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 March 31, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to
Commission File Number: 001-39245
SPHERE ENTERTAINMENT CO.
(Exact name of registrant as specified in its charter)
| Delaware | 84-3755666 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| Two Penn Plaza | New York | , | NY | 10121 | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
Registrant’s telephone number, including area code: (725) 258-0001
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A Common Stock | SPHR | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares of common stock outstanding as of April 28, 2023:
| Class A Common Stock par value $0.01 per share | — | 27,692,030 | ||||||
| Class B Common Stock par value $0.01 per share | — | 6,866,754 | ||||||
SPHERE ENTERTAINMENT CO.
INDEX TO FORM 10-Q
| Page | |||||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except per share data)
| March 31, 2023 | June 30, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | 327,245 | $ | 822,885 | ||||||||||
| Accounts receivable, net | 214,443 | 188,012 | ||||||||||||
| Prepaid expenses and other current assets | 145,838 | 135,671 | ||||||||||||
Current assets (Held for Sale) (c) | 502,567 | 72,088 | ||||||||||||
| Total current assets | 1,190,093 | 1,218,656 | ||||||||||||
| Non-Current Assets: | ||||||||||||||
| Property and equipment, net | 3,690,234 | 2,853,656 | ||||||||||||
| Right-of-use lease assets | 339,601 | 337,305 | ||||||||||||
| Goodwill | 498,817 | 498,817 | ||||||||||||
| Intangible assets, net | 82,490 | 86,464 | ||||||||||||
| Other non-current assets | 248,246 | 173,298 | ||||||||||||
Non-current assets (Held for Sale) (c) | — | 400,430 | ||||||||||||
| Total assets | $ | 6,049,481 | $ | 5,568,626 | ||||||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accounts payable, accrued and other current liabilities | $ | 699,769 | $ | 529,083 | ||||||||||
| Current portion of long-term debt | 98,750 | 74,762 | ||||||||||||
| Operating lease liabilities, current | 46,086 | 45,559 | ||||||||||||
| Deferred revenue | 265,611 | 208,895 | ||||||||||||
Current liabilities (Held for Sale) (c) | 289,817 | 102,801 | ||||||||||||
| Total current liabilities | 1,400,033 | 961,100 | ||||||||||||
| Non-Current Liabilities: | ||||||||||||||
| Long-term debt, net of deferred financing costs | 1,781,748 | 1,584,446 | ||||||||||||
| Operating lease liabilities, non-current | 342,629 | 338,534 | ||||||||||||
| Deferred tax liabilities, net | 209,742 | 209,907 | ||||||||||||
| Other non-current liabilities | 142,531 | 144,103 | ||||||||||||
Non-current liabilities (Held for Sale) (c) | — | 170,960 | ||||||||||||
| Total liabilities | 3,876,683 | 3,409,050 | ||||||||||||
| Commitments and contingencies (see Note 9) | ||||||||||||||
| Redeemable noncontrolling interests (Held for Sale) | 138,812 | 184,192 | ||||||||||||
| Equity: | ||||||||||||||
Class A Common Stock (a) | 277 | 273 | ||||||||||||
Class B Common Stock (b) | 69 | 69 | ||||||||||||
| Additional paid-in capital | 2,391,409 | 2,301,970 | ||||||||||||
| Accumulated deficit | (324,756) | (290,736) | ||||||||||||
| Accumulated other comprehensive loss | (46,439) | (48,355) | ||||||||||||
| Total Sphere Entertainment Co. stockholders’ equity | 2,020,560 | 1,963,221 | ||||||||||||
| Nonredeemable noncontrolling interests (Held for Sale) | 13,426 | 12,163 | ||||||||||||
| Total equity | 2,033,986 | 1,975,384 | ||||||||||||
| Total liabilities, redeemable noncontrolling interests and equity | $ | 6,049,481 | $ | 5,568,626 | ||||||||||
__________________
(a)Class A Common Stock, $0.01 par value per share, 120,000 shares authorized;27,692 and 27,368 shares outstanding as of March 31, 2023 and June 30, 2022, respectively.
(b)Class B Common Stock, $0.01 par value per share, 30,000 shares authorized;6,867 shares outstanding as of March 31, 2023 and June 30, 2022.
(c)The assets and liabilities of the disposal group classified as held for sale are classified as current on the March 31,2023 balance sheet as the transaction was completed and net proceeds were received on May 3,2023.
See accompanying notes to the unaudited condensed consolidated financial statements.
1
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Revenues (a) | $ | 363,297 | $ | 352,534 | $ | 1,139,492 | $ | 928,442 | ||||||||||||||||||
Direct operating expenses (a) | (210,141) | (197,967) | (658,935) | (536,076) | ||||||||||||||||||||||
Selling, general and administrative expenses (a) | (179,870) | (118,788) | (442,054) | (384,280) | ||||||||||||||||||||||
| Depreciation and amortization | (22,999) | (20,463) | (68,090) | (63,050) | ||||||||||||||||||||||
| Impairment and other (losses) gains, net | (51) | 245 | 7,361 | 245 | ||||||||||||||||||||||
| Restructuring charges | (20,498) | (14,690) | (34,180) | (14,690) | ||||||||||||||||||||||
| Operating (loss) income | (70,262) | 871 | (56,406) | (69,409) | ||||||||||||||||||||||
| Interest income | 2,640 | 767 | 10,161 | 2,311 | ||||||||||||||||||||||
| Interest expense | — | (5,528) | — | (22,051) | ||||||||||||||||||||||
| Other income (expense), net | 4,994 | (10,052) | 1,939 | (32,304) | ||||||||||||||||||||||
| Loss from continuing operations before income taxes | (62,628) | (13,942) | (44,306) | (121,453) | ||||||||||||||||||||||
| Income tax benefit (expense) | 8,649 | (6,349) | 4,717 | 10,112 | ||||||||||||||||||||||
| Loss from continuing operations | (53,979) | (20,291) | (39,589) | (111,341) | ||||||||||||||||||||||
| (Loss) income from discontinued operations, net of taxes | (4,576) | 985 | 7,548 | 20,399 | ||||||||||||||||||||||
| Net loss | (58,555) | (19,306) | (32,041) | (90,942) | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from continuing operations | — | (212) | (554) | (579) | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | (216) | (1,161) | (128) | (323) | ||||||||||||||||||||||
| Less: Net (loss) income attributable to redeemable noncontrolling interests from discontinued operations | (1,492) | (442) | 2,661 | 4,412 | ||||||||||||||||||||||
| Net loss attributable to Sphere Entertainment Co.’s stockholders | $ | (56,847) | $ | (17,491) | $ | (34,020) | $ | (94,452) | ||||||||||||||||||
| Basic and diluted (loss) earnings per common share | ||||||||||||||||||||||||||
| Continuing operations | $ | (1.55) | $ | (0.59) | $ | (1.13) | $ | (3.24) | ||||||||||||||||||
| Discontinued operations | $ | (0.09) | $ | 0.08 | $ | 0.15 | $ | 0.48 | ||||||||||||||||||
| Basic and diluted loss per common share attributable to Sphere Entertainment Co.’s stockholders | $ | (1.64) | $ | (0.51) | $ | (0.98) | $ | (2.76) | ||||||||||||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic and diluted | 34,727 | 34,320 | 34,604 | 34,230 | ||||||||||||||||||||||
_________________
(a)See Note 14, Related Party Transactions, for further information on related party revenues and expenses.
See accompanying notes to the unaudited condensed consolidated financial statements.
2
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net loss | $ | (53,979) | $ | (20,291) | $ | (39,589) | $ | (111,341) | ||||||||||||||||||
| Other comprehensive income (loss), before income taxes: | ||||||||||||||||||||||||||
| Amortization of net actuarial loss included in net periodic benefit cost | 464 | 510 | 1,484 | 1,530 | ||||||||||||||||||||||
| Cumulative translation adjustments | 1,972 | (5,340) | 637 | (9,226) | ||||||||||||||||||||||
| Other comprehensive income (loss), before income taxes | 2,436 | (4,830) | 2,121 | (7,696) | ||||||||||||||||||||||
| Income tax (expense) benefit | (421) | 919 | (362) | 1,463 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | 2,015 | (3,911) | 1,759 | (6,233) | ||||||||||||||||||||||
| Comprehensive loss from continuing operations | (51,964) | (24,202) | (37,830) | (117,574) | ||||||||||||||||||||||
| Comprehensive (loss) income from discontinued operations | (4,467) | 518 | 7,705 | 19,894 | ||||||||||||||||||||||
| Comprehensive loss | (56,431) | (23,684) | (30,125) | (97,680) | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from continuing operations | — | (212) | (554) | (579) | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | (216) | (1,161) | (128) | (323) | ||||||||||||||||||||||
| Less: Net (loss) income attributable to redeemable noncontrolling interests from discontinued operations | (1,492) | (442) | 2,661 | 4,412 | ||||||||||||||||||||||
| Comprehensive loss attributable to Sphere Entertainment Co.’s stockholders | $ | (54,723) | $ | (21,869) | $ | (32,104) | $ | (101,190) | ||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
3
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Nine Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||
| Net loss | $ | (32,041) | $ | (90,942) | ||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 89,234 | 88,602 | ||||||||||||
| Impairment and other gains, net | (7,834) | (5,480) | ||||||||||||
| Amortization of deferred financing costs | 4,186 | 6,548 | ||||||||||||
| Benefit from deferred income taxes | (5,031) | (11,872) | ||||||||||||
| Share-based compensation expense | 56,092 | 62,321 | ||||||||||||
| Amortization of right-of-use assets | 23,712 | 19,452 | ||||||||||||
| Net unrealized (gains) loss on equity investments with and without readily determinable fair value | (6,276) | 28,303 | ||||||||||||
| Other non-cash adjustments | 6,432 | 5,588 | ||||||||||||
| Change in assets and liabilities: | ||||||||||||||
| Accounts receivable, net | (24,081) | (64,496) | ||||||||||||
| Prepaid expenses and other current and non-current assets | (69,479) | (22,790) | ||||||||||||
| Accounts payable, accrued and other current and non-current liabilities | 68,650 | 31,928 | ||||||||||||
| Deferred revenue | 53,688 | 54,195 | ||||||||||||
| Right-of-use lease assets and operating lease liabilities | (19,428) | 4,844 | ||||||||||||
| Net cash provided by operating activities | $ | 137,824 | $ | 106,201 | ||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||
| Capital expenditures, net | $ | (764,513) | $ | (516,494) | ||||||||||
Capitalized interest | (88,450) | (32,202) | ||||||||||||
| Investments in nonconsolidated affiliates | (7,750) | — | ||||||||||||
| Proceeds from dispositions, net | 29,104 | — | ||||||||||||
| Proceeds from sale of equity securities | 4,369 | — | ||||||||||||
| Distributions from equity method investments | 1,756 | 770 | ||||||||||||
| Net cash used in investing activities | $ | (825,484) | $ | (547,926) | ||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||
| Proceeds from issuance of debt | $ | 275,168 | $ | — | ||||||||||
| Taxes paid in lieu of shares issued for equity-based compensation | (14,980) | (15,652) | ||||||||||||
| Noncontrolling interest holders’ capital contributions | 3,000 | 2,033 | ||||||||||||
| Distributions to noncontrolling interest holders | (1,722) | — | ||||||||||||
| Distributions to related parties associated with the settlement of certain share-based awards | (2,388) | (2,256) | ||||||||||||
| Put option payments to redeemable noncontrolling interest holders | — | (895) | ||||||||||||
| Repayments of revolving credit facility | (2,000) | (15,000) | ||||||||||||
| Principal repayments on long-term debt | (52,250) | (45,750) | ||||||||||||
| Payments for financing costs | (5,131) | — | ||||||||||||
| Other financing activities | 788 | — | ||||||||||||
| Net cash provided by (used in) financing activities | $ | 200,485 | $ | (77,520) | ||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (729) | 22 | ||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | (487,904) | (519,223) | ||||||||||||
| Cash, cash equivalents and restricted cash from continuing operations, beginning of period | 822,885 | 1,508,174 | ||||||||||||
| Cash, cash equivalents and restricted cash from discontinued operations, beginning of period | 23,125 | 31,802 | ||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 846,010 | 1,539,976 | ||||||||||||
| Cash, cash equivalents and restricted cash from continuing operations, end of period | 327,245 | 987,922 | ||||||||||||
| Cash, cash equivalents and restricted cash from discontinued operations, end of period | 30,861 | 32,831 | ||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 358,106 | $ | 1,020,753 | ||||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||
| Investments and loans to nonconsolidated affiliates | $ | 12,859 | $ | 731 | ||||||||||
| Capital expenditures incurred but not yet paid | $ | 104,004 | $ | 83,788 | ||||||||||
| Share-based compensation capitalized in property and equipment | $ | 2,887 | $ | 2,264 | ||||||||||
4
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
| Common Stock Issued | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Sphere Entertainment Co. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 346 | $ | 2,322,007 | $ | (267,909) | $ | (48,563) | $ | 2,005,881 | $ | 13,039 | $ | 2,018,920 | $ | 190,222 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | (56,847) | — | (56,847) | (216) | (57,063) | (1,492) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 2,124 | 2,124 | — | 2,124 | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 20,714 | — | — | 20,714 | — | 20,714 | — | ||||||||||||||||||||||||||||||||||||||||||
| Redeemable noncontrolling interest adjustment to redemption fair value | — | 50,045 | — | — | 50,045 | — | 50,045 | (50,045) | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of put options and adjustments | — | — | — | — | — | — | — | 587 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 1,000 | 1,000 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | (1,357) | — | — | (1,357) | (397) | (1,754) | (460) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | 346 | $ | 2,391,409 | $ | (324,756) | $ | (46,439) | $ | 2,020,560 | $ | 13,426 | $ | 2,033,986 | $ | 138,812 | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 342 | $ | 2,317,415 | $ | (173,302) | $ | (32,632) | $ | 2,111,823 | $ | 15,992 | $ | 2,127,815 | $ | 142,004 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | (17,491) | — | (17,491) | (1,373) | (18,864) | (442) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (4,378) | (4,378) | — | (4,378) | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 18,537 | — | — | 18,537 | — | 18,537 | — | ||||||||||||||||||||||||||||||||||||||||||
| Tax withholding associated with shares issued for equity-based compensation | — | (412) | — | — | (412) | — | (412) | — | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of put options | — | — | — | — | — | — | — | 587 | ||||||||||||||||||||||||||||||||||||||||||
| Put option payments to redeemable noncontrolling interest holders | — | — | — | (895) | ||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 723 | 723 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | (1,269) | — | — | (1,269) | (530) | (1,799) | (3,476) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 342 | $ | 2,334,271 | $ | (190,793) | $ | (37,010) | $ | 2,106,810 | $ | 14,812 | $ | 2,121,622 | $ | 137,778 | ||||||||||||||||||||||||||||||||||
| See accompanying notes to the unaudited condensed consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||
5
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
| Common Stock Issued | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Sphere Entertainment Co. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | 342 | $ | 2,301,970 | $ | (290,736) | $ | (48,355) | $ | 1,963,221 | $ | 12,163 | $ | 1,975,384 | $ | 184,192 | ||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | (34,020) | — | (34,020) | (682) | (34,702) | 2,661 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 1,916 | 1,916 | — | 1,916 | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 57,009 | — | — | 57,009 | — | 57,009 | — | ||||||||||||||||||||||||||||||||||||||||||
| Tax withholding associated with shares issued for equity-based compensation | 4 | (14,984) | — | — | (14,980) | — | (14,980) | — | ||||||||||||||||||||||||||||||||||||||||||
| BCE disposition | — | — | — | — | — | 667 | 667 | — | ||||||||||||||||||||||||||||||||||||||||||
| Redeemable noncontrolling interest adjustment to redemption fair value | — | 50,045 | — | — | 50,045 | — | 50,045 | (50,045) | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of put options and adjustments | — | (895) | — | — | (895) | — | (895) | 2,656 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 3,000 | 3,000 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | (1,736) | — | — | (1,736) | (1,722) | (3,458) | (652) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | 346 | $ | 2,391,409 | $ | (324,756) | $ | (46,439) | $ | 2,020,560 | $ | 13,426 | $ | 2,033,986 | $ | 138,812 | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 340 | $ | 2,294,775 | $ | (96,341) | $ | (30,272) | $ | 2,168,502 | $ | 11,904 | $ | 2,180,406 | $ | 137,834 | ||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | (94,452) | — | (94,452) | (902) | (95,354) | 4,412 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (6,738) | (6,738) | — | (6,738) | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 62,824 | — | — | 62,824 | — | 62,824 | — | ||||||||||||||||||||||||||||||||||||||||||
| Tax withholding associated with shares issued for equity-based compensation | 2 | (15,654) | — | — | (15,652) | — | (15,652) | — | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of put options | — | — | — | — | — | — | — | 1,761 | ||||||||||||||||||||||||||||||||||||||||||
| Put option payments to redeemable noncontrolling interest holders | — | — | — | — | — | — | — | (895) | ||||||||||||||||||||||||||||||||||||||||||
| Adjustments of redeemable noncontrolling interest | (6,178) | (6,178) | (6,178) | 66 | ||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 5,400 | 5,400 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | (1,496) | — | — | (1,496) | (1,590) | (3,086) | (5,400) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 342 | $ | 2,334,271 | $ | (190,793) | $ | (37,010) | $ | 2,106,810 | $ | 14,812 | $ | 2,121,622 | $ | 137,778 | ||||||||||||||||||||||||||||||||||
| See accompanying notes to the unaudited condensed consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||
6
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts included in the following notes to condensed consolidated financial statements (unaudited) are presented in thousands, except per share data or as otherwise noted.
0
Note 1. Description of Business and Basis of Presentation
Spin-off Transaction
On April 20, 2023 (the “MSGE Spinco Distribution Date”), Sphere Entertainment Co., formerly Madison Square Garden Entertainment Corp. (“Sphere Entertainment” or the “Company”), distributed approximately 67% of the outstanding common stock of Madison Square Garden Entertainment Corp. (“MSG Entertainment”, formerly MSGE Spinco, Inc.) to its stockholders (the “MSGE Spinco Distribution”), with the Company retaining approximately 33% of the outstanding common stock of MSG Entertainment (in the form of Class A common stock) immediately following the MSGE Spinco Distribution (the “MSGE Retained Interest”). MSG Entertainment owns the traditional live entertainment business previously owned and operated by the Company through its Entertainment business segment, excluding Sphere, which was retained by the Company after the MSGE Spinco Distribution Date. In the MSGE Spinco Distribution, stockholders of the Company received (a) one share of MSG Entertainment’s Class A common stock, par value $0.01 per share, for every share of the Company’s Class A common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on April 14, 2023 (the “Record Date”), and (b) one share of MSG Entertainment’s Class B common stock, par value $0.01 per share, for every share of the Company’s Class B common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on the Record Date.
As of March 31, 2023, the Company maintained the historical operating structure and reported the consolidated financial results of its traditional live entertainment business in continuing operations within the Entertainment reporting segment until the MSGE Spinco Distribution Date. Subsequent to the MSGE Spinco Distribution, the historical financial results of the Company’s traditional live entertainment business, excluding Sphere, will be reflected in the Company’s consolidated financial statements as discontinued operations under U.S. generally accepted accounting principles (“GAAP”) for all periods presented through the MSGE Spinco Distribution Date, effective as of the filing with the U.S. Securities and Exchange Commission (the “SEC”) of the Company’s Annual Report on Form 10-K for the fiscal year ending on June 30, 2023.
Tao Group Hospitality Disposition
On April 17, 2023, the Company announced it entered into an agreement to sell its 66.9% majority interest in TAO Group Sub-Holdings LLC (“Tao Group Hospitality”) to a subsidiary of Mohari Hospitality Limited, a global investment company focused on the luxury lifestyle and hospitality sectors (the “Tao Group Hospitality Disposition”). On May 3, 2023, the Company announced that, through its indirect subsidiary, TAO Group Holdings, LLC (“TAO Holdings”), the Company completed the sale of its interests in Tao Group Hospitality.
The transaction values Tao Group Hospitality at $550,000, subject to certain customary purchase price adjustments. The Company, through certain of its subsidiaries, owns 79.1% of TAO Holdings, which represents an effective ownership of 66.9% of Tao Group Hospitality, and thus would be entitled to that percentage of the total cash consideration paid to the Sellers (net of, among other things, the payoff of outstanding debt and certain debt-like items and fees, costs and expenses incurred in connection with the transaction) pursuant to the transaction agreement dated as of April 17, 2023, by and among TAO Holdings, Hakkasan USA Inc., the other sellers party thereto and Disco Ball Intermediate, LLC (the “Transaction Agreement”). At closing, the Company received approximately $295,000 of net proceeds (taking into account the payment of accrued management fees) in connection with the transaction.
As of and for the three and nine months ended March 31, 2023, the Tao Group Hospitality segment met the criteria for discontinued operations and was classified as for held for sale, along with the related operations as a discontinued operation. See Note 3. Discontinued Operations and Dispositions, for details regarding the Tao Group Hospitality Disposition.
Description of Business
Following the MSGE Spinco Distribution and the Tao Group Hospitality Disposition, the Company’s business consists of Sphere, a next-generation entertainment medium powered by new technologies to create experiences that transport audiences to places both real and imagined; MSG Networks, which operates two regional sports and entertainment networks, MSG Network and MSG Sportsnet (formerly MSG+), as well as a companion streaming service, MSG GO, delivering a wide range of live
7
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
sports content and other programming; and an approximately 33% economic interest in MSG Entertainment.
The Company is comprised of two reportable segments: Entertainment and MSG Networks. Historically, Tao Group Hospitality had been a reportable segment, but as of March 31, 2023, has been classified as a discontinued operation, as discussed above. See Note 1. Description of Business and Basis of Presentation, to the consolidated and combined financial statements included in the Form 10-K for the fiscal years ended June 30, 2022, 2021 and 2020 as filed with the SEC on August 19, 2022 (the “2022 Form 10-K”) for more information regarding the details of the Company’s business.
