UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ | ||
Non-accelerated filer ☐ | Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of April 27, 2020, the registrant’s outstanding common stock consisted of
TABLE OF CONTENTS
i | ||
Condensed Consolidated Balance Sheets — | 1 | |
2 | ||
3 | ||
4 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 5 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 74 | |
104 | ||
104 | ||
104 | ||
104 | ||
106 | ||
Item 3. | Defaults Upon Senior Securities | None |
Item 4. | Mine Safety Disclosures | None |
Item 5. | Other Information | None |
107 | ||
108 | ||
PART I — FINANCIAL INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries and “DISH DBS” refers to DISH DBS Corporation, a wholly-owned, indirect subsidiary of DISH Network, and its subsidiaries.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our plans, objectives and strategies, growth opportunities in our industries and businesses, our expectations regarding future results, financial condition, liquidity and capital requirements, our estimates regarding the impact of regulatory developments and legal proceedings, and other trends and projections. Forward-looking statements are not historical facts and may be identified by words such as “future,” “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “will,” “would,” “could,” “can,” “may,” and similar terms. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve known and unknown risks, uncertainties and other factors, which may be beyond our control. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including, but not limited to, the following:
Competition and Economic Risks
| ● | As the pay-TV industry has matured and bundled offers combining video, broadband and/or wireless services have become more prevalent and competitive, we face intense and increasing competition from providers of video, broadband and/or wireless services, which may require us to further increase subscriber acquisition and retention spending or accept lower subscriber activations and higher subscriber churn. |
| ● | Changing consumer behavior and competition from digital media companies that provide or facilitate the delivery of video content via the Internet may reduce our subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us. |
| ● | Economic weakness and uncertainty may adversely affect our ability to grow or maintain our business. |
| ● | The COVID-19 pandemic and its impact on the economic environment generally, and on us specifically, have adversely impacted our business. Furthermore, any continuation or worsening of the pandemic and economic environment could have a material adverse effect on our business, financial condition and results of operations. |
| ● | Our competitors may be able to leverage their relationships with programmers to reduce their programming costs and/or offer exclusive content that will place them at a competitive advantage to us. |
| ● | Our over-the-top (“OTT”) Sling TV Internet-based services face certain risks, including, among others, significant competition. |
| ● | If government regulations relating to the Internet change, we may need to alter the manner in which we conduct our Sling TV business, and/or incur greater operating expenses to comply with those regulations. |
| ● | Changes in how network operators handle and charge for access to data that travels across their networks could adversely impact our business. |
| ● | We face increasing competition from other distributors of unique programming services such as foreign language, sports programming and original content that may limit our ability to maintain subscribers that desire these unique programming services. |
i
Operational and Service Delivery Risks
| ● | If our operational performance and customer satisfaction were to deteriorate, our subscriber activations and our subscriber churn rate may be negatively impacted, which could in turn adversely affect our revenue. |
| ● | If our subscriber activations decrease, or if our subscriber churn rate, subscriber acquisition costs or retention costs increase, our financial performance will be adversely affected. |
| ● | Programming expenses are increasing and may adversely affect our future financial condition and results of operations. |
| ● | We depend on others to provide the programming that we offer to our subscribers and, if we fail to obtain or lose access to certain programming, our subscriber activations and our subscriber churn rate may be negatively impacted. |
| ● | We may not be able to obtain necessary retransmission consent agreements at acceptable rates, or at all, from local network stations. |
| ● | We may be required to make substantial additional investments to maintain competitive programming offerings. |
| ● | Any failure or inadequacy of our information technology infrastructure and communications systems or those of third parties that we use in our operations, including, without limitation, those caused by cyber-attacks or other malicious activities, could disrupt or harm our business. |
| ● | Technology in the pay-TV industry changes rapidly, and our success may depend in part on our timely introduction and implementation of, and effective investment in, new competitive products and services, and our failure to do so could cause our products and services to become obsolete and could negatively impact our business. |
| ● | We rely on a single vendor or a limited number of vendors to provide certain key products or services to us such as information technology support, billing systems and security access devices, and the inability of these key vendors to meet our needs could have a material adverse effect on our business. |
| ● | We rely on a few suppliers and in some cases a single supplier for many components of our new set-top boxes, and any reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business. |
| ● | Our programming signals are subject to theft, and we are vulnerable to other forms of fraud that could require us to make significant expenditures to remedy. |
| ● | We depend on independent third parties to solicit orders for our DISH TV services that represent a meaningful percentage of our total gross new DISH TV subscriber activations. |
| ● | We have limited satellite capacity and failures or reduced capacity could adversely affect our DISH TV services. |
| ● | Our owned and leased satellites are subject to construction, launch, operational and environmental risks that could limit our ability to utilize these satellites. |
| ● | Satellite anomalies or technological failures could adversely affect the value of a particular satellite or result in a complete loss. Some of the satellites acquired pursuant to the Master Transaction Agreement have experienced anomalies that may affect their useful lives or prohibit us from operating them to their currently expected capacity, and one or more of the satellites may suffer a technological failure, either of which could have an adverse effect on our business, financial condition and results of operations. |
