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 September 30, 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 October 31, 2023:
| Class A Common Stock par value $0.01 per share | — | 28,243,621 | ||||||
| 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)
| As of | ||||||||||||||
| September 30, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| ASSETS | ||||||||||||||
| Current Assets: | ||||||||||||||
Cash, cash equivalents, and restricted cash | $ | 451,742 | $ | 429,114 | ||||||||||
| Accounts receivable, net | 114,247 | 112,309 | ||||||||||||
| Related party receivables, current | 41,778 | 26,405 | ||||||||||||
| Prepaid expenses and other current assets | 66,255 | 56,085 | ||||||||||||
| Total current assets | 674,022 | 623,913 | ||||||||||||
| Non-Current Assets: | ||||||||||||||
| Investments in nonconsolidated affiliates | 50,788 | 394,519 | ||||||||||||
| Property and equipment, net | 3,471,141 | 3,307,161 | ||||||||||||
| Right-of-use lease assets | 90,000 | 84,912 | ||||||||||||
| Goodwill | 456,807 | 456,807 | ||||||||||||
| Intangible assets, net | 17,131 | 17,910 | ||||||||||||
| Other non-current assets | 104,765 | 87,793 | ||||||||||||
| Total assets | $ | 4,864,654 | $ | 4,973,015 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accounts payable, accrued and other current liabilities | $ | 428,091 | $ | 515,731 | ||||||||||
Related party payables, current | 27,691 | 56,446 | ||||||||||||
| Current portion of long-term debt | 103,125 | 82,500 | ||||||||||||
| Operating lease liabilities, current | 13,104 | 10,127 | ||||||||||||
| Deferred revenue | 70,904 | 27,337 | ||||||||||||
| Total current liabilities | 642,915 | 692,141 | ||||||||||||
| Non-Current Liabilities: | ||||||||||||||
| Long-term debt, net of deferred financing costs | 1,098,335 | 1,118,387 | ||||||||||||
| Operating lease liabilities, non-current | 111,591 | 110,259 | ||||||||||||
| Deferred tax liabilities, net | 285,852 | 379,552 | ||||||||||||
| Other non-current liabilities | 90,073 | 88,811 | ||||||||||||
| Total liabilities | 2,228,766 | 2,389,150 | ||||||||||||
Commitments and contingencies (see Note 9) | ||||||||||||||
| Equity: | ||||||||||||||
Class A Common Stock (a) | 282 | 278 | ||||||||||||
Class B Common Stock (b) | 69 | 69 | ||||||||||||
| Additional paid-in capital | 2,368,059 | 2,376,420 | ||||||||||||
| Retained earnings | 278,461 | 212,036 | ||||||||||||
| Accumulated other comprehensive loss | (10,983) | (4,938) | ||||||||||||
| Total stockholders’ equity | 2,635,888 | 2,583,865 | ||||||||||||
| Total liabilities and equity | $ | 4,864,654 | $ | 4,973,015 | ||||||||||
__________________
(a) Class A Common Stock, $0.01 par value per share, 120,000 shares authorized; 28,244 and 27,812 shares issued and outstanding as of September 30, 2023 and June 30, 2023, respectively.
(b) Class B Common Stock, $0.01 par value per share, 30,000 shares authorized; 6,867 shares issued and outstanding as of September 30, 2023 and June 30, 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 | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Revenues (a) | $ | 118,007 | $ | 123,129 | ||||||||||
Direct operating expenses (a) | (84,499) | (75,420) | ||||||||||||
Selling, general, and administrative expenses (a) | (87,144) | (94,631) | ||||||||||||
| Depreciation and amortization | (14,259) | (6,133) | ||||||||||||
| Other gains, net | 1,497 | 2,000 | ||||||||||||
| Restructuring charges | (3,391) | — | ||||||||||||
| Operating loss | (69,789) | (51,055) | ||||||||||||
| Interest income | 4,378 | 3,333 | ||||||||||||
| Other income (expense), net | 42,196 | (415) | ||||||||||||
| Loss from continuing operations before income taxes | (23,215) | (48,137) | ||||||||||||
| Income tax benefit | 90,287 | 1,834 | ||||||||||||
| Income (loss) from continuing operations | 67,072 | (46,303) | ||||||||||||
| (Loss) income from discontinued operations, net of taxes | (647) | 2,260 | ||||||||||||
| Net income (loss) | 66,425 | (44,043) | ||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | — | (410) | ||||||||||||
| Less: Net income attributable to redeemable noncontrolling interests from discontinued operations | — | 1,124 | ||||||||||||
| Net income (loss) attributable to Sphere Entertainment Co.’s stockholders | $ | 66,425 | $ | (44,757) | ||||||||||
| Basic earnings (loss) per common share | ||||||||||||||
| Continuing operations | $ | 1.92 | $ | (1.35) | ||||||||||
| Discontinued operations | $ | (0.02) | $ | 0.05 | ||||||||||
| Basic earnings (loss) per common share attributable to Sphere Entertainment Co.’s stockholders | $ | 1.90 | $ | (1.30) | ||||||||||
| Diluted earnings (loss) per common share | ||||||||||||||
| Continuing operations | $ | 1.90 | $ | (1.35) | ||||||||||
| Discontinued operations | $ | (0.01) | $ | 0.05 | ||||||||||
| Diluted earnings (loss) per common share attributable to Sphere Entertainment Co.’s stockholders | $ | 1.89 | $ | (1.30) | ||||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||
| Basic | 34,911 | 34,403 | ||||||||||||
| Diluted | 35,226 | 34,403 | ||||||||||||
_________________
(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 INCOME (LOSS)
(Unaudited)
(in thousands)
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net income (loss) | $ | 66,425 | $ | (44,043) | ||||||||||
Other comprehensive loss, before income taxes: | ||||||||||||||
Amortization of net actuarial (loss) gain included in net periodic benefit cost | (241) | 510 | ||||||||||||
| Cumulative translation adjustments | (7,919) | (16,080) | ||||||||||||
| Other comprehensive loss, before income taxes | (8,160) | (15,570) | ||||||||||||
Income tax benefit | 2,115 | 2,944 | ||||||||||||
| Other comprehensive loss, net of income taxes | (6,045) | (12,626) | ||||||||||||
| Comprehensive income (loss) | 60,380 | (56,669) | ||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | — | (410) | ||||||||||||
| Less: Net income attributable to redeemable noncontrolling interests from discontinued operations | — | 1,124 | ||||||||||||
| Comprehensive income (loss) attributable to Sphere Entertainment Co.’s stockholders | $ | 60,380 | $ | (57,383) | ||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
3
SPHERE ENTERTAINMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||
| Net income (loss) | $ | 66,425 | $ | (44,043) | ||||||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||
| Depreciation and amortization | 14,259 | 29,755 | ||||||||||||
| Other gains, net | (1,497) | (2,000) | ||||||||||||
| Amortization of deferred financing costs | 1,085 | 1,304 | ||||||||||||
Deferred income tax (benefit) expense | (91,585) | 1,012 | ||||||||||||
| Share-based compensation expense | 4,883 | 15,188 | ||||||||||||
| Non-cash lease expense | 1,027 | 7,126 | ||||||||||||
Net unrealized and realized loss (gains) on equity investments with readily determinable fair value and loss (earnings) in nonconsolidated affiliates | 20,949 | (671) | ||||||||||||
| Other non-cash adjustments | 67 | 242 | ||||||||||||
| Change in assets and liabilities: | ||||||||||||||
| Accounts receivable, net | (1,922) | 14,293 | ||||||||||||
| Related party receivables and payables, net | (44,128) | (15,615) | ||||||||||||
| Prepaid expenses and other current and non-current assets | (25,841) | (13,108) | ||||||||||||
| Accounts payable, accrued and other current and non-current liabilities | (80,124) | (92,590) | ||||||||||||
| Deferred revenue | 43,567 | 25,468 | ||||||||||||
| Right-of-use lease assets and operating lease liabilities | (1,806) | (7,544) | ||||||||||||
| Net cash used in operating activities | (94,641) | (81,183) | ||||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||
| Capital expenditures, net | (164,950) | (270,088) | ||||||||||||
| Proceeds from sale of MSGE Retained Interest | 256,501 | — | ||||||||||||
Capitalized interest | (25,053) | (20,466) | ||||||||||||
Other investing activities | — | 1,517 | ||||||||||||
| Proceeds from sale of equity securities | — | 3,819 | ||||||||||||
| Net cash provided by (used in) investing activities | 66,498 | (285,218) | ||||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||
| Proceeds from Delayed Draw Term Loan Facility | 65,000 | — | ||||||||||||
| Taxes paid in lieu of shares issued for equity-based compensation | (14,146) | (13,967) | ||||||||||||
| Noncontrolling interest holders’ capital contributions | — | 500 | ||||||||||||
| Distributions to noncontrolling interest holders | — | (530) | ||||||||||||
| Distributions to related parties associated with the settlement of certain share-based awards | — | (571) | ||||||||||||
| Proceeds from revolving credit facility | — | 7,860 | ||||||||||||
| Principal repayments on long-term debt | — | (13,312) | ||||||||||||
| Payments for financing costs | — | (3) | ||||||||||||
| Net cash provided by (used in) financing activities | 50,854 | $ | (20,023) | |||||||||||
Effect of exchange rates on cash, cash equivalents, and restricted cash | (83) | (693) | ||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 22,628 | (387,117) | ||||||||||||
Cash, cash equivalents, and restricted cash from continuing operations, beginning of period | 429,114 | 760,312 | ||||||||||||
Cash, cash equivalents, and restricted cash from discontinued operations, beginning of period | — | 85,698 | ||||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 429,114 | 846,010 | ||||||||||||
| Cash, cash equivalents and restricted cash from continuing operations, end of period | 451,742 | 325,748 | ||||||||||||
| Cash, cash equivalents and restricted cash from discontinued operations, end of period | — | 133,145 | ||||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 451,742 | $ | 458,893 | ||||||||||
4
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||
| Capital expenditures incurred but not yet paid | $ | 122,393 | $ | 35,986 | ||||||||||
Non-cash repayment of the Delayed Draw Term Loan Facility | $ | 65,512 | $ | — | ||||||||||
| Share-based compensation capitalized in property and equipment | $ | 906 | $ | 910 | ||||||||||
| Investments and loans to nonconsolidated affiliates | $ | — | $ | 1,969 | ||||||||||
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 | Retained Earnings (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, 2023 | $ | 347 | $ | 2,376,420 | $ | 212,036 | $ | (4,938) | $ | 2,583,865 | $ | — | $ | 2,583,865 | $ | — | ||||||||||||||||||||||||||||||||||
| Net income | — | — | 66,425 | — | 66,425 | — | 66,425 | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (6,045) | (6,045) | — | (6,045) | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 5,789 | — | — | 5,789 | — | 5,789 | — | ||||||||||||||||||||||||||||||||||||||||||
| Tax withholding associated with shares issued for equity-based compensation | 4 | (14,150) | — | — | (14,146) | — | (14,146) | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | 351 | $ | 2,368,059 | $ | 278,461 | $ | (10,983) | $ | 2,635,888 | $ | — | $ | 2,635,888 | $ | — | ||||||||||||||||||||||||||||||||||
| 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 | — | — | (44,757) | — | (44,757) | (410) | (45,167) | 1,124 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (12,626) | (12,626) | — | (12,626) | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 15,511 | — | — | 15,511 | — | 15,511 | — | ||||||||||||||||||||||||||||||||||||||||||
| Tax withholding associated with shares issued for equity-based compensation | — | (13,967) | — | — | (13,967) | — | (13,967) | — | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of put options | — | — | — | — | — | — | — | 587 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 500 | 500 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | (379) | — | — | (379) | (530) | (909) | (192) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | 342 | $ | 2,303,135 | $ | (335,493) | $ | (60,981) | $ | 1,907,003 | $ | 11,723 | $ | 1,918,726 | $ | 185,711 | ||||||||||||||||||||||||||||||||||
| See accompanying notes to the unaudited condensed consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||
6
All amounts included in the following notes to condensed consolidated financial statements (unaudited) are presented in USD and in thousands, except per share data or as otherwise noted.0
Note 1. Description of Business and Basis of Presentation
Description of Business
Sphere Entertainment Co. (the “Company”) is a premier live entertainment and media company comprised of two reportable segments, Sphere and MSG Networks. Sphere is a next-generation entertainment medium, and MSG Networks operates two regional sports and entertainment networks, as well as a direct-to-consumer and authenticated streaming product.