Advertising Sales Representation Agreement Termination
The advertising sales representation agreement (the “Networks Advertising Sales Representation Agreement”) between two of the Company’s subsidiaries, MSGN Holdings, L.P. and Sphere Entertainment Group, LLC (formerly MSG Entertainment Group, LLC, “Sphere Entertainment Group”), pursuant to which Sphere Entertainment Group had the exclusive right and obligation to sell MSG Networks advertising availabilities for a commission, was terminated effective as of December 31, 2022. The termination of the Networks Advertising Sales Representation Agreement has impacted the operating results of the reportable segments of the Company for the three and nine months end March 31, 2023 and on a go forward basis. As a result, the Entertainment segment will no longer recognize advertising sales commission revenue or the employee costs related to the advertising sales agency. Conversely, the MSG Networks segment will no longer incur advertising commission expense but will reflect the employee costs of the former Entertainment employees that supported the advertising sales agency as such employees have been transferred to MSG Networks, which will result in higher direct operating expenses and selling, general and administrative expenses going forward.
Basis of Presentation
The Company reports on a fiscal year basis ending on June 30th (“Fiscal Year”). In these unaudited condensed consolidated interim financial statements (“financial statements”), the years ended on June 30, 2023 and 2022 are referred to as “Fiscal Year 2023” and “Fiscal Year 2022,” respectively. Certain Fiscal Year 2022 amounts have been reclassified to conform to the Fiscal Year 2023 presentation.
The accompanying financial statements have been prepared in accordance with GAAP for interim financial information and the instructions of Rule 10-01 of Regulation S-X of the SEC, and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for Fiscal Year 2022 included in the 2022 Form 10-K.
In the opinion of the Company, the accompanying financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2023 and its results of operations for the three and nine months ended March 31, 2023, and 2022, and cash flows for the nine months ended March 31, 2023, and 2022. The condensed consolidated financial statements and the accompanying notes as of Fiscal Year 2022 were derived from audited annual financial statements but do not contain all of the footnote disclosures from the annual financial statements.
The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year. Prior to the MSGE Spinco Distribution, the Company generally earned a disproportionate share of its annual revenues in the second and third quarters of its fiscal year as a result of the production of the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”), arena license fees in connection with the use of Madison Square Garden (“The Garden”) by the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”), and MSG Networks’ advertising revenue being largely derived from the sale of inventory in its live NBA and NHL professional sports programming. Following the MSGE Spinco Distribution, our MSG Networks segment generally continues to expect to earn a higher share of its annual revenues in the second and third quarters of its fiscal year as a result of MSG Networks’ advertising revenue being largely derived from the sale of inventory in its live NBA and NHL professional sports programming.
Impact of the COVID-19 Pandemic
The Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three and nine months ended March 31, 2023, as compared to the prior year period, which was impacted by fewer ticketed events at our performance venues in the first half of the fiscal year due to the lead-time required to book touring acts and artists and the postponement or cancellation of select events at our performance venues (including the partial cancellation of the 2021 production of the Christmas Spectacular) during the second and third quarters of Fiscal Year 2022 as a result of an increase in COVID-19 cases. In addition, due to the COVID-19 pandemic, the 2020-21 NHL season was shortened and resulted in
8
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
reductions in media rights fees recognized in our MSG Networks segment, which had a residual impact reflected in the nine months ended March 31, 2022. See Note 1, Impact of the COVID-19 Pandemic, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding the impact of the COVID-19 pandemic on our business.
It is unclear to what extent COVID-19 concerns, including with respect to new variants, could result in new government or league-mandated capacity or other restrictions or vaccination/mask requirements or impact the use of and/or demand for Sphere in Las Vegas, impact demand for our sponsorship and advertising assets, deter our employees and vendors from working at Sphere in Las Vegas (which may lead to difficulties in staffing) or otherwise materially impact our operations.
Note 2. Accounting Policies
Principles of Consolidation
The financial statements of the Company include the accounts of Sphere Entertainment Co. and its subsidiaries, including Tao Group Hospitality, which is reported as a discontinued operation as of March 31, 2023 and Boston Calling Events, LLC (“BCE”), until its disposition on December 2, 2022. All significant intercompany transactions and balances have been eliminated in consolidation.
The financial statements of the Company historically included accounts of Tao Group Hospitality, which has been sold subsequent to March 31, 2023, and BCE (up to December 2, 2022) in which the Company had a controlling voting interest. The Company’s consolidation criteria are based on authoritative accounting guidance for identifying a controlling financial interest. Tao Group Hospitality and BCE were consolidated with the equity owned by other stockholders shown as redeemable or nonredeemable noncontrolling interests in the accompanying condensed consolidated balance sheets, and the other stockholders’ portion of net earnings (loss) and other comprehensive income (loss) shown as net income (loss) or comprehensive income (loss) attributable to redeemable or nonredeemable noncontrolling interests in the accompanying condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss), respectively.
See Note 3, Discontinued Operations and Dispositions, for details regarding the Tao Group Hospitality Disposition and the BCE disposition. See Note 2, Summary of Significant Accounting Policies, to the consolidated and combined financial statements included in the 2022 Form 10-K regarding the classification of redeemable noncontrolling interests of Tao Group Hospitality.
Use of Estimates
The preparation of the accompanying financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the provision for credit losses, valuation of investments, goodwill, intangible assets, other long-lived assets, deferred tax assets, pension and other postretirement benefit obligations and the related net periodic benefit cost, and other liabilities. In addition, estimates are used in revenue recognition, rights fees, performance and share-based compensation, depreciation and amortization, litigation matters and other matters. Management believes its use of estimates in the financial statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and, as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s financial statements in future periods.
Summary of Significant Accounting Policies
9
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The following is an update to the Company's Summary of Significant Accounting Policies, disclosed in the 2022 Form 10-K. The update primarily reflects the addition of a policy related to production costs for the Company’s Original Immersive Productions.
Production Costs for the Company’s Original Immersive Productions
The Company defers certain costs during the production phase of its original immersive productions for Sphere that are directly related to production activities. Such costs include, but are not limited to, fees paid to writers, directors, and producers as well as video and music production costs and production specific overhead. Deferred immersive production costs are amortized in the same ratio that current period actual revenue bears to estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year. Estimates of ultimate revenues are prepared on an individual production basis and reviewed regularly by management and revised where necessary to reflect the most current information. Ultimate revenues reflect management’s estimates of future revenue over a period not to exceed ten years following the premiere of the production. Deferred immersive production costs are subject to recoverability assessments whenever there is an indication of potential impairment.
As of March 31, 2023, the Company recorded approximately $46,500 in Other non-current assets in the accompanying condensed consolidated balance sheets related to these production costs.
Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
No recently issued accounting guidance materially impacted or is expected to impact the Company's financial statements.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers. This ASU requires that the acquiring entity in a business combination recognize and measure contract assets and contract liabilities acquired in accordance with Accounting Standard Codification (“ASC”) Topic 606. This standard was adopted by the Company in the first quarter of Fiscal Year 2023. The adoption of this standard did not have an impact on the Company’s financial statements.
Note 3. Discontinued Operations and Dispositions
Discontinued Operations in Tao Group Hospitality
As described above, on April 17, 2023, the Company announced it entered into an agreement to sell its 66.9% majority interest in Tao Group Hospitality to a subsidiary of Mohari Hospitality Limited. On May 3, 2023, the Company announced it had completed the Tao Group Hospitality Disposition.
The Company analyzed the quantitative and qualitative factors relevant to the Tao Group Hospitality Disposition and determined that the criteria to classify the assets and liabilities of Tao Group Hospitality as held for sale, along with the related operations as a discontinued operation had been satisfied as of the third quarter of Fiscal Year 2023.
The historical financial results of the Tao Group Hospitality segment have been reflected in the accompanying condensed consolidated financial statements as held for sale as of March 31, 2023 and June 30, 2022 and as discontinued operations for the three and nine months ended March 31, 2023 and March 31, 2022. No impairment loss was recognized in connection with the reclassification to discontinued operations as of March 31, 2023, and the gain on the sale will be recorded in the fourth quarter of Fiscal Year 2023. Prior to the Tao Group Hospitality Disposition, the Company’s results from discontinued operations reflect a number of intercompany transactions.
10
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The tables below sets forth, for the periods presented, the balance sheet and the operating results of the disposal group. Amounts presented below differ from historically reported results for the Tao Group Hospitality business segment due to reclassifications and adjustments made for purposes of discontinued operations presentation.
| March 31, 2023 | June 30, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | 30,861 | $ | 23,125 | ||||||||||
| Accounts receivable, net | 25,301 | 28,640 | ||||||||||||
| Prepaid expenses and other current assets | 17,890 | 20,323 | ||||||||||||
Total current assets (a) | 74,052 | 72,088 | ||||||||||||
| Non-Current Assets: | ||||||||||||||
| Property and equipment, net | 87,529 | 85,396 | ||||||||||||
| Right-of-use lease assets | 141,184 | 109,194 | ||||||||||||
| Goodwill | 1,364 | 1,364 | ||||||||||||
| Intangible assets, net | 131,413 | 141,421 | ||||||||||||
| Deferred tax assets, net | 51,117 | 46,466 | ||||||||||||
| Other non-current assets | 15,908 | 16,589 | ||||||||||||
Total non-current assets (a) | 428,515 | 400,430 | ||||||||||||
| Total assets of the disposal group classified as held for sale | $ | 502,567 | $ | 472,518 | ||||||||||
| LIABILITIES | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accounts payable, accrued and other current liabilities | $ | 49,507 | $ | 60,163 | ||||||||||
| Current portion of long-term debt | 3,750 | 3,750 | ||||||||||||
| Operating lease liabilities, current | 19,168 | 19,751 | ||||||||||||
| Deferred revenue | 15,295 | 19,137 | ||||||||||||
Total current liabilities (a) | 87,720 | 102,801 | ||||||||||||
| Non-Current Liabilities: | ||||||||||||||
| Long-term debt, net of deferred financing costs | 77,486 | 80,130 | ||||||||||||
| Operating lease liabilities, non-current | 123,191 | 89,437 | ||||||||||||
| Other non-current liabilities | 1,420 | 1,393 | ||||||||||||
Total non-current liabilities (a) | 202,097 | 170,960 | ||||||||||||
| Total liabilities of the disposal group classified as held for sale | 289,817 | 273,761 | ||||||||||||
| Net Assets of the disposal group classified as held for sale | 212,750 | 198,757 | ||||||||||||
| Redeemable noncontrolling interests of disposal group classified as held for sale | $ | 138,812 | $ | 184,192 | ||||||||||
| Nonredeemable noncontrolling interests of disposal group classified as held for sale | $ | 13,426 | $ | 12,163 | ||||||||||
_________________
(a) The assets and liabilities of the disposal group classified as held for sale are classified as current on the March 31,2023 balance sheet as the transaction was completed and net proceeds were received on May 3,2023.
11
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenues | $ | 130,857 | $ | 107,593 | $ | 398,078 | $ | 342,634 | ||||||||||||||||||
| Direct operating expenses | (77,963) | (64,509) | (232,029) | (188,419) | ||||||||||||||||||||||
| Selling, general and administrative expenses | (46,541) | (38,810) | (131,200) | (110,434) | ||||||||||||||||||||||
| Depreciation and amortization | (7,421) | (8,176) | (21,144) | (25,552) | ||||||||||||||||||||||
| Impairment and other gains, net | — | 5,074 | 473 | 5,235 | ||||||||||||||||||||||
| Operating (loss) income | (1,068) | 1,172 | 14,178 | 23,464 | ||||||||||||||||||||||
| Interest income | 49 | 7 | 85 | 11 | ||||||||||||||||||||||
| Interest expense | (160) | (303) | (3,221) | (1,195) | ||||||||||||||||||||||
| Other (expense) income, net | (8) | 75 | 719 | (301) | ||||||||||||||||||||||
| (Loss) income from operations before income taxes | (1,187) | 951 | 11,761 | 21,979 | ||||||||||||||||||||||
| Income tax (expense) benefit | (3,389) | 34 | (4,213) | (1,580) | ||||||||||||||||||||||
| Net (loss) income | (4,576) | 985 | 7,548 | 20,399 | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests | (216) | (1,161) | (128) | (323) | ||||||||||||||||||||||
| Less: Net (loss) income attributable to redeemable noncontrolling interests | (1,492) | (442) | 2,661 | 4,412 | ||||||||||||||||||||||
| Net (loss) income from discontinued operations attributable to Sphere Entertainment Co.’s stockholders | $ | (2,868) | $ | 2,588 | $ | 5,015 | $ | 16,310 | ||||||||||||||||||
As permitted under ASC 205-20-50-5b(2), the Company has elected not to adjust the consolidated statements of cash flows for the nine months ended March 31, 2023 and 2022 to exclude cash flows attributable to discontinued operations. The table below sets forth, for the periods presented, significant selected financial information related to discontinued activities included in the accompanying condensed consolidated financial statements:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Non-cash items included in net (loss) income: | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 7,421 | $ | 8,176 | $ | 21,144 | $ | 25,552 | ||||||||||||||||||
| Impairment and other gains, net | — | (5,074) | (473) | (5,235) | ||||||||||||||||||||||
| Share-based compensation expense | 2,144 | 1,876 | 6,570 | 5,745 | ||||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||||
| Capital expenditures, net | $ | (4,962) | $ | (5,295) | $ | (16,417) | $ | (16,566) | ||||||||||||||||||
| Non-cash investing activities: | ||||||||||||||||||||||||||
| Investments and loans to nonconsolidated affiliates | $ | — | $ | 55 | $ | — | $ | 731 | ||||||||||||||||||
Disposition of Our Interest in Boston Calling Events
The Company entered into an agreement on December 1, 2022 to sell its controlling interest in BCE (the “BCE Disposition”). The transaction closed on December 2, 2022 resulting in a total gain on sale of $8,744, net of transaction costs. BCE meets the definition of a business under SEC Regulation S-X Rule 11-01(d)-1 and ASC Topic 805 — Business Combinations. This disposition does not represent a strategic shift with a major effect on the Company’s operations, and as such, has not been reflected as a discontinued operation under ASC Subtopic 205-20 — Discontinued Operations. The gain on the BCE Disposition was reported under the Entertainment segment and recorded in Impairment and other (losses) gains, net in the condensed consolidated statements of operations.
12
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Disposition of Corporate Aircraft
On December 30, 2022, the Company sold its owned aircraft for $20,375. In connection with the sale, the Company recognized a loss of $4,383, net of transaction costs. The loss on the aircraft disposition was reported under the Entertainment segment and recorded in Impairment and other (losses) gains, net in the condensed consolidated statements of operations.
Note 4. Revenue Recognition
Contracts with Customers
See Note 2, Summary of Significant Accounting Policies and Note 4, Revenue Recognition, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding the details of the Company’s revenue recognition policies. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers in accordance with ASC Topic 606, except for revenues from the arena license agreements that require the Knicks and the Rangers to play their home games at The Garden (the “Arena License Agreements”), leases and subleases that are accounted for in accordance with ASC Topic 842.
Disaggregation of Revenue
The following tables disaggregate the Company’s revenue by major source and reportable segment based upon the timing of transfer of goods or services to the customer for the three and nine months ended March 31, 2023 and 2022:
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Event-related and entertainment offerings (a) | $ | 102,314 | $ | — | $ | — | $ | 102,314 | ||||||||||||||||||
Sponsorship, signage and suite licenses (b) | 59,724 | 3,060 | — | 62,784 | ||||||||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 156,162 | — | 156,162 | ||||||||||||||||||||||
Other (c) | 7,173 | 2,214 | — | 9,387 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 169,211 | 161,436 | — | 330,647 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 32,650 | — | — | 32,650 | ||||||||||||||||||||||
| Total revenues | $ | 201,861 | $ | 161,436 | $ | — | $ | 363,297 | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Event-related and entertainment offerings (a) | $ | 90,899 | $ | — | $ | — | $ | 90,899 | ||||||||||||||||||
Sponsorship, signage and suite licenses (b) | 55,609 | 2,688 | — | 58,297 | ||||||||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 163,247 | — | 163,247 | ||||||||||||||||||||||
Other (c) | 17,025 | 1,634 | (9,620) | 9,039 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 163,533 | 167,569 | (9,620) | 321,482 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 31,052 | — | — | 31,052 | ||||||||||||||||||||||
| Total revenues | $ | 194,585 | $ | 167,569 | $ | (9,620) | $ | 352,534 | ||||||||||||||||||
13
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Event-related and entertainment offerings (a) | $ | 443,992 | $ | — | $ | — | $ | 443,992 | ||||||||||||||||||
Sponsorship, signage and suite licenses (b) | 167,113 | 5,708 | — | 172,821 | ||||||||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 432,375 | — | 432,375 | ||||||||||||||||||||||
Other (c) | 25,660 | 4,730 | (8,802) | 21,588 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 636,765 | 442,813 | (8,802) | 1,070,776 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 68,716 | — | — | 68,716 | ||||||||||||||||||||||
| Total revenues | $ | 705,481 | $ | 442,813 | $ | (8,802) | $ | 1,139,492 | ||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Event-related and entertainment offerings (a) | $ | 268,391 | $ | — | $ | — | $ | 268,391 | ||||||||||||||||||
Sponsorship, signage and suite licenses (b) | 113,565 | 5,111 | — | 118,676 | ||||||||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 459,920 | — | 459,920 | ||||||||||||||||||||||
Other (c) | 31,914 | 3,992 | (17,015) | 18,891 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 413,870 | 469,023 | (17,015) | 865,878 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 62,564 | — | — | 62,564 | ||||||||||||||||||||||
| Total revenues | $ | 476,434 | $ | 469,023 | $ | (17,015) | $ | 928,442 | ||||||||||||||||||
_________________
(a)Consists of (i) ticket sales and other ticket-related revenues, (ii) venue license fees from third-party promoters, and (iii) food, beverage and merchandise sales. Event-related revenues and entertainment offerings are recognized at a point in time. As such, these revenues have been included in the same category in the table above.
(b)See Note 2, Summary of Significant Accounting Policies, Revenue Recognition, and Note 4, Revenue Recognition, to the consolidated and combined financial statements included in the 2022 Form 10-K for further details on the pattern of recognition of sponsorship, signage and suite license revenues and media related revenue.
(c)Primarily consists of (i) revenues from sponsorship sales and representation agreements with Madison Square Garden Sports Corp. (“MSG Sports”) and (ii) advertising commission revenues recognized by the Entertainment segment from the MSG Networks segment of $— and $8,802 for the three and nine months ended March 31, 2023, and $9,620 and $17,015 for the three and nine months ended March 31, 2022, respectively, that are eliminated in consolidation. The Networks Advertising Sales Representation Agreement was terminated as of December 31, 2022, as discussed in Note 1, Description of Business.
14
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
In addition to the disaggregation of the Company’s revenue by major source based upon the timing of transfer of goods or services to the customer disclosed above, the following tables disaggregate the Company’s consolidated revenues by type of goods or services in accordance with the required entity-wide disclosure requirements of ASC Subtopic 280-10-50-38 to 40 and the disaggregation of revenue required disclosures in accordance with ASC Subtopic 606-10-50-5 for the three and nine months ended March 31, 2023 and 2022:
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Ticketing and venue license fee revenues (a) | $ | 45,547 | $ | — | $ | — | $ | 45,547 | ||||||||||||||||||
Sponsorship and signage, suite, and advertising commission revenues (b) | 78,504 | — | — | 78,504 | ||||||||||||||||||||||
| Food, beverage and merchandise revenues | 43,021 | — | — | 43,021 | ||||||||||||||||||||||
Media networks revenues (c) | — | 161,436 | — | 161,436 | ||||||||||||||||||||||
| Other | 2,139 | — | — | 2,139 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 169,211 | 161,436 | — | 330,647 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 32,650 | — | — | 32,650 | ||||||||||||||||||||||
| Total revenues | $ | 201,861 | $ | 161,436 | $ | — | $ | 363,297 | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Ticketing and venue license fee revenues (a) | $ | 46,867 | $ | — | $ | — | $ | 46,867 | ||||||||||||||||||
Sponsorship and signage, suite, and advertising commission revenues (b) | 79,631 | — | (9,620) | 70,011 | ||||||||||||||||||||||
| Food, beverage and merchandise revenues | 36,344 | — | — | 36,344 | ||||||||||||||||||||||
Media networks revenues (c) | — | 167,569 | — | 167,569 | ||||||||||||||||||||||
| Other | 691 | — | — | 691 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 163,533 | 167,569 | (9,620) | 321,482 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 31,052 | — | — | 31,052 | ||||||||||||||||||||||
| Total revenues | $ | 194,585 | $ | 167,569 | $ | (9,620) | $ | 352,534 | ||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Ticketing and venue license fee revenues (a) | $ | 291,404 | $ | — | $ | — | $ | 291,404 | ||||||||||||||||||
Sponsorship and signage, suite, and advertising commission revenues (b) | 215,812 | — | (8,802) | 207,010 | ||||||||||||||||||||||
| Food, beverage and merchandise revenues | 124,711 | — | — | 124,711 | ||||||||||||||||||||||
Media networks revenues (c) | — | 442,813 | — | 442,813 | ||||||||||||||||||||||
| Other | 4,838 | — | — | 4,838 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 636,765 | 442,813 | (8,802) | 1,070,776 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 68,716 | — | — | 68,716 | ||||||||||||||||||||||
| Total revenues | $ | 705,481 | $ | 442,813 | $ | (8,802) | $ | 1,139,492 | ||||||||||||||||||
15
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Eliminations | Total | |||||||||||||||||||||||
Ticketing and venue license fee revenues (a) | $ | 172,844 | $ | — | $ | — | $ | 172,844 | ||||||||||||||||||
Sponsorship and signage, suite, and advertising commission revenues (b) | 161,046 | — | (17,015) | 144,031 | ||||||||||||||||||||||
| Food, beverage and merchandise revenues | 78,032 | — | — | 78,032 | ||||||||||||||||||||||
Media networks revenues (c) | — | 469,023 | — | 469,023 | ||||||||||||||||||||||
| Other | 1,948 | — | — | 1,948 | ||||||||||||||||||||||
| Total revenues from contracts with customers | 413,870 | 469,023 | (17,015) | 865,878 | ||||||||||||||||||||||
| Revenues from Arena License Agreements, leases and subleases | 62,564 | — | — | 62,564 | ||||||||||||||||||||||
| Total revenues | $ | 476,434 | $ | 469,023 | $ | (17,015) | $ | 928,442 | ||||||||||||||||||
_________________
(a)Amounts include ticket sales, including other ticket-related revenue, and venue license fees from the Company’s events such as (i) concerts, (ii) the presentation of the Christmas Spectacular and (iii) other live entertainment and sporting events.
