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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2024.

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

For the transition period from to .

Commission File Number: 333-179121

Hughes Satellite Systems Corporation

(Exact name of registrant as specified in its charter)

Colorado		45-0897865
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9601 South Meridian Boulevard Englewood, Colorado		80112-5308
(Address of principal executive offices)		(Zip Code)

(303) 723-1000		Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) 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. Yes ☒* No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☒	Smaller reporting 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 August 9, 2024, the registrant’s outstanding common stock consisted of 1,078 shares of common stock, $0.01 par value per share.

The Registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Quarterly Report on Form 10-Q with the reduced disclosure format.

The Registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis. The Registrant 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 as if it were subject to such filing requirements during such period.

Table of Contents

HUGHES SATELLITE SYSTEMS CORPORATION

TABLE OF CONTENTS

	Disclosure Regarding Forward Looking Statements	i

Part I - Financial Information

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Changes in Stockholder’s Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Narrative Analysis of Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	*
Item 4.	Controls and Procedures	49

Part II - Other Information

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	*
Item 3.	Defaults Upon Major Securities	*
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	50
	Signatures	51

*	This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2)(a) of Form 10-Q.

Table of Contents

PART I: FINANCIAL INFORMATION

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise required by the context, in this report, the words “HSSC,” the “Company,” “we,” “our” and “us” refer to Hughes Satellite Systems Corporation and its subsidiaries, “EchoStar” refers to EchoStar Corporation, our parent company, “DISH Network” refers to DISH Network Corporation, a wholly owned, indirect subsidiary of EchoStar Corporation, 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, those summarized below:

SUMMARY OF RISK FACTORS

●

risks relating to the ability of our parent company, EchoStar, to realize the expected benefits of the merger with DISH Network;

●

risks relating to EchoStar’s substantially increased leverage following completion of the merger with DISH Network;

●

significant risks related to our ability to launch, operate, and control our satellites, operational and environmental risks related to our owned and leased satellites, and risks related to our satellites under construction;

●

our ability and the ability of third parties with whom we engage to operate our business as a result of changes in the global business environment, including regulatory and competitive considerations;

●

our ability to implement and/or realize benefits of our investments and other strategic initiatives;

●

risks related to our foreign operations and other uncertainties associated with doing business internationally;

●

risks related to our dependency upon third-party providers, including supply chain disruptions and inflation;

●

risks related to cybersecurity incidents; and

●

risks related to our human capital resources.

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 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 Narrative Analysis of 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.

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	As of
	June 30, 2024		December 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	166,923	$	1,276,623
Marketable investment securities		—		417,743
Trade accounts receivable and contract assets, net of allowance for credit losses of $23,963 and $20,399, respectively		225,283		233,915
Prepaids and other assets		50,467		24,769
Inventory		162,870		167,236
Other current assets, net		29,643		18,562
Total current assets		635,186		2,138,848

Non-current assets:
Property and equipment, net		1,181,687		1,250,074
Operating lease right-of-use assets		994,783		1,031,303
Regulatory authorizations, net		406,178		407,819
Other intangible assets, net		12,261		13,401
Other investments, net		48,614		54,137
Other non-current assets, net		271,106		303,962
Total non-current assets		2,914,629		3,060,696
Total assets	$	3,549,815	$	5,199,544

Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Trade accounts payable	$	84,131	$	101,163
Contract liabilities		80,852		116,187
Accrued interest		38,168		39,075
Accrued compensation		29,377		38,333
Accrued expenses		61,895		45,863
Operating lease liabilities, current		19,174		155,932
Other current liabilities		40,415		240,128
Current portion of long-term debt and other notes payable		6,379		5,225
Total current liabilities		360,391		741,906

Non-current liabilities:
Long-term debt and other notes payable, net of current portion		1,535,589		1,538,978
Deferred tax liabilities, net		208,059		252,820
Operating lease liabilities, non - current		843,559		897,084
Other non-current liabilities		83,506		89,667
Total non-current liabilities		2,670,713		2,778,549
Total liabilities		3,031,104		3,520,455

Commitments and Contingencies (Note 10)

Stockholder's equity (deficit):
Preferred stock, $0.001 par value,1,000,000 shares authorized, none issued and outstanding at both June 30, 2024 and December 31, 2023		—		—
Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both June 30, 2024 and December 31, 2023		—		—
Additional paid-in capital		1,486,601		1,484,064
Accumulated other comprehensive income (loss)		(173,925)		(152,491)
Accumulated earnings (losses)		(850,716)		279,885
Total HSSC stockholder's equity (deficit)		461,960		1,611,458
Non-controlling interests		56,751		67,631
Total stockholder's equity (deficit)		518,711		1,679,089
Total liabilities and stockholder's equity (deficit)	$	3,549,815	$	5,199,544

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Revenue:
Service revenue	$	303,905	$	369,434	$	623,409	$	745,188
Equipment sales and other revenue		85,714		81,604		146,214		143,674
Total revenue		389,619		451,038		769,623		888,862

Costs and expenses (exclusive of depreciation and amortization):
Cost of services		172,114		130,856		342,564		264,895
Cost of sales - equipment and other		78,283		56,165		134,663		107,836
Selling, general and administrative expenses		93,056		109,293		196,708		221,648
Depreciation and amortization		93,093		99,223		186,875		195,574
Total costs and expenses		436,546		395,537		860,810		789,953

Operating income (loss)		(46,927)		55,501		(91,187)		98,909

Other income (expense):
Interest income, net		3,555		20,156		20,570		38,104
Interest expense, net of amounts capitalized		(22,095)		(22,206)		(49,444)		(44,733)
Other-than-temporary impairment losses on equity method investments		—		(33,400)		—		(33,400)
Other, net (Note 4)		(3,682)		1,722		(5,106)		4,227
Total other income (expense), net		(22,222)		(33,728)		(33,980)		(35,802)

