# Sphere Entertainment Co. (SPHR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sphere Entertainment Co.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1795250/000179525023000017/sphr-20230630.htm
Accession: 0001795250-23-000017
Filing date: 2023-08-22
Report date: 2023-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SPHR/
All MD&A years: /company/SPHR/mda/
Previous year: /company/SPHR/mda/fy2022/ (FY 2022)
Next year: /company/SPHR/mda/fy2024/ (FY 2024)

Item 7. 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) the timing and costs of venue construction and the development of related content, (ii) our plans to refinance MSG Networks’ existing debt, (iii) the success of Sphere and The Sphere Experience, (iv) our plans for the potential disposition of the Company’s retained interest in Madison Square Garden Entertainment Corp. (“MSG Entertainment”), (v) our strategy for MSG Networks’ direct-to-consumer product, (vi) the impact of run-rate savings that could be generated by the Company’s cost reduction program, the ability to reduce or defer certain discretionary capital projects, and (viii) 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;

•our ability to successfully design, construct, finance and operate new entertainment venues in Las Vegas and/or other markets, as applicable, 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;

•the successful development of The Sphere Experience and related original immersive productions and the investments associated with such development, as well as investment in personnel, content and technology for Sphere;

•our ability to successfully implement cost reductions and reduce or defer certain discretionary capital projects, if necessary;

•our ability to dispose of all or a portion of the remainder of the MSGE Retained Interest (as defined below) on favorable terms due to market conditions or otherwise;

•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 a direct-to-consumer 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;

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•general economic conditions, especially in the Las Vegas and New York City metropolitan areas where we have (or plan to 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 the COVID-19 pandemic or 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 by third-parties or the Company as a result of the COVID-19 pandemic or 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;

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•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 “Part I — Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” 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-K 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-K to conform these statements to actual results or to changes in our expectations.

MSGE Distribution

On April 20, 2023 (the “MSGE Distribution Date”), the Company distributed approximately 67% of the outstanding common stock of MSG Entertainment (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 (“Class A common stock”), 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 (“Class B common stock”), held of record as of the close of business, New York City time, on the Record Date. Concurrently with the MSGE Distribution, the Company entered into a delayed draw term loan (the “DDTL Facility”) with a subsidiary of MSG Entertainment that provided for a $65,000 senior unsecured delayed draw term loan facility. The DDTL Facility was fully drawn on July 14, 2023 and on August 9, 2023, the Company repaid all amounts outstanding under the DDTL Facility (including accrued interest and commitment fees) using a portion of the MSGE Retained Interest.

Following the sale of a portion of the MSGE Retained Interest and the repayment of the DDTL Facility, the Company now holds approximately 17% of the outstanding common stock of MSG Entertainment (in the form of MSG Entertainment Class A common stock), based on 49,128 total shares of MSG Entertainment common stock outstanding as of August 18, 2023.

As of April 20, 2023, the MSG Entertainment business met the criteria for discontinued operations and was classified as a discontinued operation. See Note 3. Discontinued Operations to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding the MSGE Distribution.

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”).

Since March 31, 2023, the Tao Group Hospitality segment met the criteria for discontinued operations and was classified as a discontinued operation. See Note 3. Discontinued Operations to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding the Tao Group Hospitality Disposition.

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After giving effect to the MSGE Distribution and Tao Group Hospitality Disposition, the Company operates and reports financial information in two reportable segments: Sphere and MSG Networks.

Introduction

This MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and footnotes thereto included in Item 8 of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.

Our MD&A is organized as follows:

Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.

Results of Operations. This section provides an analysis of our results of operations for Fiscal Years 2023, 2022, and 2021 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, as well as an analysis of our cash flows for Fiscal Years 2023, 2022, and 2021. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations and off balance sheet arrangements that existed at June 30, 2023.

Seasonality of Our Business. This section discusses the seasonal performance of our business.

Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section cross-references a discussion of critical accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. Our critical accounting policies and recently issued accounting pronouncements, are discussed included in Items 7 and 8, respectively, of this Annual Report on Form 10-K.

Business Overview

Sphere Entertainment Co. 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 Sphere, a next-generation entertainment medium powered by cutting-edge technologies that we believe will enable multi-sensory storytelling at an unparalleled scale. The Company’s first Sphere is expected to open in Las Vegas in September 2023. The venue can accommodate up to 20,000 guests and is expected to host a wide variety of events year-round, including The Sphere ExperienceTM, which will feature 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 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”).

Description of Our Segments

Sphere

Revenue Sources — Sphere

The Sphere segment has yet to generate material revenue during Sphere’s pre-opening period. See Note 2. Summary of Significant Accounting Policies to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding our accounting policies on revenue recognition.

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Expenses — Sphere

The Sphere segment incurs non-capitalizable content development and technology costs associated with the Company’s Sphere initiative. Sphere also incurs corporate and supporting department operating costs that are attributable to Sphere development, including charges under the transition services agreement with MSG Entertainment (the “MSGE TSA”), costs associated with the promotion of events through various advertising campaigns, and non-event related operating expenses such as insurance, utilities, repairs and maintenance, labor related to the overall management of the Sphere segment and depreciation and amortization expense related to certain corporate property, equipment and leasehold improvements. See Note 2. Summary of Significant Accounting Policies to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding our accounting policies on direct operating expenses.

MSG Networks

Revenue Sources — MSG Networks

The MSG Networks segment generates revenues principally from affiliation fees, as well as from the sale of advertising. For Fiscal Year 2023, this segment represented approximately 99.5% of our consolidated revenues.

Affiliation Fee Revenue

Affiliation fee revenue is earned from Distributors for the right to carry the Company’s networks. The fees we receive depend largely on the demand from subscribers for our programming.

Advertising Revenue

The MSG Networks’ advertising revenue is largely derived from the sale of inventory in its live professional sports programming. As such, a disproportionate share of this revenue is earned in the second and third fiscal quarters. In certain advertising arrangements, the Company guarantees specific viewer ratings for its programming.

Expenses — MSG Networks

Direct operating expenses primarily include the cost of professional team rights acquired under media rights agreements to telecast various sporting events on our networks, and other direct programming and production-related costs of our networks.

MSG Networks is a party to long-term media rights agreements with the Knicks and the Rangers, which provide the Company with the exclusive live media rights to the teams’ games in their local markets. In addition, MSG Networks has media rights agreements with the Islanders, Devils and Sabres. The media rights acquired under these agreements to telecast various sporting events and other programming for exhibition on our networks are typically expensed on a straight-line basis over the applicable annual contract or license period. We negotiate directly with the teams to determine the fee and other provisions of the media rights agreements. Media rights fees for sports programming are influenced by, among other things, the size and demographics of the geographic area in which the programming is distributed, and the popularity and/or the competitiveness of a team.

Other direct programming and production-related costs include, but are not limited to, the salaries of on-air personalities, producers, directors, technicians, writers and other creative staff, as well as expenses associated with location costs, remote facilities and maintaining studios, origination, and transmission services and facilities.

Other Expenses

The Company’s selling, general and administrative expenses primarily consist of administrative costs, including compensation, professional fees, advertising sales commissions, as well as sales and marketing costs, including non-event related advertising expenses. Selling, general and administrative expenses for periods prior to the MSGE Distribution include certain corporate overhead expenses that do not meet the criteria for inclusion in discontinued operations.

