NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada and has operated as a separately traded public company from DISH Network Corporation (“DISH”) since 2008. Our Class A common stock is publicly traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SATS.”
We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We operate in the following two business segments:
|
|
|
|
•
|
Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
|
|
|
|
|
•
|
ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
|
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activities that have not been assigned to our business segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America and; (iii) All other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 14. Segment Reporting for further detail.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and our joint venture Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”) and its subsidiaries, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
from continuing operations and segment results for the three months ended March 31, 2019, as presented in these unaudited Condensed Consolidated Financial Statements and the accompanying notes (collectively, the “Condensed Consolidated Financial Statements”).
All amounts in the following footnotes reference results from continuing operations unless otherwise noted. Refer to Note 4. Discontinued Operations for further detail.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.
All amounts presented in these Condensed Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Refer to Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in our Form 10-K for a summary and discussion of our significant accounting policies, except as updated below.
Use of Estimates
We are required to make certain estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs; (ii) allowances for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) asset impairment testing.
We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts and such differences may be material to our consolidated financial statements. Additionally, changing economic and other conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions thereto are reflected in the period they occur or prospectively if the revised estimates or assumptions affect future periods.
Principles of Consolidation
We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities in which we are the primary beneficiary and in other entities in which we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a non-controlling interest within stockholders’ equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified to conform with the current period presentation.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Recently Adopted Accounting Pronouncements
Credit Losses
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13 - Financial Instruments - Credit Losses (Topic 326), as amended, and codified in Accounting Standards Codification Topic 326 (“ASC 326”). ASC 326 introduces a new approach to the periodic estimation of credit losses for certain financial assets based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets that have experienced credit deterioration since their original purchase. We have elected to apply the requirements of the new standard prospectively and we recognized a cumulative effect of adoption of $9.1 million to Accumulated earnings (losses) as of January 1, 2020. Based on this election, we did not restate our comparative Condensed Consolidated Financial Statements and they continue to be reported under the accounting standards in effect for the periods before January 1, 2020.
The following describes the accounting impacts, by major balance sheet line item, of our adoption of this new standard based on the relevant types of losses that we and our equity method investees may be subject to:
|
|
|
|
•
|
Trade Accounts Receivable and Contract Assets, Net — Our trade accounts receivables and contract assets consist of amounts due from both our consumer and enterprise customers. Our receivables and related credit losses for our consumer customers are limited due to policies that require advance payment for services, predominant use of credit card and ACH payment processes, and our ability to promptly terminate service when timely payments are not received. However, for our enterprise customers, we estimate expected credit losses on a collective basis based on our historical loss experience, as adjusted to reflect changes in relevant factors, such as macroeconomic conditions and customer mix, that can significantly impact collectability.
|
We apply our collective estimation processes separately to several pools of receivables that share common risk characteristics, generally based on the customers’ geographical location. Customers with significant past-due balances or other atypical characteristics are excluded from our collective analysis and evaluated on a case-by-case basis. Our estimates of expected credit losses for such receivables reflect significant judgments that consider customer-specific matters such as the customer’s financial condition, payment history, and recent developments in the customer’s business and industry. Due to the short-term nature of our trade receivables and contract assets, forecasts about the future have limited relevance to our expected credit loss estimates.
We record our customer related estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
|
|
|
|
•
|
Other Current Assets, Net, and Other Non-current Assets, Net — We estimate expected credit losses for receivables with payment terms longer than one year separately by borrower, due to the unique risk characteristics of such receivables. We generally use discounted cash flow techniques to estimate such credit losses. In applying such techniques, we may estimate principal and interest cash flows under probability-weighted scenarios that consider entity-specific matters and forecasted economic conditions. The majority of our other non-current receivables are from entities in the telecommunications industry. The collection of contractual principal and interest on these receivables is highly dependent on the future business operations of those entities. Our estimation of expected credit losses for such receivables requires significant judgment about matters specific to the borrower and their industry. Accordingly, our actual collection experience may differ from the assumptions reflected in our expected credit loss estimates.
|
We record our estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
|
|
|
|
•
|
Other Investments, Net — We estimate expected credit losses on our other debt investments with payment terms longer than one year separately by debtor, due to the unique risk characteristics of such debt investments. We generally use discounted cash flow techniques to estimate such credit losses. In applying such techniques, we may estimate principal and interest cash flows under probability-weighted scenarios that consider entity-specific matters and forecasted economic conditions. The majority of our other debt investments are with entities in the telecommunications industry. The collection of contractual principal and interest on these debt
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
investments are highly dependent on the future business operations of those entities. Our estimation of expected credit losses for such debt investments require significant judgment about matters specific to the debtor and their industry. Accordingly, our actual collection experience may differ from the assumptions reflected in our expected credit loss estimates.
We record our other debt investments related estimated credit losses as a reduction of Interest income, net.
Financial Impact of Adoption. Our adoption of this new standard resulted in the following adjustments to our Condensed Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
Adoption of
ASC 326 Increase (Decrease)
|
|
Balance at
January 1, 2020
|
|
Trade accounts receivable and contract assets, net
|
|
$
|
196,629
|
|
|
$
|
(13,672
|
)
|
|
$
|
182,957
|
|
|
Other current assets, net
|
|
$
|
179,531
|
|
|
$
|
6,723
|
|
|
$
|
186,254
|
|
|
Other investments, net
|
|
$
|
325,405
|
|
|
$
|
(7,381
|
)
|
|
$
|
318,024
|
|
|
Other non-current assets, net
|
|
$
|
334,841
|
|
|
$
|
4,050
|
|
|
$
|
338,891
|
|
|
Total assets
|
|
$
|
7,154,298
|
|
|
$
|
(10,280
|
)
|
|
$
|
7,144,018
|
|
|
Deferred tax liabilities, net
|
|
$
|
351,692
|
|
|
$
|
(972
|
)
|
|
$
|
350,720
|
|
|
Accumulated earnings (losses)
|
|
$
|
632,809
|
|
|
$
|
(9,068
|
)
|
|
$
|
623,741
|
|
|
Non-controlling interests
|
|
$
|
75,748
|
|
|
$
|
(240
|
)
|
|
$
|
75,508
|
|
|
Total stockholders’ equity
|
|
$
|
3,745,553
|
|
|
$
|
(9,308
|
)
|
|
$
|
3,736,245
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
7,154,298
|
|
|
$
|
(10,280
|
)
|
|
$
|
7,144,018
|
|
The application of ASC 326 requirements did not materially affect our Condensed Consolidated Statements of Operations for the three months ended March 31, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the FASB’s overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. The updated guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new guidance.
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates (“IBORs”) to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. We are currently assessing the impact of adopting this new guidance, but do not expect it to have a material impact on our consolidated financial statements.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 3. REVENUE RECOGNITION
Contract Balances
The following table presents the components of our contract balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Trade accounts receivable and contract assets, net:
|
|
|
|
|
|
Sales and services
|
|
$
|
147,288
|
|
|
$
|
152,632
|
|
|
Leasing
|
|
4,301
|
|
|
4,016
|
|
|
Total trade accounts receivable
|
|
151,589
|
|
|
156,648
|
|
|
Contract assets
|
|
46,938
|
|
|
63,758
|
|
|
Allowance for doubtful accounts
|
|
(10,608
|
)
|
|
(23,777
|
)
|
|
Total trade accounts receivable and contract assets, net
|
|
$
|
187,919
|
|
|
$
|
196,629
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
Current
|
|
$
|
99,266
|
|
|
$
|
101,060
|
|
|
Non-current
|
|
9,426
|
|
|
10,572
|
|
|
Total contract liabilities
|
|
$
|
108,692
|
|
|
$
|
111,632
|
|
For the three months ended March 31, 2020 and 2019, we recognized revenue of $52.2 million and $39.5 million, respectively, that were previously included in the contract liability balances as of December 31, 2019 and 2018, respectively.