Income (loss) before income taxes		(69,149)		21,773		(125,167)		63,107
Income tax benefit (provision), net		11,274		(18,513)		17,026		(33,219)
Net income (loss)		(57,875)		3,260		(108,141)		29,888
Less: Net income (loss) attributable to non-controlling interests		(1,893)		(2,072)		(6,540)		(3,293)
Net income (loss) attributable to HSSC	$	(55,982)	$	5,332	$	(101,601)	$	33,181

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Net income (loss)	$	(57,875)	$	3,260	$	(108,141)	$	29,888
Other comprehensive income (loss)
Foreign currency translation adjustments		(17,473)		13,254		(25,711)		22,550
Unrealized gains (losses) on available-for-sale securities		(5)		(133)		(267)		(221)
Amounts reclassified to net income (loss):
Realized losses (gains) on available-for-sale debt securities		—		229		204		229
Total other comprehensive income (loss), net of tax		(17,478)		13,350		(25,774)		22,558
Comprehensive income (loss)		(75,353)		16,610		(133,915)		52,446
Less: Comprehensive loss (income) attributable to non-controlling interests, net of tax		5,115		178		10,880		(569)
Comprehensive income (loss) attributable to HSSC	$	(70,238)	$	16,788	$	(123,035)	$	51,877

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(In thousands)

(Unaudited)


			Accumulated
	Additional		Other		Accumulated
	Paid-in		Comprehensive		Earnings		Non-controlling
	Capital		Income (Loss)		(Losses)		Interests		Total
Balance, December 31, 2022	$	1,479,857	$	(170,184)	$	741,754	$	96,436	$	2,147,863
Stock-based compensation		1,096		—		—		—		1,096
Other comprehensive income (loss)		—		7,240		—		1,968		9,208
Net income (loss)		—		—		27,849		(1,221)		26,628
Balance, March 31, 2023	$	1,480,953	$	(162,944)	$	769,603	$	97,183	$	2,184,795
Stock-based compensation		1,043		—		—		—		1,043
Other comprehensive income (loss)		—		11,456		—		1,894		13,350
Net income (loss)		—		—		5,332		(2,072)		3,260
Balance, June 30, 2023	$	1,481,996	$	(151,488)	$	774,935	$	97,005	$	2,202,448

Balance, December 31, 2023	$	1,484,064	$	(152,491)	$	279,885	$	67,631	$	1,679,089
Stock-based compensation		993		—		—		—		993
Dividends to EchoStar Corporation		—		—		(1,029,000)		—		(1,029,000)
Other comprehensive income (loss)		—		(7,178)		—		(1,118)		(8,296)
Net income (loss)		—		—		(45,619)		(4,647)		(50,266)
Balance, March 31, 2024	$	1,485,057	$	(159,669)	$	(794,734)	$	61,866	$	592,520
Stock-based compensation		1,544		—		—		—		1,544
Other comprehensive income (loss)		—		(14,256)		—		(3,222)		(17,478)
Net income (loss)		—		—		(55,982)		(1,893)		(57,875)
Balance, June 30, 2024	$	1,486,601	$	(173,925)	$	(850,716)	$	56,751	$	518,711

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the six months ended June 30,
	2024		2023
Cash flows from operating activities:
Net income (loss)	$	(108,141)	$	29,888
Adjustments to reconcile net income (loss) to cash flows provided by (used for) operating activities:
Depreciation and amortization		186,875		195,574
Losses (gains) on investments, net		(200)		(230)
Equity in losses (earnings) of unconsolidated affiliates, net		2,523		1,097
Foreign currency transaction losses (gains), net		2,796		(6,313)
Deferred tax provision (benefit), net		(40,888)		9,069
Stock-based compensation		2,537		2,139
Amortization of debt issuance costs		435		410
(Accretion of discounts) and amortization of premiums on debt investments		(939)		(12,851)
Other-than-temporary impairment losses on equity method investments		—		33,400
Other, net		(3)		492
Changes in assets and liabilities, net:
Trade accounts receivable and contract assets, net		1,548		(35)
Changes in allowance for credit losses		3,564		865
Other current assets, net		(33,974)		(15,506)
Trade accounts payable		(5,799)		(18,235)
Contract liabilities		(35,335)		(13,762)
Accrued expenses and other current liabilities		(326,987)		2,022
Non-current assets and non-current liabilities, net		(4,527)		(9,816)
Net cash provided by (used for) operating activities		(356,515)		198,208

Cash flows from investing activities:
Purchases of marketable investment securities		—		(859,190)
Sales and maturities of marketable investment securities		414,323		611,643
Expenditures for property and equipment		(123,649)		(90,975)
Expenditures for externally marketed software		(13,245)		(15,253)
Dividend received from unconsolidated affiliate		3,000		—
Net cash provided by (used for) investing activities		280,429		(353,775)

Cash flows from financing activities:
Payment of in - orbit incentive obligations		(1,480)		(2,460)
Dividends to EchoStar Corporation		(1,029,000)		—
Other, net		437		—
Net cash provided by (used for) financing activities		(1,030,043)		(2,460)

Effect of exchange rates on cash and cash equivalents		(3,646)		3,476
Net increase (decrease) in cash and cash equivalents		(1,109,775)		(154,551)
Cash and cash equivalents, including restricted amounts, beginning of period (Note 4)		1,277,741		654,473
Cash and cash equivalents, including restricted amounts, end of period (Note 4)	$	167,966	$	499,922

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES

Principal Business

Hughes Satellite Systems Corporation (which, together with its subsidiaries, is referred to as “HSSC,” the “Company,” “we,” “us” and “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar” and “parent”). We were formed as a Colorado corporation in March 2011 to facilitate the acquisition by EchoStar (the “Hughes Acquisition”) of Hughes Communications, Inc. and its subsidiaries and related financing transactions. In connection with our formation, EchoStar contributed the assets and liabilities of its satellite services business to us, including the principal operating subsidiary of its satellite services business, EchoStar Satellite Services L.L.C. A substantial majority of the voting power of the shares of EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. During 2022, Hamid Akhavan joined the Company as its Chief Executive Officer and President.