Prior to December 31, 2022, MSG Networks was party to an advertising sales representation agreement (the “Networks Advertising Sales Representation Agreement”) with MSG Entertainment that gave MSG Entertainment the exclusive right and obligation to sell certain of MSG Networks’ advertising availabilities for a commission. The Networks Advertising Sales Representation Agreement was terminated effective as of December 31, 2022. Starting January 1, 2023, all costs incurred by MSG Networks to sell advertising (that was previously performed by MSG Entertainment) are included in selling, general, and administrative expenses.

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Factors Affecting Operating Results

The operating results of our Sphere segment will be 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.

Factors Affecting Comparability

The Company’s operations and operating results were materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities and certain professional sports leagues during Fiscal Year 2021. As a result of the shortened 2020-21 NBA and NHL seasons, MSG Networks aired substantially fewer NBA and NHL telecasts during Fiscal Year 2021, as compared with Fiscal Year 2019 (the last full fiscal year not impacted by COVID-19), and consequently experienced a decrease in revenues, including a material decrease in advertising revenue. The absence of live sports games also resulted in a decrease in certain MSG Networks expenses, including rights fees, variable production expenses, and advertising sales commissions. MSG Networks aired full regular season telecast schedules in Fiscal Year 2022 and Fiscal Year 2023 for its five professional teams across both the NBA and NHL, and, as a result, its advertising revenue and certain operating expenses, including rights fees expense, reflect the same.

It is unclear to what extent pandemic concerns, including with respect to COVID-19 or other future pandemics, could (i) result in new government-mandated capacity or other restrictions or vaccination/mask requirements or impact the use of and/or demand for Sphere in Las Vegas, impact demand for the Company’s sponsorship and advertising assets, deter employees and vendors from working at Sphere in Las Vegas (which may lead to difficulties in staffing), deter artists from touring or (ii) result in professional sports leagues suspending, cancelling or otherwise reducing the number of games scheduled in the regular reason or playoffs, which could have a material impact on the distribution and/or advertising revenues of the MSG Networks segment, or otherwise materially impact our operations.

For more information about the risks to the Company as a result of the COVID-19 pandemic and its impact on our operating results, see “Part I — Item 1A. Risk Factors — Operational and Economic Risks—Our Operations and Operating Results Were Materially Impacted by the COVID-19 Pandemic and Actions Taken in Response by Governmental Authorities and Certain Professional Sports Leagues, and a Resurgence of the COVID-19 Pandemic or Another Pandemic or Public Health Emergency Could Adversely Affect Our Business and Results of Operations.”

In addition to the above items, the MSGE Distribution and Tao Group Hospitality Disposition both qualified for discontinued operations presentation under GAAP during Fiscal Year 2023. As such, the Company’s historical results for all periods presented have been recast to exclude the operations of each disposed business. See below for further discussion.

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Results of Operations

Comparison of the Fiscal Year Ended June 30, 2023 versus the Fiscal Year Ended June 30, 2022

Consolidated Results of Operations

The table below sets forth, for the periods presented, certain historical financial information. 

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

For all periods through the MSGE Distribution, the reported financial results of the Company reflect the results of the MSG Entertainment business, previously owned and operated by the Company through its Sphere segment, as discontinued operations and for all periods through the Tao Group Hospitality Disposition, the reported financial results of the Company reflect the results of the Tao Group Hospitality segment, previously owned and operated by the Company, as discontinued operations. In addition, results from continuing operations for these periods include certain corporate overhead expenses that the Company did not incur in the period after the completion of the MSGE Distribution and does not expect to incur in future periods, but which do not meet the criteria for inclusion in discontinued operations. The reported financial results of the Company for the periods after the MSGE Distribution reflect the Company’s results on a standalone basis, including the Company’s actual corporate overhead.

The following is a summary of changes in our segments’ operating results for Fiscal Year 2023 as compared to Fiscal Year 2022, which are discussed below under “Business Segment Results.”

[[GREPCENT_TABLE]]
[["Changes attributable to","","Revenues","","Direct operating expenses","","Selling, general and administrative expenses","","Depreciation and amortization","","Impairment and other gains, net","","","","Restructuring charges","","Operating loss"],["Sphere segment","","$","710","","","$","(5,545)","","","$","(31,996)","","","$","(10,880)","","","$","5,984","","","","","$","(10,184)","","","$","(51,911)"],["MSG Networks segment","","(36,934)","","","(16,388)","","","(353)","","","2,726","","","(109)","","","","","(4,336)","","","(55,394)"],["","","$","(36,224)","","","$","(21,933)","","","$","(32,349)","","","$","(8,154)","","","$","5,875","","","","","$","(14,520)","","","$","(107,305)"]]
[[/GREPCENT_TABLE]]

Depreciation and amortization

Depreciation and amortization for Fiscal Year 2023 increased $8,154, or 36%, to $30,716 as compared to Fiscal Year 2022 primarily due to an increase in depreciation of Big Dome, the Company’s creative studio in Burbank, California, due to certain assets being placed in service during Fiscal Year 2023.

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Impairment and other gains, net

Impairment and other gains, net, were $6,120 for Fiscal Year 2023 as compared to $245 for Fiscal Year 2022. The increase in the net gain of $5,875 was primarily due to the receipt of insurance proceeds related to Big Dome, the Company’s creative studio in Burbank, California.

Restructuring charges

Restructuring charges for Fiscal Year 2023 increased $14,520, or 108%, to $27,924 as compared to Fiscal Year 2022 primarily due to termination benefits provided for a workforce reduction of certain executives and employees within the Sphere and MSG Networks segments as part of the Company’s cost reduction program implemented in Fiscal Year 2023.

Interest income

Interest income for Fiscal Year 2023 increased $8,010, as compared to the prior year period primarily due to higher interest rates.

Other income (expense), net

Other income (expense), net for Fiscal Year 2023, increased $542,405, as compared to the prior year period, primarily due to unrealized gains of $341,039 and realized gains of $204,676 associated with the Company’s retained interest in MSG Entertainment.

Income taxes

Income tax expense from continuing operations for Fiscal Year 2023 of $103,403 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to (i) tax expense of $35,656 related to state and local taxes, (ii) tax expense of $4,814 related to nondeductible officers’ compensation, and (iii) tax expense related to excess share based compensation of $4,678, partially offset by a decrease in the valuation allowance of $2,053.

Income tax benefit from continuing operations for Fiscal Year 2022 of $29,830 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) tax expense of $12,759 related to nondeductible officers’ compensation, partially offset by state income tax benefit of $3,970 and a decrease in the valuation allowance of $2,200.

See Note 16. Income Taxes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the components of income tax and a reconciliation of the statutory federal rate to the effective tax rate.

Adjusted operating income (loss) (“AOI”)

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 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.

See Note 18. Segment Information to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the definition of AOI.

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 operating performance given that, in accordance with GAAP, gains and losses related to the

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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 AOI is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. AOI 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 AOI measures as the most important indicators of its business performance, and evaluates management’s effectiveness with specific reference to these indicators.

AOI 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 AOI 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 AOI.