Sphere: This segment reflects SphereTM, a next-generation entertainment medium powered by cutting-edge technologies that enables multi-sensory storytelling at an unparalleled scale. The Company’s first Sphere opened in Las Vegas in September 2023. The venue can accommodate up to 20,000 guests and will host a wide variety of events year-round, including The Sphere ExperienceTM, which features original immersive productions, as well as concerts and residencies from renowned artists, and marquee sporting and corporate events. Supporting this strategy is Sphere Studios, which is home to a team of creative, production, technology and software experts who provide full in-house creative and production services. The studio campus in Burbank includes a 68,000-square-foot development facility, as well as Big Dome, a 28,000-square-foot, 100-foot high custom dome, with a quarter-sized version of the screen at Sphere in Las Vegas, that serves as a specialized screening, production facility, and lab for content at Sphere.
MSG Networks: This segment is comprised of the Company’s regional sports and entertainment networks, MSG Network and MSG Sportsnet, as well as its direct-to-consumer and authenticated streaming product, MSG+. 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 exclusive 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 the Buffalo Bills (the “Bills”) of the National Football League (the “NFL”).
Sphere Entertainment Co. (formerly Madison Square Garden Entertainment Corp.) was incorporated on November 21, 2019 as a direct, wholly-owned subsidiary of Madison Square Garden Sports Corp. (“MSG Sports”). On April 17, 2020, MSG Sports distributed all outstanding common stock of the Company to MSG Sports’ stockholders (the “2020 Entertainment Distribution”). Unless the context otherwise requires, all references to “Sphere Entertainment” or the “Company” refer collectively to Sphere Entertainment Co., a holding company, and its direct and indirect subsidiaries.
MSG Entertainment Distribution
On April 20, 2023 (the “MSGE Distribution Date”), 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 Distribution”), with the Company retaining approximately 33% of the outstanding common stock of MSG Entertainment (in the form of MSG Entertainment Class A common stock) immediately following the MSGE Distribution (the “MSGE Retained Interest”). Following the MSGE Distribution Date, the Company retained the Sphere and MSG Networks businesses and MSG Entertainment now owns the traditional live entertainment business previously owned and operated by the Company through its Entertainment business segment, excluding the Sphere business. In the MSGE 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. See Note 1. Description of Business and Basis of Presentation, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 (the “2023 Form 10-K”) for more information.
As of September 30, 2023, following the sales of portions of the MSGE Retained Interest and the repayment of the delayed draw term loan with MSG Entertainment using a portion of the MSGE Retained Interest (further discussed in Note 6. Investments in Nonconsolidated Affiliates and Note 10. Credit Facilities), the Company no longer holds any of the outstanding common stock of MSG Entertainment.
As of April 20, 2023, the MSG Entertainment business met the criteria for discontinued operations. See Note 3. Discontinued Operations, to the consolidated financial statements included in the 2023 Form 10-K for more information about the MSGE Distribution.
7
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Tao Group Hospitality Disposition
On May 3, 2023, the Company completed the sale of 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”). See Note 3. Discontinued Operations, to the consolidated financial statements included in the 2023 Form 10-K for more information about the Tao Group Hospitality Disposition.
Basis of Presentation
The Company reports on a fiscal year basis ending on June 30th (“Fiscal Year”). In these unaudited condensed consolidated financial statements, the years ended on June 30, 2024 and 2023 are referred to as “Fiscal Year 2024” and “Fiscal Year 2023,” respectively.
The Company has presented both the MSG Entertainment business and Tao Group Hospitality as discontinued operations for all periods presented. See Note 3. Discontinued Operations, for further discussion on accounting for the MSGE Distribution and Tao Group Hospitality Disposition.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions of Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “ SEC”), and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for Fiscal Year 2023 included in the 2023 Form 10-K.
In the opinion of the Company, the accompanying condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2023 and its results of operations for the three months ended September 30, 2023, and 2022, and cash flows for the three months ended September 30, 2023, and 2022. The condensed consolidated financial statements and the accompanying notes as of September 30, 2023 were derived from audited annual consolidated financial statements but do not contain all of the footnote disclosures from the audited annual consolidated 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. Our MSG Networks segment earns 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.
Reclassifications
For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP.
Note 2. Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements of the Company include the accounts of Sphere Entertainment Co. and its subsidiaries. They also historically included accounts of Tao Group Hospitality, MSG Entertainment, and Boston Calling Events, LLC (“BCE”) until their dispositions on May 3, 2023, April 20, 2023, and December 2, 2022, respectively. All significant intercompany transactions and balances have been eliminated in consolidation.
Prior to their dispositions, Tao Group Hospitality and Boston Calling Events, LLC were consolidated with the equity owned by other stockholders shown as redeemable or nonredeemable noncontrolling interests of discontinued operations in the accompanying 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 from discontinued operations in the accompanying consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively.
See Note 3. Discontinued Operations, for details regarding the Tao Group Hospitality Disposition, and MSGE Distribution. See Note 2. Summary of Significant Accounting Policies, to the audited annual consolidated financial statements included in the 2023 Form 10-K regarding the classification of redeemable noncontrolling interests of Tao Group Hospitality.
8
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Use of Estimates
The preparation of the accompanying condensed consolidated 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, deferred production costs, 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 condensed consolidated 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 condensed consolidated financial statements in future periods.
Production Costs for the Company’s Original Immersive Productions
There have been no material changes to the Company’s accounting policies regarding direct operating expenses related to production costs, except to note that subsequent to September 30, 2023, the Company completed and debuted its first original immersive production, Postcard From Earth, which began amortizing during the second quarter of Fiscal Year 2024.
Liquidity and Going Concern
As of the date the accompanying unaudited condensed consolidated financial statements were issued (the “issuance date”), management evaluated the presence of the following conditions and events at the Company in accordance with Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40):
As of September 30, 2023, the Company’s unrestricted cash and cash equivalents balance, inclusive of approximately $123,100 in advance cash proceeds primarily related to ticket sales, was $433,507, as compared to $131,965 as of June 30, 2023. Included in unrestricted cash and cash equivalents as of September 30, 2023 was $113,950 of cash and cash equivalents at MSG Networks, which is not available for distribution to the Company in order to maintain compliance with the covenants under the MSG Networks Credit Facilities (as defined under Note 10. Credit Facilities). As of September 30, 2023, the Company’s restricted cash balance was $18,235, as compared to $297,149 as of June 30, 2023, which included $275,000 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. Credit Facilities), which occurred on August 8, 2023. The principal balance of the Company’s total debt outstanding as of September 30, 2023 was $1,207,250, including $932,250 of debt under the MSG Networks Credit Facilities. The balance under the MSG Networks Credit Facilities was reduced to $911,625 on October 2, 2023 upon MSG Networks’ completion of its required quarterly amortization payment.
Our primary sources of liquidity are cash and cash equivalents and cash flows from the operations of our businesses. The Company’s uses of cash over the next 12 months beyond the issuance date are expected to be substantial and include working capital-related items (including funding our operations), capital spending (including the creation of additional content for Sphere), required debt service payments, and payments we expect to be made 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 our businesses, 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, market conditions could adversely impact our ability to do so at that time.
Our ability to have sufficient liquidity to fund our operations and refinance the MSG Networks Credit Facilities is dependent on the ability of Sphere in Las Vegas to generate significant positive cash flow during Fiscal Year 2024. Although we anticipate that Sphere in Las Vegas will generate substantial revenue and adjusted operating income on an annual basis over time, there can be no assurance that guests, artists, promoters, advertisers and marketing partners will embrace this new platform. Original immersive productions, such as Postcard From Earth, have not been previously pursued on the scale of Sphere, which increases the uncertainty of our operating expectations. To the extent that our efforts do not result in viable shows, or to the extent that any such productions do not achieve expected levels of popularity among audiences, we may not generate the cash flows from operations necessary to fund our operations. To the extent we do not realize expected cash flows from operations from Sphere in Las Vegas, we would have to take
9
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
several actions to improve our financial flexibility and preserve liquidity, including significant reductions in both labor and non-labor expenses as well as reductions and/or deferrals in capital spending. Therefore, while we currently believe we will have sufficient liquidity from cash and cash equivalents and cash flows from operations (including expected cash flows from operations from Sphere in Las Vegas) to fund our operations and service our credit facilities, which includes the Company’s expectation that MSG Networks will pay down $102,125 in required quarterly amortization payments on the MSG Networks Credit Facilities, as described below, no assurance can be provided our liquidity will be sufficient in the event any of the preceding uncertainties facing Sphere in Las Vegas are realized over the next 12 months beyond the issuance date. The Company also anticipates MSG Networks will pay a portion of its term loan upon refinancing of the MSG Networks Credit Facilities prior to its maturity in October 2024.
As disclosed in Note 10. Credit Facilities, all of the outstanding borrowings under the MSG Networks Credit Facilities are guaranteed by the MSGN Guarantors (as defined under Note 10. Credit Facilities) and secured by the MSGN Collateral (as defined under Note 10. Credit Facilities). Sphere Entertainment Co., Sphere Entertainment Group, LLC and the subsidiaries of Sphere Entertainment Group, LLC (collectively, the “Non-Credit Parties”) are not legally obligated to fund the outstanding borrowings under the MSG Networks Credit Facilities, nor are the assets of the Non-Credit Parties pledged as security under the MSG Networks Credit Facilities. Over the next 12 months beyond the issuance date, MSG Networks expects to make $102,125 in required quarterly amortization payments on the MSG Networks Credit Facilities. The remaining outstanding borrowings under the MSG Networks Credit Facilities of $829,125 are scheduled to mature within one year beyond the issuance date of the accompanying unaudited condensed consolidated financial statements. However, MSG Networks will be unable to generate sufficient operating cash flows over the next 12 months to settle the remaining outstanding borrowings under the MSG Networks Credit Facilities when they become due. Therefore, management plans to refinance the MSG Networks Credit Facilities prior to maturity. While MSG Networks has historically been able to refinance its indebtedness, management can provide no assurance MSG Networks will be able to refinance the MSG Networks Credit Facilities, or that such refinancing will be secured on terms that are acceptable to MSG Networks. In the event MSG Networks is unable to refinance the amount scheduled to mature under the MSG Networks Credit Facilities or secure alternative sources of funding through the capital and credit markets on acceptable terms, the lenders would retain their right to exercise all of their remedies under the MSG Networks Credit Facilities, which would include, but not be limited to, declaring an event of default and foreclosing on the MSGN Collateral. In the event of an exercise of post-default rights and remedies, the Company believes the lenders would have no further remedies or recourse against the Non-Credit Parties pursuant to the terms of the MSG Networks Credit Facilities. While this condition raises substantial doubt about the Company’s ability to continue as a going concern, for the reasons stated in this paragraph, we have concluded this condition has been effectively alleviated and the Company will be able to continue as a going concern for at least one year beyond the issuance date of the accompanying unaudited condensed consolidated financial statements.
Note 3. Discontinued Operations
As a result of the MSGE Distribution and Tao Group Hospitality Disposition, the results of the traditional live entertainment business previously owned and operated by the Company through its MSG Entertainment business segment (excluding the Sphere business) and the entertainment dining and nightlife business previously owned and operated by the Company through its Tao Group Hospitality business segment, as well as transaction costs related to the MSGE Distribution and Tao Group Hospitality Disposition, have been classified in the accompanying condensed consolidated statement of operations as discontinued operations. See Note 3. Discontinued Operations, to the consolidated financial statements included in the 2023 Form 10-K for more information about the MSGE Distribution and Tao Group Hospitality Disposition.
For the three months ended September 30, 2023, the Company recognized a loss from discontinued operations of $647, net of $294 of income tax benefit, related to the final purchase price adjustment from the Tao Group Hospitality Disposition.
10
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The table below sets forth operating results of discontinued operations for the three months ended September 30, 2022. Amounts presented below differ from historically reported results for the MSG Entertainment and Tao Group Hospitality business segments due to reclassifications and adjustments made for purposes of discontinued operations.