The following table presents the activity in our allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Credit Losses (1)
|
|
Deductions
|
|
Foreign Currency Translation
|
|
Balance at
End
of Period
|
|
For the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
$
|
23,777
|
|
|
$
|
(5,754
|
)
|
|
$
|
(6,325
|
)
|
|
$
|
(1,090
|
)
|
|
$
|
10,608
|
|
|
March 31, 2019
|
|
$
|
16,604
|
|
|
$
|
4,177
|
|
|
$
|
(6,738
|
)
|
|
$
|
(15
|
)
|
|
$
|
14,028
|
|
(1) The impact of adopting ASC 326 on January 1, 2020 was a net decrease to our allowance for doubtful accounts largely driven by a $13.4 million reclassification to Other current assets, net and Other non-current assets, net, offset by a $2.9 million adjustment to Accumulated earnings (losses).
Contract Acquisition Costs
The following table presents our unamortized contract acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Unamortized contract acquisition costs
|
|
$
|
110,397
|
|
|
$
|
113,592
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the amortization of our contract acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Amortization expense
|
|
$
|
25,431
|
|
|
$
|
21,115
|
|
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2020, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $736.6 million. We expect to recognize 39.6% of our remaining performance obligations of these contracts as revenue in the next twelve months. This amount excludes agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectability of all amounts due through the term of contracts is uncertain.
Disaggregation of Revenue
Geographic Information
The following table presents our revenue from customer contracts disaggregated by primary geographic market and by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hughes
|
|
ESS
|
|
Corporate and Other
|
|
Consolidated
Total
|
|
For the three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
382,715
|
|
|
$
|
4,652
|
|
|
$
|
2,440
|
|
|
$
|
389,807
|
|
|
South and Central America
|
|
33,956
|
|
|
—
|
|
|
92
|
|
|
34,048
|
|
|
Other
|
|
41,811
|
|
|
—
|
|
|
—
|
|
|
41,811
|
|
|
Total revenue
|
|
$
|
458,482
|
|
|
$
|
4,652
|
|
|
$
|
2,532
|
|
|
$
|
465,666
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
367,829
|
|
|
$
|
4,033
|
|
|
$
|
4,872
|
|
|
$
|
376,734
|
|
|
South and Central America
|
|
26,863
|
|
|
—
|
|
|
140
|
|
|
27,003
|
|
|
Other
|
|
50,645
|
|
|
—
|
|
|
—
|
|
|
50,645
|
|
|
Total revenue
|
|
$
|
445,337
|
|
|
$
|
4,033
|
|
|
$
|
5,012
|
|
|
$
|
454,382
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nature of Products and Services
The following table presents our revenue disaggregated by the nature of products and services and by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hughes
|
|
ESS
|
|
Corporate and Other
|
|
Consolidated
Total
|
|
For the three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
Services and other revenue:
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
390,000
|
|
|
$
|
2,765
|
|
|
$
|
1,288
|
|
|
$
|
394,053
|
|
|
Lease revenue
|
|
11,173
|
|
|
1,887
|
|
|
1,244
|
|
|
14,304
|
|
|
Total services and other revenue
|
|
401,173
|
|
|
4,652
|
|
|
2,532
|
|
|
408,357
|
|
|
Equipment revenue:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
24,839
|
|
|
—
|
|
|
—
|
|
|
24,839
|
|
|
Design, development and construction services
|
|
31,557
|
|
|
—
|
|
|
—
|
|
|
31,557
|
|
|
Lease revenue
|
|
913
|
|
|
—
|
|
|
—
|
|
|
913
|
|
|
Total equipment revenue
|
|
57,309
|
|
|
—
|
|
|
—
|
|
|
57,309
|
|
|
Total revenue
|
|
$
|
458,482
|
|
|
$
|
4,652
|
|
|
$
|
2,532
|
|
|
$
|
465,666
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
Services and other revenue:
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
380,783
|
|
|
$
|
2,817
|
|
|
$
|
1,737
|
|
|
$
|
385,337
|
|
|
Lease revenue
|
|
12,840
|
|
|
1,216
|
|
|
3,275
|
|
|
17,331
|
|
|
Total services and other revenue
|
|
393,623
|
|
|
4,033
|
|
|
5,012
|
|
|
402,668
|
|
|
Equipment revenue:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
25,960
|
|
|
—
|
|
|
—
|
|
|
25,960
|
|
|
Design, development and construction services
|
|
25,066
|
|
|
—
|
|
|
—
|
|
|
25,066
|
|
|
Lease revenue
|
|
688
|
|
|
—
|
|
|
—
|
|
|
688
|
|
|
Total equipment revenue
|
|
51,714
|
|
|
—
|
|
|
—
|
|
|
51,714
|
|
|
Total revenue
|
|
$
|
445,337
|
|
|
$
|
4,033
|
|
|
$
|
5,012
|
|
|
$
|
454,382
|
|
Lease Revenue
The following table presents our lease revenue by type of lease:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Sales-type lease revenue:
|
|
|
|
|
|
Revenue at lease commencement
|
|
$
|
913
|
|
|
$
|
688
|
|
|
Interest income
|
|
69
|
|
|
252
|
|
|
Total sales-type lease revenue
|
|
982
|
|
|
940
|
|
|
Operating lease revenue
|
|
14,235
|
|
|
17,079
|
|
|
Total lease revenue
|
|
$
|
15,217
|
|
|
$
|
18,019
|
|
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $6.6 million and $6.5 million as of March 31, 2020 and December 31, 2019, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents future operating lease payments to be received as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Year ending December 31,
|
|
|
|
2020 (remainder)
|
|
$
|
32,008
|
|
|
2021
|
|
34,910
|
|
|
2022
|
|
32,052
|
|
|
2023
|
|
30,285
|
|
|
2024
|
|
28,219
|
|
|
2025 and beyond
|
|
123,520
|
|
|
Total lease payments
|
|
$
|
280,994
|
|
The following table presents amounts for assets subject to operating leases, which are included in Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net
|
|
Customer premises equipment
|
|
$
|
1,409,187
|
|
|
$
|
(1,089,152
|
)
|
|
$
|
320,035
|
|
|
$
|
1,377,914
|
|
|
$
|
(1,043,431
|
)
|
|
$
|
334,483
|
|
|
Satellites
|
|
104,620
|
|
|
(33,104
|
)
|
|
71,516
|
|
|
104,620
|
|
|
(31,360
|
)
|
|
73,260
|
|
|
Real estate
|
|
47,243
|
|
|
(16,374
|
)
|
|
30,869
|
|
|
46,930
|
|
|
(16,048
|
)
|
|
30,882
|
|
|
Total
|
|
$
|
1,561,050
|
|
|
$
|
(1,138,630
|
)
|
|
$
|
422,420
|
|
|
$
|
1,529,464
|
|
|
$
|
(1,090,839
|
)
|
|
$
|
438,625
|
|
The following table presents depreciation expense for assets subject to operating leases, which is included in Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Customer premises equipment
|
|
$
|
45,721
|
|
|
$
|
45,812
|
|
|
Satellites
|
|
1,744
|
|
|
1,737
|
|
|
Real estate
|
|
232
|
|
|
558
|
|
|
Total
|
|
$
|
47,697
|
|
|
$
|
48,107
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 4. DISCONTINUED OPERATIONS
BSS Business
The following table presents the financial results of our discontinued operations for the BSS Business for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Revenue:
|
|
|
|
Services and other revenue - DISH Network
|
|
$
|
70,826
|
|
|
Services and other revenue - other
|
|
5,874
|
|
|
Total revenue
|
|
76,700
|
|
|
Costs and expenses:
|
|
|
|
Cost of sales - services and other (exclusive of depreciation and amortization)
|
|
10,224
|
|
|
Selling, general and administrative expenses
|
|
20
|
|
|
Depreciation and amortization
|
|
35,243
|
|
|
Total costs and expenses
|
|
45,487
|
|
|
Operating income (loss)
|
|
31,213
|
|
|
Other income (expense):
|
|
|
|
Interest expense
|
|
(6,683
|
)
|
|
Total other income (expense), net
|
|
(6,683
|
)
|
|
Income (loss) from discontinued operations before income taxes
|
|
24,530
|
|
|
Income tax benefit (provision), net
|
|
(5,283
|
)
|
|
Net income (loss) from discontinued operations
|
|
$
|
19,247
|
|
No assets or liabilities attributable to our discontinued operations of the BSS Business were held by us as of March 31, 2020 or December 31, 2019.