ii
| ● | We generally do not carry commercial in-orbit insurance on any of the satellites that we own and could face significant impairment charges if any of our owned satellites fail. |
| ● | We may have potential conflicts of interest with EchoStar due to our common ownership and management. |
| ● | We rely on key personnel and the loss of their services may negatively affect our business. |
Acquisition and Capital Structure Risks
| ● | We have made substantial investments to acquire certain wireless spectrum licenses and other related assets. In addition, we have made substantial non-controlling investments in the Northstar Entities and the SNR Entities related to AWS-3 wireless spectrum licenses. |
| ● | We face certain risks related to our non-controlling investments in the Northstar Entities and the SNR Entities, which may have a material adverse effect on our business, results of operations and financial condition. |
| ● | To the extent that we commercialize our wireless spectrum licenses, we will face certain risks entering and competing in the wireless services industry and operating a wireless services business. |
| ● | Our wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The failure to meet such build-out and/or renewal requirements may have a material adverse effect on our business, results of operations and financial condition. |
| ● | We rely on highly skilled personnel for our wireless business, including without limitation our ability to meet build-out requirements, and if we are unable to hire and retain key personnel or hire qualified personnel then our wireless business may be adversely affected. |
| ● | The Prepaid Business Sale may not be completed on the terms or timeline currently contemplated, or at all, as we and the Sellers may be unable to satisfy the conditions or obtain the approvals required to complete the Prepaid Business Sale or such approvals may contain material restrictions or conditions. |
| ● | We may fail to realize all of the anticipated benefits of the Prepaid Business Sale. |
| ● | The integration of the BSS Business may not be as successful as anticipated. |
| ● | We may fail to realize all of the anticipated benefits of the Master Transaction Agreement. |
| ● | Despite the acquisition of additional satellites acquired pursuant to the Master Transaction Agreement, we continue to have limited satellite capacity, and failures or reduced capacity could adversely affect our DISH TV services. |
| ● | Current DISH Network stockholders have reduced ownership and voting interest in and exercise less influence over management of DISH Network following the closing of the Master Transaction Agreement. |
| ● | If we were to take certain actions that could cause the Distribution to become taxable to EchoStar, we may be required to indemnify EchoStar for any resulting tax liability, and the indemnity amounts could be substantial. |
| ● | We may pursue acquisitions and other strategic transactions to complement or expand our business that may not be successful, and we may lose up to the entire value of our investment in these acquisitions and transactions. |
| ● | We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in our business and to finance acquisitions and other strategic transactions. |
iii
| ● | We have substantial debt outstanding and may incur additional debt. |
| ● | The conditional conversion features of our 3 3/8% Convertible Notes due 2026 (the “Convertible Notes due 2026”) and our 2 3/8% Convertible Notes due 2024 (the “Convertible Notes due 2024,” and collectively with the Convertible Notes due 2026, the “Convertible Notes”), if triggered, may adversely affect our financial condition. |
| ● | The convertible note hedge and warrant transactions that we entered into in connection with the offering of the Convertible Notes due 2026 may affect the value of the Convertible Notes due 2026 and our Class A common stock. |
| ● | We are subject to counterparty risk with respect to the convertible note hedge transactions. |
| ● | From time to time a portion of our investment portfolio may be invested in securities that have limited liquidity and may not be immediately accessible to support our financing needs, including investments in public companies that are highly speculative and have experienced and continue to experience volatility. |
| ● | It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our ownership structure. |
| ● | We are controlled by one principal stockholder who is also our Chairman. |
Legal and Regulatory Risks
| ● | The rulings in the Telemarketing litigation requiring us to pay up to an aggregate amount of $280 million and imposing certain injunctive relief against us, if upheld, would have a material adverse effect on our cash, cash equivalents and marketable investment securities balances and our business operations. |
| ● | Our business may be materially affected by the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). Negative or unexpected tax consequences could adversely affect our business, financial condition and results of operations. |
| ● | Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. |
| ● | We are, and may become, party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property. |
| ● | Our ability to distribute video content via the Internet, including our Sling TV services, involves regulatory risk. |
| ● | Changes in the Cable Act of 1992 (“Cable Act”), and/or the rules of the Federal Communications Commission (“FCC”) that implement the Cable Act, may limit our ability to access programming from cable-affiliated programmers at nondiscriminatory rates. |
| ● | The injunction against our retransmission of distant networks, which is currently waived, may be reinstated. |
| ● | We are subject to significant regulatory oversight, and changes in applicable regulatory requirements, including any adoption or modification of laws or regulations relating to the Internet, could adversely affect our business. |
| ● | Our DISH TV services depend on FCC licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted. |
iv
| ● | We are subject to digital high-definition (“HD”) “carry-one, carry-all” requirements that cause capacity constraints. |
| ● | Our business, investor confidence in our financial results and stock price may be adversely affected if our internal controls are not effective. |
| ● | We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”). |
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (the “10-K”) filed with the SEC, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC. All cautionary statements made or referred to herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described or referred to herein and should not place undue reliance on any forward-looking statements. The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation to update these forward-looking statements.