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||||||||
| MSGE | Tao | Eliminations | Total | |||||||||||||||||||||||
| Revenues | $ | 146,075 | $ | 132,576 | $ | (562) | $ | 278,089 | ||||||||||||||||||
| Direct operating expenses | (100,663) | (77,163) | 376 | (177,450) | ||||||||||||||||||||||
| Selling, general and administrative expenses | (28,729) | (42,543) | 462 | (70,810) | ||||||||||||||||||||||
| Depreciation and amortization | (15,986) | (7,636) | — | (23,622) | ||||||||||||||||||||||
Operating income | 697 | 5,234 | 276 | 6,207 | ||||||||||||||||||||||
| Interest income | 608 | 13 | — | 621 | ||||||||||||||||||||||
| Interest expense | (1,025) | (1,142) | — | (2,167) | ||||||||||||||||||||||
Other income, net | 886 | 1,054 | — | 1,940 | ||||||||||||||||||||||
Income from operations before income taxes | 1,166 | 5,159 | 276 | 6,601 | ||||||||||||||||||||||
Income tax expense | (2,936) | (1,405) | — | (4,341) | ||||||||||||||||||||||
| Net (loss) income | (1,770) | 3,754 | 276 | 2,260 | ||||||||||||||||||||||
| Less: Net income attributable to redeemable noncontrolling interests | — | 1,124 | — | 1,124 | ||||||||||||||||||||||
Less: Net loss attributable to nonredeemable noncontrolling interests | (372) | (38) | — | (410) | ||||||||||||||||||||||
| Net (loss) income from discontinued operations attributable to Sphere Entertainment Co.’s stockholders | $ | (1,398) | $ | 2,668 | $ | 276 | $ | 1,546 | ||||||||||||||||||
As permitted under Accounting Standards Codification (“ASC”) Subtopic 205-20-50-5b(2), the Company has elected not to adjust the condensed consolidated statements of cash flows for the three months ended September 30, 2022 to exclude cash flows attributable to discontinued operations.
The table below sets forth, for the period presented, significant selected financial information related to discontinued activities included in the accompanying condensed consolidated financial statements:
| Three Months Ended | ||||||||||||||
| September 30, 2022 | ||||||||||||||
| MSGE | Tao | |||||||||||||
| Non-cash items included in net (loss) income: | ||||||||||||||
| Depreciation and amortization | $ | 15,986 | $ | 7,636 | ||||||||||
| Share-based compensation expense | 1,646 | 2,052 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Capital expenditures, net | $ | 4,855 | $ | 5,769 | ||||||||||
Note 4. Revenue Recognition
Contracts with Customers
See Note 2. Summary of Significant Accounting Policies and Note 4. Revenue Recognition, to the consolidated financial statements included in the 2023 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, Revenue From Contracts with Customers, except for revenues from subleases that are accounted for in accordance with ASC Topic 842, Leases.
11
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
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 months ended September 30, 2023 and 2022:
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
Event-related (a) | 4,059 | — | 4,059 | |||||||||||||||||
Sponsorship, signage, ExosphereTM advertising, and suite licenses (b) | 2,560 | 218 | 2,778 | |||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 109,795 | 109,795 | |||||||||||||||||
| Other | 431 | 215 | 646 | |||||||||||||||||
| Total revenues from contracts with customers | 7,050 | 110,228 | 117,278 | |||||||||||||||||
| Revenues from subleases | 729 | — | 729 | |||||||||||||||||
| Total revenues | $ | 7,779 | $ | 110,228 | $ | 118,007 | ||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
Sponsorship, signage, Exosphere advertising, and suite licenses (b) | — | 244 | 244 | |||||||||||||||||
Media related, primarily from affiliation agreements (b) | — | 121,812 | 121,812 | |||||||||||||||||
| Other | — | 423 | 423 | |||||||||||||||||
| Total revenues from contracts with customers | — | 122,479 | 122,479 | |||||||||||||||||
| Revenues from subleases | 650 | — | 650 | |||||||||||||||||
| Total revenues | $ | 650 | $ | 122,479 | $ | 123,129 | ||||||||||||||
_________________
(a) Event-related revenues 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 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 financial statements included in the 2023 Form 10-K for further details on the pattern of recognition of sponsorship, signage, suite licenses, and media related revenue.
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 months ended September 30, 2023 and 2022:
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
Ticketing and venue license fee revenues (a) | $ | 2,807 | $ | — | $ | 2,807 | ||||||||||||||
Sponsorship, signage, Exosphere advertising, and suite revenues | 2,900 | — | 2,900 | |||||||||||||||||
Food, beverage, and merchandise revenues | 1,343 | — | 1,343 | |||||||||||||||||
Media networks revenues (b) | — | 110,228 | 110,228 | |||||||||||||||||
Total revenues from contracts with customers | 7,050 | 110,228 | 117,278 | |||||||||||||||||
| Revenues from subleases | 729 | — | 729 | |||||||||||||||||
| Total revenues | $ | 7,779 | $ | 110,228 | $ | 118,007 | ||||||||||||||
_________________
(a) Amounts include ticket sales, other ticket-related revenue, and venue license fees from the Company’s events such as (i) concerts, (ii) The Sphere Experience and (iii) other live entertainment and sporting events.
(b) 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.
12
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Three Months Ended | ||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
Media networks revenues (a) | $ | — | $ | 122,479 | $ | 122,479 | ||||||||||||||
| Revenues from subleases | 650 | — | 650 | |||||||||||||||||
| Total revenues | $ | 650 | $ | 122,479 | $ | 123,129 | ||||||||||||||
_________________
(a) 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 September 30, 2023 and June 30, 2023:
| September 30, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
Receivables from contracts with customers, net (a) | $ | 114,247 | $ | 115,039 | ||||||||||
Contract assets, current (b) | 88 | 314 | ||||||||||||
Deferred revenue, including non-current portion (c) | 70,904 | 27,397 | ||||||||||||
(a) Receivables from contracts with customers, net, 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 September 30, 2023 and June 30, 2023, the Company’s receivables from contracts with customers above included $0 and $2,730, respectively, related to various related parties. See Note 14. Related Party Transactions, for further details on these related party arrangements.
(b) Contract assets 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) Revenue recognized for the three months ended September 30, 2023 relating to the deferred revenue balance as of June 30, 2023 was $1,470.
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2023, the Company’s remaining performance obligations were approximately $84,141 of which 76% is expected to be recognized over the next two years and an additional 24% of the balance to be recognized in the following two years. This primarily relates to performance obligations under sponsorship agreements that have original expected durations longer than one year and for which the respective 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 2024, the Company incurred costs for termination benefits for certain executives and employees in the Sphere segment. As a result, the Company recognized restructuring charges of $3,391 for the three months ended September 30, 2023, which are recorded in Accounts payable, accrued and other current liabilities and Related party payables, current. No restructuring charges were recorded for the three months ended September 30, 2022.
Changes to the Company’s restructuring liability through September 30, 2023 were as follows:
| Restructuring Liability | ||||||||
| June 30, 2023 | $ | 8,891 | ||||||
Restructuring charges | 3,391 | |||||||
| Payments | (6,804) | |||||||
| September 30, 2023 | $ | 5,478 | ||||||
13
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
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 as of September 30, 2023 | September 30, 2023 | June 30, 2023 | ||||||||||||||||||
| Equity method investments: | ||||||||||||||||||||
| SACO Technologies Inc. (“SACO”) | 30 | % | $ | 20,074 | $ | 22,246 | ||||||||||||||
Holoplot Loan (a) | 20,576 | 20,971 | ||||||||||||||||||
| Holoplot | 25 | % | 1,417 | 1,542 | ||||||||||||||||
MSG Entertainment (b) | — | % | — | 341,039 | ||||||||||||||||
| Equity investments without readily determinable fair values | 8,721 | 8,721 | ||||||||||||||||||
| Total investments in nonconsolidated affiliates | $ | 50,788 | $ | 394,519 | ||||||||||||||||
_________________
(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. 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 three year term.
(b) As of September 30, 2023, following the sale of portions of the MSGE Retained Interest and the repayment of the DDTL Facility (as defined below) with MSG Entertainment using a portion of the MSGE Retained Interest, the Company no longer holds any of the outstanding common stock of MSG Entertainment. The Company elected the fair value option for its investment in MSG Entertainment as of June 30, 2023, when it held approximately 20% of the outstanding shares of common stock of MSG Entertainment (in the form of Class A common stock). The fair value of the investment was determined based on quoted market prices on the New York Stock Exchange (“NYSE”), which were classified within Level I of the fair value hierarchy.
The following table summarizes the realized and unrealized gain (loss) on equity investments with and without readily determinable fair values, which is reported in Other income (expense), net, for the three months ended September 30, 2023 and 2022:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Unrealized gain | $ | — | $ | 1,969 | ||||||||||
Realized loss from shares of MSG Entertainment Class A common stock sold | (19,027) | — | ||||||||||||
Total realized and unrealized (loss) gain on equity investments | $ | (19,027) | $ | 1,969 | ||||||||||
Supplemental information on realized loss: | ||||||||||||||
Shares of MSG Entertainment Class A common stock disposed (a) | 1,923 | — | ||||||||||||
Shares of MSG Entertainment Class A common stock sold (b) | 8,221 | — | ||||||||||||
Cash proceeds from shares of MSG Entertainment Class A common stock sold | $ | 256,501 | $ | — | ||||||||||
_________________
(a) Refer to Note 10. Credit Facilities, for further explanation of the approximately 1,923 shares disposed related to the repayment of the DDTL Facility.
(b) Shares sold of approximately 8,221 resulted in the cash proceeds from common stock sold.
14
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 7. Property and Equipment, net
As of September 30, 2023 and June 30, 2023, property and equipment, net consisted of the following:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Land | $ | 77,617 | $ | 80,878 | ||||||||||
| Buildings | 2,300,506 | 69,049 | ||||||||||||
Equipment, furniture, and fixtures | 1,090,194 | 159,786 | ||||||||||||
| Leasehold improvements | 18,491 | 18,491 | ||||||||||||
Construction in progress | 85,469 | 3,066,785 | ||||||||||||
Total property and equipment, gross | 3,572,277 | 3,394,989 | ||||||||||||
| Less accumulated depreciation and amortization | (101,136) | (87,828) | ||||||||||||
| Property and equipment, net | $ | 3,471,141 | $ | 3,307,161 | ||||||||||
The property and equipment balances above include $224,788 and $236,593 of capital expenditure accruals (primarily related to Sphere construction) as of September 30, 2023 and June 30, 2023, respectively, which are reflected in Accounts payable, accrued and other current liabilities in the accompanying condensed consolidated balance sheets. During the three months ended September 30, 2023, with the opening of Sphere, the Company placed $3,130,028 of construction in progress assets into service, and began depreciating them over their corresponding estimated useful lives. See Note 2. Summary of Significant Accounting Policies, to the consolidated financial statements included in the 2023 Form 10-K for details on the Company’s estimated useful lives for each major category of property and equipment.
The Company recorded depreciation expense on property and equipment of $13,480 and $5,354 for the three months ended September 30, 2023, and 2022, respectively, which is recognized in Depreciation and amortization.
Note 8. Goodwill and Intangible Assets
The carrying amounts of goodwill as of September 30, 2023 and June 30, 2023 are as follows:
| As of | |||||||||||
| September 30, 2023 | June 30, 2023 | ||||||||||
| Sphere | $ | 32,299 | $ | 32,299 | |||||||
| MSG Networks | 424,508 | 424,508 | |||||||||
| Total Goodwill | $ | 456,807 | $ | 456,807 | |||||||
During the first quarter of Fiscal Year 2024, 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.
The Company’s intangible assets subject to amortization, which relate to affiliate relationships, as of September 30, 2023 and June 30, 2023 were as follows:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Gross carrying amount | $ | 83,044 | $ | 83,044 | ||||||||||
| Accumulated amortization | (65,913) | (65,134) | ||||||||||||
| Intangible assets, net | $ | 17,131 | $ | 17,910 | ||||||||||
The company recognized amortization expense on intangible assets of $779 for the three months ended September 30, 2023, and 2022, which is recognized in Depreciation and amortization.