We currently operate in two operating segments with one reportable segment and Corporate and Other:

●

Hughes segment — which provides broadband services to consumer customers, which include home and small to medium-sized businesses. We also provide satellite and multi-transport technologies and managed network services to telecommunications providers, aeronautical service providers, civilian and defense government entities, and other enterprise customers. We also design, provide and install gateway and terminal equipment to customers for other satellite systems. In addition, we design, develop, construct and provide telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and other enterprise customers. We also offer a robust suite of integrated, multi-transport solutions to enable airline and airline service providers to deliver reliable in-flight network connectivity serving both commercial and business aviation. The EchoStar XXIV satellite began service in December 2023, bringing additional broadband capacity across North and South America and is expected to be an integral part of our satellite service business.

●

EchoStar Satellite Services segment (“ESS segment”) — which provides 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 include various corporate functions (primarily Executive, Treasury, Strategic Development, Human Resources, Information Technology, Finance, Accounting, Real Estate and Legal) and other activities. Operating expenses include costs incurred in certain satellite development programs and other business development activities, and other income or expenses includes gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other.

As of March 31, 2024 and June 30, 2024, the ESS operating segment did not meet the quantitative thresholds as prescribed under ASC 280, Segment Reporting, for separate reportable segments, and is not expected to meet the quantitative thresholds or be of continuing significance in the future. As such, the ESS operating segment is no longer considered a reportable segment and we included the ESS operating segment results in Corporate and Other for all periods presented.

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) Other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 11. Segment Reporting for further detail.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

On December 31, 2023, EchoStar completed the acquisition of DISH Network pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of October 2, 2023 (the “Amended Merger Agreement”), by and among EchoStar, EAV Corp., a Nevada corporation and its wholly owned subsidiary (“Merger Sub”), and DISH Network, pursuant to which EchoStar acquired DISH Network by means of the merger of Merger Sub with and into DISH Network (the “Merger”), with DISH Network surviving the Merger as EchoStar’s wholly owned subsidiary. 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, 2023.

With the Merger complete, EchoStar is currently focused on the process of integrating EchoStar’s and DISH Network’s business in a manner that facilitates synergies, cost savings and growth opportunities, and achieves other anticipated benefits.

NOTE 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, 2023. Certain prior period amounts have been reclassified to conform to the current period presentation.

All amounts presented in these Condensed Consolidated Financial Statements are expressed in thousands of U.S. dollars unless otherwise noted.

Principles of Consolidation

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and VIEs where we have been determined to be the primary beneficiary. Minority interests are recorded as noncontrolling interests or redeemable noncontrolling interests. 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, which will be initially recorded at cost, and based on observable market prices, will be adjusted to their fair value. We record fair value adjustments in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

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HUGHES SATELLITE SYSTEMS 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 certain 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 based on historical experience, observable market inputs, and other reasonable assumptions in accounting for, among other things, allowances for credit losses, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under EchoStar’s stock based compensation plans, fair value of assets and liabilities acquired in business combinations, inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs and 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, and incremental borrowing rate (“IBR”) on lease right of use assets, nonrefundable upfront fees, independent third-party retailer incentives 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.

Concentration of Credit Risk

One customer represented approximately 20% and 19% of the receivable component of “Trade accounts receivable and contract assets, net” as of June 30, 2024 and December 31, 2023, respectively. As part of our assessment for credit losses, for the quarters ended March 31, 2024 and June 30, 2024, we determined that the collection of the balance owed from a significant customer was uncertain, resulting in a reduction in the “Trade accounts receivable and contract assets, net” balance on our Condensed Consolidated Balance Sheets.

Contract Acquisition Costs

Our contract acquisition costs represent incremental direct costs of obtaining a contract and consist primarily of sales incentives paid to employees and third-party representatives. When we determine that our contract acquisition costs are recoverable, we defer and amortize the costs over the contract term, or over the estimated life of the customer relationship if anticipated renewals are expected and the incentives payable upon renewal are not commensurate with the initial incentive. We amortize contract acquisition costs in proportion to the revenue to which the costs relate on a straight-line basis. We expense sales incentives as incurred if the expected amortization period is one year or less. Unamortized contract acquisition costs are included in “Other non-current assets, net” in the Condensed Consolidated Balance Sheets and related amortization expense is included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations.

Advertising Costs

We recognize advertising expense when incurred as a component of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations. Advertising expenses totaled $10.5 million and $13.9 million for the three months ended June 30, 2024 and 2023, respectively. Advertising expenses totaled $23.5 million and $29.7 million for the six months ended June 30, 2024 and 2023, respectively.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Research and Development

Research and development costs, not incurred in connection with customer requirements, are expensed as incurred and are included as a component of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations. Additionally, customer-related research and development costs are incurred in connection with the specific requirements of a customer’s order; in such instances, the amounts for these customer funded development efforts are also included in “Cost of sales - equipment and other” in the Condensed Consolidated Statements of Operations.

The following table presents the research and development costs incurred:


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Cost of sales - equipment and other	$	15,363	$	8,846	$	26,575	$	17,524
Research and development expenses	$	4,485	$	6,840	$	9,998	$	15,096

Fair Value Measurements

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We apply the following hierarchy in determining fair value:

●

Level 1, defined as observable inputs being quoted prices in active markets for identical assets;

●

Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; and quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

●

Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available.

As of June 30, 2024 and December 31, 2023, the carrying amount for cash and cash equivalents, trade accounts receivable (net of allowance for credit losses) and contract assets, and current liabilities (excluding the “Current portion of long-term debt and other notes payable”) was equal to or approximated fair value due to their short-term nature or proximity to current market rates.

