Madison Square Garden Entertainment Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning the future operating and future financial performance of Madison Square Garden Entertainment Corp., formerly MSGE Spinco, Inc. (“MSG Entertainment”) and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” or the “Company”). 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 level of our expenses, including our corporate expenses; • the level of our revenues, which depends in part on the popularity of the Christmas Spectacular Starring the Radio City Rockettes (“Christmas Spectacular”) , the sports teams whose games are played at Madison Square Garden (“The Garden”), and other events which are presented in our venues; • lack of operating history as a stand-alone public company and costs associated with being an independent public company; • the on-ice and on-court performance of the professional sports teams whose games we host in our venues; • the level of our capital expenditures and other investments; • general economic conditions, especially in the New York City and Chicago metropolitan areas where we have business activities; • the demand for sponsorship and suite arrangements; • competition, for example, from other venues and sports and entertainment options, including new competing venues; • our ability to effectively manage any impacts of the COVID-19 pandemic (including COVID-19 variants) as well as renewed actions taken in response by governmental authorities or certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues, to the extent applicable; • the effect of any postponements or cancellations by third-parties or the Company as a result of the COVID-19 pandemic due to operational challenges and other health and safety concerns (such as the partial cancellation of the 2021 production of the Christmas Spectacular ); • the extent to which attendance at our venues may be impacted by government actions, continuing health concerns by potential attendees and reduced tourism; • the impact on the payments we receive under the arena license agreements that require the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”) to play their home games at The Garden (the “Arena License Agreements”) as a result of government-mandated capacity restrictions, league restrictions and/or social-distancing or vaccination requirements, if any, at Knicks and Rangers games; • changes in laws, guidelines, bulletins, directives, policies and agreements, and regulations under which we operate; • any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, including the unions representing players and officials of the NBA and NHL, or other work stoppage; • seasonal fluctuations and other variations in our operating results and cash flow from period to period; • the successful development of new live productions, enhancements or changes to existing productions and the investments associated with such development, enhancements, or changes; • business, reputational and litigation risk if there is a cyber or other security incident resulting in loss, disclosure or misappropriation of stored personal information, 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 venues; 27 • 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; • 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 how those regulations and laws are interpreted, as well as the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses; • the impact of any government plans to redesign New York City’s Penn Station; • the impact of sports league rules, regulations and/or agreements and changes thereto; • the substantial amount of debt incurred, the ability of our subsidiaries to make payments on, or repay or refinance, such debt under the National Properties Credit Agreement (as defined below) and our ability to obtain additional financing, to the extent required; • financial community perceptions of our business, operations, financial condition and the industries in which we operate; • the performance by Madison Square Garden Sports Corp. (“MSG Sports”) of its obligations under various agreements with the Company and ongoing commercial arrangements, including the Arena License Agreements; • the tax-free treatment of the MSGE Spinco Distribution (as defined below); • our ability to achieve the intended benefits of the MSGE Spinco Distribution; • failure of the Company or Sphere Entertainment (as defined below) to satisfy its obligations under transition services agreements, the DDTL Facility (as defined herein) or other agreements entered into in connection with the MSGE Spinco Distribution; • our status as an emerging growth company; and • the additional factors described under “Risk Factors” in the Company’s Information Statement, dated April 3, 2023 (the “Information Statement”), filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 4, 2023. We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted. Introduction This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s audited combined financial statements and notes thereto as of June 30, 2022 and 2021 and for the three years ended June 30, 2022, 2021 and 2020 (“Audited Combined Annual Financial Statements”) included in the Information Statement, to help provide an understanding of our financial condition, changes in financial condition and results of operations . Business Overview We are a live entertainment company comprised of iconic venues and marquee entertainment content. Utilizing the Company’s powerful brands and live entertainment expertise, the Company delivers unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences. We manage our business through one reportable segment. The Company’s portfolio of venues includes: The Garden, The Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, and The Chicago Theatre. The Company’s business also includes the original production, the Christmas Spectacular, and our entertainment and sports bookings business, which showcases a broad array of compelling concerts, family shows and special events, as well as a diverse mix of sporting events, for millions of guests annually. 