15
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 9. Commitments and Contingencies
Commitments
See Note 11. Commitments and Contingencies, to the consolidated financial statements included in the 2023 Form 10-K for details on the Company’s commitments. The Company’s commitments as of June 30, 2023 included a total of $3,134,884 of contract obligations (primarily related to media rights agreements from the MSG Networks segment).
During the three months ended September 30, 2023, the Company did not have any material changes in its non-cancelable contractual obligations (other than activities in the ordinary course business). See Note 10. Credit Facilities, for details of the principal repayments required under the Company’s various credit facilities.
Legal Matters
Fifteen complaints were filed in connection with the merger between a subsidiary of the Company and MSG Networks Inc. (the “Networks 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 Networks 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 Networks Merger.
Six complaints involved allegations of fiduciary breaches in connection with the negotiation and approval of the Networks Merger and were 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 named the Company as only a nominal defendant, retained all of the derivative claims and alleged that the members of the board of directors and controlling stockholders violated their fiduciary duties in the course of negotiating and approving the Networks Merger. Plaintiffs sought, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company advanced the costs incurred by defendants in this action, and defendants 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, without admitting liability, on the terms and conditions set forth in a binding term sheet, which was incorporated into a long-form settlement agreement (the “MSGE Settlement Agreement”) that was filed with the Court on April 20, 2023. The MSGE Settlement Agreement provided 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’s amount was fully funded by the other defendants’ insurers. The MSGE Settlement Agreement was approved by the Court on August 14, 2023, which constituted the final judgment in the action. A realized gain of $62,647 was recognized in Other income (expense), net on the condensed combined statement of operations in connection with the settlement payment to the Company.
On September 27, 2021, the Court entered an order consolidating four complaints filed by purported former 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 asserted 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 Networks Merger. Plaintiffs alleged that the MSG Networks Inc. board of directors and controlling stockholders breached their fiduciary duties in negotiating and approving the Networks Merger. The Company was not named as a defendant but was subpoenaed to produce documents and testimony related to the Networks Merger. Plaintiffs sought, among other relief, monetary damages for the putative class and plaintiffs’ attorneys’ fees. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company advanced the costs incurred by defendants in this action, and defendants 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, which was incorporated into a long-form settlement agreement (the “MSGN Settlement Agreement”) that was filed with the Court on May 18, 2023. The MSGN
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Settlement Agreement provided 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, of which $28,000 has been paid as of September 30, 2023, with $20,500 accrued for in Accounts payable, accrued and other current liabilities. MSG Networks has a dispute with its insurers over whether and to what extent there is insurance coverage for the settlement. Unless MSG Networks Inc. and the insurers 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 agreed to advance $20,500 to fund the settlement and related class notice costs. The MSGN Settlement Agreement was approved by the Court on August 14, 2023, which constituted the final judgment in the action.
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.
Note 10. Credit Facilities
See Note 12. Credit Facilities, to the consolidated financial statements included in the 2023 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 September 30, 2023 and June 30, 2023:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Current portion | ||||||||||||||
| MSG Networks Term Loan | $ | 103,125 | $ | 82,500 | ||||||||||
| Total Current portion of long-term debt | $ | 103,125 | $ | 82,500 | ||||||||||
| As of | ||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||||||||||||||||||||||||||
| Principal | Unamortized Deferred Financing Costs | Net | Principal | Unamortized Deferred Financing Costs | Net | |||||||||||||||||||||||||||||||||
| Non-current portion | ||||||||||||||||||||||||||||||||||||||
| MSG Networks Term Loan | $ | 829,125 | $ | (1,185) | $ | 827,940 | $ | 849,750 | $ | (1,483) | $ | 848,267 | ||||||||||||||||||||||||||
| LV Sphere Term Loan Facility | 275,000 | (4,605) | 270,395 | 275,000 | (4,880) | 270,120 | ||||||||||||||||||||||||||||||||
Long-term debt, net of deferred financing costs | $ | 1,104,125 | $ | (5,790) | $ | 1,098,335 | $ | 1,124,750 | $ | (6,363) | $ | 1,118,387 | ||||||||||||||||||||||||||
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 September 30, 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) adjusted Term SOFR (i.e., Term SOFR plus 0.10%) plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio). 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 September 30, 2023 was 7.42%.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
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 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. As of September 30, 2023, the total leverage ratio coverage ratio was 5.27:1:00. 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 September 30, 2023, the interest coverage ratio was 2.50:1:00. All borrowings under the MSGN Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of September 30, 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.
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 September 30, 2023 was 9.80%.
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. 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. Following the Liquidity Covenant Reduction Date (as defined below), the minimum liquidity level for Sphere Entertainment
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Group is set at $50,000, with $25,000 required to be held in cash or cash equivalents. Prior to the Liquidity Covenant Reduction Date, the minimum liquidity level for Sphere Entertainment Group was set at $100,000, with $75,000 required to be held in cash or cash equivalents, which amounts (in addition to certain cash proceeds from the sale of the MSGE Retained Interest) were 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 (the “Pledged Account”). The Liquidity Covenant Reduction Date occurred on August 8, 2023, once Sphere in Las Vegas was substantially completed and certain of its systems were 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 Distribution, the MSGE Retained Interest was pledged to secure the LV Sphere Term Loan Facility and was released as collateral upon the Liquidity Covenant Reduction Date.
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) until the occurrence of the Liquidity Covenant Reduction Date, 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 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 Distribution.
On July 14, 2023, the Company drew down the full amount of the $65,000 under the DDTL Facility. On August 9, 2023, the Company repaid all amounts outstanding under the DDTL Facility (including accrued interest and commitment fees) by delivering to MSG Entertainment Holdings approximately 1,923 shares of MSG Entertainment Class A common stock.
Interest payments and loan principal repayments made by the Company under the credit agreements were as follows:
| Interest Payments | Loan Principal Repayments | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
MSG Networks Credit Facilities | $ | 17,500 | $ | 9,596 | $ | — | $ | 12,375 | ||||||||||||||||||
| LV Sphere Term Loan Facility | 6,745 | — | — | — | ||||||||||||||||||||||
Delayed Draw Term Loan Facility | 460 | — | 65,000 | — | ||||||||||||||||||||||
| Total Payments | $ | 24,705 | $ | 9,596 | $ | 65,000 | $ | 12,375 | ||||||||||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The carrying value and fair value of the Company’s financial instruments reported in the accompanying condensed consolidated balance sheets are as follows:
As of | ||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||||||||||||||
Carrying Value (a) | Fair Value | Carrying Value (a) | Fair Value | |||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
MSG Networks Credit Facilities | $ | 932,250 | $ | 927,589 | $ | 932,250 | $ | 927,589 | ||||||||||||||||||
| LV Sphere Term Loan Facility | 275,000 | 273,625 | 275,000 | 272,250 | ||||||||||||||||||||||
| Total Long-term debt | $ | 1,207,250 | $ | 1,201,214 | $ | 1,207,250 | $ | 1,199,839 | ||||||||||||||||||
_________________
(a) The total carrying value of the Company’s financial instruments as of September 30, 2023 and June 30, 2023 is equal to the current and non-current principal payments for the Company’s credit agreements excluding unamortized deferred financing costs of $5,790 and $6,363, 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 (i) both funded and unfunded and qualified and non-qualified pension plans, including the Networks 1212 Plan, Networks Excess Cash Balance Plan, and the Networks Excess Retirement Plan (together, the “Networks Plans”), (ii) an excess savings plan and (iii) a postretirement benefit plan (the “Postretirement Plan”). In connection with the MSGE Distribution, the Company established an unfunded non-contributory, non-qualified frozen excess cash balance plan (the “Sphere Excess Plan”) covering certain employees who participated in the pre-MSGE Distribution cash balance plan, which was transferred to MSGE Entertainment in connection with the MSGE Distribution. The Networks Plans and Sphere Excess Plans are collectively referred to as the “Pension Plans.” Prior to the MSGE Distribution, the Company sponsored two contributory welfare plans which provided certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001. The sponsorship of the Postretirement Plan covering Networks employees was retained by the Company while the postretirement plan covering MSGE employees was transferred to MSG Entertainment in connection with MSGE Distribution. In addition, the liabilities associated with the postretirement plan for MSGE employees were transferred from the Company to MSG Entertainment in connection with the MSGE Distribution. See Note 13. Pension Plans and Other Postretirement Benefit Plans, to the consolidated financial statements included in the 2023 Form 10-K for more information regarding these plans.
Defined Benefit Pension Plans and Postretirement Benefit Plan
The following table presents components of net periodic benefit cost for the Pension Plans and Postretirement Plan included in the accompanying condensed consolidated statements of operations for the three months ended September 30, 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 Plan | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Service cost | $ | 61 | $ | 123 | $ | 5 | $ | 15 | ||||||||||||||||||
| Interest cost | 439 | 1,189 | 17 | 19 | ||||||||||||||||||||||
| Expected return on plan assets | (213) | (1,719) | — | — | ||||||||||||||||||||||
| Recognized actuarial loss (gain) | (224) | 501 | (17) | 9 | ||||||||||||||||||||||
| Net periodic benefit cost | $ | 63 | $ | 94 | $ | 5 | $ | 43 | ||||||||||||||||||
Contributions for Qualified Defined Benefit Plans
The Company sponsors one non-contributory, qualified defined benefit pension plan covering certain of its union employees, the “Networks 1212 Plan.” During the three months ended September 30, 2023, the Company contributed $500 to the Networks 1212 Plan.
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SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Defined Contribution Plans
The Company sponsors the MSGN Holdings, L.P. Excess Savings Plan, the Sphere Entertainment Excess Savings Plan, and the Madison Square Garden 401(k) Savings Plan (collectively, “Savings Plans”). For the three months ended September 30, 2023 and 2022, expenses related to the Savings Plans included in the accompanying condensed consolidated and combined statements of operations are as follows:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Continuing Operations | $ | 1,210 | $ | 1,387 | ||||||||||
Discontinued Operations | — | $ | 1,178 | |||||||||||
Total Savings Plan Expenses | $ | 1,210 | $ | 2,565 | ||||||||||
Executive Deferred Compensation
See Note 13. Pension Plans and Other Postretirement Benefit Plans, included in the Company’s Audited Consolidated Annual Financial Statements for more information regarding the Company’s Executive Deferred Compensation Plan (the “Deferred Compensation Plan”). The Company recorded compensation income of $107 and $154 for the three months ended September 30, 2023 and 2022, respectively, within Selling, general, and administrative expenses in the condensed, consolidated statements of operations to reflect the remeasurement of the Deferred Compensation Plan liability. In addition, the Company recorded loss of $107 and $154 for the three months ended September 30, 2023 and 2022, respectively, within Other income (expense), net in the condensed, consolidated statements of operations to reflect remeasurement of the fair value of assets under the Deferred Compensation Plan.
The following table summarizes amounts recognized related to the Deferred Compensation Plan in the condensed consolidated and combined balance sheets:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Non-current assets (included in Other non-current assets) | $ | 2,536 | $ | 1,087 | ||||||||||
| Non-current liabilities (included in Other non-current liabilities) | $ | (2,550) | $ | (1,087) | ||||||||||
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 14. Share-based Compensation, to the consolidated financial statement included in the 2023 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.
The following table summarizes the Company’s share-based compensation expense:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Share-based compensation (a) | $ | 4,883 | $ | 11,490 | ||||||||||
Fair value of awards vested (b) | $ | 30,153 | $ | 32,132 | ||||||||||
_________________
(a) Share-based compensation excludes costs that have been capitalized of $906 and $910 for the three months ended September 30, 2023 and 2022, respectively.
(b) To fulfill required statutory tax withholding obligations for the applicable income and other employment taxes, RSUs and PSUs with an aggregate value of $13,976 and $14,517 were retained by the Company during the three months ended September 30, 2023, and 2022, respectively.
As of September 30, 2023, there was $55,963 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 2.47 years.
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SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the three months ended September 30, 2023, weighed-average shares used in the calculation for diluted EPS consisted of 34,911 weighed-average shares for basic EPS and the dilutive effect of 315 shares issuable under share-based compensation plans. For the three months ended September 30, 2022, weighed-average shares used in the calculation for diluted EPS consisted of 34,403 weighed-average shares for basic EPS.