The following is a reconciliation of operating loss to adjusted operating loss:

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2023","","2022","","Amount","","Percentage"],["Operating loss","","$","(273,042)","","","$","(165,737)","","","$","(107,305)","","","65","%"],["Share-based compensation(a)","","42,607","","","56,760","","","(14,153)"],["Depreciation and amortization","","30,716","","","22,562","","","8,154"],["Restructuring charges","","27,924","","","13,404","","","14,520"],["Impairment and other gains, net","","(6,120)","","","(245)","","","(5,875)"],["Merger and acquisition related costs","","55,047","","","48,517","","","6,530"],["Amortization for capitalized cloud computing costs","","161","","","271","","","(110)"],["Remeasurement of deferred compensation plan liabilities","","187","","","\u2014","","","187"],["Adjusted operating loss","","$","(122,520)","","","$","(24,468)","","","$","(98,052)","","","NM"]]
[[/GREPCENT_TABLE]]

________________

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

(a)For periods through the MSGE Distribution, share-based compensation includes expenses related to corporate employees that the Company does not expect to incur in future periods, but which do not meet the criteria for inclusion in discontinued operations.

Adjusted operating loss for Fiscal Year 2023 increased $98,052 to $122,520 as compared to Fiscal Year 2022. The net increase was attributable to the following:

[[GREPCENT_TABLE]]
[["Increase in adjusted operating loss of the Sphere segment","$","(61,242)"],["Decrease in adjusted operating income of the MSG Networks segment","(36,810)"],["","$","(98,052)"]]
[[/GREPCENT_TABLE]]

47

Business Segment Results

Sphere

The table below sets 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. 

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2023","","2022","","Amount","","Percentage"],["Revenues","","$","2,610","","","$","1,900","","","$","710","","","37","%"],["Direct operating expenses","","(5,545)","","","\u2014","","","(5,545)","","","NM"],["Selling, general and administrative expenses","","(325,660)","","","(293,664)","","","(31,996)","","","11","%"],["Depreciation and amortization","","(24,048)","","","(13,168)","","","(10,880)","","","83","%"],["Impairment and other gains, net","","6,229","","","245","","","5,984","","","NM"],["Restructuring charges","","(23,136)","","","(12,952)","","","(10,184)","","","79","%"],["Operating loss","","$","(369,550)","","","$","(317,639)","","","$","(51,911)","","","16","%"],["Reconciliation to adjusted operating loss:"],["Share-based compensation expense","","36,188","","","39,668","","","(3,480)"],["Depreciation and amortization","","24,048","","","13,168","","","10,880"],["Restructuring charges","","23,136","","","12,952","","","10,184"],["Impairment and other gains, net","","(6,229)","","","(245)","","","(5,984)"],["Merger and acquisition related costs","","(189)","","","20,834","","","(21,023)"],["Amortization for capitalized cloud computing costs","","\u2014","","","95","","","(95)"],["Remeasurement of deferred compensation plan liabilities","","187","","","\u2014","","","187"],["Adjusted operating loss","","$","(292,409)","","","$","(231,167)","","","$","(61,242)","","","26","%"]]
[[/GREPCENT_TABLE]]

—————————

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

Revenues

Revenues increased $710 from $1,900 for Fiscal Year 2022 to $2,610 for Fiscal Year 2023. The net increase was attributable to the full year impact of sublease rental income of office space in San Francisco, California, that the Company subleased to a third-party after relocating certain operations to Burbank, California.

Direct operating expenses

Direct operating expenses increased $5,545 from $0 for Fiscal Year 2022 to $5,545 for Fiscal Year 2023. The net increase was primarily attributable to advertising and marketing costs related to the opening of Sphere in Las Vegas.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $31,996, or 11%, for Fiscal Year 2023 to $325,660 as compared to Fiscal Year 2022. The increase was primarily due to the impact of the MSGE TSA, 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 segment results for the entire prior year but were only included in the results for the pre-MSGE Distribution period (July 1, 2022 through April 20, 2023) in Fiscal Year 2023.

While the Company did not incur these corporate costs after the MSGE Distribution Date and does not expect to incur these corporate costs in Fiscal Year 2024, they did not meet the criteria for inclusion in discontinued operations for all periods prior to the MSGE Distribution Date.

In addition, professional fees incurred by the Company decreased, as compared to the prior year, due to the inclusion of litigation-related insurance recoveries received in Fiscal Year 2023 associated with the Networks Merger.

Depreciation and amortization

Depreciation and amortization for Fiscal Year 2023 increased $10,880, or 83%, to $24,048 as compared to Fiscal Year 2022 primarily due to an increase in depreciation of Big Dome, the Company’s creative studio in Burbank, California, due to certain assets being placed in service during Fiscal Year 2023.

48

Restructuring charges

Restructuring charges for Fiscal Year 2023 increased $10,184, or 79%, to $23,136 as compared to Fiscal Year 2022 primarily due to termination benefits provided for a workforce reduction of certain executives and employees as part of the Company’s cost reduction program implemented in Fiscal Year 2023.

Operating loss

Operating loss for Fiscal Year 2023 increased $51,911 to $369,550 as compared to an operating loss of $317,639 in Fiscal Year 2022. The increased operating loss was primarily due to the increase in selling, general and administrative expenses, higher depreciation and amortization, and an increase in restructuring charges.

Adjusted operating loss

Adjusted operating loss for Fiscal Year 2023 increased $61,242 to $292,409 as compared to Fiscal Year 2022. The increased adjusted operating loss was primarily due to the increase in net loss, partially offset by higher depreciation and amortization expenses and restructuring charges, both of which are excluded in the calculation of adjusted operating loss.

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. 

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2023","","2022","","Amount","","Percentage"],["Revenues","","$","571,221","","","$","608,155","","","$","(36,934)","","","(6)","%"],["Direct operating expenses","","(336,666)","","","(320,278)","","","(16,388)","","","5","%"],["Selling, general and administrative expenses (a)","","(126,482)","","","(126,129)","","","(353)","","","\u2014","%"],["Depreciation and amortization","","(6,668)","","","(9,394)","","","2,726","","","(29)","%"],["Impairment and other losses, net","","(109)","","","\u2014","","","(109)","","","NM"],["Restructuring charges","","(4,788)","","","(452)","","","(4,336)","","","NM"],["Operating income","","$","96,508","","","$","151,902","","","$","(55,394)","","","(36)","%"],["Reconciliation to adjusted operating income:"],["Share-based compensation expense","","6,419","","","17,092","","","(10,673)"],["Depreciation and amortization","","6,668","","","9,394","","","(2,726)"],["Restructuring charges","","4,788","","","452","","","4,336"],["Impairment and other losses, net","","109","","","\u2014","","","109"],["Merger and acquisition related costs","","55,236","","","27,683","","","27,553"],["Amortization for capitalized cloud computing costs","","161","","","176","","","(15)"],["Adjusted operating income","","$","169,889","","","$","206,699","","","$","(36,810)","","","(18)","%"]]
[[/GREPCENT_TABLE]]
_________________

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

(a)As a result of the MSGE Distribution on April 20, 2023 (which is presented as discontinued operations under GAAP), prior period results of the MSG Networks segment have been recast to exclude expenses of approximately $8,800 and $20,900 for Fiscal Years 2023 and 2022, respectively, related to the MSG Networks’ Advertising Sales Representation Agreement with MSG Entertainment, which was terminated effective as of December 31, 2022. A portion of these expenses were absorbed directly by MSG Networks following the termination of the advertising sales representation agreement and are reflected in MSG Networks’ results beginning January 1, 2023.