v
Item 1. FINANCIAL STATEMENTS
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
As of | ||||||
March 31, | December 31, | |||||
2020 |
| 2019 |
| |||
Assets | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Marketable investment securities | | | ||||
Trade accounts receivable, net of allowance for credit losses and allowance for doubtful accounts of $ | | | ||||
Inventory | | | ||||
Other current assets | | | ||||
Total current assets | | | ||||
Noncurrent Assets: | ||||||
Restricted cash, cash equivalents and marketable investment securities | | | ||||
Property and equipment, net | | | ||||
FCC authorizations | | | ||||
Other investment securities | | | ||||
Operating lease assets | | | ||||
Other noncurrent assets, net | | | ||||
Total noncurrent assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities and Stockholders' Equity (Deficit) | ||||||
Current Liabilities: | ||||||
Trade accounts payable | $ | | $ | | ||
Deferred revenue and other | | | ||||
Accrued programming | | | ||||
Accrued interest | | | ||||
Other accrued expenses | | | ||||
Current portion of long-term debt and finance lease obligations | | | ||||
Total current liabilities | | | ||||
Long-Term Obligations, Net of Current Portion: | ||||||
Long-term debt and finance lease obligations, net of current portion | | | ||||
Deferred tax liabilities | | | ||||
Operating lease liabilities | | | ||||
Long-term deferred revenue and other long-term liabilities | | | ||||
Total long-term obligations, net of current portion | | | ||||
Total liabilities | | | ||||
Commitments and Contingencies (Note 10) | ||||||
Redeemable noncontrolling interests (Note 2) | | | ||||
Stockholders’ Equity (Deficit): | ||||||
Class A common stock, $ | | | ||||
Class B common stock, $ | | | ||||
Additional paid-in capital | | | ||||
Accumulated other comprehensive income (loss) | | ( | ||||
Accumulated earnings (deficit) | | | ||||
Total DISH Network stockholders’ equity (deficit) | | | ||||
Noncontrolling interests | ( | ( | ||||
Total stockholders’ equity (deficit) | | | ||||
Total liabilities and stockholders’ equity (deficit) | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended | ||||||
March 31, | ||||||
2020 |
| 2019 |
| |||
Revenue: | ||||||
Subscriber-related revenue | $ | | $ | | ||
Equipment sales and other revenue | | | ||||
Total revenue | | | ||||
Costs and Expenses (exclusive of depreciation shown separately below - Note 7): | ||||||
Subscriber-related expenses | | | ||||
Satellite and transmission expenses | | | ||||
Cost of sales - equipment and other | | | ||||
Subscriber acquisition costs: | ||||||
Cost of sales - subscriber promotion subsidies | | | ||||
Other subscriber acquisition costs | | | ||||
Subscriber acquisition advertising | | | ||||
Total subscriber acquisition costs | | | ||||
General and administrative expenses | | | ||||
Depreciation and amortization (Note 7) | | | ||||
Impairment of long-lived assets (Note 2) | | — | ||||
Total costs and expenses | | | ||||
Operating income (loss) | | | ||||
Other Income (Expense): | ||||||
Interest income | | | ||||
Interest expense, net of amounts capitalized | ( | ( | ||||
Other, net | | | ||||
Total other income (expense) | | | ||||
Income (loss) before income taxes | | | ||||
Income tax (provision) benefit, net | ( | ( | ||||
Net income (loss) | | | ||||
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | ||||
Net income (loss) attributable to DISH Network | $ | | $ | | ||
Weighted-average common shares outstanding - Class A and B common stock: | ||||||
Basic | | | ||||
Diluted | | | ||||
Earnings per share - Class A and B common stock: | ||||||
Basic net income (loss) per share attributable to DISH Network | $ | | $ | | ||
Diluted net income (loss) per share attributable to DISH Network | $ | | $ | | ||
Comprehensive Income (Loss): | ||||||
Net income (loss) | $ | | $ | | ||
Other comprehensive income (loss): | ||||||
Foreign currency translation adjustments | | | ||||
Unrealized holding gains (losses) on available-for-sale debt securities | ( | | ||||
Deferred income tax (expense) benefit, net | | ( | ||||
Total other comprehensive income (loss), net of tax | | | ||||
Comprehensive income (loss) | | | ||||
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax | | | ||||
Comprehensive income (loss) attributable to DISH Network | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
| Accumulated | |||||||||||||||||||||
Class A and B | Additional | Other | Accumulated | Redeemable | ||||||||||||||||||
Common | Paid-In | Comprehensive | Earnings | Noncontrolling | Noncontrolling | |||||||||||||||||
