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(b)
| As of July 1, 2018, upon adoption of ASU No. 2016-01, the Company recorded a transition adjustment to reclassify accumulated other comprehensive loss associated with its investment in Townsquare in the amount of $2,466 pre-tax ($5,570, net of tax) to the Madison Square Garden Sports Corp. Investment. See Note 11 for more information related to the investment in Townsquare and its impact on the Company’s operating results for the three and nine months ended March 31, 2020 and 2019, which is reflected under Miscellaneous income (expense), net in the accompanying combined statements of operations. | | | | |
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(a)Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net unrecognized prior service credit included in net periodic benefit cost, which is reflected under Miscellaneous income (expense), net in the accompanying consolidated statements of operations.
Note 16. 17. Income Taxes
DuringFor the periods presented inprior to the combined financial statements,Entertainment Distribution, the Company did not file separate income tax returns. The Company was included in the federal and statefiled consolidated income tax returns of Madison Square Garden Sports Corp. for all periods presented.with MSG Sports. The income tax expense or benefit presentedprovision included in these periods has been determined on acalculated using the separate return basis, as if the Company filed a separate tax return. In addition, although the Company and MSG Networks did not file consolidated returns for periods prior to the Merger, income tax return.expense or benefit and deferred tax assets and liabilities have been presented on a combined basis for all historical periods, as described in Note 1.
Income tax benefit for the three months ended March 31, 2020September 30, 2021 of $10,126$20,615 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) a tax expense relatedof $9,823 to an increase in valuation allowance of $30,968,write off the deferred tax for certain transaction costs associated with the Merger and (ii) tax expense of $4,673$2,859 related to noncontrolling interests, and (iii) tax expense from nondeductible officers’ compensation, of $1,296, partially offset by (i) state income tax benefit of $14,084.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Income tax benefitexpense for the ninethree months ended March 31,September 30, 2020 of $8,686$9,392 differs from income tax benefitbenefits derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) a tax expense relatedof $6,746 resulting from a change in the estimated applicable tax rate used to an increase in valuation allowance of $22,043,measure deferred taxes, (ii) tax expense of $5,001 related to noncontrolling interests, and$7,586 resulting from an increase in the valuation allowance, (iii) tax expense fromof $1,456 related to nondeductible officers’ compensation, and (iv) tax expense of $3,846,$949 related noncontrolling interests, partially offset by state income tax benefit of $9,761$1,771.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax asset will not be realized. As of September 30, 2021, based on current facts and excesscircumstances, management believes that it is more likely than not that the Company will not realize the benefit for a portion of its deferred tax benefit relatedasset.Accordingly, a partial valuation allowance has been recorded as of September 30, 2021.The Company will continue to share-based compensation awardsassess the realizability of $2,067.its deferred tax assets on a quarterly basis.
Income tax expense forDuring the three months ended March 31, 2019 of $469 differs fromSeptember 30, 2021 the Company received income tax expense derived from applyingrefunds, net of payments, of $(9,143). During the statutory federal rate of 21% tothree months ended September 30, 2020, the pretax income primarily due to (i) a tax expense related to an increase in valuation allowance of $1,699, (ii) tax expense of nondeductible officers’ compensation of $1,422, and (iii) tax expense of $144 related to noncontrolling interests, partially offset by stateCompany made income tax expensepayments of $431.$23,960.
Income tax expense for the nine months ended March 31, 2019
Table of $1,253 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to a tax benefit related to a decrease in valuation allowance of $19,171, and excess tax benefit related to share-based compensation awards of $2,817, partially offset by (i) state income tax expense of $7,425, (ii) tax expense from nondeductible officers’ compensation of $6,140, and (iii) tax expense related to noncontrolling interests of $1,424.Contents The Company’s historical combined financial statements reflect net operating loss (“NOL”) carryforwards calculated on a separate return basis. These NOL carryforwards were calculated as if the Company operated as a separate stand-alone entity for the periods presented in the historical annual and interim combined financial statements of the Company. Because the Entertainment Distribution involved a spin-off of the Company, these NOLs do not carry over to the Company. However, in connection with the Entertainment Distribution, certain deferred revenue of the Company will be accelerated for income tax purposes, rather than recognized as the associated events occur. The tax on such acceleration will be the responsibility of Madison Square Garden Sports Corp. and not the Company. The Company will not reimburse Madison Square Garden Sports Corp. for such taxes.
Madison Square Garden Sports Corp. was notified during the third quarter of fiscal year 2018 that the Internal Revenue Service (“IRS”) was commencing an audit of the federal income tax return for the year ended June 30, 2016. In October 2019, Madison Square Garden Sports Corp. was informed by the IRS that the audit resulted in no changes.MADISON SQUARE GARDEN ENTERTAINMENT CORP.
Madison Square Garden Sports Corp. was notified in April 2020 that the City of New York was commencing an audit of the state income tax returns for the fiscal years ended June 30, 2016 and 2017. The Company does not expect the examination, when finalized, to result in material changes.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On March 31, 2020, Madison Square Garden Sports Corp. and the Company entered into a Tax Disaffiliation Agreement (“TDA”) that governs the parties’ respective rights, responsibilities and obligations with respect to taxes and tax benefits. Under the TDA, Madison Square Garden Sports Corp. will generally be responsible for all U.S. federal, state, local and other applicable income taxes of the Company for any taxable period or portion of such period ending on or before the Entertainment Distribution Date.(Continued)
Note 17.18. Related Party Transactions
Given that the Entertainment Distribution did not occur until after March 31, 2020, the transactions described below, unless otherwise indicated, were in place with Madison Square Garden Sports Corp. as of March 31, 2020, and continued with the Company following the Entertainment Distribution.
As of March 31, 2020,September 30, 2021, members of the Dolan family including trusts for membermembers of the Dolan family (collectively, the “Dolan Family Group”), for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, collectively beneficially owned all100% of Madison Square Garden Sports Corp.’sthe Company’s outstanding Class B common stockCommon Stock and approximately 3.5%5.0% of Madison Square Garden Sports Corp.’sthe Company’s outstanding Class A common stockCommon Stock (inclusive of options exercisable within 60 days of the date hereof). Such shares of Madison Square Garden Sports Corp.’sthe Company’s Class A common stockCommon Stock and Class B common stock,Common Stock, collectively, represent approximately 70.9%72.6% of the aggregate voting power of Madison Square Garden Sports Corp.’sthe Company’s outstanding common stock. Pursuant to the Entertainment Distribution on April 17, 2020, one share of the Company’s Class A Common Stock was issued for every share of Madison Square Garden Sports Corp.’s Class A common stock held as of the Record Date, and one share of the Company’s Class B Common Stock was issued for every share of Madison Square Garden Sports Corp.’s Class B common stock held as of the Record Date.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Members of the Dolan family are also the controlling stockholders of the Company, Madison Square GardenMSG Sports Corp., MSG Networks and AMC Networks Inc. (“AMC Networks”).
Current Related Party Arrangements
The Company is party to the following agreements and/or arrangements with MSG Sports:
•Media rights agreements with MSG Sports pursuant to which the Company has the exclusive media rights to Knicks and Rangers games in their local markets.
The•Sponsorship sales and service representation agreements pursuant to which the Company has variousthe exclusive right and obligation to sell MSG Sports’ sponsorships for an initial stated term of ten years for a commission;
•A team sponsorship allocation agreement, pursuant to which MSG Sports continues receiving an allocation of sponsorship and signage revenues associated with the sponsorship agreements with that existed at the Entertainment Distribution Date;
•Arena License Agreements pursuant to which the Company (i) provides MSG NetworksSports the right to use The Garden for games of the Knicks and Rangers for a 35-year term in exchange for venue license fees, (ii) shares revenues collected for suite licenses, (iii) operates and manages the sale of the sports teams merchandise at The Garden for a commission, (iv) operates and manages the sale of food and beverage sales and catering services during the Knicks and Rangers games for a portion of net profits (as defined under the Arena License Agreements), including an advertising sales representation agreement and a(v) provides day of game services agreement (the “Services Agreement”). Pursuantthat were historically provided prior to the Entertainment Distribution, and (vi) provides other general services within The Garden;
•Transition Services Agreement (the “TSA”) pursuant to which was effective July 1, 2019, the Company provides certain services to MSG Networks, such as information technology, accounts payable and payroll, human resources, and other corporate functions, as well as the executive support services described below, in exchange for service fees. MSG Networks also provides certain services to the Company, in exchange for service fees.
In connection with the Entertainment Distribution, on March 31, 2020, the Company entered into a Transition Services Agreement with Madison Square Garden Sports Corp. (the “TSA”). Pursuant to the TSA, following the Entertainment Distribution, the Company will provide Madison Square Garden Sports Corp. certain corporate and other transition services to MSG Sports, such as information technology, accounting, accounts payable, payroll, tax, certain legal functions, human resources, insurance and risk management, government affairs, investor relations, corporate communications, benefit plan administration and reporting, and internal audit functions as well as certain marketing functions, in exchange for service fees. Madison Square GardenMSG Sports Corp. will also provideprovides certain transition services to the Company, in exchange for service fees.fees;
•Sublease agreement, pursuant to which the Company subleases office space to MSG Sports;
•Group ticket sales representation agreement, pursuant to which the Company appointed MSG Sports as its sales and service representative to sell group ticket packages related to Company events in exchange for a commission;
•Single night rental commission agreement, pursuant to which MSG Sports may, from time to time, sell (or make referrals for sales of) licenses for the use of suites at The Garden for individual Company events in exchange for a commission;
•Aircraft time sharing agreements (discussed below); and
•Other agreements with MSG Sports entered into in connection with the Entertainment Distribution such as a distribution agreement, a tax disaffiliation agreement, an employee matters agreement, a trademark license agreement and certain other arrangements.
Further, the Company shares certain executive support costs, including office space, executive assistants, security and transportation costs, for (i) the Company’s Executive Chairman and Chief Executive Officer and the Company’s President with MSG NetworksSports and (ii) the Company’s Vice Chairman with MSG NetworksSports and AMC Networks. Following the Entertainment Distribution, the Company will also share these expenses with Madison Square Garden Sports Corp.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company is a party to various aircraft arrangements. Pursuant to certain Aircraft Support Services Agreements (the “Support Agreements”), the Company provides certain aircraft support services to entities controlled by (i) James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and a director, (ii) Charles F. Dolan, a director, and certain of his children, who are siblings of James L. Dolan, specifically: Thomas C. Dolan (a director of the Company), Deborah Dolan-Sweeney, Patrick F. Dolan, Marianne Dolan Weber (a director of the Company), and Kathleen M. Dolan, and (iii) Patrick F. Dolan, the son of Charles F. Dolan and brother of James L. Dolan.
The Company hasentered into reciprocal time sharing/dry lease agreements with each of (i) Quart 2C, LLC (“Q2C”), a company controlled by James L. Dolan and Kristin A. Dolan, his spouse and a director of the Company, and (ii) Charles F. Dolan and Sterling2k LLC (collectively, “CFD”), an entity owned and controlled by Deborah Dolan-Sweeney, the daughter of Charles F. Dolan and the sister of James L. Dolan, pursuant to which the Company has agreed from time to time to make its aircraft available to each of Q2C and CFD, and Q2C, and CFD have agreed from time to time to make their aircraft available to the Company. Pursuant to the terms of the agreements, Q2C and/or CFD may lease on a non-exclusive, “time sharing” basis, the Company’s Gulfstream Aerospace G550 aircraft.
The Company is also party to a dry lease agreement with Brighid Air, LLC (“Brighid Air”), a company owned and controlled by Patrick F. Dolan, the son of Charles F. Dolan and the brother of James L. Dolan, pursuant to which the Company may lease on a non-exclusive basis Brighid Air’s Bombardier BD100-1A10 Challenger 350 aircraft (the “Challenger”). In connection with the dry lease agreement, the Company also entered into a Flight Crew Services Agreement (the “Flight Crew Agreement”) with Dolan Family Office, LLC (“DFO”), an entity owned and controlled by Charles F. Dolan, pursuant to which the Company may utilize pilots employed by DFO for purposes of flying the Challenger when the Company is leasing that aircraft under the Company’s dry lease agreement with Brighid Air.
The Company and each of MSG NetworksSports and AMC Networks are party to certain aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make aircraft available to MSG NetworksSports and/or AMC Networks for lease on a “time sharing” basis. Additionally, the Company, MSG NetworksSports and AMC Networks have agreed on an allocation of the costs of certain aircraft and helicopter use by their shared executives. Following the Entertainment Distribution, the Company will also share these expenses with Madison Square Garden Sports Corp.
In addition to the aircraft arrangements described above, certain executives of the Company are party to aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make certain aircraft available for lease on a “time sharing” basis for personal use in exchange for payment of actual expenses of the flight (as listed in the agreement).
