders back to EchoStar.
Unless earlier terminated under the terms and conditions of the SES Transponder Agreement and QuetzSat-1 Transponder Agreement, the initial service term will expire in November 2021. Upon expiration of the initial term, we have the option to renew the SES Transponder Agreement on a year-to-year basis through the end-of-life of the QuetzSat-1 satellite. There can be no assurance that any options to renew the SES Transponder Agreement will be exercised. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, the SES Transponder Agreement was transferred to us. See above for further information on the Master Transaction Agreement.
TT&C Agreement. Effective January 1, 2012, we entered into a TT&C agreement pursuant to which we receive TT&C services from EchoStar for certain satellites (the “TT&C Agreement”). In February 2018, we amended the TT&C Agreement to, among other things, extend the term for i one-year with i four automatic i one-year renewal periods. The fees for services provided under the TT&C Agreement are calculated at either: (i) a fixed fee; or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. We and EchoStar are able to terminate the TT&C Agreement for any reason upon i 12 months’ notice. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, the assets and employees that provide these services were transferred to us. See above for further information on the Master Transaction Agreement.
“Cost of sales – equipment and other”
During the three months ended September 30, 2020 and 2019, we incurred $ i 1 million and $ i 4 million, respectively, for satellite hosting, operations and maintenance services as well as transmission of certain data. During the nine months ended September 30, 2020 and 2019, we incurred $ i 3 million and $ i 4 million, respectively, for satellite hosting, operations and maintenance services as well as transmission of certain data. These amounts are recorded in “Cost of sales – equipment and other” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
70
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
DBSD North America Agreement. On March 9, 2012, we completed the DBSD Transaction. During the second quarter 2011, EchoStar acquired Hughes. Prior to our acquisition of DBSD North America and EchoStar’s acquisition of Hughes, DBSD North America and HNS entered into an agreement pursuant to which HNS provides, among other things, hosting, operations and maintenance services for DBSD North America’s satellite gateway and associated ground infrastructure. This agreement generally may be terminated by us at any time for convenience.
TerreStar Agreement. On March 9, 2012, we completed the TerreStar Transaction. Prior to our acquisition of substantially all the assets of TerreStar and EchoStar’s acquisition of Hughes, TerreStar and HNS entered into various agreements pursuant to which HNS provides, among other things, hosting, operations and maintenance services for TerreStar’s satellite gateway and associated ground infrastructure. These agreements generally may be terminated by us at any time for convenience.
Hughes Equipment and Services Agreement. In February 2019, we and HNS entered into an agreement pursuant to which HNS will provide us with HughesNet Service and HughesNet equipment for the transmission of certain data related to our 5G Network Deployment. This agreement has an initial term of i five years with automatic renewal for successive i one-year terms unless terminated by DISH Network with at least i 180 days’ written notice to us or by us with at least i 365 days’ written notice to DISH Network.
“Selling, general and administrative expenses”
During the three months ended September 30, 2020 and 2019, we incurred $ i 3 million and $ i 6 million, respectively, for selling, general and administrative expenses for services provided to us by EchoStar. During the nine months ended September 30, 2020 and 2019, we incurred $ i 10 million and $ i 17 million, respectively, for selling, general and administrative expenses for services provided to us by EchoStar. These amounts are recorded in “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
Real Estate Lease Agreements. We have entered into lease agreements pursuant to which we lease certain real estate from EchoStar. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area, and EchoStar is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. The term of each lease is set forth below:
| ● | Meridian Lease Agreement. The lease for all of 9601 S. Meridian Blvd. in Englewood, Colorado was for a period ending on December 31, 2019. In December 2019, we and EchoStar amended this lease to, among other things, extend the term thereof for one additional year until December 31, 2020. |
| ● | Santa Fe Lease Agreement. The lease for all of 5701 S. Santa Fe Dr. in Littleton, Colorado was for a period ending on December 31, 2018. In December 2018, we and EchoStar amended this lease to, among other things, extend the term thereof for one additional year until December 31, 2019. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, this real estate was transferred to us. See above for further information on the Master Transaction Agreement. |
71
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| ● | Cheyenne Lease Agreement. The lease for certain space at 530 EchoStar Drive in Cheyenne, Wyoming is for a period ending on December 31, 2031. In connection with the completion of the Share Exchange, EchoStar transferred ownership of a portion of this property to us, and, effective March 1, 2017, we and EchoStar amended this lease agreement to (i) terminate the lease of certain space at the portion of the property that was transferred to us and (ii) provide for the continued lease to us of certain space at the portion of the property that EchoStar retained. On May 19, 2019, we entered into a Master Transaction Agreement pursuant to which, on September 10, 2019, this real estate was transferred to us. See above for further information on the Master Transaction Agreement. |
| ● | 100 Inverness Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, we lease certain space from EchoStar at 100 Inverness Terrace East, Englewood, Colorado for a period ending in December 2020. This agreement may be terminated by either party upon i 180 days’ prior notice. |
Professional Services Agreement. Prior to 2010, in connection with the Spin-off, we entered into various agreements with EchoStar including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired on January 1, 2010 and were replaced by a Professional Services Agreement. During 2009, we and EchoStar agreed that EchoStar shall continue to have the right, but not the obligation, to receive the following services from us, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, we and EchoStar agreed that we shall continue to have the right, but not the obligation, to engage EchoStar to manage the process of procuring new satellite capacity for us (previously provided under the Satellite Procurement Agreement) and receive logistics, procurement and quality assurance services from EchoStar (previously provided under the Services Agreement) and other support services. The Professional Services Agreement renewed on January 1, 2020 for an additional i one-year period until January 1, 2021 and renews automatically for successive i one-year periods thereafter, unless terminated earlier by either party upon at least i 60 days’ notice. However, either party may terminate the Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least i 30 days’ notice. In connection with the completion of the Share Exchange on February 28, 2017, DISH Network and EchoStar amended the Professional Services Agreement to, among other things, provide certain transition services to each other related to the Share Exchange Agreement. In addition, on May 19, 2019, we entered into a Master Transaction Agreement, pursuant to which, effective September 10, 2019, DISH Network and EchoStar amended the Professional Services Agreement to, among other things, provide certain transition services to each other related to the Master Transaction Agreement and to remove certain services no longer necessary as a result of the Master Transaction Agreement. See above for further information on the Master Transaction Agreement. During March 2020, we and EchoStar added a service under the Professional Services Agreement whereby we provide EchoStar with rights to use certain satellite capacity in exchange for certain credits to amounts owed by us to EchoStar under the TerreStar Agreement described above.
Revenue for services provided by us to EchoStar under the Professional Services Agreement is recorded in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
72
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Other Agreements - EchoStar
Tax Sharing Agreement. In connection with the Spin-off, we entered into a tax sharing agreement (the “Tax Sharing Agreement”) with EchoStar which governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by us, and we will indemnify EchoStar for such taxes. However, we are not liable for and will not indemnify EchoStar for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended (the “Code”) because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar takes or fails to take; or (iii) any action that EchoStar takes that is inconsistent with the information and representations furnished to the Internal Revenue Service (“IRS”) in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar is solely liable for, and will indemnify us for, any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will only terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, during the third quarter 2013, we and EchoStar agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’ examination of these consolidated tax returns. As a result, we agreed to pay EchoStar $ i 84 million of the tax benefit we received or will receive. This resulted in a reduction of our recorded unrecognized tax benefits and this amount was reclassified to a long-term payable to EchoStar within “Long-term deferred revenue and other long-term liabilities” on our Condensed Consolidated Balance Sheets during the third quarter 2013. Any payment to EchoStar, including accrued interest, will be made at such time as EchoStar would have otherwise been able to realize such tax benefit.
In addition, during the third quarter 2013, we and EchoStar agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and EchoStar for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”). During the third quarter 2018, we and EchoStar amended the Tax Sharing Agreement and the 2013 agreements (the “Amendment”).
Under the Amendment, among other things, we are entitled to apply the benefit of EchoStar’s 2009 net operating losses to our federal tax return for the year ended December 31, 2008, in exchange for paying EchoStar over time the value of the net annual federal income taxes paid by EchoStar that would have been otherwise offset by their 2009 net operating loss. In addition, the Amendment extends the term of the State Tax Arrangement for filing certain combined state income tax returns to the earlier to occur of (1) termination of the Tax Sharing Agreement, (2) a change in control of either us or EchoStar or, (3) for any particular state, if we and EchoStar no longer file a combined tax return for such state.
We and EchoStar file combined income tax returns in certain states. In 2015 and 2014, EchoStar earned and recognized a tax benefit for certain state income tax credits that EchoStar estimates it would be unable to utilize in the future if it had filed separately from us. We expect to utilize these tax credits to reduce our state income tax payable in the future. Any payments made to EchoStar related to the utilization of these credits will be recorded as a reduction to “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.
73
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Tax Matters Agreement – Share Exchange. In connection with the completion of the Share Exchange, we and EchoStar entered into a Tax Matters Agreement, which governs certain rights, responsibilities and obligations with respect to taxes of the Transferred Businesses pursuant to the Share Exchange. Generally, EchoStar is responsible for all tax returns and tax liabilities for the Transferred Businesses for periods prior to the Share Exchange, and we are responsible for all tax returns and tax liabilities for the Transferred Businesses from and after the Share Exchange. Both we and EchoStar have made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and EchoStar have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, we have agreed to indemnify EchoStar if the Transferred Businesses are acquired, either directly or indirectly (e.g., via an acquisition of us), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The Tax Matters Agreement supplements the Tax Sharing Agreement described above, which continues in full force and effect.
Tax Matters Agreement – Master Transaction Agreement. In connection with the completion of the Master Transaction Agreement, we and EchoStar entered into a Tax Matters Agreement, which governs certain rights, responsibilities and obligations with respect to taxes of the BSS Business pursuant to the Master Transaction Agreement. Generally, EchoStar is responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the Master Transaction Agreement, and we are responsible for all tax returns and tax liabilities for the BSS Business from and after the Master Transaction Agreement. Both we and EchoStar have made certain tax-related representations in contemplation of the Master Transaction Agreement. Both we and EchoStar have agreed to indemnify each other if there is a breach of any such tax representation and that breach results in the Master Transaction Agreement not qualifying for tax free treatment for the other party. In addition, we have agreed to indemnify EchoStar if the BSS Business are acquired, either directly or indirectly (e.g., via an acquisition of us), by one or more persons and such acquisition results in the Master Transaction Agreement not qualifying for tax free treatment. The Tax Matters Agreement - Master Transaction Agreement supplements the Tax Sharing Agreement described above, which continues in full force and effect.
Patent Cross-License Agreements. In December 2011, we and EchoStar entered into separate patent cross-license agreements with the same third party whereby: (i) EchoStar and such third-party licensed their respective patents to each other subject to certain conditions; and (ii) we and such third-party licensed our respective patents to each other subject to certain conditions (each, a “Cross-License Agreement”). Each Cross License Agreement covers patents acquired by the respective party prior to January 1, 2017 and aggregate payments under both Cross-License Agreements total less than $ i 10 million. Each Cross License Agreement also contains an option to extend each Cross-License Agreement to include patents acquired by the respective party prior to January 1, 2022. In December 2016, we and EchoStar independently exercised our respective options to extend each Cross-License Agreement. The aggregate additional payments to such third-party was less than $ i 3 million. Since the aggregate payments under both Cross-License Agreements were based on the combined annual revenues of us and EchoStar, we and EchoStar agreed to allocate our respective payments to such third party based on our respective percentage of combined total revenue.
Rovi License Agreement. On August 19, 2016, we entered into a i ten-year patent license agreement (the “Rovi License Agreement”) with Rovi Corporation (“Rovi”) and, for certain limited purposes, EchoStar. EchoStar is a party to the Rovi License Agreement solely with respect to certain provisions relating to the prior patent license agreement between EchoStar and Rovi. There are i no payments between us and EchoStar under the Rovi License Agreement.
74
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Hughes Broadband Master Services Agreement. In March 2017, DISH Network L.L.C. (“DNLLC”) and HNS entered into the MSA pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders for the Hughes broadband satellite service and related equipment; and (ii) installs Hughes service equipment with respect to activations generated by DNLLC. Under the MSA, HNS will make certain payments to DNLLC for each Hughes service activation generated, and installation performed, by DNLLC. Payments from HNS for services provided are recorded in “Service revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For each of the three months ended September 30, 2020 and 2019, these payments were $ i i 4 / million. For the nine months ended September 30, 2020 and 2019, these payments were $ i 13 million and $ i 15 million, respectively. The MSA has an initial term of i five years with automatic renewal for successive i one-year terms. After the first anniversary of the MSA, either party has the ability to terminate the MSA, in whole or in part, for any reason upon at least i 90 days’ notice to the other party. Upon expiration or termination of the MSA, HNS will continue to provide the Hughes service to subscribers and make certain payments to DNLLC pursuant to the terms and conditions of the MSA. For the three months ended September 30, 2020 and 2019, we purchased broadband equipment from HNS of $ i 4 million and $ i 2 million, respectively, under the MSA. For the nine months ended September 30, 2020 and 2019, we purchased broadband equipment from HNS of $ i 11 million and $ i 10 million, under the MSA, respectively.
Employee Matters Agreement – Share Exchange. In connection with the completion of the Share Exchange, effective March 1, 2017, we and EchoStar entered into an Employee Matters Agreement that addresses the transfer of employees from EchoStar to us, including certain benefit and compensation matters and the allocation of responsibility for employee-related liabilities relating to current and past employees of the Transferred Businesses. We assumed employee-related liabilities relating to the Transferred Businesses as part of the Share Exchange, except that EchoStar will be responsible for certain existing employee-related litigation as well as certain pre-Share Exchange compensation and benefits for employees transferring to us in connection with the Share Exchange.
Employee Matters Agreement – Master Transaction Agreement. In connection with the completion of the Master Transaction Agreement, effective September 10, 2019, we and EchoStar entered into an Employee Matters Agreement that addresses the transfer of employees from EchoStar to us, including certain benefit and compensation matters and the allocation of responsibility for employee-related liabilities relating to current and past employees of the BSS Business. We assumed employee-related liabilities relating to the BSS Business as part of the Master Transaction Agreement, except that EchoStar will be responsible for certain existing employee-related litigation as well as certain pre-Master Transaction Agreement compensation and benefits for employees transferring to us in connection with the Master Transaction Agreement.
Intellectual Property and Technology License Agreement – Share Exchange. In connection with the completion of the Share Exchange, effective March 1, 2017, we and EchoStar entered into an Intellectual Property and Technology License Agreement (“IPTLA”), pursuant to which we and EchoStar license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, EchoStar granted to us a license to its intellectual property and technology for use by us, among other things, in connection with our continued operation of the Transferred Businesses acquired pursuant to the Share Exchange Agreement, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, we granted a license back to EchoStar, among other things, for the continued use of all intellectual property and technology transferred to us pursuant to the Share Exchange Agreement that is used in EchoStar’s retained businesses.
75
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Intellectual Property and Technology License Agreement – Master Transaction Agreement. In connection with the completion of the Master Transaction Agreement, effective September 10, 2019, we and EchoStar entered into an IPTLA (the “MTA IPTLA”), pursuant to which we and EchoStar license to each other certain intellectual property and technology. The MTA IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the MTA IPTLA, EchoStar granted to us a license to its intellectual property and technology for use by us, among other things, in connection with our continued operation of the BSS Business acquired pursuant to the Master Transaction Agreement, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period. EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, we granted a license back to EchoStar, among other things, for the continued use of all intellectual property and technology transferred to us pursuant to the Master Transaction Agreement that is used in EchoStar’s retained businesses.
Related Party Transactions with NagraStar L.L.C.
As a result of the completion of the Share Exchange on February 28, 2017, we own a i 50% interest in NagraStar, a joint venture that is our primary provider of encryption and related security systems intended to assure that only authorized customers have access to our programming. Certain payments related to NagraStar are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, certain other payments are initially included in “Inventory” and are subsequently capitalized as “Property and equipment, net” on our Condensed Consolidated Balance Sheets or expensed as “Selling, general and administrative expenses” or “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the equipment is deployed. We record all payables in “Trade accounts payable” or “Other accrued expenses” on our Condensed Consolidated Balance Sheets. Our investment in NagraStar is accounted for using the equity method.
The table below summarizes our transactions with NagraStar:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 |
| ||||
| | (In thousands) | | ||||||||||
Purchases (including fees): | | | | | | | | | | | | | |
Purchases from NagraStar |
| $ | i 14,073 |
| $ | i 14,434 | | $ | i 41,424 |
| $ | i 43,148 | |
| | | | | | | | | | | | | |
| | As of | | | | | | | | ||||
| | September 30, | | | | | | | | | |||
| | 2020 |
| 2019 | | | | | | | | ||
| | (In thousands) | | | | | | | | ||||
Amounts Payable and Commitments: | | | | | | | | | | | | | |
Amounts payable to NagraStar |
| $ | i 8,745 |
| $ | i 9,630 | | | | | | | |
Commitments to NagraStar |
| $ | i 4,260 |
| $ | i 4,893 | | | | | | | |
| | | | | | | | | | | | | |
76
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Related Party Transactions with Dish Mexico
Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”) is an entity that provides direct-to-home satellite services in Mexico, which is owned i 49% by EchoStar. We provide certain broadcast services and certain satellite services to Dish Mexico, which are recorded in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The table below summarizes our transactions with Dish Mexico:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 |
| ||||
| | (In thousands) | | ||||||||||
Sales: | | | | | | | | | | | | | |
Satellite capacity | | $ | i 5,462 | | $ | i 1,275 | | $ | i 16,387 | | $ | i 1,275 | |
Uplink services | | | i 1,207 |
| | i 1,406 | | | i 3,876 |
| | i 4,222 | |
Total | | $ | i 6,669 | | $ | i 2,681 | | $ | i 20,263 | | $ | i 5,497 | |
| | | | | | | | | | | | | |
| | As of | | | | | | | | ||||
| | September 30, | | | | | | | | | |||
| | 2020 |
| 2019 | | | | | | | | ||
| | (In thousands) | | | | | | | | ||||
Amounts Receivable: | | | | | | | | | | | | | |
Satellite capacity receivable | | $ | i 13,686 | | $ | i 5,866 | | | | | | | |
Uplink amounts receivable from Dish Mexico |
| | i 2,603 | | | i 1,191 | | | | | | | |
| | $ | i 16,289 | | $ | i 7,057 | | | | | | | |
77
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following management’s discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and notes to our financial statements included elsewhere in this Quarterly Report on Form 10-Q. This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in financial condition and results of our operations and contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under the caption “Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and June 30, 2020, and in our Annual Report on Form 10-K for the year ended December 31, 2019. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we expressly disclaim any obligation to update any forward-looking statements.