(b)Amounts include (i) revenues from sponsorship sales and representation agreements with MSG Sports and (ii) advertising commission revenues recognized by the Entertainment segment from the MSG Networks segment of $8,802 for the nine months ended March 31, 2023, and $9,620 and $17,015 for the three and nine month ended March 31, 2022, respectively, that are eliminated in consolidation.
(c)Primarily consists of affiliation fees from Distributors and, to a lesser extent, advertising revenues through the sale of commercial time and other advertising inventory during MSG Networks programming.
Contract Balances
The following table provides information about contract balances from the Company’s contracts with customers as of March 31, 2023 and June 30, 2022:
| March 31, | June 30, | |||||||||||||
| 2023 | 2022 | |||||||||||||
Receivables from contracts with customers, net (a) | $ | 225,644 | $ | 192,630 | ||||||||||
Contract assets, current (b) | 8,324 | 5,688 | ||||||||||||
Contract assets, non-current (b) | — | 756 | ||||||||||||
Deferred revenue, including non-current portion (c) | 265,894 | 209,473 | ||||||||||||
(a)Receivables from contracts with customers, which are reported in Accounts receivable and Prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets, represent the Company’s unconditional rights to consideration under its contracts with customers. As of March 31, 2023 and June 30, 2022, the Company’s receivables from contracts with customers above included $11,201 and $4,618, respectively, related to various related parties. See Note 14, Related Party Transactions for further details on related party arrangements.
(b)Contract assets, which are reported as Prepaid expenses and other current assets or Other non-current assets in the Company’s condensed consolidated balance sheets, primarily relate to the Company’s rights to consideration for goods or services transferred to customers, for which the Company does not have an unconditional right to bill as of the reporting date. Contract assets are transferred to accounts receivable once the Company’s right to consideration becomes unconditional.
(c)Deferred revenue primarily relates to the Company’s receipt of consideration from customers in advance of the Company’s transfer of goods or services to the customers. Deferred revenue is reduced and the related revenue is recognized once the
16
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
underlying goods or services are transferred to a customer. Revenue recognized for the three and nine months ended March 31, 2023 relating to the deferred revenue balance as of June 30, 2022 was $21,196 and $175,363, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of March 31, 2023, the Company’s remaining performance obligations were approximately $577,000 of which 40% is expected to be recognized over the next two years and an additional 42% of the balance to be recognized in the following two years. This primarily relates to performance obligations under sponsorship and suite license arrangements that have original expected durations longer than one year and for which the consideration is not variable. In developing the estimated revenue, the Company applies the allowable practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Note 5. Restructuring Charges
During Fiscal Year 2023, the Company implemented a cost reduction program which resulted in the recognition of termination benefits for a workforce reduction of certain executives and employees in the Entertainment and MSG Networks segments. As a result, the Company recognized restructuring charges of $20,498 and $34,180 for the three and nine months ended March 31, 2023, respectively, inclusive of $7,384 and $9,677, respectively, of share-based compensation expenses, which are accrued in accounts payable, accrued and other current liabilities and additional paid-in-capital on the condensed consolidated balance sheet. The Company recognized restructuring charges of $14,690 for the three and nine months ended March 31, 2022, inclusive of $4,589 of share-based compensation expenses, which are accrued in accounts payable, accrued and other current liabilities and additional paid-in-capital on the condensed consolidated balance sheet.
Changes to the Company’s restructuring liability through March 31, 2023 were as follows:
| June 30, 2022 | $ | 8,081 | ||||||
| Restructuring charges (excluding share-based compensation expense) | 24,503 | |||||||
| Payments | (16,647) | |||||||
| March 31, 2023 | $ | 15,937 | ||||||
Note 6. Investments in Nonconsolidated Affiliates
The Company’s investments in nonconsolidated affiliates, which are accounted for under the equity method of accounting or as equity investments without readily determinable fair value, are included within Other non-current assets in the accompanying condensed consolidated balance sheets and consisted of the following:
| Investment As of | ||||||||||||||||||||
| Ownership Percentage | March 31, 2023 | June 30, 2022 | ||||||||||||||||||
| Equity method investments: | ||||||||||||||||||||
| SACO Technologies Inc. (“SACO”) | 30 | % | $ | 23,733 | $ | 31,448 | ||||||||||||||
Holoplot Loan (a) | 20,584 | — | ||||||||||||||||||
| Holoplot | 25 | % | 1,809 | 2,096 | ||||||||||||||||
| Equity securities without readily determinable fair values | 9,195 | 7,102 | ||||||||||||||||||
| Total investments in nonconsolidated affiliates | $ | 55,321 | $ | 40,646 | ||||||||||||||||
_________________
(a)In January 2023, the Company, through an indirect subsidiary, extended financing to Holoplot GmbH (“Holoplot”) in the form of a three-year convertible loan (the “Holoplot Loan”) of €18,804, equivalent to $20,484 using the applicable exchange rate at the time of the transaction. The Holoplot Loan is comprised of $7,625 cash and $12,859 of outstanding deposits paid by the Company to Holoplot in prior periods. Absent conversion, which is currently not available under the terms of the Holoplot Loan, the Holoplot Loan and interest accrued thereon are due and payable at the conclusion of the year term.
17
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Equity Investments with Readily Determinable Fair Value
In addition to the investments discussed above, the Company holds investments in (i) Townsquare Media, Inc. (“Townsquare”), and (ii) DraftKings Inc. (“DraftKings”).
•Townsquare is a media, entertainment and digital marketing solutions company that is listed on the New York Stock Exchange (“NYSE”) under the symbol “TSQ.”
•DraftKings is a fantasy sports contest and sports gambling provider that is listed on the NASDAQ Stock Market (“NASDAQ”) under the symbol “DKNG” for its common stock.
The fair value of the Company’s investments in Class A common stock of Townsquare and Class A common stock of DraftKings are determined based on quoted market prices in active markets on the NYSE and NASDAQ, respectively, which are classified within Level I of the fair value hierarchy. As a holder of Class C common stock of Townsquare, the Company is entitled to convert at any time all or any part of the Company’s shares into an equal number of shares of Class A common stock of Townsquare, subject to restrictions set forth in Townsquare’s certificate of incorporation.
The carrying fair value of these investments, which are reported under Other non-current assets in the accompanying condensed balance sheets as of March 31, 2023 and June 30, 2022, are as follows:
| Equity Investments with Readily Determinable Fair Value | March 31, 2023 | June 30, 2022 | ||||||||||||
| Townsquare Class A common stock | $ | 4,665 | $ | 4,776 | ||||||||||
| Townsquare Class C common stock | 21,000 | 21,499 | ||||||||||||
| DraftKings common stock | 12,397 | 10,146 | ||||||||||||
| Total Equity Investments with Readily Determinable Fair Values | $ | 38,062 | $ | 36,421 | ||||||||||
The following table summarizes the realized and unrealized gain (loss) on equity investments with and without readily determinable fair value, which is reported in Other expense, net, for the three and nine months ended March 31, 2023 and 2022:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Unrealized gain (loss) — Townsquare | $ | 2,406 | $ | (1,732) | $ | (609) | $ | 129 | ||||||||||||||||||
| Unrealized gain (loss) — DraftKings | 5,104 | (6,956) | 4,916 | (28,432) | ||||||||||||||||||||||
| Unrealized gain — Other | — | — | 1,969 | — | ||||||||||||||||||||||
| Gain from shares sold — DraftKings | 214 | — | 1,703 | — | ||||||||||||||||||||||
| Total realized and unrealized gain (loss) | $ | 7,724 | $ | (8,688) | $ | 7,979 | $ | (28,303) | ||||||||||||||||||
| Supplemental information on realized gain: | ||||||||||||||||||||||||||
| Shares of common stock sold — DraftKings | 29 | — | 229 | — | ||||||||||||||||||||||
| Cash proceeds from common stock sold — DraftKings | $ | 550 | $ | — | $ | 4,369 | $ | — | ||||||||||||||||||
18
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 7. Property and Equipment
As of March 31, 2023 and June 30, 2022, property and equipment consisted of the following:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Land | $ | 141,257 | $ | 140,239 | ||||||||||
| Buildings | 1,066,722 | 997,345 | ||||||||||||
| Equipment, furniture and fixtures | 516,266 | 455,463 | ||||||||||||
Aircraft (a) | — | 38,090 | ||||||||||||
| Leasehold improvements | 124,369 | 124,369 | ||||||||||||
Construction in progress (b) | 2,818,995 | 2,024,117 | ||||||||||||
| Total Property and equipment | 4,667,609 | 3,779,623 | ||||||||||||
Less accumulated depreciation and amortization (a) | (977,375) | (925,967) | ||||||||||||
| Property and equipment, net | $ | 3,690,234 | $ | 2,853,656 | ||||||||||
_________________
(a)On December 30, 2022, the Company completed the disposition of a corporate aircraft (see Note 3, Dispositions), which resulted in a reduction of gross assets of $38,090, and accumulated depreciation of $13,689.
(b)Construction in progress includes labor and interest that are capitalized during the construction period for significant long term construction projects. These costs primarily relate to the construction of Sphere in Las Vegas. For the three and nine months ended March 31, 2023, the Company capitalized interest of $38,115 and $88,450 of interest, respectively. For the three and nine months ended March 31, 2022, the Company capitalized $12,272 and $32,202 of interest, respectively.
The increase in Construction in progress is primarily associated with the development and construction of Sphere in Las Vegas, which includes capitalized labor and interest. The property and equipment balances above include $307,368 and $206,462 of capital expenditure accruals (primarily related to Sphere construction) as of March 31, 2023 and June 30, 2022, respectively, which are reflected in Accounts payable, accrued and other current liabilities in the accompanying condensed consolidated balance sheets.
Depreciation and amortization expense on property and equipment was $22,220 and $65,000 for the three and nine months ended March 31, 2023, respectively, and $19,351 and $59,712, for the three and nine months ended March 31, 2022, respectively.
Note 8. Goodwill and Intangible Assets
The carrying amount of goodwill as of March 31, 2023 and June 30, 2022 are as follows:
| March 31, 2023 | June 30, 2022 | ||||||||||
| Entertainment | $ | 74,309 | $ | 74,309 | |||||||
| MSG Networks | 424,508 | 424,508 | |||||||||
| Total Goodwill | $ | 498,817 | $ | 498,817 | |||||||
During the first quarter of Fiscal Year 2023, the Company performed its annual impairment test of goodwill and determined that there was no impairment of goodwill identified as of the impairment test date.
19
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The carrying amount of indefinite-lived intangible assets, all of which are within the Entertainment segment, as of March 31, 2023 and June 30, 2022 were as follows:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Trademarks | $ | 61,881 | $ | 61,881 | ||||||||||
| Photographic related rights | 1,920 | 1,920 | ||||||||||||
| Total indefinite-lived intangible assets | $ | 63,801 | $ | 63,801 | ||||||||||
During the first quarter of Fiscal Year 2023, the Company performed its annual impairment test of indefinite-lived intangible assets and determined that there was no impairment of indefinite-lived intangibles identified as of the impairment test date.
The Company’s intangible assets subject to amortization are as follows:
| March 31, 2023 | Gross | Accumulated Amortization | Net | |||||||||||||||||
| Affiliate relationships | 83,044 | (64,355) | 18,689 | |||||||||||||||||
Other intangibles (b) | 4,217 | (4,217) | — | |||||||||||||||||
| Total amortizable intangible assets | $ | 87,261 | $ | (68,572) | $ | 18,689 | ||||||||||||||
| June 30, 2022 | Gross | Accumulated Amortization | Net | |||||||||||||||||
Trade names (a) | $ | 2,530 | $ | (2,169) | $ | 361 | ||||||||||||||
| Affiliate relationships | 83,044 | (62,019) | 21,025 | |||||||||||||||||
Festival rights (a) | 8,080 | (6,926) | 1,154 | |||||||||||||||||
| Other intangibles | 4,217 | (4,094) | 123 | |||||||||||||||||
| Total amortizable intangible assets | $ | 97,871 | $ | (75,208) | $ | 22,663 | ||||||||||||||
_________________
(a) On December 2, 2022, the Company completed the BCE Disposition (see Note 3, Dispositions), which resulted in a reduction of gross assets and accumulated amortization related to festival rights and trade names, associated with the BCE Disposition.
(b) Other intangibles gross and accumulated amortization balances were fully amortized.
Amortization expense for intangible assets was $779 and $3,090 for the three and nine months ended March 31, 2023, respectively, and $1,112 and $3,338 for the three and nine months ended March 31, 2022, respectively.
Note 9. Commitments and Contingencies
Commitments
See Note 14, Commitments and Contingencies, to the consolidated and combined financial statements included in the 2022 Form 10-K for details on the Company’s off-balance sheet commitments. The Company’s off-balance sheet commitments as of June 30, 2022 included a total of $3,893,665 of contract obligations (primarily related to media rights agreements from the MSG Networks segment).
During the three and nine months ended March 31, 2023, the Company did not have any material changes in its non-cancelable contractual obligations (other than activities in the ordinary course of business), except for the execution of the LV Sphere Term Loan Facility (as defined below) on December 22, 2022. See Note 10, Credit Facilities for details of the principal repayments required under the Company’s various credit facilities, including the LV Sphere Term Loan Facility.
Legal Matters
Fifteen complaints were filed in connection with the Company’s acquisition of MSG Networks Inc. (the “Merger”) by purported stockholders of the Company and MSG Networks Inc.
20
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Nine of these complaints involved allegations of materially incomplete and misleading information set forth in the joint proxy statement/prospectus filed by the Company and MSG Networks Inc. in connection with the Merger. As a result of supplemental disclosures made by the Company and MSG Networks Inc. on July 1, 2021, all of the disclosure actions were voluntarily dismissed with prejudice prior to or shortly following the consummation of the Merger.
Six complaints involved allegations of fiduciary breaches in connection with the negotiation and approval of the Merger and have since been consolidated into two remaining litigations.
On September 10, 2021, the Court of Chancery of the State of Delaware (the “Court”) entered an order consolidating two derivative complaints filed by purported Company stockholders. The consolidated action is captioned: In re Madison Square Garden Entertainment Corp. Stockholders Litigation, C.A. No. 2021-0468-KSJM (the “MSG Entertainment Litigation”). The consolidated plaintiffs filed their Verified Consolidated Derivative Complaint on October 11, 2021. The complaint, which names the Company as only a nominal defendant, retains all of the derivative claims and alleges that the members of the board of directors and controlling stockholders violated their fiduciary duties in the course of negotiating and approving the Merger. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. The Company and other defendants filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and on November 16, 2022, fact discovery closed. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company has advanced the costs incurred by defendants in this action, and defendants have asserted indemnification rights in respect of any adverse judgment or settlement of the action.
On March 14, 2023, the parties to the MSG Entertainment Litigation reached an agreement in principle to settle the MSG Entertainment Litigation on the terms and conditions set forth in a binding term sheet, which was incorporated into a long-form settlement agreement (“MSGE Settlement Agreement”) that was filed with the Court on April 20, 2023. The MSGE Settlement Agreement provides for, among other things, the final dismissal of the MSG Entertainment Litigation in exchange for a settlement payment to the Company of $85,000, subject to customary reduction for attorneys’ fees and expenses, in an amount to be determined by the Court. The settlement amount will be fully funded by defendants’ insurers. The settlement of the MSG Entertainment Litigation is subject to the final approval of the Court. No gain amount relating to the proposed settlement has been recorded as of March 31, 2023.
On September 27, 2021, the Court entered an order consolidating four complaints filed by purported stockholders of MSG Networks Inc. The consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. No. 2021-0575-KSJM (the “MSG Networks Litigation”). The consolidated plaintiffs filed their Verified Consolidated Stockholder Class Action Complaint on October 29, 2021. The complaint asserts claims on behalf of a putative class of former MSG Networks Inc. stockholders against each member of the board of directors of MSG Networks Inc. and the controlling stockholders prior to the Merger. Plaintiffs allege that the MSG Networks Inc. board of directors and controlling stockholders breached their fiduciary duties in negotiating and approving the Merger. The Company is not named as a defendant but has been subpoenaed to produce documents and testimony related to the Merger. Plaintiffs seek, among other relief, monetary damages for the putative class and plaintiffs’ attorneys’ fees. Defendants in the MSG Networks Litigation filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and on November 16, 2022 fact discovery closed. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company has advanced the costs incurred by defendants in this action, and defendants have asserted indemnification rights in respect of any adverse judgment or settlement of the action.
On April 6, 2023, the parties to the MSG Networks Litigation reached an agreement in principle to settle the MSG Networks Litigation, without admitting liability, on the terms and conditions set forth in a binding term sheet (“MSG Networks Term Sheet”), which will be incorporated into a long-form settlement agreement. The MSG Networks Term Sheet provides for, among other things, the final dismissal of the MSG Networks Litigation in exchange for a settlement payment to the plaintiffs and the class of $48,500 which has been recorded in Accounts payable, accrued and other current liabilities as of March 31, 2023. MSG Networks has a dispute with its insurers over whether and to what extent there is insurance coverage for the settlement. Unless those parties settle that insurance dispute, it is expected to be resolved in a pending Delaware insurance coverage action. In the interim, and subject to final resolution of the parties’ insurance coverage dispute, certain of MSG Networks’ insurers have agreed to advance $20,500 to fund the settlement and related class notice costs. The settlement of the MSG Networks Litigation is subject to the final approval of the Court.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
21
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 10. Credit Facilities
See Note 15, Credit Facilities, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding the Company’s credit facilities. The following table summarizes the presentation of the outstanding balances under the Company’s credit agreements as of March 31, 2023 and June 30, 2022:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Current portion | ||||||||||||||
| MSG Networks Term Loan | $ | 82,500 | $ | 66,000 | ||||||||||
National Properties Term Loan Facility | 16,250 | 8,125 | ||||||||||||
| Other current portion of long-term debt | — | 637 | ||||||||||||
| Total Current portion of long-term debt | $ | 98,750 | $ | 74,762 | ||||||||||
| March 31, 2023 | June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Principal | Unamortized Deferred Financing Costs | Net | Principal | Unamortized Deferred Financing Costs | Net | |||||||||||||||||||||||||||||||||
| Non-current portion | ||||||||||||||||||||||||||||||||||||||
| MSG Networks Term Loan | $ | 870,375 | $ | (1,788) | $ | 868,587 | $ | 932,250 | $ | (2,715) | $ | 929,535 | ||||||||||||||||||||||||||
National Properties Term Loan Facility | 629,687 | (13,645) | 616,042 | 641,875 | (16,064) | 625,811 | ||||||||||||||||||||||||||||||||
| National Properties Revolving Credit Facility | 27,100 | — | 27,100 | 29,100 | — | 29,100 | ||||||||||||||||||||||||||||||||
| LV Sphere Term Loan Facility | 275,000 | (5,149) | 269,851 | — | — | — | ||||||||||||||||||||||||||||||||
| Other long-term debt | 168 | — | 168 | — | — | — | ||||||||||||||||||||||||||||||||
| Total Long-term debt, net of deferred financing costs | $ | 1,802,330 | $ | (20,582) | $ | 1,781,748 | $ | 1,603,225 | $ | (18,779) | $ | 1,584,446 | ||||||||||||||||||||||||||
MSG Networks Credit Facilities
General. MSGN Holdings, L.P. (“MSGN L.P.”), MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, an indirect subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “MSGN Holdings Entities”), and certain subsidiaries of MSGN L.P. have senior secured credit facilities pursuant to a credit agreement (as amended and restated on October 11, 2019, the “MSGN Credit Agreement”) consisting of: (i) an initial $1,100,000 term loan facility (the “MSGN Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “MSGN Revolving Credit Facility” and, together with the MSGN Term Loan Facility, the “MSG Networks Credit Facilities”), each with a term of five years. Up to $35,000 of the MSGN Revolving Credit Facility is available for the issuance of letters of credit. As of March 31, 2023, there were no borrowings or letters of credit issued and outstanding under the MSGN Revolving Credit Facility.
Interest Rates. Borrowings under the MSGN Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio) (the “MSGN Base Rate”), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio) (the “MSGN Eurodollar Rate”). Upon a payment default in respect of principal, interest or other amounts due and payable under the MSGN Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. The MSGN Credit Agreement requires that MSGN L.P. pay a commitment fee ranging from 0.225% to 0.30% (determined based on a total net leverage ratio) in respect of the average daily unused commitments under the MSGN Revolving Credit Facility. MSGN L.P. will also be required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit. The interest rate on the MSGN Term Loan Facility as of March 31, 2023 was 6.86%.
Principal Repayments. Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily repay outstanding loans under the MSGN Credit Agreement at any time, in whole or in part, without premium or penalty (except for
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(continued)
customary breakage costs with respect to Eurodollar loans). The MSGN Term Loan Facility amortizes quarterly in accordance with its terms beginning March 31, 2020 through September 30, 2024 with a final maturity date of October 11, 2024. MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including MSGN Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
Covenants. The MSGN Credit Agreement generally requires the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the MSGN Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of March 31, 2023, the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the covenants.
In addition to the financial covenants discussed above, the MSGN Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants, and events of default. The MSGN Credit Agreement contains certain restrictions on the ability of MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the MSGN Credit Agreement, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) changing their lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The MSGN Holdings Entities are also subject to customary passive holding company covenants.
Guarantors and Collateral. All obligations under the MSGN Credit Agreement are guaranteed by the MSGN Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “MSGN Subsidiary Guarantors,” and together with the MSGN Holdings Entities, the “MSGN Guarantors”). All obligations under the MSGN Credit Agreement, including the guarantees of those obligations, are secured by certain assets of MSGN L.P. and each MSGN Guarantor (collectively, “MSGN Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each MSGN Subsidiary Guarantor held directly or indirectly by MSGN L.P.