Fair values of our marketable investment securities are measured on a recurring basis based on a variety of observable market inputs. For our investments in publicly traded equity securities and U.S. government securities, fair value ordinarily is determined based on Level 1 measurements that reflect quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities are generally based on Level 2 measurements as the markets for such debt securities are less active. We consider trades of identical debt securities on or near the measurement date as a strong indication of fair value and matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features may also be used to determine fair value of our investments in marketable debt securities. Additionally, we use fair value measurements from time to time in connection with other investments, asset impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies. Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy. Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period. See Note 4. Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investments for the fair value of our marketable investment securities.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Fair values for our publicly traded debt securities are based on quoted market prices, when available. The fair values of private debt are based on, among other things, available trade information, and/or an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information. In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the debt securities. See Note 9. Long-Term Debt and Other Notes Payable for the fair value of our long-term debt.

Government Funding

The Company is currently participating in two government programs: New York-Connect America Fund, New York Broadband, and prior to the program’s termination in February 2024, the company participated in the Affordable Connectivity Plan (“ACP”), with funding for the ACP ending in May 2024. The purpose of these programs is to provide internet and connectivity services to qualifying households in the United States. The Company is entitled to reimbursement from the government for services provided. We record gross monies received from government entities in “Service revenue,” and associated expenses such as salaries and supplies are recorded in “Cost of services,” or “Selling, general and administrative expenses,” on our Condensed Consolidated Statement of Operations, depending on the nature of expenditure. We accrue for reimbursement requests submitted to government entities in “Trade accounts receivable and contract assets, net” on our Condensed Consolidated Balance Sheets. During the three and six months ended June 30, 2024, the Company recognized $1.9 million and $6.6 million respectively, in “Service revenue” on our Condensed Consolidated Statement of Operations, respectively. As of June 30, 2024, we have trade accounts receivable of $1.3 million related to our government programs on our Condensed Consolidated Balance Sheets.

New Accounting Pronouncements

Joint Ventures. On August 23, 2023, the FASB issued ASU 2023-05, Business Combinations — Joint Venture Formations (Subtopic 805-60) (“ASU 2023-05”), which requires an entity that qualifies as either a joint venture or a corporate joint venture as defined in the FASB Accounting Standards Codification (ASC) master glossary to apply a new basis of accounting upon the formation of the joint venture. This standard will be effective for all joint venture formations with a formation date on or after January 1, 2025. A joint venture that was formed before January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted in any interim or annual period in which financial statements have not yet been issued or made available for issuance. We are evaluating the impact the adoption of ASU 2023-05 will have on our Condensed Consolidated Financial Statements and related disclosures.

Segment Reporting. On November 27, 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reporting Segment Disclosures (“ASU 2023-07”), which will enhance financial reporting by providing additional information about a public company’s significant segment expenses and more timely and detailed segment information reporting throughout the fiscal period. This standard will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are evaluating the impact the adoption of ASU 2023-07 will have on our Condensed Consolidated Financial Statements and related disclosures

Income Taxes. On December 14, 2023, the FASB issued ASU 2023-9, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which will enhance income tax disclosures. ASU 2023-09 requires among other items disaggregated information in a reporting entity’s rate reconciliation table, clarification on uncertain tax positions and the related financial statement impact as well as information on income taxes paid on a disaggregated basis. This standard will be effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. We are evaluating the impact the adoption of ASU 2023‑09 will have on our Condensed Consolidated Financial Statements and related disclosures.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 3. SUPPLEMENTAL DATA - STATEMENTS OF CASH FLOWS

The following table presents certain supplemental cash flow and other non-cash data. See Note 8. Leases for supplemental cash flow and non-cash data related to leases.


		For the six months ended June 30,
	2024		2023
Supplemental disclosure of cash flow information:
Cash paid for interest, (including capitalized interest)	$	51,790	$	51,004
Cash received for interest		28,716		30,945
Cash paid for income taxes, net of (refunds)⁽¹⁾		200,346		3,339
Capitalized interest		—		5,264
Accrued capital expenditures		4,896		11,979

(1)	Our cash paid for income taxes, net of refunds, includes approximately $198.0 million of income taxes paid to our parent Company, EchoStar. Substantially all of this balance relates to amounts accrued for as of December 31, 2023.

EchoStar Exchange Offer

On March 4, 2024, EchoStar commenced a tender offer to eligible employees (which excludes EchoStar’s co-founders and the non-executive/non-employee members of EchoStar’s Board of Directors) to exchange eligible stock options (which excludes the Ergen 2020 Performance Award) for new options as detailed in the Schedule TO filed March 4, 2024 with the Securities and Exchange Commission (the “Exchange Offer”), to, among other things, further align employee incentives with the current market. The Exchange Offer expired on April 1, 2024 and EchoStar accepted for exchange 4 million stock options of employees of the Company. As a result of the Exchange Offer, the exercise price of approximately 3 million new stock options, affecting approximately 400 eligible employees of the Company, was adjusted to $14.04. The total incremental non-cash stock-based compensation expense resulting from the Exchange Offer is $3 million, which will be recognized over the remaining vesting period of the applicable options.

NOTE 4. MARKETABLE INVESTMENT SECURITIES, RESTRICTED CASH AND CASH EQUIVALENTS, AND OTHER INVESTMENTS

The following table presents our “Marketable investment securities”:


	As of
	June 30, 2024		December 31, 2023
Marketable investment securities:
Available-for-sale debt securities:
Corporate bonds	$	—	$	91,548
Commercial paper		—		282,898
Other debt securities		—		43,297
Total marketable investment securities	$	—	$	417,743

During the six months ended June 30, 2024, we liquidated our marketable investment securities portfolio to make cash distributions to our parent.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Debt Securities

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 June 30, 2024
Corporate bonds	$	—	$	—	$	—	$	—
Commercial paper		—		—		—		—
Other debt securities		—		—		—		—
Total available-for-sale debt securities	$	—	$	—	$	—	$	—
As of December 31, 2023
Corporate bonds	$	91,474	$	79	$	(5)	$	91,548
Commercial paper		282,898		—		—		282,898
Other debt securities		43,307		—		(10)		43,297
Total available-for-sale debt securities	$	417,679	$	79	$	(15)	$	417,743

The following table presents the activity on our available-for-sale debt securities:


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Proceeds from sales	$	—	$	93,612	$	294,292	$	131,721

Restricted Cash and Cash Equivalents

We have restricted cash and cash equivalents of $1.0 million and $1.1 million as of June 30, 2024 and December 31, 2023, respectively. Our restricted cash and cash equivalents are included in “Other non-current assets, net” on our Condensed Consolidated Balance Sheets.