Overview
We currently operate two primary business segments, Pay-TV and Wireless. Our Wireless segment consists of two business units, the Retail Wireless business unit and the 5G Network Deployment business unit.
Our Pay-TV business strategy is to be the best provider of video services in the United States by providing products with the best technology, outstanding customer service, and great value. We promote our Pay-TV services as providing our subscribers with a better “price-to-value” relationship than those available from other subscription television service providers. In connection with the growth in OTT industry, we promote our SLING TV services primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services.
Our Wireless business strategy is to commercialize our wireless spectrum licenses and related assets to deploy a 5G broadband network (“5G Network Deployment”) and offer a 5G broadband service. We are obligated by the FCC to offer 5G broadband service to certain population coverage targets and minimum core network, tower and spectrum use targets. We have issued requests for information and proposals (“RFI/Ps”) to various vendors in the wireless industry and are in the process of selecting certain vendors as we move forward with our 5G Network Deployment. In addition, we offer prepaid and postpaid retail wireless services to subscribers under our Boost Mobile and Ting Mobile brands, as well as a competitive portfolio of wireless devices. We offer customers value by providing choice and flexibility in our wireless service. We offer competitive consumer plans with no annual service contracts.
Financial Highlights
2020 Third Quarter Consolidated Results of Operations and Key Operating Metrics
| ● | Revenue of $4.532 billion |
| ● | Net income attributable to DISH Network of $505 million and basic and diluted earnings per share of common stock of $0.96 and $0.86, respectively |
| ● | Addition of approximately 116,000 net Pay-TV subscribers |
| ● | Loss of approximately 87,000 net DISH TV subscribers |
| ● | Addition of approximately 203,000 net SLING TV subscribers |
| ● | Pay-TV ARPU of $91.79 |
| ● | Gross new DISH TV subscriber activations of approximately 292,000 |
| ● | DISH TV churn rate of 1.41% |
| ● | DISH TV SAC of $864 |
| ● | Obtained over 9 million wireless subscribers through business combinations |
| ● | Gross new wireless subscriber activations of approximately 1.104 million |
| ● | Loss of approximately 212,000 net wireless subscribers |
| ● | Wireless ARPU of $38.17 |
78
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
| ● | Wireless churn rate of 4.64% |
Consolidated Financial Condition as of September 30, 2020
| ● | Cash, cash equivalents and current marketable investment securities of $2.795 billion |
| ● | Total assets of $36.100 billion |
| ● | Total long-term debt and finance lease obligations of $14.082 billion |
Recent Developments
COVID-19 Update
A novel strain of coronavirus which causes the disease COVID-19 has resulted in a worldwide health pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in global travel restrictions and business slowdowns or shutdowns. The COVID-19 pandemic has also created unanticipated circumstances and uncertainty, disruption, and significant volatility in the economic environment generally, which have and may continue to adversely affect our business operations and may materially and adversely affect our business, financial condition and results of operations. As the COVID-19 pandemic continues, many of our customers are impacted by recommendations and/or mandates from federal, state, and local authorities to practice social distancing, to refrain from gathering in groups and, in some areas, to refrain from non-essential movements outside of their homes. Governmental authorities are taking various actions in an effort to slow the spread of COVID-19. COVID-19 has impacted our business, in particular the following areas:
| ● | In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees. We have implemented increased health and safety practices including, increased use of personal protective equipment for employees to protect them and our subscribers, and temperature checks at certain locations. |
| ● | With respect to our wireless business, in March we provided access to certain of our wireless spectrum licenses to AT&T and T-Mobile for no cost for a 60-day period and NorthStar Wireless and SNR Wireless also provided access to certain of their wireless spectrum licenses at no cost to Verizon for a 60-day period. We extended access to certain wireless licenses for T-Mobile, this agreement expired on June 30, 2020. We are continuing our focus on our wireless initiatives, including our 5G Network Deployment. |
| ● | Our commercial business is impacted as many bars, restaurants, and other commercial establishments have been and continue to be recommended and/or mandated to suspend all non-essential “in-person” business operations and/or operate at reduced capacity. In addition, airlines and hotels significantly reduced operations as a result of government actions and/or related lower consumer demand. |
| ● | Beginning in the second half of March 2020, COVID-19 and the related governmental recommendations and/or mandates created reduced in person selling opportunities, and a reduction in customers’ willingness to open direct mail marketing and allow in-home technicians into their homes. As a result, we reduced our marketing expenditures and our gross new DISH TV subscribers began to decrease. |
| ● | Our retail wireless business was impacted as governmental recommendations and/or mandates caused temporary retail store closures and reduced in person selling opportunities. |
| ● | Our OnTech Smart Services and DISH Smart Home Services brands were impacted as in-home installation and support has been impacted by government actions and/or related lower consumer demand for these services. |
79
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
| ● | Widespread unemployment may impact our subscribers’ ability to pay for the services they receive and, as a result, we have increased our allowance for credit losses as a component of “Trade accounts receivable, net” as of September 30, 2020 on our Condensed Consolidated Balance Sheets. We continue to monitor the health of our business, including the potential impact of widespread unemployment on our subscribers’ ability to pay for the services they receive. |
| ● | Our supply chain has been impacted by COVID-19, and there have been and could be additional significant and unanticipated interruptions and/or delays in the supply of materials and/or equipment across our supply chain, due to, among other things, surges in COVID-19. Furthermore, we may not be able to diversify sources of supply in a timely manner to mitigate these interruptions and/or delays. These interruptions and/or delays in our supply chain could have a material adverse effect on our business, including our Pay-TV and Retail Wireless operations, our ability to meet our build-out requirement deadlines for our wireless spectrum licenses and our 5G Network Deployment generally. |
| ● | Due to the current economic climate, combined with changing needs of our customers and how we can best serve them, during the second quarter of 2020, we made the decision to reevaluate our organization. This included a focused set of staffing reductions to align our workforce to best serve our customers. |
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health agencies and may take additional actions based on their recommendations. In these circumstances, there may be developments beyond our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Acquisitions
We accounted for the Boost Mobile Acquisition and Ting Mobile Acquisition (as defined below) as business combinations. The identifiable assets acquired and liabilities assumed were recorded at their preliminary fair values as of the acquisition date and are consolidated into our financial statements. Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition from July 1, 2020 and the Ting Mobile Acquisition from August 1, 2020. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information.
Sprint Asset Acquisition
Asset Purchase Agreement. On July 26, 2019, we entered into an Asset Purchase Agreement (the “APA”) with T-Mobile US, Inc. (“TMUS”) and Sprint Corporation (“Sprint” and together with TMUS, the “Sellers” and given the consummation of the Sprint-TMUS merger, sometimes referred to as “NTM”) to acquire from NTM certain assets and liabilities associated with Sprint’s Boost Mobile and Sprint-branded prepaid mobile services businesses (the “Prepaid Business”) for an aggregate purchase price of $1.4 billion as adjusted for specific categories of net working capital on the Closing Date (the “Boost Mobile Acquisition”). Effective July 1, 2020 (the “Closing Date”), upon the terms and subject to the conditions set forth in the APA and in accordance with the Final Judgment (as defined below), we and NTM completed the Boost Mobile Acquisition.
80
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
In connection with the Boost Mobile Acquisition and the consummation of the Sprint-TMUS merger, we, TMUS, Sprint, Deutsche Telekom AG (“DT”) and SoftBank Group Corporation (“SoftBank”) came to an agreement with the United States Department of Justice (the “DOJ”) on key terms and approval of the Transaction Agreements (as defined below) and our wireless service business and spectrum. On July 26, 2019, we, TMUS, Sprint, DT and SoftBank (collectively, the “Defendants”) entered into a Stipulation and Order (the “Stipulation and Order”) with the DOJ binding the Defendants to a Proposed Final Judgment (the “Proposed Final Judgment”) which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the United States District Court for the District of Columbia (the “District Court”) on July 26, 2019 and on April 1, 2020, the Proposed Final Judgment was entered with the District Court (the Proposed Final Judgment as so entered with the District Court, the “Final Judgment”) and the Sellers consummated the Sprint-TMUS merger.
Ting Mobile Acquisition
On August 1, 2020, we entered into an asset purchase agreement with Tucows Inc. (“Tucows”) pursuant to which we purchased the assets of Ting Mobile, including over 200,000 Ting Mobile subscribers (the “Ting Mobile Acquisition”). In addition, we entered into a services agreement pursuant to which Tucows will act as a mobile virtual network enabler for certain of our retail wireless subscribers. The consideration for the Ting Mobile Acquisition is an earn out provision and the fair value of the earn out provision has been assigned to a customer relationship intangible that is recorded in “Intangible assets” on our Condensed Consolidated Balance Sheets. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Service revenue. “Service revenue” consists principally of Pay-TV subscriber revenue and fixed monthly recurring charges for wireless voice, text, and data services and other fees earned from our retail wireless business unit. Certain of the amounts included in “Service revenue” are not recurring on a monthly basis.
Equipment sales and other revenue. “Equipment sales and other revenue” principally includes the sale of wireless devices and the non-subsidized sales of Pay-TV equipment.
Cost of services. “Cost of services” principally include Pay-TV programming expenses and other operating costs related to our Pay-TV segment, costs of wireless services (including costs incurred under the MNSA), as well as costs associated with our SLING TV services.
Cost of sales - equipment and other. “Cost of sales – equipment and other” principally includes the cost of wireless devices and other related items as well as costs related to the non-subsidized sales of Pay-TV equipment. Costs are generally recognized as products are delivered to customers and the related revenue is recognized.
Selling, general and administrative expenses. “Selling, general and administrative expenses” consists primarily of direct sales costs, advertising, third-party commissions related to the acquisition of subscribers, costs related to the installation of our Pay-TV subscribers, the cost of subsidized sales of Pay-TV equipment and employee-related costs associated with administrative services such as legal, information systems, and accounting and finance.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” primarily includes interest expense (net of capitalized interest), prepayment premiums, amortization of debt discounts and debt issuance costs associated with our long-term debt, and interest expense associated with our finance lease obligations.
81
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Other, net. The main components of “Other, net” are gains and losses realized on the sale and/or conversion of marketable and non-marketable investment securities and derivative instruments, impairment of marketable and non-marketable investment securities, unrealized gains and losses from changes in fair value of certain marketable investment securities and derivative instruments, and equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as “Net income (loss) attributable to DISH Network” plus “Interest expense, net of amounts capitalized” net of “Interest income,” “Income tax (provision) benefit, net” and “Depreciation and amortization.” This “non-GAAP measure” is reconciled to “Net income (loss) attributable to DISH Network” in our discussion of “Results of Operations” below.
Operating income before depreciation and amortization (“OIBDA”). OIBDA is defined as “Operating income (loss)” plus “Depreciation and amortization.” This “non-GAAP measure” is reconciled to “Operating income (loss)” in our discussion of “Results of Operations” below.
DISH TV subscribers. We include customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our DISH TV subscriber count. We also provide DISH TV services to hotels, motels and other commercial accounts. For certain of these commercial accounts, we divide our total revenue for these commercial accounts by $34.99, and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our DISH TV subscriber count.
SLING TV subscribers. We include customers obtained through direct sales and third-party marketing agreements in our SLING TV subscriber count. SLING TV subscribers are recorded net of disconnects. SLING TV customers receiving service for no charge, under certain new subscriber promotions, are excluded from our SLING TV subscriber count. For customers who subscribe to multiple SLING TV packages, each customer is only counted as one SLING TV subscriber.
Pay-TV subscribers. Our Pay-TV subscriber count includes all DISH TV and SLING TV subscribers discussed above. For customers who subscribe to both our DISH TV services and our SLING TV services, each subscription is counted as a separate Pay-TV subscriber.
Pay-TV average monthly revenue per subscriber (“Pay-TV ARPU”). We are not aware of any uniform standards for calculating ARPU and believe presentations of ARPU may not be calculated consistently by other companies in the same or similar businesses. We calculate Pay-TV average monthly revenue per Pay-TV subscriber, or Pay-TV ARPU, by dividing average monthly Pay-TV “Service revenue,” excluding revenue from broadband services, for the period by our average number of Pay-TV subscribers for the period. The average number of Pay-TV subscribers is calculated for the period by adding the average number of Pay-TV subscribers for each month and dividing by the number of months in the period. The average number of Pay-TV subscribers for each month is calculated by adding the beginning and ending Pay-TV subscribers for the month and dividing by two. SLING TV subscribers on average purchase lower priced programming services than DISH TV subscribers, and therefore, as SLING TV subscribers increase, it has had a negative impact on Pay-TV ARPU.
DISH TV average monthly subscriber churn rate (“DISH TV churn rate”). We are not aware of any uniform standards for calculating subscriber churn rate and believe presentations of subscriber churn rates may not be calculated consistently by different companies in the same or similar businesses. We calculate DISH TV churn rate for any period by dividing the number of DISH TV subscribers who terminated service during the period by the average number of DISH TV subscribers for the same period, and further dividing by the number of months in the period. The average number of DISH TV subscribers is calculated for the period by adding the average number of DISH TV subscribers for each month and dividing by the number of months in the period. The average number of DISH TV subscribers for each month is calculated by adding the beginning and ending DISH TV subscribers for the month and dividing by two.
82
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH TV SAC. Subscriber acquisition cost measures are commonly used by those evaluating traditional companies in the pay-TV industry. We are not aware of any uniform standards for calculating the “average subscriber acquisition costs per new DISH TV subscriber activation,” or DISH TV SAC, and we believe presentations of pay-TV SAC may not be calculated consistently by different companies in the same or similar businesses. Our DISH TV SAC is calculated using all of costs of acquiring DISH TV subscribers (e.g., subsidized equipment, advertising, installation, commissions and direct sales, etc.) which are included in “Selling, general and administrative expenses,” plus capitalized payments made under certain sales incentive programs and the value of equipment capitalized under our lease program for new DISH TV subscribers, divided by gross new DISH TV subscriber activations. We include all new DISH TV subscribers in our calculation, including DISH TV subscribers added with little or no subscriber acquisition costs. Although we no longer have a separate line item for subscriber acquisition costs on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), our methodology for calculating DISH TV SAC is unchanged from prior periods.
Wireless subscribers. We include prepaid and postpaid customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our wireless subscriber count.
Wireless average monthly revenue per subscriber (“Wireless ARPU”). We calculate average monthly revenue per wireless subscriber, or Wireless ARPU, by dividing average monthly retail wireless “Service revenue” for the period by our average number of wireless subscribers for the period. The average number of wireless subscribers is calculated for the period by adding the average number of wireless subscribers for each month and dividing by the number of months in the period. The average number of wireless subscribers for each month is calculated by adding the beginning and ending wireless subscribers for the month and dividing by two.
Wireless average monthly subscriber churn rate (“Wireless churn rate”). We calculate our “Wireless churn rate” for any period by dividing the number of wireless subscribers who terminated service during the period by the average number of wireless subscribers for the same period, and further dividing by the number of months in the period. The average number of wireless subscribers is calculated for the period by adding the average number of wireless subscribers for each month and dividing by the number of months in the period. The average number of wireless subscribers for each month is calculated by adding the beginning and ending wireless subscribers for the month and dividing by two.
Free cash flow. We define free cash flow as “Net cash flows from operating activities” less “Purchases of property and equipment” and “Capitalized interest related to FCC authorizations,” as shown on our Condensed Consolidated Statements of Cash Flows.
83
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Segments
Business Segments
We currently operate two primary business segments: (1) our Pay-TV segment; and (2) our Wireless segment. Our Wireless segment consists of two business units, the Retail Wireless business unit and 5G Network Deployment business unit. Revenue and operating income by segment are shown in the table below:
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
| | | | | | | | | | | |
| | For the Three Months Ended | | | | | | ||||
| | September 30, | | Variance | |||||||
| | 2020 |
| 2019 | |
| Amount | | % | ||
| | (In thousands) | |||||||||
Revenue: | | | | | | | | | | | |
Pay-TV | | $ | 3,190,664 | | $ | 3,169,967 | | $ | 20,697 | | 0.7 |
Wireless | | | 1,341,512 | | | 64 | | | 1,341,448 | | * |
Eliminations | | | (585) | | | (1,668) | | | 1,083 | | 64.9 |
Total revenue | | $ | 4,531,591 | | $ | 3,168,363 | | $ | 1,363,228 | | 43.0 |
| | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | |
Pay-TV | | $ | 803,817 | | $ | 491,696 | | $ | 312,121 | | 63.5 |
Wireless | | | 7,431 | | | (22,804) | | | 30,235 | | * |
Eliminations | | | — | | | — | | | — | | * |
Total operating income (loss) | | $ | 811,248 | | $ | 468,892 | | $ | 342,356 | | 73.0 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total revenue. Our consolidated revenue totaled $4.532 billion for the three months ended September 30, 2020, an increase of $1.363 billion or 43.0% compared to the same period in 2019. The increase primarily resulted from the completion of the Boost Mobile Acquisition.
Total operating income (loss). Our consolidated operating income totaled $811 million for the three months ended September 30, 2020, an increase of $342 million or 73.0% compared to the same period in 2019. The change primarily resulted from an increase in operating income from our Pay-TV segment.
84
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
| | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | ||||
| | September 30, | | Variance | |||||||
| | 2020 |
| 2019 | |
| Amount | | % | ||
| | (In thousands) | |||||||||
Revenue: | | | | | | | | | | | |
Pay-TV | | $ | 9,595,131 | | $ | 9,569,972 | | $ | 25,159 | | 0.3 |
Wireless | | | 1,343,893 | | | 187 | | | 1,343,706 | | * |
Eliminations | | | (2,954) | | | (3,340) | | | 386 | | 11.6 |
Total revenue | | $ | 10,936,070 | | $ | 9,566,819 | | $ | 1,369,251 | | 14.3 |
| | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | |
Pay-TV | | $ | 2,040,970 | | $ | 1,406,179 | | $ | 634,791 | | 45.1 |
Wireless | | | (447,994) | | | (50,255) | | | (397,739) | | * |
Eliminations | | | — | | | — | | | — | | * |
Total operating income (loss) | | $ | 1,592,976 | | $ | 1,355,924 | | $ | 237,052 | | 17.5 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total revenue. Our consolidated revenue totaled $10.936 billion for the nine months ended September 30, 2020, an increase of $1.369 billion or 14.3% compared to the same period in 2019. The increase primarily resulted from the completion of the Boost Mobile Acquisition.