28 The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden, The Theater at Madison Square Garden and The Chicago Theatre, and leases Radio City Music Hall and the Beacon Theatre. All of the Company’s revenues and assets are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area. Spin-off Transaction On April 20, 2023 (the “MSGE Spinco Distribution Date”), Sphere Entertainment Co., formerly Madison Square Garden Entertainment Corp. (“Sphere Entertainment”), distributed approximately 67% of the outstanding common stock of MSG Entertainment, to its stockholders (the “MSGE Spinco Distribution”), with Sphere Entertainment retaining approximately 33% of the outstanding common stock of MSG Entertainment (in the form of Class A common stock) (the “MSGE Retained Interest”) immediately following the MSGE Spinco Distribution. The Company owns the traditional live entertainment business previously owned and operated by Sphere Entertainment through its Entertainment business segment, excluding Sphere, which was retained by Sphere Entertainment after the MSGE Spinco Distribution Date. In the MSGE Spinco Distribution, stockholders of Sphere Entertainment received (a) one share of MSG Entertainment’s Class A common stock, par value $0.01 per share, for every share of Sphere Entertainment’s Class A common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on April 14, 2023 (the “Record Date”), and (b) one share of MSG Entertainment’s Class B common stock, par value $0.01 per share, for every share of Sphere Entertainment’s Class B common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on the Record Date. Our MD&A is organized as follows: Results of Operations. This section provides an analysis of our unaudited results of operations for the three and nine months ended March 31, 2023 and 2022. Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the nine months ended March 31, 2023 and 2022, as well as certain contractual obligations and off-balance sheet arrangements. Seasonality of Our Business. This section discusses the seasonal performance of our business. Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, recently issued accounting pronouncements not yet adopted by the Company, as well as the results of the Company’s annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2023. This section should be read together with our critical accounting policies, which are discussed in the Information Statement under “Management's Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the condensed combined financial statements (“financial statements”) of the Company included therein. Factors Affecting Results of Operations The Company’s combined statements of operations for the three and nine months ended March 31, 2023 and 2022 were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of Sphere Entertainment, and are presented as carve-out financial statements, because the Company was not a standalone public company prior to the MSGE Spinco Distribution. See Note 1 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information. The Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three and nine months ended March 31, 2023, as compared to the prior year period, which was impacted by fewer ticketed events at our venues in the first half of the fiscal year due to the lead-time required to book touring acts and artists and the postponement or cancellation of select events (including the partial cancellation of the 2021 production of the Christmas Spectacular) during the fiscal second and third quarters of the fiscal year as a result of an increase in COVID-19 cases. See Note 1. Impact of the COVID-19 Pandemic, to the Audited Combined Annual Financial Statements for more information regarding the impact of the COVID-19 pandemic on our business. It is unclear to what extent COVID-19 concerns, including new variants, could result in new government- or league-mandated capacity, other restrictions, vaccination/mask requirements, or impact the use of and/or demand for our venues, demand for our sponsorship and advertising assets, deter our employees and vendors from working at our venues (which may lead to difficulties in staffing) or otherwise materially impact our operations. 29 Our operating results are largely dependent on our ability to attract concerts and other events to our venues, revenues under various agreements entered into with MSG Sports, and the continuing popularity of the Christmas Spectacular . Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams whose games we host at The Garden. 