National Properties Credit Facilities
General. On June 30, 2022, MSG National Properties, LLC (“MSG National Properties”) an indirect, wholly-owned subsidiary of the Company, Sphere Entertainment Group, LLC (formerly known as MSG Entertainment Group, LLC, “Sphere Entertainment Group”) and certain subsidiaries of MSG National Properties entered into a credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and the lenders and L/C issuers party thereto (the “National Properties Credit Agreement”), providing for a five-year, $650,000 senior secured term loan facility (the “National Properties Term Loan Facility”) and a five-year, $100,000 revolving credit facility (the “National Properties Revolving Credit Facility” and, together with the National Properties Term Loan Facility, the “National Properties Credit Facilities”). As of March 31, 2023, outstanding letters of credit were $7,992 and the remaining balance available under the National Properties Revolving Credit Facility was $72,900.
Interest Rates. Borrowings under the current National Properties Credit Facilities bear interest at a floating rate, which at the option of MSG National Properties may be either (a) a base rate plus an applicable margin ranging from 1.50% to 2.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries (the “National Properties Base Rate”), or (b) Term SOFR plus an applicable margin ranging from 2.50% to 3.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries (the “National Properties SOFR Rate”). The National Properties Credit Agreement requires MSG National Properties to pay a commitment fee ranging from 0.30% to 0.50% in respect of the daily unused commitments under the National Properties Revolving Credit Facility. MSG National Properties is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the National Properties Credit Agreement. The interest rate on the National Properties Credit Facilities as of March 31, 2023 was 7.41%.
Principal Repayments. Subject to customary notice and minimum amount conditions, MSG National Properties may voluntarily repay outstanding loans under the National Properties Credit Facilities and terminate commitments under the National
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(continued)
Properties Revolving Credit Facility, at any time, in whole or in part, subject only to customary breakage costs in the case of prepayment of Term SOFR loans. The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments beginning with the fiscal quarter ending March 31, 2023, in an aggregate amount equal to 2.50% per annum (0.625% per quarter), stepping up to 5.0% per annum (1.25% per quarter) in the fiscal quarter ending September 30, 2025, with the balance due at the maturity of the facility on June 30, 2027. The principal obligations under the National Properties Revolving Credit Facility are due at the maturity of the facility. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to the net cash proceeds of certain sales of assets or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair, or replacement rights), subject to certain exceptions.
Covenants. The National Properties Credit Agreement includes financial covenants requiring MSG National Properties and its restricted subsidiaries to maintain a specified minimum liquidity level, a specified minimum debt service coverage ratio and specified maximum total leverage ratio. The minimum liquidity level is set at $50,000, and is tested based on the level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter over the life of the National Properties Credit Facilities. The debt service coverage ratio covenant began testing in the fiscal quarter ending December 31, 2022, and is set at a ratio of 2:1 before stepping up to 2.5:1 in the fiscal quarter ending September 30, 2024. The leverage ratio covenant begins testing in the fiscal quarter ending June 30, 2023. It is tested based on the ratio of MSG National Properties and its restricted subsidiaries’ consolidated total indebtedness to adjusted operating income, with an initial maximum ratio of 6:1, stepping down to 5.5:1 in the fiscal quarter ending June 30, 2024 and 4.5:1 in the fiscal quarter ending June 30, 2026. As of March 31, 2023, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Credit Agreement.
In addition to the financial covenants discussed above, the National Properties Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. The National Properties Credit Agreement contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the National Properties Credit Agreement, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix) merge or consolidate; and (x) make certain dispositions.
Guarantors and Collateral. As of March 31, 2023, obligations under the National Properties Credit Facilities were guaranteed by Sphere Entertainment Group and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own The Garden and certain other excluded subsidiaries (the “Subsidiary Guarantors”).
All obligations under the National Properties Credit Facilities, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theatre.
The National Properties Credit Facilities were transferred to MSG Entertainment on the MSGE Spinco Distribution Date.
LV Sphere Term Loan Facility
General. On December 22, 2022, MSG Las Vegas, LLC (“MSG LV”), an indirect, wholly-owned subsidiary of the Company, entered into a credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and the lenders party thereto, providing for a five-year, $275,000 senior secured term loan facility (the “LV Sphere Term Loan Facility”).
Interest Rates. Borrowings under the LV Sphere Term Loan Facility bear interest at a floating rate, which at the option of MSG LV may be either (i) a base rate plus a margin of 3.375% per annum or (ii) adjusted Term SOFR (i.e., Term SOFR plus 0.10%) plus a margin of 4.375% per annum. The interest rate on the LV Sphere Term Loan Facility as of March 31, 2023 was 9.23%.
Principal Repayments. The LV Sphere Term Loan Facility will mature on December 22, 2027. The principal obligations under the LV Sphere Term Loan Facility are due at the maturity of the facility, with no amortization payments prior to maturity.
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(continued)
Under certain circumstances, MSG LV is required to make mandatory prepayments on the loan, including prepayments in an amount equal to the net cash proceeds of casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights), subject to certain exceptions.
Covenants. The LV Sphere Term Loan Facility and related guaranty by Sphere Entertainment Group include financial covenants requiring MSG LV to maintain a specified minimum debt service coverage ratio and requiring Sphere Entertainment Group to maintain a specified minimum liquidity level. The debt service coverage ratio covenant begins testing in the fiscal quarter ending December 31, 2023 on a historical basis and, beginning with the first fiscal quarter occurring after the date on which the first ticketed performance or event open to the general public occurs at Sphere in Las Vegas, is also tested on a prospective basis. Both the historical and prospective debt service coverage ratios are set at 1.35:1. In addition, among other conditions, MSG LV is not permitted to make distributions to Sphere Entertainment Group unless the historical and prospective debt service coverage ratios are at least 1.50:1. The minimum liquidity level for Sphere Entertainment Group is set at $100,000, with $75,000 required to be held in cash or cash equivalents, which amounts, prior to the Liquidity Covenant Reduction Date (as defined below), must be held in an account pledged as collateral for the LV Sphere Term Loan Facility until its release upon the Liquidity Covenant Reduction Date (the “Pledged Account”), before stepping down to $50,000, with $25,000 required to be held in cash or cash equivalents, once Sphere in Las Vegas has been substantially completed and certain of its systems are ready to be used in live, immersive events (the “Liquidity Covenant Reduction Date”). The minimum liquidity level was tested on the closing date and is tested as of the last day of each fiscal quarter thereafter based on Sphere Entertainment Group’s unencumbered liquidity, consisting of cash and cash equivalents and available lines of credit, as of such date. Following the completion of the MSGE Spinco Distribution, the MSGE Retained Interest was pledged to secure the LV Sphere Term Loan Facility and will remain pledged until the Liquidity Covenant Reduction Date, and a portion of the value of the MSGE Retained Interest may also be counted toward the minimum liquidity level.
In addition to the covenants described above, the LV Sphere Term Loan Facility and the related guaranty and security and pledge agreements contain certain customary representations and warranties, affirmative and negative covenants and events of default. The LV Sphere Term Loan Facility contains certain restrictions on the ability of MSG LV and Sphere Entertainment Group to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the LV Sphere Term Loan Facility and the related guaranty and security and pledge agreements, including the following: (i) incur additional indebtedness; (ii) create liens on Sphere in Las Vegas, the MSGE Retained Interest or the real property intended for development as Sphere in London; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions (which will restrict the ability of MSG LV to make cash distributions to the Company); (v) change its lines of business; (vi) engage in certain transactions with affiliates; (vii) amend organizational documents; (viii) merge or consolidate; and (ix) make certain dispositions.
Guarantors and Collateral. All obligations under the LV Sphere Term Loan Facility are guaranteed by Sphere Entertainment Group. All obligations under the LV Sphere Term Loan Facility, including the guarantees of those obligations, are secured by all of the assets of MSG LV and certain assets of Sphere Entertainment Group including, but not limited to, MSG LV’s leasehold interest in the land on which Sphere in Las Vegas is located, a pledge of all of the equity interests held directly by Sphere Entertainment Group in MSG LV and, until the Liquidity Covenant Reduction Date, the Pledged Account and a pledge of the MSGE Retained Interest.
Delayed Draw Term Loan Facility
On April 20, 2023, the Company entered into a delayed draw term loan facility (the “DDTL Facility”) with MSG Entertainment Holdings, LLC (“MSG Entertainment Holdings”). Pursuant to the DDTL Facility, MSG Entertainment Holdings has committed to lend up to $65,000 in delayed draw term loans to the Company on an unsecured basis for a period of 18 months following the consummation of the MSGE Spinco Distribution. The Company has not yet drawn upon the DDTL Facility.
The DDTL Facility will mature and any unused commitments thereunder will expire on October 20, 2024. Borrowings under the DDTL Facility will bear interest at a variable rate equal to either, at the option of the Company, (a) a base rate plus an applicable margin, or (b) Term SOFR plus 0.10%, plus an applicable margin. The applicable margin is equal to the applicable margin under the National Properties Credit Facilities, plus 1.00% per annum.
Subject to customary borrowing conditions, the DDTL Facility may be drawn in up to six separate borrowings of $5 million or more. The DDTL Facility is prepayable at any time without penalty and amounts repaid on the DDTL Facility may not be
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
reborrowed. If drawn, the Company will have the option to make any payments of principal, interest or fees under the DDTL Facility either in cash or by delivering to MSG Entertainment Holdings shares of MSG Entertainment Class A common stock. If the Company elected to make any payment in the form of MSG Entertainment Class A common stock, the amount of such payment would be calculated based on the dollar volume-weighted average trading price for MSG Entertainment Class A common stock for the twenty trading days ending on the day on which the Company made such election. The Company shall only be permitted to use the proceeds of the DDTL Facility (i) for funding costs associated with the Sphere initiative and (ii) in connection with refinancing of the indebtedness under MSG Networks Credit Facilities.
The DDTL Facility contains certain representations and warranties and affirmative and negative covenants, including, among others, financial reporting, notices of material events, and limitations on asset dispositions restricted payments, and affiliate transactions.
Interest payments and loan principal repayments made by the Company under the credit agreements were as follows:
| Interest Payments | Loan Principal Repayments | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
MSG Networks Credit Facilities | $ | 41,034 | $ | 13,238 | $ | 45,375 | $ | 37,125 | ||||||||||||||||||
National Properties Credit Facilities | 35,283 | 34,917 | 6,063 | 4,875 | ||||||||||||||||||||||
| LV Sphere Term Loan Facility | 6,211 | — | — | — | ||||||||||||||||||||||
| Total Payments | $ | 82,528 | $ | 48,155 | $ | 51,438 | $ | 42,000 | ||||||||||||||||||
The carrying value and fair value of the Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
| March 31, 2023 | June 30, 2022 | |||||||||||||||||||||||||
Carrying Value (a) | Fair Value | Carrying Value (a) | Fair Value | |||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
MSG Networks Credit Facilities | $ | 952,875 | $ | 938,582 | $ | 998,250 | $ | 958,320 | ||||||||||||||||||
National Properties Credit Facilities | 673,037 | 666,307 | 679,100 | 679,100 | ||||||||||||||||||||||
| LV Sphere Term Loan Facility | 275,000 | 269,500 | — | — | ||||||||||||||||||||||
| Other debt | 168 | 168 | 637 | 637 | ||||||||||||||||||||||
| Total Long-term debt | $ | 1,901,080 | $ | 1,874,557 | $ | 1,677,987 | $ | 1,638,057 | ||||||||||||||||||
_________________
(a)The total carrying value of the Company’s financial instruments as of March 31, 2023 and June 30, 2022 is equal to the current and non-current principal payments for the Company’s credit agreements excluding unamortized deferred financing costs of $20,582 and $18,779, respectively.
The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted indices of similar instruments for which the inputs are readily observable.
Note 11. Pension Plans and Other Postretirement Benefit Plan
The Company sponsors several pension, savings and postretirement benefit plans including the Company’s defined benefit pension plans (“MSGE Pension Plans”), postretirement benefit plan (“MSGE Postretirement Plan”), The Madison Square Garden 401(k) Savings Plan and the MSG Sports & Entertainment, LLC Excess Savings Plan (collectively, the “Savings Plans”), and The Madison Square Garden 401(k) Union Plan (the “Union Savings Plan”). See Note 16, Pension Plans and Other Postretirement Benefit Plans, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding these plans.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Defined Benefit Pension Plans and Postretirement Benefit Plans
The following tables present components of net periodic benefit cost for the Pension Plans and Postretirement Plans included in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and 2022. Service cost is recognized in direct operating expenses and selling, general and administrative expenses. All other components of net periodic benefit cost are reported in Other expense, net.
| Pension Plans | Postretirement Plans | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Service cost | $ | 123 | $ | 118 | $ | 15 | $ | 16 | ||||||||||||||||||
| Interest cost | 1,189 | 1,190 | 19 | 20 | ||||||||||||||||||||||
| Expected return on plan assets | (1,719) | (1,719) | — | — | ||||||||||||||||||||||
| Recognized actuarial loss (gain) | 476 | 501 | (12) | 9 | ||||||||||||||||||||||
| Net periodic benefit cost | $ | 69 | $ | 90 | $ | 22 | $ | 45 | ||||||||||||||||||
| Pension Plans | Postretirement Plans | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Service cost | $ | 369 | $ | 354 | $ | 45 | $ | 48 | ||||||||||||||||||
| Interest cost | 3,567 | 3,570 | 57 | 60 | ||||||||||||||||||||||
| Expected return on plan assets | (5,157) | (5,157) | — | — | ||||||||||||||||||||||
| Recognized actuarial loss | 1,478 | 1,503 | 6 | 27 | ||||||||||||||||||||||
| Net periodic benefit cost | $ | 257 | $ | 270 | $ | 108 | $ | 135 | ||||||||||||||||||
Contributions for Qualified Defined Benefit Plans
The Company sponsors two non-contributory, qualified defined benefit pension plans covering certain of its union employees (the “UTT Plan” and the “Networks 1212 Plan,” collectively the “Union Plans”). During the three and nine months ended March 31, 2023, the Company contributed $500 to the Networks 1212 Plan.
Contributions for Defined Contribution Plans
For the three and nine months ended March 31, 2023 and 2022, expenses related to the Savings Plans and Union Savings Plan included in the accompanying condensed consolidated statements of operations are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Savings Plans | $ | 3,304 | $ | 2,095 | $ | 8,611 | $ | 6,589 | ||||||||||||||||||
| Union Savings Plan | $ | 371 | $ | 24 | $ | 409 | $ | 45 | ||||||||||||||||||
Note 12. Share-based Compensation
The Company has three share-based compensation plans: the 2020 Employee Stock Plan, the 2020 Stock Plan for Non-Employee Directors and the MSG Networks Inc. 2010 Employee Stock Plan. See Note 17, Share-based Compensation, to the consolidated and combined financial statement included in the 2022 Form 10-K for more detail on these plans.
Share-based compensation expense for the Company’s restricted stock units (“RSUs”), performance stock units (“PSUs”) and/or stock options are recognized in the condensed consolidated statements of operations as a component of direct operating expenses or selling, general and administrative expenses.
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(continued)
The following table summarizes the Company’s share-based compensation expense:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Share-based compensation (a) | $ | 10,899 | $ | 12,157 | $ | 39,846 | $ | 51,987 | ||||||||||||||||||
Intrinsic value of awards vested (b) | $ | 344 | $ | 1,198 | $ | 34,028 | $ | 35,048 | ||||||||||||||||||
_________________
(a)Share-based compensation excludes costs that have been capitalized of $2,887 and $2,264 for the nine months ended March 31, 2023 and 2022, respectively. For the three and nine months ended March 31, 2023, share-based compensation also excludes costs of $7,384 and $9,677, respectively, and for the three and nine months ended March 31, 2022, share-based compensation also excludes costs of $4,589, that have been reclassified to Restructuring charges in the condensed consolidated statements of operations, as detailed in Note 5, Restructuring Charges.
(b)To fulfill required statutory tax withholding obligations for the applicable income and other employment taxes, RSUs and PSUs with an aggregate value of $14,188 and $15,548 were retained by the Company during the nine months ended March 31, 2023, and 2022, respectively. The aggregate value of the RSUs and PSUs retained included $305 and $477 related to MSG Sports employees, during the nine months ended March 31, 2023, and 2022, respectively.
As of March 31, 2023, there was $69,512 of unrecognized compensation cost related to unvested RSUs and PSUs held by the Company’s employees. The cost is expected to be recognized over a weighted-average period of approximately 1.7 years.
For the three and nine months ended March 31, 2023 and 2022 all restricted stock units and stock options were excluded from the anti-dilutive calculation because the Company reported a net loss for the period and, therefore, their impact on reported loss per share would have been antidilutive.
Award Activity
RSUs
During the nine months ended March 31, 2023 and 2022, approximately 620 and 413 RSUs were granted and approximately 526 and 367 RSUs vested, respectively.
PSUs
During the nine months ended March 31, 2023 and 2022, approximately 529 and 390 PSUs were granted and approximately 91 and 77 PSUs vested, respectively.
Note 13. Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 15,000 shares of preferred stock, par value $0.01. As of March 31, 2023 and June 30, 2022, no shares of preferred stock were outstanding.
Stock Repurchase Program
On March 31, 2020, the Company’s Board of Directors authorized the repurchase of up to $350,000 of the Company’s Class A Common Stock once the shares of the Company’s Class A Common Stock began “regular way” trading on April 20, 2020. The program was re-authorized by the Company’s Board of Directors on March 29, 2023. Under the authorization, shares of Class A Common Stock may be purchased from time to time in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. The Company has not engaged in any share repurchase activities under its share repurchase program to date.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Accumulated Other Comprehensive Loss
The following tables detail the components of accumulated other comprehensive loss:
| Three Months Ended | |||||||||||||||||
| March 31, 2023 | |||||||||||||||||
| Pension Plans and Postretirement Plans | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of December 31, 2022 | $ | (39,453) | $ | (9,110) | $ | (48,563) | |||||||||||
| Other comprehensive income | — | 2,105 | 2,105 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 464 | — | 464 | ||||||||||||||
| Income tax expense | (58) | (387) | (445) | ||||||||||||||
| Other comprehensive income | 406 | 1,718 | 2,124 | ||||||||||||||
| Balance as of March 31, 2023 | $ | (39,047) | $ | (7,392) | $ | (46,439) | |||||||||||
| Three Months Ended | |||||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Pension Plans and Postretirement Plans | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of December 31, 2021 | $ | (44,596) | $ | 11,964 | $ | (32,632) | |||||||||||
| Other comprehensive loss | — | (5,912) | (5,912) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 510 | — | 510 | ||||||||||||||
| Income tax (expense) benefit | 2,675 | (1,651) | 1,024 | ||||||||||||||
| Other comprehensive income (loss) | 3,185 | (7,563) | (4,378) | ||||||||||||||
| Balance as of March 31, 2022 | $ | (41,411) | $ | 4,401 | $ | (37,010) | |||||||||||
| Nine Months Ended | |||||||||||||||||
| March 31, 2023 | |||||||||||||||||
| Pension Plans and Postretirement Plans | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2022 | $ | (40,287) | $ | (8,068) | $ | (48,355) | |||||||||||
| Other comprehensive income | — | 828 | 828 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 1,484 | — | 1,484 | ||||||||||||||
| Income tax expense | (244) | (152) | (396) | ||||||||||||||
| Other comprehensive income | 1,240 | 676 | 1,916 | ||||||||||||||
| Balance as of March 31, 2023 | $ | (39,047) | $ | (7,392) | $ | (46,439) | |||||||||||
| Nine Months Ended | |||||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Pension Plans and Postretirement Plans | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2021 | $ | (45,425) | $ | 15,153 | $ | (30,272) | |||||||||||
| Other comprehensive loss | — | (9,844) | (9,844) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 1,530 | — | 1,530 | ||||||||||||||
| Income tax benefit (expense) | 2,484 | (908) | 1,576 | ||||||||||||||
| Other comprehensive income (loss) | 4,014 | (10,752) | (6,738) | ||||||||||||||
| Balance as of March 31, 2022 | $ | (41,411) | $ | 4,401 | $ | (37,010) | |||||||||||
(a)Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net
29
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
unrecognized prior service credit included in net periodic benefit cost, which is reflected under Other income (expense), net in the accompanying condensed consolidated statements of operations (see Note 11, Pension Plans and Other Postretirement Benefit Plans).
Note 14. Related Party Transactions
The descriptions of the transactions below, unless otherwise indicated, are as of March 31, 2023, and do not reflect the MSGE Spinco Distribution, which did not occur until after March 31, 2023.
As of March 31, 2023, members of the Dolan Family, including trusts for the benefit of members of the Dolan family (collectively, the “Dolan Family Group”), for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, collectively beneficially owned 100% of the Company’s outstanding Class B Common Stock and approximately 5.5% of the Company’s outstanding Class A Common Stock (inclusive of options exercisable within 60 days of March 31, 2023). Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 72.4% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG Sports and AMC Networks Inc., as well as MSG Entertainment following the MSGE Spinco Distribution.
See Note 21, Related Party Transactions, to the consolidated and combined financial statements included in the 2022 Form 10-K for a description of the Company’s related party arrangements. Following the MSGE Spinco Distribution, the Company is no longer party to the arrangements described thereunder, except for the media rights agreements and 2020 distribution-related agreements with MSG Sports, and the sharing of certain executive support costs, including office space, executive assistants, security and transportation costs, for (i) the Company’s Executive Chairman and Chief Executive Officer with MSG Entertainment and MSG Sports and (ii) the Company’s Vice Chairman with MSG Entertainment, MSG Sports and AMC Networks.
From time to time the Company enters into arrangements with 605, LLC (“605”). James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and a director, and his spouse, Kristin A. Dolan (a director of the Company), own 50% of 605. Kristin A. Dolan is also the founder and Non-Executive Chairman of 605. 605 provides audience measurement and data analytics services to the Company and its subsidiaries in the ordinary course of business. The Company’s Audit Committee approved the entry into one or more agreements with 605 to provide certain data analytics services to the Company for an aggregate amount of up to $1,000. In August 2022, a subsidiary of the Company entered into a three-year agreement with 605, valued at approximately $750, covering several customer analysis projects per year in connection with events held at our venues. The Company expects to engage 605 to provide additional data analytics services in the future. Pursuant to this arrangement, the Company recognized approximately $70 and $205 of expense for the three and nine months ended March 31, 2023, respectively, and as of March 31, 2023 approximately $70 has been recognized in Prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.