Revenues

Revenues for Fiscal Year 2023 decreased $36,934, or 6%, to $571,221 as compared to the prior year. The changes in revenues were attributable to the following: 

[[GREPCENT_TABLE]]
[["","","","","Year Ended June 30, 2023"],["Decrease in affiliation fee revenue","","","","$","(49,302)"],["Increase in advertising revenue","","","","11,517"],["Other net increases","","","","851"],["","","","","$","(36,934)"]]
[[/GREPCENT_TABLE]]

49

For Fiscal Year 2023, affiliation fee revenue decreased $49,302, primarily due to a decrease in subscribers of approximately 10.5% (excluding the impact of the non-renewal of MSG Networks’ carriage agreement with Comcast Corporation (“Comcast”) as of October 1, 2021) and, to a lesser extent, the impact of the Comcast non-renewal. These decreases were partially offset by net favorable affiliate adjustments of approximately $10,400 and the impact of higher affiliation rates.

Effective October 1, 2021, Comcast’s license to carry MSG Networks expired and MSG Networks has not been carried by Comcast since that date. Comcast’s non-carriage reduced MSG Networks’ subscribers by approximately 10% and reduced MSG Networks’ revenue by a comparable percentage. In addition, MSG Networks’ segment operating income and AOI were reduced by an amount that is approximately equal to the dollar amount of the reduced revenue.

For Fiscal Year 2023, the increase in advertising revenue primarily reflected higher advertising sales related to professional sports telecasts due to the impact of a higher number of live telecasts and an increase in per-game advertising sales as compared with the prior year periods, as well as higher sales related to the Company’s non-ratings-based advertising initiatives.

Direct operating expenses

For Fiscal Year 2023, direct operating expenses increased $16,388, or 5%, to $336,666 as compared to the prior year. The changes were attributable to the following:

[[GREPCENT_TABLE]]
[["","","Year Ended June 30, 2023"],["Increase in rights fees expense","","$","14,610"],["Change in other programming and production costs","","1,778"],["","","$","16,388"]]
[[/GREPCENT_TABLE]]

For Fiscal Year 2023, right fees expense increased $14,610 primarily due to the impact of annual contractual rate increases and due to the absence of reductions in media rights fees related to the shortened 2020-21 NHL season recorded in the prior year first quarter.

For Fiscal Year 2023, other programming and production costs increased $1,778 primarily due to a higher number of professional sports telecasts in the current fiscal year.

Selling, general and administrative expenses

For Fiscal Year 2023, selling, general and administrative expenses increased $353, to $126,482 as compared to the prior year primarily due to litigation settlement expenses of $48,500 recognized in the current year related to the Networks Merger, which was partially offset by lower advertising and marketing expenses, lower employee compensation and related benefits, and other cost decreases.

Operating income

For Fiscal Year 2023, operating income decreased $55,394, or 36%, to $96,508 as compared to the prior year. The decrease in operating income was primarily due to the decrease in revenues, increase in direct operating expenses, and the impact of restructuring charges.

Adjusted operating income

For Fiscal Year 2023, adjusted operating income decreased $36,810, or 18%, to $169,889 as compared to the prior year. The decrease in adjusted operating income was lower than the decrease in operating income of $55,394 primarily due to the decrease in revenues and increase in direct operating expenses, partially offset by a decrease in selling, general and administrative expenses (excluding the impact of the Networks Merger litigation settlement and restructuring expenses discussed above).

50

Comparison of the Fiscal Year Ended June 30, 2022 versus the Fiscal Year Ended June 30, 2021

Consolidated Results of Operations

The table below sets forth, for the periods presented, certain historical financial information. 

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2022","","2021","","Amount","","Percentage"],["Revenues","","$","610,055","","","$","647,510","","","$","(37,455)","","","(6)","%"],["Direct operating expenses","","(320,278)","","","(262,859)","","","(57,419)","","","22","%"],["Selling, general and administrative expenses","","(419,793)","","","(295,472)","","","(124,321)","","","42","%"],["Depreciation and amortization","","(22,562)","","","(16,606)","","","(5,956)","","","36","%"],["Impairment and other gains, net","","245","","","\u2014","","","245","","","NM"],["Restructuring charges","","(13,404)","","","(8,061)","","","(5,343)","","","66","%"],["Operating (loss) income","","(165,737)","","","64,512","","","(230,249)","","","NM"],["Interest income","","3,575","","","3,172","","","403","","","13","%"],["Interest expense","","\u2014","","","(20,219)","","","20,219","","","(100)","%"],["Other income (expense), net","","(5,518)","","","(3,935)","","","(1,583)","","","40","%"],["(Loss) income from operations before income taxes","","(167,680)","","","43,530","","","(211,210)","","","NM"],["Income tax (expense) benefit","","29,830","","","(38,907)","","","68,737","","","(177)","%"],["(Loss) income from continuing operations","","(137,850)","","","4,623","","","(142,473)","","","NM"],["Loss from discontinued operations, net of taxes","","(52,297)","","","(171,142)","","","118,845","","","(69)","%"],["Net loss","","(190,147)","","","(166,519)","","","(23,628)","","","14","%"],["Less: Net income (loss) attributable to redeemable noncontrolling interests from discontinued operations","","7,739","","","(16,269)","","","24,008","","","(148)","%"],["Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations","","(3,491)","","","(2,099)","","","(1,392)","","","66","%"],["Net loss attributable to Sphere Entertainment Co.\u2019s stockholders","","$","(194,395)","","","$","(148,151)","","","$","(46,244)","","","31","%"]]
[[/GREPCENT_TABLE]]

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 Fiscal Year 2022 as compared to Fiscal Year 2021:

[[GREPCENT_TABLE]]
[["Changes attributable to","","Revenues","","Direct operating expenses","","Selling, general and administrative expenses","","Depreciation and amortization","","Impairment and other gains, net","","Restructuring charges","","Operating (loss) income"],["Sphere segment","","$","1,900","","","$","\u2014","","","$","(99,833)","","","$","(3,897)","","","$","245","","","$","(4,891)","","","$","(106,476)"],["MSG Networks segment","","(39,355)","","","(57,419)","","","(24,488)","","","(2,059)","","","\u2014","","","(452)","","","(123,773)"],["","","$","(37,455)","","","$","(57,419)","","","$","(124,321)","","","$","(5,956)","","","$","245","","","$","(5,343)","","","$","(230,249)"]]
[[/GREPCENT_TABLE]]

Depreciation and amortization

Depreciation and amortization for Fiscal Year 2022 increased $5,956, or 36%, to $22,562 as compared to Fiscal Year 2021 primarily due to an increase in depreciation of Big Dome, the Company’s creative studio in Burbank, California, due to certain equipment and other assets being placed in service during Fiscal Year 2022.