For the three months ended September 30, 2023, weighted-average anti-dilutive shares primarily consisted of approximately 690 units of RSUs and stock options and were excluded in the calculation of diluted earnings per share because their effect would have been anti-dilutive. For the three months ended September 30, 2022, all RSUs 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 three months ended September 30, 2023 and 2022, approximately 449 and 598 RSUs were granted and approximately 564 and 493 RSUs vested, respectively.
PSUs
During the three months ended September 30, 2023 and 2022, approximately 404 and 566 PSUs were granted and approximately 241 and 82 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 September 30, 2023 and June 30, 2023, 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. 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.
Accumulated Other Comprehensive Loss
The following tables detail the components of accumulated other comprehensive loss:
| Three Months Ended | |||||||||||||||||
| September 30, 2023 | |||||||||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2023 | $ | (5,138) | $ | 200 | $ | (4,938) | |||||||||||
| Other comprehensive loss: | |||||||||||||||||
Other comprehensive loss before reclassifications | — | (7,919) | (7,919) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | (241) | — | (241) | ||||||||||||||
| Income tax benefit | 63 | 2,052 | 2,115 | ||||||||||||||
Other comprehensive loss, total | (178) | (5,867) | (6,045) | ||||||||||||||
| Balance as of September 30, 2023 | $ | (5,316) | $ | (5,667) | $ | (10,983) | |||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Three Months Ended | |||||||||||||||||
| September 30, 2022 | |||||||||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2022 | $ | (40,287) | $ | (8,068) | $ | (48,355) | |||||||||||
Other comprehensive income (loss): | |||||||||||||||||
| Other comprehensive loss before reclassifications | — | (16,080) | (16,080) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 510 | — | 510 | ||||||||||||||
| Income tax (expense) benefit | (10) | 2,954 | 2,944 | ||||||||||||||
Other comprehensive income (loss), total | 500 | (13,126) | (12,626) | ||||||||||||||
| Balance as of September 30, 2022 | $ | (39,787) | $ | (21,194) | $ | (60,981) | |||||||||||
(a) Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net 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
As of September 30, 2023, certain members of the Dolan family, including certain 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 5.6% of the Company’s outstanding Class A Common Stock (inclusive of options exercisable within 60 days of September 30, 2023). Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 72.1% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG Entertainment, MSG Sports and AMC Networks Inc.
See Note 17. Related Party Transactions, to the consolidated financial statements included in the 2023 Form 10-K for a description of the Company’s related party arrangements. There have been no material changes in such related party arrangements except as described below.
The Company has entered into arrangements with (i) MSG Sports, pursuant to which MSG Sports provides certain sponsorship and other business operations services to the Company in exchange for service fees, (ii) MSGE Entertainment, pursuant to which MSG Entertainment provides certain sponsorship-related account management services to the Company in exchange for service fees, and (iii) MSG Sports and MSG Entertainment, pursuant to which the three companies have agreed to allocate expenses in connection with the use by each company of aircraft owned or leased by MSG Entertainment and MSG Sports.
The Company has also entered into certain commercial agreements with its equity method investment nonconsolidated affiliates in connection with Sphere. The Company recorded $5,668 and $50,670 for the three months ended September 30, 2023 and 2022, respectively, of capital expenditures in connection with services provided to the Company under these agreements. As of September 30, 2023 and June 30, 2023, accrued liabilities associated with related parties were $16,084 and $13,412, respectively, and are reported under Accounts payable, accrued and other current liabilities in the accompanying condensed consolidated balance sheets.
From time to time the Company enters into arrangements with 605, LLC (“605”). Kristin Dolan, a director of the Company and the spouse of James L. Dolan, the Executive Chairman and Chief Executive Officer of the Company, founded and was the Chief Executive Officer of 605, an audience measurement and data analytics company in the media and entertainment industries, until February 2023. 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. On September 13, 2023, 605 was sold to iSpot.tv, and James L. Dolan and Kristin A. Dolan now hold a minority interest in iSpot.tv. As a result, from and after September 13, 2023, 605 is no longer considered to be a related party.
23
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 months ended September 30, 2023 and 2022:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenues | $ | 390 | $ | — | ||||||||||
| Operating expenses (credits): | ||||||||||||||
| Media rights fees | $ | 44,185 | 42,767 | |||||||||||
| Cost reimbursement from MSG Sports - MSG Sports Services Agreement | — | (9,517) | ||||||||||||
Corporate general and administrative expenses, net - MSG Entertainment Transition Services Agreement (a) | 30,337 | — | ||||||||||||
| Origination, master control and technical services | 1,257 | 1,232 | ||||||||||||
| Other operating expenses, net | 544 | (11) | ||||||||||||
Total operating expenses, net (b) | $ | 76,323 | $ | 34,471 | ||||||||||
_________________
(a) Included in Corporate general and administrative expenses, net - MSG Entertainment Transition Services Agreement are $2,805 related to Restructuring charges for employees who provided services to the Company under the MSG Entertainment Transition Services Agreement.
(b) Of the total operating expenses, net, $46,078 and $44,248 for three months ended September 30, 2023 and 2022, respectively, are included in direct operating expenses in the accompanying condensed consolidated statements of operations, and $30,245 and $(9,777) for three months ended September 30, 2023 and 2022, respectively, are included as net credits in selling, general, and administrative expenses.
Revenues
Revenues from related parties relate primarily to certain advertising agreements between MSG Networks and MSG Sports.
Note 15. Segment Information
As of September 30, 2023, the Company was comprised of two reportable segments: Sphere 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.
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) depreciation, amortization and impairments of property and equipment, goodwill and intangible assets,
(ii) amortization for capitalized cloud computing arrangement costs,
(iii) share-based compensation expense,
(iv) restructuring charges or credits,
(v) merger and acquisition-related costs, including merger-related litigation expenses,
(vi) gains or losses on sales or dispositions of businesses and associated settlements,
(vii) the impact of purchase accounting adjustments related to business acquisitions, and
(viii) 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 the exclusion of share-based compensation expense or benefit allows investors to better track the performance 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 provides investors with a clearer picture of the Company’s
24
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
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).
Information as to the operations of the Company’s reportable segments is set forth below.
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
| Revenues | $ | 7,779 | $ | 110,228 | $ | 118,007 | ||||||||||||||
| Direct operating expenses | (7,805) | (76,694) | (84,499) | |||||||||||||||||
| Selling, general and administrative expenses | (84,150) | (2,994) | (87,144) | |||||||||||||||||
| Depreciation and amortization | (12,377) | (1,882) | (14,259) | |||||||||||||||||
Other gains, net | 1,497 | — | 1,497 | |||||||||||||||||
| Restructuring charges | (3,391) | — | (3,391) | |||||||||||||||||
| Operating (loss) income | $ | (98,447) | $ | 28,658 | $ | (69,789) | ||||||||||||||
Interest income | 4,378 | |||||||||||||||||||
| Other income, net | 42,196 | |||||||||||||||||||
| Loss from operations before income taxes | $ | (23,215) | ||||||||||||||||||
Reconciliation of operating (loss) income to adjusted operating (loss) income: | ||||||||||||||||||||
| Operating (loss) income | $ | (98,447) | $ | 28,658 | $ | (69,789) | ||||||||||||||
| Add back: | ||||||||||||||||||||
| Share-based compensation | 3,919 | 964 | 4,883 | |||||||||||||||||
| Depreciation and amortization | 12,377 | 1,882 | 14,259 | |||||||||||||||||
| Restructuring charges | 3,391 | — | 3,391 | |||||||||||||||||
| Other gains, net | (1,497) | — | (1,497) | |||||||||||||||||
Merger and acquisition related costs, net of insurance recoveries | (2,702) | (6,341) | (9,043) | |||||||||||||||||
Amortization for capitalized cloud computing arrangement costs | — | 22 | 22 | |||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | (107) | — | (107) | |||||||||||||||||
| Adjusted operating (loss) income | $ | (83,066) | $ | 25,185 | $ | (57,881) | ||||||||||||||
| Other information: | ||||||||||||||||||||
| Capital expenditures | $ | 183,163 | $ | 1,408 | $ | 184,571 | ||||||||||||||
25
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
| Three Months Ended | ||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Sphere | MSG Networks | Total | ||||||||||||||||||
| Revenues | $ | 650 | $ | 122,479 | $ | 123,129 | ||||||||||||||
| Direct operating expenses | — | (75,420) | (75,420) | |||||||||||||||||
Selling, general and administrative expenses | (77,191) | (17,440) | (94,631) | |||||||||||||||||
| Depreciation and amortization | (4,515) | (1,618) | (6,133) | |||||||||||||||||
Other gains, net | 2,000 | — | 2,000 | |||||||||||||||||
| Operating (loss) income | $ | (79,056) | $ | 28,001 | $ | (51,055) | ||||||||||||||
Interest income | 3,333 | |||||||||||||||||||
| Other expense, net | (415) | |||||||||||||||||||
| Loss from operations before income taxes | $ | (48,137) | ||||||||||||||||||
Reconciliation of operating (loss) income to adjusted operating (loss) income: | ||||||||||||||||||||
| Operating (loss) income | $ | (79,056) | $ | 28,001 | $ | (51,055) | ||||||||||||||
| Add back: | ||||||||||||||||||||
| Share-based compensation | 9,786 | 1,704 | 11,490 | |||||||||||||||||
| Depreciation and amortization | 4,515 | 1,618 | 6,133 | |||||||||||||||||
| Other gains, net | (2,000) | — | (2,000) | |||||||||||||||||
Merger and acquisition related costs | 2,749 | 1,901 | 4,650 | |||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 77 | 44 | 121 | |||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | (154) | — | (154) | |||||||||||||||||
| Adjusted operating (loss) income | (64,083) | $ | 33,268 | $ | (30,815) | |||||||||||||||
| Other information: | ||||||||||||||||||||
| Capital expenditures | $ | 260,239 | $ | 1,227 | $ | 261,466 | ||||||||||||||
Concentration of Risk
Accounts receivable, net in the accompanying condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023 include amounts due from the following individual customers, which accounted for the noted percentages of the gross balance:
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Customer A | 22 | % | 23 | % | ||||||||||
| Customer B | 21 | % | 22 | % | ||||||||||
| Customer C | 17 | % | 17 | % | ||||||||||
Revenues in the accompanying condensed consolidated statements of operations for the three months ended September 30, 2023 and September 30, 2022 include amounts from the following individual customers:
26
SPHERE ENTERTAINMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 16. Additional Financial Information
The following table provides a summary of the amounts recorded as cash, cash equivalents and restricted cash.
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Cash and cash equivalents | $ | 433,507 | $ | 131,965 | ||||||||||
| Restricted cash | 18,235 | $ | 297,149 | |||||||||||
Total cash, cash equivalents and restricted cash | $ | 451,742 | $ | 429,114 | ||||||||||
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:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Prepaid expenses | $ | 18,812 | $ | 22,616 | ||||||||||
Note and other receivables | 28,441 | 21,453 | ||||||||||||
Inventory | 2,388 | — | ||||||||||||
| Current deferred production costs | 11,624 | 6,524 | ||||||||||||
| Other | 4,990 | 5,492 | ||||||||||||
| Total prepaid expenses and other current assets | $ | 66,255 | $ | 56,085 | ||||||||||
Accounts payable, accrued and other current liabilities consisted of the following:
| As of | ||||||||||||||
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Accounts payable | $ | 19,319 | $ | 39,654 | ||||||||||
| Accrued payroll and employee related liabilities | 42,809 | 75,579 | ||||||||||||
| Cash due to promoters | 71,059 | 73,611 | ||||||||||||
Capital related accruals | 224,788 | 236,593 | ||||||||||||
| Accrued legal fees | 24,679 | 53,857 | ||||||||||||
| Other accrued expenses | 45,437 | 36,437 | ||||||||||||
| Total accounts payable, accrued and other current liabilities | $ | 428,091 | $ | 515,731 | ||||||||||
Other income (expense), net includes the following:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Gain on litigation settlement | 62,647 | $ | — | |||||||||||
Realized loss on equity method investments | (19,027) | (2,247) | ||||||||||||
| Other | (1,424) | 1,832 | ||||||||||||
Total other income (expense), net | $ | 42,196 | $ | (415) | ||||||||||
Income Taxes
During the three months ended September 30, 2023 and 2022, the Company made income tax payments, net of refunds, of $17,868 and $974, respectively.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted.