MSG Sports has made market rate interest-bearing advances to the Company (and such advances will be with MSG Entertainment following the MSGE Spinco Distribution) in connection with the construction of new premium hospitality suites at The Garden. The advances will be repaid (including interest) through cash receipts from the licenses for each new suite. As of March 31, 2023, MSG Sports had advanced approximately $170 to the Company in connection with the arrangement. This advance has been recognized in Long-term debt, net of deferred financing costs in the accompanying condensed consolidated balance sheets.
As of June 30, 2022, the Company had $637 of notes payable with respect to a loan received by BCE from its noncontrolling interest holder. As of March 31, 2023 there were no notes payable with respect to this BCE loan as a result of the BCE Disposition (as defined below).
The Company has also entered into certain commercial agreements with its equity method investment nonconsolidated affiliates in connection with Sphere. The Company recorded $14,271 and $46,577 for the three months ended March 31, 2023 and 2022, respectively, and $87,357 and $83,318 for the nine months ended March 31, 2023 and 2022, respectively, of capital expenditures in connection with services provided to the Company under these agreements. As of March 31, 2023 and June 30, 2022, accrued capital expenditures associated with related parties were $24,826 and $25,028, respectively, and are reported under Accounts payable, accrued and other current liabilities in the accompanying condensed consolidated balance sheets.
30
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Revenues and Operating Expenses
The following table summarizes the composition and amounts of the transactions with the Company’s affiliates. These amounts are reflected in revenues and operating expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and 2022:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenues | $ | 42,795 | $ | 39,987 | $ | 88,431 | $ | 79,314 | ||||||||||||||||||
| Operating expenses (credits): | ||||||||||||||||||||||||||
| Media rights fees | $ | 43,433 | $ | 40,948 | $ | 129,633 | $ | 122,206 | ||||||||||||||||||
| Revenue sharing expenses | 7,353 | 5,791 | 15,639 | 12,187 | ||||||||||||||||||||||
| Reimbursement under Arena License Agreements | (8,911) | (10,047) | (18,761) | (19,097) | ||||||||||||||||||||||
| Cost reimbursement from MSG Sports - per Transition services agreement | (9,789) | (9,159) | (28,781) | (28,888) | ||||||||||||||||||||||
| Origination, master control and technical services | 1,257 | 1,232 | 3,721 | 3,648 | ||||||||||||||||||||||
| Other operating expenses, net | 851 | 279 | 3,143 | 3,193 | ||||||||||||||||||||||
Total operating expenses, net (a) | $ | 34,194 | $ | 29,044 | $ | 104,594 | $ | 93,249 | ||||||||||||||||||
_________________
(a)Of the total operating expenses, net, $44,264 and $37,949 for three months ended March 31, 2023 and 2022, respectively, and $133,071 and $119,146 for the nine months ended March 31, 2023 and, 2022, respectively, are included in direct operating expenses in the accompanying condensed consolidated statements of operations, and $(10,070) and $(8,905) for three months ended March 31, 2023 and 2022, respectively, and $(28,477) and $(25,897) for the nine months ended March 31, 2023 and 2022, respectively, are included as net credits in selling, general and administrative expenses.
Revenues
The Company recorded $31,163 and $64,312 of revenues under the Arena License Agreements for the three and nine months ended March 31, 2023, respectively. In addition to the Arena License Agreements, the Company’s revenues from related parties primarily reflected sponsorship sales and service representation agreements of $7,079 and $15,643 and merchandise sharing revenues of $2,160 and $4,451 with MSG Sports during the three and nine months ended March 31, 2023, respectively. The Company also earned sublease revenue from related parties of $716 and $2,100 during the three and nine months ended March 31, 2023, respectively.
The Company recorded $29,616 and $58,797 of revenues under the Arena License Agreements for the three and nine months ended March 31, 2022, respectively. In addition, the Company recorded revenues under sponsorship sales and service representation agreements of $7,027 and $14,206 and merchandise sharing revenues of $1,548 and $3,000 with MSG Sports during the three and nine months ended March 31, 2022, respectively. The Company also earned sublease revenue from related parties of $736 and $1,958 during the three and nine months ended March 31, 2022, respectively.
Note 15. Segment Information
As of March 31, 2023, the Company was comprised of two reportable segments: Entertainment and MSG Networks. The Company takes into account whether two or more operating segments can be aggregated together as one reportable segment as well as the type of discrete financial information that is available and regularly reviewed by its Chief Operating Decision Maker. Following the MSGE Entertainment Distribution, the Company currently has two reportable segments.
The Company incurs non-capitalizable content development and technology costs associated with the Company’s Sphere initiative, which are reported in Entertainment. In addition to event-related operating expenses, Entertainment also includes other expenses such as (a) corporate and supporting department operating costs that are attributable to Sphere development and (b) non-event related operating expenses for the Company’s venues, such as (i) rent for the Company’s leased venues, (ii) real estate taxes, (iii) insurance, (iv) utilities, (v) repairs and maintenance, (vi) labor related to the overall management of the venues, and (vii) depreciation and amortization expense related to the Company’s performance venues and certain corporate
31
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
property, equipment and leasehold improvements. Additionally, the Company does not allocate any purchase accounting adjustments related to business acquisitions to the reporting segments.
The Company evaluates segment performance based on several factors, of which the key financial measure is adjusted operating income (loss), a non-GAAP financial measure. We define adjusted operating income (loss) as operating income (loss) excluding:
(i) the impact of non-cash straight-line leasing revenue associated with the Arena License Agreements with MSG Sports,
(ii) depreciation, amortization and impairments of property and equipment, goodwill and intangible assets,
(iii) amortization for capitalized cloud computing arrangement costs,
(iv) share-based compensation expense,
(v) restructuring charges or credits,
(vi) merger and acquisition-related costs, including litigation expenses,
(vii) gains or losses on sales or dispositions of businesses and associated settlements,
(viii) the impact of purchase accounting adjustments related to business acquisitions, and
(ix) gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan (which was established in November 2021).
The Company believes that given the length of the Arena License Agreements and resulting magnitude of the difference in leasing revenue recognized and cash revenue received, the exclusion of non-cash leasing revenue provides investors with a clearer picture of the Company's operating performance. Management believes that this adjustment is beneficial for other incremental reasons as well. This adjustment provides senior management, investors and analysts with important information regarding a long-term related party agreement with MSG Sports. In addition, this adjustment is included under the Company’s debt covenant compliance calculations and is a component of the performance measures used to evaluate, and compensate, senior management of the Company. The Company believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. The Company eliminates merger and acquisition-related costs, when applicable, because the Company does not consider such costs to be indicative of the ongoing operating performance of the Company as they result from an event that is of a non-recurring nature, thereby enhancing comparability. In addition, management believes that the exclusion of gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan, which were included for the first time in Fiscal Year 2022, provides investors with a clearer picture of the Company’s operating performance given that, in accordance with GAAP, gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan are recognized in Operating income (loss) whereas gains and losses related to the remeasurement of the assets under the Company’s Executive Deferred Compensation Plan, which are equal to and therefore fully offset the gains and losses related to the remeasurement of liabilities, are recognized in Other income (expense), net, which is not reflected in Operating income (loss).
The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance, and evaluates management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss).
32
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Information as to the operations of the Company’s reportable segments is set forth below.
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Other (b) | Total | |||||||||||||||||||||||
| Revenues | $ | 201,861 | $ | 161,436 | $ | — | $ | 363,297 | ||||||||||||||||||
| Direct operating expenses | (120,835) | (89,251) | (55) | (210,141) | ||||||||||||||||||||||
| Selling, general and administrative expenses | (120,307) | (60,052) | 489 | (179,870) | ||||||||||||||||||||||
| Depreciation and amortization | (21,310) | (1,689) | — | (22,999) | ||||||||||||||||||||||
| Impairment and other losses, net | (51) | — | — | (51) | ||||||||||||||||||||||
| Restructuring charges | (20,498) | — | — | (20,498) | ||||||||||||||||||||||
| Operating (loss) income | $ | (81,140) | $ | 10,444 | $ | 434 | $ | (70,262) | ||||||||||||||||||
| Interest income, net | 2,640 | |||||||||||||||||||||||||
| Other income, net | 4,994 | |||||||||||||||||||||||||
| Loss from operations before income taxes | $ | (62,628) | ||||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | ||||||||||||||||||||||||||
| Operating (loss) income | $ | (81,140) | $ | 10,444 | $ | 434 | $ | (70,262) | ||||||||||||||||||
| Add back: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (12,149) | — | — | (12,149) | ||||||||||||||||||||||
| Share-based compensation | 10,259 | 640 | — | 10,899 | ||||||||||||||||||||||
| Depreciation and amortization | 21,310 | 1,689 | — | 22,999 | ||||||||||||||||||||||
| Restructuring charges | 20,498 | — | — | 20,498 | ||||||||||||||||||||||
| Impairment and other losses, net | 51 | — | — | 51 | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 1,528 | 45,513 | — | 47,041 | ||||||||||||||||||||||
Amortization for capitalized cloud computing costs | 185 | 43 | — | 228 | ||||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | 126 | — | — | 126 | ||||||||||||||||||||||
| Adjusted operating (loss) income | $ | (39,332) | $ | 58,329 | $ | 434 | $ | 19,431 | ||||||||||||||||||
| Other information: | ||||||||||||||||||||||||||
| Capital expenditures | $ | 198,924 | $ | 1,818 | $ | — | $ | 200,742 | ||||||||||||||||||
33
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Other (b) | Total | |||||||||||||||||||||||
| Revenues | $ | 194,585 | $ | 167,569 | $ | (9,620) | $ | 352,534 | ||||||||||||||||||
| Direct operating expenses | (110,688) | (87,174) | (105) | (197,967) | ||||||||||||||||||||||
Selling, general and administrative expenses | (96,198) | (32,237) | 9,647 | (118,788) | ||||||||||||||||||||||
| Depreciation and amortization | (18,522) | (1,764) | (177) | (20,463) | ||||||||||||||||||||||
| Impairment and other gains, net | 245 | — | — | 245 | ||||||||||||||||||||||
| Restructuring charges | (14,238) | (452) | — | (14,690) | ||||||||||||||||||||||
| Operating (loss) income | $ | (44,816) | $ | 45,942 | $ | (255) | $ | 871 | ||||||||||||||||||
| Interest expense, net | (4,761) | |||||||||||||||||||||||||
| Other expense, net | (10,052) | |||||||||||||||||||||||||
| Loss from operations before income taxes | $ | (13,942) | ||||||||||||||||||||||||
Reconciliation of operating (loss) income to adjusted operating income (loss): | ||||||||||||||||||||||||||
| Operating (loss) income | $ | (44,816) | $ | 45,942 | $ | (255) | $ | 871 | ||||||||||||||||||
| Add back: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (12,073) | — | — | (12,073) | ||||||||||||||||||||||
| Share-based compensation | 10,399 | 1,758 | — | 12,157 | ||||||||||||||||||||||
| Depreciation and amortization | 18,522 | 1,764 | 177 | 20,463 | ||||||||||||||||||||||
| Restructuring charges | 14,238 | 452 | — | 14,690 | ||||||||||||||||||||||
| Impairment and other gains, net | (245) | — | — | (245) | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 1,647 | 866 | — | 2,513 | ||||||||||||||||||||||
| Amortization for capitalized cloud computing costs | 38 | 43 | — | 81 | ||||||||||||||||||||||
| Adjusted operating (loss) income | $ | (12,290) | $ | 50,825 | $ | (78) | $ | 38,457 | ||||||||||||||||||
| Other information: | ||||||||||||||||||||||||||
| Capital expenditures | $ | 200,958 | $ | 320 | $ | — | $ | 201,278 | ||||||||||||||||||
34
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Other (b) | Total | |||||||||||||||||||||||
| Revenues | $ | 705,481 | $ | 442,813 | $ | (8,802) | $ | 1,139,492 | ||||||||||||||||||
| Direct operating expenses | (403,642) | (255,071) | (222) | (658,935) | ||||||||||||||||||||||
Selling, general and administrative expenses | (336,421) | (115,951) | 10,318 | (442,054) | ||||||||||||||||||||||
| Depreciation and amortization | (62,514) | (4,944) | (632) | (68,090) | ||||||||||||||||||||||
| Impairment and other gains, net | 7,361 | — | — | 7,361 | ||||||||||||||||||||||
| Restructuring charges | (30,192) | (3,988) | — | (34,180) | ||||||||||||||||||||||
| Operating (loss) income | $ | (119,927) | $ | 62,859 | $ | 662 | $ | (56,406) | ||||||||||||||||||
| Interest expense, net | 10,161 | |||||||||||||||||||||||||
| Other income, net | 1,939 | |||||||||||||||||||||||||
| Loss from operations before income taxes | $ | (44,306) | ||||||||||||||||||||||||
Reconciliation of operating (loss) income to adjusted operating income (loss): | ||||||||||||||||||||||||||
| Operating (loss) income | $ | (119,927) | $ | 62,859 | $ | 662 | $ | (56,406) | ||||||||||||||||||
| Add back: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (25,078) | — | — | (25,078) | ||||||||||||||||||||||
| Share-based compensation | 34,204 | 5,642 | — | 39,846 | ||||||||||||||||||||||
| Depreciation and amortization | 62,514 | 4,944 | 632 | 68,090 | ||||||||||||||||||||||
| Restructuring charges | 30,192 | 3,988 | — | 34,180 | ||||||||||||||||||||||
| Impairment and other gains, net | (7,361) | — | — | (7,361) | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 4,221 | 52,958 | — | 57,179 | ||||||||||||||||||||||
| Amortization for capitalized cloud computing costs | 453 | 131 | — | 584 | ||||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | 132 | — | — | 132 | ||||||||||||||||||||||
| Adjusted operating (loss) income | $ | (20,650) | $ | 130,522 | $ | 1,294 | $ | 111,166 | ||||||||||||||||||
| Other information: | ||||||||||||||||||||||||||
| Capital expenditures | $ | 745,385 | $ | 5,710 | $ | — | $ | 751,095 | ||||||||||||||||||
35
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Entertainment | MSG Networks | Other (b) | Total | |||||||||||||||||||||||
| Revenues | $ | 476,434 | $ | 469,023 | $ | (17,015) | $ | 928,442 | ||||||||||||||||||
| Direct operating expenses | (294,333) | (241,521) | (222) | (536,076) | ||||||||||||||||||||||
Selling, general and administrative expenses | (283,715) | (117,404) | 16,839 | (384,280) | ||||||||||||||||||||||
| Depreciation and amortization | (57,202) | (5,317) | (531) | (63,050) | ||||||||||||||||||||||
| Impairment and other gains, net | 245 | — | — | 245 | ||||||||||||||||||||||
| Restructuring charges | (14,238) | (452) | — | (14,690) | ||||||||||||||||||||||
| Operating (loss) income | $ | (172,809) | $ | 104,329 | $ | (929) | $ | (69,409) | ||||||||||||||||||
| Interest expense, net | (19,740) | |||||||||||||||||||||||||
| Other expense, net | (32,304) | |||||||||||||||||||||||||
| Loss from operations before income taxes | $ | (121,453) | ||||||||||||||||||||||||
Reconciliation of operating (loss) income to adjusted operating (loss) income: | ||||||||||||||||||||||||||
| Operating (loss) income | $ | (172,809) | $ | 104,329 | $ | (929) | $ | (69,409) | ||||||||||||||||||
| Add back: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (23,962) | — | — | (23,962) | ||||||||||||||||||||||
| Share-based compensation | 36,697 | 15,290 | — | 51,987 | ||||||||||||||||||||||
| Depreciation and amortization | 57,202 | 5,317 | 531 | 63,050 | ||||||||||||||||||||||
| Restructuring charges | 14,238 | 452 | — | 14,690 | ||||||||||||||||||||||
| Impairment and other gains, net | (245) | — | — | (245) | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 17,095 | 24,941 | — | 42,036 | ||||||||||||||||||||||
| Amortization for capitalized cloud computing costs | 45 | 131 | — | 176 | ||||||||||||||||||||||
| Adjusted operating (loss) income | $ | (71,739) | $ | 150,460 | $ | (398) | $ | 78,323 | ||||||||||||||||||
| Other information: | ||||||||||||||||||||||||||
| Capital expenditures | $ | 500,714 | $ | 2,369 | $ | — | $ | 503,083 | ||||||||||||||||||
_________________
(a) This adjustment represents the non-cash portion of operating lease revenue related to the Company’s Arena License Agreements with MSG Sports. Pursuant to GAAP, recognition of operating lease revenue is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. As a result, operating lease revenue is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Operating income on a GAAP basis includes lease income of (i) $19,014 and $39,234 of revenue collected in cash for the three and nine months ended March 31, 2023, respectively, and $17,543 and $34,836 of revenue collected in cash for the three and nine months ended March 31, 2022, respectively, and (ii) a non-cash portion of $12,149 and $25,078 for the three and nine months ended March 31, 2023, respectively, and $12,073 and $23,962for the three and nine months ended March 31, 2022, respectively.
(b) Includes inter-segment eliminations and, for operating (loss) income, purchase accounting adjustments.
36
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Concentration of Risk
Accounts receivable, net in the accompanying condensed consolidated balance sheets as of March 31, 2023 and June 30, 2022 include amounts due from the following individual customers, which accounted for the noted percentages of the gross balance:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Customer A | 14 | % | 16 | % | ||||||||||
| Customer B | 12 | % | 14 | % | ||||||||||
| Customer C | 10 | % | 12 | % | ||||||||||
Revenues in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and March 31, 2022 include amounts from the following individual customers:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Customer 1 | 11 | % | 11 | % | 10 | % | 13 | % | ||||||||||||||||||
| Customer 2 | N/A | 12 | % | 10 | % | 14 | % | |||||||||||||||||||
Note 16. Additional Financial Information
The following table provides a summary of the amounts recorded as cash, cash equivalents and restricted cash.
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Cash and cash equivalents | $ | 217,576 | $ | 805,415 | ||||||||||
| Restricted cash | 109,669 | 17,470 | ||||||||||||
Total cash, cash equivalents and restricted cash | $ | 327,245 | $ | 822,885 | ||||||||||
The Company’s cash, cash equivalents and restricted cash are classified within Level I of the fair value hierarchy as it is valued using observable inputs that reflect quoted prices for identical assets in active markets. The Company’s restricted cash includes cash deposited in escrow accounts. The Company has deposited cash in an interest-bearing escrow account related to credit support, debt facilities, and collateral to its workers compensation and general liability insurance obligations.