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
From time to time the Company enters into arrangements with 605, LLC. James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and a director, and his spouse, Kristin A. Dolan (a director of the Company), own 50% of 605, LLC. Kristin A. Dolan is also the founder and Chief Executive Officer of 605, LLC. 605, LLC provides audience measurement and data analytics services to the Company and its subsidiaries in the ordinary course of business.
As of March 31, 2020September 30, 2021 and June 30, 2019,2021, BCE had $637 of notes payable duewith respect to a loan received by BCE from its noncontrolling interest holder. See Note 1213 for further information.
The Company has also entered into certain commercial agreements with its equity method investment nonconsolidated affiliates in connection with MSG Sphere. For the ninethree months ended March 31,September 30, 2021 and 2020, the Company recorded approximately $11,137$8,677 and $13,077, respectively, of capital expenditures in connection with services provided to the Company under these agreements. As of September 30, 2021 and June 30, 2021, accrued capital expenditures associated with related parties were $9,824 and $6,921, respectively, and are reported under other accrued liabilities in the accompanying consolidated balance sheets.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Revenues and Operating Expenses (Credits)
The following table summarizes the composition and amounts of the transactions with the Company’s affiliates. These amounts are reflected in revenues and operating expenses in the accompanying combinedconsolidated statements of operations for the three and nine months ended March 31, 2020September 30, 2021 and 2019:2020:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | $ | 6,333 |
| | $ | 7,906 |
| | $ | 13,792 |
| | $ | 15,762 |
|
| Operating expenses (credits): | | | | | | | | |
| Revenue sharing expenses | | $ | 42,878 |
| | $ | 55,756 |
| | $ | 108,380 |
| | $ | 124,949 |
|
| Allocation of charges for venue usage to Madison Square Garden Sports Corp. | | (26,355 | ) | | (21,694 | ) | | (48,459 | ) | | (44,447 | ) |
| Corporate general and administrative expenses, net — Madison Square Garden Sports Corp. | | (32,672 | ) | | (30,716 | ) | | (96,485 | ) | | (85,196 | ) |
| Corporate general and administrative expenses, net — MSG Networks | | (2,672 | ) | | (2,514 | ) | | (7,876 | ) | | (7,790 | ) |
| Consulting fees | | — |
| | — |
| | — |
| | 1,792 |
|
| Advertising expenses | | 316 |
| | 403 |
| | 460 |
| | 749 |
|
| Other operating expenses, net | | 174 |
| | (49 | ) | | 297 |
| | (38 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| | | | | | 2021 | | 2020 |
| Revenues | | | | | | $ | 4,187 | | | $ | 2,823 | |
| Operating expenses (credits): | | | | | | | | |
| Direct operating — media rights fees | | | | | | $ | 40,445 | | | $ | 39,541 | |
| Direct operating — revenue sharing expenses | | | | | | 854 | | | 81 | |
| | | | | | | | |
| Direct operating — reimbursement under Arena License Arrangement | | | | | | (340) | | | (890) | |
| Direct operating and general and administrative — net credits with MSG Sports | | | | | | (9,216) | | | (10,180) | |
| | | | | | | | |
| | | | | | | | |
| Direct operating — origination, master control and technical services | | | | | | 1,208 | | | 1,184 | |
| | | | | | | | |
| | | | | | | | |
| Other operating expenses, net | | | | | | 2,122 | | | 133 | |
Revenues
RevenuesIn connection with the Entertainment Distribution, the Company entered into Arena License Agreements with MSG Sports that, among other things, require the Knicks and the Rangers to play their home games at The Garden in exchange for fixed annual license fees scheduled to be paid monthly over the term of the agreements. The Company accounts for these license fees as operating lease revenue given that the Company provides MSG Sports with the right to direct the use of and obtain substantially all of the economic benefit from The Garden during Knicks and Rangers home games, as further detailed in Note 9. Operating lease revenue is recognized on a straight-line basis over the lease term, adjusted pursuant to the terms of the Arena License Agreements. In the case of the Arena License Agreements, the lease terms relate to non-consecutive periods of use when MSG Sports uses The Garden for their professional sports teams’ home games, and operating lease revenue is therefore recognized ratably as events occur.
The Arena License Agreements provide that license fees are not required to be paid by MSG Sports during periods when The Garden is unavailable for use due to a force majeure event. As a result of government-mandated suspension of events at The Garden beginning on March 13, 2020 due to the impact of the COVID-19 pandemic, The Garden was not available for use by MSG Sports from the effective date of the Arena License Agreements through the first quarter of Fiscal Year 2021 and, accordingly, the Company did not record any operating lease revenue for this arrangement during the first quarter of Fiscal Year 2021. The Company recorded $1,328 of revenues under the Arena License Agreements for the three months ended September 30, 2021.
In addition to the Arena License Agreements discussed above, the Company’s revenues from related parties primarily consistalso included revenue from sponsorship sales and service representation agreements with MSG Sports of commissions$2,348 and $2,204 during the three months ended September 30, 2021 and 2020, respectively. The Company also earned $611 and $619 of sublease revenue from related parties during the three months ended September 30, 2021 and 2020, respectively. These related party revenues were partially offset by approximately $124 of merchandise revenue sharing with MSG Sports during the three months ended September 30, 2021.
Media Rights Fees
The media rights agreements with MSG Sports, effective as of July 1, 2015, provide the MSG Networks segment with the exclusive media rights to Knicks and Rangers games in their local markets.
Revenue Sharing Expenses
In connection with the advertising sales representation agreement pursuant to which the Company has the exclusive right and obligation to sellEntertainment Distribution, revenue sharing expenses include MSG Networks’ advertising availabilities. In addition, amounts disclosed above include the Company’sSports’ share of revenues earned from sponsorship agreements that were entered into by Madison Square Garden Sports Corp. and include performance obligations satisfied by both the Company and Madison Square Garden Sports Corp.
In addition, the Company and Tribeca Enterprises have a service agreement pursuant to which the Company provides marketing inventory, advertising sales and consulting services to Tribeca Enterprises for a fee. On August 5, 2019, the Company sold its equity capital in Tribeca Enterprises. Accordingly, Tribeca Enterprises is no longer a related party of the Company, and thus the related party transactions disclosed herein that relate to Tribeca Enterprises were recognized prior to August 5, 2019. The Company is also a party to certain commercial arrangements with AMC Networks and its subsidiaries.
Revenue sharing expenses
Revenue for the Company’s suite license arrangements and certain venue signage and sponsorship agreements entered into by the Company, is recorded on a gross basis. Madison Square Garden Sports Corp.’s share of the Company’s revenueas well as profit sharing expenses related to such arrangements is recognized as a component of direct operating expenses. See Note 3 toin-venue food and beverage sales in connection with the Company’s audited combinedArena License Agreements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO COMBINEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
financial statements and notes thereto for the year ended June 30, 2019 included in the Company’s Information Statement for more information.
Allocation of Charges for Venue Usage to Madison Square Garden Sports Corp.
For purposes of the Company’s combined financial statements, the Company allocates to Madison Square Garden Sports Corp. certain expenses for the usage of The Garden, which are reported as a reduction of direct operating expense in the accompanying combined statements of operations. See Note 2 to the Company’s audited combined financial statements and notes thereto for the year ended June 30, 2019 included in the Company’s Information Statement for more information.
Corporate General and Administrative Expenses, net — Madison Square Garden Sports Corp.
Allocations of corporate overhead and shared services expense were recorded by both the Company and Madison Square Garden Sports Corp. for corporate and operational functions based on direct usage or the relative proportion of revenue, headcount or other measures of the Company or Madison Square Garden Sports Corp. The Company’s corporate overhead expenses primarily related to centralized functions, including executive management, finance, treasury, tax, internal audit, legal, information technology, human resources and risk management functions.
Corporate General and Administrative Expenses, net — MSG NetworksSports
The Company’s corporate overhead expenses that are charged to MSG NetworksSports are primarily related to centralized functions, including executive compensation, finance, treasury, tax, internal audit, legal, information technology, accounting, accounts payable, payroll, tax, legal, human resources, insurance and risk management, functions.investor relations, corporate communications, benefit plan administration and reporting, and internal audit.
CorporateFor the three months ended September 30, 2021 and 2020, direct operating and general and administrative expenses, net – MSG Networks reflectsSports on the table above primarily reflect charges from the Company to MSG Networks underSports pursuant to the Services AgreementTSA of $2,700$9,216 and $2,563 for the three months ended March 31, 2020 and 2019, respectively, and$7,982 and $7,850 for the nine months ended March 31, 2020 and 2019,$10,179, respectively.
Consulting FeesDirect operating — origination, master control and technical services
On December 5, 2018, the Company’s joint venture interest in AMSGE was sold to Azoff Music, which resulted in the Company no longer being an owner of AMSGE (renamed The Azoff Company). Accordingly, The Azoff Company is not a related party of the Company,AMC Networks provides certain origination, master control, and thus the related party transactions disclosed herein that relate to AMSGE were recognized prior to December 5, 2018. Priortechnical services to the sale of AMSGE, the Company paid AMSGE and its nonconsolidated affiliates for advisory and consulting services that AMSGE and its nonconsolidated affiliates provided to the Company, and for the reimbursement of certain expenses in connection with such services.
Advertising Expenses
The Company incurs advertising expenses for services rendered by its related parties, primarily MSG Networks most of which are related to the utilization of advertising and promotional benefits by the Company.segment.
Other Operating Expenses, net
The Company and its related parties enter into transactions with each other in the ordinary course of business. Amounts charged to the Company for other transactions with its related parties are net of amounts charged by the Company to the Knickerbocker Group, LLC, an entity owned by James L. Dolan, the Executive Chairman, Chief Executive Officer and a director of the Company, and Madison Square Garden Sports Corp., for office space equal to the allocated cost of such space and the cost of certain technology services. In addition, other operating expenses include net charges relating to (i) reciprocal aircraft arrangements between the Company and each of Q2C and CFD, and (ii) time sharing and/or dry lease agreements with MSG Sports, AMC Networks and AMC Networks.Brighid Air and (iii) commission under the group ticket sales representation agreement with MSG Sports.
Nonoperating Expense
Miscellaneous expense, netNote 19. Segment Information
The Company is comprised of 3 reportable segments: Entertainment, MSG Networks and Tao Group Hospitality. In determining its reportable segments, the Company assessed the guidance of ASC 280-10-50-1, which provides the definition of a reportable segment. In accordance with the FASB’s guidance, the Company takes into account whether two or more operating segments can be aggregated together as one reportable segment as well as the type of discrete financial information that is available and regularly reviewed by its CODM. The Company has evaluated this guidance and determined that there are 3 reportable segments. In addition, the Company incurs non-capitalizable content development and technology costs associated with the Company’s MSG Sphere initiative, which are reported in “Entertainment.” In addition to event-related operating expenses, Entertainment also includes a contributory chargeother expenses such as (a) corporate and supporting department operating costs that are attributable to Madison Square Garden Sports Corp.MSG Sphere development and (b) non-event related operating expenses for the Company’s venues such as (i) rent for the Company’s leased venues, (ii) real estate taxes, (iii) insurance, (iv) utilities, (v) repairs and maintenance, (vi) labor related to the participationoverall management of Madison Square Gardenthe venues, and (vii) depreciation and amortization expense related to the Company’s performance venues and certain corporate property, equipment and leasehold improvements. Additionally, the Company does not allocate any purchase accounting adjustments related to business acquisitions to the reporting segments.
The Company evaluates segment performance based on several factors, of which the key financial measure is operating income (loss) before (i) adjustments to remove the impact of non-cash straight-line leasing revenue associated with the Arena License Agreements with MSG Sports, Corp.(ii) depreciation, amortization and corporate employeesimpairments of property and equipment, goodwill and intangible assets, (iii) amortization for capitalized cloud computing arrangement costs, (iv) share-based compensation expense or benefit, (v) restructuring charges or credits, (vi) merger and acquisition-related costs and (vii) gains or losses on sales or dispositions of businesses and associated settlements, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of the items discussed above, the impact of purchase accounting adjustments related to business acquisitions is also excluded in evaluating the Shared PlansCompany’s consolidated adjusted operating income (loss). Because it is based upon operating income (loss), adjusted operating income (loss) also excludes interest expense (including cash interest expense) and Postretirement Plan,other non-operating income and expense items. Management believes that the exclusion of $67share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. In addition, the Company believes that given the length of the Arena License Agreements and $183 forresulting magnitude of the three months ended March 31, 2020difference in leasing revenue recognized and 2019, respectively,cash revenue received, the exclusion of non-cash leasing revenue provides investors with a clearer picture of the Company's operating performance. We eliminate merger and $178 and $548 foracquisition-related costs because the nine months ended March 31, 2020 and 2019, respectively.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.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO COMBINEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Cash Management
Madison Square Garden Sports Corp. uses a centralized approach to cash management and financing of operations. The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance, and evaluates management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other Madison Square Garden Sports Corp. measures of performance and/or Madison Square Garden Sports Corp. subsidiaries’ cash was available for use and was regularly “swept” historically. Transfersliquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of cash bothperformance calculated in accordance with GAAP, this measure may not be comparable to and from Madison Square Garden Sports Corp. are includedsimilar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss).