The following table presents the significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations of the BSS Business for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Operating activities:
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
19,247
|
|
|
Depreciation and amortization
|
|
$
|
35,243
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
Expenditures for property and equipment
|
|
$
|
108
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
Payment of finance lease obligations
|
|
$
|
9,597
|
|
|
Payment of in-orbit incentive obligations
|
|
$
|
1,035
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Terminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. Unless noted differently below, we have no further obligations and have neither earned additional revenue nor incurred additional expense, as applicable, under or in connection with these agreements after the consummation of the BSS Transaction.
Satellite Capacity Leased to DISH Network. We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites, as listed below, owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements. The terms of each of the agreements are set forth below:
|
|
|
|
•
|
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV — In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII satellite, the EchoStar X satellite, the EchoStar XI satellite and the EchoStar XIV satellite.
|
•EchoStar XII — DISH Network leased satellite capacity from us on the EchoStar XII satellite.
|
|
|
|
•
|
EchoStar XVI — In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite beginning in January 2013.
|
|
|
|
|
•
|
Nimiq 5 Agreement — In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service. Following the consummation of the BSS Transaction, we retained certain obligations related to DISH Network’s performance under the Telesat Transponder Agreement.
|
|
|
|
|
•
|
QuetzSat-1 Agreement — In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on five DBS transponders on the QuetzSat-1 satellite.
|
TT&C Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “2012 TT&C Agreement”). The fees for services provided under the 2012 TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Real Estate Leases to DISH Network. We entered into lease agreements pursuant to which DISH Network leased certain real estate from us. The rent on a per square foot basis each of the leases or subsequent amendments was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. These components of the BSS Transaction do not qualify for discontinued operations treatment, and therefore the revenue from these lease agreements has not been treated as discontinued operations. The terms of each of the leases are set forth below:
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
|
|
|
|
•
|
Santa Fe Lease Agreement — DISH Network leased from us all of 5701 S. Santa Fe Dr., Littleton, Colorado. In connection with the BSS Transaction, we transferred this property to DISH Network.
|
|
|
|
|
•
|
Cheyenne Lease Agreement — During 2017, we and certain of our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries whereby we and certain of our subsidiaries received all the shares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”) in exchange for 100% of the equity interests of certain of our subsidiaries that held substantially all of our former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Prior to the Share Exchange, we leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, we transferred ownership of a portion of this property to DISH Network and we and DISH Network amended this agreement to, among other things, provide for a continued lease to DISH Network of the portion of the property we retained (the “Cheyenne Data Center”). In connection with the BSS Transaction, we transferred the Cheyenne Data Center to DISH Network.
|
Real Estate Leases from DISH Network. We entered into a lease agreement pursuant to which we leased from DISH Network certain space at 801 N. DISH Dr. in Gilbert, Arizona for the Satellite Operations Center and Satellite Access Center. The rent on a per square foot basis was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and included our portion of the taxes, insurance, utilities and certain maintenance of the premises. In connection with the BSS Transaction, we terminated this lease and transferred the Gilbert Satellite Operations Center, including any and all equipment, software, processes, software licenses, hardware licenses, furniture and technical documentation located within, to DISH Network.
NOTE 5. BUSINESS COMBINATIONS
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to one of our Brazilian subsidiaries in exchange for a 20% equity ownership interest in that subsidiary (the “Yahsat Brazil JV Transaction”). The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. The results of operations related to the business we acquired from Yahsat have been included in these Condensed Consolidated Financial Statements from the date of acquisition. Through March 31, 2020, we have incurred $1.6 million of costs associated with the closing of the Yahsat Brazil JV Transaction.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
All assets and liabilities acquired from Yahsat have been recorded at fair value. The following table presents our updated preliminary allocation of the purchase price:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,858
|
|
|
Other current assets, net
|
|
7,106
|
|
|
Property and equipment
|
|
86,983
|
|
|
Regulatory authorization
|
|
4,498
|
|
|
Goodwill
|
|
6,328
|
|
|
Other non-current assets, net
|
|
1,502
|
|
|
Total assets
|
|
$
|
114,275
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Trade accounts payable
|
|
$
|
3,879
|
|
|
Accrued expenses and other current liabilities
|
|
4,796
|
|
|
Total liabilities
|
|
$
|
8,675
|
|
|
|
|
|
|
Total purchase price (1)
|
|
$
|
105,600
|
|
(1) Based on the value determined for the equity ownership interest issued by our Brazilian subsidiary as consideration for the business acquired by us in the Yahsat Brazil JV Transaction.
The following preliminary valuation of the acquired assets was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Satellite payload
|
|
$
|
49,363
|
|
|
Regulatory authorization
|
|
4,498
|
|
|
Total
|
|
$
|
53,861
|
|
The satellite payload and regulatory authorization were valued using an income approach and are being amortized over seven and 11 years, respectively.
We recognized goodwill of $6.3 million, including a currency translation adjustment of $1.2 million. The goodwill is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. This goodwill has been allocated entirely to our Hughes segment.
NOTE 6. EARNINGS PER SHARE
We present basic and diluted earnings or losses per share (“EPS”) for our Class A and Class B common stock. Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing Net income (loss) attributable to EchoStar Corporation common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if shares of common stock were issued pursuant to our stock-based compensation awards. The potential dilution from common stock awards is computed using the treasury stock method based on the average market value of our Class A common stock during the period. The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, the effect of which would be anti-dilutive, of 4.8 million and 4.9 million shares for the three months ended March 31, 2020 and 2019, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the calculation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Net income (loss) attributable to EchoStar Corporation common stock:
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(54,295
|
)
|
|
$
|
(5,045
|
)
|
|
Net income (loss) from discontinued operations
|
|
—
|
|
|
19,247
|
|
|
Net income (loss) attributable to EchoStar Corporation common stock
|
|
$
|
(54,295
|
)
|
|
$
|
14,202
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
Class A and B common stock:
|
|
|
|
|
|
Basic and diluted
|
|
97,811
|
|
|
95,386
|
|
|
|
|
|
|
|
|
Earnings (losses) per share:
|
|
|
|
|
|
Class A and B common stock:
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.56
|
)
|
|
$
|
(0.05
|
)
|
|
Discontinued operations
|
|
—
|
|
|
0.20
|
|
|
Total basic and diluted earnings (losses) per share
|
|
$
|
(0.56
|
)
|
|
$
|
0.15
|
|
NOTE 7. MARKETABLE INVESTMENT SECURITIES
The following table presents our Marketable investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Marketable investment securities:
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
Corporate bonds
|
|
$
|
446,515
|
|
|
$
|
568,442
|
|
|
Other debt securities
|
|
303,703
|
|
|
335,580
|
|
|
Total available-for-sale debt securities
|
|
750,218
|
|
|
904,022
|
|
|
Fair value option - corporate bonds
|
|
12,181
|
|
|
9,128
|
|
|
Total debt securities
|
|
762,399
|
|
|
913,150
|
|
|
Equity securities
|
|
29,673
|
|
|
35,566
|
|
|
Total marketable investment securities, including restricted amounts
|
|
792,072
|
|
|
948,716
|
|
|
Less: Restricted marketable investment securities
|
|
(1,711
|
)
|
|
(8,093
|
)
|
|
Total marketable investment securities
|
|
$
|
790,361
|
|
|
$
|
940,623
|
|
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds, commercial paper and mutual funds.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Available-for-Sale
The following table presents the components of our available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
449,483
|
|
|
$
|
—
|
|
|
$
|
(2,968
|
)
|
|
$
|
446,515
|
|
|
Other debt securities
|
|
303,694
|
|
|
9
|
|
|
—
|
|
|
303,703
|
|
|
Total available-for-sale debt securities
|
|
$
|
753,177
|
|
|
$
|
9
|
|
|
$
|
(2,968
|
)
|
|
$
|
750,218
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
567,926
|
|
|
$
|
518
|
|
|
$
|
(2
|
)
|
|
$
|
568,442
|
|
|
Other debt securities
|
|
335,572
|
|
|
8
|
|
|
—
|
|
|
335,580
|
|
|
Total available-for-sale debt securities
|
|
$
|
903,498
|
|
|
$
|
526
|
|
|
$
|
(2
|
)
|
|
$
|
904,022
|
|
The following table presents the activity on our available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Proceeds from sales
|
|
$
|
10,000
|
|
|
$
|
435,978
|
|
|
Gains (losses) on sales, net
|
|
$
|
—
|
|
|
$
|
549
|
|
As of March 31, 2020, we have $705.7 million of available-for-sale debt securities with contractual maturities of one year or less and $44.5 million with contractual maturities greater than one year.