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 suite licenses and tickets to our live productions, concerts, family shows and other events, which would also negatively affect concession and merchandise sales, and lower levels of sponsorship and venue signage. These conditions may also affect the number of concerts, family shows and other events that take place in the future. An economic downturn could adversely affect our business and results of operations. The Company may explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time. Results of Operations Comparison of the three and nine months ended March 31, 2023 versus the three and nine months ended March 31, 2022 Three Months Ended March 31, Change 2023 2022 Amount Percentage Revenues $ 201,229 $ 193,988 $ 7,241 4 % Direct operating expenses (115,133) (109,962) (5,171) 5 % Selling, general and administrative expenses (44,122) (47,027) 2,905 (6) % Depreciation and amortization (14,798) (16,007) 1,209 (8) % Loss, net on dispositions (51) — (51) NM Restructuring charges (2,461) (5,171) 2,710 (52) % Operating income 24,664 15,821 8,843 56 % Interest income 2,482 1,541 941 61 % Interest expense (13,423) (13,009) (414) 3 % Other income (expense), net 8,070 (8,495) 16,565 NM Income (loss) from operations before income taxes 21,793 (4,142) 25,935 NM Income tax expense (73) — (73) NM Net income (loss) 21,720 (4,142) 25,862 NM Less: Net loss attributable to nonredeemable noncontrolling interest — (212) 212 NM Net income (loss) attributable to MSG Entertainment’s stockholders $ 21,720 $ (3,930) $ 25,650 NM 30 Nine Months Ended March 31, Change 2023 2022 Amount Percentage Revenues $ 703,561 $ 475,150 $ 228,411 48 % Direct operating expenses (397,398) (292,198) (105,200) 36 % Selling, general and administrative expenses (127,537) (128,725) 1,188 (1) % Depreciation and amortization (46,369) (49,166) 2,797 (6) % Gains, net on dispositions 4,361 — 4,361 NM Restructuring charges (9,820) (5,171) (4,649) 90 % Operating income (loss) 126,798 (110) 126,908 NM Interest income 5,804 5,145 659 13 % Interest expense (38,055) (39,804) 1,749 (4) % Other income (expense), net 6,784 (27,742) 34,526 (124) % Income (loss) from operations before income taxes 101,331 (62,511) 163,842 NM Income tax expense (804) — (804) NM Net income (loss) 100,527 (62,511) 163,038 NM Less: Net loss attributable to nonredeemable noncontrolling interest (553) (579) 26 (4) % Net income (loss) attributable to MSG Entertainment’s stockholders $ 101,080 $ (61,932) $ 163,012 NM NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful. Revenues Revenues for the three and nine months ended March 31, 2023 increased $7,241 and $228,411, respectively, as compared to the prior year periods. The changes in revenues were attributable to the following: Three Months Ended Nine Months Ended March 31, 2023 March 31, 2023 Increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements $ 10,111 $ 45,516 Increase in revenues from the presentation of the Christmas Spectacular 3,533 74,947 Increase in venue-related sponsorship, signage and suite license fee revenues 1,872 18,958 Increase in arena license fees from MSG Sports pursuant to the Arena License Agreements 1,547 5,515 (Decrease) increase in event-related revenues (527) 87,244 Decrease in agency commission due to termination of Network Ad Sales agreement (9,621) (8,213) Other net increases 326 4,444 $ 7,241 $ 228,411 For the three months ended March 31, 2023, the increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects higher food, beverage and merchandise sales, suite license fee revenues and single event suite sales at Knicks and Rangers games. For the nine months ended March 31, 2023, the increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects higher food, beverage and merchandise sales and higher suite license fees revenues at Knicks and Rangers games and higher suite license fee revenues due to the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 (due to the COVID-19 pandemic). The Company had 181 Christmas Spectacular performances during this year’s holiday season, of which seven took place in the third quarter of Fiscal Year 2023, as compared to 101 performances in the prior year’s holiday season (due to the partial cancellation of the 2021 production as a result of an increase in COVID-19 cases), all of which took place in the second quarter of Fiscal Year 2022. For this year’s holiday season, approximately 930,000 tickets were sold, representing an over 25% 31 increase in attendance on a per-show basis as compared to the prior year. For the three months ended March 31, 2023, the increase in revenues from the presentation of the Christmas Spectacular production was due to the seven performances that took place in the current year period as compared to no performances in the third quarter of Fiscal Year 2022. For the nine months ended March 31, 2023, the increase in revenues from the presentation of the Christmas Spectacular production was primarily due to higher ticket-related revenues. This reflected the increase in the number of performances as compared to the prior year period described above, and, to a lesser extent, higher per-show paid attendance. For the three months ended March 31, 2023, the increase in venue-related sponsorship, signage and suite license fee revenues was primarily due to higher suite sales. For the nine months ended March 31, 2023, the increase in venue-related sponsorship, signage and suite license fee revenues was primarily due to the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 and higher suite sales. For the three months ended March 31, 2023, the decrease in event-related revenues primarily reflects lower revenues