Total operating income (loss). Our consolidated operating income totaled $1.593 billion for the nine months ended September 30, 2020, an increase of $237 million or 17.5% compared to the same period in 2019. The change primarily resulted from an increase in the operating income from our Pay-TV segment, partially offset by an increase in operating losses associated with our Wireless segment, principally related to an “Impairment of long-lived assets” of $356 million in the first quarter of 2020.
85
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Pay-TV Segment
We are the nation’s fourth largest pay-TV provider and offer pay-TV services under the DISH® brand and the SLING® brand (collectively “Pay-TV” services). The DISH branded pay-TV service consists of, among other things, Federal Communications Commission (“FCC”) licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in our operations (“DISH TV”). We also design, develop and distribute receiver systems and provide digital broadcast operations, including satellite uplinking/downlinking, transmission and other services to third-party pay-TV providers. The SLING branded pay-TV services consist of, among other things, multichannel, live-linear streaming over-the-top (“OTT”), Internet-based domestic, international and Latino video programming services (“SLING TV”). As of September 30, 2020, we had 11.423 million Pay-TV subscribers in the United States, including 8.965 million DISH TV subscribers and 2.458 million SLING TV subscribers.
Competition has intensified in recent years as the pay-TV industry has matured. To differentiate our DISH TV services from our competitors, we offer the Hopper whole-home DVR and have continued to add functionality and simplicity for a more intuitive user experience. Our Hopper and Joey® whole-home DVR promotes a suite of integrated features and functionality designed to maximize the convenience and ease of watching TV anytime and anywhere. It also has several innovative features that a consumer can use, at his or her option, to watch and record television programming, through their televisions, streaming media devices, tablets, phones and computers. The Hopper 3, among other things, features 16 tuners, delivers an enhanced 4K Ultra HD experience, and supports up to seven TVs simultaneously.
We market our SLING TV services primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Our SLING TV services require an Internet connection and are available on multiple streaming-capable devices including streaming media devices, TVs, tablets, computers, game consoles and phones. We offer SLING International, SLING Latino and SLING domestic video programming services.
Our domestic SLING TV services have a single-stream service branded SLING Orange and a multi-stream service branded SLING Blue, which includes, among other things, the ability to stream on up to three devices simultaneously. We face competition from providers of video content distributed over the Internet including services with live-linear television programming, as well as single programmer offerings and offerings of large libraries of on-demand content, including in certain cases original content. These providers include, among others, Netflix, Hulu, Apple, Amazon, Alphabet, Disney, AT&T, ViacomCBS, STARZ, Peakcock, Fubo and Philo. Many of these companies have larger customer bases, stronger brand recognition and greater financial, marketing and other resources than we do. In addition, traditional providers of video entertainment, including broadcasters, cable channels and MVPDs, are increasing their Internet-based video offerings. Some of these services charge nominal or no fees for access to their content, which could adversely affect demand for our Pay-TV services. Moreover, new technologies have been, and will likely continue to be, developed that further increase the number of competitors we face with respect to video services, including competition from piracy-based video offerings.
This competition, among other things, has caused the rate of growth in subscribers to our SLING TV services to decrease. In June 2018, we launched additional SLING TV services which include offering consumers a la carte channel subscriptions, access to pay-per-view events and movies, and access to free content. There can be no assurance that these additional services and other offers will positively affect our results of operations or our net SLING TV subscribers.
86
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Trends in our Pay-TV Segment
Competition
Competition has intensified in recent years as the pay-TV industry has matured. With respect to our DISH TV services, we and our competitors increasingly must seek to attract a greater proportion of new subscribers from each other’s existing subscriber bases rather than from first-time purchasers of pay-TV services.
We incur significant costs to retain our existing DISH TV subscribers, mostly as a result of upgrading their equipment to next generation receivers, primarily including our Hopper receivers, and by providing retention credits. Our DISH TV subscriber retention costs may vary significantly from period to period.
Many of our competitors have been especially aggressive by offering discounted programming and services for both new and existing subscribers, including bundled offers combining broadband, video and/or wireless services and other promotional offers. Certain competitors have been able to subsidize the price of video services with the price of broadband and/or wireless services.
Our Pay-TV services also face increased competition from programmers and other companies who distribute video directly to consumers over the Internet. Our SLING TV services face increased competition from content providers and other companies, as well as traditional satellite television providers, cable companies and large telecommunications companies that are increasing their Internet-based video offerings. We also face competition from providers of video content distributed over the Internet including services with live-linear television programming, as well as single programmer offerings and offerings of large libraries of on-demand content, including in certain cases original content. These providers include, among others, Netflix, Hulu, Apple, Amazon, Alphabet, Disney, Verizon, AT&T, ViacomCBS, STARZ, Peakcock, Fubo and Philo. Furthermore, our DISH TV services face increased competition as programming offered over the Internet has become more prevalent and consumers are spending an increasing amount of time accessing video content via the Internet on their mobile devices.
Significant changes in consumer behavior with regard to the means by which consumers obtain video entertainment and information in response to digital media competition could have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business. In particular, consumers have shown increased interest in viewing certain video programming in any place, at any time and/or on any broadband-connected device they choose. Online content providers may cause our subscribers to disconnect our DISH TV services (“cord cutting”), downgrade to smaller, less expensive programming packages (“cord shaving”) or elect to purchase through these online content providers a certain portion of the services that they would have historically purchased from us, such as pay per view movies, resulting in less revenue to us.
Mergers and acquisitions, joint ventures and alliances among cable television providers, telecommunications companies, programming providers and others may result in, among other things, greater scale and financial leverage and increase the availability of offerings from providers capable of bundling video, broadband and/or wireless services in competition with our services and may exacerbate the risks described in our public filings. In October 2016, AT&T announced its acquisition of Time Warner, which was completed in June 2018. In December 2017, Walt Disney Company announced its acquisition of certain assets of Twenty-First Century Fox, Inc., which was completed in March 2019. These transactions may affect us adversely by, among other things, making it more difficult for us to obtain access to certain programming networks on nondiscriminatory and fair terms, or at all. For example, in connection with AT&T’s acquisition of Time Warner, Turner sent all of its distributors written, irrevocable offers to submit disputes over the price and other terms of Turner programming to binding arbitration and to guarantee continued access to that programming while any arbitration is pending. However, in October 2018, AT&T removed its HBO and Cinemax channels, which are not part of Turner, from our DISH TV and SLING TV programming lineup, as we and AT&T have been unable to negotiate the terms and conditions of a new programming carriage contract.
87
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
We implement new marketing promotions from time to time that are intended to increase our Pay-TV subscriber activations. For our DISH TV services, we have launched various marketing promotions offering certain DISH TV programming packages without a price increase for a commitment period. We also launched our Flex Pack skinny bundle with a core package of programming consisting of more than 50 channels and the choice of one of ten themed add-on channel packs, which include, among others, local broadcast networks and kids and general entertainment programming. Subscribers can also add or remove additional channel packs to best suit their entertainment needs. In addition, certain streaming apps, including, among others, Netflix, Amazon Prime Video and YouTube, have been integrated into select Hopper receiver systems. While we plan to implement new marketing efforts for our DISH TV services, there can be no assurance that we will ultimately be successful in increasing our gross new DISH TV subscriber activations.
Additionally, in response to our efforts, we may face increased competitive pressures, including aggressive marketing and retention efforts, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers.
For our SLING TV services, we offer a personalized TV experience with a customized channel line-up and two of the lowest priced multichannel live-linear online streaming services in the industry, our SLING Orange service and our SLING Blue service. While we plan to implement new marketing efforts for our SLING TV services, there can be no assurance that we will ultimately be successful in increasing our net SLING TV subscriber activations.
Our Pay-TV subscriber base has been declining due to, among other things, the factors described above. There can be no assurance that our Pay-TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. As our Pay-TV subscriber base continues to decline, it could have a material adverse long-term effect on our business, results of operations, financial condition and cash flow.
Programming
Our ability to compete successfully will depend, among other things, on our ability to continue to obtain desirable programming and deliver it to our subscribers at competitive prices. Programming costs represent a large percentage of our “Cost of services” and the largest component of our total expense. We expect these costs to continue to increase due to contractual price increases and the renewal of long-term programming contracts on less favorable pricing terms and certain programming costs are rising at a much faster rate than wages or inflation. In particular, the rates we are charged for retransmitting local broadcast channels have been increasing substantially and may exceed our ability to increase our prices to our customers. Going forward, our margins may face pressure if we are unable to renew our long-term programming contracts on acceptable pricing and other economic terms or if we are unable to pass these increased programming costs on to our customers.
Increases in programming costs have caused us to increase the rates that we charge to our subscribers, which could in turn cause our existing Pay-TV subscribers to disconnect our service or cause potential new Pay-TV subscribers to choose not to subscribe to our service. Additionally, even if our subscribers do not disconnect our services, they may purchase through new and existing online content providers a certain portion of the services that they would have historically purchased from us, such as pay-per-view movies, resulting in less revenue to us.
88
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Furthermore, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate may be negatively impacted if we are unable to renew our long-term programming carriage contracts before they expire. In the past, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate have been negatively impacted as a result of programming interruptions and threatened programming interruptions in connection with the scheduled expiration of programming carriage contracts with content providers. For example, in June 2018 and November 2018, Univision Communications Inc. (“Univision”) removed certain of its channels from our DISH TV and SLING TV programming lineup. On March 26, 2019, we and Univision signed a new programming carriage contract which restored certain of these Univision channels to our DISH TV programming lineup. In October 2018, AT&T removed its HBO and Cinemax channels from our DISH TV and SLING TV programming lineup, as we and AT&T have been unable to negotiate the terms and conditions of a new programming carriage contract. AT&T offers its programming, including its HBO and Cinemax channels, directly to consumers over the Internet and provides HBO for free to its subscribers under certain offers. In July 2019, Fox Regional Sports Networks (“RSNs”) also removed certain of its channels from our DISH TV and SLING TV programming lineup. In August 2019, Sinclair Broadcast Group acquired the Fox RSNs. We experienced a higher DISH TV churn rate, higher net Pay-TV subscriber losses and lower gross new DISH TV subscriber activations during 2018 and 2019, when Univision, AT&T and Sinclair RSNs removed certain of their channels from our DISH TV and SLING TV programming lineup. There can be no assurance that channel removals, such as the removal of the channels discussed above or others, will not have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business.
We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate resulting from additional programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses.
Operations and Customer Service
While competitive factors have impacted the entire pay-TV industry, our relative performance has also been driven by issues specific to us. In the past, our subscriber growth has been adversely affected by signal theft and other forms of fraud and by our operational inefficiencies. For our DISH TV services, in order to combat signal theft and improve the security of our broadcast system, we use microchips embedded in credit card sized access cards, called “smart cards,” or security chips in our DBS receiver systems to control access to authorized programming content (“Security Access Devices”). We expect that future replacements of these devices may be necessary to keep our system secure. To combat other forms of fraud, among other things, we monitor our independent third-party distributors’ and independent third-party retailers’ adherence to our business rules. Furthermore, for our SLING TV services, we encrypt programming content and use digital rights management software to, among other things, prevent unauthorized access to our programming content.
While we have made improvements in responding to and dealing with customer service issues, we continue to focus on the prevention of these issues, which is critical to our business, financial condition and results of operations. To improve our operational performance, we continue to make investments in staffing, training, information systems, and other initiatives, primarily in our call center and in-home service operations. These investments are intended to help combat inefficiencies introduced by the increasing complexity of our business, improve customer satisfaction, reduce churn, increase productivity, and allow us to scale better over the long run. We cannot be certain, however, that our spending will ultimately be successful in improving our operational performance.
89
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Master Transaction Agreement
On May 19, 2019, we and our wholly-owned subsidiary BSS Merger Sub Inc., (“Merger Sub”), entered into a Master Transaction Agreement (the “Master Transaction Agreement”) with EchoStar and EchoStar BSS Corporation, a wholly-owned subsidiary of EchoStar (“Newco”).
Pursuant to the Master Transaction Agreement, among other things: (i) EchoStar carried out an internal reorganization in which certain assets and liabilities of the EchoStar Satellite Services segment, the business segment of EchoStar that provides broadcast satellite operations and satellite services, as well as certain related licenses, real estate properties and employees (together, the “BSS Business”) were transferred to Newco (the “Pre-Closing Restructuring”); (ii) EchoStar distributed all outstanding shares of common stock, par value $0.001 per share, of Newco (such stock, “Newco Common Stock”) on a pro rata basis (the “Distribution”), to the holders of record of Class A common stock, par value $0.001 per share, of EchoStar and Class B common stock, par value $0.001 per share, of EchoStar; and (iii) upon the consummation of the Pre-Closing Restructuring and the Distribution, Merger Sub merged with and into Newco (the “Merger”) such that, upon consummation of the Merger, Merger Sub ceased to exist and Newco continued as our wholly-owned subsidiary.
Effective September 10, 2019, pursuant to the terms and subject to the conditions set forth in the Master Transaction Agreement, in consideration for the Merger, we issued 22,937,188 shares of our Class A common stock to the holders of Newco Common Stock at a ratio of 0.23523769 of our Class A common stock for each outstanding share of Newco Common Stock. The transaction was structured as a tax-free spin-off and merger.
In addition, as the result of the Merger, we, EchoStar and, as relevant, certain of our or their respective subsidiaries, entered into ancillary agreements involving tax, employment and intellectual property matters, which set forth certain rights and obligations of us and EchoStar and our and their respective subsidiaries related to the Merger with respect to, among other things: (i) the payment of tax liability refunds, and the filing of tax returns related to Newco and the BSS Business; (ii) the allocation of employment-related assets and liabilities between us and EchoStar; (iii) certain employee compensation, equity awards, benefit plans, programs and arrangements relating to employees who are expected to be transferred to us pursuant to the Merger; (iv) a cross-license between us and EchoStar for certain intellectual property either transferred to us as part of the Merger or retained by EchoStar that is also used in the BSS Business; and (v) the provision of certain telemetry, tracking and control services by us and our subsidiaries to EchoStar and its subsidiaries.
The description of the Master Transaction Agreement in this section is qualified in its entirety by reference to the complete text of the Master Transaction Agreement, a copy of which is filed as Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
The Merger was accounted for as an asset purchase, as substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets. As the Merger was between entities that were under common control, we recorded the assets and liabilities received under the Merger at EchoStar’s historical cost basis, with the offsetting amount recorded in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets. A significant portion of the assets received under the Merger were historically leased to us by EchoStar. As these assets and the related liabilities have been transferred to us pursuant to the Master Transaction Agreement, they are no longer be included in “Operating lease assets,” “Other current liabilities” and “Operating lease liabilities,” but rather in “Property and equipment, net” on our Condensed Consolidated Balance Sheets.
90
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – PAY-TV Segment
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 3,139,575 | | $ | 3,117,191 | | $ | 22,384 | | 0.7 | |
Equipment sales and other revenue | | | 51,089 | | | 52,776 | | | (1,687) | | (3.2) | |
Total revenue | | | 3,190,664 | | | 3,169,967 | | | 20,697 | | 0.7 | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 1,822,440 | | | 2,044,339 | | | (221,899) | | (10.9) | |
% of Service revenue | | | 58.0 | % | 65.6 | % | | | | | ||
Cost of sales - equipment and other | | | 31,044 | | | 43,517 | | | (12,473) | | (28.7) | |
Selling, general and administrative expenses | | | 381,116 | | 440,431 | | (59,315) | | (13.5) | | ||
% of Total revenue | | | 11.9 | % | 13.9 | % | | | | | ||
Depreciation and amortization | | | 152,247 | | | 149,984 | | | 2,263 | | 1.5 | |
Total costs and expenses | | | 2,386,847 | | | 2,678,271 | | | (291,424) | | (10.9) | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 803,817 | | $ | 491,696 | | $ | 312,121 | | 63.5 | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Pay-TV subscribers, as of period end (in millions) ** | | | 11.423 | | | 12.180 | | | (0.757) | | (6.2) | |
DISH TV subscribers, as of period end (in millions) ** | | | 8.965 | | | 9.494 | | | (0.529) | | (5.6) | |
SLING TV subscribers, as of period end (in millions) | | | 2.458 | | | 2.686 | | | (0.228) | | (8.5) | |
Pay-TV subscriber additions (losses), net (in millions) | | | 0.116 | | | 0.148 | | | (0.032) | | (21.6) | |
DISH TV subscriber additions (losses), net (in millions) | | | (0.087) | | | (0.066) | | | (0.021) | | (31.8) | |
SLING TV subscriber additions (losses), net (in millions) | | | 0.203 | | | 0.214 | | | (0.011) | | (5.1) | |
Pay-TV ARPU | | $ | 91.79 | | $ | 85.29 | | $ | 6.50 | | 7.6 | |
DISH TV subscriber additions, gross (in millions) | | | 0.292 | | | 0.416 | | | (0.124) | | (29.8) | |
DISH TV churn rate | | | 1.41 | % | 1.69 | % | (0.28) | % | (16.6) | | ||
DISH TV SAC | | $ | 864 | | $ | 827 | | $ | 37 | | 4.5 | |
Purchases of property and equipment | | | 90,948 | | | 116,227 | | | (25,279) | | (21.7) | |
OIBDA | | $ | 956,064 | | $ | 641,680 | | $ | 314,384 | | 49.0 | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
|
**During the first quarter 2020, we removed approximately 250,000 subscribers representing commercial accounts impacted by COVID-19 from our ending Pay-TV subscriber count. During the second and third quarters 2020, 45,000 and 35,000, respectively, of these subscribers came off pause or had temporary rate relief end and are included in our ending Pay-TV subscriber count as of September 30, 2020. See “Results of Operations – Pay-TV subscribers” for further information. |
91
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Pay TV subscribers
DISH TV subscribers. We lost approximately 87,000 net DISH TV subscribers during the three months ended September 30, 2020 compared to the loss of approximately 66,000 net DISH TV subscribers during the same period in 2019. This increase in net DISH TV subscriber losses primarily resulted from lower gross new DISH TV subscriber activations, partially offset by a lower DISH TV churn rate.