Stock | Capital | Income (Loss) | (Deficit) | Interests | Total | Interests | ||||||||||||||||
Balance, December 31, 2018 | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Issuance of Class A common stock: | ||||||||||||||||||||||
Exercise of stock awards | — | | — | — | — | | — | |||||||||||||||
Employee Stock Purchase Plan | | | — | — | — | | — | |||||||||||||||
Non-cash, stock-based compensation | — | | — | — | — | | — | |||||||||||||||
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | — | — | | — | — | | — | |||||||||||||||
Deferred income tax (expense) benefit attributable to unrealized gains (losses) on available-for-sale securities | — | — | ( | — | — | ( | — | |||||||||||||||
Foreign currency translation | — | — | | — | — | | — | |||||||||||||||
Net income (loss) attributable to noncontrolling interests | — | — | — | — | | | | |||||||||||||||
Net income (loss) attributable to DISH Network | — | — | — | | — | | — | |||||||||||||||
Balance, March 31, 2019 | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Balance, December 31, 2019 | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Issuance of Class A common stock: | ||||||||||||||||||||||
Exercise of stock awards | — | | — | — | — | | — | |||||||||||||||
Employee Stock Purchase Plan | | | — | — | — | | — | |||||||||||||||
Non-cash, stock-based compensation | — | | — | — | — | | — | |||||||||||||||
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | — | — | ( | — | — | ( | — | |||||||||||||||
Deferred income tax (expense) benefit attributable to unrealized gains (losses) on available-for-sale securities | — | — | | — | — | | — | |||||||||||||||
Foreign currency translation | — | — | | — | — | | — | |||||||||||||||
Net income (loss) attributable to noncontrolling interests | — | — | — | — | | | — | |||||||||||||||
Net income (loss) attributable to DISH Network | — | — | — | | — | | | |||||||||||||||
Balance, March 31, 2020 | $ | | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended | |||||||
March 31, | |||||||
| 2020 |
| 2019 |
| |||
Cash Flows From Operating Activities: | |||||||
Net income (loss) |
| $ | | $ | | ||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | |||||||
Depreciation and amortization | | | |||||
Impairment of long-lived assets (Note 2) | | — | |||||
Realized and unrealized losses (gains) on investments | ( | ( | |||||
Non-cash, stock-based compensation | | | |||||
Deferred tax expense (benefit) | | | |||||
Allowance for credit losses and allowance for doubtful accounts, respectively | | | |||||
Other, net | | ( | |||||
Changes in current assets and current liabilities, net | | | |||||
Net cash flows from operating activities | | | |||||
Cash Flows From Investing Activities: | |||||||
Purchases of marketable investment securities | ( | ( | |||||
Sales and maturities of marketable investment securities | | | |||||
Purchases of property and equipment | ( | ( | |||||
Capitalized interest related to FCC authorizations (Note 2) | ( | ( | |||||
Other, net | | | |||||
Net cash flows from investing activities | ( | ( | |||||
Cash Flows From Financing Activities: | |||||||
Redemption and repurchases of senior notes | — | ( | |||||
Repayment of long-term debt and finance lease obligations | ( | ( | |||||
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan | | | |||||
Other, net | | | |||||
Net cash flows from financing activities | ( | | |||||
Net increase (decrease) in cash, cash equivalents, restricted cash and cash equivalents | | | |||||
Cash, cash equivalents, restricted cash and cash equivalents, beginning of period (Note 5) | | | |||||
Cash, cash equivalents, restricted cash and cash equivalents, end of period (Note 5) | $ | | $ | | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Organization and Business Activities
Principal Business
DISH Network Corporation is a holding company. Its subsidiaries (which together with DISH Network Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our,” unless otherwise required by the context) operate
Pay-TV
We offer pay-TV services under the DISH® brand and the Sling® brand (collectively “Pay-TV” services). The DISH branded pay-TV service consists of, among other things, FCC licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in our operations (“DISH TV”). We also design, develop and distribute receiver systems and provide digital broadcast operations, including satellite uplinking/downlinking, transmission and other services to third-party pay-TV providers. The Sling branded pay-TV services consist of, among other things, multichannel, live-linear streaming OTT Internet-based domestic, international and Latino video programming services (“Sling TV”). As of March 31, 2020, we had