from concerts of $10,656, which was partially offset by an increase in revenues from other sporting and live entertainment events (excluding the Knicks and Rangers) of $10,129. The decrease in revenues from concerts was due to a decrease in the number of concerts at the Company’s venues as compared to the prior year period, partially offset by higher per-concert revenues. The increase in revenues from other sporting and live entertainment events (excluding the Knicks and Rangers) was due to higher per-event revenue and a higher number of events at the Company’s venues as compared to the prior year period. For the nine months ended March 31, 2023, the increase in event-related revenues primarily reflects higher revenues from concerts of $77,416, which was primarily due to the return of live events at the Company’s venues as compared to limited live events held during the first quarter of Fiscal Year 2022 (due to the COVID-19 pandemic). See “— Introduction —Factors Affecting Results of Operations” for more information . Direct operating expenses Direct operating expenses for the three and nine months ended March 31, 2023 increased $5,171 and $105,200, respectively, as compared to the prior year periods. The changes in direct operating expenses were attributable to the following: Three Months Ended Nine Months Ended March 31, 2023 March 31, 2023 Increase in expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements $ 4,488 $ 33,181 Increase in direct operating expenses associated with the Arena License Agreements 3,748 8,480 Increase in direct operating expenses associated with the Christmas Spectacular 2,326 12,181 (Decrease) increase in event-related direct operating expenses (4,515) 43,129 (Decrease) increase in venue operating costs (570) 6,057 Other net (decreases) increases (306) 2,172 $ 5,171 $ 105,200 For the three and nine months ended March 31, 2023, the increase in direct operating expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects the increase in suite license fees and, to a lesser extent, the increase in Knicks’ and Rangers’ food and beverage sales. For the three and nine months ended March 31, 2023, the increase in expenses associated with the Arena License Agreements primarily reflects an increase in food and beverage costs associated with the increase in Knicks’ and Rangers’ food and beverage sales. For the three and nine months ended March 31, 2023, the increase in direct operating expenses associated with the Christmas Spectacular production was primarily due to the increase in the number of performances as compared to the prior year periods. For the three months ended March 31, 2023, the decrease in event-related direct operating expenses reflects lower direct operating expenses from concerts of $6,785, which was primarily due to the decrease in the number of concerts held at the Company’s venues as compared to the prior year period, partially offset by higher direct operating expenses from other sporting and live entertainment events (excluding the Knicks and Rangers) of $2,269, which was primarily due to the increase in the number of sporting events held at the Company’s venues as compared to the prior year period. For the nine months ended March 31, 2023, the increase in event-related direct operating expenses reflects higher direct operating expenses from concerts 32 of $39,637, which was primarily due to the increase in the number of events held at the Company’s venues as compared to the prior year period. Selling, general and administrative expenses For the three months ended March 31, 2023 selling, general and administrative expenses decreased $2,905 to $44,122 as compared to the prior year period, and for the nine months ended March 31, 2023, selling, general and administrative expenses decreased $1,188 to $127,537 as compared to the prior year period. The decrease is primarily due to lower employee compensation and related benefits, partially offset by other net increases. (Loss) gains, net on dispositions (Loss) gains, net on dispositions for the three months ended March 31, 2023, was a loss of $51 as compared to zero in the prior year period. (Loss) gains, net on dispositions for the nine months ended March 31, 2023 was a gain of $4,361 as compared to zero in the prior year period. The (loss) gains for the nine months ended March 31, 2023 were due to the gain on sale of the Company’s controlling interest in Boston Calling Events, LLC (“BCE Disposition”) , partially offset by the net loss on the disposal of a corporate aircraft. Restructuring charges Restructuring charges for the three months ended March 31, 2023 decreased $2,710 to $2,461 as compared to the prior year period. For the nine months ended March 31, 2023 restructuring charges increased $4,649 to $9,820 as compared to the prior year period. The restructuring charges relate to termination benefits provided due to a workforce reduction of certain executives and employees as part of Sphere Entertainment’s cost reduction program implemented in Fiscal Year 2023. Operating income (loss) For the three months ended March 31, 2023, operating income was $24,664 as compared to $15,821 in the prior year period, an increase of $8,843. The increase in operating income was primarily due to an increase in revenues, a decrease in selling, general and administrative expenses, and lower restructuring charges as compared to the prior year period, partially offset by higher direct operating