SLING TV subscribers. We added approximately 203,000 net SLING TV subscribers during the three months ended September 30, 2020 compared to the addition of approximately 214,000 net SLING TV subscribers during the same period in 2019. This decrease in net SLING TV subscriber additions was primarily related to lower SLING TV subscriber activations, increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, and delays and cancellations of sporting events as a result of COVID-19.
DISH TV subscribers, gross. During the three months ended September 30, 2020, we activated approximately 292,000 gross new DISH TV subscribers compared to approximately 416,000 gross new DISH TV subscribers during the same period in 2019, a decrease of 29.8%. This decrease in our gross new DISH TV subscriber activations was primarily related to the impact of COVID-19. Beginning in the second half of March 2020, COVID-19 and the related governmental recommendations and/or mandates created reduced in person selling opportunities, and a reduction in customers’ willingness to open direct mail marketing and allow in-home technicians into their homes as well as delays and cancellations of sporting events. As a result, beginning in the first quarter 2020, we reduced our marketing expenditures and our gross new DISH TV subscribers began to decrease. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our gross new DISH TV subscribers as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, our gross new DISH TV subscriber activations continue to be negatively impacted by stricter customer acquisition policies for our DISH TV subscribers, including an emphasis on acquiring higher quality subscribers, and by increased competitive pressures, including aggressive short term introductory pricing and bundled offers combining broadband, video and/or wireless services and other discounted promotional offers, and channel removals.
DISH TV churn rate. Our DISH TV churn rate for the three months ended September 30, 2020 was 1.41% compared to 1.69% for the same period in 2019. This decrease primarily resulted from the impact of COVID-19, including, among other things, the recommendations and/or mandates from federal, state, and local authorities that customers refrain from non-essential movements outside of their homes and the resulting increased consumption of our Pay-TV services. In addition, COVID-19 had an impact on competitive pressures due to, among other things, a reduction in customers’ willingness to allow competitors’ technicians into their homes. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, this decrease also resulted from our emphasis on acquiring and retaining higher quality subscribers. Our DISH TV churn rate continues to be adversely impacted by external factors, such as, among other things, increased competitive pressures, including aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers, as well as cord cutting. Our DISH TV churn rate is also impacted by internal factors, such as, among other things, our ability to consistently provide outstanding customer service, price increases, programming interruptions in connection with the scheduled expiration of certain programming carriage contracts, our ability to control piracy and other forms of fraud and the level of our retention efforts.
92
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Beginning in March 2020, several federal, state, and local government agencies implemented recommendations, guidelines, and orders regarding “social distancing” in an attempt to slow or stop the spread of COVID-19. As a result of these actions, many bars, restaurants, and other commercial establishments have been and continue to be recommended and/or ordered to suspend all non-essential “in-person” business operations and/or operate at reduced capacity. In addition, airlines and hotels significantly reduced operations as a result of government actions and/or related lower consumer demand. In an effort to avoid charging commercial customers for services in their establishments which are no longer open to the public, we have paused service or provided temporary rate relief for certain of those commercial accounts. For certain commercial accounts, each subscription is counted as one Pay-TV subscriber. For other commercial accounts, as discussed above, we divide our total revenue for these commercial accounts by $34.99, and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our Pay-TV subscriber count. During the first quarter 2020, we removed 250,000 subscribers from our ending Pay-TV subscriber count for commercial accounts we placed on pause, or received reduced revenue, or we anticipate the account to disconnect due to COVID-19. During the second and third quarters 2020, 45,000 and 35,000, respectively, of these subscribers came off pause or had temporary rate relief end and 17,000 and 5,000, respectively, of these subscribers disconnected.
We have not incurred and do not expect to incur any significant expenses in connection with the return of these commercial accounts and accordingly, these commercial accounts were added to our ending subscriber count and were not recorded as gross new Pay-TV subscriber activations. We cannot predict when the remaining commercial accounts will be able to fully reopen, how many will return or when they may return to active subscriber status, and there can be no assurance that they will return. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our subscriber base, gross new DISH TV subscribers and our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and our reduced ability to perform our in-home service operations due to the impact of social distancing. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition and results of operations.
We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV subscriber churn rate resulting from programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses.
We have not always met our own standards for performing high-quality installations, effectively resolving subscriber issues when they arise, answering subscriber calls in an acceptable timeframe, effectively communicating with our subscriber base, reducing calls driven by the complexity of our business, improving the reliability of certain systems and subscriber equipment and aligning the interests of certain independent third-party retailers and installers to provide high-quality service. Most of these factors have affected both gross new DISH TV subscriber activations as well as DISH TV subscriber churn rate. Our future gross new DISH TV subscriber activations and our DISH TV subscriber churn rate may be negatively impacted by these factors, which could in turn adversely affect our revenue.
Service revenue. “Service revenue” totaled $3.140 billion for the three months ended September 30, 2020, an increase of $22 million or 0.7% compared to the same period in 2019. The increase in “Service revenue” compared to the same period in 2019 was primarily related to an increase in Pay-TV ARPU, discussed below, partially offset by lower average Pay-TV subscriber base.
Pay-TV ARPU. Pay-TV ARPU was $91.79 during the three months ended September 30, 2020 versus $85.29 during the same period in 2019. The $6.50 or 7.6% increase in Pay-TV ARPU was primarily attributable to the DISH TV programming package price increases in the first quarter 2020 and 2019, the SLING TV programming package price increases in the first quarter 2020 and fourth quarter 2019, and an increase in revenue related to advertising sales. In addition, Pay-TV ARPU for the three months ended September 30, 2020 was positively impacted by fewer commercial accounts compared to the same period in 2019. Commercial accounts have lower Pay-TV ARPU than residential subscribers, and therefore, the decrease in commercial accounts had a positive impact on Pay-TV ARPU.
93
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Cost of services. “Cost of services” totaled $1.822 billion during the three months ended September 30, 2020, a decrease of $222 million or 10.9% compared to the same period in 2019. The decrease in “Cost of services” was primarily attributable to a lower average Pay-TV subscriber base, a decrease in variable and retention costs per subscriber, lower programming costs per subscriber and the reduction of expense associated with the transfer of certain assets to us pursuant to the Master Transaction Agreement. Variable and retention costs per subscriber decreased due to, among other things, increased operational efficiencies, including a focused set of staffing reductions, and fewer customer upgrades. Programming costs per subscriber decreased during the three months ended September 30, 2020 due to, among others, Sinclair RSN’s removal of certain of their channels from our programming lineup in July 2019 and multiple one-time programming adjustments. These decreases were partially offset by increases in programming costs per subscriber related to rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates, particularly for local broadcast channels. “Cost of services” represented 58.0% and 65.6% of “Service revenue” during the three months ended September 30, 2020 and 2019, respectively. See Note 14 in the Notes to our Condensed Consolidated Financial Statements for further information on the Master Transaction Agreement.
In the normal course of business, we enter into contracts to purchase programming content in which our payment obligations are generally contingent on the number of Pay-TV subscribers to whom we provide the respective content. Our “Cost of services” have and will continue to face further upward pressure from price increases and the renewal of long-term programming contracts on less favorable pricing terms. In addition, our programming expenses will increase to the extent we are successful in growing our Pay-TV subscriber base.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $381 million during the three months ended September 30, 2020, a $59 million or 13.5% decrease compared to the same period in 2019. This change was primarily driven by a decrease in subscriber acquisition costs resulting from fewer gross new DISH TV subscriber activations, and by cost cutting initiatives in the Pay-TV segment, including a focused set of staffing reductions.
DISH TV SAC. DISH TV SAC was $864 during the three months ended September 30, 2020 compared to $827 during the same period in 2019, an increase of $37 or 4.5%. This change was primarily attributable to an increase in advertising costs per subscriber.
During the three months ended September 30, 2020 and 2019, the amount of equipment capitalized under our lease program for new DISH TV subscribers totaled $49 million and $66 million, respectively. This decrease in capital expenditures primarily resulted from a decrease in gross new DISH TV subscriber activations.
To remain competitive, we upgrade or replace subscriber equipment periodically as technology changes, and the costs associated with these upgrades may be substantial. To the extent technological changes render a portion of our existing equipment obsolete, we would be unable to redeploy all returned equipment and consequently would realize less benefit from the DISH TV SAC reduction associated with redeployment of that returned lease equipment.
Our “DISH TV SAC” may materially increase in the future to the extent that we, among other things, transition to newer technologies, introduce more aggressive promotions, or provide greater equipment subsidies. See further information under “Liquidity and Capital Resources – Subscriber Acquisition and Retention Costs.”
94
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 9,455,429 | | $ | 9,427,533 | | $ | 27,896 | | 0.3 | |
Equipment sales and other revenue | | | 139,702 | | | 142,439 | | | (2,737) | | (1.9) | |
Total revenue | | | 9,595,131 | | | 9,569,972 | | | 25,159 | | 0.3 | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 5,838,595 | | | 6,354,775 | | | (516,180) | | (8.1) | |
% of Service revenue | | | 61.7 | % | 67.4 | % | | | | | ||
Cost of sales - equipment and other | | | 89,881 | | | 133,584 | | | (43,703) | | (32.7) | |
Selling, general and administrative expenses | | | 1,160,791 | | 1,223,037 | | (62,246) | | (5.1) | | ||
% of Total revenue | | | 12.1 | % | 12.8 | % | | | | | ||
Depreciation and amortization | | | 464,894 | | | 452,397 | | | 12,497 | | 2.8 | |
Total costs and expenses | | | 7,554,161 | | | 8,163,793 | | | (609,632) | | (7.5) | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 2,040,970 | | $ | 1,406,179 | | $ | 634,791 | | 45.1 | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Pay-TV subscribers, as of period end (in millions) ** | | | 11.423 | | | 12.180 | | | (0.757) | | (6.2) | |
DISH TV subscribers, as of period end (in millions) ** | | | 8.965 | | | 9.494 | | | (0.529) | | (5.6) | |
SLING TV subscribers, as of period end (in millions) | | | 2.458 | | | 2.686 | | | (0.228) | | (8.5) | |
Pay-TV subscriber additions (losses), net (in millions) | | | (0.393) | | | (0.142) | | | (0.251) | | * | |
DISH TV subscriber additions (losses), net (in millions) | | | (0.259) | | | (0.411) | | | 0.152 | | 37.0 | |
SLING TV subscriber additions (losses), net (in millions) | | | (0.134) | | | 0.269 | | | (0.403) | | * | |
Pay-TV ARPU | | $ | 90.88 | | $ | 85.55 | | $ | 5.33 | | 6.2 | |
DISH TV subscriber additions, gross (in millions) | | | 0.859 | | | 1.007 | | | (0.148) | | (14.7) | |
DISH TV churn rate | | | 1.36 | % | 1.64 | % | (0.28) | % | (17.1) | | ||
DISH TV SAC | | $ | 854 | | $ | 813 | | $ | 41 | | 5.0 | |
Purchases of property and equipment | | | 244,744 | | | 300,169 | | | (55,425) | | (18.5) | |
OIBDA | | $ | 2,505,864 | | $ | 1,858,576 | | $ | 647,288 | | 34.8 | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
|
**During the first quarter 2020, we removed approximately 250,000 subscribers representing commercial accounts impacted by COVID-19 from our ending Pay-TV subscriber count. During the second and third quarters 2020, 45,000 and 35,000, respectively, of these subscribers came off pause or had temporary rate relief end and are included in our ending Pay-TV subscriber count as of September 30, 2020. The effect of the removal of these 250,000 subscribers as of March 31, 2020 and the addition of these 80,000 subscribers as of September 30, 2020 was excluded from the calculation of our gross new Pay-TV subscriber activations, net Pay-TV subscriber additions/losses and Pay-TV churn rate for the nine months ended September 30, 2020. See “Results of Operations – Pay-TV subscribers” for further information. |
95
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Pay TV subscribers
DISH TV subscribers. We lost approximately 259,000 net DISH TV subscribers during the nine months ended September 30, 2020 compared to the loss of approximately 411,000 net DISH TV subscribers during the same period in 2019. This decrease in net DISH TV subscriber losses primarily resulted from a lower DISH TV churn rate, partially offset by lower gross new DISH TV subscriber activations.
SLING TV subscribers. We lost approximately 134,000 net SLING TV subscribers during the nine months ended September 30, 2020 compared to the addition of approximately 269,000 net SLING TV subscribers during the same period in 2019. This decrease in net SLING TV subscriber additions was primarily related to lower SLING TV subscriber activations, increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, and delays and cancellations of sporting events as a result of COVID-19.
DISH TV subscribers, gross. During the nine months ended September 30, 2020, we activated approximately 859,000 gross new DISH TV subscribers compared to approximately 1.007 million gross new DISH TV subscribers during the same period in 2019, a decrease of 14.7%. This decrease in our gross new DISH TV subscriber activations was primarily related to the impact of COVID-19. Beginning in the second half of March 2020, COVID-19 and the related governmental recommendations and/or mandates created reduced in person selling opportunities, and a reduction in customers’ willingness to open direct mail marketing and allow in-home technicians into their homes as well as delays and cancellations of sporting events. As a result, beginning in the first quarter 2020, we reduced our marketing expenditures and our gross new DISH TV subscribers began to decrease. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our gross new DISH TV subscribers as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, our gross new DISH TV subscriber activations continue to be negatively impacted by stricter customer acquisition policies for our DISH TV subscribers, including an emphasis on acquiring higher quality subscribers, and by increased competitive pressures, including aggressive short term introductory pricing and bundled offers combining broadband, video and/or wireless services and other discounted promotional offers, and channel removals.
DISH TV churn rate. Our DISH TV churn rate for the nine months ended September 30, 2020 was 1.36% compared to 1.64% for the same period in 2019. This decrease primarily resulted from the impact of COVID-19, including, among other things, the recommendations and/or mandates from federal, state, and local authorities that customers refrain from non-essential movements outside of their homes and the resulting increased consumption of our Pay-TV services. In addition, COVID-19 had an impact on competitive pressures due to, among other things, a reduction in customers’ willingness to allow competitors’ technicians into their homes and delays and cancellations of sporting events that reduced the attractiveness of competitors’ promotional offers and services. Furthermore, our DISH TV churn rate for the nine months ended September 30, 2019 was negatively impacted by Univision’s removal of certain of their channels from our programming lineup. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, this decrease also resulted from our emphasis on acquiring and retaining higher quality subscribers. Our DISH TV churn rate continues to be adversely impacted by external factors, such as, among other things, increased competitive pressures, including aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers, as well as cord cutting. Our DISH TV churn rate is also impacted by internal factors, such as, among other things, our ability to consistently provide outstanding customer service, price increases, programming interruptions in connection with the scheduled expiration of certain programming carriage contracts, our ability to control piracy and other forms of fraud and the level of our retention efforts.
96
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Beginning in March 2020, several federal, state, and local government agencies implemented recommendations, guidelines, and orders regarding “social distancing” in an attempt to slow or stop the spread of COVID-19. As a result of these actions, many bars, restaurants, and other commercial establishments have been and continue to be recommended and/or ordered to suspend all non-essential “in-person” business operations and/or operate at reduced capacity. In addition, airlines and hotels significantly reduced operations as a result of government actions and/or related lower consumer demand. In an effort to avoid charging commercial customers for services in their establishments which are no longer open to the public, we have paused service or provided temporary rate relief for certain of those commercial accounts. For certain commercial accounts, each subscription is counted as one Pay-TV subscriber. For other commercial accounts, as discussed above, we divide our total revenue for these commercial accounts by $34.99, and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our Pay-TV subscriber count. During the first quarter 2020, we removed 250,000 subscribers from our ending Pay-TV subscriber count for commercial accounts we placed on pause, or received reduced revenue, or we anticipate the account to disconnect due to COVID-19. During the second and third quarters 2020, 45,000 and 35,000, respectively, of these subscribers came off pause or had temporary rate relief end and 17,000 and 5,000, respectively, of these subscribers disconnected.
We have not incurred and do not expect to incur any significant expenses in connection with the return of these commercial accounts and accordingly, these commercial accounts were added to our ending subscriber count and were not recorded as gross new Pay-TV subscriber activations. We cannot predict when the remaining commercial accounts will be able to fully reopen, how many will return or when they may return to active subscriber status, and there can be no assurance that they will return. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our subscriber base, gross new DISH TV subscribers and our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and our reduced ability to perform our in-home service operations due to the impact of social distancing. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition and results of operations.
Service revenue. “Service revenue” totaled $9.455 billion for the nine months ended September 30, 2020, an increase of $28 million or 0.3% compared to the same period in 2019. The increase in “Service revenue” compared to the same period in 2019 was primarily related to an increase in Pay-TV ARPU discussed below, partially offset by a lower average Pay-TV subscriber base.
Pay-TV ARPU. Pay-TV ARPU was $90.88 during the nine months ended September 30, 2020 versus $85.55 during the same period in 2019. The $5.33 or 6.2% increase in Pay-TV ARPU was primarily attributable to the DISH TV programming package price increases in the first quarter 2020 and 2019, the SLING TV programming package price increases in the first quarter 2020 and fourth quarter 2019 and fewer commercial accounts compared to the same period in 2019, which have lower Pay-TV ARPU than residential subscribers.
97
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Cost of services. “Cost of services” totaled $5.839 billion during the nine months ended September 30, 2020, a decrease of $516 million or 8.1% compared to the same period in 2019. The decrease in “Cost of services” was primarily attributable to a lower average Pay-TV subscriber base, lower programming costs per subscriber and the reduction of expense associated with the transfer of certain assets to us pursuant to the Master Transaction Agreement. Programming costs per subscriber decreased during the nine months ended September 30, 2020 due to, among others, Sinclair RSN’s removal of certain of their channels from our programming lineup in July 2019 and multiple one-time programming adjustments in the third quarter 2020. These decreases were partially offset by increases in programming costs per subscriber related to rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates, particularly for local broadcast channels. “Cost of services” represented 61.7% and 67.4% of “Service revenue” during the nine months ended September 30, 2020 and 2019, respectively. See Note 14 in the Notes to our Condensed Consolidated Financial Statements for further information on the Master Transaction Agreement.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $1.161 billion during the nine months ended September 30, 2020, a $62 million or 5.1% decrease compared to the same period in 2019.
This change was primarily driven by a decrease in subscriber acquisition costs resulting from fewer gross new DISH TV subscriber activations, and by cost cutting initiatives in the Pay-TV segment, including a focused set of staffing reductions.