Prepaid expenses and other current assets consisted of the following:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Prepaid expenses | $ | 81,083 | $ | 77,059 | ||||||||||
| Related party receivables | 24,729 | 32,541 | ||||||||||||
| Notes and other receivables | 15,588 | 2,725 | ||||||||||||
| Current contract assets | 8,324 | 5,688 | ||||||||||||
| Current deferred production costs | 5,240 | 7,227 | ||||||||||||
| Other | 10,874 | 10,431 | ||||||||||||
| Total prepaid expenses and other current assets | $ | 145,838 | $ | 135,671 | ||||||||||
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SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Accounts payable, accrued and other current liabilities consisted of the following:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Accounts payable | $ | 32,617 | $ | 13,255 | ||||||||||
| Related party payables | 37,682 | 37,746 | ||||||||||||
| Accrued payroll and employee related liabilities | 99,376 | 130,287 | ||||||||||||
| Cash due to promoters | 84,975 | 78,428 | ||||||||||||
Capital expenditure accruals | 307,368 | 206,462 | ||||||||||||
| Accrued expenses | 137,751 | 62,905 | ||||||||||||
| Total accounts payable, accrued and other current liabilities | $ | 699,769 | $ | 529,083 | ||||||||||
Other expense, net includes the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Loss on equity method investments | $ | (2,883) | $ | (1,555) | $ | (6,287) | $ | (4,064) | ||||||||||||||||||
| Gains from shares sold — DraftKings | 214 | — | 1,703 | — | ||||||||||||||||||||||
Net unrealized gain (loss) on equity investments with readily determinable fair value | 7,510 | (8,688) | 4,307 | (28,303) | ||||||||||||||||||||||
| Unrealized gain on equity investments without readily determinable fair value | — | — | 1,969 | — | ||||||||||||||||||||||
| Other | 153 | 191 | 247 | 63 | ||||||||||||||||||||||
Total other expense, net | $ | 4,994 | $ | (10,052) | $ | 1,939 | $ | (32,304) | ||||||||||||||||||
Income Taxes
During the nine months ended March 31, 2023, the Company made income tax payments, net of refunds, of $3,341. During the nine months ended March 31, 2022, the Company received income tax refunds, net of payments, of $3,959.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning the future operating and future financial performance of Sphere Entertainment Co. and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” “Sphere Entertainment,” or the “Company”), including the timing and costs of new venue construction and the development of related content, our plans to refinance our existing debt, the impact of run-rate savings expected to be generated by the Company’s cost reduction program, the ability to reduce or defer certain discretionary capital projects, the potential disposition of the Company’s retained interest in MSG Entertainment and possible additional debt financing. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
•the substantial amount of debt we have incurred, the ability of our subsidiaries to make payments on, or repay or refinance, such debt under their respective credit facilities (including refinancing the MSG Networks debt prior to its maturity in October 2024), and our ability to obtain additional financing, to the extent required;
•our ability to successfully design, construct, finance and operate new entertainment venues in Las Vegas and other markets, and the investments, costs and timing associated with those efforts, including the impact of inflation and any construction delays and/or cost overruns;
•our ability to maintain, obtain or produce content, together with the cost of such content;
•the successful development of Sphere Experiences and the investments associated with such development, as well as investment in personnel, content and technology for Sphere;
•our ability to successfully implement cost reductions and reduce or defer certain discretionary capital projects, if necessary;
•the level of our expenses and our operational cash burn rate, including our corporate expenses;
•the level of our revenues, which depends in part on the popularity of the sports teams whose games are broadcast on our networks, and other events which are broadcast on our networks or which will be presented at Sphere in Las Vegas;
•the demand for MSG Networks programming among cable, satellite, fiber-optic and other platforms that distribute its networks (“Distributors”) and the subscribers thereto, and our ability to enter into and renew affiliation agreements with Distributors, or to do so on favorable terms, as well as the impact of consolidation among Distributors;
•our ability to develop and successfully execute MSG Networks’ strategy for a direct-to-consumer offering;
•the ability of our Distributors to maintain, or minimize declines in, subscriber levels;
•the impact of subscribers selecting Distributors’ packages that do not include our networks or distributors that do not carry our networks at all;
•our ability to effectively manage any impacts of the COVID-19 pandemic (including COVID-19 variants) as well as renewed actions taken in response by governmental authorities, or certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues, to the extent applicable;
•the effect of any postponements or cancellations by third-parties or the Company as a result of the COVID-19 pandemic due to operational challenges and other health and safety concerns;
•the extent to which attendance at Sphere in Las Vegas may be impacted by government actions, health concerns by potential attendees or reduced tourism;
•the security of our MSG Networks program signal and electronic data;
•the on-ice and on-court performance of the professional sports teams whose games we broadcast on our networks;
•the level of our capital expenditures and other investments;
•general economic conditions, especially in the Las Vegas and New York City metropolitan areas where we have (or plan to have) significant business activities;
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•the demand for sponsorship and suite arrangements, exosphere advertising and advertising and viewer ratings for our networks;
•competition, for example, from other venues (including the construction of new competing venues) and other regional sports and entertainment networks;
•the relocation or insolvency of professional sports teams with which we have a media rights agreement;
•MSG Networks’ ability to renew or replace our media rights agreements with professional sports teams;
•changes in laws, guidelines, bulletins, directives, policies and agreements, and regulations under which we operate;
•any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, including the unions representing players and officials of the NBA and NHL, or other work stoppage;
•seasonal fluctuations and other variations in our operating results and cash flow from period to period;
•business, reputational and litigation risk if there is a cyber or other security incident resulting in loss, disclosure or misappropriation of stored personal information, disruption of our MSG Networks business or disclosure of confidential information or other breaches of our information security;
•activities or other developments (such as pandemics, including the COVID-19 pandemic) that discourage or may discourage congregation at prominent places of public assembly, including our venue;
•the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions;
•our ability to successfully integrate acquisitions, new venues or new businesses into our operations;
•the operating and financial performance of our strategic acquisitions and investments, including those we do not control;
•our internal control environment and our ability to identify any future material weaknesses;
•the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire;
•the impact of governmental regulations or laws, changes in how those regulations and laws are interpreted, as well as the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses;
•the impact of sports league rules, regulations and/or agreements and changes thereto;
•financial community perceptions of our business, operations, financial condition and the industries in which we operate;
•the ability of our investees and others to repay loans and advances we have extended to them;
•the tax-free treatment of the MSGE Spinco Distribution (as defined below) and the 2020 Entertainment Distribution (as defined below);
•our ability to achieve the intended benefits of the MSGE Spinco Distribution;
•the performance by Madison Square Garden Entertainment Corp. (“MSG Entertainment”, formerly MSGE Spinco, Inc.) of its obligations under various agreements with the Company and the performance by the Company of its obligations under various arrangements with MSG Entertainment, in each case related to the MSGE Spinco Distribution and ongoing commercial arrangements; and
•the additional factors described under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022 filed on August 19, 2022 (the “2022 Form 10-K”).
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted.
Spin-off Transaction
On April 20, 2023 (the “MSGE Spinco Distribution Date”), the Company distributed approximately 67% of the outstanding common stock of MSG Entertainment to its stockholders (the “MSGE Spinco Distribution”), with the Company retaining approximately 33% of the outstanding common stock of MSG Entertainment (in the form of Class A common stock)
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immediately following the MSGE Spinco Distribution. MSG Entertainment owns the traditional live entertainment business previously owned and operated by the Company through its Entertainment business segment, excluding Sphere, which was retained by the Company after the MSGE Spinco Distribution Date. In the MSGE Spinco Distribution, stockholders of the Company received (a) one share of MSG Entertainment’s Class A common stock, par value $0.01 per share, for every share of the Company’s Class A common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on April 14, 2023 (the “Record Date”), and (b) one share of MSG Entertainment’s Class B common stock, par value $0.01 per share, for every share of the Company’s Class B common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on the Record Date.
The disclosures within this Management’s Discussion and Analysis of Financial Condition and Results of Operations that discuss the quarter ended March 31, 2023 are on a consolidated Company basis, which means that they include the results of MSG Entertainment and do not take the MSGE Spinco Distribution into account. In future filings, beginning with our Annual Report on Form 10-K for the fiscal year ending June 30, 2023, the historical results of the Company’s traditional live entertainment business, excluding Sphere, will be presented as discontinued operations. In addition, the unaudited pro forma consolidated balance sheet of the Company as of December 31, 2022 and the unaudited pro forma condensed consolidated statements of operations of the Company for the six months ended December 31, 2022 and the fiscal years ended June 30, 2022, 2021 and 2020, in each case giving effect to the MSGE Spinco Distribution, are set forth in Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 24, 2023. As a result of the MSGE Spinco Distribution, the accompanying unaudited condensed consolidated interim financial statements of the Company are not indicative of the Company’s future financial position, results of operations or cash flows.
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.
The Company has historically had three reportable segments (Entertainment, MSG Networks, and Tao Group Hospitality). However, as of March 31, 2023, Tao Group Hospitality is classified as held for sale and its results are recorded as discontinued operations as disclosed in Note 3. Discontinued Operations and Dispositions in the Form 10-Q. As a result, Tao Group Hospitality is no longer a reportable segment, and the Company has two reportable segments (Entertainment and MSG Networks) for the period ended March 31, 2023.
The Entertainment segment included the Company’s portfolio of venues as of March 31, 2023: Madison Square Garden (“The Garden”), The Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, and The Chicago Theatre. In addition, the Company has unveiled its vision for state-of-the-art venues, called Sphere, and is completing construction of its first such venue in Las Vegas. As of March 31, 2023, the Entertainment segment also included the original production, the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”). As of March 31, 2023, this segment also included our bookings business, which features a variety of live entertainment and sports experiences. The Company also previously owned a controlling interest in Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival. The Company disposed of its controlling interest in BCE on December 2, 2022.
The MSG Networks segment is comprised of the Company’s regional sports and entertainment networks, MSG Network and MSG Sportsnet (formerly MSG+), as well as a companion streaming service, MSG GO. MSG Networks serves the New York Designated Market Area, as well as other portions of New York, New Jersey, Connecticut and Pennsylvania and features a wide range of sports content, including live local games and other programming of the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”), New York Islanders (the “Islanders”), New Jersey Devils (the “Devils”) and Buffalo Sabres (the “Sabres”) of the National Hockey League (the “NHL”), as well as significant coverage of the New York Giants (the “Giants”) and Buffalo Bills (the “Bills”) of the National Football League (the “NFL”).
As of March 31, 2023, the Company conducted a significant portion of its operations at venues that it owns or operates under long-term leases. As of March 31, 2023 the Company owned The Garden, The Theater at Madison Square Garden and The Chicago Theatre, and leased Radio City Music Hall and the Beacon Theatre.
Our MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited results of operations for the three and nine months ended March 31, 2023 and 2022 on both a (i) consolidated basis and (ii) segment basis.
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Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the nine months ended March 31, 2023 and 2022, as well as certain contractual obligations and off-balance sheet arrangements.
Seasonality of Our Business. This section discusses the seasonal performance of our Entertainment and MSG Networks segments.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, recently issued accounting pronouncements not yet adopted by the Company, as well as the results of the Company’s annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2023. This section should be read together with our critical accounting policies, which are discussed in our Form 10-K under “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the condensed consolidated financial statements (“financial statements”) of the Company included therein.
Factors Affecting Results of Operations
The Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three and nine months ended March 31, 2023, as compared to the prior year period, which was impacted by fewer ticketed events at our performance venues in the first half of the fiscal year due to the lead-time required to book touring acts and artists and the postponement or cancellation of select events at our performance venues (including the partial cancellation of the 2021 production of the Christmas Spectacular) during the second and third quarters of Fiscal Year 2022 as a result of an increase in COVID-19 cases. In addition, due to the COVID-19 pandemic, the 2020-21 NHL season was shortened and resulted in reductions in media rights fees recognized in our MSG Networks segment, which had a residual impact reflected in the nine months ended March 31, 2022. See Note 1, Impact of the COVID-19 Pandemic, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding the impact of the COVID-19 pandemic on our business.
It is unclear to what extent COVID-19 concerns, including with respect to new variants, could result in new government or league-mandated capacity or other restrictions or vaccination/mask requirements or impact the use of and/or demand for Sphere in Las Vegas, impact demand for our sponsorship and advertising assets, deter our employees and vendors from working at Sphere in Las Vegas (which may lead to difficulties in staffing) or otherwise materially impact our operations.
In addition to the above, the operating results of our segments will be largely dependent on our ability to attract audiences to our Sphere Experiences, concerts and other events to Sphere in Las Vegas, and are dependent on the affiliation agreements MSG Networks negotiates with Distributors, the number of Distributor subscribers that receive our networks, the advertising rates we charge advertisers and sponsorship rates we can charge our partners. Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams whose games we broadcast on our networks.
Our Company’s future performance is dependent in part on general economic conditions and the effect of these conditions on our customers. Weak economic conditions may lead to lower demand for our entertainment offerings and programming content, which would also decrease advertising revenues. These conditions may also affect the number of concerts, Sphere Experiences and other events that take place in the future. An economic downturn could adversely affect our business and results of operations.
Due largely to the generally recurring nature of our affiliation fee revenue, the MSG Networks segment has consistently produced operating profits for a number of years. Advertising revenues are less predictable and can vary based upon a number of factors, including general economic conditions and team performance.
Additionally, the advertising sales representation agreement (the “Networks Advertising Sales Representation Agreement”) between two of the Company’s subsidiaries, MSGN Holdings, L.P. and Sphere Entertainment Group, LLC (formerly MSG Entertainment Group, LLC, “Sphere Entertainment Group”), pursuant to which Sphere Entertainment Group had the exclusive right and obligation to sell MSG Networks advertising availabilities for a commission, was terminated effective as of December 31, 2022. The termination of the Networks Advertising Sales Representation Agreement has impacted the operating results of the reportable segments of the Company for the three and nine months end March 31, 2023 and on a go forward basis. As a result, the Entertainment segment will no longer recognize advertising sales commission revenue or the employee costs related to the advertising sales agency. Conversely, the MSG Networks segment will no longer incur advertising commission expense but will reflect the employee costs of the former Entertainment employees that supported the advertising sales agency as such employees have been transferred to MSG Networks, which will result in higher direct operating expenses and selling, general and administrative expenses going forward.
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The Company continues to explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time. Our results will also be affected by investments in, and the success of, new attractions, such as Sphere Experiences.
Consolidated Results of Operations
Comparison of the Three and Nine Months Ended March 31, 2023 versus the Three and Nine Months Ended March 31, 2022
The tables below set forth, for the periods presented, certain historical financial information.
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 363,297 | $ | 352,534 | $ | 10,763 | 3 | % | ||||||||||||||||||
| Direct operating expenses | (210,141) | (197,967) | (12,174) | 6 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (179,870) | (118,788) | (61,082) | 51 | % | |||||||||||||||||||||
| Depreciation and amortization | (22,999) | (20,463) | (2,536) | 12 | % | |||||||||||||||||||||
| Impairment and other (losses) gains, net | (51) | 245 | (296) | (121) | % | |||||||||||||||||||||
| Restructuring charges | (20,498) | (14,690) | (5,808) | 40 | % | |||||||||||||||||||||
| Operating (loss) income | (70,262) | 871 | (71,133) | NM | ||||||||||||||||||||||
| Interest income | 2,640 | 767 | 1,873 | NM | ||||||||||||||||||||||
| Interest expense | — | (5,528) | 5,528 | (100) | % | |||||||||||||||||||||
| Other income (expense), net | 4,994 | (10,052) | 15,046 | (150) | % | |||||||||||||||||||||
| Loss from operations before income taxes | (62,628) | (13,942) | (48,686) | NM | ||||||||||||||||||||||
| Income tax benefit (expense) | 8,649 | (6,349) | 14,998 | NM | ||||||||||||||||||||||
| Loss from continuing operations | (53,979) | (20,291) | (33,688) | 166 | % | |||||||||||||||||||||
| Loss from discontinued operations, net of taxes | (4,576) | 985 | (5,561) | NM | ||||||||||||||||||||||
| Net loss | (58,555) | (19,306) | (39,249) | NM | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from continuing operations | — | (212) | 212 | (100) | % | |||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | (216) | (1,161) | 945 | (81) | % | |||||||||||||||||||||
| Less: Net loss attributable to redeemable noncontrolling interests from discontinued operations | (1,492) | (442) | (1,050) | NM | ||||||||||||||||||||||
| Net income attributable to Sphere Entertainment Co.’s stockholders | $ | (56,847) | $ | (17,491) | $ | (39,356) | NM | |||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 1,139,492 | $ | 928,442 | $ | 211,050 | 23 | % | ||||||||||||||||||
| Direct operating expenses | (658,935) | (536,076) | (122,859) | 23 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (442,054) | (384,280) | (57,774) | 15 | % | |||||||||||||||||||||
| Depreciation and amortization | (68,090) | (63,050) | (5,040) | 8 | % | |||||||||||||||||||||
| Impairment and other gains, net | 7,361 | 245 | 7,116 | NM | ||||||||||||||||||||||
| Restructuring charges | (34,180) | (14,690) | (19,490) | 133 | % | |||||||||||||||||||||
| Operating loss | (56,406) | (69,409) | 13,003 | 19 | % | |||||||||||||||||||||
| Interest income | 10,161 | 2,311 | 7,850 | NM | ||||||||||||||||||||||
| Interest expense | — | (22,051) | 22,051 | (100) | % | |||||||||||||||||||||
| Other income (expense), net | 1,939 | (32,304) | 34,243 | (106) | % | |||||||||||||||||||||
| Loss from continuing operations before income taxes | (44,306) | (121,453) | 77,147 | 64 | % | |||||||||||||||||||||
| Income tax benefit | 4,717 | 10,112 | (5,395) | (53) | % | |||||||||||||||||||||
| Loss from continuing operations | (39,589) | (111,341) | 71,752 | 64 | % | |||||||||||||||||||||
| Income from discontinued operations, net of taxes | 7,548 | 20,399 | (12,851) | (63) | % | |||||||||||||||||||||
| Net loss | (32,041) | (90,942) | 58,901 | 65 | % | |||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from continuing operations | (554) | (579) | 25 | (4) | % | |||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | (128) | $ | (323) | 195 | (60) | % | ||||||||||||||||||||
| Less: Net income attributable to redeemable noncontrolling interests from discontinued operations | 2,661 | 4,412 | (1,751) | (40) | % | |||||||||||||||||||||
| Net loss attributable to Sphere Entertainment Co.’s stockholders | $ | (34,020) | $ | (94,452) | $ | 60,432 | NM | |||||||||||||||||||
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
The following is a summary of changes in our segments’ operating results for the three and nine months ended March 31, 2023 as compared to the prior year period, which are discussed below under “Business Segment Results.”
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Impairment and other losses, net | Restructuring charges | Operating income (loss) | ||||||||||||||||||||||||||||||||||
| Entertainment segment | $ | 7,276 | $ | (10,147) | $ | (24,109) | $ | (2,788) | $ | (296) | $ | (6,260) | $ | (36,324) | |||||||||||||||||||||||||||
| MSG Networks segment | (6,133) | (2,077) | (27,815) | 75 | — | 452 | (35,498) | ||||||||||||||||||||||||||||||||||
Other (a) | 9,620 | 50 | (9,158) | 177 | — | — | 689 | ||||||||||||||||||||||||||||||||||
| $ | 10,763 | $ | (12,174) | $ | (61,082) | $ | (2,536) | $ | (296) | $ | (5,808) | $ | (71,133) | ||||||||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Impairment and other gains, net | Restructuring charges | Operating income (loss) | |||||||||||||||||||||||||||||||||||||
| Entertainment segment | $ | 229,047 | $ | (109,309) | $ | (52,706) | $ | (5,312) | $ | 7,116 | $ | (15,954) | $ | 52,882 | ||||||||||||||||||||||||||||||
| MSG Networks segment | (26,210) | (13,550) | 1,453 | 373 | — | (3,536) | (41,470) | |||||||||||||||||||||||||||||||||||||
Other (a) | 8,213 | — | (6,521) | (101) | — | — | 1,591 | |||||||||||||||||||||||||||||||||||||
| $ | 211,050 | $ | (122,859) | $ | (57,774) | $ | (5,040) | $ | 7,116 | $ | (19,490) | $ | 13,003 | |||||||||||||||||||||||||||||||
(a) Other relates to inter-segment eliminations.
Impairment and other (losses) gains, net
Impairment and other (losses) gains, net for the three months ended March 31, 2023 decreased $296, to $51 as compared to the prior year period. Impairment and other gains, net for the nine months ended March 31, 2023 increased $7,116 to $7,361 as compared to the prior year period primarily due to the gain on sale of the Company’s controlling interest in BCE and receipt of insurance proceeds related to the Company’s creative studio in Burbank, CA, partially offset by the net loss on the disposal of a corporate aircraft.
Restructuring charges
Restructuring charges for the three months ended March 31, 2023 increased $5,808 to $20,498 as compared to the prior year period due to termination benefits provided for a workforce reduction of certain executives and employees within the Entertainment segment as part of the Company’s cost reduction program implemented in Fiscal Year 2023.
Restructuring charges for the nine months ended March 31, 2023 increased $19,490 to $34,180 as compared to the prior year period due to termination benefits provided for a workforce reduction of certain executives and employees within the Entertainment and MSG Networks segments as part of the Company’s cost reduction program implemented in Fiscal Year 2023.
Interest income
Interest income for the three and nine months ended March 31, 2023 increased $1,873 and $7,850, respectively, as compared to the prior year periods primarily due to higher interest rates.
Interest expense
Interest expense for the three and nine months ended March 31, 2023 decreased $5,528 and $22,051, respectively, as compared to the prior year periods primarily due to a higher amount of interest cost capitalization of $23,347 and $52,383 related to Sphere construction.
Other income (expense), net
Other income (expense), net for the three and nine months ended March 31, 2023, increased $15,046 and $34,243, respectively, as compared to the prior year periods, primarily due to unrealized gains of approximately $5,000 for the three and nine months ended March 31, 2023, as compared to unrealized losses in the prior year periods associated with the Company’s investments in DraftKings Inc.
Income tax benefit (expense)
In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or expense recognized in an interim period. The estimated annual effective tax rate exceeds the statutory federal tax rate of 21% primarily due to state taxes, nondeductible officers’ compensation and changes in the valuation allowance. The estimated annual effective tax rate is revised on a quarterly basis.
Income tax benefit for the three and nine months ended March 31, 2023 of $8,649 and $4,717, respectively, reflects an effective income tax of 14% and 11%, respectively.
Income tax expense for the three months ended March 31, 2022 of $6,349 reflects an effective income tax of (46)%. Income tax benefit for the nine months ended March 31, 2022 of $10,112 reflects an effective income tax rate of 8%.
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Adjusted operating income (“AOI”)
The following is a reconciliation of operating (loss) income to adjusted operating income (as defined in Note 15. Segment Information in the notes to the financial statements) for the three and nine months ended March 31, 2023 as compared to the prior year periods:
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Operating loss | $ | (56,406) | $ | (69,409) | $ | 13,003 | 19 | % | ||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (25,078) | (23,962) | (1,116) | (5) | % | |||||||||||||||||||||
| Share-based compensation | 39,846 | 51,987 | (12,141) | (23) | % | |||||||||||||||||||||
| Depreciation and amortization | 68,090 | 63,050 | 5,040 | 8 | % | |||||||||||||||||||||
| Restructuring charges | 34,180 | 14,690 | 19,490 | 133 | % | |||||||||||||||||||||
| Impairment and other gains, net | (7,361) | (245) | (7,116) | NM | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 57,179 | 42,036 | 15,143 | 36 | % | |||||||||||||||||||||
| Amortization for capitalized cloud computing costs | 584 | 176 | 408 | NM | ||||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | 132 | — | 132 | NM | ||||||||||||||||||||||
| Adjusted operating income | $ | 111,166 | $ | 78,323 | $ | 32,843 | 42 | % | ||||||||||||||||||
_________________
(a) This adjustment represents the non-cash portion of operating lease revenue related to the Company’s Arena License Agreements with MSG Sports. Pursuant to U.S. generally accepted accounting principles (“GAAP”), recognition of operating lease revenue is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. As a result, operating lease revenue is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Operating income on a GAAP basis includes lease income of (i) $19,014 and $39,234 of revenue collected in cash for the three and nine months ended March 31, 2023, respectively, and $17,543 and $34,836 of revenue collected in cash for the three and nine months ended March 31, 2022, respectively, and (ii) a non-cash portion of $12,149 and $25,078 for the three and nine months ended March 31, 2023, respectively, and $12,073 and $23,962 for the three and nine months ended March 31, 2022, respectively.
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
46
Adjusted operating income for the three months ended March 31, 2023 decreased $19,026 to $19,431. Adjusted operating income for the nine months ended March 31, 2023 increased $32,843 to $111,166. The changes in adjusted operating income were attributable to the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
| Changes attributable to | March 31, 2023 | March 31, 2023 | ||||||||||||
| Entertainment segment | $ | (27,042) | $ | 51,089 | ||||||||||
| MSG Networks segments | 7,504 | (19,938) | ||||||||||||
Other (a) | 512 | 1,692 | ||||||||||||
| $ | (19,026) | $ | 32,843 | |||||||||||
_________________
(a) Other relates to inter-segment eliminations.