Fair Value Option
The following table presents the activity on our fair value option corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Gains (losses) on investments, net
|
|
$
|
(4,208
|
)
|
|
$
|
4,198
|
|
For the three months ended March 31, 2020 and 2019, we did not have any sales of fair value option corporate bonds.
Equity Securities
The following table presents the activity of our equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Proceeds from sales
|
|
$
|
134
|
|
|
$
|
50,877
|
|
|
Gains (losses) on investments, net
|
|
$
|
(11,115
|
)
|
|
$
|
30,249
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Fair Value Measurements
The following table presents our marketable investment securities categorized by the fair value hierarchy, certain of which have historically experienced volatility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
—
|
|
|
$
|
446,515
|
|
|
$
|
446,515
|
|
|
$
|
—
|
|
|
$
|
568,442
|
|
|
$
|
568,442
|
|
|
Other debt securities
|
|
1,711
|
|
|
301,992
|
|
|
303,703
|
|
|
8,093
|
|
|
327,487
|
|
|
335,580
|
|
|
Total available-for-sale debt securities
|
|
1,711
|
|
|
748,507
|
|
|
750,218
|
|
|
8,093
|
|
|
895,929
|
|
|
904,022
|
|
|
Fair value option - corporate bonds
|
|
—
|
|
|
12,181
|
|
|
12,181
|
|
|
—
|
|
|
9,128
|
|
|
9,128
|
|
|
Total debt securities
|
|
1,711
|
|
|
760,688
|
|
|
762,399
|
|
|
8,093
|
|
|
905,057
|
|
|
913,150
|
|
|
Equity securities
|
|
23,090
|
|
|
6,583
|
|
|
29,673
|
|
|
27,933
|
|
|
7,633
|
|
|
35,566
|
|
|
Total marketable investment securities, including restricted amounts
|
|
24,801
|
|
|
767,271
|
|
|
792,072
|
|
|
36,026
|
|
|
912,690
|
|
|
948,716
|
|
|
Less: Restricted marketable investment securities
|
|
(1,711
|
)
|
|
—
|
|
|
(1,711
|
)
|
|
(8,093
|
)
|
|
—
|
|
|
(8,093
|
)
|
|
Total marketable investment securities
|
|
$
|
23,090
|
|
|
$
|
767,271
|
|
|
$
|
790,361
|
|
|
$
|
27,933
|
|
|
$
|
912,690
|
|
|
$
|
940,623
|
|
As of March 31, 2020 and December 31, 2019, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.
NOTE 8. PROPERTY AND EQUIPMENT
The following tables presents the components of Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Property and equipment, net:
|
|
|
|
|
|
Satellites, net
|
|
$
|
1,688,827
|
|
|
$
|
1,749,576
|
|
|
Other property and equipment, net
|
|
739,716
|
|
|
779,162
|
|
|
Total property and equipment, net
|
|
$
|
2,428,543
|
|
|
$
|
2,528,738
|
|
Satellites
As of March 31, 2020, our operating satellite fleet consisted of 10 satellites, seven of which are owned and three of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents our owned and leased satellites:
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
|
|
Segment
|
|
Launch Date
|
|
Nominal Degree Orbital Location (Longitude)
|
|
Depreciable Life (In Years)
|
|
Owned:
|
|
|
|
|
|
|
|
|
|
SPACEWAY 3 (1)
|
|
Hughes
|
|
August 2007
|
|
95 W
|
|
10
|
|
EchoStar XVII
|
|
Hughes
|
|
July 2012
|
|
107 W
|
|
15
|
|
EchoStar XIX
|
|
Hughes
|
|
December 2016
|
|
97.1 W
|
|
15
|
|
Al Yah 3 (2)
|
|
Hughes
|
|
January 2018
|
|
20 W
|
|
7
|
|
EchoStar IX (3)
|
|
ESS
|
|
August 2003
|
|
121 W
|
|
12
|
|
EUTELSAT 10A (4)
|
|
Corporate and Other
|
|
April 2009
|
|
10 E
|
|
-
|
|
EchoStar XXI
|
|
Corporate and Other
|
|
June 2017
|
|
10.25 E
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
Eutelsat 65 West A
|
|
Hughes
|
|
March 2016
|
|
65 W
|
|
15
|
|
Telesat T19V
|
|
Hughes
|
|
July 2018
|
|
63 W
|
|
15
|
|
EchoStar 105/SES-11
|
|
ESS
|
|
October 2017
|
|
105 W
|
|
15
|
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with Yahsat in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of November 2019.
(3) We own the Ka-band and Ku-band payloads on this satellite.
(4) We acquired the S-band payload on this satellite in December 2013. Prior to acquisition, the S-band payload experienced an anomaly at the time of launch and, as a result, is not fully operational.
The following table presents the components of our satellites, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable Life
(In Years)
|
|
As of
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Satellites, net:
|
|
|
|
|
|
Satellites - owned
|
|
7 to 15
|
|
$
|
1,803,878
|
|
|
$
|
1,816,303
|
|
|
Satellites - acquired under finance leases
|
|
15
|
|
352,206
|
|
|
381,163
|
|
|
Construction in progress
|
|
—
|
|
377,369
|
|
|
365,133
|
|
|
Total satellites
|
|
|
|
2,533,453
|
|
|
2,562,599
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
Satellites - owned
|
|
|
|
(788,241
|
)
|
|
(756,635
|
)
|
|
Satellites - acquired under finance leases
|
|
|
|
(56,385
|
)
|
|
(56,388
|
)
|
|
Total accumulated depreciation
|
|
|
|
(844,626
|
)
|
|
(813,023
|
)
|
|
Total satellites, net
|
|
|
|
$
|
1,688,827
|
|
|
$
|
1,749,576
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the depreciation expense and capitalized interest associated with our satellites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Depreciation expense:
|
|
|
|
|
|
Satellites - owned
|
|
$
|
32,073
|
|
|
$
|
32,015
|
|
|
Satellites acquired under finance leases
|
|
6,013
|
|
|
6,490
|
|
|
Total depreciation expense
|
|
$
|
38,086
|
|
|
$
|
38,505
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
$
|
6,681
|
|
|
$
|
4,901
|
|
Construction in Progress
In August 2017, we entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as enterprise broadband services. In the first quarter of 2020, Space Systems/Loral, LLC (“SS/L”), the manufacturer of our EchoStar XXIV satellite, invoked the “force majeure” clause of our contract and notified us of a possible delay in completion of the satellite due to “shelter-in-place” orders affecting personnel at SS/L and its subcontractors, and other potential impacts of the COVID-19 pandemic. We currently expect the EchoStar XXIV satellite to be launched no earlier than the second half of 2021. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other in our segment reporting.
Satellite Commitments
As of March 31, 2020 and December 31, 2019, our satellite-related obligations were $402.7 million and $419.0 million, respectively. These primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite, payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Satellite Anomalies and Impairments
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the three months ended March 31, 2020.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our long-term debt and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain only for the SPACEWAY 3 satellite, the EchoStar XVII satellite and the Al Yah 3 Brazilian payload, insurance or other contractual arrangements during the commercial in-orbit service of such satellite or payload. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Fair Value of In-Orbit Incentives
As of March 31, 2020 and December 31, 2019, the fair values of our in-orbit incentive obligations from our continuing operations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $56.2 million and $57.0 million, respectively.