DISH TV SAC. DISH TV SAC was $854 during the nine months ended September 30, 2020 compared to $813 during the same period in 2019, an increase of $41 or 5.0%. This change was primarily attributable to fewer commercial additions compared to the same period in 2019, which historically have lower DISH TV SAC than residential activations, and an increase in advertising costs per subscriber.
During the nine months ended September 30, 2020 and 2019, the amount of equipment capitalized under our lease program for new DISH TV subscribers totaled $120 million and $143 million, respectively. This decrease in capital expenditures primarily resulted from a decrease in gross new DISH TV subscriber activations.
98
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless Segment
Our wireless business segment operates in two business units, Retail Wireless and 5G Network Deployment. Revenue, operating income and purchases of property and equipment by business unit are shown in the table below:
| | | | | | | | | | |
|
| | | | | |
| |||
| | | | | | | | | | |
Three Months Ended September 30, 2020 | | | Retail Wireless | | | 5G Network Deployment | | | Total Wireless | |
| | (In thousands) | | |||||||
Total revenue | | $ | 1,338,167 | | $ | 3,345 | | $ | 1,341,512 | |
Operating income (loss) | | $ | 34,858 | | $ | (27,427) | | $ | 7,431 | |
Purchases of property and equipment | | $ | — | | $ | 21,884 | | $ | 21,884 | |
| | | | | | | | | | |
| | | | | | | | | | |
Nine Months Ended September 30, 2020 | | | Retail Wireless | | | 5G Network Deployment | | | Total Wireless | |
| | (In thousands) | | |||||||
Total revenue | | $ | 1,338,167 | | $ | 5,726 | | $ | 1,343,893 | |
Operating income (loss) | | $ | 19,323 | | $ | (467,317) | | $ | (447,994) | |
Purchases of property and equipment | | $ | — | | $ | 64,805 | | $ | 64,805 | |
| | | | | | | | | | |
Wireless – Retail Wireless
As a result of the Boost Mobile Acquisition and the Ting Mobile Acquisition, we have entered the retail wireless business. See Note 5 for further information. We offer nationwide prepaid and postpaid retail wireless services to subscribers under our Boost Mobile and Ting Mobile brands, as well as a competitive portfolio of wireless devices. Prepaid wireless subscribers generally include customers who pay in advance for monthly access to wireless talk, text, and data services. Postpaid wireless subscribers generally include subscribers who are qualified to pay after receiving wireless talk, text, and data services. We currently operate our retail wireless business unit as a mobile virtual network operator (“MVNO”) while we build our 5G broadband network. We acquired over 9 million subscribers as a result of the Boost Mobile Acquisition and acquired over 200,000 subscribers as a result of the Ting Mobile Acquisition. Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition from July 1, 2020 and Ting Mobile Acquisition from August 1, 2020. As of September 30, 2020, we had 9.418 million retail wireless subscribers.
Currently, we offer wireless customers competitive consumer plans with no annual service contracts and monthly service plans offered range from $10 for 1GB of high-speed data and unlimited talk and text to $60 for unlimited data, talk and text. Boost Mobile features a “Shrink It!” plan whereby the longer a customer stays with Boost Mobile, the less they pay for a similar level of service.
Boost Mobile operates within the prepaid wireless space. Customers pay in advance for monthly access to talk, text and data. Prepaid Wireless is a mature market with moderate year-over-year organic growth. Primary competitors to Boost Mobile include Metro PCS (owned by T-Mobile), Cricket Wireless (owned by AT&T) and Tracfone Wireless. Verizon announced its acquisition of Tracfone Wireless in September 2020. Verizon, AT&T, and T-Mobile are currently the only nationwide Mobile Network Operators (“MNO’s”) in the United States and are the three largest providers of retail wireless services in the United States.
99
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless – 5G Network Deployment
Since 2008, we have directly invested over $11 billion to acquire certain wireless spectrum licenses and related assets and made over $10 billion in non-controlling investments in certain entities, for a total of over $21 billion. The $21 billion of investments related to wireless spectrum licenses does not include $5 billion of capitalized interest related to the carrying value of such licenses. See Note 2 “Capitalized Interest” in the Notes to our Condensed Consolidated Financial Statements for further information on capitalized interest.
DISH Network Spectrum
We have directly invested over $11 billion to acquire certain wireless spectrum licenses and related assets. These wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. In March 2017, we notified the FCC that we planned to deploy a narrowband IoT network on certain of these wireless licenses, which was to be the first phase of our network deployment (“First Phase”). We expected to complete the First Phase by March 2020, with subsequent phases to be completed thereafter. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines was probable and, therefore, we no longer intended to complete our narrowband IoT deployment. The FCC issued an Order effectuating the build-out deadline changes contemplated above on September 11, 2020.
During the first quarter 2020, we impaired certain assets that would not be utilized in our 5G broadband network deployment (“5G Network Deployment”), resulting in a $253 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We have issued RFI/Ps to various vendors in the wireless industry and are in the process of selecting certain vendors as we move forward with our 5G Network Deployment. We currently expect expenditures for our 5G Network Deployment to be approximately $10 billion, excluding capitalized interest. We will need to make significant additional investments or partner with others to, among other things, commercialize, build-out, and integrate these licenses and related assets, and any additional acquired licenses and related assets; and comply with regulations applicable to such licenses.
Depending on the nature and scope of such commercialization, build-out, integration efforts, and regulatory compliance, any such investments or partnerships could vary significantly. In addition, as we consider our options for the commercialization of our wireless spectrum, we will incur significant additional expenses and will have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure. We may also determine that additional wireless spectrum licenses may be required to commercialize our wireless business and to compete with other wireless service providers. See Note 2 “Capitalized Interest” and Note 11 “Commitments and Contingencies – Commitments – Wireless – DISH Network Spectrum” in the Notes to our Condensed Consolidated Financial Statements for further information.
100
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American AWS-3 Wireless II L.L.C. (“American II”) and American AWS-3 Wireless III L.L.C. (“American III”), we initially made over $10 billion in certain non-controlling investments in Northstar Spectrum, LLC (“Northstar Spectrum”), the parent company of Northstar Wireless, L.L.C. (“Northstar Wireless,” and collectively with Northstar Spectrum, the “Northstar Entities”), and in SNR Wireless HoldCo, LLC (“SNR HoldCo”), the parent company of SNR Wireless LicenseCo, LLC (“SNR Wireless,” and collectively with SNR HoldCo, the “SNR Entities”), respectively. On October 27, 2015, the FCC granted certain AWS-3 wireless spectrum licenses (the “AWS-3 Licenses”) to Northstar Wireless and to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. Under the applicable accounting guidance in Accounting Standards Codification 810, Consolidation (“ASC 810”), Northstar Spectrum and SNR HoldCo are considered variable interest entities and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out, integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. See Note 11 “Commitments and Contingencies – DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses” in the Notes to our Condensed Consolidated Financial Statements for further information.
We may need to raise significant additional capital in the future to fund the efforts described above, which may not be available on acceptable terms or at all. There can be no assurance that we, the Northstar Entities and/or the SNR Entities will be able to develop and implement business models that will realize a return on these wireless spectrum licenses or that we, the Northstar Entities and/or the SNR Entities will be able to profitably deploy the assets represented by these wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations. See Note 11 “Commitments and Contingencies” in the Notes to our Condensed Consolidated Financial Statements for further information.
101
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Wireless Segment – Retail Wireless Business Unit
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 | 2019 |
| Amount |
| % |
| ||||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 1,082,570 | | $ | — | | $ | 1,082,570 | | * | |
Equipment sales and other revenue | | | 255,597 | | | — | | | 255,597 | | * | |
Total revenue | | | 1,338,167 | | | — | | | 1,338,167 | | * | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 666,534 | | | — | | | 666,534 | | * | |
% of Service revenue | | | 61.6 | % | * | % | | | | | ||
Cost of sales - equipment and other | | | 481,121 | | | — | | | 481,121 | | * | |
Selling, general and administrative expenses | | | 111,617 | | | — | | 111,617 | | * | | |
% of Total revenue | | | 8.3 | % | * | % | | | | | ||
Depreciation and amortization | | | 44,037 | | | — | | | 44,037 | | * | |
Total costs and expenses | | | 1,303,309 | | | — | | | 1,303,309 | | * | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 34,858 | | $ | — | | $ | 34,858 | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Wireless subscribers, as of period end (in millions) | | | 9.418 | | | — | | | 9.418 | | * | |
Wireless subscriber additions, gross (in millions) | | | 1.104 | | | — | | | 1.104 | | * | |
Wireless subscriber additions (losses), net (in millions) | | | (0.212) | | | — | | | (0.212) | | * | |
Wireless ARPU | | $ | 38.17 | | $ | — | | $ | 38.17 | | * | |
Wireless churn rate | | | 4.64 | % | — | % | 4.64 | % | * | | ||
OIBDA | | $ | 78,895 | | $ | — | | $ | 78,895 | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
The above includes the results of the Boost Mobile Acquisition from July 1, 2020 and the Ting Mobile Acquisition from August 1, 2020. During the third quarter 2020, we added over 9 million wireless subscribers as a result of acquisitions and lost 212,000 net wireless subscribers as a result of implementing certain operational changes. We are currently in the process of integrating our retail wireless operations and making certain operational changes to enhance profitability. We are working to ensure that the customers we acquire and retain are profitable under our MVNO economics. As an example, certain subscribers that use high amounts of data, may be profitable for an MNO, but are not profitable under an MVNO.
102
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % | | |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 1,082,570 | | $ | — | | $ | 1,082,570 | | * | |
Equipment sales and other revenue | | | 255,597 | | | — | | | 255,597 | | * | |
Total revenue | | | 1,338,167 | | | — | | | 1,338,167 | | * | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 666,534 | | | — | | | 666,534 | | * | |
% of Service revenue | | | 61.6 | % | * | % | | | | | ||
Cost of sales - equipment and other | | | 481,122 | | | — | | | 481,122 | | * | |
Selling, general and administrative expenses | | | 127,151 | | | — | | 127,151 | | * | | |
% of Total revenue | | | 9.5 | % | * | % | | | | | ||
Depreciation and amortization | | | 44,037 | | | — | | | 44,037 | | * | |
Total costs and expenses | | | 1,318,844 | | | — | | | 1,318,844 | | * | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 19,323 | | $ | — | | $ | 19,323 | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Wireless subscribers, as of period end (in millions) | | | 9.418 | | | — | | | 9.418 | | * | |
Wireless subscriber additions, gross (in millions) | | | 1.104 | | | — | | | 1.104 | | * | |
Wireless subscriber additions (losses), net (in millions) | | | (0.212) | | | — | | | (0.212) | | * | |
Wireless ARPU | | $ | 38.17 | | | — | | $ | 38.17 | | * | |
Wireless churn rate | | | 4.64 | % | — | | | 4.64 | % | * | | |
OIBDA | | $ | 63,360 | | | — | | $ | 63,360 | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
The nine months ended September 30, 2020 includes the activity from the Boost Mobile Acquisition on July 1, 2020 and the Ting Mobile Acquisition on August 1, 2020, as well as certain transaction costs that took place prior to the Boost Mobile Acquisition which are recorded in “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Operations.
103
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Wireless Segment – 5G Network Deployment Business Unit
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Equipment sales and other revenue | | | 3,345 | | | 64 | | | 3,281 | | * | |
Total revenue | | | 3,345 | | | 64 | | | 3,281 | | * | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of sales - equipment and other | | | 3,478 | | | 9,480 | | | (6,002) | | (63.3) | |
Selling, general and administrative expenses | | | 24,495 | | | 9,191 | | | 15,304 | | * | |
Depreciation and amortization | | | 2,799 | | | 4,197 | | | (1,398) | | (33.3) | |
Total costs and expenses | | | 30,772 | | | 22,868 | | | 7,904 | | 34.6 | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (27,427) | | $ | (22,804) | | $ | (4,623) | | (20.3) | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Purchases of property and equipment | | $ | 21,884 | | $ | 63,453 | | $ | (41,569) | | (65.5) | |
OIBDA | | $ | (24,628) | | $ | (18,607) | | $ | (6,021) | | (32.4) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $3 million for the three months ended September 30, 2020, an increase of $3 million compared to the same period in 2019. This increase primarily resulted from leasing a portion of our 600MHz spectrum licenses to TMUS, which began on September 11, 2020. The spectrum lease with TMUS will result in $56 million of annual revenue during its 42 month term, subject to our right to terminate individual licenses prior to 42 months. The specific termination rights vary by license.
Selling, general and administrative expenses “Selling, general and administrative expenses” totaled $24 million during the three months ended September 30, 2020, a $15 million increase compared to the same period in 2019. This increase was primarily driven by an increase in general and administrative expenses related to our 5G Network Deployment.
Purchases of property and equipment. “Purchases of property and equipment” totaled $22 million for the three months ended September 30, 2020, a decrease of $42 million compared to the same period in 2019. The three months ended September 30, 2019 was impacted by capital expenditures related to our narrowband IoT deployment for which we determined in the first quarter of 2020 that we would no longer complete. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information. Capital expenditures for the three months ended September 30, 2020 are related to our 5G Network Deployment. We anticipate expenditures for our 5G Network Deployment to remain at a similar level during the fourth quarter 2020, and increase substantially during the second half of 2021 as we ramp up the build-out phase of our 5G Network Deployment.
104
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % | | |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Equipment sales and other revenue | | | 5,726 | | | 187 | | | 5,539 | | * | |
Total revenue | | | 5,726 | | | 187 | | | 5,539 | | * | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of sales - equipment and other | | | 15,669 | | | 13,626 | | | 2,043 | | 15.0 | |
Selling, general and administrative expenses | | | 91,860 | | | 32,191 | | | 59,669 | | * | |
Depreciation and amortization | | | 9,096 | | | 4,625 | | | 4,471 | | 96.7 | |
Impairment of long-lived assets | | | 356,418 | | | — | | | 356,418 | | * | |
Total costs and expenses | | | 473,043 | | | 50,442 | | | 422,601 | | * | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (467,317) | | $ | (50,255) | | $ | (417,062) | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Purchases of property and equipment | | $ | 64,805 | | $ | 161,233 | | $ | (96,428) | | (59.8) | |
OIBDA | | $ | (458,221) | | $ | (45,630) | | $ | (412,591) | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $6 million for the nine months ended September 30, 2020, an increase of $6 million compared to the same period in 2019. This increase primarily resulted from leasing a portion of our 600MHz spectrum licenses to TMUS, which began on September 11, 2020. The spectrum lease with TMUS will result in $56 million of annual revenue during its 42 month term, subject to our right to terminate individual licenses prior to 42 months. The specific termination rights vary by license.
Selling, general and administrative expenses “Selling, general and administrative expenses” totaled $92 million during the nine months ended September 30, 2020, a $60 million increase compared to the same period in 2019. This increase was primarily driven by an increase in general and administrative expenses related to our 5G Network Deployment.
Impairment of long-lived assets. “Impairment of long-lived assets” of $356 million during the nine months ended September 30, 2020 resulted from impairments of the T1 satellite and D1 satellites, as well as certain wireless equipment and operating lease assets related to our narrowband IoT deployment which we no longer intend to complete. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
Purchases of property and equipment. “Purchases of property and equipment” totaled $65 million for the nine months ended September 30, 2020, a decrease of $96 million compared to the same period in 2019. The nine months ended September 30, 2019 was impacted by capital expenditures related to our narrowband IoT deployment for which we determined in the first quarter of 2020 that we would no longer complete. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information. Capital expenditures for the three months ended September 30, 2020 are related to our 5G Network Deployment. We anticipate expenditures for our 5G Network Deployment to remain at a similar level during the fourth quarter 2020, and increase substantially during the second half of 2021 as we ramp up the build-out phase of our 5G Network Deployment.
105
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
OTHER CONSOLIDATED RESULTS
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % |
| |||
| | (In thousands) | | | ||||||||
Operating income (loss) | | $ | 811,248 | | $ | 468,892 | | $ | 342,356 | | 73.0 | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 1,647 | | | 32,301 | | | (30,654) | | (94.9) | |
Interest expense, net of amounts capitalized | | | 6,778 | | | (6,027) | | | 12,805 | | * | |
Other, net | | | (13,200) | | | (1,796) | | | (11,404) | | * | |
Total other income (expense) | | | (4,775) | | | 24,478 | | | (29,253) | | * | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 806,473 | | | 493,370 | | | 313,103 | | 63.5 | |
Income tax (provision) benefit, net | | | (273,514) | | | (116,213) | | | (157,301) | | * | |
Effective tax rate | | | 33.9 | % | 23.6 | % | | | | | ||
Net income (loss) | | | 532,959 | | | 377,157 | | | 155,802 | | 41.3 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | 28,360 | | | 23,853 | | | 4,507 | | 18.9 | |
Net income (loss) attributable to DISH Network | | $ | 504,599 | | $ | 353,304 | | $ | 151,295 | | 42.8 | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Interest income. “Interest income” totaled $2 million during the three months ended September 30, 2020, a decrease of $31 million or 94.9% compared to the same period in 2019. This decrease primarily resulted from lower average cash and marketable investment securities balances and lower percentage returns earned on our cash and marketable investment securities during the three months ended September 30, 2020.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled a negative $7 million during the three months ended September 30, 2020, a decrease in expense of $13 million compared to the same period in 2019. This decrease was primarily related to a reversal of interest expense previously accrued on uncertain tax positions that was released during the three months ended September 30, 2020. For the three months ended September 30, 2020 and 2019, materially all of our interest expense was capitalized. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
Income tax (provision) benefit, net. Our income tax provision was $274 million during the three months ended September 30, 2020, an increase of $157 million compared to the same period in 2019. The increase in the provision was primarily related to an increase in “Income (loss) before income taxes” and an increase in our effective tax rate due to changes in the state tax rates applied to our deferred taxes as a result of the Boost Mobile Acquisition, partially offset by a benefit recognized for the carryback of net operating losses under The Coronavirus Aid Relief and Economic Security Act (the “CARES Act”).
