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Sphere Entertainment (SPHR) - 2025 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Sphere Entertainment Co. as of March 31, 2025, and for the three months ended March 31, 2025 and 2024. It includes the balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders' equity, along with detailed notes explaining the financial data. Key highlights include a net loss of $82.0 million for the quarter, a significant decrease in cash from operating activities, and a critical situation regarding the matured debt of the MSG Networks segment Condensed Consolidated Balance Sheets The balance sheet as of March 31, 2025, shows total assets of $4.45 billion and total liabilities of $2.31 billion. Compared to December 31, 2024, total assets decreased slightly. A significant portion of current liabilities is the $804.1 million current portion of long-term debt, primarily related to the matured MSG Networks term loan Condensed Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $735,105 | $760,993 | | Total Assets | $4,447,618 | $4,515,300 | | Total Current Liabilities | $1,381,092 | $1,371,667 | | Current portion of long-term debt, net | $804,125 | $829,125 | | Total Liabilities | $2,305,554 | $2,313,881 | | Total Stockholders' Equity | $2,142,064 | $2,201,419 | Condensed Consolidated Statements of Operations For the three months ended March 31, 2025, the company reported revenues of $280.6 million, a decrease from $321.3 million in the prior-year period. The operating loss widened to $78.6 million from $40.4 million, and the net loss increased to $82.0 million from $47.2 million year-over-year Statement of Operations Highlights (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Revenues | $280,574 | $321,330 | | Operating Loss | $(78,609) | $(40,393) | | Net Loss | $(81,954) | $(47,240) | | Basic Loss Per Share | $(2.27) | $(1.33) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $6.3 million for the quarter, a sharp decline from $101.0 million in the same period last year. Net cash used in investing activities was $17.6 million, while financing activities used $26.3 million. This resulted in a net decrease in cash of $37.4 million for the quarter Cash Flow Summary (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,348 | $101,018 | | Net cash used in investing activities | $(17,570) | $(21,213) | | Net cash used in financing activities | $(26,307) | $(12,963) | | Net (decrease) increase in cash | $(37,431) | $66,119 | Notes to Condensed Consolidated Financial Statements (Unaudited) The notes provide critical details on accounting policies, segment information, debt, and contingencies. A key disclosure is the 'Liquidity and Going Concern' section (Note 2), which discusses the material uncertainty related to the MSG Networks' debt default and the subsequent Transaction Support Agreement aimed at restructuring it. Note 17 details this subsequent event, outlining the proposed debt restructuring, which is crucial for the company's financial stability. Other notes detail revenue sources, debt composition, and related-party transactions - The company's business is comprised of two reportable segments: Sphere, a next-generation entertainment medium, and MSG Networks, which operates regional sports networks21 - A material uncertainty exists regarding the company's ability to continue as a going concern due to the MSG Networks' term loan maturing without repayment in October 2024. However, management believes its plans, including the Transaction Support Agreement, have alleviated substantial doubt3439 - Subsequent to the quarter end, on April 24, 2025, the company entered into a Transaction Support Agreement to restructure the MSG Networks debt. Key terms include a new $210 million term loan, a $15 million capital contribution from Sphere Entertainment, and reduced media rights fees payable to the Knicks and Rangers149153 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results, liquidity, and operational factors affecting the business. The analysis highlights a 13% decrease in consolidated revenue, driven by a 19% drop at MSG Networks. The Sphere segment's revenue also declined 8%. A significant portion of the discussion is dedicated to the MSG Networks' debt situation, detailing the default, forbearance, and the subsequent Transaction Support Agreement. Management expresses confidence that Sphere's cash flow will support operations but acknowledges the uncertainty. Adjusted Operating Income (AOI), a key non-GAAP metric, decreased 42% to $36.0 million, primarily due to a 53% decline in MSG Networks' AOI Consolidated Results of Operations (in thousands) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $280,574 | $321,330 | (13)% | | Operating Loss | $(78,609) | $(40,393) | 95% | | Net Loss | $(81,954) | $(47,240) | 73% | Adjusted Operating Income (AOI) Reconciliation (in thousands) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Operating Loss | $(78,609) | $(40,393) | 95% | | Adjusted Operating Income | $35,968 | $61,521 | (42)% | - The primary source of liquidity is cash from operations, which is expected to be substantially used for working capital, capital spending (including Sphere content), and debt service. The ability to fund operations is dependent on Sphere generating significant positive cash flow220221 - A Transaction Support Agreement was signed on April 24, 2025, to restructure MSG Networks' debt. This is expected to result in a non-cash gain but also the elimination of approximately half of the company's net operating losses171177 Business Segment Results - Sphere The Sphere segment reported revenues of $157.5 million, an 8% decrease from the prior year. The decline was driven by lower revenues from The Sphere Experience and Exosphere advertising, partially offset by an increase in event-related revenues from more concerts. Direct operating expenses increased 13% to $70.5 million. Despite the revenue drop, adjusted operating income improved slightly to $13.1 million from $12.9 million, primarily due to lower SG&A expenses Sphere Segment Performance (in thousands) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $157,545 | $170,364 | (8)% | | Direct Operating Expenses | $(70,536) | $(62,294) | 13% | | Operating Loss | $(93,762) | $(83,498) | 12% | | Adjusted Operating Income | $13,147 | $12,909 | 2% | - Revenue from The Sphere Experience decreased by $26.2 million due to fewer performances. Exosphere advertising and sponsorship revenue fell by $15.8 million, mainly due to the absence of Super Bowl-related campaigns that occurred in the prior-year period194195 - Event-related revenues increased by $25.6 million, driven by 10 more concerts held at the venue compared to the prior year194196 Business Segment Results - MSG Networks The MSG Networks segment saw a significant 19% revenue decline to $123.0 million, primarily due to a $29.9 million drop in distribution revenue. This was caused by the temporary non-carriage by Altice and an 11.5% decrease in total subscribers. Direct operating expenses decreased 4% to $87.8 million. Consequently, adjusted operating income fell 53% to $22.8 million MSG Networks Segment Performance (in thousands) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $123,029 | $150,966 | (19)% | | Direct Operating Expenses | $(87,787) | $(91,746) | (4)% | | Operating Income | $15,153 | $43,105 | (65)% | | Adjusted Operating Income | $22,821 | $48,612 | (53)% | - Distribution revenue decreased by $29.9 million, driven by the absence of revenue from Altice during a non-carriage period (Jan 1 - Feb 21, 2025) and a decline in total subscribers of approximately 11.5% (excluding the Altice impact)210211212 - Advertising revenue increased by $1.9 million due to a higher number of live professional sports telecasts210212 Liquidity and Capital Resources As of March 31, 2025, the company had $465.0 million in unrestricted cash. A major liquidity concern is the $804.1 million MSG Networks term loan that matured in October 2024 and is in default. The company entered a Transaction Support Agreement in April 2025 to restructure this debt. Management states that while this situation raises substantial doubt about the ability to continue as a going concern, their plans have effectively alleviated this doubt. Future liquidity is highly dependent on Sphere generating significant positive cash flow - The principal balance of total debt was $1.34 billion as of March 31, 2025, including $804.1 million of MSG Networks debt that matured in October 2024 and is in default221 - If the MSG Networks debt work-out fails, it is probable that MSG Networks Inc. would seek bankruptcy protection or lenders would foreclose on its assets. The parent company and Sphere segment are not legally obligated for this debt223224 Cash Flow Summary (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,348 | $101,018 | | Net cash used in investing activities | $(17,570) | $(21,213) | | Net cash used in financing activities | $(26,307) | $(12,963) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rates and foreign currency fluctuations. A hypothetical 200 basis point (2%) increase in floating interest rates would increase annual interest payments by approximately $21.6 million. The company also has foreign currency exposure to the British pound sterling and the Euro, though the potential impact from a 10% fluctuation is relatively small ($3.2 million and $0.18 million, respectively) - The company is subject to interest rate risk on its floating-rate debt. A hypothetical 200 basis point increase in rates would increase annual interest payments by $21.6 million266 - The company has foreign currency exchange rate exposure to the British pound sterling (GBP) and the Euro (EUR). A hypothetical 10% fluctuation in the GBP/USD rate would change net asset value by approximately $3.2 million, and a similar fluctuation in EUR/USD would change it by $0.18 million267268 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2025. There were no material changes in internal control over financial reporting during the quarter - Management concluded that the Company's disclosure controls and procedures were effective as of March 31, 2025270 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control271 PART II. OTHER INFORMATION Item 1. Legal Proceedings This section details litigation related to the 2021 merger with MSG Networks Inc. The MSG Entertainment Litigation was settled with an $85 million payment to the company, funded by insurers. The MSG Networks Litigation was settled for approximately $48.5 million, with about $28 million paid by the company. An insurance dispute over coverage for this settlement is ongoing - The MSG Entertainment Litigation related to the Networks Merger was settled, resulting in a payment of approximately $85 million to the Company, funded by defendants' insurers278 - The MSG Networks Litigation was settled for approximately $48.5 million. The Company paid about $28 million of the settlement, with the remainder covered by insurers, although a dispute over the full insurance coverage remains280 Item 1A. Risk Factors This section outlines significant risks to the company's business. The most critical risks relate to the MSG Networks segment's debt situation, including the potential for bankruptcy or foreclosure if the refinancing efforts fail. Other major risks include the company's high overall leverage, its dependence on the financial success of the Sphere venue to generate sufficient cash flow for operations and debt service, and its reliance on media rights agreements for the MSG Networks business Risks Related to Our MSG Networks Business The primary risk is the failure to refinance the MSG Networks term loan, which is currently in default. The company believes a failure to complete the workout contemplated by the Transaction Support Agreement would probably lead to MSG Networks Inc. seeking bankruptcy protection or lenders foreclosing on the business. This could lead to the deconsolidation of the segment and potential claims against the parent company. The business also depends on renewing media rights agreements with sports teams, which is not guaranteed - If MSG Networks cannot refinance its term loan, the company believes it is probable that MSG Networks Inc. and/or its subsidiaries would seek bankruptcy protection or lenders would foreclose on the collateral283289 - Events of default exist under the MSG Networks Credit Agreement. While a Transaction Support Agreement is in place, there is no assurance it will be successfully consummated. Any successful refinancing is expected to be on terms materially less favorable than the current ones293296 - The MSG Networks business is dependent on media rights agreements with professional sports teams. The Transaction Support Agreement proposes reducing the term of the Knicks and Rangers agreements to expire after the 2028-29 season299 Risks Related to Our Indebtedness, Financial Condition, and Internal Control The company is highly leveraged with a consolidated debt balance of approximately $1.3 billion as of March 31, 2025. Its ability to fund operations and service this debt is dependent on Sphere generating significant positive cash flow, which is not assured. The uncertainty surrounding the MSG Networks debt raises substantial doubt about the company's ability to continue as a going concern, although management believes its plans have alleviated this doubt for the next year - The company is highly leveraged with a consolidated debt balance of approximately $1.3 billion as of March 31, 2025302 - The company's ability to have sufficient liquidity to fund operations and refinance its debt is dependent on the ability of the Sphere venue to generate significant positive cash flow306 - While conditions at MSG Networks raise substantial doubt about the company's ability to continue as a going concern, management has concluded that its plans have effectively alleviated this doubt as of the report's issuance date311 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a share repurchase program authorizing up to $350 million of its Class A Common Stock. The program was re-authorized in March 2023. To date, no shares have been repurchased under this program - The company has a board-authorized share repurchase program for up to $350 million of Class A Common Stock. No shares have been repurchased under this program to date313 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various amendments to the MSG Networks Forbearance Agreement, the Transaction Support Agreement, and certifications by the CEO and CFO