NOTE 9. REGULATORY AUTHORIZATIONS
The following table presents the components of our Regulatory authorizations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite lived
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Total
|
|
Indefinite lived
|
|
Total
|
|
Balance, December 31, 2018
|
|
$
|
46,787
|
|
|
$
|
(16,790
|
)
|
|
$
|
29,997
|
|
|
$
|
400,042
|
|
|
$
|
430,039
|
|
|
Amortization expense
|
|
—
|
|
|
(878
|
)
|
|
(878
|
)
|
|
—
|
|
|
(878
|
)
|
|
Foreign currency translation
|
|
(854
|
)
|
|
331
|
|
|
(523
|
)
|
|
—
|
|
|
(523
|
)
|
|
Balance, March 31, 2019
|
|
$
|
45,933
|
|
|
$
|
(17,337
|
)
|
|
$
|
28,596
|
|
|
$
|
400,042
|
|
|
$
|
428,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
58,451
|
|
|
$
|
(20,144
|
)
|
|
$
|
38,307
|
|
|
$
|
440,291
|
|
|
$
|
478,598
|
|
|
Amortization expense
|
|
—
|
|
|
(964
|
)
|
|
(964
|
)
|
|
—
|
|
|
(964
|
)
|
|
Foreign currency translation
|
|
(1,828
|
)
|
|
366
|
|
|
(1,462
|
)
|
|
(5,008
|
)
|
|
(6,470
|
)
|
|
Balance, March 31, 2020
|
|
$
|
56,623
|
|
|
$
|
(20,742
|
)
|
|
$
|
35,881
|
|
|
$
|
435,283
|
|
|
$
|
471,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average useful life
|
|
|
|
13 years
|
|
|
|
|
|
|
Finite Lived Assets
In November 2019, we were granted an S-Band spectrum license for terrestrial rights in Mexico for $7.9 million. The acquired asset is subject to amortization over a period of 15 years.
In November 2019, we also acquired Ka-band spectrum rights for $4.5 million, upon consummation of the Yahsat Brazil JV Transaction, which are subject to amortization over a period of 11 years.
NOTE 10. OTHER INVESTMENTS
The following table presents the components of Other investments, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Other investments, net:
|
|
|
|
|
|
Equity method investments
|
|
$
|
163,689
|
|
|
$
|
166,209
|
|
|
Other equity investments
|
|
43,364
|
|
|
66,627
|
|
|
Other debt investments, net
|
|
91,094
|
|
|
92,569
|
|
|
Total other investments, net
|
|
$
|
298,147
|
|
|
$
|
325,405
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Equity Method Investments
Dish Mexico
We own 49% of Dish Mexico and its subsidiaries, a joint venture that we entered into in 2008 to provide direct-to-home satellite services in Mexico. Historically, we provided certain satellite services to Dish Mexico. However, following the consummation of the BSS Transaction, we no longer provide these services.
Deluxe/EchoStar LLC
We own 50% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $1.3 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had trade accounts receivable from Deluxe of $1.0 million and $0.6 million, respectively.
Broadband Connectivity Solutions (Restricted) Limited
In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS. We recognized revenue from BCS for such services and equipment of $1.7 million and $2.3 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had trade accounts receivable from BCS of $4.5 million and $5.2 million, respectively.
Other Equity Investments
During the three months ended March 31, 2020 and 2019, we recorded a $21.3 million and a $28.7 million, respectively, reduction to the carrying amount of our investments based on circumstances that indicated the fair value of the investment was less than its carrying amount.
Other Debt Investments, Net
The following table presents our other debt investments, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Other debt investments, net:
|
|
|
|
|
|
Cost basis
|
|
$
|
103,768
|
|
|
$
|
102,878
|
|
|
Discount
|
|
(10,442
|
)
|
|
(10,309
|
)
|
|
Allowance for credit losses
|
|
(2,232
|
)
|
|
—
|
|
|
Total other debt investments, net
|
|
$
|
91,094
|
|
|
$
|
92,569
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the activity in our allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Credit Losses(1)
|
|
Deductions
|
|
Balance at
End
of Period
|
|
For the three months ended:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
$
|
—
|
|
|
$
|
2,232
|
|
|
$
|
—
|
|
|
$
|
2,232
|
|
(1) The impact of adopting ASC 326 on January 1, 2020 was a $2.1 million adjustment to Accumulated earnings (losses).
During the three months ended March 31, 2020 and 2019, we recorded interest income related to these debt instruments of $3.3 million and zero, respectively.
NOTE 11. LONG-TERM DEBT
The following table presents the carrying amounts and fair values of our Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rates
|
|
As of
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
5 1/4% Senior Secured Notes due 2026
|
|
5.320%
|
|
$
|
750,000
|
|
|
$
|
748,133
|
|
|
$
|
750,000
|
|
|
$
|
825,308
|
|
|
Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
7 5/8% Senior Unsecured Notes due 2021
|
|
8.062%
|
|
900,000
|
|
|
922,527
|
|
|
900,000
|
|
|
963,783
|
|
|
6 5/8% Senior Unsecured Notes due 2026
|
|
6.688%
|
|
750,000
|
|
|
770,715
|
|
|
750,000
|
|
|
833,903
|
|
|
Less: Unamortized debt issuance costs
|
|
|
|
(9,782
|
)
|
|
|
|
|
(10,832
|
)
|
|
|
|
|
Total long-term debt
|
|
|
|
$
|
2,390,218
|
|
|
$
|
2,441,375
|
|
|
$
|
2,389,168
|
|
|
$
|
2,622,994
|
|
No amounts on our long-term debt are due during the next twelve months.
NOTE 12. INCOME TAXES
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are partially offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.
Our income tax benefit was $7.5 million for the three months ended March 31, 2020 compared to $2.9 million of income tax provision for the three months ended March 31, 2019. Our estimated effective income tax rate was 11.5% and (216.1)% for the three months ended March 31, 2020 and 2019, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act features significant tax provisions and other measures to assist individuals and businesses impacted by the economic effects of the COVID-19 pandemic, including a five-year carryback of net operating losses, relaxation of Section 163(j) interest deduction limitations, acceleration of Alternative Minimum Tax refunds, relief for payroll tax and tax credits for employers who retain employees. These provisions did not affect our income tax provision for the three months ended March 31, 2020.
NOTE 13. CONTINGENCIES
Patents and Intellectual Property
Many entities, including some of our competitors, have or may have in the future patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Certain Arrangements with DISH Network
In connection with our spin-off from DISH in 2008 (the “Spin-off”), we entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, we assumed certain liabilities that relate to our 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 we will generally only be liable for our acts or omissions following the Spin-off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off. In connection with the Share Exchange and the BSS Transaction, we entered into the Share Exchange Agreement and the Master Transaction Agreement, respectively, and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These agreements also contain additional indemnification provisions between us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.
Litigation
We are involved in a number of legal proceedings against us concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or 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 and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending legal proceedings are charged to expense as incurred.
For certain proceedings, management is unable to predict with any degree of certainty the outcome or 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 or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals,
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
motions or other proceedings; (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 are involved (as with many patent-related cases). Except as described below, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We intend to vigorously defend the proceedings against us. In the event that a court, tribunal, other body or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Elbit
On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary Hughes Network Systems, L.L.C. (“HNS”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”). In December 2019, we entered into a comprehensive settlement agreement with Elbit pursuant to which we paid a total of $33.0 million in satisfaction of all amounts relating to these matters and all open proceedings, including appeals, were dismissed with prejudice.
Shareholder Litigation
On July 2, 2019, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust, purporting to sue on behalf of a class of EchoStar Corporation’s stockholders, filed a complaint in the District Court of Clark County, Nevada against our directors, Charles W. Ergen, R. Stanton Dodge, Anthony M. Federico, Pradman P. Kaul, C. Michael Schroeder, Jeffrey R. Tarr, William D. Wade, and Michael T. Dugan; our officer, David J. Rayner; EchoStar Corporation; our subsidiary Hughes Satellite Services Corporation (“HSSC”); our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October 11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as our controlling stockholder, breached fiduciary duties to EchoStar Corporation’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing our and HSSC’s boards of directors to approve the BSS Transaction. The amended complaint also alleges that the other defendants aided and abetted such alleged breaches. The plaintiffs seek equitable and monetary relief, including the issuance of additional DISH Common Stock, and other costs and disbursements, including attorneys’ fees on behalf of the purported class. On November 11, 2019, we and the other defendants filed separate motions to dismiss plaintiff’s amended complaint and during a hearing on January 13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. We intend to vigorously defend this case. We cannot predict its outcome with any degree of certainty.