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Information as componentsto the operations of the Madison Square Garden Sports Corp. investmentCompany’s reportable segments is set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | Three Months Ended September 30, 2021 |
| | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Purchase
accounting adjustments | | Inter-segment eliminations | | Total |
| Revenues | | | $ | 34,239 | | | $ | 141,473 | | | $ | 119,464 | | | $ | — | | | $ | (666) | | | $ | 294,510 | |
| Direct operating expenses | | | 36,302 | | | 68,423 | | | 61,093 | | | 85 | | | (142) | | | 165,761 | |
| Selling, general and administrative expenses |
| | 92,962 | | | 47,975 | | | 34,094 | | | — | | | (192) | | | 174,839 | |
| Depreciation and amortization | | | 19,656 | | | 1,797 | | | 6,378 | | | 1,599 | | | — | | | 29,430 | |
| Impairment of long-lived assets | | | — | | | — | | | 7,818 | | | — | | | — | | | 7,818 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | $ | (114,681) | | | $ | 23,278 | | | $ | 10,081 | | | $ | (1,684) | | | $ | (332) | | | $ | (83,338) | |
| Loss in equity method investments | | | | | | | | | | | | | (1,207) | |
| Interest income | | | | | | | | | | | | | 775 | |
| Interest expense | | | | | | | | | | | | | (18,574) | |
| Miscellaneous expense, net | (a) | | | | | | | | | | | | (2,547) | |
| Loss from operations before income taxes | | | | | | | | | | | | | $ | (104,891) | |
| Reconciliation of operating loss to adjusted operating income: | | | | |
| Operating income (loss) | | | $ | (114,681) | | | $ | 23,278 | | | $ | 10,081 | | | $ | (1,684) | | | $ | (332) | | | $ | (83,338) | |
| Add back: | | | | | | | | | | | | | |
| Non-cash portion of arena license fees from MSG Sports | | | (543) | | | — | | | — | | | — | | | — | | | (543) | |
| Share-based compensation | | | 10,143 | | | 7,474 | | | 1,911 | | | — | | | — | | | 19,528 | |
| Depreciation and amortization | | | 19,656 | | | 1,797 | | | 6,378 | | | 1,599 | | | — | | | 29,430 | |
| Amortization for capitalized cloud computing arrangement costs | | | 41 | | | 44 | | | — | | | — | | | — | | | 85 | |
| Merger and acquisition related costs | | | 13,992 | | | 23,200 | | | — | | | — | | | — | | | 37,192 | |
| Impairment of long-lived assets | | | — | | | — | | | 7,818 | | | — | | | — | | | 7,818 | |
| | | | | | | | | | | | | |
| Other purchase accounting adjustments | | | — | | | — | | | — | | | 85 | | | — | | | 85 | |
| Adjusted operating income (loss) | | | $ | (71,392) | | | $ | 55,793 | | | $ | 26,188 | | | $ | — | | | $ | (332) | | | $ | 10,257 | |
| Other information: | | | | | | | | | | | | | |
| Capital expenditures | | | $ | 133,538 | | | $ | 1,449 | | | $ | 2,284 | | | $ | — | | | $ | — | | | $ | 137,271 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | Three Months Ended September 30, 2020 |
| | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Purchase
accounting adjustments | | Inter-segment eliminations | | Total |
| Revenues | | | $ | 7,555 | | | $ | 157,363 | | | $ | 7,221 | | | $ | — | | | $ | (1,593) | | | $ | 170,546 | |
| Direct operating expenses | | | 23,615 | | | 65,072 | | | 9,828 | | | 924 | | | (208) | | | 99,231 | |
| Selling, general and administrative expenses | | | 52,650 | | | 22,527 | | | 7,603 | | | — | | | (1,123) | | | 81,657 | |
| Depreciation and amortization | | | 22,014 | | | 1,828 | | | 1,046 | | | 3,522 | | | — | | | 28,410 | |
| | | | | | | | | | | | | |
| Restructuring charges | | | 19,927 | | | — | | | — | | | — | | | — | | | 19,927 | |
| Operating income (loss) | | | $ | (110,651) | | | $ | 67,936 | | | $ | (11,256) | | | $ | (4,446) | | | $ | (262) | | | $ | (58,679) | |
| Loss in equity method investments | | | | | | | | | | | | | (1,696) | |
| Interest income | | | | | | | | | | | | | 772 | |
| Interest expense | | | | | | | | | | | | | (5,628) | |
| Miscellaneous income, net | (a) | | | | | | | | | | | | 34,017 | |
| Loss from operations before income taxes | | | | | | | | | | | | | $ | (31,214) | |
| Reconciliation of operating loss to adjusted operating loss: | | | | |
| Operating income (loss) | | | $ | (110,651) | | | $ | 67,936 | | | $ | (11,256) | | | $ | (4,446) | | | $ | (262) | | | $ | (58,679) | |
| Add back: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation | | | 10,433 | | | 4,627 | | | 1,096 | | | — | | | — | | | 16,156 | |
| Depreciation and amortization | | | 22,014 | | | 1,828 | | | 1,046 | | | 3,522 | | | — | | | 28,410 | |
| | | | | | | | | | | | | |
| Restructuring charges | | | 19,927 | | | — | | | — | | | — | | | — | | | 19,927 | |
| Other purchase accounting adjustments | | | — | | | — | | | — | | | 924 | | | — | | | 924 | |
| Adjusted operating income (loss) | | | $ | (58,277) | | | $ | 74,391 | | | $ | (9,114) | | | $ | — | | | $ | (262) | | | $ | 6,738 | |
| Other information: | | | | | | | | | | | | | |
| Capital expenditures | | | $ | 111,399 | | | $ | 1,741 | | | $ | 659 | | | $ | — | | | $ | — | | | $ | 113,799 | |
_________________
(a)Miscellaneous income (expense), net includes the following:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
| | 2021 | | 2020 | | | | |
Unrealized gain (loss) on equity investments with readily determinable fair value, see Note 7 for further details. | | $ | (2,460) | | | $ | 33,658 | | | | | |
| Non-service cost components of net periodic pension and postretirement benefit costs | | (8) | | | (91) | | | | | |
| | | | | | | | |
| | | | | | | | |
| Others, net | | (79) | | | 450 | | | | | |
| Total | | $ | (2,547) | | | $ | 34,017 | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Concentration of Risk
Substantially all revenues and assets of the Company’s reportable segments are attributed to or located in the United States. A majority of the Company’s revenue and assets are concentrated in the New York City metropolitan area.
Accounts receivable, net on the combinedaccompanying consolidated balance sheets as of September 30, 2021 and June 30, 2021 include amounts due from the following individual customers, all derived from the MSG Networks segment, which accounted for the noted percentages of the gross balance:
| | | | | | | | | | | | | | |
| | September 30, 2021 | | June 30, 2021 |
| Customer A | | 16 | % | | 16 | % |
| Customer B | | 16 | % | | 15 | % |
| Customer C | | 13 | % | | 17 | % |
| | | | |
Revenues in the accompanying consolidated statements of divisional equityoperations for the three months ended September 30, 2021 and redeemable noncontrolling interests. The main components2020 include amounts from the following individual customers, which accounted for the noted percentages of the net transfers (to)/from Madison Square Garden Sports Corp. are cash pooling/general financing activities, various expense allocations to/from Madison Square Garden Sports Corp.,total:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | | | September 30, 2021 | | September 30, 2020 |
| Customer 1 | | | | | | 15 | % | | 26 | % |
| Customer 2 | | | | | | 13 | % | | 24 | % |
| Customer 3 | | | | | | 10 | % | | 19 | % |
| | | | | | | | |
The accompanying consolidated balance sheets as of September 30, 2021 and receivables/payables from/to Madison Square Garden Sports Corp. deemed to be effectively settled uponJune 30, 2021 include the distribution of the Company by Madison Square Garden Sports Corp.
TheMadison Square Garden Sports Corp. Investment
All significant balances and transactions among the Company and Madison Square Garden Sports Corp. and its subsidiaries, which include allocations of corporate general and administrative expenses, share-based compensation expense and other historical intercompany activities,following approximate amounts that are recorded as components of Divisional Equity. As the books and records of the Company were not kept on a separate basis from Madison Square Garden Sports Corp., the determination of the average net balance due to or from Madison Square Garden Sports Corp. is not practicable.
Related Party Transactions after the Entertainment Distribution
Inin connection with the Entertainment Distribution the Company and Madison Square Garden Sports Corp. have entered into arrangementsCompany’s license agreement with respect to transition services and a number of ongoing commercial relationships, including Arena License Agreements with Madison Square Garden Sports Corp. that will require the New York Knicks ( the “Knicks”) and the New York Rangers (the “Rangers”) to play their home games at The Garden. Additionally, on April 17, 2020, subsidiaries of Madison Square Garden Sports Corp., MSG NYK Holdings, LLC and MSG NYR Holdings, LLC, entered into separate delayed draw term loan credit agreements (the “DDTL Facilities”) with a wholly-owned subsidiary of the Company as lender. The DDTL Facilities provide for a $110,000 and $90,000 senior unsecured delayed draw term loan facilities, for the MSG NYK Holdings, LLC and MSG NYR Holdings, LLC, respectively. The DDTL Facilities will mature and any unused commitments thereunder will expire on October 17, 2021.Jersey Devils:
| | | | | | | | | | | | | | |
| | September 30, 2021 | | June 30, 2021 |
| Prepaid expenses | | $ | 700 | | | $ | 1,400 | |
| Other current assets | | 3,700 | | | 3,700 | |
| Other assets | | 30,400 | | | 31,100 | |
| | $ | 34,800 | | | $ | 36,200 | |
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”&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 MSG Entertainment Spinco, Inc.) and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” “MSG Entertainment,” or the “Company”), including the impact of the COVID-19 pandemic on our future operations, our ability to realize the potential for future impairment charges,benefits of the Merger with MSG Networks, cost-cutting measures the Company may or may not pursue to preserve cash and financial flexibility and the ability to maintain such cost savings, the timing and costs of new venue construction, our expansion plan for Tao Group Hospitality, our plans to pursue additional debt financing and negotiate amendments to the National Properties Term Loan Facility or Tao Group Hospitality’s credit facility, increased investment in personnel, content and technology for the status of the non-carriage of MSG Spheres, and increased expenses of being a standalone public company.Networks by Comcast. 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:
•our ability to effectively manage the impacts of the COVID-19 pandemic and the actions taken in response by governmental authorities and certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues as they are permitted to continue to operate;
•risks related to the Merger, as defined herein, with MSG Networks Inc., including, but not limited to: failure to realize the expected benefits of the Merger, business disruption following the Merger and the risk of the litigation relating to the Merger;
•the extent to which attendance at our venues may be suppressed due to government mandated suspensionactions, continuing health concerns by potential attendees and reduced tourism;
•the impact on the payments we receive under the Arena License Agreements as a result of government-mandated capacity restrictions, league restrictions and/or social-distancing or vaccination requirements at Knicks and Rangers games;
•the level of our business operations;expenses and our operational cash burn rate, including our corporate expenses;
•our ability to successfully design, construct, finance and operate new entertainment venues in Las Vegas London and other markets, and the investments, costs and timing associated with those efforts, including the impact of the current temporary suspension of construction and any other unexpected construction delays and/or cost overruns;
| |
• | •the level of our revenues, which depends in part on the popularity of the Christmas Spectacular, the sports teams whose games are played at The Garden and broadcast on our networks, the appeal of our Tao Group Hospitality venues, and other entertainment and other events which are presented in our venues or broadcast on our networks; •the demand for our MSG Networks programming among cable, satellite, telephone and other platforms (“Distributors”) and the 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; •the ability of our Distributors to maintain, or 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; •the security of our MSG Networks program signal and electronic data; •the on-ice and on-court performance of the professional sports teams whose games we broadcast on our networks and host in our venues; •Christmas Spectacular and other entertainment and sports events which are presented in our venues; |
the level of our capital expenditures and other investments;
•general economic conditions, especially in the New York City, Las Vegas, Chicago and London metropolitan areas where we have (or plan to have) significant business activities;
•the demand for sponsorship arrangements and advertising and viewer ratings for advertising;our networks;
•competition, for example, from other venues and other sports and entertainment and nightlife options and other regional sports and entertainment networks, including the construction of new competing venues;
•the relocation or insolvency of professional sports teams with which we have a media rights agreement;
•our ability to maintain, obtain or produce content, together with the cost of such content;
•our ability to renew or replace our media rights agreements with professional sports teams through MSG Networks Inc.;
•changes in laws, guidelines, bulletins, directives, policies and agreements, orand regulations under which we operate;
•any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations;organizations, including the unions representing players and officials of the National Basketball Association (“NBA”) and National Hockey League (“NHL”), or other work stoppage due to COVID-19 or otherwise;
•seasonal fluctuations and other variations in our operating results and cash flow from period to period;
the level of our expenses, including our corporate expenses as a stand-alone publicly traded company;
•the successful development of new live productions or attractions, enhancements or changes to existing productions and the investments associated with such development, enhancements, or changes, as well as investment in personnel, content and technology for the MSG Spheres;Sphere;
•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 Networks business or disclosure of confidential information or other breaches of our information security;
•activities or other developments (including COVID-19)(such as pandemics, including the COVID-19 pandemic) that discourage or may discourage congregation at prominent places of public assembly, including our venues;
•the continued popularity and success of Tao Group Hospitality entertainment dining and nightlife venues, as well as its existing brands, and the ability to successfully open and operate new entertainment dining and nightlife venues;
•the ability of BCE Boston Calling Events, LLC (“BCE”)to attract attendees and performers to its future festivals;
•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;operations, including the Merger with MSG Networks Inc. and our acquisition of Hakkasan through Tao Group Hospitality;
the operating and financial performance of our strategic acquisitions and investments, including those we do not control;
•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, including changes in how those regulations and laws are interpreted, andincluding with respect to the legalization of sports gaming, 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 Pennsylvania Station;
a•the impact of sports league rules, regulations and/or agreements and changes thereto;
•the substantial amount of debt incurred, and any default, by our subsidiaries under their respective credit facilities;
•financial community and rating agency perceptions of our business, operations, financial condition and the industryindustries in which we operate;
•the ability of our investees and others to repay loans and advances we have extended to them;
our status as an emerging growth company;
•the tax-free treatment of the Entertainment Distribution (as defined below);
•our ability to achieve the intended benefits of the Entertainment Distribution;Distribution and the Merger with MSG Networks;
•the performance by Madison Square GardenMSG Sports Corp. of its obligations under various agreements with the Company related to the Entertainment Distribution and ongoing commercial arrangements;arrangements, including the Arena License Agreements;
•lack of operating history as an operating company and costs associated with being an independent public company; andand;
•the additional factors described under “Risk Factors” in the Company’s Information Statement, and this QuarterlyAnnual Report on Form 10-Q under “Part II - Item 1A. Risk Factors.”10-K for the year ended June 30, 2021.