Restructuring charges

Restructuring charges for Fiscal Year 2022 increased $5,343, or 66%, to $13,404 as compared to Fiscal Year 2021 primarily due to termination benefits provided for a workforce reduction of certain executives and employees within the Sphere and MSG Networks segments as part of the Company’s cost reduction program implemented in Fiscal Year 2022.

Interest expense

Interest expense for Fiscal Year 2022 were nil as compared to Fiscal Year 2021 primarily due to a higher amount of interest expense capitalization related to Sphere construction.

51

Other income (expense), net

Other income (expense), net for Fiscal Year 2022 increased $1,583, or 40% to $5,518 as compared to Fiscal Year 2021 primarily due to the absence of the unrealized gain on equity investment without readily determinable fair value.

Income taxes

Income tax benefit from continuing operations for Fiscal Year 2022 of $29,830 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to tax expense of $12,759 related to nondeductible officers’ compensation, partially offset by state income tax benefit of $3,970 and a decrease in the valuation allowance of $2,200.

Income tax expense for continuing operations for Fiscal Year 2021 of $38,907 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to (i) tax expense of $9,646 related to nondeductible officers’ compensation, (ii) state income tax expense of $9,222, (iii) tax expense of $5,332 related to a change in the applicable state tax rate used to measure deferred taxes and (iv) an increase in the valuation allowance of $4,863.

Adjusted operating income

The following is a reconciliation of operating (loss) income to adjusted operating (loss) income:

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2022","","2021","","Amount","","Percentage"],["Operating (loss) income","","$","(165,737)","","","$","64,512","","","$","(230,249)","","","NM"],["Share-based compensation(a)","","56,760","","","59,786","","","(3,026)"],["Depreciation and amortization","","22,562","","","16,606","","","5,956"],["Restructuring charges","","13,404","","","8,061","","","5,343"],["Impairment and other gains, net","","(245)","","","\u2014","","","(245)"],["Merger and acquisition related costs","","48,517","","","20,582","","","27,935"],["Amortization for capitalized cloud computing costs","","271","","","\u2014","","","271"],["Adjusted operating (loss) income","","$","(24,468)","","","$","169,547","","","$","(194,015)","","","(114)","%"]]
[[/GREPCENT_TABLE]]

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

(a)For periods through the MSGE Distribution, share-based compensation includes expenses related to corporate employees that the Company does not expect to incur in future periods, but which do not meet the criteria for inclusion in discontinued operations.

Adjusted operating income for Fiscal Year 2022 decreased $194,015 to $24,468 as compared to the prior year. The net decrease was primarily attributable to the following:

[[GREPCENT_TABLE]]
[["Increase in adjusted operating loss of the Sphere segment","$","(95,535)"],["Decrease in adjusted operating income of the MSG Networks segment","(98,480)"],["","$","(194,015)"]]
[[/GREPCENT_TABLE]]

52

Business Segment Results

Sphere

The table below sets 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. 

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2022","","2021","","Amount","","Percentage"],["Revenues","","$","1,900","","","$","\u2014","","","$","1,900","","","NM"],["Selling, general and administrative expenses","","(293,664)","","","(193,831)","","","(99,833)","","","52","%"],["Depreciation and amortization","","(13,168)","","","(9,271)","","","(3,897)","","","42","%"],["Impairment and other gains, net","","245","","","\u2014","","","245","","","NM"],["Restructuring charges","","(12,952)","","","(8,061)","","","(4,891)","","","61","%"],["Operating loss","","$","(317,639)","","","$","(211,163)","","","$","(106,476)","","","50","%"],["Reconciliation to adjusted operating loss:"],["Share-based compensation expense","","39,668","","","42,119","","","(2,451)"],["Depreciation and amortization","","13,168","","","9,271","","","3,897"],["Restructuring charges","","12,952","","","8,061","","","4,891"],["Impairment and other gains, net","","(245)","","","\u2014","","","(245)"],["Merger and acquisition related costs","","20,834","","","16,080","","","4,754"],["Amortization for capitalized cloud computing costs","","95","","","\u2014","","","95"],["Adjusted operating loss","","$","(231,167)","","","$","(135,632)","","","$","(95,535)","","","70","%"]]
[[/GREPCENT_TABLE]]

————————

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

Revenues

Revenues increased $1,900 for Fiscal Year 2022. The net increase was attributable to sublease rental income that commenced during Fiscal Year 2022 related to office space in San Francisco, California, that the Company subleased to a third-party after relocating certain operations to Burbank, California.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $99,833, or 52%, for Fiscal Year 2022 to $293,664 as compared to Fiscal Year 2021. The increase was primarily due to (i) a net increase in employee compensation and related benefits, and (ii) higher professional fees inclusive of costs for Sphere development, partially offset by higher reimbursement of corporate costs under the services agreement with MSG Sports in Fiscal Year 2022 as compared to Fiscal Year 2021.

Depreciation and amortization

Depreciation and amortization for Fiscal Year 2022 increased $3,897, or 42%, to $13,168 as compared to Fiscal Year 2021 primarily due to an increase in depreciation of Big Dome, the Company’s creative studio in Burbank, California, due to certain equipment and other assets being placed in service during Fiscal Year 2022.

Restructuring charges

Restructuring charges for Fiscal Year 2022 increased $4,891, or 61%, to $12,952 as compared to Fiscal Year 2021 primarily due to termination benefits provided for a workforce reduction of certain executives and employees within the Sphere segment as part of the Company’s cost reduction program implemented in Fiscal Year 2022.

Operating loss

Operating loss for Fiscal Year 2022 increased $106,476 to $317,639 as compared to an operating loss of $211,163 in June 30, 2021. The increased operating loss was primarily due to the increase in selling, general and administrative expenses.

Adjusted operating loss

Adjusted operating loss for Fiscal Year 2022 increased $95,535 to $231,167 as compared to Fiscal Year 2021. The increased adjusted operating loss was primarily due to the increase in selling, general and administrative expenses, partially offset by higher merger and acquisition related costs, and higher depreciation and amortization expenses, both of which are excluded in the calculation of adjusted operating loss.

53

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. 

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,","","Change"],["","","2022","","2021","","Amount","","Percentage"],["Revenues","","$","608,155","","","$","647,510","","","$","(39,355)","","","(6)","%"],["Direct operating expenses","","(320,278)","","","(262,859)","","","(57,419)","","","22","%"],["Selling, general and administrative expenses (a)","","(126,129)","","","(101,641)","","","(24,488)","","","24","%"],["Depreciation and amortization","","(9,394)","","","(7,335)","","","(2,059)","","","28","%"],["Restructuring charges","","(452)","","","\u2014","","","(452)","","","NM"],["Operating income","","$","151,902","","","$","275,675","","","$","(123,773)","","","(45)","%"],["Reconciliation to adjusted operating income:"],["Share-based compensation expense","","17,092","","","17,667","","","(575)"],["Depreciation and amortization","","9,394","","","7,335","","","2,059"],["Restructuring charges","","452","","","\u2014","","","452"],["Merger and acquisition related costs","","27,683","","","4,502","","","23,181"],["Amortization for capitalized cloud computing costs","","176","","","\u2014","","","176"],["Adjusted operating income","","$","206,699","","","$","305,179","","","$","(98,480)","","","(32)","%"]]
[[/GREPCENT_TABLE]]
_________________

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

(a) As a result of the MSGE Distribution on April 20, 2023 (which is presented as discontinued operations under GAAP), prior period results of the MSG Networks segment have been recast to exclude expenses of approximately $20,900 and $13,700 for Fiscal Years 2022, and 2021, respectively, related to the MSG Networks’ Advertising Sales Representation Agreement with MSG Entertainment, which was terminated effective as of December 31, 2022. A portion of these expenses were absorbed directly by MSG Networks following the termination of the advertising sales representation agreement and are reflected in MSG Networks’ results beginning January 1, 2023.