Other Investments, net

The following table presents our “Other investments, net”:


	As of
	June 30, 2024		December 31, 2023
Other investments, net:
Equity method investments	$	37,336	$	42,859
Cost method investments		11,278		11,278
Total other investments, net	$	48,614	$	54,137

Equity Method Investments

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.

Broadband Connectivity Solutions (Restricted) Limited. We own 20% of Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), a joint venture that we entered into in 2018 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.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Cost Method Investments

Hughes Systique Corporation (“Hughes Systique”). We own 42% of Hughes Systique via preferred shares and contract with Hughes Systique for software development services. Prior to December 31, 2023, we consolidated Hughes Systique’s financial statements into our Condensed Consolidated Financial Statements. As of December 31, 2023, we have deconsolidated the Hughes Systique results from our Condensed Consolidated Financial Statements and recorded the investment as a cost method investment in “Other investments, net” on our Condensed Consolidated Balance Sheets. See our Annual Report on Form 10-K for the year ended December 31, 2023, Note 5. Business Combinations for further information.

Fair Value Measurements

Our investments measured at fair value on a recurring basis were as follows:


	Level 1		Level 2		Total
As of June 30, 2024
Cash equivalents (including restricted)	$	7,929	$	52,926	$	60,855
Available-for-sale debt securities:
Corporate bonds	$	—	$	—	$	—
Commercial paper		—		—		—
Other debt securities		—		—		—
Total marketable investment securities	$	—	$	—	$	—

As of December 31, 2023
Cash equivalents (including restricted)	$	177,009	$	999,347	$	1,176,356
Available-for-sale debt securities:
Corporate bonds	$	—	$	91,548	$	91,548
Commercial paper		—		282,898		282,898
Other debt securities		38,799		4,498		43,297
Total marketable investment securities	$	38,799	$	378,944	$	417,743

As of June 30, 2024 and December 31, 2023, we did not have any investments that were categorized within, or transferred into or out of, Level 3 of the fair value hierarchy.

Gains and Losses on Sales and Changes in Carrying Amounts of Investments and Other

“Other, net” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations is as follows:


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Other, net:
Marketable and non-marketable investment securities - realized and unrealized gains (loss)	$	—	$	233	$	200	$	230
Equity in earnings (losses) of unconsolidated affiliates		(1,190)		(546)		(2,523)		(1,097)
Foreign currency transaction gains (losses)		(2,510)		3,283		(2,796)		6,313
Other		18		(1,248)		13		(1,219)
Total	$	(3,682)	$	1,722	$	(5,106)	$	4,227

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 5. INVENTORY

Inventory consisted of the following:


	As of
	June 30, 2024		December 31, 2023
Raw materials	$	43,714	$	32,492
Work-in-process		29,031		32,832
Finished goods		90,125		101,912
Total inventory	$	162,870	$	167,236

NOTE 6. PROPERTY AND EQUIPMENT

Property and Equipment

Property and equipment consisted of the following:


		As of
	Depreciable	June 30,		December 31,
	Life (In Years)	2024		2023
Equipment leased to customers	2 to 4	$	842,423	$	883,565
Satellites ⁽¹⁾	5 to 15		1,214,275		1,506,541
Satellites acquired under finance lease agreements	15		354,531		368,384
Land	—		13,509		13,547
Buildings and improvements	1 to 40		128,824		115,354
Furniture, fixtures, equipment and other	1 to 12		984,149		977,154
Construction in progress	—		7,488		28,217
Total property and equipment			3,545,199		3,892,762
Accumulated depreciation			(2,363,512)		(2,642,688)
Property and equipment, net		$	1,181,687	$	1,250,074

(1)	The Spaceway 3 satellite was deorbited in January 2024.

Depreciation and amortization expense consisted of the following:


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Equipment leased to customers	$	43,631	$	43,407	$	71,700	$	86,643
Satellites		26,646		26,904		53,545		51,845
Buildings, furniture, fixtures, equipment and other		7,192		13,460		30,077		26,635
Software and computer equipment		6,601		7,150		13,203		14,145
Intangible assets and other amortization expense		9,023		8,302		18,350		16,306
Total depreciation and amortization expense	$	93,093	$	99,223	$	186,875	$	195,574

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation and amortization expense related to satellites, equipment leased to customers, and amortization of development costs of externally marketed software.

Satellites

As of June 30, 2024, our satellite fleet consisted of eight satellites in geosynchronous (“GEO”) orbit, approximately 22,300 miles above the equator, four of which we own and depreciate over their estimated useful life. We also lease four satellites, three of which are accounted for as finance leases and are depreciated over their economic life and one of which is accounted for as an operating lease.

As of June 30, 2024, our satellite fleet in service consisted of the following:


		Degree Orbital	Lease
		Location	Termination
Satellites	Launch Date	(Longitude)	Date
Owned:
EchoStar XVII	July 2012	107 W	N/A
EchoStar XIX	December 2016	97.1 W	N/A
Al Yah 3 ("AY3")⁽¹⁾	January 2018	20 W	N/A
EchoStar IX	August 2003	121 W	N/A

Finance leases:
Eutelsat 65 West A	March 2016	65 W	July 2031
Telesat T19V	July 2018	63 W	August 2033
EchoStar 105/SES‑11	October 2017	105 W	November 2028

Operating leases:
EchoStar XXIV	July 2023	95.2 W	December 2030

(1)	We own the Ka-band and Ku-band payloads on this satellite.