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 annual financial statements and footnotes thereto included inAnnual Report on Form 10-K for the Company’s Information Statementyear ended June 30, 2021 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “MSG Entertainment,”or the “Company” refer collectively to Madison Square Garden Entertainment Corp., a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are actually conducted. Through the period ended March 31,April 17, 2020, the Company operatesoperated and reportsreported financial information as one reportable segment. Following the Entertainment Distribution on April 17, 2020 and the Merger on July 9, 2021, the Company will have twohas three segments (the Entertainment business, and the Tao Group Hospitality business), which will be presented in the Company’s Annual Report on Form 10-K for the fiscal year ending June 30, 2020.
A significant majority 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.
The Company is a leader in live experiences comprised of iconic venues; marquee entertainment content; popular dining and nightlife offerings; and a premier music festival that, together, entertain millions of guests each year. Utilizing our 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. The Company’s portfolio of venues includes: The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre. In addition, the Company is constructing a state-of-the-art venue, MSG Sphere, in Las Vegas and plans to build a second MSG Sphere in London. The Company also includes the original production, the Christmas Spectacular, as well as BCE, the entertainment production company that owns and operates the Boston Calling Music Festival, and Tao Group Hospitality, a hospitality group with globally-recognized entertainment dining and nightlife brands.
Tao Group Hospitality’s Operating Results
The Company completed the Tao Group Hospitality acquisition on January 31, 2017. Tao Group Hospitality’s financial statements are not available within the time constraints the Company requires to ensure the financial accuracy of the operating results. Therefore, the Company records Tao Group Hospitality’s operating results in its combined statements of operations on a three-month lag basis. As a result, the Company’s results for the three months ended March 31, 2020 and 2019 include Tao Group Hospitality’s operating results from September 30, 2019 to December 29, 2019 and from October 1, 2018 to December 30, 2018, respectively,business, and the Company’s results for the nine months ended March 31, 2020 and 2019 include Tao Group Hospitality’s operating results from April 1, 2019MSG Networks business). See Note 19 to December 29, 2019 and from April 2, 2018 to December 30, 2018, respectively. With the exception of the balances and activities pertaining to Tao Group Hospitality’s credit agreements entered into in May 2019, which are recorded as of March 31, 2020 and June 30, 2019 and for the period ended March 31, 2020, as well as cash distributions, impairment charges, and change in ownership as discussed below, all disclosures related to Tao Group Hospitality’s financial position are reported as of December 29, 2019 and March 31, 2019, as applicable.
The Spin-Off from Madison Square Garden Sports Corp.
On April 17, 2020, the Company became an independent publicly traded company through the Entertainment Distribution. In the Entertainment Distribution, stockholders of Madison Square Garden Sports Corp. received (a) one share of the Company’s Class A Common Stock for every share of Madison Square Garden Sports Corp. Class A common stock, held of record as of the close of business, New York City time, on the Record Date and (b) one share of the Company’s Class B Common Stock for every share of Madison Square Garden Sports Corp. Class B common stock held of record as of the close of business, New York City time, on the Record Date. In the Entertainment Distribution, an aggregate of 19,461,991 shares of the Company’s Class A Common Stock and 4,529,517 shares of the Company’s Class B Common Stock were issued, with any fractional shares converted to cash and paid to stockholders.
Factors Affecting Results of Operations
Basis of Presentation - Impact of the Entertainment Distribution
The Company’s combined statements of operations for the three and nine months ended March 31, 2020 and 2019 were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of Madison Square Garden Sports Corp., and are presented as carve-out financial statements, because the Company was not a standalone public company prior to the Entertainment Distribution.
The Company’s combined statements of operations for the periods ended March 31, 2020 and 2019 include allocations for certain support functions that were provided on a centralized basis by Madison Square Garden Sports Corp. and not historically recorded at the business unit level, such as expenses related to executive management, finance, legal, human resources, government affairs, information technology and venue operations, among others.
As part of the Entertainment Distribution, certain corporate and operational support functions were transferred to the Company and therefore, charges were reflected in order to properly burden all business units comprising Madison Square Garden Sports Corp.’s historical operations. These expenses have been allocated to Madison Square Garden Sports Corp. operations on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined revenues, headcount or other measures of the Company or Madison Square Garden Sports Corp., which are recorded as a reduction of either direct operating expenses or selling, general and administrative expense. In addition, certain of the Company’s contracts with its customers for suite license, sponsorship and venue signage arrangements contain performance obligations that are fulfilled by both the Company and Madison Square Garden Sports Corp. Revenue sharing expenses attributable to Madison Square Garden Sports Corp. have primarily been recorded on the basis of specific identification where possible, with the remainder allocated proportionately as a component of direct operating expenses within the combined statements of operations. See Note 4 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information on revenue recognition.
Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by the Company and may not reflect its combined results of operations, financial position and cash flows had it been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company is unable to quantify the amounts that it would have recorded during the historical periods on a stand-alone basis as it is not practicable to do so. 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.
Impact of COVID-19 on Our Business
Our operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by the government and certain professional sports leagues. As of the date of this Quarterly Report on Form 10-Q, virtually all of the business operations of the Company have been suspended and it is not clear when those operations will resume.
As a result of government mandated assembly limitations and closures, no events are currently permitted to be held at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre, and virtually all events at our venues are postponed or cancelled through June. We are not recognizing revenue from those events and it is unclear whether and to what extent those events will be rescheduled. The 2020 Boston Calling music festival, which had been slated for Memorial Day weekend, has also been cancelled. Additionally, public officials have imposed mandates limiting restaurants and bars to only take-out and delivery service and requiring that nightlife venues close in the cities in which Tao Group Hospitality operates. As a result, virtually all Tao Group Hospitality venues are closed, which has materially impacted business. The National Basketball Association (the “NBA”) and the National Hockey League (the “NHL”) have also suspended their 2019-20 seasons. It is unclear how long these restrictions will be in effect.
The COVID-19 pandemic has materially impacted our revenues, most significantly because we are currently not generating revenue from:
events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre;
rent payments under the Arena License Agreements (defined below);
sponsorships, suite licenses and in-venue advertising;
our Tao Group Hospitality dining and nightlife business; and
the 2020 Boston Calling music festival.
While we have the ability to reduce certain operating expenses as a result of the COVID-19 pandemic (including (i) direct event expenses at any of our performance venues during the period our business operations are suspended, (ii) advertising and promotional spending for suspended and cancelled games and events and (iii) certain direct operating and SG&A expenses, including at our Tao Group Hospitality business), those expense reduction opportunities are not sufficient to fully offset revenue losses.
Additionally, as a result of operating disruptions due to COVID-19, the Company’s projected cash flows were directly impacted. This disruption along with the deteriorating macroeconomic conditions and industry/market considerations, were considered a “triggering event” for the Tao Group Hospitality reporting unit, which required the Company to assess the carrying value of Tao Group Hospitality’s intangible assets, long-lived assets and goodwill for impairment. Based on this evaluation, the Company recorded a non-cash goodwill impairment charge of $80,698 during the three and nine months ended March 31, 2020 associated with the Tao Group Hospitality reporting unit. In addition, during the three and nine months ended March 31, 2020, the Company recorded non-cash impairment charges associated with one venue within Tao Group Hospitality of $11,573, $6,399 and $3,541, for right-of-use assets, property and equipment assets, and certain intangible assets, respectively. Due to the COVID-19-related shutdown of its venues, TAO Group Hospitality began a review of its lease contracts and could decide to close certain venues (which may later reopen elsewhere) if the landlords are unwilling to make appropriate concessions, which could result in additional charges related to the venue’s long-lived assets.
There was no triggering event identified by the Company for the Entertainment reporting unit as of March 31, 2020. However, the duration and impact of the COVID-19 pandemic may result in additional future impairment charges that management will evaluate as facts and circumstances evolve over time. See Notes 1, 7, 8 and 9 to the combined financial statements included in “Part I -“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details.
We are building a state-of-the-art venue in Las Vegas, called MSG Sphere. This is a complex construction project with cutting-edge technology that relies on subcontractors obtaining components from a variety of sources around the world. The widespread global effects of COVID-19 have resulted in significant impediments to construction that are beyond our control, including disruptions to our supply chain. As a result, in April 2020, we implemented a temporary suspension of construction and we expect to incur additional expenses related to stopping and re-starting construction. At this time, we are unable to determine the full impact of COVID-19 related disruptions, however they may impact our cost estimates. We remain committed
to building a state-of-the-art venue in Las Vegas and we look forward to quickly and efficiently resuming construction as soon as practicable. As a result of this delay, we do not expect to achieve our goal of opening the venue in calendar year 2021.
A subsidiarydiscussion of the Company is party to arena license agreements (the “Arena License Agreements”) with subsidiaries of Madison Square Garden Sports Corp. that require the New York Knicks (the “Knicks”) of the NBA and the New York Rangers (the “Rangers”) of the NHL to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers will pay an annual license fee in connection with their respective use of The Garden. For each, the license fee for the initial contract year ending June 30, 2020 will be prorated based on the number of games scheduled to be played at The Garden between the Distribution date and the end of that contract year. The license fee for the first full contract year ending June 30, 2021 is approximately $22,500 for the Knicks and approximately $16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. If, due to a force majeure event (including the government-mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19), capacity at The Garden is limited to 1,000 or fewer attendees, the teams may schedule and play home games at The Garden with amounts payable to the Company under the Arena License Agreements reduced by up to 80%. The teams are not required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event. As a result, we have not yet received any rent payments under the Arena License Agreements and will continue to not receive any rent payments during the government mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19. However, once The Garden becomes available following a force majeure event, future rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers even if the NBA or NHL seasons do not resume simultaneously or at all.
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 II - Item 1A. Risk Factors - Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government Actions Taken in Response.”
Obscura’s Operating Results
The results of operations of the Company for the three and nine months ended March 31, 2019 included Obscura’s results of operations from its third-party production business. The Company made a decision in the fiscal year 2019 to wind down Obscura’s third-party production business to focus on MSG Sphere development.
Renewal of a Ticketing Agreement
The Company’s operating results for the three and nine months ended March 31, 2019 were impacted by the recognition of additional revenues for events that took place during previous periods as the result of the renewal of the agreement with the Company’s ticketing platform provider during the quarter ended March 31, 2019. The following table presents the impact on the Company’s combined revenues, operating income and adjusted operating income for the three and nine months ended March 31, 2019 from events in the prior periods as a result of the ticketing agreement renewal.
|
| | | | | | | | |
| | | Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| Renewal of a Ticketing Agreement | | $ | 4,000 |
| | $ | 2,000 |
|
This 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 unaudited results of operations for the three and nine months ended March 31,September 30, 2021 and 2020 on both a consolidated basis and 2019.a segment basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the ninethree months ended March 31,September 30, 2021 and 2020, and 2019, as well as certain contractual obligations and off balanceoff-balance sheet arrangements.