Revenues

Revenues for Fiscal Year 2022 decreased $39,355, or 6%, to $608,155 as compared to the prior year. The changes in revenues were attributable to the following: 

[[GREPCENT_TABLE]]
[["","","","","Year Ended June 30, 2022"],["Decrease in affiliation fee revenue","","","","$","(67,286)"],["Increase in advertising revenue","","","","26,310"],["Other net increases","","","","1,621"],["","","","","$","(39,355)"]]
[[/GREPCENT_TABLE]]

For Fiscal Year 2022, the decrease in affiliation fee revenue was primarily due to the impact of (i) the non-renewal of MSG Networks’ carriage agreement with Comcast as of October 1, 2021 and (ii) a decrease in subscribers of approximately 7% (excluding the impact of previously disclosed non-renewals with Comcast and a small Connecticut-based distributor). These decreases were partially offset by the impact of higher affiliation rates and a decrease in net unfavorable affiliate adjustments of approximately $9,400.

For Fiscal Year 2022, the increase in advertising revenue was primarily due to the impact of (i) higher per-game advertising sales from the telecast of live professional sports programming, (ii) a greater number of live NBA and NHL telecasts in the current year as compared with the prior year and (iii) increased advertising sales related to the Company’s non-ratings based advertising initiatives. As a result of the impact of the COVID-19 pandemic on the 2020-21 NBA and NHL seasons, MSG Networks telecasted fewer NBA and NHL games in the prior year, as compared with a regular NBA and NHL telecast schedule in the current year.

Direct operating expenses

For Fiscal Year 2022, direct operating expenses increased $57,419, or 22%, to $320,278 as compared to the prior year. The increases were primarily due to higher rights fees expenses of $45,024 and, to a lesser extent, an increase in other programming

54

and production-related costs of $12,395. The increase in rights fees was primarily due to the net impact of lower media rights fees in the prior year as a result of fewer NBA and NHL games made available for exclusive broadcast by MSG Networks during the shortened 2020-21 NBA and NHL regular seasons, and annual contractual rate increases. The increase in other programming and production-related costs was primarily due to the impact of fewer NBA and NHL regular season games in the prior year, as compared with a regular NBA and NHL telecast schedule in the current year, and expenses related to sports gaming programming, partially offset by other net cost decreases.

Selling, general and administrative expenses

For Fiscal Year 2022, selling, general and administrative expenses increased $24,488, or 24%, to $126,129 as compared to the prior year. The increase in selling, general and administrative expenses reflected an increase of approximately $24,900 of merger and acquisition costs that occurred in Fiscal Year 2022, inclusive of the impact of executive separation agreements and share based compensation expense. In addition, the increase in selling, general and administrative expenses was due to higher advertising, and marketing expenses of approximately $3,100. These increases were partially offset by lower employee compensation and related benefits (including share based compensation expense) of $5,600.

Operating income

For Fiscal Year 2022, operating income decreased $123,773, or 45%, to $151,902 as compared to the prior year. The decrease in operating income was primarily due to the increase in direct operating expenses, the decrease in revenues, and to a lesser extent, the increase in selling, general and administrative expenses.

Adjusted operating income

For Fiscal Year 2022, adjusted operating income decreased $98,480, or 32%, to $206,699 as compared to the prior year. The decrease in adjusted operating income was lower than the decrease in operating income of $130,953 primarily due to the increase in merger and acquisition-related costs of approximately $25,000, which are excluded in the calculation of adjusted operating income.

55

Liquidity and Capital Resources

Sources and Uses of Liquidity

Our primary sources of liquidity are cash and cash equivalents and cash flows from the operations of our businesses, as well as any proceeds from the sale of the MSGE Retained Interest. Our uses of cash over the next 18 months are expected to be substantial and include working capital-related items (including funding our operations), capital spending (including completing construction of Sphere in Las Vegas and related original content, as described below), debt service and payments we expect to make in connection with the refinancing of our indebtedness, and investments and related loans and advances that we may fund from time to time. We may also use cash to repurchase our common stock. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, market conditions could adversely impact our ability to do so at that time.

We regularly monitor and assess our ability to meet our net funding and investing requirements, including completing the construction of Sphere in Las Vegas and the refinancing of the MSG Networks Credit Facilities prior to their maturity in October 2024. The Company’s unrestricted cash and cash equivalents balance as of June 30, 2023 was $131,965, and was $747,313 as of June 30, 2022. As of June 30, 2023, the Company’s restricted cash and cash equivalents balance was approximately $297,000, inclusive of $275,000, which was 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). The Liquidity Covenant Reduction Date occurred on August 8, 2023. Additionally, on July 14, 2023, we borrowed the full $65,000 amount available under the DDTL Facility and subsequently, on August 9, 2023, we repaid all amounts outstanding under the DDTL Facility using a portion of the MSGE Retained Interest. The Company’s unrestricted and restricted cash and cash equivalents balance as of August 18, 2023 was $341,489 and $39,179, respectively.

The principal balance of the Company’s total debt outstanding as of June 30, 2023 was $1,207,250. We believe we will have sufficient liquidity from cash and cash equivalents, cash flows from operations (including expected cash from operations from Sphere in Las Vegas), as well as any proceeds from the sale of the MSGE Retained Interest (which had an aggregate fair market value of approximately $270,000 as of August 18, 2023), to fund our operations and service the credit facilities for the foreseeable future, as well as to complete the construction of Sphere in Las Vegas. This also includes the Company’s expectation that it will pay down a portion of MSG Networks’ term loan upon the refinancing of the loan prior to its maturity in October 2024. There can be no assurances that we will be able to dispose of all or a portion of the remainder of the MSGE Retained Interest on favorable terms due to market conditions or otherwise.

Our ability to have sufficient liquidity to fund our operations, including the creation of content, 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, there can be no assurances 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 that we are planning for, which increases the uncertainty of our operating expectations. To the extent that our efforts do not result in a viable show or attraction, 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 flow 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.

Our liquidity plans assume that we will pay down a portion of MSG Networks’ term loan upon the refinancing of the loan. There can be no assurances that our lenders will refinance the MSG Networks’ term loan on those terms, particularly if the declines in operating income and adjusted operating income at MSG Networks continue. We may not have sufficient liquidity to pay down a higher amount in connection with the refinancing. If we are not able to refinance the MSG Networks’ term loan prior to its maturity in October 2024, a default thereunder would be triggered, resulting in an acceleration of outstanding debt thereunder and potentially a foreclosure upon the MSG Networks business.

To the extent that the MSGE Retained Interest is not used to provide liquidity, the MSGE Retained Interest may be exchanged for our shares and/or distributed pro rata to our stockholders.