expenses as discussed above. For the nine months ended March 31, 2023, operating income was $126,798 as compared to a $110 operating loss in the prior year period, an improvement of $126,908. The improvement in operating income was primarily due to an increase in revenues, partially offset by higher direct operating expenses as discussed above. Interest income For the three and nine months ended March 31, 2023, interest income increased $941 and $659, respectively, as compared to the prior year periods primarily due to higher interest rates, partially offset by the absence of the interest income in the current year from the subordinated credit agreement the Company entered into with TAO Group Sub-Holdings, LLC, a wholly-owned subsidiary of Sphere Entertainment, which was fully repaid on June 9, 2022. Interest expense For the three months ended March 31, 2023, interest expense increased $414, as compared to the prior year period primarily due to increase in interest rates, partially offset by decrease in amortization of deferred financing costs following the extinguishment of MSG National Properties prior term loan facility in June 2022 and the absence of notes payable to BCE following the BCE Disposition. For the nine months ended March 31, 2023, interest expense decreased $1,749, as a result of decrease in amortization of deferred financing costs following the extinguishment of MSG National Properties prior term loan facility in June 2022 and the absence of notes payable to BCE following the BCE Disposition, partially offset by increase in interest rate. Other income (expense), net For the three and nine months ended March 31, 2023, other income, net, increased $16,565 and $34,526, as compared to the prior year period primarily due to unrealized gains as compared to unrealized losses in the prior year periods associated with the Company’s investments in DraftKings Inc. Income tax expense Income tax expense for the three and nine months ended March 31, 2023 of $73 and $804, respectively reflects an effective income tax of 0% and 1%, respectively, due to an equal and offsetting tax impact of a valuation allowance. 33 Adjusted operating income (“AOI”) The Company evaluates its performance based on several factors, of which the key financial measure is adjusted operating income (loss), a non-GAAP financial measure. We define adjusted operating income (loss) as operating income (loss) excluding: (i) the impact of non-cash straight-line leasing revenue associated with the Arena License Agreements with MSG Sports, (ii) depreciation, amortization and impairments of property and equipment, goodwill and intangible assets, (iii) 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, (viii) gains and losses related to the remeasurement of liabilities under the executive deferred compensation plan, and (ix) amortization for capitalized cloud computing arrangement costs. The Company believes that given the length of the Arena License Agreements and resulting magnitude of the difference in leasing revenue recognized and cash revenue received, the exclusion of non-cash leasing revenue provides investors with a clearer picture of the Company’s operating performance. Management believes that this adjustment is beneficial for other incremental reasons as well. This adjustment provides senior management, investors and analysts with important information regarding a long-term related party agreement with MSG Sports. In addition, this adjustment is included under the Company’s debt covenant compliance calculations and is a component of the performance measures used to evaluate, and compensate, senior management of the Company. The Company believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the 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 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 remeasurement of liabilities under the executive deferred compensation plan are recognized in Operating (income) loss whereas gains and losses related to the remeasurement of the assets under the 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 the Company on a combined 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. 34 The following is a reconciliation of operating income (loss) to adjusted operating income for the three and nine months ended March 31, 2023 as compared to the prior year period: Three Months Ended March 31, Change 2023 2022 Amount Percentage Operating income $ 24,664 $ 15,821 $ 8,843 56 % Non-cash portion of arena license fees from MSG Sports (a) (12,149) (12,073) (76) 1 % Depreciation and amortization 14,798 16,007 (1,209) (8) % Share-based compensation 8,014 8,789 (775) (9) % Restructuring charges 2,461 5,171 (2,710) (52) % Loss, net on dispositions 51 — 51 NM Amortization for capitalized cloud computing arrangement costs 65 12 53 NM Remeasurement of deferred compensation plan liabilities 126 — 126 NM Adjusted operating income $ 38,030 $ 33,727 $ 4,303 13 % Nine Months Ended March 31, Change 2023 2022 Amount Percentage Operating income (loss) $ 126,798 $ (110) $ 126,908 NM Non-cash portion of arena license fees from MSG Sports (a) (25,078) (23,962) (1,116) 5 % Depreciation and amortization 46,369 49,166 (2,797) (6) % Share-based compensation 21,980 29,868 (7,888) (26) % Restructuring charges 9,820 5,171 4,649 90 % Gains, net of dispositions (4,361) — (4,361) NM Amortization for capitalized cloud computing arrangement costs 169 12 157 NM Remeasurement of deferred