Seasonality of Our Business. This section discusses the seasonal performance of our Christmas Spectacular production and Tao Group Hospitality. Entertainment segment.
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 2020 and interim impairment testing of goodwill performed
during the third quarter of fiscal year 2020.Fiscal Year 2022. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year ended June 30, 2021 under “Management's“Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the combinedconsolidated financial statements of the Company included therein.
Business Overview
The Company is a leader in live experiences comprised of iconic venues; marquee entertainment brands; regional sports and entertainment networks; popular dining and nightlife offerings; and a premier music festival that, together, entertain millions of guests each year. The Company’s auditedportfolio of venues includes: The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre. In addition, the Company unveiled its vision for a state-of-the-art venues, called MSG Sphere, and is currently building its first such venue in Las Vegas. The Company also includes the original production, the Christmas Spectacular, as well as BCE, the entertainment production company that owns and operates the Boston Calling Music Festival. MSG Networks produces, develops and acquires content for multiple distribution platforms, including content originating from the Company’s venues, and is comprised of the Company’s regional sports and entertainment networks, MSG Network and MSG+, a companion streaming app, MSG GO, and other digital properties. Tao Group Hospitality is a hospitality group with globally-recognized entertainment dining and nightlife brands.
Merger with MSG Networks Inc.
On July 9, 2021, the Company completed its previously announced acquisition of MSG Networks Inc. pursuant to that certain Agreement and Plan of Merger, dated as of March 25, 2021 (the “Merger Agreement”), among the Company, Broadway Sub Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and MSG Networks Inc. Merger Sub merged with and into MSG Networks Inc. (the “Merger”), with MSG Networks Inc. surviving and continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of the Company. On July 9, 2021, at the effective time of the Merger (the “Effective Time”), (i) each share of Class A common stock, par value $0.01 per share, of MSG Networks (“MSGN Class A Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class A common stock, par value $0.01 per share, of the Company (“Class A Common
Stock”) such that each holder of record of shares of MSGN Class A Common Stock had the right to receive, in the aggregate, a number of shares of Class A Common Stock equal to the total number of shares of MSGN Class A Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share and (ii) each share of Class B common stock, par value $0.01 per share, of MSG Networks Inc. (“MSGN Class B Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class B common stock, par value $0.01 per share, of the Company (“Class B Common Stock”) such that each holder of record of shares of MSGN Class B Common Stock had the right to receive, in the aggregate, a number of shares of Class B Common Stock equal to the total number of shares of MSGN Class B Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share, in each case except for Excluded Shares (as defined in the Merger Agreement). The Company issued 7,476 shares of the Class A Common Stock and 2,337 shares of Class B Common Stock on July 9, 2021 to holders of MSGN Class A Common Stock and MSGN Class B Common Stock, respectively, which shares are reflected as outstanding for all periods presented.
Beginning this fiscal year, the Merger has been accounted for as a transaction between entities under common control as the Company and MSG Networks Inc. were, prior to the Merger, each controlled by the Dolan Family Group (as defined herein). Upon the closing of the Merger, the net assets of MSG Networks Inc. were combined financial statementswith those of the Company at their historical carrying amounts and notes theretothe companies have been presented on a combined basis for all historical periods that the companies were under common control.
Factors Affecting Results of Operations
Impact of the COVID-19 Pandemic on Our Business
The Company’s operations and operating results have been, and may continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities and certain professional sports leagues. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended, MSG Networks aired substantially fewer games and Tao Group Hospitality was operating at significantly reduced capacity and demand. While operations have resumed, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our performance venues were closed beginning in mid-March 2020. Use of The Garden resumed for Knicks and Rangers home games without fans in December 2020 and January 2021, respectively, and was available at 10% seating capacity from mid-February through mid-May 2021 with certain safety protocols and social distancing. Beginning in mid-May 2021, all of our New York performance venues were permitted to host guests at full capacity, subject to certain restrictions, and effective June 2021, The Chicago Theatre was permitted to host events without restrictions.For all events hosted at our New York performance venues with 100% capacity prior to August 17, 2021, guests were required to provide proof of full vaccination or a negative COVID-19 test, depending on the requirements of that venue and/or preference of the performer. Effective August 17, 2021, all workers and customers in New York City indoor dining, indoor fitness and indoor entertainment facilities are required to show proof of at least one vaccination shot. Guests are also required to wear masks unless they show proof that they are fully vaccinated (although specific performers may require enhanced protocols). Children under age 12 can attend events with a vaccinated adult, but ages 2 to 11 need to wear a mask while inside our venues. In addition, effective August 20, 2021, masks are required for all individuals in indoor public spaces in Chicago, including our venues.
For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or canceled and, while live events are permitted to be held at all of our performance venues as of the date of this filing and we are continuing to host and book new events, due to the lead-time required to book touring acts and artists, which is the majority of our Entertainment business, we expect that our bookings will continue to be impacted through the 2021 calendar year. We continue to actively pursue one-time or multi-night performances at our venues as the touring market ramps up.
The impact to our operations also included the cancellation of the 2020 production of the Christmas Spectacular and both the 2020 and 2021 Boston Calling Music Festivals. While the 2021 production of the Christmas Spectacular is currently on-sale, the current production is scheduled for 160 shows, as compared with 199 shows for the fiscal2019 production, which was the last production presented prior to the impact of the COVID-19 pandemic.
The Company has long-term arena license agreements (the “Arena License Agreements”) with MSG Sports that require the Knicks and Rangers to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers pay an annual license fee in connection with their respective use of The Garden. The license fee for the first full contract year ending June 30, 2021 was approximately $22,500 for the Knicks and approximately $16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. The teams are not required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event (including when events at The Garden were suspended by government mandate as a result of the COVID-19 pandemic). As a result, we did not receive any license fee payments under the Arena License Agreements from the period
following the Entertainment Distribution through November 2020.On July 1, 2021, the Knicks and Rangers began paying the full amounts provided for under their respective Arena License Agreements and full 82-game regular seasons for the 2021-22 NBA and NHL seasons are scheduled. See “Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Revenue Sources - Entertainment — Venue License Fees” on the Company’s Annual Report on Form 10-K for the year ended June 30, 2021 for further information on revenue recognition under the Arena License Agreements.
As a result of the COVID-19 pandemic and league and government actions relating thereto, 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 has resumed airing full regular season telecast schedules for its five professional teams across both the NBA and NHL, and, as result, expects a return to normalized levels of advertising revenue and certain operating expenses, including rights fees expense.
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. Due to government actions taken in response to the COVID-19 pandemic, virtually all of Tao Group Hospitality’s venues were closed for approximately three months starting in mid-March 2020. Additionally, three venues were permanently closed. Throughout Fiscal Year 2021, Tao Group Hospitality conducted limited operations at certain venues, subject to significant regulatory requirements, including capacity limits, curfews and social distancing requirements for outdoor and indoor dining. Tao Group Hospitality’s operations fluctuated throughout Fiscal Year 2021 and during the first quarter of Fiscal Year 2022 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. Effective August 17, 2021, workers and customers in New York City indoor dining facilities are required to show proof of at least one vaccination shot. In addition, certain jurisdictions have reinstated safety protocols, such as mask mandates in Nevada and Chicago, but Tao Group Hospitality is continuing to operate without capacity restrictions in domestic and key international markets.
It is unclear how long and to what extent COVID-19 concerns, including with respect to new variants, will continue to impact government and league-mandated capacity restrictions, the use of and/or demand for our entertainment and dining and nightlife venues, and demand for our sponsorship and advertising assets, or deter our employees and vendors from working at our venues (which may lead to difficulties in staffing).
During Fiscal Year 2021, the COVID-19 pandemic materially impacted our revenues, most significantly because, for the majority of the year, we were not generating revenue from (i) ticketed events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre, (ii) suite licenses, (iii) the 2020 production of the Christmas Spectacular and (iv) the 2021 Boston Calling Music Festival. In addition, we generated substantially reduced revenue in connection with (i) sponsorship and advertising, (ii) payments under the Arena License Agreements, (iii) food and beverage sales and catering services at Knicks and Rangers games and (iv) non-ticketed events such as the Big East Tournament in March 2021.
As a result of the material impact COVID-19 had on our revenues during Fiscal Year 2021, we took several actions to improve our financial flexibility, reduce operating costs and preserve liquidity, including (i) revising our construction schedule for MSG Sphere, with an anticipated opening date of calendar year 2023, (ii) making significant cuts in both Entertainment and Tao Group Hospitality venue and corporate headcounts, and (iii) having our wholly-owned subsidiary, MSG National Properties, LLC (“MSG National Properties”) enter into a five-year $650,000 senior secured term loan facility (“National Properties Term Loan Facility”). See Note 14 to the audited consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the Information Statement.National Properties Term Loan Facility.
In August 2020, Tao Group Hospitality entered into an amendment to the Tao Senior Credit Agreement, which suspended certain financial covenants through December 31, 2021 and increased the minimum liquidity requirement. In addition, in connection with the amendment, our wholly-owned subsidiary MSG Entertainment Group, LLC (“MSG Entertainment Group”) entered into a guarantee agreement, which also included a minimum liquidity requirement for MSG Entertainment Group. See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding the amendment to the Tao Senior Credit Agreement. Tao Group Hospitality may need to seek covenant waivers in the future. Tao Group Hospitality’s failure to obtain debt covenant waivers could trigger a violation of these covenants and lead to default, acceleration of all of its outstanding debt and a demand for payment under the guarantee of MSG Entertainment Group, which would negatively impact the liquidity of Tao Group Hospitality and the Company. CombinedThe Company is building its first MSG Sphere in Las Vegas. This is a complex construction project with cutting-edge technology, which relies on subcontractors obtaining components from a variety of sources around the world. In April 2020, the Company announced that it was suspending construction of MSG Sphere due to COVID-19 related factors that were outside of its control, including supply chain issues. As the ongoing effects of the pandemic continued to impact its business operations,
in August 2020, the Company disclosed that it had resumed full construction with a lengthened timetable to better preserve cash through the COVID-19 pandemic. The Company remains committed to bringing MSG Sphere to Las Vegas and expects to open the venue in calendar year 2023.
In December 2020, the Company terminated its construction agreement with AECOM and assumed the role of construction manager to gain greater transparency and control over the construction process, including direct engagement and supervision of subcontractors. AECOM continues to support MSG Sphere at The Venetian through a services agreement that facilitates their ongoing involvement through MSG Sphere’s completion. As the construction manager of the project, we aim to aggressively manage the cost of the project in this volatile environment to minimize any potential cost increases.
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—General Risk Factors— Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Actions Taken in Response by Governmental Authorities and Certain Professional Sports Leagues.” of the Company’s Annual Report on Form 10-K for the year ended June 30, 2021.
For the three months ended September 30, 2021, the Company’s operations and operating results were still materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities. While the Company has started to see an increase in events held at its venues and in demand for its hospitality business, it is not clear when the Company will fully return to normal business operations.
Factors Related to the MSG Networks Business
As further discussed under Note 2 to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, the financial performance of MSG Networks business is affected by the affiliation agreements the Company negotiates with Distributors (including rates, terms, and conditions as well as the ability to renew such agreements), the number of subscribers of our Distributors that receive MSG Networks, and also by the advertising rates we charge advertisers. Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams carried on the Company’s networks as well as the cost and the attractiveness of the Company’s programming content.