See Note 12. Credit Facilities to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the MSG Networks Credit Facilities, the LV Sphere Term Loan Facility and the DDTL Facility.

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For additional information regarding the Company’s capital expenditures, including those related to Sphere in Las Vegas, see Note 18. Segment Information to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

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.

Sphere

The Company is completing construction of its first state-of-the-art entertainment venue in Las Vegas. See “Part I — Item 1. Business—Our Business —Sphere ” in this Form 10-K. The Company expects the venue to have a number of significant revenue streams, including a wide variety of content such as original immersive productions, advertising and marketing partnerships, concert residencies and marquee sporting and corporate events. As a result, we anticipate that Sphere in Las Vegas will generate substantial revenue and adjusted operating income on an annual basis.

The Company expects to open the venue in September 2023. As with any major construction project, the construction of Sphere is subject to potential delays and unexpected complications.

As of the date of this filing, we estimate that the final project construction costs, inclusive of core technology and soft costs, for Sphere in Las Vegas will be approximately $2,300,000. This cost estimate is net of $75,000 that The Venetian has agreed to pay to defray certain construction costs. Relative to our cost estimate above, our actual construction costs for Sphere in Las Vegas paid through August 18, 2023 were approximately $2,250,000, which is net of $65,000 received from The Venetian. Both the estimated and actual construction costs exclude significant capitalized and non-capitalized costs for items such as content creation, internal labor, capitalized interest, and furniture and equipment.

With regard to Sphere in Las Vegas, the Company plans to finance the completion of the construction of the venue from cash-on-hand and cash flows from operations.

In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to a future Sphere. The Company submitted planning applications to the local planning authority in March 2019 and that process, which requires various stages of review to be completed and approvals to be granted, is ongoing. Therefore, we do not have a definitive timeline at this time.

We will continue to explore additional domestic and international markets where we believe next-generation venues such as Sphere can be successful. The Company’s intention for any future venues is to utilize several options, such as joint ventures, equity partners, a managed venue model and non-recourse debt financing.

Financing Agreements

See Note 12. Credit Facilities to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussions of the Company’s debt obligations and various financing arrangements.

MSG Networks Senior Secured Credit Facility

MSGN L.P., MSGN Eden, LLC, an indirect subsidiary of the Company (through the Networks Merger) 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”), each with a term of five years. As of June 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.

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The MSGN Credit Agreement generally requires the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the MSGN Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of June 30, 2023, the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the covenants.

See Note 12. Credit Facilities to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information such as repayments of $66,000 made in Fiscal Year 2023 and scheduled repayment requirement of $82,500 in Fiscal Year 2024 on the MSG Networks Term Loan.

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 was $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. A portion of the value of the MSGE Retained Interest may also be counted toward the minimum liquidity level.

Letters of Credit

The Company uses letters of credit to support its business operations. As of June 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.

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Cash Flow Discussion

As of June 30, 2023, cash, cash equivalents and restricted cash totaled $429,114, as compared to $760,312 as of June 30, 2022 and $1,190,105 as of June 30, 2021. The following table summarizes the Company’s cash flow activities for Fiscal Years 2023, 2022, and 2021:

[[GREPCENT_TABLE]]
[["","","Years Ended June 30,"],["","","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","","$","153,591","","","$","141,340","","","$","(58,694)"],["Net cash used in investing activities","","(653,923)","","","(804,164)","","","(123,183)"],["Net cash provided by (used in) financing activities","","85,542","","","(30,392)","","","592,685"],["Effect of exchange rates on cash, cash equivalents and restricted cash","","(2,106)","","","(750)","","","8,027"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","(416,896)","","","$","(693,966)","","","$","418,835"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities for Fiscal Year 2023 increased by $12,251 to $153,591 as compared to the prior year primarily due to net income in the current year and changes in working capital assets and liabilities, which primarily included an increase in customers’ advanced payments associated with deferred revenue, an increase in payables and accruals, partially offset by a decrease in prepaid expenses and other current and non-current assets.

Net cash provided by operating activities for Fiscal Year 2022 increased by $200,034 to $141,340 as compared to the prior year primarily due to positive adjustments to reconcile net loss to net cash provided by operating activities in Fiscal Year 2022 and changes in working capital assets and liabilities, which primarily included an increase in payables and accruals, partially offset by lower cash receipts from collections of accounts receivables.

Investing Activities

Net cash used in investing activities for Fiscal Year 2023 decreased by $150,241 to $653,923 as compared to Fiscal Year 2022 primarily due to (i) proceeds received from the dispositions of Tao Group Hospitality, Boston Calling Events, LLC, and the corporate aircraft in the current year period and (ii) proceeds received from the sale of investments (primarily from the sale of the MSGE Retained Interest) in the current year period, partially offset by an increase in capital expenditures in the current year related to Sphere in Las Vegas.

Net cash used in investing activities for Fiscal Year 2022 increased by $680,981 to $804,164 as compared to Fiscal Year 2021 primarily due to an increase in capital expenditures in Fiscal Year 2022 related to Sphere in Las Vegas, partially offset by higher proceeds received from the sale of equity security investments in Fiscal Year 2021.

Financing Activities

Net cash provided by financing activities for Fiscal Year 2023 increased by $115,934 to $85,542 as compared to Fiscal Year 2022 primarily due to the proceeds from the issuance of debt associated with the LV Sphere Term Loan Facility in Fiscal Year 2023, partially offset by the impact of cash transferred in connection with the MSGE Distribution in Fiscal Year 2023.

Net cash used in financing activities for Fiscal Year 2022 increased by $623,077 to $30,392 as compared to the prior year primarily due to higher repayments of long-term debt in Fiscal Year 2022, partially offset by higher proceeds received from term loans in Fiscal Year 2022.

Contractual Obligations

As of June 30, 2023, the approximate future payments under our contractual obligations are as follows:

[[GREPCENT_TABLE]]
[["","","Payments Due by Period (c)"],["","","Total","","Year 1","","Years 2-3","","Years 4-5","","More Than 5 Years"],["Leases (a)","","$","184,711","","","$","10,489","","","$","31,831","","","$","22,952","","","$","119,439"],["Debt repayments (b)","","1,207,250","","","82,500","","","849,750","","","275,000","","","\u2014"],["Total future payments under contractual obligations","","$","1,391,961","","","$","92,989","","","$","881,581","","","$","297,952","","","$","119,439"]]
[[/GREPCENT_TABLE]]

_________________

(a)Includes contractually obligated minimum lease payments for operating leases having an initial noncancellable term in excess of one year for various office space and equipment. These commitments are presented exclusive of the imputed interest used to reflect the payment’s present value. See Note 9. Leases to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information.

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(b)See Note 12. Credit Facilities to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information surrounding the principal repayments required under the credit agreements.

(c)Pension obligations have been excluded from the table above as the timing of the future cash payments is uncertain. See Note 13. Pension Plans and Other Postretirement Benefit Plans to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on the future funding requirements under our pension obligations.