License Fee Dispute with Government of India, Department of Telecommunications
In 1994, the Government of India promulgated a “National Telecommunications Policy” under which the government liberalized the telecommunications sector and required telecommunications service providers to pay fixed license fees. Pursuant to this policy, our subsidiary Hughes Communications India Private Limited (“HCIPL”), formerly known as Hughes Escorts Communications Limited, obtained a license to operate a data network over satellite using VSAT systems. In 1999, HCIPL’s license was amended pursuant to a new government policy that eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees, interest on such fees and penalties and interest on the penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCPIL is required to pay the DOT, and ordering payment by January 23, 2020. On November 23, 2019, HCIPL and other telecommunication service providers filed a petition asking the Supreme Court to reconsider its decision. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an application requesting that the Supreme Court modify the Order to permit the DOT to calculate the final amount due and extend HCPIL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court denied this application and directed us and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the Supreme Court in October 2019 must be paid, including interest, penalties and interest on the penalties. The Supreme Court also ordered that the parties appear for a further hearing addressing, potentially among other things, a proposal by the DOT to allow for extended or deferred payments of amounts due. This hearing was postponed due to the COVID-19 pandemic and not yet rescheduled. To date, the DOT has issued HCIPL written assessments totaling $28.4 million, comprised of $4.0 million for additional license fees, $4.1 million for penalties and $20.3 million for interest and interest on penalties. In the first quarter of 2020, HCIPL paid the DOT $2.9 million with respect to this matter. As a result of the Supreme Court’s orders in this matter, HCIPL’s payments to date and the impact of foreign exchange rates, and using the DOT’s methodology as reflected in the assessments HCIPL has received as of the date of the Order, we have recorded an accrual of $77.1 million as of March 31, 2020, comprised of $3.8 million for additional license fees, $3.9 million for penalties and $69.4 million for interest and interest on penalties. We had recorded an accrual of $80.2 million as of December 31, 2019. Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accrual and such differences could be significant.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 14. SEGMENT REPORTING
Business segments are components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We operate in two business segments, Hughes and ESS, as described in Note 1. Organization and Business Activities.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”).
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
The following table presents revenue, EBITDA and capital expenditures for each of our business segments. Capital expenditures are net of refunds and other receipts related to our property and equipment.
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Hughes
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ESS
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Corporate and Other
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Consolidated
Total
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For the three months ended March 31, 2020
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|
|
|
|
|
|
|
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External revenue
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|
$
|
458,482
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|
|
$
|
4,367
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|
|
$
|
2,817
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|
|
$
|
465,666
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|
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Intersegment revenue
|
|
—
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|
|
285
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|
|
(285
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)
|
|
—
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|
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Total revenue
|
|
$
|
458,482
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|
|
$
|
4,652
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|
|
$
|
2,532
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|
|
$
|
465,666
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|
|
|
|
|
|
|
|
|
|
|
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EBITDA
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|
$
|
154,641
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|
|
$
|
2,030
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|
|
$
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(65,440
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)
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|
$
|
91,231
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Capital expenditures
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|
$
|
91,517
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|
|
$
|
—
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|
|
$
|
13,087
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|
|
$
|
104,604
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|
|
|
|
|
|
|
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|
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For the three months ended March 31, 2019
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External revenue
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$
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445,337
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|
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$
|
3,852
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|
|
$
|
5,193
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|
|
$
|
454,382
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Intersegment revenue
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|
—
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|
|
181
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|
|
(181
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)
|
|
—
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Total revenue
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|
$
|
445,337
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|
|
$
|
4,033
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|
|
$
|
5,012
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|
|
$
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454,382
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|
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|
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|
|
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EBITDA
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|
$
|
161,132
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|
|
$
|
1,729
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|
|
$
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(17,260
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)
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$
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145,601
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Capital expenditures
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|
$
|
73,821
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|
|
$
|
—
|
|
|
$
|
38,033
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|
|
$
|
111,854
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The following table reconciles Income (loss) from continuing operations before income taxes in the Condensed Consolidated Statements of Operations to EBITDA:
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For the three months
ended March 31,
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2020
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2019
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Income (loss) from continuing operations before income taxes
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$
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(65,229
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)
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$
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(1,341
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)
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Interest income, net
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|
(15,583
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)
|
|
(24,429
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)
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Interest expense, net of amounts capitalized
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|
36,233
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|
|
53,199
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Depreciation and amortization
|
|
132,368
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|
|
118,978
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|
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Net loss (income) attributable to non-controlling interests
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|
3,442
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|
|
(806
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)
|
|
EBITDA
|
|
$
|
91,231
|
|
|
$
|
145,601
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 15. RELATED PARTY TRANSACTIONS - DISH NETWORK
Overview
EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008. A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. In addition, prior to March 2017, DISH Network owned the Tracking Stock, which in the aggregate represented an 80% economic interest in the residential retail satellite broadband business of our Hughes segment. The Tracking Stock was retired in March 2017.
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, we and DISH Network entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network, DISH Network obtains certain products, services and rights from us; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided. We may also enter into additional agreements with DISH Network in the future.
The following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.
Services and Other Revenue — DISH Network
The following table presents our Services and other revenue from DISH Network:
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For the three months ended March 31,
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2020
|
|
2019
|
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Services and other revenue - DISH Network
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|
$
|
10,313
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|
|
$
|
15,062
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The following table presents the related trade accounts receivable:
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As of
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|
|
|
March 31, 2020
|
|
December 31, 2019
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Trade accounts receivable - DISH Network
|
|
$
|
10,948
|
|
|
$
|
10,683
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Satellite Capacity Leased to DISH Network. We have entered into an agreement and have previously entered into a now terminated agreement to lease satellite capacity pursuant to which we have provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depend upon, among other things, the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite and the length of the service arrangements. The terms of these agreements are set forth below:
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|
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•
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EchoStar IX — Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis.
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•
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103 Degree Orbital Location/SES-3 — In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”). In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Spectrum Development Agreement and we exercised our right to terminate the 103 Spectrum Development Agreement.
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year agreement with Ciel pursuant to which we leased certain satellite capacity from Ciel on the SES-3 satellite at the 103 degree west longitude orbital location (the “Ciel 103 Agreement”). In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network leased certain satellite capacity from us on the SES-3 satellite (the “DISH 103 Agreement”). Under the terms of the DISH 103 Agreement, DISH Network made certain monthly payments to us through the service term. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Agreement and we exercised our right to terminate the Ciel 103 Agreement.
Telesat Obligation Agreement. We transferred the Telesat Transponder Agreement to DISH Network as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement. In September 2019, we and DISH Network entered into an agreement whereby DISH Network compensates us for retaining such obligations.
Real Estate Leases to DISH Network. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. 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 at the time of the leases or subsequent amendments and includes DISH Network’s portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
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•
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100 Inverness Occupancy License Agreement — Effective March 2017, DISH Network is licensed to use certain of our space at 100 Inverness Terrace East, Englewood, Colorado for a period ending in December 2020. This agreement may be terminated by either party upon 180 days’ prior notice. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice. In connection with the BSS Transaction, we transferred to DISH Network the Englewood Satellite Operations Center located at 100 Inverness Terrace East, including any and all equipment, hardware licenses, software, processes, software licenses, furniture and technical documentation associated with the satellites transferred in the BSS Transaction.
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|
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•
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Meridian Lease Agreement — The lease for all of 9601 S. Meridian Blvd., Englewood, Colorado was originally for a period ending in December 2016. We and DISH Network have amended this lease over time to, among other things, extend the term through December 2020. After December 2020, this agreement may be converted by mutual consent to a month-to-month lease agreement with either party having the right to terminate upon 30 days’ notice.