Recent Developments
Sprint Asset Acquisition
Asset Purchase Agreement
On July 26, 2019, we entered into an Asset Purchase Agreement (the “APA”) with T-Mobile US, Inc. (“TMUS”) and Sprint Corporation (“Sprint” and together with TMUS, the “Sellers” and given the consummation of the Sprint-TMUS merger, sometimes referred to as “NTM”).
Pursuant to the APA, at the closing of the transaction, NTM will sell to us and we will acquire from NTM certain assets and liabilities associated with Sprint’s Boost Mobile, Virgin Mobile and Sprint-branded prepaid mobile services businesses (the “Prepaid Business”) for an aggregate purchase price of $
5
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In connection with the Prepaid Business Sale and the consummation of the Sprint-TMUS merger, we, TMUS, Sprint, Deutsche Telekom AG (“DT”) and SoftBank Group Corporation (“SoftBank”) agreed with the United States Department of Justice (the “DOJ”) on certain key terms relating to the Transaction Agreements (as defined below) and our wireless service business and spectrum. On July 26, 2019, we, TMUS, Sprint, DT and SoftBank (collectively, the “Defendants”) entered into a Stipulation and Order (the “Stipulation and Order”) with the DOJ binding the Defendants to a Proposed Final Judgment (the “Proposed Final Judgment”) which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the United States District Court for the District of Columbia (the “District Court”) on July 26, 2019.
On June 11, 2019, a number of state attorneys general filed a lawsuit against TMUS, DT, Sprint, and SoftBank in the U.S. District Court for the Southern District of New York (the “Southern District”), alleging that the Sprint-TMUS merger, if consummated, would violate Section 7 of the Clayton Act and therefore should be enjoined. On February 11, 2020, the Southern District ruled in favor of the Sprint-TMUS merger.
On April 1, 2020, District Court signed and entered the Proposed Final Judgment (the Proposed Final Judgment as so entered with the District Court, the “Final Judgment”) and the Sellers consummated the Sprint-TMUS merger. The term of the Final Judgment will be
At the closing of the Prepaid Business Sale, we and NTM will enter into a transition services agreement under which we will receive certain transitional services (the “TSA”), a master network services agreement for the provision of network services by NTM to us (the “MNSA”), an option agreement entitling us to acquire certain decommissioned cell sites and retail stores of NTM (the “Option Agreement”) and an agreement under which we would purchase all of Sprint’s 800 MHz spectrum licenses, totaling approximately 13.5 MHz of nationwide wireless spectrum for an additional approximately $
Agreement with the DOJ: The Stipulation and Order and the Final Judgment
Certain of the provisions of the Stipulation and Order and the Final Judgment are also reflected in the terms of the Transaction Agreements. In addition to the terms reflected in the Transaction Agreements, the Stipulation and Order and the Final Judgment provide for other rights and obligations of the Sellers and us, including the following:
| ● | For a period of |
| ● | Within |
| ● | NTM must take all actions required to enable us to provision any new or existing customer with a compatible handset onto the NTM network within |
| ● | If we elect not to purchase the 800 MHz licenses pursuant to the Spectrum Purchase Agreement, we must pay $ |
6
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| ● | If we buy the 800 MHz spectrum pursuant to the Spectrum Purchase Agreement but fail to deploy all of the 800 MHz spectrum licenses for use in the provision of retail mobile wireless services by the expiration of the Final Judgment (as described below), the DOJ may require us to forfeit to the FCC any of the 800 MHz licenses for spectrum that are not being used to provide retail mobile wireless services, unless we are already providing nationwide retail wireless service. |
| ● | We and NTM must negotiate in good faith to reach an agreement for NTM to lease some or all of our 600 MHz spectrum licenses for deployment to retail consumers by NTM. We and NTM must report on the status of the negotiations within |
| ● | We and NTM must agree to support eSIM technology on smartphones. |
| ● | The Sellers must introduce the suppliers and distributors of the Prepaid Business to us and the Sellers may not interfere in our negotiations with such suppliers and distributors. |