106
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2020 |
| 2019 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Operating income (loss) | | $ | 1,592,976 | | $ | 1,355,924 | | $ | 237,052 | | 17.5 | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 21,440 | | | 65,944 | | | (44,504) | | (67.5) | |
Interest expense, net of amounts capitalized | | | (20,322) | | | (17,598) | | | (2,724) | | (15.5) | |
Other, net | | | (11,592) | | | 10,124 | | | (21,716) | | * | |
Total other income (expense) | | | (10,474) | | | 58,470 | | | (68,944) | | * | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 1,582,502 | | | 1,414,394 | | | 168,108 | | 11.9 | |
Income tax (provision) benefit, net | | | (469,864) | | | (335,372) | | | (134,492) | | (40.1) | |
Effective tax rate | | | 29.7 | % | 23.7 | % | | | | | ||
Net income (loss) | | | 1,112,638 | | | 1,079,022 | | | 33,616 | | 3.1 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | 82,597 | | | 68,914 | | | 13,683 | | 19.9 | |
Net income (loss) attributable to DISH Network | | $ | 1,030,041 | | $ | 1,010,108 | | $ | 19,933 | | 2.0 | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Interest income. “Interest income” totaled $21 million during the nine months ended September 30, 2020, a decrease of $45 million or 67.5% compared to the same period in 2019. This decrease primarily resulted from lower average cash and marketable investment securities balances and lower percentage returns earned on our cash and marketable investment securities during the nine months ended September 30, 2020.
Income tax (provision) benefit, net. Our income tax provision was $470 million during the nine months ended September 30, 2020, an increase of $134 million compared to the same period in 2019. The increase in the provision was primarily related to an increase in “Income (loss) before income taxes” and an increase in our effective tax rate due to changes in the state tax rates applied to our deferred taxes as a result of the Boost Mobile Acquisition, partially offset by a benefit recognized for the carryback of net operating losses under the CARES Act.
107
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Non-GAAP Performance Measures and Reconciliation
It is management’s intent to provide non-GAAP financial information to enhance the understanding of our GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. We believe that providing these non-GAAP measures in addition to the GAAP measures allows management, investors and other users of our financial information to more fully and accurately assess both consolidated and segment performance. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be directly comparable to that of other companies.
Consolidated EBITDA
Consolidated EBITDA is not a measure determined in accordance with GAAP and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Consolidated EBITDA is used as a measurement of operating efficiency and overall financial performance and we believe it is a helpful measure for those evaluating operating performance in relation to our competitors. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Consolidated EBITDA | | $ | 968,771 | | $ | 597,424 | | $ | 2,016,814 | | $ | 1,754,156 |
Interest, net | | | 8,425 | | | 26,274 | | | 1,118 | | | 48,346 |
Income tax (provision) benefit, net | | | (273,514) | | | (116,213) | | | (469,864) | | | (335,372) |
Depreciation and amortization | | | (199,083) | | | (154,181) | | | (518,027) | | | (457,022) |
Net income (loss) attributable to DISH Network | | $ | 504,599 | | $ | 353,304 | | $ | 1,030,041 | | $ | 1,010,108 |
| | | | | | | | | | | | |
The changes in Consolidated EBITDA during the three and nine months ended September 30, 2020, compared to the same periods in 2019, were primarily a result of the factors described in connection with operating revenues and operating expenses.
Segment OIBDA
Segment OIBDA, which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income (loss) as a measure of operating performance. We believe this measure is useful to management, investors and other users of our financial information in evaluating operating profitability of our business segments on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions for those business segments, as well as in evaluating operating performance in relation to our competitors. Segment OBIDA is calculated by adding back depreciation and amortization expense to segment operating income (loss). See Note 12 to the Notes to our Condensed Consolidated Financial Statements for further information.
108
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | |||||||||
| | September 30, | | | ||||||||||
| | 2020 | | 2019 |
| 2020 |
| 2019 |
| |||||
| | (In thousands) | | |||||||||||
Pay-TV OIBDA | | $ | 956,064 | | $ | 641,680 | |
| $ | 2,505,864 | | $ | 1,858,576 | |
Depreciation and amortization | | | 152,247 | | | 149,984 | | | | 464,894 | | | 452,397 | |
Segment operating income (loss) | | $ | 803,817 | | $ | 491,696 | | | $ | 2,040,970 | | $ | 1,406,179 | |
| | | | | | | | | | | | | | |
Retail Wireless OIBDA | | $ | 78,895 | | $ | - | | | $ | 63,360 | | $ | — | |
Depreciation and amortization | | | 44,037 | | | - | | | | 44,037 | | | — | |
Segment operating income (loss) | | $ | 34,858 | | $ | - | | | $ | 19,323 | | $ | — | |
| | | | | | | | | | | | | | |
5G Network Deployment OIBDA | | $ | (24,628) | | $ | (18,607) | | | $ | (458,221) | | $ | (45,630) | |
Depreciation and amortization | | | 2,799 | | | 4,197 | | | | 9,096 | | | 4,625 | |
Segment operating income (loss) | | $ | (27,427) | | $ | (22,804) | | | $ | (467,317) | | $ | (50,255) | |
| | | | | | | | | | | | | | |
Consolidated OIBDA | | $ | 1,010,331 | | $ | 623,073 | | | $ | 2,111,003 | | $ | 1,812,946 | |
Depreciation and amortization | | | 199,083 | | | 154,181 | | | | 518,027 | | | 457,022 | |
Consolidated operating income (loss) | | $ | 811,248 | | $ | 468,892 | | | $ | 1,592,976 | | $ | 1,355,924 | |
| | | | | | | | | | | | | | |
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information regarding our marketable investment securities. As of September 30, 2020, our cash, cash equivalents and current marketable investment securities totaled $2.795 billion compared to $2.860 billion as of December 31, 2019, a decrease of $65 million. This decrease in cash, cash equivalents and current marketable investment securities primarily resulted from the closing of the Boost Mobile Acquisition for a net aggregate purchase price of $1.312 billion, cash used for the redemption of our 5 1/8% Senior Notes due 2020 with an aggregate principal balance of $1.1 billion, capital expenditures of $956 million (including capitalized interest related to FCC authorizations), and a $317 million payment to the FCC for the 3550-3650 MHz Licenses and the 37 GHz, 39 GHZ and 47 GHz Licenses. These decreases were partially offset by cash generated from operating activities of $2.718 billion and $998 million in net proceeds from the issuance of our 7 3/8% Senior Notes due 2028.
Cash Flow
The following discussion highlights our cash flow activities during the nine months ended September 30, 2020.
Cash flows from operating activities
For the nine months ended September 30, 2020, we reported “Net cash flows from operating activities” of $2.718 billion primarily attributable to $2.752 billion of “Net income (loss)” adjusted to exclude the non-cash items for “Depreciation and amortization” expense, “Impairment of long-lived assets” and “Deferred tax expense (benefit).” In addition, “Net cash flows from operating activities” was impacted by the timing difference between book expense and cash payments, including income taxes.
109
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Cash flows from investing activities
For the nine months ended September 30, 2020, we reported outflows from “Net cash flows from investing activities” of $3.180 billion primarily related to the closing of the Boost Mobile Acquisition for a net aggregate purchase price of $1.312 billion, capital expenditures of $956 million (including capitalized interest related to FCC authorizations), $581 million in net purchases of marketable investment securities, and a $317 million payment to the FCC for the 3550-3650 MHz Licenses and the 37 GHz, 39 GHZ and 47 GHz Licenses. The capital expenditures included $646 million of capitalized interest related to FCC authorizations, $165 million for new and existing DISH TV subscriber equipment, $65 million for wireless equipment and $80 million of other corporate capital expenditures.
Cash flows from financing activities
For the nine months ended September 30, 2020, we reported outflows from “Net cash flows from financing activities” of $157 million primarily related to the redemption of our 5 1/8% Senior Notes due 2020 with an aggregate principal balance of $1.1 billion and repayment of long-term debt and finance lease obligations of $77 million, partially offset by $998 million in net proceeds from the issuance of our 7 3/8% Senior Notes due 2028.
Free Cash Flow
We define free cash flow as “Net cash flows from operating activities” less “Purchases of property and equipment,” and “Capitalized interest related to FCC authorizations,” as shown on our Condensed Consolidated Statements of Cash Flows. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments (including strategic wireless investments), fund acquisitions and for certain other activities. Free cash flow is not a measure determined in accordance with GAAP and should not be considered a substitute for “Operating income,” “Net income,” “Net cash flows from operating activities” or any other measure determined in accordance with GAAP. Since free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure is useful in addition to the most directly comparable GAAP measure “Net cash flows from operating activities.”
Free cash flow can be significantly impacted from period to period by changes in “Net income (loss)” adjusted to exclude certain non-cash charges, operating assets and liabilities, “Purchases of property and equipment,” and “Capitalized interest related to FCC authorizations.” These items are shown in the “Net cash flows from operating activities” and “Net cash flows from investing activities” sections on our Condensed Consolidated Statements of Cash Flows included herein. Operating asset and liability balances can fluctuate significantly from period to period and there can be no assurance that free cash flow will not be negatively impacted by material changes in operating assets and liabilities in future periods, since these changes depend upon, among other things, management’s timing of payments and control of inventory levels, and cash receipts. In addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary significantly from period to period depending upon, among other things, net Pay-TV subscriber additions (losses), subscriber revenue, DISH TV subscriber churn, subscriber acquisition and retention costs including amounts capitalized under our equipment lease programs for DISH TV subscribers, operating efficiencies, increases or decreases in purchases of property and equipment, expenditures related to the commercialization of our wireless spectrum and other factors.
110
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
The following table reconciles free cash flow to “Net cash flows from operating activities.”
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2020 |
| 2019 | | ||
| | (In thousands) | | ||||
Free cash flow |
| $ | 1,761,877 | | $ | 832,596 | |
Add back: | | | | | | | |
Purchases of property and equipment (including capitalized interest related to FCC authorizations) | | | 955,814 | | | 1,196,033 | |
Net cash flows from operating activities | | $ | 2,717,691 | | $ | 2,028,629 | |
| | | | | | | |
Operational Liquidity
We make general investments in property such as satellites, set-top boxes, information technology and facilities that support our overall Pay-TV business. We also will need to make significant additional investments or partner with others to, among other things, commercialize, build-out, and integrate our wireless spectrum licenses and related assets. Moreover, since we are primarily a subscriber-based company, we also make subscriber-specific investments to acquire new subscribers and retain existing subscribers. While the general investments may be deferred without impacting the business in the short-term, the subscriber-specific investments are less discretionary. Our overall objective is to generate sufficient cash flow over the life of each subscriber to provide an adequate return against the upfront investment. Once the upfront investment has been made for each subscriber, the subsequent cash flow is generally positive, but there can be no assurances that over time we will recoup or earn a return on the upfront investment.
There are a number of factors that impact our future cash flow compared to the cash flow we generate at a given point in time. The first factor is our DISH TV churn rate and how successful we are at retaining our current Pay-TV subscribers. To the extent we lose Pay-TV subscribers from our existing base, the positive cash flow from that base is correspondingly reduced. The second factor is how successful we are at maintaining our service margins. To the extent our “Cost of services” grow faster than our “Service revenue,” the amount of cash flow that is generated per existing subscriber is reduced. Our service margins have been reduced by, among other things, a shift to lower priced Pay-TV programming packages and higher programming costs. The third factor is the rate at which we acquire new subscribers. The faster we acquire new subscribers, the more our positive ongoing cash flow from existing subscribers is offset by the negative upfront cash flow associated with acquiring new subscribers. Conversely, the slower we acquire subscribers, the more our operating cash flow is enhanced in that period. Finally, our future cash flow is impacted by the rate at which we make general investments (including significant investments in wireless), incur expenditures related to the commercialization of our wireless licenses (including any expenditures associated with the deployment of our wireless networks), incur litigation expense, and any cash flow from financing activities. Declines in our Pay-TV subscriber base and subscriber related-margins continue to negatively impact our cash flow, and there can be no assurances that these declines will not continue.
111
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Subscriber Base
DISH TV subscribers. We lost approximately 259,000 net DISH TV subscribers during the nine months ended September 30, 2020 compared to the loss of approximately 411,000 net DISH TV subscribers during the same period in 2019. This decrease in net DISH TV subscriber losses primarily resulted from a lower DISH TV churn rate, partially offset by lower gross new DISH TV subscriber activations.
SLING TV subscribers. We lost approximately 134,000 net SLING TV subscribers during the nine months ended September 30, 2020 compared to the addition of approximately 269,000 net SLING TV subscribers during the same period in 2019. This decrease in net SLING TV subscriber additions was primarily related to lower SLING TV subscriber activations, increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, and delays and cancellations of sporting events as a result of COVID-19.
Wireless subscribers. During the third quarter 2020, we added over 9 million wireless subscribers as a result of acquisitions and lost 212,000 net wireless subscribers as a result of implementing certain operational changes.
See “Results of Operations” above for further information.
Subscriber Acquisition and Retention Costs
We incur significant upfront costs to acquire subscribers, including advertising, independent third-party retailer incentives, payments made to third-parties, equipment subsidies, installation services, and/or new customer promotions. While we attempt to recoup these upfront costs over the lives of their subscription, there can be no assurance that we will be successful in achieving that objective. With respect to our DISH TV services, we employ business rules such as minimum credit requirements for prospective customers and contractual commitments to receive service for a minimum term. We strive to provide outstanding customer service to increase the likelihood of customers keeping their Pay-TV services over longer periods of time. Subscriber acquisition costs for SLING TV subscribers are significantly lower than those for DISH TV subscribers. Our subscriber acquisition costs may vary significantly from period to period.
We incur significant costs to retain our existing DISH TV subscribers, mostly as a result of upgrading their equipment to next generation receivers, primarily including our Hopper receivers, and by providing retention credits. As with our subscriber acquisition costs, our retention upgrade spending includes the cost of equipment and installation services. In certain circumstances, we also offer programming at no additional charge and/or promotional pricing for limited periods to existing customers in exchange for a contractual commitment to receive service for a minimum term. A component of our retention efforts includes the installation of equipment for customers who move. Our DISH TV subscriber retention costs may vary significantly from period to period.
Seasonality
Historically, the first half of the year generally produces fewer gross new DISH TV subscriber activations than the second half of the year, as is typical in the pay-TV industry. In addition, the first and fourth quarters generally produce a lower DISH TV churn rate than the second and third quarters. However, in recent years, as the pay-TV industry has matured, we and our competitors increasingly must seek to attract a greater proportion of new subscribers from each other’s existing subscriber bases rather than from first-time purchasers of pay-TV services. As a result, historical trends in seasonality described above may not be indicative of future trends. Our net SLING TV subscriber additions are impacted by, among other things, certain major sporting events and other major television events. Due to the COVID-19 pandemic the historical trends discussed above, for both gross new DISH TV subscriber activations and net SLING TV subscriber additions, may not be indicative of future trends.
112
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Satellites
Operation of our DISH TV services requires that we have adequate satellite transmission capacity for the programming that we offer. Moreover, current competitive conditions require that we continue to expand our offering of new programming. While we generally have had in-orbit satellite capacity sufficient to transmit our existing channels and some backup capacity to recover the transmission of certain critical programming, our backup capacity is limited. In the event of a failure or loss of any of our owned or leased satellites, we may need to acquire or lease additional satellite capacity or relocate one of our other satellites and use it as a replacement for the failed or lost satellite. Such a failure could result in a prolonged loss of critical programming or a significant delay in our plans to expand programming as necessary to remain competitive and cause us to expend a significant portion of our cash to acquire or lease additional satellite capacity.
Security Systems
Increases in theft of our signal or our competitors’ signals could, in addition to reducing gross new subscriber activations, also cause subscriber churn to increase. We use Security Access Devices in our DBS receiver systems to control access to authorized programming content. Furthermore, for our SLING TV services, we encrypt programming content and use digital rights management software to, among other things, prevent unauthorized access to our programming content. Our signal encryption has been compromised in the past and may be compromised in the future even though we continue to respond with significant investment in security measures, such as Security Access Device replacement programs and updates in security software, that are intended to make signal theft more difficult. It has been our prior experience that security measures may only be effective for short periods of time or not at all and that we remain susceptible to additional signal theft. We expect that future replacements of Security Access Devices may be necessary to keep our system secure. We cannot ensure that we will be successful in reducing or controlling theft of our programming content and we may incur additional costs in the future if our system’s security is compromised.
Covenants and Restrictions Related to our Long-Term Debt
We are subject to the covenants and restrictions set forth in the indentures related to our long-term debt. In particular, the indentures related to our outstanding senior notes issued by DISH DBS Corporation (“DISH DBS”) contain restrictive covenants that, among other things, impose limitations on the ability of DISH DBS and its restricted subsidiaries to: (i) incur additional indebtedness; (ii) enter into sale and leaseback transactions; (iii) pay dividends or make distributions on DISH DBS’ capital stock or repurchase DISH DBS’ capital stock; (iv) make certain investments; (v) create liens; (vi) enter into certain transactions with affiliates; (vii) merge or consolidate with another company; and (viii) transfer or sell assets. Should we fail to comply with these covenants, all or a portion of the debt under the senior notes and our other long-term debt could become immediately payable. The senior notes also provide that the debt may be required to be prepaid if certain change-in-control events occur. In addition, the 3 3/8% Convertible Notes due 2026 (the “Convertible Notes due 2026”) and the 2 3/8% Convertible Notes due 2024 (the “Convertible Notes due 2024,” and collectively with the Convertible Notes due 2026, the “Convertible Notes”) provide that, if a “fundamental change” (as defined in the related indenture) occurs, holders may require us to repurchase for cash all or part of their Convertible Notes. As of the date of filing of this Quarterly Report on Form 10-Q, we and DISH DBS were in compliance with the covenants and restrictions related to our respective long-term debt.
Other
We are also vulnerable to fraud, particularly in the acquisition of new subscribers. While we are addressing the impact of subscriber fraud through a number of actions, there can be no assurance that we will not continue to experience fraud, which could impact our subscriber growth and churn. Economic weakness may create greater incentive for signal theft, piracy and subscriber fraud, which could lead to higher subscriber churn and reduced revenue.
113
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Obligations and Future Capital Requirements
Contractual Obligations
Our purchase obligations increased during the third quarter 2020 as a result of the Boost Mobile Acquisition and the Ting Mobile Acquisition.
As of September 30, 2020, our future purchase obligations were $1.959 billion for the remaining three months of 2020, $61 million for 2021, $27 million for 2022, $9 million for 2023, for a total of $2.056 billion.