Satellite-Related Commitments

As of June 30, 2024 and December 31, 2023 our satellite-related commitments, excluding in-orbit incentives, were $173.6 million and $193.3 million, respectively. These include payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease 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

Except as described above, 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 June 30, 2024.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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 our joint venture agreement with Yahsat, we are required to maintain insurance for the Al Yah 3 Brazilian payload during the commercial in-orbit service of such payload, subject to certain limitations on coverage. The insurance policies were procured by Yahsat, under which the Company and Yahsat are the beneficiaries of any claims in proportion to their shareholdings. An insurance claim was submitted in the second quarter of 2023 for compensation with respect to the reduction in estimated useful life of the Al Yah 3 satellite.

Fair Value of In-Orbit Incentives

As of June 30, 2024 and December 31, 2023, the fair values of our in-orbit incentive obligations approximated their carrying amounts of $43.2 million and $46.3 million, respectively.

NOTE 7. REGULATORY AUTHORIZATIONS

The following table presents our “Regulatory authorizations, net”:


	Finite lived
			Accumulated				Indefinite
	Cost		Amortization		Total		lived		Total
Balance, December 31, 2022	$	11,331	$	(2,712)	$	8,619	$	400,000	$	408,619
Amortization expense		—		(754)		(754)		—		(754)
Currency translation adjustments		1,375		(353)		1,022		—		1,022
Balance, June 30, 2023	$	12,706	$	(3,819)	$	8,887	$	400,000	$	408,887

Balance, December 31, 2023	$	12,754	$	(4,935)	$	7,819	$	400,000	$	407,819
Amortization expense		—		(1,067)		(1,067)		—		(1,067)
Currency translation adjustments		(1,161)		587		(574)		—		(574)
Balance, June 30, 2024	$	11,593	$	(5,415)	$	6,178	$	400,000	$	406,178

Weighted-average useful life (in years)				12

NOTE 8. LEASES

We enter into non-cancelable operating and finance leases for, among other things, satellites, satellite-related ground infrastructure, data centers, office space, warehouses and distribution centers. Substantially all of our leases have remaining lease terms from one to 13 years, some of which include renewal options, and some of which include options to terminate the leases within one year. For certain arrangements, the lease term includes the non-cancelable period plus the renewal period that we are reasonably certain to exercise.

Our Eutelsat 65 West A, Telesat T19V and EchoStar 105/SES-11 satellites are accounted for as finance leases. Substantially all of our remaining leases are accounted for as operating leases, including our EchoStar XXIV satellite lease. Refer to Note 13. Related Party Transactions- EchoStar for further details on the EchoStar XXIV operating lease.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The following table presents the amounts for right-of-use (“ROU”) assets and lease liabilities:


	As of
	June 30, 2024		December 31, 2023
Right-of-use assets:
Operating	$	994,783	$	1,031,303
Finance		199,642		218,807
Total right-of-use assets	$	1,194,425	$	1,250,110

Lease liabilities:
Current:
Operating ⁽¹⁾	$	19,174	$	155,932
Finance		—		—
Total current		19,174		155,932
Non-current:
Operating		843,559		897,084
Finance		—		—
Total non-current		843,559		897,084
Total lease liabilities	$	862,733	$	1,053,016

(1)

The decrease in current operating lease liabilities is due to prepayments related to the EchoStar XXIV satellite, resulting in the lease liability and associated asset being remeasured. Refer to Note 13. Related Party Transactions- EchoStar for further details on the EchoStar XXIV operating lease prepayments.

As of June 30, 2024, we have prepaid our obligations regarding all of our finance right-of-use assets. Finance lease assets are reported net of accumulated amortization of $154.9 million and $149.6 million as of June 30, 2024 and December 31, 2023, respectively.

The following table presents the components of lease cost and weighted-average lease terms and discount rates for operating and finance leases:


	For the three months ended				For the six months ended
	June 30,				June 30,
	2024		2023		2024		2023
Lease cost:
Operating lease cost	$	5,548	$	6,551	$	12,195	$	13,099
Operating lease cost - EchoStar XXIV		47,593		—		95,350		—
Total operating lease cost		53,141		6,551		107,545		13,099
Finance lease cost:
Amortization of right-of-use assets		790		8,474		5,313		15,615
Interest on lease liabilities		—		—		—		—
Total finance lease cost		790		8,474		5,313		15,615
Short-term lease cost		—		—		—		—
Variable lease cost		—		—		—		—
Total lease cost	$	53,931	$	15,025	$	112,858	$	28,714

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)


	As of
	June 30, 2024		December 31, 2023
Lease term and discount rate:
Weighted-average remaining lease term:
Finance leases	— years		— years
Operating leases	7.1 years		7.5 years

Weighted-average discount rate:
Finance leases	—	%	—	%
Operating leases	12.0	%	12.1	%

Supplemental cash flow information related to leases was as follows:


	For the six months ended
	June 30,
	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	260,546	$	13,127
Operating cash flows from finance leases		—		—
Financing cash flows from finance leases		—		—

We obtained nominal ROU assets in exchange for lease liabilities upon commencement of operating leases during the six months ended June 30, 2024. We did not obtain any ROU assets in exchange for lease liabilities upon commencement of operating leases during the six months ended June 30, 2023.