compensation plan liabilities 132 — 132 NM Adjusted operating income $ 175,829 $ 60,145 $ 115,684 192 % _________________ NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful. (a) This adjustment represents the non-cash portion of operating lease revenue related to the Company’s Arena License Agreements with MSG Sports. Pursuant to GAAP, recognition of operating lease revenue is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. As a result, operating lease revenue is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Operating income on a GAAP basis includes lease income of (i) $19,014 and $39,234 of revenue collected in cash for the three and nine months ended March 31, 2023, respectively, and $17,543 and $34,836 of revenue collected in cash for the three and nine months ended March 31, 2022, respectively, and (ii) a non-cash portion of $12,149 and $25,078 for the three and nine months ended March 31, 2023, respectively, and $12,073 and $23,962 for the three and nine months ended March 31, 2022, respectively. Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests For the three and nine months ended March 31, 2023, the Company recorded $0 and $553 of net loss attributable to nonredeemable noncontrolling interests as compared to $212 and $579 of net loss attributable to nonredeemable noncontrolling interests for the three and nine months ended March 31, 2022. These amounts represent the share of net loss of BCE that is not attributable to the Company. The Company disposed of its controlling interest in BCE on December 2, 2022. 35 Liquidity and Capital Resources Sources and Uses of Liquidity As further described in “Item 2. - Management’s Discussion and Analysis - Introduction,” on April 20, 2023, the Company completed the MSGE Spinco Distribution. Although the information set forth in this Quarterly Report on Form 10-Q generally is as of March 31, 2023 and does not give effect to the MSGE Spinco Distribution, the information set forth in this section also focuses on the liquidity and capital resources of the Company following the MSGE Spinco Distribution. Our primary sources of liquidity are cash and cash equivalents, cash flows from our business operations and available borrowing capacity under the National Properties Revolving Credit Facility (as defined below) . Our principal uses of cash include working capital-related items (including funding our operations), capital spending, debt service, investments and related loans and advances that we may fund from time to time. In addition, prior to October 20, 2024, we may be required to advance up to $65,000 to Sphere Entertainment under the delayed draw term loan facility entered into on April 20, 2023 (the “DDTL Facility”). We may also use cash to repurchase our common stock. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic and market conditions could adversely impact our ability to do so at that time. As of March 31, 2023, the Company’s unrestricted cash and cash equivalents balance was $122,731. The principal balance of the Company’s total debt outstanding as of March 31, 2023 was $673,205 and the Company had $64,908 of available borrowing capacity under its revolving credit facility. We believe we have sufficient liquidity from cash and cash equivalents, available borrowing capacity under our credit facilities and cash flows from operations to fund our operations and satisfy any obligations for the foreseeable future. On March 29, 2023, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $250,000 of the Company’s Class A Common Stock. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market or private transactions, block trades or such other manner as the Company may determine (including through repayment by Sphere Entertainment of the DDTL Facility with shares of the Company’s Class A Common Stock) in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. No shares have been repurchased to date. Financing Agreements See Note 10. Credit Facilities, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements. National Properties Facilities On June 30, 2022, MSG National Properties, LLC (“MSG National Properties”), Sphere Entertainment Group, LLC (formerly known as MSG Entertainment Group, LLC, “Sphere Entertainment Group”) and certain subsidiaries of MSG National Properties entered into a credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and the lenders and L/C issuers party thereto (the “National Properties Credit Agreement”), providing for a five-year, $650,000 senior secured term loan facility (as amended, the “National Properties Term Loan Facility”) and a five-year, $100,000 revolving credit facility (the “National Properties Revolving Credit Facility” and, together with the National Properties Term Loan Facility, the “National Properties Facilities”). Up to $25,000 of the National Properties Revolving Credit Facility is available for the issuance of letters of credit. As of March 31, 2023 outstanding letters of credit were $7,992 and the remaining balance available under the National Properties Revolving Credit Facility was $64,908 . Borrowings under the current National Properties Facilities bear interest at a floating rate, which at the option of MSG National Properties may be either (a) a base rate plus an applicable margin ranging from 1.50% to 2.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries (the “National Properties Base Rate”), or (b) Term SOFR plus an applicable margin ranging from 2.50% to 3.