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TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment (the “TerreStar Agreements”). In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least 21 days’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless operations and maintenance services are terminated by DISH Network upon at least 90 days’ written notice to us. The provision of hosting services will continue until May 2022. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges. In March 2020, we entered into an agreement with DISH Network pursuant to which we perform certain work and provide certain credits to amounts owed to us under the TerreStar Agreements in exchange for DISH Network’s granting us rights to use certain satellite capacity under the Amended and Restated Professional Services Agreement (as defined below).
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Hughes Broadband Distribution Agreement. Effective October 2012, we and DISH Network, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for the HughesNet service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the HughesNet service. The Distribution Agreement had an initial term of five years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 days’ before the expiration of the then-current term. In February 2014, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
DBSD North America Agreement. In March 2012, DISH Network completed its acquisition of all of the equity of reorganized DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least 21 days’ written notice to us. The provision of hosting services will continue until February 2022 and will automatically renew for an additional five-year period until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
Hughes Equipment and Services Agreement. In February 2019, we and DISH Network entered into an agreement pursuant to which we will sell to DISH Network our HughesNet Service and HughesNet equipment that has been modified to meet DISH Network’s internet-of-things specifications for the transfer of data to DISH Network’s network operations centers. This agreement has an initial term of five years expiring February 2024 with automatic renewal for successive one-year terms unless terminated by DISH Network with at least 180 days‘ written notice to us or by us with at least 365 days’ written notice to DISH Network.
Operating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
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|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Operating expenses - DISH Network
|
|
$
|
1,455
|
|
|
$
|
916
|
|
The following table presents the related trade accounts payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Trade accounts payable - DISH Network
|
|
$
|
1,229
|
|
|
$
|
1,923
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Amended and Restated Professional Services Agreement. In connection with the Spin-off, we entered into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, we and DISH Network agreed that we continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a 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 DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from us (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, we and DISH amended and restated the Professional Services Agreement (as amended to date, the “Amended and Restated Professional Services Agreement”) to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the Share Exchange, including access to antennas owned by DISH Network for our use in performing TT&C services and maintenance and support services for our antennas (collectively, the “TT&C Antennas”). In September 2019, in connection with the BSS Transaction, we and DISH further amended the Amended and Restated Professional Services Agreement to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. The term of the Amended and Restated Professional Services Agreement is through January 2021 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice. We or DISH Network may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice, unless the statement of work for particular services states otherwise. Certain services being provided for under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Leases from DISH Network. We have entered into lease agreements pursuant to which we lease certain real estate from DISH Network. The rent on a per square foot basis is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and, includes our portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
|
|
|
|
•
|
Cheyenne Lease Agreement — Effective March 2017, we entered into a lease with DISH Network for certain space at 530 EchoStar Drive in Cheyenne, Wyoming for a period ending in February 2019. In August 2018, we exercised our option to renew this lease for a one year period ending in February 2020. In connection with the BSS Transaction, we transferred the Cheyenne Satellite Operations Center, including any equipment, software licenses, and furniture located within, to DISH Network and amended this lease to reduce the space provided to us for the Cheyenne Satellite Access Center for a period ending in September 2021, with the option for us to renew for a one year period upon 180 days’ written notice prior to the end of the term.
|
|
|
|
|
•
|
American Fork Occupancy License Agreement — Effective March 2017, we entered into an agreement with DISH Network for certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We exercised our option to renew this agreement for a five-year period ending in August 2022. We and DISH Network amended this agreement to, among other things, terminate this agreement in March 2019.
|
Collocation and Antenna Space Agreements. We and DISH Network have entered into an agreement pursuant to which DISH Network provides us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and provides us with renewal options for four consecutive years. Effective August 2015, we exercised our first renewal option for a period ending in August 2018 and in April 2018 we exercised our second renewal option for a period ending in August 2021. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement to be effective May 2020. In August 2017, we and DISH Network also entered into
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to us in Monee, Illinois and Spokane, Washington through August 2022. Generally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides us with certain additional collocation space in Cheyenne, Wyoming for a period ending in September 2020, with the option for us to renew for a one-year period, with prior written notice no more than 120 days but no less than 90 days prior to the end of the term. The fees for the services provided under these agreements depend on the number of racks located at the location.
Also in connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network will provide us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing no later than October 2020, with four three-year renewal terms, with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term.
Hughes Broadband Master Services Agreement. In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years through March 2022 with automatic renewal for successive one-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $4.6 million and $4.8 million for the three months ended March 31, 2020 and 2019, respectively.
2019 TT&C Agreement. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides TT&C services to us for a period ending in September 2021, with the option for us to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “2019 TT&C Agreement”). The fees for services provided under the 2019 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. Any party is able to terminate the 2019 TT&C Agreement for any reason upon 12 months’ notice.
Other Receivables - DISH Network
The following table presents our other receivables owed from DISH Network:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Other receivables - DISH Network
|
|
$
|
93,299
|
|
|
$
|
92,892
|
|
Tax Sharing Agreement. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our and DISH Network’s 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 DISH Network and DISH Network indemnifies us for such taxes. However, DISH Network is not liable for and does not indemnify us 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 Code, because of: (i) a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take or (iii) any action that we take that is inconsistent with the information and representations furnished to the 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, we will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
expenses. The Tax Sharing Agreement will 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, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our non-current deferred tax liabilities. The agreement with DISH Network in 2013 requires DISH Network to pay us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a non-current receivable from DISH Network in Other receivables - DISH Network and a corresponding increase in our Deferred tax liabilities, net to reflect the effects of this agreement in September 2013. In addition, in September 2013, we and DISH Network 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 DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
In August 2018, we and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, to the extent permitted by applicable tax law, DISH Network is entitled to apply the benefit of our 2009 net operating losses (the “SATS 2009 NOLs”) to DISH Network’s federal tax return for the year ended December 31, 2008, in exchange for DISH Network paying us over time the value of the net annual federal income taxes paid by us that would have been otherwise offset by the SATS 2009 NOLs. The Tax Sharing Amendment also requires us and DISH Network to pay the other for the benefits of certain past and future federal research and development tax credits that we or DISH Network receive or received as a result of being part of a controlled group under the Code, and requires DISH Network to compensate us for certain past tax losses utilized by DISH Network and for certain past and future excess California research and development tax credits generated by us and used by DISH Network. In addition, the Tax Sharing Amendment extends the term of the State Tax Arrangement to the earlier to occur of termination of the Tax Sharing Agreement, a change in control of either us or DISH Network or, for any particular state, if we and DISH Network no longer file a combined tax return for such state.
We and DISH Network file combined income tax returns in certain states. We have earned and recognized tax benefits for certain state income tax credits that we would be unable to utilize currently if we had filed separately from DISH Network. We have charged Additional paid-in capital in prior periods when DISH Network has utilized such tax benefits. We expect to increase Additional paid-in capital upon receipt of any consideration that DISH Network pays to us in exchange for these tax credits.
Other Agreements
Master Transaction Agreement. In May 2019, we and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) we transferred the BSS Business to BSS Corp.; (ii) we completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by us and DISH Network, including our representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities. We and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively.
BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the BSS Business acquired pursuant to the
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
BSS Transaction, 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, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, we are responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the BSS Business from and after the BSS Transaction. Both we and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both we and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify us if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal income tax purposes. This tax matters agreement supplements the Tax Sharing Agreement outlined above and the Share Exchange Tax Matters Agreement outlined below, both of which continue in full force and effect.
BSS Transaction Employee Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, 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. DISH Network assumed employee-related liabilities relating to the BSS Business as part of the BSS Transaction, except that we are responsible for certain pre-BSS Transaction compensation and benefits for employees who transferred to DISH Network in connection with the BSS Transaction.
Share Exchange Agreement. In January 2017, we and certain of our subsidiaries entered into the Share Exchange Agreement with DISH and certain of its subsidiaries pursuant to which, in February 2017, we received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, we no longer operate the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange Agreement, we transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by us related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. We and DISH Network also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by us or DISH causes the transaction to be taxable to the other party after closing.
