Sphere Entertainment Co.: Form 10-Q for the period ended Sep 30, 2023

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;
• 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”).

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.

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.

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.

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.”

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.

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:

NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.

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:

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.

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:

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.

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:

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.

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.

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:

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:

For the three months ended September 30, 2023, right fees expense increased $1,547 primarily due to the impact of annual contractual rate increases.

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.

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.

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.

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:

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.

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:

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

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.

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.

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.