Consolidated Results of Operations
Comparison of the Three and Nine Months EndedMarch 31, 2020 September 30, 2021 versus the Three and Nine Months EndedMarch 31, 2019 September 30, 2020
The table below sets forth, for the periods presented, certain historical financial information.
|
| | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | March 31, | | Change (a) |
| | | 2020 | | 2019 | | Amount | | Percentage |
| Revenues | | 199,861 |
| | 250,018 |
| | (50,157 | ) | | (20 | )% |
| | | | | | | | | |
| Direct operating expenses | | 132,809 |
| | 158,710 |
| | (25,901 | ) | | (16 | )% |
| Selling, general and administrative expenses | | 84,186 |
| | 83,159 |
| | 1,027 |
| | 1 | % |
| Depreciation and amortization | | 26,196 |
| | 26,768 |
| | (572 | ) | | (2 | )% |
| Impairment of intangibles, long-lived assets and goodwill | | 102,211 |
| | — |
| | 102,211 |
| | NM |
|
| Operating loss | | (145,541 | ) | | (18,619 | ) | | (126,922 | ) | | NM |
|
| Other income (expense): | | | | | | | | |
| Loss in equity method investments | | (1,096 | ) | | (2,881 | ) | | 1,785 |
| | 62 | % |
| Interest income, net | | 3,054 |
| | 4,740 |
| | (1,686 | ) | | (36 | )% |
| Miscellaneous income (expense), net | | (17,381 | ) | | 4,613 |
| | (21,994 | ) | | NM |
|
| Loss from operations before income taxes | | (160,964 | ) | | (12,147 | ) | | (148,817 | ) | | NM |
|
| Income tax benefit (expense) | | 10,126 |
| | (469 | ) | | 10,595 |
| | NM |
|
| Net loss | | (150,838 | ) | | (12,616 | ) | | (138,222 | ) | | NM |
|
| Less: Net loss attributable to redeemable noncontrolling interests | | (22,447 | ) | | (7 | ) | | (22,440 | ) | | NM |
|
| Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 195 |
| | (680 | ) | | 875 |
| | NM |
|
| Net loss attributable to the Company | | (128,586 | ) | | (11,929 | ) | | (116,657 | ) | | NM |
|
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended | | | | |
| | | March 31, | | Change (a) |
| | | 2020 | | 2019 | | Amount | | Percentage |
| Revenues | | $ | 767,038 |
| | $ | 832,384 |
| | $ | (65,346 | ) | | (8 | )% |
| | | | | | | | | |
| Direct operating expenses | | 472,582 |
| | 507,249 |
| | (34,667 | ) | | (7 | )% |
| Selling, general and administrative expenses | | 257,970 |
| | 231,038 |
| | 26,932 |
| | 12 | % |
| Depreciation and amortization | | 80,271 |
| | 81,606 |
| | (1,335 | ) | | (2 | )% |
| Impairment of intangibles, long-lived assets and goodwill | | 102,211 |
| | — |
| | 102,211 |
| | NM |
|
| Operating income (loss) | | (145,996 | ) | | 12,491 |
| | (158,487 | ) | | NM |
|
| Other income (expense): | | | | | | | | |
| Earnings (loss) in equity method investments | | (3,739 | ) | | 17,131 |
| | (20,870 | ) | | NM |
|
| Interest income, net | | 15,388 |
| | 11,944 |
| | 3,444 |
| | 29 | % |
| Miscellaneous expense, net | | (2,893 | ) | | (4,118 | ) | | 1,225 |
| | 30 | % |
| Income (loss) from operations before income taxes | | (137,240 | ) | | 37,448 |
| | (174,688 | ) | | NM |
|
| Income tax benefit (expense) | | 8,686 |
| | (1,253 | ) | | 9,939 |
| | NM |
|
| Net income (loss) | | (128,554 | ) | | 36,195 |
| | (164,749 | ) | | NM |
|
| Less: Net loss attributable to redeemable noncontrolling interests | | (23,851 | ) | | (3,662 | ) | | (20,189 | ) | | NM |
|
| Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 38 |
| | (3,121 | ) | | 3,159 |
| | NM |
|
| Net income (loss) attributable to the Company | | $ | (104,741 | ) | | $ | 42,978 |
| | $ | (147,719 | ) | | NM |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
| Revenues | | $ | 294,510 | | | $ | 170,546 | | | $ | 123,964 | | | 73 | % |
| | | | | | | | |
| Direct operating expenses | | 165,761 | | | 99,231 | | | 66,530 | | | 67 | % |
| Selling, general and administrative expenses (“SG&A”) | | 174,839 | | | 81,657 | | | 93,182 | | | 114 | % |
| Depreciation and amortization | | 29,430 | | | 28,410 | | | 1,020 | | | 4 | % |
| Impairment of long-lived assets | | 7,818 | | | — | | | 7,818 | | | NM |
| Restructuring charges | | — | | | 19,927 | | | (19,927) | | | NM |
| Operating loss | | (83,338) | | | (58,679) | | | (24,659) | | | (42) | % |
| Other income (expense): | | | | | | | | |
| Loss in equity method investments | | (1,207) | | | (1,696) | | | 489 | | | 29 | % |
| Interest income (expense), net | | (17,799) | | | (4,856) | | | (12,943) | | | NM |
| Miscellaneous income (expense), net | | (2,547) | | | 34,017 | | | (36,564) | | | NM |
| Loss from operations before income taxes | | (104,891) | | | (31,214) | | | (73,677) | | | NM |
| Income tax benefit (expense) | | 20,615 | | | (9,392) | | | 30,007 | | | NM |
| Net loss | | (84,276) | | | (40,606) | | | (43,670) | | | (108) | % |
| Less: Net income (loss) attributable to redeemable noncontrolling interests | | 2,212 | | | (3,889) | | | 6,101 | | | NM |
| Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 365 | | | (630) | | | 995 | | | NM |
| Net loss attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (86,853) | | | $ | (36,087) | | | $ | (50,766) | | | (141) | % |
_________________
NM — Percentage isAbsolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningfulmeaningful.
| |
(a)
| The Company’s operating results were materially impacted during the three and nine months ended March 31, 2020 by the COVID-19 pandemic and government actions taken in response. Please see “— Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” for more information. |
Revenues
RevenuesThe following is a summary of changes in operating income (loss) by segments for the three months ended March 31, 2020 decreased $50,157, or 20%, to $199,861September 30, 2021 as compared to the prior year period. Revenues | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Changes attributable to | | | | | | | | | | | | | | Operating income (loss) |
| Entertainment | | | | | | | | | | | | | | $ | (4,030) | |
| MSG Networks | | | | | | | | | | | | | | (44,658) | |
| Tao Group Hospitality | | | | | | | | | | | | | | 21,337 | |
| Purchase accounting adjustments | | | | | | | | | | | | | | 2,762 | |
| Inter-segment eliminations | | | | | | | | | | | | | | (70) | |
| MSG Entertainment Corp. total | | | | | | | | | | | | | | $ | (24,659) | |
_________________
(a)See “Business Segment Results” for a more detailed discussion of the operating results of our segments.
Loss in equity method investmentsnine
For the three months ended March 31, 2020 September 30, 2021, loss in equity method investments decreased $65,346,$489, or 8%29%, to $767,038$1,207 as compared to the prior year period. The net decreases were attributable to the following:
|
| | | | | | | | |
| | | Three | | Nine |
| | | Months | | Months |
| Decrease in event-related revenues from concerts | | $ | (17,694 | ) | | $ | (22,600 | ) |
| Decrease in suite license fee revenues | | (9,464 | ) | | (9,617 | ) |
| Decrease in venue-related signage and sponsorship revenues | | (6,296 | ) | | (11,049 | ) |
| Decrease in event-related revenues from other live sporting events | | (5,204 | ) | | (8,704 | ) |
(Decrease) increase in revenues associated with entertainment dining and nightlife offerings (a) | | (5,037 | ) | | 1,503 |
|
| Decrease in event-related revenues from other live entertainment events | | (3,889 | ) | | (2,068 | ) |
| Decrease in revenues from Obscura due to the decision to wind down its third-party production business to focus on the development of MSG Sphere | | (1,049 | ) | | (9,178 | ) |
| Decrease in ad sales commission due to lower sales in advertising availabilities of MSG Networks | | (793 | ) | | (552 | ) |
| Decrease in revenues associated with the expiration of the Wang Theatre booking agreement in February 2019 | | (632 | ) | | (3,883 | ) |
Increase in revenues from the presentation of the Christmas Spectacular | | 275 |
| | 2,044 |
|
| Other net decreases | | (374 | ) | | (1,242 | ) |
| | | $ | (50,157 | ) | | $ | (65,346 | ) |
_________________
| |
(a)
| Tao Group Hospitality’s operating results are recorded in the Company’s combined statements of operations on a three-month lag basis. Accordingly, the Company’s results for the three and nine months ended March 31, 2020 include Tao Group Hospitality’s operating results from September 30, 2019 to December 29, 2019 and from April 1, 2019 to December 29, 2019, respectively. As such, the Tao Group Hospitality’s operating results reported above did not include the periods impacted by COVID-19, which will be reflected in the fourth quarter of fiscal year 2020. See “Note 2 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion of Tao Group Hospitality’s consolidation. |
Theyear-over-year decrease in event-related revenues from concerts for the three months ended March 31, 2020 was due to (i) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19, (ii) fewer events held at the Company’s venues prior to the temporary closure of venues on March 12, 2020 as compared to the prior year period, and (iii) the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019. For the nine months ended March 31, 2020, the decrease in event-related revenues from concertsloss was primarily due to (i) lower per-event revenues prior to the temporary closure of venues on March 12, 2020 as compared to the prior year period, (ii) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19, (iii) the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019, partially offsethigher earnings from an investment held by additional events held at the Company’s venues prior to the temporary closure of venues on March 12, 2020 as compared to the prior year period.Tao Group Hospitality.
The decrease in suite license revenues for the three and nine months ended March 31, 2020 was primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. As further described in Note 3 to the Company’s audited combined financial statements for the year ended June 30, 2019 included in the Company’s Information Statement, suite license revenue is recognized proportionately over the license period as the Company satisfies the related performance obligation, which is generally determined based on the Company’s projections for the concentration of scheduled events across fiscal periods. As a result, the amount of suite license revenue recognized over any period of time will vary based on the concentration of scheduled events over that period, and therefore the suite license revenue for the period from March 12 through 31, 2020 is not representative of suite license revenue earned over any other period during the fiscal year.Interest income (expense), net
The decrease in venue-related signage and sponsorship revenues for the three and nine months ended March 31, 2020 was primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. In addition, the decrease during the three months ended March 31, 2020 was slightly offset by higher sales of existing sponsorship and signage inventory in the current year period as compared to the prior year period.
The decrease in event-related revenues from other live sporting events for the three months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19, slightly offset by an additional event prior to the temporary closure. The decrease in event-related revenues from other live sporting events for the nine months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19 and fewer events prior to the temporary closure slightly offset by higher per-event revenue.
The decrease in revenues associated with entertainment dining and nightlife offerings for the three months ended March 31, 2020 was primarily due to lower revenues in New York including the impact of closing one venue in January 2019. For the nine months ended March 31, 2020, the increase in revenues associated with entertainment dining and nightlife offerings was primarily due to the impact of new venues (both owned and managed), partially offset by lower revenues at other venues, including the impact of closing one venue in New York in January 2019.
The decreases in event-related revenues from other live entertainment events for the three and nine months ended March 31, 2020 were primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. In addition, the decrease in event-related revenues from other live entertainment events for the three months ended March 31, 2020 also included lower per-event revenue prior to the temporary closure of venues on March 12, 2020 as compared to the prior year period. For the nine months ended March 31, 2020, the Company had higher per-event revenue from a theatrical production at the Hulu Theater at Madison Square Garden and The Chicago Theatre in the current year period largely offset by the impact of a large-scale special event held at Radio City Music Hall during the prior year period. The Company did not have a comparable special event in the current year period.
For the three months ended March 31, 2020, the increase in revenues from the presentation of the Christmas Spectacular,September 30, 2021, net interest expense was $17,799 as compared to $4,856 in the prior year period, an increase of net interest expense of $12,943. The increase in net interest income in the current year period was primarily due to higher per-show ticket-related revenue from an increase in average per-show paid attendance, higher average ticket prices and higher ticket-related feesinterest expense associated with the National Properties Term Loan Facility, which was entered in the current year period, largely offset by the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the thirdsecond quarter of fiscal year 2019.
For the nine months ended March 31, 2020, the increase in revenues from the presentation of the Christmas Spectacular, as compared to the prior year period, was primarily due to the following:
higher per-show ticket-related revenue from higher average ticket prices, an increase in average per-show paid attendance,Fiscal Year 2021, and higher ticket-related fees in the current year period; and
higher merchandise revenue due to recording certain merchandise sales on a gross basis (as principal) as a result of transitioning those operations in-house in the current year period that were outsourcedis therefore not reflected in the prior year period.
The increases in per-show ticket-related revenue and merchandise revenue discussed above were partially offset by the impact on ticket-related revenue due to fewer scheduled performances in the current year period as compared to the prior year period. The Company had 199 scheduled Christmas Spectacular performances in this year’s holiday season, of which 186 and 13 took place in the second quarter and third quarter of fiscal year 2020, respectively, as compared to 210 scheduled performances in the prior year’s holiday season, of which 197 and 13 took place in the second quarter and third quarter of fiscal year 2019, respectively. For this year’s holiday season, more than one million tickets were sold, representing a low-single digit percentage decrease as compared to the prior year period.