| ● | On the first day of the fiscal quarter following the entry of the Final Judgment and of each -day period thereafter, we will be obligated to provide the DOJ with a description of our deployment efforts over the prior quarter including: (i) the number of towers and small cells deployed, (ii) the spectrum bands on which we have deployed equipment, (iii) progress in obtaining devices that operate on our spectrum frequencies, (iv) POPs coverage of our network, (v) the number of our mobile wireless subscriptions, (vi) the amount of traffic transmitted to our subscribers using our network and using NTM’s network, and (vii) whether there are or have been any efforts by NTM to interfere with our efforts to deploy and operate our network. |
| ● | We cannot sell, lease or otherwise provide the right to use any of the divested assets to any national facilities-based mobile wireless provider and may not sell any of the divested assets or similar assets back to TMUS during the term of the Final Judgment (as described below), except that we may lease back to NTM up to 4 MHz of the 800 MHz spectrum we will acquire (as discussed above). |
| ● | We must comply with the 2023 AWS-4, Lower 700 MHz E Block, AWS H Block, and nationwide 5G broadband network build-out commitments made to the FCC, subject to verification by the FCC (as described below). If we fail to comply with such build-out commitments, we could face civil contempt in addition to the substantial voluntary contributions and license forfeitures described below if we fail to meet the June 14, 2023 commitments (as described below). |
FCC Build-Out Commitments
In a letter filed with the FCC on July 26, 2019, we voluntarily committed to deploy a nationwide 5G broadband network and meet revised timelines relating to the build-out of our AWS-4, Lower 700 MHz E Block, AWS H Block and 600 MHz spectrum assets, subject to certain penalties. Pursuant to these commitments, we requested multi-year extensions to deploy our AWS-4, Lower 700 MHz E Block, and AWS H Block spectrum, and we have committed to build-out our 600 MHz licenses on an accelerated schedule to better align with our 5G deployment. We have also committed to offer 5G broadband service to certain population coverage targets, along with minimum core network, tower and spectrum use targets, and have waived our right to deploy any technology of our choice under the FCC’s “flexible use” rules with respect to these spectrum bands. Failure to meet the various commitments would require us to pay voluntary contributions totaling up to $
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On November 5, 2019, the FCC released an Order that, among other things, approved the Sprint-TMUS merger, tolled our existing March 7, 2020 build-out deadline for our AWS-4 and Lower 700 MHz E Block Licenses, and directed the FCC’s Wireless Telecommunications Bureau to adopt our commitments after a 30 day review period (the “FCC Merger Order”).
Beginning on November 5, 2019, the March 7, 2020 build-out deadline for both the AWS-4 and Lower 700 MHz E Block spectrum bands is tolled; however, if the Prepaid Business Sale is not consummated, the original deadline will be reinstated with extensions equal to the length of time the deadline was tolled. Except for the tolling of the March 2020 deadline, we may not receive the requested buildout extensions unless and until the Prepaid Business Sale closes.
Our 5G deployment commitments for each of the
| ● | With respect to the 600 MHz licenses, we committed to offer 5G broadband service to at least |
| ● | With respect to the AWS-4 licenses, we committed to offer 5G broadband service to at least |
| ● | With respect to the Lower 700 MHz E Block licenses, we committed to offer 5G broadband service to at least |
| ● | With respect to the AWS H Block licenses, we committed to offer 5G broadband service to at least |
Wireless
Beginning on November 5, 2019, the March 7, 2020 build-out deadline for both the AWS-4 and Lower 700 MHz E Block spectrum bands is tolled; however, if the Prepaid Business Sale is not consummated, the original deadlines (as discussed in Note 10) would be reinstated with extensions equal to the length of time the deadline was tolled. During October 2019, we paused work on our narrowband Internet of Things (“IoT”) deployment due to our March 2020 build-out deadlines being tolled. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our buildout deadlines as discussed above was probable and, therefore, we no longer intend to complete our narrowband IoT deployment. We have issued requests for information and proposals (“RFI/Ps”) to various vendors in the wireless industry as we move forward with our 5G broadband network deployment (“5G Network Deployment”).