Off Balance Sheet Arrangements

As of June 30, 2023, the Company has the following off balance sheet arrangements:

[[GREPCENT_TABLE]]
[["","","Commitments"],["","","June 30, 2024","","June 30, 2025","","June 30, 2026","","June 30, 2027","","June 30, 2028","","Thereafter","","Total"],["Sphere"],["Event-related commitments","","$","7,624","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","7,624"],["Letter of credit","","868","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","868"],["MSG Networks"],["Broadcast rights","","241,472","","","241,059","","","248,957","","","256,214","","","266,406","","","1,818,870","","","3,072,978"],["Purchase commitments","","13,713","","","6,148","","","3,279","","","1,434","","","258","","","\u2014","","","24,832"],["Talent commitments","","5,701","","","2,086","","","512","","","345","","","354","","","359","","","9,357"],["Other","","6,513","","","6,137","","","2,032","","","2,073","","","2,116","","","354","","","19,225"],["Total Commitments","","$","275,891","","","$","255,430","","","$","254,780","","","$","260,066","","","$","269,134","","","$","1,819,583","","","$","3,134,884"]]
[[/GREPCENT_TABLE]]

In addition, the Company and The Venetian are parties to a 50-year ground lease in Las Vegas pursuant to which the Company has agreed to construct a large-scale venue. The Venetian agreed to provide us with $75,000 to help fund the construction costs, including the cost of a pedestrian bridge that links Sphere to The Venetian Expo. Through June 30, 2023, The Venetian paid us $65,000 of this amount for construction costs. The ground lease has no fixed rent, however, if certain return objectives are achieved, The Venetian will receive 25% of the after-tax cash flow in excess of such objectives. See “Part I — Item 1. Business — Our Business — Sphere.”

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 Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements.

Critical Accounting Estimates

Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions.

The preparation of the Company’s 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. Management believes its use of estimates in the consolidated financial statements to be reasonable. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition - Arrangements with Multiple Performance Obligations

The Company may enter into arrangements with multiple performance obligations, such as multi-year sponsorship agreements which may derive revenues for the Company as well as MSG Entertainment and MSG Sports within a single arrangement. The Company may also derive revenue from similar types of arrangements which are entered into by MSG Entertainment or MSG Sports. Payment terms for such arrangements can vary by contract, but payments are generally due in installments throughout the contractual term. The performance obligations included in each sponsorship agreement vary and may include advertising and

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other benefits such as, but not limited to, signage at Sphere, digital advertising, event or property specific advertising, as well as non-advertising benefits such as suite licenses and event tickets. To the extent the Company’s multi-year arrangements provide for performance obligations that are consistent over the multi-year contractual term, such performance obligations generally meet the definition of a series as provided for under the accounting guidance. If performance obligations are concluded to meet the definition of a series, the contractual fees for all years during the contract term are aggregated and the related revenue is recognized proportionately as the underlying performance obligations are satisfied.

The timing of revenue recognition for each performance obligation is dependent upon the facts and circumstances surrounding the Company’s satisfaction of its respective performance obligation. The Company allocates the transaction price for such arrangements to each performance obligation within the arrangement based on the estimated relative standalone selling price of the performance obligation. The Company’s process for determining its estimated standalone selling prices involves management’s judgment and considers multiple factors including company specific and market specific factors that may vary depending upon the unique facts and circumstances related to each performance obligation. Key factors considered by the Company in developing an estimated standalone selling price for its performance obligations include, but are not limited to, prices charged for similar performance obligations, the Company’s ongoing pricing strategy and policies, and consideration of pricing of similar performance obligations sold in other arrangements with multiple performance obligations.

The Company may incur costs such as commissions to obtain its multi-year sponsorship agreements. The Company assesses such costs for capitalization on a contract by contract basis. To the extent costs are capitalized, the Company estimates the useful life of the related contract asset which may be the underlying contract term or the estimated customer life depending on the facts and circumstances surrounding the contract. The contract asset is amortized over the estimated useful life.

Impairment of Long-Lived and Indefinite-Lived Assets

The Company’s long-lived and indefinite-lived assets accounted for approximately 78% of the Company’s consolidated total assets as of June 30, 2023 and consisted of the following:

[[GREPCENT_TABLE]]
[["Goodwill","$","456,807"],["Intangible assets, net","17,910"],["Property and equipment, net","3,307,161"],["Right-of-use lease assets","84,912"],["","$","3,866,790"]]
[[/GREPCENT_TABLE]]

In assessing the recoverability of the Company’s long-lived and indefinite-lived assets when there is an indicator of potential impairment, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized as well as the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve significant uncertainties and judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its long-lived and/or indefinite-lived assets.

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 June 30, 2023, the Company has 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 consolidated balance sheet as of June 30, 2023 by reportable segment was as follows:

[[GREPCENT_TABLE]]
[["Sphere","$","32,299"],["MSG Networks","424,508"],["","$","456,807"]]
[[/GREPCENT_TABLE]]

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, the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

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The estimates of the fair values 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 2023 annual impairment test. These assessments considered factors such as:

•macroeconomic conditions;

•industry and market considerations;

•cost factors;

•overall financial performance of the reporting unit;

•other relevant company-specific factors such as changes in management, strategy or customers; and

•relevant reporting unit specific events such as changes in the carrying amount of net assets.

During the first quarter of Fiscal Year 2023, the Company performed its most recent annual impairment test of goodwill for the MSG Networks reporting unit and determined that there were no impairments of goodwill 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 periods prior to the MSGE Distribution, including at the date of the annual goodwill impairment test, Sphere was included with the MSG Entertainment business in a combined reporting unit for purposes of goodwill impairment testing. No impairment of goodwill was identified for this reporting unit as of the annual impairment test date. In connection with the MSGE Distribution, the goodwill balance associated with this reporting unit was allocated between MSG Entertainment discontinued operations and Sphere based upon a relative fair value approach, resulting in $32,299 of goodwill attributed to Sphere. Goodwill attributed to the MSG Entertainment business is included in the carrying value of MSG Entertainment discontinued operations.

Other Long-Lived Assets

For other long-lived assets, including right-of-use lease assets and intangible assets that are amortized, the Company evaluates assets for recoverability when there is an indication of potential impairment. Amortizable intangible assets and other long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent from cash flows from other assets and liabilities. In determining whether an impairment of long-lived assets has occurred, the Company considers both qualitative and quantitative factors. The quantitative analysis involves estimating the undiscounted future cash flows directly related to that asset group and comparing the resulting value against the carrying value of the asset group. If the carrying value of the asset group is greater than the sum of the undiscounted future cash flows, an impairment loss is recognized for the difference between the carrying value of the asset group and its estimated fair value.

The Company has recognized intangible assets for affiliate relationships as a result of purchase accounting, and has determined that these intangible assets have finite lives. The estimated useful lives and net carrying values of the Company’s intangible assets subject to amortization as of June 30, 2023 were as follows:

[[GREPCENT_TABLE]]
[["","Estimated Useful Lives","","Net Carrying Value"],["Affiliate relationships","24 years","","$","17,910"]]
[[/GREPCENT_TABLE]]

The useful lives of the Company’s long-lived assets are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. In estimating the useful lives, the Company considers factors such as, but not limited to, risk of obsolescence, anticipated use, plans of the Company, and applicable laws. In light of these facts and circumstances, the Company has determined that its estimated useful lives are appropriate.

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