Net income (loss) attributable to nonredeemable noncontrolling interests
For the three months ended March 31, 2023, the Company recorded $0 of net income attributable to nonredeemable noncontrolling interests as compared to $212 of net loss attributable to nonredeemable noncontrolling interests for the three months ended March 31, 2022. For the nine months ended March 31, 2023, the Company recorded $554 of net loss attributable to nonredeemable noncontrolling interests as compared to $579 of net loss attributable to nonredeemable noncontrolling interests for the nine months ended March 31, 2022. These amounts represent the share of net income (loss) from the Company’s investments in BCE that are not attributable to the Company up to the disposition date.
Business Segment Results
Entertainment
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating loss to adjusted operating loss for the Company’s Entertainment segment.
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 201,861 | $ | 194,585 | $ | 7,276 | 4 | % | ||||||||||||||||||
| Direct operating expenses | (120,835) | (110,688) | (10,147) | 9 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (120,307) | (96,198) | (24,109) | 25 | % | |||||||||||||||||||||
| Depreciation and amortization | (21,310) | (18,522) | (2,788) | 15 | % | |||||||||||||||||||||
| Impairment and other (losses) gains, net | (51) | 245 | (296) | 121 | % | |||||||||||||||||||||
| Restructuring charges | (20,498) | (14,238) | (6,260) | 44 | % | |||||||||||||||||||||
| Operating loss | $ | (81,140) | $ | (44,816) | $ | (36,324) | (81) | % | ||||||||||||||||||
| Reconciliation to adjusted operating loss: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (12,149) | (12,073) | (76) | 1 | % | |||||||||||||||||||||
| Share-based compensation | 10,259 | 10,399 | (140) | (1) | % | |||||||||||||||||||||
| Depreciation and amortization | 21,310 | 18,522 | 2,788 | 15 | % | |||||||||||||||||||||
| Restructuring charges | 20,498 | 14,238 | 6,260 | 44 | % | |||||||||||||||||||||
| Impairment and other losses (gains), net | 51 | (245) | 296 | 121 | % | |||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 1,528 | 1,647 | (119) | (7) | % | |||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 185 | 38 | 147 | NM | ||||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | 126 | — | 126 | NM | ||||||||||||||||||||||
| Adjusted operating loss | $ | (39,332) | $ | (12,290) | $ | (27,042) | NM | |||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 705,481 | $ | 476,434 | $ | 229,047 | 48 | % | ||||||||||||||||||
| Direct operating expenses | (403,642) | (294,333) | (109,309) | 37 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (336,421) | (283,715) | (52,706) | 19 | % | |||||||||||||||||||||
| Depreciation and amortization | (62,514) | (57,202) | (5,312) | 9 | % | |||||||||||||||||||||
| Impairment and other gains, net | 7,361 | 245 | 7,116 | NM | ||||||||||||||||||||||
| Restructuring charges | (30,192) | (14,238) | (15,954) | (112) | % | |||||||||||||||||||||
| Operating loss | $ | (119,927) | $ | (172,809) | $ | 52,882 | 31 | % | ||||||||||||||||||
| Reconciliation to adjusted operating loss: | ||||||||||||||||||||||||||
Non-cash portion of arena license fees from MSG Sports (a) | (25,078) | (23,962) | (1,116) | 5 | % | |||||||||||||||||||||
| Share-based compensation | 34,204 | 36,697 | (2,493) | (7) | % | |||||||||||||||||||||
| Depreciation and amortization | 62,514 | 57,202 | 5,312 | 9 | % | |||||||||||||||||||||
| Restructuring charges | 30,192 | 14,238 | 15,954 | 112 | % | |||||||||||||||||||||
| Impairment and other gains, net | (7,361) | (245) | (7,116) | NM | ||||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recovery | 4,221 | 17,095 | (12,874) | (75) | % | |||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 453 | 45 | 408 | NM | ||||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | 132 | — | 132 | NM | ||||||||||||||||||||||
| Adjusted operating loss | $ | (20,650) | $ | (71,739) | $ | 51,089 | 71 | % | ||||||||||||||||||
_________________
(a) This adjustment represents the non-cash portion of operating lease revenue related to the Company’s Arena License Agreements with MSG Sports. Pursuant to GAAP, recognition of operating lease revenue is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. As a result, operating lease revenue is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Operating income on a GAAP basis includes lease income of (i) $19,014 and $39,234 of revenue collected in cash for the three and nine months ended March 31, 2023, respectively, and $17,543 and $34,836 of revenue collected in cash for the three and nine months ended March 31, 2022, respectively, and (ii) a non-cash portion of $12,149 and $25,078 for the three and nine months ended March 31, 2023, respectively, and $12,073 and $23,962 for the three and nine months ended March 31, 2022, respectively.
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Revenues
Revenues for the three and nine months ended March 31, 2023 increased $7,276 and $229,047, respectively, as compared to the prior year periods. The changes in revenues were attributable to the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2023 | March 31, 2023 | |||||||||||||
Increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements | $ | 10,111 | $ | 45,516 | ||||||||||
Increase in revenues from the presentation of the Christmas Spectacular | 3,533 | 74,947 | ||||||||||||
| Increase in venue-related sponsorship, signage and suite license fee revenues | 1,872 | 18,958 | ||||||||||||
| Increase in arena license fees from MSG Sports pursuant to the Arena License Agreements | 1,547 | 5,515 | ||||||||||||
(Decrease) increase in event-related revenues | (527) | 87,244 | ||||||||||||
Decrease in commissions due to termination of the Networks Advertising Sales Representation Agreement | (9,621) | (8,213) | ||||||||||||
| Other net increases | 361 | 5,080 | ||||||||||||
| $ | 7,276 | $ | 229,047 | |||||||||||
For the three months ended March 31, 2023, the increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects higher food, beverage and merchandise sales and higher suite
48
license fees revenues at Knicks and Rangers games. For the nine months ended March 31, 2023, the increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects higher suite license fees revenues, including the impact of the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 (due to the COVID-19 pandemic), as well as higher food, beverage and merchandise sales at Knicks and Rangers games.
The Company had 181 Christmas Spectacular performances during this year’s holiday season, of which 7 took place in the third quarter of Fiscal Year 2023, as compared to 101 performances in the prior year’s holiday season (due to the partial cancellation of the 2021 production as a result of an increase in COVID-19 cases), all of which took place in the second quarter of Fiscal Year 2022. For this year’s holiday season, approximately 930,000 tickets were sold, representing an over 25% increase in attendance on a per-show basis as compared to the prior year.
For the three months ended March 31, 2023, the increase in revenues from the presentation of the Christmas Spectacular production was due to the 7 performances that took place in the current year period as compared to no performances in the third quarter of Fiscal Year 2022. For the nine months ended March 31, 2023, the increase in revenues from the presentation of the Christmas Spectacular production was primarily due to higher ticket-related revenues. This reflected an increase in the number of performances as compared to the prior year period and, to a lesser extent, higher per-show paid attendance.
For the three months ended March 31, 2023, the increase in venue-related sponsorship, signage and suite license fee revenues was primarily due to higher suite sales. For the nine months ended March 31, 2023, the increase in venue-related sponsorship, signage and suite license fee revenues was primarily due to the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 and higher suite sales.
For the three months ended March 31, 2023, the decrease in event-related revenues primarily reflects lower revenues from concerts of $10,656 which was partially offset by an increase in revenues from other sporting and live entertainment events (excluding the Knicks and Rangers) of 10,129.The decrease in revenues from concerts was due to a decrease in the number of concerts at the Company’s venues as compared to the prior year period, partially offset by higher per-concert revenues. The increase in revenues from other sporting and live entertainment events (excluding the Knicks and Rangers) was due to higher per-event revenue and a higher number of events at the Company’s venues as compared to the prior year period. For the nine months ended March 31, 2023, the increase in event-related revenues primarily reflects higher revenues from concerts of $77,416 which was primarily due to the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 (due to the COVID-19 pandemic). See “— Introduction — Factors Affecting Results of Operations” for more information.
Direct operating expenses
Direct operating expenses for the three and nine months ended March 31, 2023 increased $10,147 and $109,309, respectively, as compared to the prior year periods. The changes in direct operating expenses were attributable to the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2023 | March 31, 2023 | |||||||||||||
| Increase in expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements | $ | 4,488 | $ | 33,181 | ||||||||||
| Impact of direct operating expenses related to the Company’s Sphere initiative in the current periods | 4,389 | 4,389 | ||||||||||||
| Increase in direct operating expenses associated with the Arena License Agreements | 3,748 | 8,480 | ||||||||||||
Increase in direct operating expenses associated with the Christmas Spectacular | 2,326 | 12,181 | ||||||||||||
| (Decrease) increase in event-related direct operating expenses | (4,515) | 43,129 | ||||||||||||
| (Decrease) increase in venue operating costs | (570) | 6,057 | ||||||||||||
| Other net increases | 281 | 1,892 | ||||||||||||
| $ | 10,147 | $ | 109,309 | |||||||||||
For the three and nine months ended March 31, 2023, the increase in direct operating expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects the increase in suite license fees and, to a lesser extent, the increase in Knicks’ and Rangers’ food and beverage sales.
For the three and nine months ended March 31, 2023, the increase in expenses associated with the Arena License Agreements primarily reflects an increase in food and beverage costs associated with the increase in Knicks’ and Rangers’ food and beverage sales.
49
For the three and nine months ended March 31, 2023, the increase in direct operating expenses associated with the Christmas Spectacular production was primarily due to the increase in the number of performances as compared to the prior year periods.
For the three months ended March 31, 2023, the decrease in event-related direct operating expenses reflects lower direct operating expenses from concerts of $6,785 which was primarily due to the decrease in the number of concerts held at the Company’s venues as compared to the prior year period, partially offset by higher direct operating expenses from other sporting and live entertainment events (excluding the Knicks and Rangers) of $2,269 which was primarily due to the increase in the number of sporting events held at the Company’s venues as compared to the prior year period. For the nine months ended March 31, 2023, the increase in event-related direct operating expenses reflects higher direct operating expenses from concerts of $39,637 which was primarily due to the increase in the number of events held at the Company’s venues as compared to the prior year period.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2023 increased $24,109, or 25% to $120,307 as compared to the prior year period. The increase primarily reflects higher professional fees of $11,438, which was driven by costs related to the MSGE Spinco Distribution, as well as higher employee compensation and related benefits of $7,967, and other general administrative expenses of $4,704, both primarily due to the Company’s Sphere initiative.
For the nine months ended March 31, 2023, selling, general and administrative expenses increased $52,706, or 19%, to $336,421 as compared to the prior year period. The increase primarily reflects higher employee compensation and related benefits of $27,829, primarily due to the Company’s Sphere initiative, higher professional fees of $11,808 which was driven by an increase in costs related to the Company’s spin-off of its live entertainment businesses, and higher other general administrative expenses of $$13,069, primarily due to the Company’s Sphere initiative of $9,702.
Impairment and other gains, net
For the three and nine months ended March 31, 2023, the Company recorded a net loss of $51 and a net gain $7,361, respectively. The net gain for the nine months ended March 31, 2023 was primarily due to the gain on sale of the Company’s controlling interest in BCE and receipt of insurance proceeds related to the Company’s creative studio in Burbank, CA, partially offset by the net loss on the disposal of a corporate aircraft.
Operating loss
Operating loss for the three months ended March 31, 2023 was $81,140 as compared to $44,816 in the prior year period, an increase of $36,324. The increase in operating loss was primarily due to an increase in direct operating expenses and selling, general and administrative expenses, partially offset by an increase in revenues. For the nine months ended March 31, 2023, operating loss was $119,927 as compared to $172,809 in the prior year period, an improvement of $52,882. The improvements in operating loss were primarily due to an increase in revenues, partially offset by higher direct operating expenses and selling, general and administrative expenses, as discussed above.
Adjusted operating income (loss)
Adjusted operating loss for the three months ended March 31, 2023 was $39,332 as compared to $12,290 in the prior year period, an increase of $27,042. The increase in adjusted operating loss was primarily due to an increase in direct operating expenses and selling, general, and administrative expenses, partially offset by an increase in revenues.
For the nine months ended March 31, 2023, adjusted operating loss was $20,650 as compared to $71,739 in the prior year period, an improvement of $51,089. The improvement in adjusted operating income was primarily due to an increase in revenues, partially offset by an increase in direct operating expenses and selling, general and administrative expenses.
50
MSG Networks
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Networks segment.
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 161,436 | $ | 167,569 | $ | (6,133) | (4) | % | ||||||||||||||||||
| Direct operating expenses | (89,251) | (87,174) | (2,077) | 2 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (60,052) | (32,237) | (27,815) | 86 | % | |||||||||||||||||||||
| Depreciation and amortization | (1,689) | (1,764) | 75 | (4) | % | |||||||||||||||||||||
| Restructuring charges | — | (452) | 452 | (100) | % | |||||||||||||||||||||
| Operating income | $ | 10,444 | $ | 45,942 | $ | (35,498) | (77) | % | ||||||||||||||||||
| Reconciliation to adjusted operating income: | ||||||||||||||||||||||||||
| Share-based compensation | 640 | 1,758 | (1,118) | (64) | % | |||||||||||||||||||||
| Depreciation and amortization | 1,689 | 1,764 | (75) | (4) | % | |||||||||||||||||||||
| Restructuring charges | — | 452 | (452) | NM | ||||||||||||||||||||||
| Merger and acquisition related costs | 45,513 | 866 | 44,647 | NM | ||||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 43 | 43 | — | — | % | |||||||||||||||||||||
| Adjusted operating income | $ | 58,329 | $ | 50,825 | $ | 7,504 | 15 | % | ||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 442,813 | $ | 469,023 | $ | (26,210) | (6) | % | ||||||||||||||||||
| Direct operating expenses | (255,071) | (241,521) | (13,550) | 6 | % | |||||||||||||||||||||
| Selling, general and administrative expenses | (115,951) | (117,404) | 1,453 | (1) | % | |||||||||||||||||||||
| Depreciation and amortization | (4,944) | (5,317) | 373 | (7) | % | |||||||||||||||||||||
| Restructuring charges | (3,988) | (452) | (3,536) | NM | ||||||||||||||||||||||
| Operating income | $ | 62,859 | $ | 104,329 | $ | (41,470) | (40) | % | ||||||||||||||||||
| Reconciliation to adjusted operating income: | ||||||||||||||||||||||||||
| Share-based compensation | 5,642 | 15,290 | (9,648) | (63) | % | |||||||||||||||||||||
| Depreciation and amortization | 4,944 | 5,317 | (373) | (7) | % | |||||||||||||||||||||
| Restructuring charges | 3,988 | 452 | 3,536 | NM | ||||||||||||||||||||||
| Merger and acquisition related costs | 52,958 | 24,941 | 28,017 | 112 | % | |||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 131 | 131 | — | — | % | |||||||||||||||||||||
| Adjusted operating income | $ | 130,522 | $ | 150,460 | $ | (19,938) | (13) | % | ||||||||||||||||||
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Revenues
Revenues for the three and nine months ended March 31, 2023 decreased $6,133 and $26,210, respectively, as compared to the prior year periods. The changes in revenues were attributable to the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2023 | March 31, 2023 | |||||||||||||
| Decrease in affiliation fee revenue | $ | (11,051) | $ | (37,561) | ||||||||||
| Increase in advertising revenue | 4,476 | 10,702 | ||||||||||||
| Other net increases | 442 | 649 | ||||||||||||
| $ | (6,133) | $ | (26,210) | |||||||||||
For the three months ended March 31, 2023, affiliation fee revenue decreased $11,051, primarily due to a decrease in subscribers of approximately 10%. This decrease was partially offset by the impact of higher affiliation rates.
51
For the nine months ended March 31, 2023, affiliation fee revenue decreased $37,561, primarily due to a decrease in subscribers of approximately 10% (excluding the impact of the non-renewal of MSG Networks’ carriage agreement with Comcast Corporation (“Comcast”) as of October 1, 2021) and, to a lesser extent, the impact of the Comcast non-renewal. These decreases were partially offset by net favorable affiliate adjustments of approximately $10,400 and the impact of higher affiliation rates.
Effective October 1, 2021, Comcast’s license to carry MSG Networks expired and MSG Networks has not been carried by Comcast since that date. Comcast’s non-carriage reduced MSG Networks’ subscribers by approximately 10% and reduced MSG Networks’ revenue by a comparable percentage. In addition, MSG Networks’ segment operating income and AOI were reduced by an amount that is approximately equal to the dollar amount of the reduced revenue.
For the three and nine months ended March 31, 2023, the increase in advertising revenue primarily reflected higher advertising sales related to professional sports telecasts due to the impact of a higher number of live telecasts and an increase in per-game advertising sales as compared with the prior year periods, as well as higher sales related to the Company’s non-ratings-based advertising initiatives.
Direct operating expenses
Direct operating expenses for the three and nine months ended March 31, 2023 increased $2,077 and $13,550, respectively, as compared to the prior year periods. The changes in direct operating expenses were attributable to the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2023 | March 31, 2023 | |||||||||||||
Increase in rights fees expense | $ | 2,502 | $ | 11,508 | ||||||||||
| Change in other programming and production costs | (425) | 2,042 | ||||||||||||
| $ | 2,077 | $ | 13,550 | |||||||||||
For the three and nine months ended March 31, 2023, right fees expense increased $2,502 and $11,508, respectively, primarily due to the impact of annual contractual rate increases. For the nine months ended March 31, 2023, the increase was also due to the absence of reductions in media rights fees related to the shortened 2020-21 NHL season recorded in the prior year first quarter.
For the three months ended March 31, 2023, other programming and production costs decreased $425, including the impact of the Company’s cost reduction program implemented during the current fiscal year. For the nine months ended March 31, 2023, other programming and production costs increased $2,042, primarily due to a higher number of professional sports telecasts in the current year period.
Selling, general and administrative expenses
For the three months ended March 31, 2023, selling, general and administrative expenses of $60,052 increased $27,815 as compared to the prior year quarter, primarily due to an approximately $44,600 increase in expenses, primarily litigation-related, associated with the acquisition of MSG Networks Inc. by the Company (the “Merger”). This increase was partially offset by net lower advertising sales commissions of $8,318, due to the termination of the Networks Advertising Sales Representation Agreement in the current year period, lower advertising and marketing expenses of $4,966, lower employee compensation and related benefits of $1,252 and other cost decreases.
For the nine months ended March 31, 2023, selling, general and administrative expenses of $115,951 decreased $1,453 as compared to the prior year, primarily due to lower advertising and marketing expenses of $1,1077, lower employee compensation and related benefits of $7,310 and net lower advertising commissions of $6,910, due to the termination of the Networks Advertising Sales Representation Agreement in the current period. These decreases were offset by a net increase in acquisition-related costs of $26,320 primarily due to litigation settlement expenses of $48,500 recognized in the current year period related to the Merger as discussed above which was partially offset by lower other acquisition-related costs as compared to the prior year period.
Operating income
For the three months ended March 31, 2023, operating income of $10,444 decreased $35,498, or 77%, as compared to the prior year quarter, primarily due to the increase in selling, general and administrative expenses (including the impact of the Merger litigation settlement discussed above), and, to a lesser extent, the decrease in revenues and the increase in direct operating expenses.
For the nine months ended March 31, 2023, operating income of $62,859 decreased $41,470, or 40%, as compared to the prior year quarter, primarily due to the decrease in revenues, increase in direct operating expenses, and the impact of restructuring
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charges, partially offset by a decrease in selling, general and administrative expenses (including the impact of the Merger litigation settlement and restructuring expenses discussed above).
Adjusted operating income
For the three months ended March 31, 2023, adjusted operating income of $58,329 increased $7,504, or 15%, as compared to the prior year quarter, primarily due to the decrease in selling, general and administrative expenses (excluding the impact of the Merger litigation settlement discussed above) partially offset by a decrease in revenues and to a lesser extent, higher direct operating expenses.
For the nine months ended March 31, 2023, adjusted operating income of $130,522 decreased $19,938, or 13%, as compared to the prior year quarter, primarily due to the decrease in revenues and increase in direct operating expenses, partially offset by a decrease in selling, general and administrative expenses (excluding the impact of the Merger litigation settlement and restructuring expenses discussed above).
Liquidity and Capital Resources
Sources and Uses of Liquidity
As further described in “Item 2. - Management’s Discussion and Analysis - Introduction,” on April 20, 2023, the Company completed the MSGE Spinco Distribution. Although the information set forth in this Quarterly Report on Form 10-Q generally is as of March 31, 2023 and does not give effect to the MSGE Spinco Distribution, the information set forth in this section also focuses on the liquidity and capital resources of the Company following the MSGE Spinco Distribution.
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our businesses and available borrowing capacity under the Delayed Draw Term Loan Facility (the “DDTL Facility”) described below, as well as proceeds from the sale of a portion of the MSGE Retained Interest, if needed. Our uses of cash over the next 18 months are expected to be substantial and include working capital-related items (including funding our operations), capital spending (including completing construction of Sphere in Las Vegas and related original content, as described below), debt service and payments we expect to make in connection with the refinancing of our indebtedness, and investments and related loans and advances that we may fund from time to time. We may also use cash to repurchase our common stock. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic and market conditions could adversely impact our ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements, including the construction of Sphere in Las Vegas and the refinancing of the MSG Networks Credit Facilities prior to their maturity in October 2024. As of May 9, 2023, after giving effect to the MSGE Spinco Distribution and including proceeds from the sale of our interest in Tao Group Hospitality (the “Tao Group Hospitality Disposition”), the Company’s unrestricted cash and cash equivalents balance was approximately $232,700. The Company’s unrestricted cash and cash equivalents balance as of March 31, 2023 was $217,576, which does not give effect to the MSGE Spinco Distribution, and was $432,173 as of December 31, 2022, which does not give effect to the MSGE Spinco Distribution or the Tao Group Hospitality Disposition. As of May 9, 2023 the Company’s restricted cash and cash equivalents balance was approximately $110,000, inclusive of $75,000 that is required to be held in an account pledged as collateral for the LV Sphere Term Loan Facility until its release upon the Liquidity Covenant Reduction Date (as defined under Note 10). The principal balance of the Company’s total debt outstanding as of May 9, 2023, after giving effect to the MSGE Spinco Distribution and the Tao Group Hospitality Disposition, was $1,227,875. We believe we have sufficient liquidity from cash and cash equivalents, available borrowing capacity under the DDTL Facility, cash flows from operations (including savings generated by the Company’s cost reduction program and expected cash from operations from Sphere in Las Vegas), as well as proceeds from the sale of a portion of the MSGE Retained Interest (which had an aggregate fair market value of approximately $575,000 as of May 9, 2023), if needed, to fund our operations and service the credit facilities for the foreseeable future, as well as complete the construction of Sphere in Las Vegas. This also includes the Company’s expectation that it will pay down a portion of MSG Networks’ term loan upon the refinancing of the loan prior to its maturity in October 2024.