Since 2008, we have directly invested over $
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
DISH Network Spectrum
We have directly invested over $
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American AWS-3 Wireless II L.L.C. (“American II”) and American AWS-3 Wireless III L.L.C. (“American III”), we initially made over $
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out, integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our non-controlling investments in the Northstar Entities and the SNR Entities. See Note 10 for further information.
2.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary. Minority interests are recorded as noncontrolling interests or redeemable noncontrolling interests. See below for further information. Non-consolidated investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee. When we do not have the ability to significantly influence the operating decisions of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at fair value with changes recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
Redeemable Noncontrolling Interests
Northstar Wireless. Northstar Wireless is a wholly-owned subsidiary of Northstar Spectrum, which is an entity owned by Northstar Manager, LLC (“Northstar Manager”) and us. Under the applicable accounting guidance in ASC 810, Northstar Spectrum is considered a variable interest entity and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate Northstar Spectrum into our financial statements. The Northstar Operative Agreements, as amended, provide for, among other things, that after the and anniversaries of the grant of the AWS-3 Licenses to Northstar Wireless (and in certain circumstances, prior to the fifth anniversary of the grant of the AWS-3 Licenses to Northstar Wireless), Northstar Manager has the ability, but not the obligation, to require Northstar Spectrum to purchase Northstar Manager’s ownership interests in Northstar Spectrum (the “Northstar Put Right”) for a purchase price that equals its equity contribution to Northstar Spectrum plus a fixed annual rate of return. The fifth and sixth anniversaries of the grant of the AWS-3 Licenses to Northstar Wireless are in the fourth quarter 2020 and fourth quarter 2021, respectively.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In the event that the Northstar Put Right is exercised by Northstar Manager, the consummation of the sale will be subject to FCC approval. Northstar Spectrum does not have a call right with respect to Northstar Manager’s ownership interests in Northstar Spectrum. Although Northstar Manager is the sole manager of Northstar Spectrum, Northstar Manager’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. Northstar Manager’s ownership interest in Northstar Spectrum was initially accounted for at fair value. Subsequently, Northstar Manager’s ownership interest in Northstar Spectrum is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of Northstar Spectrum attributable to Northstar Manager are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 10 for further information.
SNR Wireless. SNR Wireless is a wholly-owned subsidiary of SNR HoldCo, which is an entity owned by SNR Wireless Management, LLC (“SNR Management”) and us. Under the applicable accounting guidance in ASC 810, SNR HoldCo is considered a variable interest entity and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate SNR HoldCo into our financial statements. The SNR Operative Agreements, as amended, provide for, among other things, that after the and anniversaries of the grant of the AWS-3 Licenses to SNR Wireless (and in certain circumstances, prior to the fifth anniversary of the grant of the AWS-3 Licenses to SNR Wireless), SNR Management has the ability, but not the obligation, to require SNR HoldCo to purchase SNR Management’s ownership interests in SNR HoldCo (the “SNR Put Right”) for a purchase price that equals its equity contribution to SNR HoldCo plus a fixed annual rate of return. The fifth and sixth anniversaries of the grant of the AWS-3 Licenses to SNR Wireless are in the fourth quarter 2020 and fourth quarter 2021, respectively. In the event that the SNR Put Right is exercised by SNR Management, the consummation of the sale will be subject to FCC approval. SNR HoldCo does not have a call right with respect to SNR Management’s ownership interests in SNR HoldCo. Although SNR Management is the sole manager of SNR HoldCo, SNR Management’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. SNR Management’s ownership interest in SNR HoldCo was initially accounted for at fair value. Subsequently, SNR Management’s ownership interest in SNR HoldCo is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of SNR HoldCo attributable to SNR Management are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 10 for further information.
As of March 31, 2020, Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $578 million, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for credit losses, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, relative standalone selling prices of performance obligations, finance leases, asset impairments, estimates of future cash flows used to evaluate and recognize impairments, useful lives of property, equipment and intangible assets, independent third-party retailer incentives, programming expenses and subscriber lives. Economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
Marketable Investment Securities
All equity securities are carried at fair value, with changes in fair value recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
All debt securities are classified as available-for-sale and are recorded at fair value. Historically, we reported temporary unrealized gains and losses as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. Subsequent to the adoption of ASU 2016-13 Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) during the first quarter of 2020, we report the temporary unrealized gains and losses related to changes in market conditions of marketable debt securities as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. The corresponding changes in the fair value of marketable debt securities, which are determined to be company specific credit losses are recorded in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We evaluate our debt investment portfolio to determine whether declines in the fair value of these securities are related to credit loss. Management estimates credit losses on marketable debt securities utilizing a credit loss impairment model on a quarterly basis. We estimate the expected credit losses, measured over the contractual life of marketable debt securities considering relevant issuer specific factors, including but not limited to decrease in credit ratings or an entities ability to pay.