Maturities of lease liabilities as of June 30, 2024 were as follows:


	Operating Leases
Year ending December 31,
2024 (remaining six months)	$	13,182
2025		173,188
2026		215,519
2027		214,088
2028		212,221
Thereafter		483,424
Total future minimum lease payments		1,311,622
Less: Interest		(448,889)
Total lease liabilities	$	862,733

Lessor Accounting

The following table presents our lease revenue by type of lease:


	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Sales-type lease revenue:
Revenue at lease commencement	$	995	$	2,887	$	1,544	$	6,641
Interest income		544		554		1,079		1,001
Total sales-type lease revenue		1,539		3,441		2,623		7,642
Operating lease revenue		4,305		12,191		10,860		24,518
Total lease revenue	$	5,844	$	15,632	$	13,483	$	32,160

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $25.1 million and $30.4 million as of June 30, 2024 and December 31, 2023, respectively.

The following table presents future operating lease payments to be received as of June 30, 2024:


	Amounts
December 31,
2024 (remaining six months)	$	8,497
2025		8,291
2026		5,383
2027		3,058
2028		761
Thereafter		402
Total lease payments to be received	$	26,392

NOTE 9. LONG-TERM DEBT AND OTHER NOTES PAYABLE

The following table summarizes the carrying amount and fair value of our debt facilities as of June 30, 2024 and December 31, 2023:


	As of
	June 30, 2024				December 31, 2023
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior Secured Notes:
5 1/4% Senior Secured Notes due 2026	$	750,000	$	580,208	$	750,000	$	665,678
Senior Unsecured Notes:
6 5/8% Senior Unsecured Notes due 2026		750,000		331,920		750,000		591,525
Subtotal		1,500,000	$	912,128		1,500,000	$	1,257,203
Less: Unamortized debt issuance costs		(1,957)		—		(2,391)		—
Other notes payable		43,925		—		46,594		—
Total long-term debt and other notes payable (including current portion)	$	1,541,968			$	1,544,203

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

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(Unaudited)

NOTE 10. COMMITMENTS AND CONTINGENCIES

Contingencies

Patents and Intellectual Property

Many entities, including some of our competitors, have, or may in the future, obtain patents and other intellectual property rights that cover or affect products or services that we offer or that we may offer in the future. We may not be aware of all intellectual property rights that our products or 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 patents 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 components of our products and services. We cannot be certain that these persons do not own the rights they claim, that our products do not infringe on these rights, and/or that these rights are not valid. Further, we cannot be certain that we would be able to obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products to avoid infringement.

Litigation

We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.

For certain cases described on the following pages, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

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 2002, HCIPL’s license was amended pursuant to a 1999 government policy that eliminated fixed license fees and replaced them with license fees based on service providers’ 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 and penalties and interest on such fees and penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from both licensed and unlicensed activities.

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(Unaudited)

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 DOT also issued license fee assessments to other telecommunications service providers and those other providers filed similar petitions 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 “October 2019 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 HCIPL was 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 the October 2019 Order. 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 October 2019 Order to permit the DOT to calculate the final amount due and extend HCIPL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court directed HCIPL 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 October 2019 Order 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, among other things, a proposal by the DOT to allow for extended or deferred payments of amounts due. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the proposal made by the DOT to extend the time frame for payment of the amounts owed and for HCIPL and the other telecommunication providers to provide security for such payments.

On September 1, 2020, the Supreme Court issued a judgment permitting a 10-year payment schedule. Under this payment schedule, HCIPL is required to make an annual payment every March 31, through 2031. Following the Supreme Court of India’s October 2019 judgment, HCIPL made payments during the first quarter of 2020, and additional payments on each March 31 thereafter. As of June 30, 2024, the gross amount of fees, penalties and interest owed was approximately $92 million with $54 million remaining outstanding as a result of historical payments.

Pursuant to the Contribution and Membership Interest Purchase Agreement (the “Purchase Agreement”) dated December 3, 2004 between The DirecTV Group, Inc. (“DirecTV”) and certain other entities relating to DirecTV’s spinoff of certain of its subsidiaries, including HCIPL, DirecTV undertook to indemnify HCIPL for certain pre-closing tax liabilities. On March 27, 2020, HCIPL filed an indemnification complaint against DirecTV in the United States District Court for the Southern District of New York, seeking to recover certain license fees, penalties and interest owed to the Indian government as a result of the aforementioned proceedings. On November 16, 2021, the New York court granted summary judgment in favor of DirecTV, but on June 22, 2023, the United States Court of Appeals for the Second Circuit reversed, holding that, under the Purchase Agreement, HCIPL is entitled to indemnification from DirecTV. The Second Circuit remanded the case back to the trial court to determine the amount of indemnification owed.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The following table presents the components of the accrual:


	As of
	June 30, 2024		December 31, 2023
Additional license fees	$	3,402	$	3,405
Penalties		3,492		3,495
Interest and interest on penalties		84,767		82,627
Less: Payments		(37,910)		(27,807)
Total accrual		53,751		61,720
Less: Current portion		10,122		10,130
Total long-term accrual	$	43,629	$	51,590

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.

Hughes Telecommunicaoes do Brasil v. State of São Paulo Treasury Department of São Paulo Treasury Department

On December 12, 2019, Hughes Telecommunicaoes do Brasil (“HTB”) filed a tax annulment claim in the Judicial Court of São Paulo, claiming that a tax assessment from the State Treasury of São Paulo, for the period from January 2013 to December 2014, was based on an erroneous interpretation of an exemption to the ICMS (a state tax on, among other things, communications).

In June 2022, a judicial expert determined that HTB’s interpretation of the exemption was correct. Nonetheless, in July 2023, the Court entered judgment against HTB, and in October 2023, rejected HTB’s request for clarification. In November 2023, HTB filed an appeal to the Court of Justice.

We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit.

Other

In addition to the above actions, we are subject to various other legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial condition, results of operations or liquidity, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

NOTE 11. SEGMENT REPORTING

Operating segments are components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”) is the primary measure used by our chief operating decision maker to evaluate segment operating performance. We operate in two operating segments: Hughes segment and ESS segment. As of March 31, 2024, and June 30, 2024, the ESS operating segment did not meet the quantitative thresholds as prescribed under ASC 280, Segment Reporting, for separate reportable segments, and is not expected to meet the quantitative thresholds or be of continuing significance in the future. As such, the ESS operating segment is no longer considered a reportable segment and we included the ESS operating segment results in Corporate and Other for all periods presented.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Total assets by segment have not been reported herein because the information is not provided to our chief operating decision maker on a regular basis.