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries (the “National Properties SOFR Rate”). The National Properties Credit Agreement requires MSG National Properties to pay a commitment fee ranging from 0.30%% to 0.50% in respect of the daily unused commitments under the National Properties Revolving Credit Facility. MSG National Properties is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the National Properties Credit Agreement. The interest rate on the National Properties Facilities as of March 31, 2023 was 7.41%. Subject to customary notice and minimum amount conditions, the Company may voluntarily repay outstanding loans under the National Properties Facilities and terminate commitments under the National Properties Revolving Credit Facility, at any time, in whole or in part, subject only to customary breakage costs in the case of prepayment of Term SOFR loans. The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments beginning with the fiscal 36 quarter ending March 31, 2023, in an aggregate amount equal to 2.50% per annum (0.625% per quarter), stepping up to 5% per annum (1.25% per quarter) in the fiscal quarter ending September 30, 2025, with the balance due at the maturity of the facility on June 30, 2027. The principal obligations under the National Properties Revolving Credit Facility are due at the maturity of the facil ity. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to the net cash proceeds of certain sales of assets or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair, or replacement rights), subject to certain exceptions. The National Properties Credit Agreement includes financial covenants requiring MSG National Properties and its restricted subsidiaries to maintain a specified minimum liquidity level, a specified minimum debt service coverage ratio and specified maximum total leverage ratio. The minimum liquidity level is set at $50,000, and is tested based on the level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter over the life of the National Properties Facilities. The debt service coverage ratio covenant began testing in the fiscal quarter ending December 31, 2022, and is set at a ratio of 2:1 before stepping up to 2.5:1 in the fiscal quarter ending September 30, 2024. The leverage ratio covenant begins testing in the fiscal quarter ending June 30, 2023. It is tested based on the ratio of MSG National Properties and its restricted subsidiaries’ consolidated total indebtedness to adjusted operating income, with an initial maximum ratio of 6:1, stepping down to 5.5:1 in the fiscal quarter ending June 30, 2024 and 4.5:1 in the fiscal quarter ending June 30, 2026. As of March 31, 2023, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Credit Agreement. In addition to the financial covenants discussed above, the National Properties Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. The National Properties Credit Agreement contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the National Properties Credit Agreement, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix) merge or consolidate; and (x) make certain dispositions. As of March 31, 2023, all obligations under the National Properties Facilities were guaranteed by Sphere Entertainment Group and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own The Garden and certain other excluded subsidiaries (the “Subsidiary Guarantors”). In connection with the MSGE Spinco Distribution, on April 18, 2023, the National Properties Credit Agreement was amended to change the parent guarantor from Sphere Entertainment Group to MSG Entertainment Holdings, LLC, a subsidiary of the Company and the direct parent of MSG National Properties. All obligations under the National Properties Facilities, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theatre. Contractual Obligations During the nine months ended March 31, 2023, the Company’s off-balance sheet commitments increased by a total of $6,478 of contractual obligations offset by an immaterial decrease in marketing partnerships agreement-related commitments. The increase in contractual obligations primarily relates to future performances at The Garden. See Note 9. Commitments and Contingencies, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details on the timing and amount of payments under various media rights agreements. 37 Cash Flow Discussion As of March 31, 2023, cash, cash equivalents and restricted cash totaled $122,981, as compared to $62,573 as of June 30, 2022. The following table summarizes the Company’s cash flow activities for the nine months ended March 31, 2023 and 2022: Nine Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 132,341 $ 60,338 Net cash provided by (used in) investing activities 13,261 (13,060) Net cash used in financing activities (85,194) (150,035) Net increase (decrease) in cash, cash equivalents and restricted cash $ 60,408 $ (102,757) Operating Activities Net cash provided by operating activities for the nine months ended March 31, 2023 improved by $72,003 to $132,341 as compared to the prior year period, primarily due to the increase in net income, partially offset by (i) changes in working capital assets and liabilities, which included a decrease in accounts payable, accrued and other current and non-current liabilities, a decrease in related party receivables, net of payables, and a decrease on operating lease right-of-use assets and lease liabilities, (ii) a decrease