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 (i) our plans to refinance MSG Networks’ existing debt, (ii) the success of Sphere and The Sphere ExperienceTM, (iii) timing and costs of new venue construction and the development of related content, (iv) our execution of the strategy for and the success of MSG Networks’ direct-to-consumer and authenticated streaming product, (v) the ability to reduce or defer certain discretionary capital projects, and (vi) our plans for 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, on terms favorable to us or at all;
•the popularity of The Sphere Experience, as well as our ability to attract advertisers and marketing partners, and audiences and artists to residencies, concerts and other events at Sphere in Las Vegas;
•the successful development of The Sphere Experience and related original immersive productions and content and the investments associated with such development, as well as investment in personnel, content and technology for Sphere;
•our ability to successfully design, construct, finance and operate new Sphere venues, and the investments, costs and timing associated with those efforts, including obtaining financing, the impact of inflation and any construction delays and/or cost overruns;
•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 demand for MSG Networks programming among cable, satellite, fiber-optic and other platforms that distribute its networks (“Distributors”) and the number of 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 successfully execute MSG Networks’ strategy for its direct-to-consumer and authenticated streaming product (MSG+), the success of such offering and our ability to adapt to new content distribution platforms or changes in consumer behavior resulting from emerging technologies;
•the ability of our Distributors to 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;
•MSG Networks’ ability to renew or replace its media rights agreements with professional sports teams and its ability to perform its obligations thereunder;
•the relocation or insolvency of professional sports teams with which we have a media rights agreement;
•general economic conditions, especially in the Las Vegas and New York City metropolitan areas where we have significant business activities;
•the demand for advertising and marketing partnership offerings at Sphere 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 offerings;
28
•our ability to effectively manage any impacts of future pandemics or public health emergencies, 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 of events by third-parties or the Company as a result of future pandemics 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 and popularity of the professional sports teams whose games we broadcast on our networks;
•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 that may impact us or our business partners;
•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 Sphere or MSG Networks businesses 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 level of our capital expenditures and other investments;
•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 and remedy 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 these regulations or laws or how those regulations and laws are interpreted, as well as our ability to maintain necessary permits, licenses and easements;
•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 performance by our affiliated entities of their obligations under various agreements with us, as well as our performance of our obligations under such agreements and ongoing commercial arrangements;
•the tax-free treatment of the MSGE Distribution (as defined below) and the distribution from MSG Sports in 2020;
•our ability to achieve the intended benefits of the MSGE Distribution; and
•the additional factors described under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 filed on August 22, 2023 (the “2023 Form 10-K”).
29
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in the 2023 Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited condensed consolidated financial statements (“financial statements”) and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s audited consolidated financial statements and notes thereto as of June 30, 2023 and 2022 and for the three years ended June 30, 2023, 2022 and 2021 (“Audited Consolidated Annual Financial Statements”) included in the 2023 Form 10-K, to help provide an understanding of our financial condition, changes in financial condition and results of operations.
Business Overview
Sphere Entertainment Co. (the “Company”) is a premier live entertainment and media company comprised of two reportable segments, Sphere and MSG Networks. Sphere is a next-generation entertainment medium, and MSG Networks operates two regional sports and entertainment networks, as well as a direct-to-consumer and authenticated streaming product.
Sphere: This segment reflects SphereTM, a next-generation entertainment medium powered by cutting-edge technologies that enables multi-sensory storytelling at an unparalleled scale. The Company’s first Sphere opened in Las Vegas in September 2023. The venue can accommodate up to 20,000 guests and will host a wide variety of events year-round, including The Sphere ExperienceTM, which features original immersive productions, as well as concerts and residencies from renowned artists, and marquee sporting and corporate events. Supporting this strategy is Sphere Studios, which is home to a team of creative, production, technology and software experts who provide full in-house creative and production services. The studio campus in Burbank includes a 68,000-square-foot development facility, as well as Big Dome, a 28,000-square-foot, 100-foot high custom dome, with a quarter-sized version of the screen at Sphere in Las Vegas, that serves as a specialized screening, production facility, and lab for content at Sphere.
MSG Networks: This segment is comprised of the Company’s regional sports and entertainment networks, MSG Network and MSG Sportsnet, as well as its direct-to-consumer and authenticated streaming product, MSG+. 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 exclusive 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 the Buffalo Bills (the “Bills”) of the National Football League (the “NFL”).
Unless the context otherwise requires, all references to “Sphere Entertainment” or the “Company” refer collectively to Sphere Entertainment Co., a holding company, and its direct and indirect subsidiaries.
Our MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited results of operations for the three months ended September 30, 2023 and 2022 on both a (i) consolidated basis and (ii) segment basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the three months ended September 30, 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 business.
30
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 2024. This section should be read together with our critical accounting policies, which are discussed in the 2023 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 Audited Consolidated Annual Financial Statements of the Company included therein.
MSG Entertainment Distribution
On April 20, 2023 (the “MSGE Distribution Date”), 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 Distribution”), with the Company retaining approximately 33% of the outstanding common stock of MSG Entertainment (in the form of MSG Entertainment Class A common stock) immediately following the MSGE Distribution (the “MSGE Retained Interest”). Following the MSGE Distribution Date, the Company retained the Sphere and MSG Networks businesses and MSG Entertainment now owns the traditional live entertainment business previously owned and operated by the Company through its Entertainment business segment, excluding the Sphere business. In the MSGE 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. See Note 1. Description of Business and Basis of Presentation, to the Audited Consolidated Annual Financial Statements for more information about the MSGE Distribution.
As of September 30, 2023, following the sales of portions of the MSGE Retained Interest and the repayment of the delayed draw term loan (further discussed below) with MSG Entertainment using a portion of the MSGE Retained Interest, the Company no longer holds any of the outstanding common stock of MSG Entertainment.
As of April 20, 2023, the MSG Entertainment business met the criteria for discontinued operations and was classified as a discontinued operation.
Tao Group Hospitality Disposition
On May 3, 2023, the Company completed the sale of 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”). See Note 3. Discontinued Operations, to the Audited Consolidated Annual Financial Statements for more information about the Tao Group Hospitality Disposition.
Since March 31, 2023, the Tao Group Hospitality segment met the criteria for discontinued operations and was classified as a discontinued operation.
Factors Affecting Operating Results
The operating results of our Sphere segment are largely dependent on our ability to attract audiences to The Sphere Experience, and advertisers and marketing partners, as well as guests and artists to residencies, concerts and other events at our venue. The operating results of our MSG Networks segment are largely dependent on the affiliation agreements MSG Networks negotiates with Distributors, the number of subscribers of certain Distributors, the success of our DTC product, and the advertising rates we charge advertisers. 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 (including The Sphere Experience) and programming content, which would also negatively affect concession and merchandise sales, and could lead to lower levels of advertising, sponsorship and venue signage. These conditions may also affect the number of immersive productions, concerts, residencies and other events that take place in the future. An economic downturn could adversely affect our business and results of operations.
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 contribute to the success of the Company over time. Our results will also be affected by investments in, and the success of, new immersive productions.
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Condensed Consolidated Results of Operations
Comparison of the Three Months Ended September 30, 2023 versus the Three Months Ended September 30, 2022
The tables below set forth, for the periods presented, certain historical financial information.
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 118,007 | $ | 123,129 | $ | (5,122) | (4) | % | ||||||||||||||||||
| Direct operating expenses | (84,499) | (75,420) | (9,079) | 12 | % | |||||||||||||||||||||
Selling, general, and administrative expenses | (87,144) | (94,631) | 7,487 | (8) | % | |||||||||||||||||||||
| Depreciation and amortization | (14,259) | (6,133) | (8,126) | 132 | % | |||||||||||||||||||||
| Other gains, net | 1,497 | 2,000 | (503) | (25) | % | |||||||||||||||||||||
| Restructuring charges | (3,391) | — | (3,391) | NM | ||||||||||||||||||||||
Operating loss | (69,789) | (51,055) | (18,734) | 37 | % | |||||||||||||||||||||
| Interest income | 4,378 | 3,333 | 1,045 | 31 | % | |||||||||||||||||||||
| Other income (expense), net | 42,196 | (415) | 42,611 | NM | ||||||||||||||||||||||
| Loss from operations before income taxes | (23,215) | (48,137) | 24,922 | 52 | % | |||||||||||||||||||||
Income tax benefit | 90,287 | 1,834 | 88,453 | NM | ||||||||||||||||||||||
| Income (loss) from continuing operations | 67,072 | (46,303) | 113,375 | NM | ||||||||||||||||||||||
| (Loss) income from discontinued operations, net of taxes | (647) | 2,260 | (2,907) | NM | ||||||||||||||||||||||
| Net income (loss) | 66,425 | (44,043) | 110,468 | NM | ||||||||||||||||||||||
| Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations | — | (410) | 410 | NM | ||||||||||||||||||||||
Less: Net income attributable to redeemable noncontrolling interests from discontinued operations | — | 1,124 | (1,124) | NM | ||||||||||||||||||||||
Net income (loss) attributable to Sphere Entertainment Co.’s stockholders | $ | 66,425 | $ | (44,757) | $ | 111,182 | 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 months ended September 30, 2023, as compared to the prior year period, which are discussed below under “Business Segment Results.”
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Other gains, net | Restructuring charges | Operating loss | ||||||||||||||||||||||||||||||||||
| Sphere segment | $ | 7,129 | $ | (7,805) | $ | (6,959) | $ | (7,862) | $ | (503) | $ | (3,391) | $ | (19,391) | |||||||||||||||||||||||||||
| MSG Networks segment | (12,251) | (1,274) | 14,446 | (264) | — | — | 657 | ||||||||||||||||||||||||||||||||||
| $ | (5,122) | $ | (9,079) | $ | 7,487 | $ | (8,126) | $ | (503) | $ | (3,391) | $ | (18,734) | ||||||||||||||||||||||||||||
Depreciation and amortization
For the three months ended September 30, 2023, depreciation and amortization increased $8,126, or 132%, to $14,259 as compared to the prior year period primarily due to an increase in depreciation of assets relating to Sphere in Las Vegas that were placed in service during the first quarter of Fiscal Year 2024.
Other gains, net
For the three months ended September 30, 2023, other gains, net, decreased $503, to $1,497 as compared to the prior year period. The Company received insurance proceeds of $1,497 and $2,000 during the three months ended September 30, 2023 and 2022, respectively, related to the Company’s creative studio in Burbank, California.
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Restructuring charges
For the three months ended September 30, 2023, the Company recorded total restructuring charges of $3,391 related to termination benefits provided for certain executives and employees. No amounts were recorded as restructuring charges during the comparative prior year period.
Interest income
Interest income for the three months ended September 30, 2023 increased $1,045, as compared to the prior year period primarily due to higher interest rates and higher average balances in the Company’s cash and cash equivalents.
Other income (expense), net
Other income (expense), net for the three months ended September 30, 2023 increased $42,611 as compared to the prior year period, primarily due to a realized gain of $62,647 related to the Networks Merger litigation, offset by a realized loss of $19,027 related to the sale of a portion of the MSGE Retained Interest.
Income tax benefit
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 is revised on a quarterly basis.
Income tax benefit for the three months ended September 30, 2023 of $90,287, reflects an effective tax rate of 389%. The effective tax rate exceeds the statutory federal tax rate of 21% primarily due to discrete items including $64,401 of income tax benefit related to the state rate change used to measure the deferred taxes, and income tax benefit of $15,655 related to the nontaxable gain on the repayment of all amounts outstanding under the delayed draw term loan facility (the “DDTL Facility”).
Income tax benefit for the three months ended September 30, 2022 of $1,834, reflects an effective tax rate of 4%. The effective tax rate is lower than the statutory federal tax rate of 21% primarily due to nondeductible transaction costs and state and local taxes.