Trade Accounts Receivable
Prior to January 1, 2020, management estimated the amount of allowance for doubtful accounts for potential non-collectability of accounts receivable based upon past collection experience and consideration of other relevant factors.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Subsequent to January 1, 2020 due to the adoption of ASU 2016-13, trade accounts receivable are recorded at amortized cost less an allowance for expected credit losses that are not expected to be recovered. We maintain allowances for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for expected credit losses at inception and reassess quarterly based on management’s expectation of the asset’s collectability. Management estimates credit losses on financial assets, including our trade accounts receivable, utilizing a current expected credit loss impairment model. We estimate the expected credit losses, measured over the contractual life of an asset considering relevant historical loss information, credit quality of the customer base, current economic conditions and forecasts of future economic conditions.
In determining the allowance for credit losses management groups similar types of financial assets with consistent risk characteristics. Pools identified by management include but are not limited to residential customers, commercial customers and advertising services. The risk characteristics of the financial asset portfolios are monitored by management and reviewed periodically. The forecasts for future economic conditions are based on several factors including but not limited to, changes in the unemployment rate, external economic forecasts and current collection rates. Our estimates of the allowance for credit losses may not be indicative of our actual credit losses requiring additional charges to be incurred to reflect the actual amount collected.
Impairment of Long-Lived Assets
We review our long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the asset would be impaired if the carrying amount of the asset (or asset group) exceeded its undiscounted future net cash flows. Once an impairment is determined, the actual impairment recognized is the difference between the carrying amount and the fair value as estimated using one of the following approaches: income, cost and/or market. Assets which are to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The carrying amount of a long-lived asset or asset group is considered impaired when the anticipated undiscounted cash flows from such asset or asset group is less than its carrying amount. In that event, a loss is recorded in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) based on the amount by which the carrying amount exceeds the fair value of the long-lived asset or asset group. Fair value, using the income approach, is determined primarily using a discounted cash flow model that uses the estimated cash flows associated with the asset or asset group under review, discounted at a rate commensurate with the risk involved. Fair value, utilizing the cost approach, is determined based on the replacement cost of the asset reduced for, among other things, depreciation and obsolescence. Fair value, utilizing the market approach, benchmarks the fair value against the carrying amount. See Note 7 for further information.
DBS Satellites. We currently evaluate our DBS satellite fleet for impairment as one asset group whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We do not believe any triggering event has occurred which would indicate impairment as of March 31, 2020 or December 31, 2019. We will continue to monitor the DBS satellite fleet for indicators of impairment, including monitoring the impact of the COVID-19 pandemic on all aspects of our business.
AWS-4 Satellites. We currently evaluate our AWS-4 satellite fleet for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that revisions to the AWS-4 buildout deadlines, which are currently tolled (as described in Note 10), was probable, which we determined to be a triggering event. Accordingly, we quantitatively assessed the value of the AWS-4 satellites (T1 and D1) and wrote down the fair value of the satellites to their estimated fair value of
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Narrowband IoT network. As discussed in Note 10, we were in the process of deploying a narrowband IoT network. We paused work on the narrowband IoT deployment in October 2019. In light of, among other things, certain developments related to the Sprint-TMUS merger, during the first quarter 2020, we determined that the revision of certain of our buildout deadlines as discussed in Note 10 was probable. Based on this, we no longer intend to complete our narrowband IoT deployment, which we consider a triggering event. As such, we reviewed the capitalized costs of equipment, labor and other assets related to the narrowband IoT deployment, including our operating lease assets, and impaired those items that will not be utilized in our ongoing 5G Network Deployment, resulting in a $
Impairment of long-lived assets consisted of the following:
For the Three Months Ended | ||||
| March 31, 2020 | |||
| (In thousands) | |||
T1 satellite | $ | | ||
D1 satellite | | |||
Construction in progress related to narrowband IoT deployment | | |||
Operating lease assets related to narrowband IoT deployment | | |||
Impairment of long-lived assets | $ | | ||
Indefinite-Lived Intangible Assets and Goodwill
We do not amortize indefinite-lived intangible assets and goo