The Company has undertaken and may continue to undertake additional cost reduction efforts which would include further reductions in discretionary spend in normal course of business and reductions in investments in non-essential capital.
To the extent that proceeds from the sale of a portion of the MSGE Retained Interest are not required for the uses of liquidity cited in the previous paragraph, the MSGE Retained Interest may be exchanged for our shares, distributed pro rata to our shareholders or used to repay borrowings under the DDTL Facility, if any.
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See Note 10, Credit Facilities to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the MSG Networks Credit Facilities and the LV Sphere Term Loan Facility.
For additional information regarding the Company’s capital expenditures, including those related to Sphere in Las Vegas, see Note 22, Segment Information to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2022 included in the Company’s Annual Report on Form 10-K.
On March 31, 2020, the Company’s Board of Directors authorized, effective following the 2020 Entertainment Distribution, a share repurchase program to repurchase up to $350,000 of the Company’s Class A Common Stock. The program was re-authorized by the Company’s Board of Directors on March 29, 2023. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market transactions, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. No shares have been repurchased under the share repurchase program to date.
Spheres
The Company has made significant progress on Sphere in Las Vegas, its state-of-the-art entertainment venue under construction in Las Vegas. See “Part I — Item 1. Our Business — Our Performance Venues — MSG Sphere” in the Company’s Annual Report on Form 10-K. The Company expects the venue to have a number of significant revenue streams, including a wide variety of content such as Sphere Experiences, concert residencies and corporate and select sporting events, as well as sponsorship and premium hospitality opportunities. As a result, we anticipate that Sphere in Las Vegas will generate substantial revenue and adjusted operating income on an annual basis.
The Company expects to open the venue in September 2023. As with any major construction project, the construction of Sphere is subject to potential delays, unexpected complications or cost fluctuations.
As of May 9, 2023, our cost estimate, inclusive of core technology and soft costs, for Sphere in Las Vegas is approximately $2,300,000. This cost estimate is net of $75,000 that the Venetian has agreed to pay to defray certain construction costs and also excludes significant capitalized and non-capitalized costs for items such as content creation, internal labor, capitalized interest, and furniture and equipment. Relative to our cost estimate above, our actual construction costs for Sphere in Las Vegas paid through May 9, 2023 were approximately $2,080,000, which is net of $65,000 received from The Venetian.
With regard to Sphere in Las Vegas, the Company plans to finance the completion of the construction of the venue from cash-on-hand and cash flows from operations. The Company may also access proceeds from the sale of a portion of the MSGE Retained Interest and capacity under the DDTL Facility, if needed.
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to a future Sphere. The Company submitted planning applications to the local planning authority in March 2019 and that process, which requires various stages of review to be completed and approvals to be granted, is ongoing. Therefore, we do not have a definitive timeline at this time.
We will continue to explore additional domestic and international markets where we believe next-generation venues such as Sphere can be successful. The Company’s intention for any future venues is to utilize several options, such as non-recourse debt financing, joint ventures, equity partners and a managed venue model.
Financing Agreements
See Note 10, Credit Facilities, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements.
MSG Networks Credit Facilities
MSGN Holdings, L.P. (“MSGN L.P.”), MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, an indirect subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “MSGN Holdings Entities”), and certain subsidiaries of MSGN L.P. have senior secured credit facilities pursuant to a credit agreement (as amended and restated on October 11, 2019, the “MSGN Credit Agreement”) consisting of: (i) an initial $1,100,000 term loan facility (the “MSGN Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “MSGN Revolving Credit Facility” and, together with the MSGN Term Loan Facility, the “MSG Networks Credit Facilities”), each with a term of five years. As of March 31, 2023, there were no borrowings or letters of credit issued and outstanding under the MSGN Revolving Credit Facility.
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The MSGN Term Loan Facility amortizes quarterly in accordance with its terms beginning March 31, 2020 through September 30, 2024 with a final maturity date of October 11, 2024. MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including MSGN Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
The MSGN Credit Agreement generally requires the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the MSGN Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of March 31, 2023, the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the covenants.
LV Sphere Term Loan Facility
On December 22, 2022, MSG Las Vegas, LLC (“MSG LV”), an indirect, wholly-owned subsidiary of the Company, entered into a credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and the lenders party thereto, providing for a five-year, $275,000 senior secured term loan facility (the “LV Sphere Term Loan Facility”). All obligations under the LV Sphere Term Loan Facility are guaranteed by Sphere Entertainment Group.
The LV Sphere Term Loan Facility will mature on December 22, 2027. The principal obligations under the LV Sphere Term Loan Facility are due at the maturity of the facility, with no amortization payments prior to maturity. Under certain circumstances, MSG LV is required to make mandatory prepayments on the loan, including prepayments in an amount equal to the net cash proceeds of casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights), subject to certain exceptions.
The LV Sphere Term Loan Facility and related guaranty by Sphere Entertainment Group include financial covenants requiring MSG LV to maintain a specified minimum debt service coverage ratio and requiring Sphere Entertainment Group to maintain a specified minimum liquidity level. The debt service coverage ratio covenant begins testing in the fiscal quarter ending December 31, 2023 on a historical basis and, beginning with the first fiscal quarter occurring after the date on which the first ticketed performance or event open to the general public occurs at Sphere in Las Vegas, is also tested on a prospective basis. Both the historical and prospective debt service coverage ratios are set at 1.35:1. In addition, among other conditions, MSG LV is not permitted to make distributions to Sphere Entertainment Group unless the historical and prospective debt service coverage ratios are at least 1.50:1. The minimum liquidity level for Sphere Entertainment Group is set at $100,000, with $75,000 required to be held in cash or cash equivalents, which amounts, prior to the Liquidity Covenant Reduction Date (as defined below), must be held in an account pledged as collateral for the LV Sphere Term Loan Facility until its release upon the Liquidity Covenant Reduction Date, before stepping down to $50,000, with $25,000 required to be held in cash or cash equivalents, once Sphere in Las Vegas has been substantially completed and certain of its systems are ready to be used in live, immersive events (the “Liquidity Covenant Reduction Date”). The minimum liquidity level was tested on the closing date and is tested as of the last day of each fiscal quarter thereafter based on Sphere Entertainment Group’s unencumbered liquidity, consisting of cash and cash equivalents and available lines of credit, as of such date. Following the completion of the MSGE Spinco Distribution, the MSGE Retained Interest was pledged to secure the LV Sphere Term Loan Facility and will remain pledged until the Liquidity Covenant Reduction Date, and a portion of the value of the MSGE Retained Interest may also be counted toward the minimum liquidity level.
Delayed Draw Term Loan Facility
As an additional source of liquidity for the Company, on April 20, 2023, the Company entered into a delayed draw term loan facility (the “DDTL Facility”) with MSG Entertainment Holdings, LLC (“MSG Entertainment Holdings”). Pursuant to the DDTL Facility, MSG Entertainment Holdings has committed to lend up to $65,000 in delayed draw term loans to the Company on an unsecured basis for a period of 18 months following the consummation of the MSGE Spinco Distribution. The Company has not yet drawn upon the DDTL Facility.
The DDTL Facility will mature and any unused commitments thereunder will expire on October 20, 2024. Borrowings under the DDTL Facility will bear interest at a variable rate equal to either, at the option of the Company, (a) a base rate plus an applicable margin, or (b) Term SOFR plus 0.10%, plus an applicable margin. The applicable margin is equal to the applicable margin under the Credit Agreement, dated as of June 30, 2022, among MSG National Properties, LLC, the guarantors party thereto, the lenders party thereto, the issuing banks party thereto and JPMorgan Chase Bank, N.A., in its capacity as administrative agent (the “National Properties Credit Facilities), plus 1.00% per annum.
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Subject to customary borrowing conditions, the DDTL Facility may be drawn in up to six separate borrowings of $5 million or more. The DDTL Facility is prepayable at any time without penalty and amounts repaid on the DDTL Facility may not be reborrowed. If drawn, the Company will have the option to make any payments of principal, interest or fees under the DDTL Facility either in cash or by delivering to MSG Entertainment Holdings shares of MSG Entertainment Class A common stock. If the Company elected to make any payment in the form of MSG Entertainment Class A common stock, the amount of such payment would be calculated based on the dollar volume-weighted average trading price for MSG Entertainment Class A common stock for the twenty trading days ending on the day on which the Company made such election. The Company shall only be permitted to use the proceeds of the DDTL Facility (i) for funding costs associated with the Sphere initiative and (ii) in connection with refinancing of the indebtedness under MSG Networks Credit Facilities.
The DDTL Facility contains certain representations and warranties and affirmative and negative covenants, including, among others, financial reporting, notices of material events, and limitations on asset dispositions restricted payments, and affiliate transactions.
Letters of Credit
The Company uses letters of credit to support its business operations. As of March 31, 2023, the Company had a total of $8,860 of letters of credit outstanding, which included two outstanding letters of credit for an aggregate of $7,992 issued under the National Properties Revolving Credit Facility.
Contractual Obligations
As of March 31, 2023, the Company did not have any material changes in its non-cancelable contractual obligations (other than activities in the ordinary course of business), except for the execution of the LV Sphere Term Loan Facility on December 22, 2022. See Note 9, Commitments and Contingencies, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details on the timing and amount of payments under various media rights agreements.
Cash Flow Discussion
As of March 31, 2023, cash, cash equivalents and restricted cash totaled $327,245, as compared to $822,885 as of June 30, 2022. The following table summarizes the Company’s cash flow activities for the nine months ended March 31, 2023 and 2022:
| Nine Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net cash provided by operating activities | $ | 137,824 | $ | 106,201 | ||||||||||
| Net cash used in investing activities | (825,484) | (547,926) | ||||||||||||
| Net cash provided by (used in) financing activities | 200,485 | (77,520) | ||||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (729) | 22 | ||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (487,904) | $ | (519,223) | ||||||||||
Operating Activities
Net cash provided by operating activities for the nine months ended March 31, 2023 improved by $31,623 to $137,824 as compared to the prior year period, primarily due to a lower net loss from continuing operations in the current year period, and changes in working capital assets and liabilities, which included (i) higher accrued expenses related to the Merger litigation, and (ii) higher cash receipts from collections of accounts receivables, partially offset by (i) an increase in deferred production costs associated with Sphere in Las Vegas, and (ii) higher net related party receivables. Our lower net loss from continuing operations in the current year period reflects significant non-cash items such as a net unrealized gain of $6,275 as compared to a net unrealized loss of $28,303 in the prior year period.
Investing Activities
Net cash used in investing activities for the nine months ended March 31, 2023 increased by $277,558 to $825,484 as compared to the prior year period primarily due to investing activities in continuing operations related to capital expenditures for Sphere in Las Vegas in the current year period.
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Financing Activities
Net cash provided by (used in) financing activities for the nine months ended March 31, 2023 increased by $278,005 to $200,485 as compared to the prior year period primarily due to financing activities in continuing operations related to proceeds received from the LV Sphere Term Loan Facility in the current year period.
Seasonality of Our Business
Prior to the MSGE Spinco Distribution, the Company generally earned a disproportionate share of its annual revenues in the second and third quarters of its fiscal year as a result of the production of the Christmas Spectacular, arena license fees in connection with the use of The Garden by the Knicks and the Rangers, and MSG Networks’ advertising revenue being largely derived from the sale of inventory in its live NBA and NHL professional sports programming. Following the MSGE Spinco Distribution, our MSG Networks segment generally continues to expect to earn a higher share of its annual revenues in the second and third quarters of its fiscal year as a result of MSG Networks’ advertising revenue being largely derived from the sale of inventory in its live NBA and NHL professional sports programming.
Recently Issued Accounting Pronouncements and Critical Accounting Estimates
Recently Issued and Adopted Accounting Pronouncements
See Note 2, Accounting Policies, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements.
Critical Accounting Estimates
There have been no material changes to the Company’s critical accounting policies, except for the addition of a policy related to production costs from the Company’s Original Immersive Productions mentioned in Note 2. Accounting Policies in “— Item 1. Financial Statements”, as compared with those set forth in Note 2. Summary of Significant Accounting Policies of the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2022 included in the Form 10-K. The following discussion has been included to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2023.
Impairment of Goodwill and Indefinite-Lived Assets
Goodwill is tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. As of March 31, 2023, the Company had two operating and reportable segments consistent with the process the Company’s management followed in making decisions and allocating resources to the business.
For purposes of evaluating goodwill for impairment, the Company has two reporting units: Entertainment and MSG Networks.
The goodwill balance reported on the Company’s condensed consolidated balance sheet as of March 31, 2023 by reporting unit was as follows:
Entertainment | $ | 74,309 | |||
| MSG Networks | 424,508 | ||||
| Total Goodwill | $ | 498,817 | |||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform a quantitative impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, a quantitative goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of the fair value of the Company’s reporting units are primarily determined using discounted cash flows, comparable market transactions or other acceptable valuation techniques, including the cost approach. These valuations are based on estimates and assumptions including projected future cash flows, discount rates, cost-based assumptions, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Significant judgments inherent in a discounted cash flow analysis include the selection of the appropriate discount rate, the estimate of the amount and timing of projected future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows. The amount of an impairment loss is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
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The Company elected to perform the qualitative assessment of impairment for all of the Company’s reporting units for the Fiscal Year 2023 annual impairment test. These assessments considered factors such as:
•macroeconomic conditions;
•industry and market considerations;
•cost factors;
•overall financial performance of the reporting units;
•other relevant company-specific factors such as changes in management, strategy or customers; and
•relevant reporting unit specific events such as changes in the carrying amount of net assets.
During the first quarter of Fiscal Year 2023, the Company performed its most recent annual impairment tests of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date. Based on these impairment tests, the Company’s reporting units had sufficient safety margins, representing the excess of the estimated fair value of each reporting unit, derived from the most recent quantitative assessments, less its respective carrying value (including goodwill allocated to each respective reporting unit). The Company believes that if the fair value of the reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company’s condensed consolidated balance sheet as of March 31, 2023:
| Trademarks | $ | 61,881 | |||
| Photographic related rights | 1,920 | ||||
| Total indefinite-lived intangibles | $ | 63,801 | |||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis, if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) forgoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For all periods presented, the Company elected to perform the qualitative assessment of impairment for the photographic related rights and the trademarks. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair values of the intangible assets. Examples of such events and circumstances include:
•cost factors;
•financial performance;
•legal, regulatory, contractual, business or other factors;
•other relevant company-specific factors such as changes in management, strategy or customers;
•industry and market considerations; and
•macroeconomic conditions.
During the first quarter of Fiscal Year 2023, the Company performed its most recent annual impairment test of the identifiable indefinite-lived intangible assets and determined that there were no impairments identified. Based on these impairment tests, the Company’s indefinite-lived intangible assets had sufficient safety margins, representing the excess of each identifiable indefinite-lived intangible asset’s estimated fair value over its respective carrying value. The Company believes that if the fair value of an indefinite-lived intangible asset exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures regarding market risks in connection with our pension and postretirement plans. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Form 10-K.
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Potential Interest Rate Risk Exposure
The Company, through its subsidiaries, MSG National Properties (prior to the MSGE Spinco Distribution), MSG Networks and MSG LV, is subject to potential interest rate risk exposure related to borrowings incurred under their respective credit facilities. Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under these credit facilities. The effect of a hypothetical 200 basis point increase in floating interest rate prevailing as of March 31, 2023 and continuing for a full year would increase the Company’s interest payments on the outstanding amounts under the credit facilities by $38,022.
Foreign Currency Exchange Rate Exposure
We are exposed to market risk resulting from foreign currency fluctuations, primarily to the British pound sterling through our net investment position initiated with our acquisition of land in London in the second quarter of fiscal year 2018 for future Sphere development and through cash and invested funds which will be deployed in the construction of our London venue. We may evaluate and decide, to the extent reasonable and practical, to reduce the translation risk of foreign currency fluctuations by entering into foreign currency forward exchange contracts with financial institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. We do not plan to enter into derivative financial instrument transactions for foreign currency speculative purposes. During the past twelve months ended March 31, 2023, the GBP/USD exchange rate ranged from 1.0695 to 1.3826 as compared to GBP/USD exchange rate of 1.2343 on March 31, 2023, a fluctuation range of approximately 12.01%. As of March 31, 2023, a uniform hypothetical 13.71% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $23,900 in the Company’s net asset value.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Fifteen complaints were filed in connection with the Company’s acquisition of MSG Networks Inc. (the “Merger”) by purported stockholders of the Company and MSG Networks Inc.
Nine of these complaints involved allegations of materially incomplete and misleading information set forth in the joint proxy statement/prospectus filed by the Company and MSG Networks Inc. in connection with the Merger. As a result of supplemental disclosures made by the Company and MSG Networks Inc. on July 1, 2021, all of the disclosure actions were voluntarily dismissed with prejudice prior to or shortly following the consummation of the Merger.
Six complaints involved allegations of fiduciary breaches in connection with the negotiation and approval of the Merger and have since been consolidated into two remaining litigations.
On September 10, 2021, the Court of Chancery of the State of Delaware (the “Court”) entered an order consolidating two derivative complaints filed by purported Company stockholders. The consolidated action is captioned: In re Madison Square Garden Entertainment Corp. Stockholders Litigation, C.A. No. 2021-0468-KSJM (the “MSG Entertainment Litigation”). The consolidated plaintiffs filed their Verified Consolidated Derivative Complaint on October 11, 2021. The complaint, which names the Company as only a nominal defendant, retains all of the derivative claims and alleges that the members of the board of directors and controlling stockholders violated their fiduciary duties in the course of negotiating and approving the Merger. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. The Company and other defendants filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and on November 16, 2022, fact discovery closed. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company has advanced the costs incurred by defendants in this action, and defendants have asserted indemnification rights in respect of any adverse judgment or settlement of the action.
On March 14, 2023, the parties to the MSG Entertainment Litigation reached an agreement in principle to settle the MSG Entertainment Litigation on the terms and conditions set forth in a binding term sheet, which was incorporated into a long-form settlement agreement (“MSGE Settlement Agreement”) that was filed with the Court on April 20, 2023. The MSGE Settlement Agreement provides for, among other things, the final dismissal of the MSG Entertainment Litigation in exchange for a settlement payment to the Company of $85 million, subject to customary reduction for attorneys’ fees and expenses, in an amount to be determined by the Court. The settlement amount will be fully funded by defendants’ insurers. The settlement of the MSG Entertainment Litigation is subject to the final approval of the Court.
On September 27, 2021, the Court entered an order consolidating four complaints filed by purported stockholders of MSG Networks Inc. The consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. No. 2021-0575-KSJM (the “MSG Networks Litigation”). The consolidated plaintiffs filed their Verified Consolidated Stockholder Class Action Complaint on October 29, 2021. The complaint asserts claims on behalf of a putative class of former MSG Networks Inc. stockholders against each member of the board of directors of MSG Networks Inc. and the controlling stockholders prior to the Merger. Plaintiffs allege that the MSG Networks Inc. board of directors and controlling stockholders breached their fiduciary duties in negotiating and approving the Merger. The Company is not named as a defendant but has been subpoenaed to produce documents and testimony related to the Merger. Plaintiffs seek, among other relief, monetary damages for the putative class and plaintiffs’ attorneys’ fees. Defendants in the MSG Networks Litigation filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and on November 16, 2022 fact discovery closed. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company has advanced the costs incurred by defendants in this action, and defendants have asserted indemnification rights in respect of any adverse judgment or settlement of the action.
On April 6, 2023, the parties to the MSG Networks Litigation reached an agreement in principle to settle the MSG Networks Litigation, without admitting liability, on the terms and conditions set forth in a binding term sheet (“MSG Networks Term Sheet”), which will be incorporated into a long-form settlement agreement. The MSG Networks Term Sheet provides for, among other things, the final dismissal of the MSG Networks Litigation in exchange for a settlement payment to the plaintiffs and the class of $48.5 million. MSG Networks has a dispute with its insurers over whether and to what extent there is insurance coverage for the settlement. Unless those parties settle that insurance dispute, it is expected to be resolved in a pending Delaware insurance coverage action. In the interim, and subject to final resolution of the parties’ insurance coverage dispute, certain of MSG Networks’ insurers have agreed to advance $20.5 million to fund the settlement and related class notice costs. The settlement of the MSG Networks Litigation is subject to the final approval of the Court.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of March 31, 2023, the Company has the ability to repurchase up to $350 million of the Company’s Class A Common Stock under the Class A Common Stock share repurchase program initially authorized by the Company’s Board of Directors on March 31, 2020 and reauthorized on March 29, 2023. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market transactions, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. No shares have been repurchased to date.
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Item 6. Exhibits
(a)Index to Exhibits
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| EXHIBIT NO. | DESCRIPTION | |||||||
| 101 | The following materials from Sphere Entertainment Co. (formerly Madison Square Garden Entertainment Corp.) Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of comprehensive loss, (iv) condensed consolidated statements of cash flows, (v) condensed consolidated statements of equity and redeemable noncontrolling interests, and (vi) notes to condensed consolidated financial statements. | |||||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in Inline XBRL and contained in Exhibit 101. | |||||||
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† This exhibit is a management contract or a compensatory plan or arrangement.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 10th day of May 2023.
| Sphere Entertainment Co. | ||||||||
| By: | /S/ GAUTAM RANJI | |||||||
| Name: | Gautam Ranji | |||||||
| Title: | Executive Vice President, Chief Financial Officer and Treasurer | |||||||
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