Adjusted operating income (loss) (“AOI”)
The following is a reconciliation of operating loss to adjusted operating loss (as defined in Note 15. Segment Information in the Audited Consolidated Annual Financial Statements) for the three months ended September 30, 2023 as compared to the prior year period:
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Operating loss | $ | (69,789) | $ | (51,055) | $ | (18,734) | (37) | % | ||||||||||||||||||
| Share-based compensation | 4,883 | 11,490 | (6,607) | (58) | % | |||||||||||||||||||||
| Depreciation and amortization | 14,259 | 6,133 | 8,126 | 132 | % | |||||||||||||||||||||
| Restructuring charges | 3,391 | — | 3,391 | NM | ||||||||||||||||||||||
| Other gains, net | (1,497) | (2,000) | 503 | 25 | % | |||||||||||||||||||||
Merger and acquisition related costs, net of insurance recoveries | (9,043) | 4,650 | (13,693) | NM | ||||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 22 | 121 | (99) | (82) | % | |||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | (107) | (154) | 47 | NM | ||||||||||||||||||||||
| Adjusted operating loss | $ | (57,881) | $ | (30,815) | $ | (27,066) | (88) | % | ||||||||||||||||||
________________
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
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Adjusted operating loss for the three months ended September 30, 2023 increased $27,066 to $57,881. The changes in adjusted operating loss were attributable to the following:
| Three Months Ended | ||||||||
| Changes attributable to | September 30, 2023 | |||||||
Sphere segment | $ | (18,983) | ||||||
MSG Networks segment | (8,083) | |||||||
| $ | (27,066) | |||||||
Business Segment Results
Sphere
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 Sphere segment.
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 7,779 | $ | 650 | $ | 7,129 | NM | |||||||||||||||||||
| Direct operating expenses | (7,805) | — | (7,805) | NM | ||||||||||||||||||||||
| Selling, general, and administrative expenses | (84,150) | (77,191) | (6,959) | 9 | % | |||||||||||||||||||||
| Depreciation and amortization | (12,377) | (4,515) | (7,862) | 174 | % | |||||||||||||||||||||
| Other gains, net | 1,497 | 2,000 | (503) | 25 | % | |||||||||||||||||||||
| Restructuring charges | (3,391) | — | (3,391) | NM | ||||||||||||||||||||||
| Operating loss | $ | (98,447) | $ | (79,056) | $ | (19,391) | (25) | % | ||||||||||||||||||
| Reconciliation to adjusted operating loss: | ||||||||||||||||||||||||||
| Share-based compensation | 3,919 | 9,786 | (5,867) | (60) | % | |||||||||||||||||||||
| Depreciation and amortization | 12,377 | 4,515 | 7,862 | 174 | % | |||||||||||||||||||||
| Restructuring charges | 3,391 | — | 3,391 | NM | ||||||||||||||||||||||
| Other gains, net | (1,497) | (2,000) | 503 | 25 | % | |||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recoveries | (2,702) | 2,749 | (5,451) | (198) | % | |||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | — | 77 | (77) | (100) | % | |||||||||||||||||||||
| Remeasurement of deferred compensation plan liabilities | (107) | (154) | 47 | NM | ||||||||||||||||||||||
| Adjusted operating loss | $ | (83,066) | $ | (64,083) | $ | (18,983) | (30) | % | ||||||||||||||||||
________________
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 months ended September 30, 2023 increased $7,129, as compared to the prior year period. The changes in revenues were attributable to the following:
| Three Months Ended | ||||||||
| September 30, 2023 | ||||||||
Increase in event-related revenues | $ | 4,059 | ||||||
Increase in revenues from sponsorship, signage, Exosphere advertising, and suite license fee revenues | 2,560 | |||||||
| Other net increases | 510 | |||||||
| $ | 7,129 | |||||||
For the three months ended September 30, 2023, the increase in event-related revenues was primarily due to revenues from concerts of $4,059, which reflects the opening of Sphere in Las Vegas on September 29, 2023.
For the three months ended September 30, 2023, the increase in revenues from sponsorship, signage, Exosphere advertising and suite license fees primarily reflects advertising campaigns on the Exosphere, which began in September 2023.
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Direct operating expenses
Direct operating expenses for the three months ended September 30, 2023 increased by $7,805, as compared to the prior year period. The changes in direct operating expenses were attributable to the following:
| Three Months Ended | ||||||||
| September 30, 2023 | ||||||||
Increase in venue operating expenses | $ | 2,826 | ||||||
Increase in event-related direct operating expenses | 2,169 | |||||||
Increase in direct operating expenses for The Sphere Experience | 2,114 | |||||||
Increase in expenses from sponsorship, signage, Exosphere advertising, and suite license fees | 541 | |||||||
| Other net increases | 155 | |||||||
| $ | 7,805 | |||||||
For the three months ended September 30, 2023, the increase in venue operating expenses reflects the opening of Sphere in Las Vegas on September 29, 2023.
For the three months ended September 30, 2023, the increase in event-related direct operating expenses was due to expenses from concerts of $2,169, which reflects the opening of Sphere in Las Vegas on September 29, 2023.
For the three months ended September 30, 2023, the increase in direct operating expenses for The Sphere Experience was due to advertising expenses ahead of the October 6, 2023 debut of The Sphere Experience featuring Postcard From Earth.
For the three months ended September 30, 2023, the increase in direct operating expenses from sponsorship, signage, Exosphere advertising, and suite license fees revenue primarily reflects expenses related to advertising campaigns on the Exosphere, which began in September 2023.
Selling, general, and administrative expenses
For the three months ended September 30, 2023, selling, general, and administrative expenses increased $6,959, or 9% to $84,150 as compared to the prior year period. The increase was primarily due to the impact of the Company’s transition services agreement with MSG Entertainment, higher employee compensation and related benefits and other cost increases. The overall increase was partially offset by the absence of certain corporate expenses that were included in the results for the first quarter of Fiscal Year 2023. While the Company did not incur these corporate costs after the MSGE Distribution Date (April 20, 2023) and does not expect to incur these corporate costs in future periods, they did not meet the criteria for inclusion in discontinued operations for all periods prior to the MSGE Distribution Date.
Depreciation and amortization
For the three months ended September 30, 2023, depreciation and amortization increased $7,862, or 174%, to $12,377 as compared to the prior year period primarily due to an increase in depreciation of assets relating to Sphere in Las Vegas that were placed in service during the first quarter of Fiscal Year 2024.
Other gains, net
For the three months ended September 30, 2023, other gains, net, decreased $503, to $1,497 as compared to the prior year period. The Company received insurance proceeds of $1,497 and $2,000 during the three months ended September 30, 2023 and 2022, respectively, related to the Company’s creative studio in Burbank, California.
Restructuring charges
For the three months ended September 30, 2023, the Company recorded total restructuring charges of $3,391 related to termination benefits provided for certain executives and employees. No amounts were recorded as restructuring charges during the comparative prior year period.
Operating loss
Operating loss for the three months ended September 30, 2023 was $98,447 as compared to $79,056 in the prior year period, an increase of $19,391. The increase in operating loss was primarily due to an increase in depreciation and amortization, direct operating expenses, selling, general and administrative expenses, and restructuring charges, partially offset by the increase in revenues.
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Adjusted operating income (loss)
Adjusted operating loss for the three months ended September 30, 2023 increased $18,983 to $83,066 as compared to the prior year period. The increase in adjusted operating loss was primarily due to an increase in selling, general and administrative expenses (excluding share-based compensation expense and merger and acquisition related costs) and direct operating expenses, partially offset by the increase in revenues.
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 | ||||||||||||||||||||||||||
| September 30, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||||||||||||
| Revenues | $ | 110,228 | $ | 122,479 | $ | (12,251) | (10) | % | ||||||||||||||||||
| Direct operating expenses | (76,694) | (75,420) | (1,274) | 2 | % | |||||||||||||||||||||
| Selling, general, and administrative expenses | (2,994) | (17,440) | 14,446 | (83) | % | |||||||||||||||||||||
| Depreciation and amortization | (1,882) | (1,618) | (264) | 16 | % | |||||||||||||||||||||
| Operating income | $ | 28,658 | $ | 28,001 | $ | 657 | 2 | % | ||||||||||||||||||
| Reconciliation to adjusted operating income: | ||||||||||||||||||||||||||
| Share-based compensation | 964 | 1,704 | (740) | (43) | % | |||||||||||||||||||||
| Depreciation and amortization | 1,882 | 1,618 | 264 | 16 | % | |||||||||||||||||||||
| Merger and acquisition related costs, net of insurance recoveries | (6,341) | 1,901 | (8,242) | NM | ||||||||||||||||||||||
| Amortization for capitalized cloud computing arrangement costs | 22 | 44 | (22) | 50 | % | |||||||||||||||||||||
| Adjusted operating income | $ | 25,185 | $ | 33,268 | $ | (8,083) | (24) | % | ||||||||||||||||||
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 months ended September 30, 2023 decreased $12,251 as compared to the prior year period. The changes in revenues were attributable to the following:
| Three Months Ended | ||||||||
| September 30, 2023 | ||||||||
| Decrease in affiliation fee revenue | $ | (11,746) | ||||||
Decrease in advertising revenue | (375) | |||||||
| Other net decreases | (130) | |||||||
| $ | (12,251) | |||||||
For the three months ended September 30, 2023, affiliation fee revenue decreased $11,746, primarily due to a decrease in subscribers of approximately 11.5%, partially offset by the impact of higher affiliation rates.
Direct operating expenses
Direct operating expenses for the three months ended September 30, 2023 increased by $1,274, as compared to the prior year period. The changes in direct operating expenses were attributable to the following:
| Three Months Ended | ||||||||
| September 30, 2023 | ||||||||
Increase in rights fees expense | $ | 1,547 | ||||||
| Change in other programming and production costs | (273) | |||||||
| $ | 1,274 | |||||||
For the three months ended September 30, 2023, right fees expense increased $1,547 primarily due to the impact of annual contractual rate increases.
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Selling, general, and administrative expenses
For the three months ended September 30, 2023, selling, general and administrative expenses of $2,994 decreased $14,446 as compared to the prior year period, primarily due to lower professional fees of $8,050 inclusive of litigation-related insurance recoveries associated with the Networks Merger, and lower employee compensation and related benefits of $3,739.
Operating income
For the three months ended September 30, 2023, operating income of $28,658 increased $657, or 2%, as compared to the prior year period, primarily due to the decrease in selling, general and administrative expenses, partially offset by the decrease in revenues and to a lesser extent, the increase in direct operating expenses.
Adjusted operating income
For the three months ended September 30, 2023, adjusted operating income of $25,185 decreased $8,083, or 24%, as compared to the prior year period, primarily due to the decrease in revenues and, to a lesser extent, the increase in direct operating expenses, partially offset by the decrease in selling, general and administrative expenses (excluding merger and acquisition related costs, net of insurance recoveries).
Liquidity and Capital Resources
Sources and Uses of Liquidity
As of September 30, 2023, the Company’s unrestricted cash and cash equivalents balance, inclusive of approximately $123,100 in advance cash proceeds primarily related to ticket sales, was $433,507, as compared to $131,965 as of June 30, 2023. Included in unrestricted cash and cash equivalents as of September 30, 2023 was $113,950 of cash and cash equivalents at MSG Networks, which is not available for distribution to the Company in order to maintain compliance with the covenants under the MSG Networks Credit Facilities (as defined below). As of September 30, 2023, the Company’s restricted cash balance was $18,235, as compared to $297,149 as of June 30, 2023, which included $275,000 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 below), which occurred on August 8, 2023. The principal balance of the Company’s total debt outstanding as of September 30, 2023 was $1,207,250, including $932,250 of debt under the MSG Networks Credit Facilities. The balance under the MSG Networks Credit Facilities was reduced to $911,625 on October 2, 2023 upon MSG Networks’ completion of its required quarterly amortization payment.
Our primary sources of liquidity are cash and cash equivalents and cash flows from the operations of our businesses. The Company’s uses of cash over the next 12 months are expected to be substantial and include working capital-related items (including funding our operations), capital spending (including the creation of additional content for Sphere), required debt service payments, and payments we expect to be made 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 our businesses, 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, market conditions could adversely impact our ability to do so at that time.