Direct operating expenses
Direct operating expenses for the three months ended March 31, 2020 decreased $25,901, or 16%, to $132,809 as compared to the prior year period. Direct operating expenses for the nine months ended March 31, 2020 decreased $34,667, or 7%, to $472,582 as compared to the prior year period. The net decreases are attributable to the following: |
| | | | | | | |
| | Three | | Nine |
| | Months | | Months |
| Decrease in event-related direct operating expenses associated with concerts primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19 | $ | (6,883 | ) | | $ | (6,958 | ) |
| Decrease in direct operating expenses associated with suite licenses primarily due to lower revenue sharing expenses associated with suite license fee revenue decreases | (6,112 | ) | | (6,793 | ) |
| Decrease in direct operating expenses associated with the venue-related signage and sponsorship primarily due to lower revenue sharing expenses associated with venue-related signage and sponsorship revenue decreases | (6,014 | ) | | (9,686 | ) |
| Decrease in direct operating expenses associated with entertainment dining and nightlife offerings | (2,880 | ) | | (427 | ) |
| Decrease in event-related expenses associated with live sporting events | (1,863 | ) | | (3,529 | ) |
| Decrease in direct operating expenses associated with Obscura due to the decision to wind down its third-party production business to focus on the development of MSG Sphere | (1,822 | ) | | (8,314 | ) |
| Decrease in event-related direct operating expenses associated with other live entertainment events | (1,115 | ) | | (2,384 | ) |
| Decrease in direct operating expenses associated with the expiration of the Wang Theatre booking agreement in February 2019 | (927 | ) | | (2,621 | ) |
(Decrease) increase in direct operating expenses associated with the presentation of the Christmas Spectacular | (85 | ) | | 231 |
|
| Increase in venue operating costs, net of recovery charges from Madison Square Garden Sports Corp. | 3,578 |
| | 6,809 |
|
| Other net decreases | (1,778 | ) | | (995 | ) |
| | $ | (25,901 | ) | | $ | (34,667 | ) |
For the three months ended March 31, 2020, the decrease in direct operating expenses associated with entertainment dining and nightlife offerings was primarily due to (i) higher expenses during the prior year period at a new venue which opened in September 2018, (ii) lower food and beverage costs and employee compensation and related benefits due to lower revenues, and (iii) the absence of costs related to one venue in New York which closed in January 2019.
The decrease in event-related expenses associated with other live sporting events for the three months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19, slightly offset by an additional event prior to the temporary closure and higher per-event expenses. The decrease in event-related expenses associated with other live sporting events for the nine months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19 and fewer events prior to the temporary closure, slightly offset by higher per-event expenses.
The decrease in event-related direct operating expenses associated with other live entertainment events for the three months ended March 31, 2020 was primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. For the nine months ended March 31, 2020, the decrease in event-related direct operating expenses associated with other live entertainment events was due to (i) the impact of a large-scale special event held at Radio City Music Hall during the prior year period with no comparable special event during the current year period, and (ii) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. The decrease was partially offset by higher per-event expenses from a theatrical production at the Hulu Theater at Madison Square Garden and The Chicago Theatre during the second quarter of the current year period.
The increase in venue operating costs, net for the three and nine months ended March 31, 2020 reflects higher labor-related venue operating costs as the Company continued to pay event-level employees during the temporary shutdown of its venues. In addition, for the three months ended March 31, 2020, this increase was slightly offset by higher recovery charges for venue usage from Madison Square Garden Sports Corp. for hosting the professional sports franchises’ home games of the Knicks and Rangers at The Garden in the current year period as compared to the prior year period.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2020 increased $1,027, or 1%, to $84,186 as compared to the prior year period. Selling, general and administrative expenses for the nine months ended March 31, 2020 increased $26,932, or 12%, to $257,970 as compared to the prior year period.
For the three months ended March 31, 2020 the increase was primarily due to higher expenses related to the Company’s MSG Sphere initiative of $13,013, which include increases in personnel, content development and technology costs offset by (i) lower employee compensation and related benefits of $3,814, (ii) lower professional fees of $2,561, (iii) the absence of venue pre-opening costs of $1,443 associated with entertainment dining and nightlife offerings that were recorded in the prior year period, (iv) lower selling, general and administrative expenses associated with Obscura of $1,413 due to the Company’s decision to wind down Obscura’s third-party production business to focus on the development of MSG Sphere, and (v) other net decreases.
For the nine months ended March 31, 2020 the increase was primarily due to (i) higher expenses related to the Company’s MSG Sphere initiative of $31,655, which include increases in personnel, content development and technology costs, (ii) an increase in employee compensation and related benefits of $5,002, and (iii) higher professional fees of $2,225. The increase was partially offset by (i) lower selling, general and administrative expenses associated with Obscura of $6,542 due to the Company’s decision to wind down Obscura’s third-party production business to focus on the development of MSG Sphere, and (ii) the absence of venue pre-opening costs of $5,181 associated with entertainment dining and nightlife offerings that were recorded in the prior year period.
In connection with its MSG Sphere initiative, the Company expects to continue increasing its investment in personnel, content and technology. Based on the timing of these efforts, the Company expects higher expenses in future periods.
Depreciation and amortization
Depreciation and amortization for the three months ended March 31, 2020 decreased $572, or 2%, to $26,196 as compared to the prior year period. Depreciation and amortization for the nine months ended March 31, 2020 decreased $1,335, or 2%, to $80,271 as compared to the prior year period. For the nine months ended March 31, 2020, the decrease was primarily due to certain assets and purchase accounting adjustments being fully depreciated and amortized, partially offset by depreciation and amortization related to a new entertainment dining and nightlife venue.
Impairment of intangibles, long-lived assets and goodwill
The disruptions caused by COVID-19 directly impacted the Company’s projected cash flows resulting in operating disruptions. This disruption along with the deteriorating macroeconomic conditions and industry/market considerations, were considered a “triggering event” for the Company’s Tao Group Hospitality reporting unit, which required the Company to assess the carrying value of Tao Group Hospitality’s intangible assets, long-lived assets and goodwill for impairment. Based on this evaluation, the Company recorded a non-cash impairment charge of $102,211 for the three and nine months ended March 31, 2020, which included impairment charges associated with one venue within Tao Group Hospitality of $3,541 and $17,972, related to a tradename and certain long-lived asset, respectively, and an impairment charge of $80,698 related to goodwill associated with the Tao Group Hospitality reporting unit.
Due to the COVID-19-related shutdown of its venues, TAO Group Hospitality began a review of its lease contracts and could decide to close certain venues (which may later reopen elsewhere) if the landlords are unwilling to make appropriate concessions, which could result in additional charges related to the venue’s long-lived assets.
Operating income (loss)
Operating loss for the three months ended March 31, 2020 increased $126,922 to $145,541 as compared to the prior year period. Operating loss for the nine months ended March 31, 2020 was $145,996 as compared to an operating income of $12,491 in the prior year period. The change in operating loss for the three and nine months ended March 31, 2020 as compared to the prior year period was primarily due to (i) a non-cash impairment of intangibles, long-lived assets and goodwill and, to a lesser extent, (ii) lower revenues, and (iii) higher selling, general and administrative expenses slightly offset by lower direct operating expenses and lower depreciation and amortization, as discussed above.
Earnings (loss) in equity method investments
Loss in equity method investments for the three months ended March 31, 2020 decreased $1,785, or 62%, to $1,096 as compared to the prior year period. Loss in equity method investments for the nine months ended March 31, 2020 was $3,739 as compared to earnings of $17,131 in the prior year period. The decreases were due to the absence of equity earnings from AMSGE and Tribeca Enterprises as the Company sold these investments in December 2018 and August 2019, respectively. For
the three and nine months ended March 31, 2019, the Company reported net loss in equity method investments of $1,571 and net earnings in equity method investments of $20,415, respectively, from those investments.
Interest income, net
Net interest income for the three months ended March 31, 2020 decreased $1,686, or 36%, to 3,054 as compared to the prior year period primarily due to lower interest income as a result of (i) lower interest rates, (ii) a change in investment mix, and (iii) the absence of interest income earned on loans extended to AMSGE and Tribeca Enterprises as compared to the prior year period since these loans were fully repaid during the first and second quarters of fiscal year 2020, respectively. The decrease in interest income was partially offset by lower interest expense associated with Tao Group Hospitality, as a result of the refinancing of its credit facility in May 2019, which resulted in a reduction of the outstanding balance payable to third-parties by entering into an intercompany subordinated credit agreement with the Company, as well as lower variable interest rates under the Tao Senior Credit Agreement in the current year period as compared to the previous credit facility in the prior year period. See Note 12 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details of the Tao Senior Credit Agreement.
Net interest income for the nine months ended March 31, 2020 increased $3,444, or 29%, to $15,388 as compared to the prior year period primarily due to lower interest expense associated with Tao Group Hospitality, partially offset by lower interest income as a result of (i) lower interest rates, (ii) a change in investment mix, and (iii) lower interest earned on loans extended to AMSGE and Tribeca Enterprises.
Miscellaneous income (expense), net
Net miscellaneous expense forFor the three months ended March 31, 2020 was $17,381 as compared to aSeptember 30, 2021, net miscellaneous income of $4,613 in the prior year period. Net miscellaneous expense for the nine months ended March 31, 2020 decreased $1,225, or 30%, to $2,893 as compared to the prior year period. The change for the three months ended March 31, 2020 was$36,564, primarily due to the unrealized loss associated with the investments in DraftKings of $17,196 related to$3,487 for the Company’s investment in Townsquare in the current year periodthree months ended September 30, 2021 as compared to an unrealized gain of $5,261$33,048 in the prior year period. See Note 6 and Note 11 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information related to the investment in Townsquare. For the nine months ended March 31, 2020, the decrease in net miscellaneous expense was primarily due to lower pension and postretirement benefit cost related to the non-service components in accordance with ASU No. 2017-07.
Income taxes
See Note 1617 to the combinedconsolidated financial statements included in “Part I —“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s income taxes.
Adjusted operating income (loss)
We believe adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of our Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze our performance. We use revenues and adjusted operating income (loss) as the most important indicators of our business performance, and evaluate management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.
The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss).
The following are the reconciliations of operating income (loss)loss to adjusted operating income (loss) for the three and nine months ended March 31, 2020September 30, 2021 as compared to the prior year periods:period:
|
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | March 31, | | Change |
| | | 2020 | | 2019 | | Amount | | Percentage |
| Operating loss | | $ | (145,541 | ) | | $ | (18,619 | ) | | $ | (126,922 | ) | | NM |
| Share-based compensation | | 8,836 |
| | 8,726 |
| | | | |
Depreciation and amortization (a) | | 26,196 |
| | 26,768 |
| | | | |
Impairment of intangibles, long-lived assets and goodwill (b) | | 102,211 |
| | — |
| | | | |
| Other purchase accounting adjustments | | 1,068 |
| | 1,069 |
| | | | |
| Adjusted operating income (loss) | | $ | (7,230 | ) | | $ | 17,944 |
| | $ | (25,174 | ) | | NM |
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended | | | | |
| | | March 31, | | Change |
| | | 2020 | | 2019 | | Amount | | Percentage |
| Operating income (loss) | | $ | (145,996 | ) | | $ | 12,491 |
| | $ | (158,487 | ) | | NM |
|
| Share-based compensation | | 29,294 |
| | 27,929 |
| |
|
| | |
Depreciation and amortization (a) | | 80,271 |
| | 81,606 |
| | | | |
Impairment of intangibles, long-lived assets and goodwill (b) | | 102,211 |
| | — |
| | | | |
| Other purchase accounting adjustments | | 4,464 |
| | 3,717 |
| | | | |
| Adjusted operating income | | $ | 70,244 |
| | $ | 125,743 |
| | $ | (55,499 | ) | | (44 | )% |
_________________
NM — Percentage is not meaningful
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(a)
| Depreciation and amortization includes purchase accounting adjustments of $3,799 and $3,509 for the three months ended March 31, 2020 and 2019, respectively, and $9,727 and $11,880 for the nine months ended March 31, 2020 and 2019, respectively. |
| | | | | | |
(b)
| For the three and nine months ended March 31, 2020, the Company recorded a non-cash impairment charge of $102,211 associated with Tao Group Hospitality. This impairment charge included impairment charges associated with one venue within Tao Group Hospitality of $3,541 and $17,972, related to a tradename and long-lived assets, respectively, in addition to an impairment charge of $80,698 related to goodwill associated with the Tao Group Hospitality reporting unit. See Notes 7 and 9 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details. | | | | | |
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Adjusted operating loss | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
| Operating loss | | $ | (83,338) | | | $ | (58,679) | | | $ | (24,659) | | | (42) | % |
| Non-cash portion of arena license fees from MSG Sports | | (543) | | | — | | | | | |
| Share-based compensation | | 19,528 | | | 16,156 | | | | | |
Depreciation and amortization (a) | | 29,430 | | | 28,410 | | | | | |
| Amortization for capitalized cloud computing arrangement costs | | 85 | | | — | | | | | |
| Merger and acquisition related costs | | 37,192 | | | — | | | | | |
Impairment of long-lived assets (b) | | 7,818 | | | — | | | | | |
| Restructuring charges | | — | | | 19,927 | | | | | |
| Other purchase accounting adjustments | | 85 | | | 924 | | | | | |
| Adjusted operating income | | $ | 10,257 | | | $ | 6,738 | | | $ | 3,519 | | | 52 | % |
_________________
(a) Depreciation and amortization includes purchase accounting adjustments of $1,599 and $3,522 for the three months ended March 31,September 30, 2021 and 2020, was $7,230 as comparedrespectively.