in net unrealized loss on equity investments with readily determinable fair value, (iii) lower share-based compensation expense, and (iv) gains, net on dispositions recognized in the current year period. Investing Activities Net cash provided by investing activities for the nine months ended March 31, 2023 improved by $26,321 to $13,261 as compared to the prior year period (i) proceeds received from the dispositions of BCE and the corporate aircraft and (ii) proceeds received from the sale of investments, partially offset by the absence of proceeds received from a related party loan receivable in the current year period. Financing Activities Net cash used in financing activities from continuing operations for the nine months ended March 31, 2023 decreased by $64,841 to $(85,194) as compared to the prior year period primarily due to lower net transfers to Sphere Entertainment and Sphere Entertainment’s subsidiaries in the current year period as compared to the prior year period. Seasonality of Our Business The revenues the Company earns from the Christmas Spectacular and arena license fees from MSG Sports in connection with the Knicks’ and Rangers’ use of The Garden generally means the Company earns a disproportionate share of its revenues and operating income in the second and third quarters of the Company’s fiscal year, with the first and fourth fiscal quarters being disproportionately lower. Recently Issued Accounting Pronouncements and Critical Accounting Estimates Recently Issued and Adopted Accounting Pronouncements See Note 2. Accounting Policies, to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements. Critical Accounting Estimates There have been no material changes to the Company’s critical accounting policies. The following discussion has been included to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2023. Impairment of Goodwill and Indefinite-Lived Assets Goodwill is tested annually for impairment as of August 31 st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. As of March 31, 2023, the Company had one operating and reportable segment, consistent with the way management makes decisions and allocates resources to the business. For purposes of evaluating goodwill for impairment, the Company has one reporting unit. 38 The goodwill balance reported on the Company’s condensed combined balance sheet as of March 31, 2023 was $69,041. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform a quantitative impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, a quantitative goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimate of the fair value of the Company’s reporting unit is 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 its reporting unit for the Fiscal Year 2023 annual impairment test. These assessments considered factors such as: • macroeconomic conditions; • industry and market considerations; • cost factors; • overall financial performance of the reporting units; • other relevant company-specific factors such as changes in management, strategy or customers; and • relevant reporting unit specific events such as changes in the carrying amount of net assets. During the first quarter of Fiscal Year 2023, the Company performed its most recent annual impairment test of goodwill and determined that there was no impairment of goodwill identified for its reporting unit as of the impairment test date. Based on this impairment test, the Company’s reporting unit had sufficient safety margins, representing the excess of the estimated fair value of the reporting unit, derived from the most recent quantitative assessments, less its respective carrying value (including goodwill). The Company believes that if the fair value of the reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized. Identifiable Indefinite-Lived Intangible Assets Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31 st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company’s condensed combined balance sheet as of March 31, 2023: March 31, 2023 Trademarks $ 61,881 Photographic related rights 1,920 Total indefinite-lived intangibles $ 63,801 The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis, if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) forgoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For all periods presented, the Company elected to perform the qualitative assessment of impairment for the photographic related rights and the trademarks. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair values of the intangible assets. Examples of such events and circumstances include: 39 • cost factors; • financial performance; • legal, regulatory, contractual, business or other factors; • other relevant company-specific factors such as changes in management, strategy or customers; • industry and market considerations; and • macroeconomic conditions. During the first quarter of Fiscal Year 2023, the Company performed its most recent annual impairment test of identifiable indefinite-lived intangible assets and determined that there were no impairments identified. Based on these impairment tests, the Company’s indefinite-lived intangible assets had sufficient safety margins, representing the excess of each identifiable indefinite-lived intangible asset’s estimated fair value over its respective carrying value. The Company believes that if the fair value of an indefinite-lived intangible asset exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.