Our ability to have sufficient liquidity to fund our operations and refinance the MSG Networks Credit Facilities is dependent on the ability of Sphere in Las Vegas to generate significant positive cash flow during Fiscal Year 2024. Although we anticipate that Sphere in Las Vegas will generate substantial revenue and adjusted operating income on an annual basis over time, there can be no assurance that guests, artists, promoters, advertisers and marketing partners will embrace this new platform. Original immersive productions, such as Postcard From Earth, have not been previously pursued on the scale of Sphere, which increases the uncertainty of our operating expectations. To the extent that our efforts do not result in viable shows, or to the extent that any such productions do not achieve expected levels of popularity among audiences, we may not generate the cash flows from operations necessary to fund our operations. To the extent we do not realize expected cash flows from operations from Sphere in Las Vegas, we would have to take several actions to improve our financial flexibility and preserve liquidity, including significant reductions in both labor and non-labor expenses as well as reductions and/or deferrals in capital spending. Therefore, while we currently believe we will have sufficient liquidity from cash and cash equivalents and cash flows from operations (including expected cash flows from operations from Sphere in Las Vegas) to fund our operations and service our credit facilities, which includes the Company’s expectation that MSG Networks will pay down $102,125 in required quarterly amortization payments on the MSG Networks Credit Facilities, as described below, no assurance can be provided our liquidity will be sufficient in the event any of the preceding uncertainties facing Sphere in Las Vegas are realized over the next 12 months. The Company also anticipates MSG Networks will pay a portion of its term loan upon refinancing of the MSG Networks Credit Facilities prior to its maturity in October 2024.
37
As disclosed in Note 10. Credit Facilities, all of the outstanding borrowings under the MSG Networks Credit Facilities are guaranteed by the MSGN Guarantors (as defined under Note 10. Credit Facilities) and secured by the MSGN Collateral (as defined under Note 10. Credit Facilities). Sphere Entertainment Co., Sphere Entertainment Group, LLC and the subsidiaries of Sphere Entertainment Group, LLC (collectively, the “Non-Credit Parties”) are not legally obligated to fund the outstanding borrowings under the MSG Networks Credit Facilities, nor are the assets of the Non-Credit Parties pledged as security under the MSG Networks Credit Facilities. Over the next 12 months, MSG Networks expects to make $102,125 in required quarterly amortization payments on the MSG Networks Credit Facilities. The remaining outstanding borrowings under the MSG Networks Credit Facilities of $829,125 are scheduled to mature within one year beyond the issuance date of the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. However, MSG Networks will be unable to generate sufficient operating cash flows over the next 12 months to settle the remaining outstanding borrowings under the MSG Networks Credit Facilities when they become due. Therefore, management plans to refinance the MSG Networks Credit Facilities prior to maturity. While MSG Networks has historically been able to refinance its indebtedness, management can provide no assurance MSG Networks will be able to refinance the MSG Networks Credit Facilities, or that such refinancing will be secured on terms that are acceptable to MSG Networks. In the event MSG Networks is unable to refinance the amount scheduled to mature under the MSG Networks Credit Facilities or secure alternative sources of funding through the capital and credit markets on acceptable terms, the lenders would retain their right to exercise all of their remedies under the MSG Networks Credit Facilities, which would include, but not be limited to, declaring an event of default and foreclosing on the MSGN Collateral. In the event of an exercise of post-default rights and remedies, the Company believes the lenders would have no further remedies or recourse against the Non-Credit Parties pursuant to the terms of the MSG Networks Credit Facilities. While this condition raises substantial doubt about the Company’s ability to continue as a going concern, for the reasons stated in this paragraph, we have concluded this condition has been effectively alleviated and the Company will be able to continue as a going concern for at least one year beyond the issuance date of the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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 18. Segment Information, to the Company’s Audited Consolidated Annual Financial Statements.
On March 31, 2020, the Company’s Board of Directors authorized 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 opened Sphere in Las Vegas in September 2023. See “Part I — Item 1. Our Business — Sphere” in the 2023 Form 10-K. The venue has a number of revenue streams, including The Sphere Experience (which includes original immersive productions), advertising and marketing partnerships, and concert residencies, corporate and marquee sporting events, each of which the Company expects to become significant over time. As a result, over time, we anticipate that Sphere in Las Vegas will generate substantial revenue and adjusted operating income on an annual basis.
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 Sphere venues can be successful. The Company’s intention for any future venues is to utilize several options, such as joint ventures, equity partners, a managed venue model and non-recourse debt financing.
Financing Agreements
See Note 10. Credit Facilities, to the condensed consolidated 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.
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MSG Networks Senior Secured Credit Facility
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 September 30, 2023, there were no borrowings or letters of credit issued and outstanding under the MSGN Revolving Credit Facility.
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. As of September 30, 2023, the total leverage ratio coverage ratio was 5.27:1:00. 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 September 30, 2023, the interest coverage ratio was 2.50:1:00. As of September 30, 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, LLC (“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. Following the Liquidity Covenant Reduction Date (as defined below), the minimum liquidity level for Sphere Entertainment Group is set at $50,000, with $25,000 required to be held in cash or cash equivalents. Prior to the Liquidity Covenant Reduction Date, the minimum liquidity level for Sphere Entertainment Group was set at $100,000 with $75,000 required to be held in cash or cash equivalents, which amounts (in addition to certain cash proceeds from the sale of the MSGE Retained Interest) were 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. The Liquidity Covenant Reduction Date occurred on August 8, 2023, once Sphere in Las Vegas was substantially completed and certain of its systems were 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 Distribution, the MSGE Retained Interest was pledged to secure the LV Sphere Term Loan Facility and was released as collateral upon the Liquidity Covenant Reduction Date.
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Letters of Credit
The Company uses letters of credit to support its business operations. As of September 30, 2023, there were no borrowings or letters of credit issued and outstanding under the MSGN Revolving Credit Facility. The Company has letters of credit relating to operating leases which are supported by cash and cash equivalents that are classified as restricted.
Contractual Obligations
As of September 30, 2023, the Company did not have any material changes in its non-cancelable contractual obligations (other than activities in the ordinary course of business). See Note 9. Commitments and Contingencies, to the condensed consolidated 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 September 30, 2023, cash, cash equivalents and restricted cash totaled $451,742, as compared to $429,114 as of June 30, 2023. The following table summarizes the Company’s cash flow activities for the three months ended September 30, 2023 and 2022:
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net cash used in operating activities | $ | (94,641) | $ | (81,183) | ||||||||||
| Net cash provided by (used in) investing activities | 66,498 | (285,218) | ||||||||||||
| Net cash provided by (used in) financing activities | 50,854 | (20,023) | ||||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (83) | (693) | ||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 22,628 | $ | (387,117) | ||||||||||
Operating Activities
Net cash used in operating activities for the three months ended September 30, 2023 increased by $13,458 to $94,641 as compared to the prior year period, primarily due to net income reflecting a significant non-cash deferred income tax benefit of $91,585, as compared to a deferred income tax expense of $1,012 in the corresponding prior year period, as well as changes in working capital assets and liabilities, which included fewer collections from customers and related parties, and a larger amount of payments to related parties, as compared to the corresponding prior year period. These were offset by a net income of $66,425, as compared to a net loss of $44,043 in the corresponding prior year period.
Investing Activities
Net cash provided by (used in) investing activities for the three months ended September 30, 2023 increased by $351,716 to $66,498 as compared to the prior year period, primarily due to the proceeds from the sale of MSGE Retained Interest, as well as a decrease in capital expenditures for Sphere in Las Vegas when compared to the corresponding prior year period.
Financing Activities
Net cash provided by (used in) financing activities for the three months ended September 30, 2023 increased by $70,877 to $50,854 as compared to the prior year period primarily due to proceeds of $65,000 from the DDTL Facility, and the absence of principal repayments in the current year period.
Seasonality of Our Business
Our MSG Networks segment generally earns 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 condensed consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements.
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Critical Accounting Estimates
There have been no material changes to the Company’s critical accounting policies other than the one noted in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q . 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 2024.
Impairment of Goodwill
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. As of September 30, 2023, the Company had two reportable segments and two reporting units, Sphere and MSG Networks, consistent with the way management makes decisions and allocates resources to the business.
The goodwill balance reported on the Company’s condensed consolidated balance sheet as of September 30, 2023 by reporting unit was as follows:
As of | |||||
| September 30, 2023 | |||||
Sphere | $ | 32,299 | |||
| MSG Networks | 424,508 | ||||
| Total Goodwill | $ | 456,807 | |||
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.
The Company elected to perform the qualitative assessment of impairment for all of the Company’s reporting units for the Fiscal Year 2024 annual impairment test. These assessments considered qualitative 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 2024, 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 the impairment test, the Company’s MSG Networks reporting unit had a sufficient safety margin, representing the excess of the estimated fair value of the reporting unit, derived from the most recent quantitative assessment, less its carrying value (including goodwill allocated to the 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.
For the Sphere reporting unit, the goodwill balance was determined based upon a relative fair value allocation between Sphere and MSG Entertainment at the time of the MSGE Distribution. Due to the proximity of the annual goodwill impairment test to the MSGE
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Distribution and the related relative fair value allocation, the Company primarily considered qualitative factors, as noted above, in determining that the Sphere reporting unit goodwill was not impaired.
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 the 2023 Form 10-K.
Potential Interest Rate Risk Exposure
The Company, through its subsidiaries, 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 September 30, 2023 and continuing for a full year would increase the Company’s interest payments on the outstanding amounts under the credit facilities by $24,145.
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 12 months ended September 30, 2023, the GBP/USD exchange rate ranged from 1.0975 to 1.3137 as compared to GBP/USD exchange rate of 1.2206 on September 30, 2023, a fluctuation range of approximately 7.63%. As of September 30, 2023, a uniform hypothetical 9.42% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $19,700 in the Company’s net asset value.
Item 4. Controls and Procedures
Our management, with the participation of our Executive Chairman and Chief Executive Officer and our Senior Vice President, Controller and Principal Accounting Officer (functioning as our principal 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 of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Executive Chairman and Chief Executive Officer and our Senior Vice President, Controller and Principal Accounting Officer (functioning as our principal financial officer) concluded that the Company's disclosure controls and procedures were effective as of September 30, 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 Exchange Act during the fiscal quarter ended September 30, 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 merger between a subsidiary of the Company and MSG Networks Inc. (the “Networks 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 Networks 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 Networks Merger.
Six complaints involved allegations of fiduciary breaches in connection with the negotiation and approval of the Networks Merger and were 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 named the Company as only a nominal defendant, retained all of the derivative claims and alleged that the members of the board of directors and controlling stockholders violated their fiduciary duties in the course of negotiating and approving the Networks Merger. Plaintiffs sought, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company advanced the costs incurred by defendants in this action, and defendants 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, without admitting liability, on the terms and conditions set forth in a binding term sheet, which was incorporated into a long-form settlement agreement (the “MSGE Settlement Agreement”) that was filed with the Court on April 20, 2023. The MSGE Settlement Agreement provided 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’s amount was fully funded by the other defendants’ insurers. The MSGE Settlement Agreement was approved by the Court on August 14, 2023, which constituted the final judgment in the action. A realized gain of $62.6 million was recognized in Other income (expense), net on the condensed combined statement of operations in connection with the settlement payment to the Company.
On September 27, 2021, the Court entered an order consolidating four complaints filed by purported former 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 asserted 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 Networks Merger. Plaintiffs alleged that the MSG Networks Inc. board of directors and controlling stockholders breached their fiduciary duties in negotiating and approving the Networks Merger. The Company was not named as a defendant but was subpoenaed to produce documents and testimony related to the Networks Merger. Plaintiffs sought, among other relief, monetary damages for the putative class and plaintiffs’ attorneys’ fees. Pursuant to the indemnity rights in its bylaws and Delaware law, the Company advanced the costs incurred by defendants in this action, and defendants 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, which was incorporated into a long-form settlement agreement (the “MSGN Settlement Agreement”) that was filed with the Court on May 18, 2023. The MSGN Settlement Agreement provided 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, of which $28 million has been paid as of September 30, 2023, with $20.5 million accrued for in Accounts payable, accrued and other current liabilities. MSG Networks has a dispute with its insurers over whether and to what extent there is insurance coverage for the settlement. Unless MSG Networks Inc. and the insurers 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 agreed to advance $20.5 million to fund the settlement and related class notice costs. The MSGN Settlement Agreement was approved by the Court on August 14, 2023, which constituted the final judgment in the action.
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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.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
As of September 30, 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
_________________
† 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 8th day of November 2023.
| Sphere Entertainment Co. | ||||||||
| By: | /S/ GREGORY BRUNNER | |||||||
| Name: | Gregory Brunner | |||||||
| Title: | Senior Vice President, Controller and Principal Accounting Officer | |||||||
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