Purchase Obligations
Our 2020 purchase obligations primarily consist of binding purchase orders for certain fixed contractual commitments to purchase programming content, receiver systems and related equipment, broadband equipment, digital broadcast operations, transmission costs, streaming delivery technology and infrastructure, engineering services, and other products and services related to the operation of our Pay-TV services. In addition, our 2020 purchase obligations also include wireless devices related to our retail wireless business as well as transition services. Furthermore, our 2020 purchase obligations include equipment related to our 5G Network Deployment, such as software and hardware necessary to complete our wireless broadband network. Our purchase obligations may fluctuate significantly from period to period due to, among other things, management’s timing of payments and inventory purchases as well as expenditures related to our wireless projects and 5G Network Deployment, and can materially impact our future operating asset and liability balances, and our future working capital requirements.
Future Capital Requirements
We expect to fund our future working capital, capital expenditures and debt service requirements from cash generated from operations, existing cash, cash equivalents and marketable investment securities balances, and cash generated through raising additional capital. We will need to make significant additional investments to, among other things, commercialize, build-out, and integrate our wireless spectrum licenses and related assets. The amount of capital required to fund our future working capital and capital expenditure needs varies, depending on, among other things, the rate at which we deploy our 5G network and the rate at which we acquire new subscribers and the cost of subscriber acquisition and retention, including capitalized costs associated with our new and existing subscriber equipment lease programs. Certain of our capital expenditures for 2020 are expected to be driven by the rate at which we deploy our 5G network as well as costs associated with subscriber premises equipment. These expenditures are necessary for the deployment of our 5G network as well as to operate and maintain our DISH TV services. Consequently, we consider them to be non-discretionary. Our capital expenditures vary depending on the number of satellites leased or under construction at any point in time and could increase materially as a result of increased competition, significant satellite failures, or economic weakness and uncertainty. Our DISH TV subscriber base has been declining and there can be no assurance that our DISH TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. In the event that our DISH TV subscriber base continues to decline, it will have a material adverse long-term effect on our cash flow. In addition, the rulings in the Telemarketing litigation requiring us to pay up to an aggregate amount of $280 million and imposing certain injunctive relief against us, for which we have filed a petition for rehearing and rehearing en banc, if upheld, would have a material adverse effect on our cash, cash equivalents and marketable investment securities balances and our business operations. Furthermore, the Northstar and SNR Operative Agreements, as amended, provide for, among other things, the SNR Put Right and the Northstar Put Right for a purchase price that equals the equity contribution to Northstar Spectrum and SNR HoldCo, respectively, plus a fixed annual rate of return. As of September 30, 2020, Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $634 million, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets.
114
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
We expect to incur capital expenditures in 2020 related to the commercialization of our existing wireless spectrum licenses, including capital expenditures associated with our wireless projects and 5G Network Deployment, and potential purchase of additional wireless spectrum licenses, discussed below. The amount of capital required will also depend on the levels of investment necessary to support potential strategic initiatives that may arise from time to time. These factors, including a reduction in our available future cash flows, could require that we raise additional capital in the future.
Volatility in the financial markets has made it more difficult at times for issuers of high-yield indebtedness, such as us, to access capital markets at acceptable terms. These developments may have a significant effect on our cost of financing and our liquidity position.
Sprint Asset Acquisition
Asset Purchase Agreement
Effective on July 1, 2020, upon the terms and subject to the conditions set forth in the APA and in accordance with the Final Judgment, we completed the Boost Mobile Acquisition.
Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition from the Closing Date forward. We accounted for the Boost Mobile Acquisition as a business combination. The identifiable assets acquired and liabilities assumed were recorded at their preliminary fair values as of the acquisition date and are consolidated into our financial statements. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information.
In connection with the Boost Mobile Acquisition and the consummation of the Sprint-TMUS merger, we, TMUS, Sprint, DT and SoftBank came to an agreement with the DOJ on key terms and approval of the Transaction Agreements and our wireless service business and spectrum. On July 26, 2019, the Defendants entered into the Stipulation and Order with the DOJ binding the Defendants to the Proposed Final Judgment, which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the District Court on July 26, 2019 and on April 1, 2020, the Final Judgment was entered with the District Court.
The term of the Final Judgment is seven years from the date of its entry with the District Court or five years if the DOJ gives notice that the divestitures, build-outs and other requirements have been completed to its satisfaction. A Monitoring Trustee has been appointed by the District Court that has the power and authority to monitor the Defendants’ compliance with the Final Judgment and settle disputes among the Defendants regarding compliance with the provisions of the Final Judgment and may recommend action to the DOJ in the event a party fails to comply with the Final Judgment.
Also in connection with the closing of the Boost Mobile Acquisition, we and NTM entered into the TSA, the MNSA, the Option Agreement, and the Spectrum Purchase Agreement for an additional approximately $3.59 billion. See Note 11 “Commitments and Contingencies – Commitments – Sprint Asset Acquisition” in the Notes to our Condensed Consolidated Financial Statements for further information on the Transaction Agreements.
115
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Agreement with the DOJ: The Stipulation and Order and the Final Judgment
Certain of the provisions of the Stipulation and Order and the Final Judgment are also reflected in the terms of the Transaction Agreements. In addition to the terms reflected in the Transaction Agreements, the Stipulation and Order and the Final Judgment provide for other rights and obligations of the Sellers and us, including the following:
| ● | For a period of one year after the Closing Date, if we determine that certain assets not included in the divestiture were previously used by the Prepaid Business and are reasonably necessary for the continued competitiveness of the Prepaid Business, subject to certain carve-outs, we may request that such assets be transferred to us, which the DOJ can approve or deny in its sole discretion. |
| ● | Within one year of the Closing Date, we are required to offer nationwide postpaid retail mobile wireless service. |
| ● | If we elect not to purchase the 800 MHz licenses pursuant to the Spectrum Purchase Agreement, we must pay $360 million (equal to 10% of the Spectrum Purchase Agreement purchase price) to the United States. However, we will not be required to make such payment if we have deployed a core network and offered 5G service to at least 20% of the U.S. population within three years of the Closing Date. |
| ● | If we buy the 800 MHz spectrum pursuant to the Spectrum Purchase Agreement but fail to deploy all of the 800 MHz spectrum licenses for use in the provision of retail mobile wireless services by the expiration of the Final Judgment, the DOJ may require us to forfeit to the FCC any of the 800 MHz licenses for spectrum that are not being used to provide retail mobile wireless services, unless we are already providing nationwide retail wireless service. |
| ● | We and NTM were required to negotiate in good faith to reach an agreement for NTM to lease some or all of our 600 MHz spectrum licenses for deployment to retail consumers by NTM. On September 11, 2020, we and T-Mobile entered into an agreement to lease a portion of our 600 MHz spectrum licenses for an annual lease payment of approximately $56 million. |
| ● | We and NTM must agree to support eSIM technology on smartphones. |
| ● | The Sellers must introduce the suppliers and distributors of the Prepaid Business to us and the Sellers may not interfere in our negotiations with such suppliers and distributors. |
| ● | On the first day of the fiscal quarter following the entry of the Final Judgment and of each 180-day period thereafter, we are obligated to provide the DOJ with a description of our deployment efforts over the prior quarter including: (i) the number of towers and small cells deployed, (ii) the spectrum bands on which we have deployed equipment, (iii) progress in obtaining devices that operate on our spectrum frequencies, (iv) POPs coverage of our network, (v) the number of our mobile wireless subscriptions, (vi) the amount of traffic transmitted to our subscribers using our network and using NTM’s network, and (vii) whether there are or have been any efforts by NTM to interfere with our efforts to deploy and operate our network. |
| ● | We cannot sell, lease or otherwise provide the right to use any of the divested assets to any national facilities-based mobile wireless provider and may not sell any of the divested assets or similar assets back to TMUS during the term of the Final Judgment, except that we may lease back to NTM up to 4 MHz of the 800 MHz spectrum we will acquire (as discussed above). |
| ● | We must comply with the June 14, 2023 AWS-4, Lower 700 MHz E Block, AWS H Block, and nationwide 5G broadband network build-out commitments made to the FCC, subject to verification by the FCC (as described below). If we fail to comply with such build-out commitments, we may be subject to civil contempt in addition to the substantial voluntary contributions and license forfeitures described below if we fail to meet these commitments (as described below). |
116
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
FCC Build-Out Commitments
In a letter filed with the FCC on July 26, 2019, we voluntarily committed to deploy a nationwide 5G broadband network and meet revised timelines relating to the build-out of our AWS-4, Lower 700 MHz E Block, AWS H Block and 600 MHz spectrum assets, subject to certain penalties. Pursuant to these commitments, we requested multi-year extensions to deploy our AWS-4, Lower 700 MHz E Block, and AWS H Block spectrum, and we have committed to build-out our 600 MHz licenses on an accelerated schedule to better align with our 5G deployment. We have also committed to offer 5G broadband service to certain population coverage targets, along with minimum core network, tower and spectrum use targets, and have waived our right to deploy any technology of our choice under the FCC’s “flexible use” rules with respect to these spectrum bands. Failure to meet the various commitments would require us to pay voluntary contributions totaling up to $2.2 billion to the FCC and would subject certain licenses in the AWS-4, Lower 700 MHz E Block, and AWS H Block spectrum to forfeiture. We have also agreed not to sell our AWS-4 and 600 MHz spectrum for six years without prior DOJ and FCC approval (unless such sale is part of a change of control of DISH Network). Additionally, we have agreed not to lease a certain percentage of network capacity on our AWS-4 and 600 MHz spectrum for six years to the three largest U.S. wireless carriers (i.e., AT&T, Verizon and NTM), without prior FCC approval. On November 5, 2019, the FCC released an Order that, among other things, approved the Sprint-TMUS merger, tolled our existing March 7, 2020 build-out deadline for our AWS-4 and Lower 700 MHz E Block Licenses, and directed the FCC’s Wireless Telecommunications Bureau to adopt our commitments after a 30 day review period (the “FCC Merger Order”).
On September 11, 2020, the FCC’s Wireless Telecommunications Bureau issued an Order adopting these commitments. Our 5G deployment obligations for each of the four spectrum bands are generally set forth below.
| ● | With respect to the 600 MHz licenses, we must offer 5G broadband service to at least 70% of the U.S. population and have deployed a core network no later than June 14, 2023, and offer 5G broadband service to at least 75% of the population in each Partial Economic Area (which are service areas established by the FCC) no later than June 14, 2025. Note that these commitments are earlier than the current 600 MHz Final Build-Out Requirement date of June 2029. See Note 11 “Commitments and Contingencies – Commitments” in the Notes to our Condensed Consolidated Financial Statements for further information. |
| ● | With respect to the AWS-4 licenses, we must offer 5G broadband service to at least 20% of the U.S. population and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least 70% of the U.S. population no later than June 14, 2023. |
| ● | With respect to the Lower 700 MHz E Block licenses, we must offer 5G broadband service to at least 20% of the U.S. population who are covered by such licenses and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least 70% of the U.S. population who are covered by such licenses no later than June 14, 2023. |
| ● | With respect to the AWS H Block licenses, we must offer 5G broadband service to at least 20% of the U.S. population and have deployed a core network no later than June 14, 2022, and offer 5G broadband service to at least 70% of the U.S. population no later than June 14, 2023. |
Wireless – 5G Network Deployment
Since 2008, we have directly invested over $11 billion to acquire certain wireless spectrum licenses and related assets and made over $10 billion in non-controlling investments in certain entities, for a total of over $21 billion. The $21 billion of investments related to wireless spectrum licenses does not include $5 billion of capitalized interest related to the carrying value of such licenses. See Note 2 “Capitalized Interest” in the Notes to our Condensed Consolidated Financial Statements for further information on capitalized interest.
117
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH Network Spectrum
We have directly invested over $11 billion to acquire certain wireless spectrum licenses and related assets. These wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. In March 2017, we notified the FCC that we planned to deploy a narrowband IoT network on certain of these wireless licenses, which was to be the First Phase. We expected to complete the First Phase by March 2020, with subsequent phases to be completed thereafter. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines was probable and, therefore, we no longer intended to complete our narrowband IoT deployment. The FCC issued an Order effectuating the build-out deadline changes contemplated above on September 11, 2020. During the first quarter 2020, we impaired certain assets that would not be utilized in our 5G Network Deployment, resulting in a $253 million non-cash impairment charge in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We have issued RFI/Ps to various vendors in the wireless industry and are in the process of selecting certain vendors as we move forward with our 5G Network Deployment. We currently expect expenditures for our 5G Network Deployment to be approximately $10 billion, excluding capitalized interest. We will need to make significant additional investments or partner with others to, among other things, commercialize, build-out, and integrate these licenses and related assets, and any additional acquired licenses and related assets; and comply with regulations applicable to such licenses.
Recent Wireless Spectrum Acquisitions
3550-3650 MHz. The auction for the Priority Access Licenses for the 3550-3650 MHz band (“Auction 105”) began on July 23, 2020 and ended on August 25, 2020. On September 2, 2020, the FCC announced that Wetterhorn Wireless L.L.C. (“Wetterhorn”), a wholly-owned subsidiary of DISH Network, was the winning bidder of 5,492 Priority Access Licenses in the 3550-3650 MHz band, with Wetterhorn’s aggregate winning bids totaling approximately $913 million. During the second and third quarters 2020, we paid $83 million and $100 million, respectively, to the FCC for our winning bids. These amounts are included in “Other current assets” on our Condensed Consolidated Balance Sheets as of September 30, 2020. On October 1, 2020, we paid the remaining balance of our winning bids of approximately $730 million. The FCC has not yet issued the licenses to Wetterhorn.
Depending on the nature and scope of such commercialization, build-out, integration efforts, and regulatory compliance, any such investments or partnerships could vary significantly. In addition, as we consider our options for the commercialization of our wireless spectrum, we will incur significant additional expenses and will have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure. We may also determine that additional wireless spectrum licenses may be required to commercialize our wireless business and to compete with other wireless service providers. For example, on September 22, 2020, we filed an application with the FCC to participate as a potential bidder in the upcoming wireless spectrum auction for the Flexible-Use Service Licenses in the 3.7-3.98 GHz Band (“Auction 107”). The auction is scheduled to commence on December 8, 2020. The FCC determined that bidding in this auction will be “anonymous,” which means that prior to and during the course of the auction the FCC will not make public any information about a specific applicant’s upfront deposit or its bids. In addition, FCC rules restrict information that bidders may disclose about their participation in the auction.
See Note 2 “Capitalized Interest” and Note 11 “Commitments and Contingencies – Commitments – Wireless – DISH Network Spectrum” in the Notes to our Condensed Consolidated Financial Statements for further information.
118
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American II and American III, we initially made over $10 billion in certain non-controlling investments in Northstar Spectrum, the parent company of Northstar Wireless, and in SNR HoldCo, the parent company of SNR Wireless, respectively. On October 27, 2015, the FCC granted certain AWS-3 Licenses to Northstar Wireless and to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. Under the applicable accounting guidance in ASC 810, Northstar Spectrum and SNR HoldCo are considered variable interest entities and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out, integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. See Note 11 “Commitments and Contingencies – Commitments – Wireless – DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses” in the Notes to our Condensed Consolidated Financial Statements for further information.
We may need to raise significant additional capital in the future to fund the efforts described above, which may not be available on acceptable terms or at all. There can be no assurance that we, the Northstar Entities and/or the SNR Entities will be able to develop and implement business models that will realize a return on these wireless spectrum licenses or that we, the Northstar Entities and/or the SNR Entities will be able to profitably deploy the assets represented by these wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations. See Note 11 “Commitments and Contingencies – Commitments – Wireless” in the Notes to our Condensed Consolidated Financial Statements for further information.
Availability of Credit and Effect on Liquidity
The ability to raise capital has generally existed for us despite economic weakness and uncertainty. While modest fluctuations in the cost of capital will not likely impact our current operational plans, significant fluctuations could have a material adverse effect on our business, results of operations and financial condition.
Debt Issuances and Maturity
Our 5 1/8% Senior Notes with an aggregate principal balance of $1.1 billion were redeemed on May 1, 2020.
Our 6 3/4% Senior Notes due 2021 with an aggregate principal balance of $2.0 billion mature on June 1, 2021. We expect to fund this obligation from cash and marketable investment securities balances at that time. But, depending on market conditions, we may refinance this obligation in whole or in part.
On July 1, 2020, we issued $1.0 billion aggregate principal amount of our 7 3/8% Senior Notes due July 1, 2028. Interest accrues at an annual rate of 7 3/8% and is payable semi-annually in cash, in arrears on January 1 and July 1 of each year, commencing on January 1, 2021.
Off-Balance Sheet Arrangements
We generally do not engage in off-balance sheet financing activities.
119
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the nine months ended September 30, 2020. For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 4.CONTROLS AND PROCEDURES
Conclusion regarding disclosure controls and procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting
On July 1, 2020, we completed Boost Mobile Acquisition. This resulted in us implementing new processes and internal controls to assist us in the preparation and disclosure of financial information associated with the transaction. Given the magnitude of the Boost Mobile Acquisition and the complexity of the applicable systems and business processes, we intend to exclude the Prepaid Business from our assessment and report on internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act), during the most recently completed fiscal quarter. In addition, we are continually monitoring the COVID-19 pandemic and any potential impact to our internal controls.
PART II — OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
See Note 11 “Commitments and Contingencies – Litigation” in the Notes to our Condensed Consolidated Financial Statements for information regarding certain legal proceedings in which we are involved.
Item 1A. RISK FACTORS
Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and June 30, 2020 include a detailed discussion of our risk factors.