Share Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an intellectual property and technology license agreement (“IPTLA”) pursuant to which we and DISH Network 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, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, we are responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both we and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and DISH Network 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, DISH Network has agreed to indemnify us if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), 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 outlined above, which continues in full force and effect.
Share Exchange Employee Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, 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. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain existing employee related litigation as well as certain pre-Share Exchange compensation and benefits for employees who transferred to DISH Network in connection with the Share Exchange.
NOTE 16. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation
We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately 43% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc. and a member of our board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, in the aggregate, own approximately 25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of March 31, 2020. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in these Condensed Consolidated Financial Statements.
TerreStar Solutions, Inc.
DISH Network owns more than 15% of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $2.2 million and $5.1 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had trade accounts receivable from TSI of $2.3 million and $2.7 million, respectively.
Global-IP Cayman
In May 2017, we entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and services to Global IP. Mr. William David Wade, a member of our board of directors, served as a member of the board of directors of Global IP and as an executive advisor to the Chief Executive Officer of Global IP from September 2017 until April 2019 and from September 2017 until December 2019, respectively. In August 2018, we and Global IP amended the agreement to: (i) change certain of the equipment and services to be provided to Global IP, (ii) modify certain payment terms, (iii) provide Global IP an option to use one of our test lab facilities and (iv) effectuate the assignment of the agreement from Global IP to one of its wholly-owned subsidiaries. In February 2019, we terminated the agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
under the terms of the agreement and we reserved our rights and remedies against Global IP under the agreement. We recognized revenue under this agreement of zero for each of the three months ended March 31, 2020 and 2019. As of both March 31, 2020 and December 31, 2019, we were owed $7.5 million from Global IP.
Maxar Technologies Inc.
Mr. Jeffrey Tarr, who joined our board of directors in March 2019, served as a consultant and advisor to Maxar Technologies Inc. and its subsidiaries (“Maxar Tech”) through May 2019. We previously entered into agreements with Maxar Tech for the manufacture and certain other services of the EchoStar IX satellite, the EchoStar XVII satellite, the EchoStar XIX satellite, the EchoStar XXI satellite and the EchoStar XXIV satellite and our former EchoStar XI satellite, EchoStar XIV satellite, EchoStar XVI satellite and EchoStar XXIII satellite. Maxar Tech provides us with anomaly support for these satellites once launched pursuant to the terms of the agreements. Maxar Tech also provides a warranty on one of these satellites and may be required to pay us certain amounts should the satellite not operate according to certain performance specifications. Our obligations to pay Maxar Tech under these agreements during the design life of the applicable satellites may be reduced if the applicable satellites do not operate according to certain performance specifications. We incurred aggregate costs payable to Maxar Tech under these agreements of $7.9 million and $35.7 million for the three months ended March 31, 2020 and 2019, respectively. At both March 31, 2020 and December 31, 2019, we had no trade accounts payable to Maxar Tech.
NOTE 17. SUPPLEMENTAL FINANCIAL INFORMATION
Research and Development
The following table presents the research and development costs incurred in connection with customers’ orders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Cost of sales - equipment (exclusive of depreciation and amortization)
|
|
$
|
6,692
|
|
|
$
|
5,395
|
|
|
Research and development expenses
|
|
$
|
6,254
|
|
|
$
|
6,888
|
|
Cash and Cash Equivalents and Restricted Cash
The following table reconciles Cash and cash equivalents and restricted cash, as presented in the Condensed Consolidated Balance Sheets, to the total of the same as presented in the Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Cash and cash equivalents, including restricted amounts, beginning of period:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,519,431
|
|
|
$
|
928,306
|
|
|
Restricted cash
|
|
2,458
|
|
|
1,189
|
|
|
Total cash and cash equivalents, included restricted amounts, beginning of period
|
|
$
|
1,521,889
|
|
|
$
|
929,495
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted amounts, end of period:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,599,025
|
|
|
$
|
1,349,724
|
|
|
Restricted cash
|
|
8,278
|
|
|
982
|
|
|
Total cash and cash equivalents, included restricted amounts, end of period
|
|
$
|
1,607,303
|
|
|
$
|
1,350,706
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other Current Assets, Net and Other Non-Current Assets, Net
The following table presents the components of Other current assets, net and Other non-current assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Other current assets, net:
|
|
|
|
|
|
Trade accounts receivable - DISH Network
|
|
$
|
10,948
|
|
|
$
|
10,683
|
|
|
Inventory
|
|
88,446
|
|
|
79,621
|
|
|
Prepaids and deposits
|
|
52,380
|
|
|
50,145
|
|
|
Contract acquisition costs, net
|
|
14,290
|
|
|
16,869
|
|
|
Other, net
|
|
23,823
|
|
|
22,213
|
|
|
Total other current assets, net
|
|
$
|
189,887
|
|
|
$
|
179,531
|
|
|
|
|
|
|
|
|
Other non-current assets, net:
|
|
|
|
|
|
Other receivables - DISH Network
|
|
$
|
93,299
|
|
|
$
|
92,892
|
|
|
Restricted marketable investment securities
|
|
1,711
|
|
|
8,093
|
|
|
Restricted cash
|
|
8,278
|
|
|
2,458
|
|
|
Deferred tax assets, net
|
|
7,145
|
|
|
7,251
|
|
|
Capitalized software, net
|
|
104,401
|
|
|
101,786
|
|
|
Contract acquisition costs, net
|
|
96,107
|
|
|
96,723
|
|
|
Contract fulfillment costs, net
|
|
2,782
|
|
|
3,010
|
|
|
Other, net
|
|
25,917
|
|
|
22,628
|
|
|
Total other non-current assets, net
|
|
$
|
339,640
|
|
|
$
|
334,841
|
|
The following table presents the activity in our allowance for doubtful accounts, which is included within Other, net in each of Other current assets, net and Other non-current assets, net in the table above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Credit Losses (1)
|
|
Deductions
|
|
Foreign Currency Translation
|
|
Balance at
End
of Period
|
|
For the three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets, net
|
|
$
|
—
|
|
|
$
|
1,595
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,595
|
|
|
Other non-current assets, net
|
|
$
|
—
|
|
|
$
|
13,379
|
|
|
$
|
—
|
|
|
$
|
(358
|
)
|
|
$
|
13,021
|
|
(1) The impact of adopting ASC 326 on January 1, 2020 was a net increase to our allowance for doubtful accounts largely driven by a $13.4 million reclassification from Trade accounts receivables and contracts assets, net.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Accrued Expenses and Other Current Liabilities
The following table presents the components of Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
Trade accounts payable - DISH Network
|
|
$
|
1,229
|
|
|
$
|
1,923
|
|
|
Accrued interest
|
|
36,072
|
|
|
42,622
|
|
|
Accrued compensation
|
|
38,542
|
|
|
50,787
|
|
|
Accrued taxes
|
|
18,183
|
|
|
18,525
|
|
|
Operating lease obligation
|
|
13,527
|
|
|
14,651
|
|
|
Other
|
|
132,153
|
|
|
142,371
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
239,706
|
|
|
$
|
270,879
|
|
Inventory
The following table presents the components of inventory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Raw materials
|
|
$
|
8,399
|
|
|
$
|
4,240
|
|
|
Work-in-process
|
|
9,421
|
|
|
6,979
|
|
|
Finished goods
|
|
70,626
|
|
|
68,402
|
|
|
Total inventory
|
|
$
|
88,446
|
|
|
$
|
79,621
|
|
Supplemental and Non-cash Investing and Financing Activities
The following table presents the supplemental and non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
43,847
|
|
|
$
|
54,572
|
|
|
Cash paid for income taxes
|
|
$
|
716
|
|
|
$
|
772
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Employee benefits paid in Class A common stock
|
|
$
|
6,920
|
|
|
$
|
6,654
|
|
|
Increase (decrease) in capital expenditures included in accounts payable, net
|
|
$
|
(5,549
|
)
|
|
$
|
(15,320
|
)
|
|
Non-cash net assets received in exchange for a 20% ownership interest in our existing Brazilian subsidiary
|
|
$
|
2,824
|
|
|
$
|
—
|
|