The following table presents total revenue, capital expenditures and EBITDA for each of our business segments:


			Corporate		Consolidated
	Hughes		and Other		Total
For the three months ended June 30, 2024
External revenue	$	388,321	$	1,298	$	389,619

Capital expenditures	$	55,123	$	—	$	55,123
EBITDA	$	61,103	$	(16,726)	$	44,377

For the three months ended June 30, 2023
External revenue	$	444,335	$	6,703	$	451,038

Capital expenditures	$	43,950	$	—	$	43,950
EBITDA	$	140,997	$	(15,879)	$	125,118


For the six months ended June 30, 2024
External revenue	$	767,029	$	2,594	$	769,623

Capital expenditures	$	123,454	$	195	$	123,649
EBITDA	$	131,077	$	(33,955)	$	97,122

For the six months ended June 30, 2023
External revenue	$	875,530	$	13,332	$	888,862

Capital expenditures	$	90,975	$	—	$	90,975
EBITDA	$	298,231	$	(29,628)	$	268,603

The following table reconciles “Net income (loss)” in the Condensed Consolidated Statements of Operations to EBITDA:


		For the three months ended				For the six months ended
		June 30,				June 30,
	2024		2023		2024		2023
Net income (loss)	$	(57,875)	$	3,260	$	(108,141)	$	29,888
Interest income, net		(3,555)		(20,156)		(20,570)		(38,104)
Interest expense, net of amounts capitalized		22,095		22,206		49,444		44,733
Income tax provision (benefit), net		(11,274)		18,513		(17,026)		33,219
Depreciation and amortization		93,093		99,223		186,875		195,574
Net loss (income) attributable to non-controlling interests		1,893		2,072		6,540		3,293
EBITDA	$	44,377	$	125,118	$	97,122	$	268,603

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 12. REVENUE RECOGNITION

Contract Balances

Contract assets arise when we recognize revenue for providing a service in advance of billing our customers. Our contract assets typically relate to our long-term contracts where we recognize revenue using the cost-based input method and the revenue recognized exceeds the amount billed to the customer.

Our contract assets also include receivables related to sales-type leases recognized over the lease term as the customer is billed. Contract assets are amortized as the customer is billed for services. Contract assets are recorded in “Trade accounts receivable and contract assets, net” on our Condensed Consolidated Balance Sheets.

Contract liabilities arise when we bill our customers and receive consideration in advance of providing the service. Contract liabilities are recognized as revenue when the service has been provided to the customer. Contract liabilities are recorded in “Contract liabilities” or “Other non-current liabilities” on our Condensed Consolidated Balance Sheets.

The following table presents the components of our contract balances:


	As of
	June 30, 2024		December 31, 2023
Contract assets	$	91,865	$	66,095

Contract liabilities:
Current	$	80,852	$	116,187
Non-current		6,078		7,401
Total contract liabilities	$	86,930	$	123,588

The following table presents the revenue recognized in the Condensed Consolidated Statements of Operations that was previously included within contract liabilities:



	For the three months ended June 30,				For the six months ended June 30,
	2024		2023		2024		2023
Revenue	$	33,448	$	11,586	$	91,421	$	72,549

The following table presents the activity in our allowance for credit losses:


	For the six months ended June 30,
	2024
Balance at beginning of period	$	20,399
Current period provision for expected losses		16,784
Write-offs charged against allowances		(12,979)
Foreign currency translation		(241)
Balance at end of period	$	23,963

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Contract Acquisition Costs

The following table presents the activity in our contract acquisition costs, net:


	For the six months ended
	June 30,
	2024		2023
Balance at beginning of period	$	49,343	$	64,447
Additions		25,920		23,601
Amortization expense		(18,843)		(32,135)
Foreign currency translation		(901)		1,006
Balance at end of period	$	55,519	$	56,919

Performance Obligations

As of June 30, 2024, the remaining performance obligations for our customer contracts was approximately $1.4 billion, compared to $1.7 billion as of December 31, 2023, a decrease of $316 million. This decrease resulted from the evaluation of the credit worthiness of the portfolio. Performance obligations expected to be satisfied within one year and greater than one year are 30% and 70%, respectively. This amount and percentages exclude leasing arrangements and agreements with consumer customers.

Disaggregation of Revenue

Geographic Information

Revenue is attributed to geographic markets based upon the billing location of the customer. Substantially all of our revenue is related to our Hughes segment. The following tables present our revenue from customer contracts disaggregated by primary geographic market:


	For the three months ended					For the six months ended
	June 30,					June 30,
	2024		2023		2024			2023
North America	$	311,705	$	370,129	$	619,553	$	724,579
South and Central America		35,361		41,312		71,316		79,685
Other		42,553		39,597		78,754		84,598
Total revenue	$	389,619	$	451,038	$	769,623	$	888,862

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Nature of Products and Services

The following tables present our revenue disaggregated by the nature of products and services. Substantially all of our revenue is related to our Hughes segment:


	For the three months ended				For the six months ended
	June 30,				June 30,
	2024		2023		2024		2023
Service revenue:
Services	$	299,600	$	357,243	$	612,549	$	720,670
Lease revenue		4,305		12,191		10,860		24,518
Total service revenue		303,905		369,434		623,409		745,188
Equipment and other revenue:
Equipment		48,457		26,687		83,589		47,652
Design, development and construction services		35,718		51,476		60,002		88,380
Lease revenue		1,539		3,441		2,623		7,642
Total equipment and other revenue		85,714		81,604		146,214		143,674
Total revenue	$	389,619	$

Hughes Satellite Systems Corp 10-Q