120
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding repurchases of our Class A common stock from July 1, 2020 through September 30, 2020:
| | | | | | | | | | | |
| | | | | | | Total Number of | | Maximum Approximate | | |
| | Total | | | | | Shares Purchased | | Dollar Value of Shares | | |
| | Number of | | Average | | as Part of Publicly | | that May Yet be | | ||
| | Shares | | Price Paid | | Announced | | Purchased Under the | | ||
Period |
| Purchased |
| per Share |
| Programs |
| Programs (1) |
| ||
| | (In thousands, except share data) | | ||||||||
| — | | $ | — | | — | | $ | 1,000,000 | | |
| — | | $ | — | | — | | $ | 1,000,000 | | |
| — | | $ | — | | — | | $ | 1,000,000 | | |
Total | | — | | $ | | | — | | $ | 1,000,000 | |
| | | | | | | | | | | |
| (1) | On October 30, 2020, our Board of Directors authorized stock repurchases of up to $1.0 billion of our outstanding Class A common stock through and including December 31, 2021. Purchases under our repurchase program may be made through open market purchases, privately negotiated transactions, or Rule 10b5-1 trading plans, subject to market conditions and other factors. We may elect not to purchase the maximum amount of shares allowable under this program and we may also enter into additional share repurchase programs authorized by our Board of Directors. |
Item 5. OTHER INFORMATION
Ergen 2020 Performance Award
On November 4, 2020, the Executive Compensation Committee of the Board of Directors (the “Compensation Committee”) of DISH Network approved an award to Mr. Charles W. Ergen, DISH Network’s Chairman, of long-term performance-based options (the “Ergen 2020 Performance Award” or the “Award”) to purchase up to 12,500,000 shares of DISH Network’s Class A Common Stock (the “Class A Shares”). The Award is subject to the achievement of performance vesting goals based on specified stock price targets (the “DISH Stock Price Targets”) as set forth in the table below over the ten-year period following the date of grant (except for the first two DISH Stock Price Goals (Tranche 1 and Tranche 2)). The Award will be granted on November 6, 2020, with an exercise price equal to the closing stock price of a Class A Share as reported on NASDAQ on November 6, 2020 (the “Award Exercise Price”) which will follow DISH Network’s earnings release for its quarter ending September 30, 2020 (which is expected to be released before trading begins on November 6, 2020). The Award will expire on February 6, 2031.
In approving the Ergen 2020 Performance Award, the Compensation Committee recognized, among other things, the unique blend of leadership, experience, and knowledge of our industry and business that Mr. Ergen brings to DISH Network and the continued importance of Mr. Ergen’s role as the individual who identifies strategic priorities and leads the execution of DISH Network’s long-term strategy, including, without limitation, its wireless business, which is expected to drive long-term value for DISH Network and its stockholders. In an effort to further incentivize Mr. Ergen’s continued long-term performance, the Compensation Committee designed the Award to be a challenging long-term incentive for future performance, and the Compensation Committee noted in particular that the performance thresholds could take many years to achieve, if they can be achieved at all. In addition, the Compensation Committee sought to ensure that the Ergen 2020 Performance Award would further align Mr. Ergen’s interests with those of DISH Network’s stockholders over the long-term.
121
In connection with its design, evaluation and approval of the Ergen 2020 Performance Award, the Compensation Committee retained an independent compensation consultant, Compensia, a national compensation consulting firm, to consider various designs for the structure of the award related to the grant value and award structure. Compensia’s review included an assessment of comparable long-term incentive awards granted to other leaders of a range of technology and media companies. In addition, Compensia prepared a competitive market assessment of Mr. Ergen’s projected annual compensation relative to the annual pay of leaders at a peer set of similar industry and size/value competitors to DISH Network. This analysis determined that Mr. Ergen’s annual compensation (including the annualized fair value of the Ergen 2020 Performance Award) was generally lower than the compensation of the leaders of these peer companies.
Although the Award Exercise Price (which affects non-cash stock compensation expense) will not be established until the end of trading on November 6, 2020, assuming an Award Exercise Price of $25.82 (the closing price of a Class A Share as reported on NASDAQ on November 2, 2020), the Ergen 2020 Performance Award would result in an estimated aggregate non-cash stock compensation expense to DISH Network in the range of approximately $80 million to $90 million. DISH Network will recognize such expense over the period from the date of grant through approximately December 31, 2028, and currently estimates that approximately three-fourths of the total will be recognized in the first four years following the date of the grant.
Subject to Mr. Ergen’s continued employment in his position as Chairman of DISH Network (or a substantially equivalent role as determined by the Compensation Committee in its discretion) through the date on which the DISH Stock Price Targets are achieved, the Ergen 2020 Performance Award will vest in the following tranches upon achievement of the following DISH Stock Price Goals:
| ||||||
Tranche | DISH Stock Price Goal | Absolute Change in DISH Stock Price from Award Exercise Price | Vesting % | Options Vesting | | |
1 | 125% of Award Exercise Price | 25% | 10% | 1,250,000 | | |
2 | 125% of DISH Stock Price Goal for Tranche #1 | 56% | 10% | 1,250,000 | | |
3 | 125% of DISH Stock Price Goal for Tranche #2 | 95% | 10% | 1,250,000 | | |
4 | 125% of DISH Stock Price Goal for Tranche #3 | 144% | 10% | 1,250,000 | | |
5 | 125% of DISH Stock Price Goal for Tranche #4 | 205% | 10% | 1,250,000 | | |
6 | 125% of DISH Stock Price Goal for Tranche #5 | 281% | 10% | 1,250,000 | | |
7 | 125% of DISH Stock Price Goal for Tranche #6 | 377% | 10% | 1,250,000 | | |
8 | 125% of DISH Stock Price Goal for Tranche #7 | 496% | 10% | 1,250,000 | | |
9 | 125% of DISH Stock Price Goal for Tranche #8 | 645% | 10% | 1,250,000 | | |
10 | 125% of DISH Stock Price Goal for Tranche #9 | 831% | 10% | 1,250,000 | | |
In the event that a DISH Stock Price Goal is determined by the Compensation Committee to have been achieved during an applicable calendar quarter (or at its ten-year anniversary) as set forth below: (i) that applicable DISH Stock Price Goal will be retired; and (ii) the corresponding tranche of the option will vest and shall become exercisable contemporaneously with the filing of the Corporation’s financial results for that quarter or year, as applicable, with the Securities and Exchange Commission.
For purposes of the DISH Stock Price Goals, except for Tranches 1 and 2, the Stock Price Goal will be considered achieved if the average closing stock price, as reported on NASDAQ, of the Class A Shares for the thirty (30) calendar day period immediately prior to the end of during any calendar quarter exceeds the respective DISH Stock Price Goal (and the thirty (30) calendar day period prior to the Award’s ten-year anniversary on November 6, 2030) during the period that is ten years following the date of the grant.
122
With respect to Tranche 1, the applicable DISH Stock Price Goal will be considered achieved if the average closing stock price, as reported on NASDAQ, of the Class A Shares for the thirty (30) calendar day period immediately prior to the end of any calendar quarter exceeds the respective DISH Stock Price Goal during the first four years following the date of the grant.
With respect to Tranche 2, the applicable DISH Stock Price Goal will be considered achieved if the average closing stock price, as reported on NASDAQ, of the Class A Shares for the thirty (30) calendar day period immediately prior to the end of any calendar quarter exceeds the respective DISH Stock Price Goal during the first seven years following the date of the grant.
In the event a “change in control” of the Corporation occurs while any portion of the 2020 Ergen Performance Award is unvested, the value of the transaction consideration per share for a Class A Share will be used to determine whether any additional portion of the Ergen 2020 Performance Award will vest. For purposes of the Award, a “change in control” of the Corporation is generally deemed to occur upon: (i) a transaction or a series of transactions the result of which is that any person (other than Mr. Ergen (our controlling shareholder) or a related party) individually owns more than fifty percent (50%) of the total equity interests of either: (A) the Corporation; or (B) the surviving entity in any such transaction(s) or a controlling affiliate of such surviving entity in such transaction(s); and (ii) the first day on which a majority of the members of the Board of Directors are not continuing directors.
The Ergen 2020 Performance Award is being granted under the terms of the Corporation’s 2019 Stock Incentive Plan and a non-qualified stock option agreement that includes, among other terms and conditions, a post-exercise holding period requirement (net of taxes and exercise price) on the Class A Shares obtained upon exercise that is equal to the longer of (i) five years from the date of grant; or (ii) one year following the date of exercise for applicable shares exercised under the Award.
The foregoing summary of the terms and conditions of the Ergen 2020 Performance Award set forth above do not purport to be complete and are qualified in their entirety by reference to the provisions of the Corporation’s 2019 Stock Incentive Plan and by reference to the non-qualified stock option agreement, which is attached as Exhibit 10.1 to this current report on Form 10-Q and is incorporated by reference into this Item 5 of Part II.
123
Item 6.EXHIBITS
(a) | Exhibits. |
| ||
| | |
10.1* | | |
| | |
10.2* | | |
| | |
10.3* | | |
| | |
10.4* | | |
| | |
10.5* | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
32.2* | | |
| | |
101* | | The following materials from the Quarterly Report on Form 10-Q of DISH Network for the quarter ended September 30, 2020 filed on November 6, 2020, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit), (iv) Condensed Consolidated Statements of Cash Flows and (v) related notes to these financial statements. |
104* | | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document). |
124
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| DISH NETWORK CORPORATION | |
| | |
| | |
| By: | /s/ W. Erik Carlson |
| ||
| President and Chief Executive Officer | |
| (Duly Authorized Officer) | |
| | |
| | |
| By: | /s/ Paul W. Orban |
| ||
| Executive Vice President and Chief Financial Officer | |
| (Principal Financial Officer) | |
Date: November 6, 2020
125
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/31/31 | ||||
| 2/6/31 | ||||
| 11/6/30 | ||||
| 6/4/30 | ||||
| 12/11/29 | ||||
| 10/27/29 | ||||
| 10/2/29 | ||||
| 12/31/28 | ||||
| 7/1/28 | ||||
| 10/27/25 | ||||
| 6/14/25 | ||||
| 10/27/24 | ||||
| 3/1/24 | ||||
| 7/1/23 | ||||
| 6/14/23 | ||||
| 10/27/22 | ||||
| 6/14/22 | ||||
| 1/1/22 | 4 | |||
| 12/31/21 | 10-K | |||
| 10/27/21 | ||||
| 9/7/21 | ||||
| 7/26/21 | ||||
| 6/1/21 | 4 | |||
| 3/1/21 | SEC LETTER | |||
| 1/1/21 | 4 | |||
| 12/31/20 | 10-K, SD | |||
| 12/8/20 | ||||
| Filed on: | 11/6/20 | 4 | ||
| 11/4/20 | ||||
| 11/3/20 | ||||
| 11/2/20 | ||||
| 10/30/20 | ||||
| 10/27/20 | ||||
| 10/22/20 | ||||
| 10/13/20 | ||||
| 10/1/20 | ||||
| For Period end: | 9/30/20 | |||
| 9/22/20 | 4 | |||
| 9/11/20 | ||||
| 9/9/20 | ||||
| 9/2/20 | ||||
| 9/1/20 | ||||
| 8/31/20 | ||||
| 8/25/20 | ||||
| 8/7/20 | 10-Q | |||
| 8/1/20 | ||||
| 7/31/20 | ||||
| 7/24/20 | ||||
| 7/23/20 | ||||
| 7/20/20 | ||||
| 7/17/20 | 4 | |||
| 7/13/20 | ||||
| 7/10/20 | ||||
| 7/1/20 | 4, 8-K | |||
| 6/30/20 | 10-Q, 4 | |||
| 6/29/20 | ||||
| 6/25/20 | 8-K | |||
| 6/9/20 | 3 | |||
| 6/5/20 | ||||
| 6/4/20 | 4 | |||
| 6/3/20 | 4, SC 13D/A | |||
| 5/21/20 | SC 13D/A | |||
| 5/12/20 | SC 13D/A | |||
| 5/5/20 | 8-K | |||
| 5/1/20 | 8-K, DEF 14A | |||
| 4/24/20 | ||||
| 4/14/20 | ||||
| 4/9/20 | ||||
| 4/1/20 | 4 | |||
| 3/31/20 | 10-Q | |||
| 3/29/20 | ||||
| 3/26/20 | ||||
| 3/16/20 | 3, 4 | |||
| 3/12/20 | ||||
| 3/10/20 | 4, SC 13D/A | |||
| 3/7/20 | ||||
| 3/6/20 | 4 | |||
| 3/5/20 | ||||
| 2/25/20 | ||||
| 2/12/20 | SC 13G/A | |||
| 2/4/20 | ||||
| 1/31/20 | ||||
| 1/30/20 | ||||
| 1/21/20 | ||||
| 1/17/20 | ||||
| 1/15/20 | ||||
| 1/10/20 | ||||
| 1/9/20 | ||||
| 1/7/20 | ||||
| 1/1/20 | 4 | |||
| 12/31/19 | 10-K, SD | |||
| 12/30/19 | ||||
| 12/20/19 | ||||
| 12/19/19 | D | |||
| 12/16/19 | ||||
| 12/13/19 | 4, 8-K, CT ORDER, SC 13D/A | |||
| 12/10/19 | ||||
| 12/5/19 | 4 | |||
| 12/3/19 | 3, 4, SC 13D/A | |||
| 11/22/19 | 424B5, 8-A12B, 8-K, CERT, SC 13D/A | |||
| 11/13/19 | ||||
| 11/8/19 | ||||
| 11/6/19 | ||||
| 11/5/19 | ||||
| 10/22/19 | ||||
| 10/18/19 | ||||
| 10/15/19 | ||||
| 10/11/19 | ||||
| 9/30/19 | 10-Q | |||
| 9/27/19 | ||||
| 9/10/19 | 4, 4/A, 8-K | |||
| 8/12/19 | ||||
| 7/26/19 | 8-K | |||
| 7/22/19 | ||||
| 7/19/19 | ||||
| 7/15/19 | ||||
| 7/11/19 | ||||
| 7/10/19 | ||||
| 7/2/19 | 4, 8-K | |||
| 6/30/19 | 10-Q | |||
| 6/25/19 | ||||
| 6/10/19 | 3 | |||
| 6/3/19 | 4 | |||
| 5/30/19 | 3, 4 | |||
| 5/19/19 | ||||
| 5/9/19 | 4 | |||
| 4/23/19 | ||||
| 3/31/19 | 10-Q | |||
| 3/28/19 | ||||
| 3/26/19 | ||||
| 3/7/19 | 3 | |||
| 2/26/19 | ||||
| 2/11/19 | 4, SC 13G/A | |||
| 1/31/19 | ||||
| 1/1/19 | 4 | |||
| 12/31/18 | 10-K, 4, SD | |||
| 12/20/18 | ||||
| 11/27/18 | ||||
| 10/26/18 | 4 | |||
| 10/22/18 | 4 | |||
| 10/9/18 | 4 | |||
| 10/1/18 | 4 | |||
| 9/17/18 | ||||
| 8/6/18 | ||||
| 8/1/18 | 4 | |||
| 7/25/18 | ||||
| 7/23/18 | 3, 4 | |||
| 7/12/18 | 4 | |||
| 7/3/18 | ||||
| 6/30/18 | 10-Q | |||
| 6/25/18 | ||||
| 6/11/18 | 4 | |||
| 6/8/18 | 8-K | |||
| 6/7/18 | 8-K | |||
| 6/4/18 | 4 | |||
| 5/15/18 | ||||
| 4/24/18 | ||||
| 4/16/18 | ||||
| 4/5/18 | ||||
| 3/31/18 | 10-Q, 8-K | |||
| 3/12/18 | SC 13D/A | |||
| 3/5/18 | ||||
| 2/10/18 | ||||
| 2/7/18 | SC 13G/A | |||
| 1/26/18 | ||||
| 1/24/18 | ||||
| 1/12/18 | ||||
| 1/9/18 | 4 | |||
| 1/4/18 | ||||
| 12/31/17 | 10-K, SD | |||
| 12/20/17 | ||||
| 12/14/17 | ||||
| 11/13/17 | ||||
| 11/8/17 | ||||
| 11/6/17 | ||||
| 10/26/17 | ||||
| 10/19/17 | ||||
| 10/10/17 | 4 | |||
| 10/6/17 | ||||
| 9/12/17 | ||||
| 8/31/17 | 4 | |||
| 8/29/17 | 4 | |||
| 8/10/17 | ||||
| 8/8/17 | ||||
| 7/28/17 | ||||
| 7/19/17 | ||||
| 7/18/17 | ||||
| 7/3/17 | 4 | |||
| 6/12/17 | ||||
| 6/6/17 | ||||
| 6/5/17 | 4 | |||
| 5/22/17 | ||||
| 3/2/17 | ||||
| 3/1/17 | ||||
| 2/28/17 | ||||
| 2/27/17 | ||||
| 2/14/17 | SC 13G/A | |||
| 2/13/17 | ||||
| 2/9/17 | ||||
| 1/31/17 | 8-K | |||
| 1/19/17 | ||||
| 1/1/17 | 3, 4 | |||
| 12/20/16 | ||||
| 11/4/16 | ||||
| 11/2/16 | ||||
| 10/31/16 | ||||
| 10/25/16 | ||||
| 9/23/16 | ||||
| 8/23/16 | ||||
| 8/19/16 | ||||
| 7/20/16 | ||||
| 7/14/16 | ||||
| 5/16/16 | ||||
| 2/11/16 | ||||
| 2/10/16 | ||||
| 1/19/16 | ||||
| 10/27/15 | ||||
| 10/1/15 | 4, 8-K, ARS | |||
| 9/9/15 | ||||
| 8/18/15 | CT ORDER | |||
| 8/1/15 | ||||
| 7/17/15 | ||||
| 5/13/15 | ||||
| 2/11/15 | ||||
| 12/12/14 | ||||
| 10/13/14 | ||||
| 3/13/14 | ||||
| 3/1/14 | ||||
| 2/20/14 | ||||
| 1/1/14 | 4 | |||
| 12/23/13 | ||||
| 12/21/12 | 8-K | |||
| 10/1/12 | ||||
| 3/9/12 | 8-K | |||
| 1/1/12 | ||||
| 9/29/11 | ||||
| 1/1/10 | ||||
| 3/25/09 | ||||
| 12/31/08 | 10-K, 4, ARS | |||
| 1/1/08 | 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 4/01/24 Dish DBS Corp. 10-K 12/31/23 105:15M Toppan Merrill Bridge/FA 3/29/24 DISH Network Corp. 10-K 12/31/23 109:25M Toppan Merrill Bridge/FA 2/29/24 EchoStar Corp. 10-K 12/31/23 136:29M Toppan Merrill Bridge/FA 3/16/23 Dish DBS Corp. 10-K 12/31/22 101:16M Toppan Merrill Bridge/FA 2/23/23 DISH Network Corp. 10-K 12/31/22 115:26M Toppan Merrill Bridge/FA 3/11/22 Dish DBS Corp. 10-K 12/31/21 100:16M Toppan Merrill Bridge/FA 2/24/22 DISH Network Corp. 10-K 12/31/21 117:26M Toppan Merrill Bridge/FA 3/24/21 Dish DBS Corp. 10-K 12/31/20 101:17M Toppan Merrill Bridge/FA 2/22/21 DISH Network Corp. 10-K 12/31/20 121:27M Toppan Merrill Bridge/FA 11/13/20 Dish DBS Corp. 10-Q 9/30/20 74:11M Toppan Merrill Bridge/FA |