(b) For the three months ended September 30, 2021, the Company recorded a non-cash impairment charge of $7,818 associated with Tao Group Hospitality. This impairment charge included impairment charges associated with certain Tao Group Hospitality due to decisions made by management to cease operations at certain Hakkasan venues subsequent to the Hakkasan acquisition date, resulting in the impairment of the respective right-of-use asset and a leasehold improvement.
For the three months ended September 30, 2021, adjusted operating income of $17,944 in the prior year period. Adjusted operating income for the nine months ended March 31, 2020 decreased $55,499, or 44%increased $3,519, 52%, to $70,244 as compared to the prior year period.$10,257. The decreasesincreases in adjusted operating incomeloss were lower than the increases in operating losses primarily dueattributable to the impairmentfollowing:
| | | | | | | | | | |
| | | | Three Months Ended September 30, 2021 |
Increase in adjusted operating loss of the Entertainment segment (a) | | | | $ | (13,115) | |
Decrease in adjusted operating income of the MSG Networks segments (a) | | | | (18,598) | |
Increase in adjusted operating income of the Tao Group Hospitality segment (a) | | | | 35,302 | |
| Inter-segment eliminations | | | | (70) | |
| | | | $ | 3,519 | |
_________________
(a)See “ — Business Segment Results” for a more detailed discussion of intangibles, long-lived assets and goodwill.
Net income (loss)loss attributable to redeemable and nonredeemable noncontrolling interests
For the three months ended March 31, 2020,September 30, 2021, the Company recorded $22,447$2,212 of net loss attributable to redeemable noncontrolling interests including a proportional share of expenses related to impairment charges of $22,997 and purchase accounting adjustments (“PPA Expenses”), which total $22,257 and $195$365 of net loss attributable to nonredeemable noncontrolling interests including $57 of PPA Expenses as compared to $7$3,889 of net loss attributable to redeemable noncontrolling interests including $1,595 of PPA Expenses and $680$630 of net loss attributable to nonredeemable noncontrolling interests including $87 of PPA Expenses for the three months ended March 31, 2019.
For the nine months ended March 31, 2020, the Company recorded $23,851 of net loss attributable to redeemable noncontrolling interests, including a proportional share of expenses related to impairment charges of $22,997 and PPA Expenses, which total $25,547, and $38 of net loss attributable to nonredeemable noncontrolling interests, including $171 of PPA Expenses, as compared to $3,662 of net loss attributable to redeemable noncontrolling interests, including $5,499 of PPA Expenses, and $3,121 of net loss attributable to nonredeemable noncontrolling interests, including $261 of PPA Expenses, for the nine months ended March 31, 2019.
September 30, 2020. These amounts represent the share of net loss from the Company’s investments in Tao Group Hospitality and BCE that are not attributable to the Company.
Business Segment Results
Entertainment
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 Entertainment segment.
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| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
| Revenues | | $ | 34,239 | | | $ | 7,555 | | | $ | 26,684 | | | NM |
| Direct operating expenses | | 36,302 | | | 23,615 | | | 12,687 | | | 54 | % |
| Selling, general and administrative expenses | | 92,962 | | | 52,650 | | | 40,312 | | | 77 | % |
| Depreciation and amortization | | 19,656 | | | 22,014 | | | (2,358) | | | (11) | % |
| | | | | | | | |
| Restructuring charges | | — | | | 19,927 | | | (19,927) | | | NM |
| Operating loss | | $ | (114,681) | | | $ | (110,651) | | | $ | (4,030) | | | (4) | % |
| Reconciliation to adjusted operating loss: | | | | | | | | |
| Non-cash portion of arena license fees from MSG Sports | | (543) | | | — | | | | | |
| Share-based compensation | | 10,143 | | | 10,433 | | | | | |
| Depreciation and amortization | | 19,656 | | | 22,014 | | | | | |
| Amortization for capitalized cloud computing arrangement costs | | 41 | | | — | | | | | |
| Merger and acquisition related costs | | 13,992 | | | — | | | | | |
| | | | | | | | |
| Restructuring charges | | — | | | 19,927 | | | | | |
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| Adjusted operating loss | | $ | (71,392) | | | $ | (58,277) | | | $ | (13,115) | | | (23) | % |
_________________
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Factors Affecting Results of Operations
Impact of the COVID-19 Pandemic
For the three months ended September 30, 2021, the Entertainment segment operations and operating results were materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities. While the number of events held at the Company’s venues has started to increase, it is not clear when the Company will fully return to normal business operations. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information.
Revenues
For the three months ended September 30, 2021, revenues increased $26,684 to $34,239 as compared to the prior year period. The net increases were attributable to the following:
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| Increase in event-related revenues, as discussed below | | $ | 20,660 | | | |
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| Increase in venue-related signage and sponsorship revenues due to the return of events at the Company’s venues during the current year period as compared to no events held in the prior year period due to the COVID-19 pandemic | | 2,663 | | | |
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| Increase in revenues from signage, suites licenses, and sales of food, beverage and merchandise subject to revenue or profit sharing with MSG Sports pursuant to the Arena License Agreements | | 1,726 | | | |
| Increase in arena license fees from MSG Sports pursuant to the Arena License Agreements, as discussed below | | 1,328 | | | |
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| Decrease in inter-segment revenues on advertising sales commission from MSG Networks, which is eliminated on consolidated basis | | (785) | | | |
| Other net increases | | 1,092 | | | |
| | $ | 26,684 | | | |
For the three months ended September 30, 2021, the increase in event-related revenues reflects (i) higher revenues from concerts of $16,501, and (ii) higher revenues from other sporting and live entertainment events of $4,159, primarily due to the return of events at the Company’s venues during the current year period as compared to no events held in the prior year period due to the COVID-19 pandemic. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information.
For the three months ended September 30, 2021, the Rangers played a total of two preseason games at The Garden and the Company recorded $1,328 of revenues under the Arena License Agreements. No Rangers preseason games were played at The Garden during the prior year period due to the delayed start of the 2020-21 NHL seasons as a result of the COVID-19 pandemic. Therefore, the Company did not recognize any arena license fees from MSG Sports pursuant to the Arena License Agreements in the prior year period.
Direct operating expenses
For the three months ended September 30, 2021, direct operating expenses increased $12,687, or 54%, to $36,302 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | | | |
| | | | |
| Increase in event-related direct operating expenses, as discussed below | | $ | 9,726 | | | |
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| Increase in direct operating expenses associated with venue operating costs | | 2,726 | | | |
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| Increase in direct operating expenses associated with revenue sharing expense from signage, suites licenses and sales of food, beverage and merchandise with MSG Sports pursuant to the Arena License Agreements | | 1,281 | | | |
| Other net decreases | | (1,046) | | | |
| | $ | 12,687 | | | |
For the three months ended September 30, 2021, the increase in event-related direct operating expenses reflects (i) higher direct operating expenses from concerts of $7,265 and (ii) higher direct operating expenses from other sporting and live entertainment events of $2,461, primarily due to the return of events at the Company’s venues during the current year period as compared to no events held in the prior year period due to the COVID-19 pandemic.
Selling, general and administrative expenses
For the three months ended September 30, 2021, selling, general and administrative expenses increased $40,312, or 77%, to $92,962 as compared to the prior year period. This increase primarily reflects an increase of $18,763 in other employee compensation and related benefits and expenses in the current year period related to the Company’s acquisition of MSG Networks Inc. of $13,992.
Depreciation and amortization
Depreciation and amortization for the three months ended September 30, 2021, decreased $2,358, or 11% to $19,656 as compared to the prior year period primarily due to lower depreciation expense due to certain assets in The Garden being fully depreciated and amortized and disposal of certain assets in the prior year period.
Operating loss
For the three months ended September 30, 2021, operating loss was $114,681 as compared to $110,651 in the prior year period, an increase in operating loss of $4,030. The increase in operating loss was primarily due to higher selling, general and administrative expenses and direct operating expenses, largely offset by (i) an increase in revenues, (ii) the impact of restructuring charges in the prior year period and (iii) lower depreciation and amortization expenses, as discussed above.
Adjusted operating loss
For the three months ended September 30, 2021, adjusted operating loss was $71,392 as compared to $58,277 in the prior year period, an increase in adjusted operating loss of $13,115. The increase in adjusted operating loss was higher than the increase in operating loss of $4,030 primarily due to (i) nonrecurring expenses of $19,927 in the restructuring charges in the prior year period as compared to merger and acquisition related costs of $13,992 in the current year period and (ii) a decrease in depreciation and amortization of $2,358, which are excluded in the calculation of adjusted operating loss.
MSG Networks
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Networks segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
| Revenues | | $ | 141,473 | | | $ | 157,363 | | | $ | (15,890) | | | (10) | % |
| Direct operating expenses | | 68,423 | | | 65,072 | | | 3,351 | | | 5 | % |
| Selling, general and administrative expenses | | 47,975 | | | 22,527 | | | 25,448 | | | 113 | % |
| Depreciation and amortization | | 1,797 | | | 1,828 | | | (31) | | | (2) | % |
| | | | | | | | |
| | | | | | | | |
| Operating income | | $ | 23,278 | | | $ | 67,936 | | | $ | (44,658) | | | (66) | % |
| Reconciliation to adjusted operating income: | | | | | | | | |
| | | | | | | | |
| Share-based compensation | | 7,474 | | | 4,627 | | | | | |
| Depreciation and amortization | | 1,797 | | | 1,828 | | | | | |
| Amortization for capitalized cloud computing arrangement costs | | 44 | | | — | | | | | |
| Merger and acquisition related costs | | 23,200 | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
| Adjusted operating income | | $ | 55,793 | | | $ | 74,391 | | | $ | (18,598) | | | (25) | % |
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NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Factors Affecting Results of Operations
Due to the COVID-19 pandemic, in March 2020, the 2019-20 NHL and NBA seasons were suspended. The leagues resumed play during the summer of 2020, with the Rangers and Islanders participating in the NHL’s return to play and the Islanders advancing to the 2019-20 playoffs. The NHL and NBA subsequently completed their shortened 2019-2020 seasons in September and October 2020, respectively, which resulted in a delayed start to the shortened 2020-21 NBA and NHL seasons. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information.
Revenues
Revenues for the three months ended September 30, 2021 decreased $15,890, or 10%, to $141,473 as compared to the prior year period. The net decreases were attributable to the following:
| | | | | | | | | | |
| | | | |
| Decrease in affiliation fee revenue | | $ | (12,265) | | | |
| Decrease in advertising revenue | | (3,562) | | | |
| Other net decreases | | (63) | | | |
| | $ | (15,890) | | | |
For the three months ended September 30, 2021, the decrease in affiliation fee revenue was primarily due to the impact of (i) a decrease in subscribers of approximately 6.5% (excluding the impact of a previously disclosed non-renewal with a small Connecticut-based distributor as of October 1, 2020), (ii) an increase in net affiliate adjustments of approximately $5,200 primarily related to accruals for potential affiliate fee rebates and, (iii) to a lesser extent, the impact of the aforementioned non-renewal. These decreases were partially offset by the impact of higher affiliation rates.
We currently expect to record accruals for potential affiliate fee rebates in the second quarter of Fiscal Year 2022 at a lower level compared to this quarter.
For the three months ended September 30, 2021, the decrease in advertising revenue primarily reflects the impact in the prior year period of live telecasts related to the New York Rangers’ and Islanders’ participation in the 2019-20 NHL return to play, as well as the Islanders’ advancement to the 2019-20 playoffs, as compared with the impact of live telecasts related to 2021-22 NHL preseason telecasts in the current year period.
Effective October 1, 2021, Comcast’s license to carry MSG Networks expired and MSG Networks has not been carried by Comcast since that date. The financial impact of Comcast’s non-carriage of MSG Networks will depend on many factors including if, when and on what terms Comcast and the Company reach a new carriage agreement and the extent to which Comcast subscribers switch to other Distributors that carry MSG Networks. Comcast’s non-carriage has reduced MSG Networks’ subscribers by approximately 10% and, subject to the foregoing factors, is expected to reduce MSG Networks’ revenue by a comparable percentage for so long as MSG Networks’ carriage agreement with Comcast is not renewed. In addition, during any period of non-carriage, MSG Networks’ segment operating income and AOI are expected to be reduced by an amount that is approximately equal to the dollar amount of the reduced revenue.
Direct operating expenses
Direct operating expenses for the three months ended September 30, 2021 increased $3,351, or 5%, to $68,423 as compared to the prior year period. The increase was primarily due to higher rights fees expenses of $2,542 and, to a lesser extent, an increase in other programming and production-related costs of $809. The increase in rights fees expenses was primarily due to annual contractual rate increases and the impact of net lower reductions in media rights fees related to the 2020-21 seasons in the current year quarter as compared with reductions related to the 2019-20 seasons in the prior year quarter.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2021 increased $25,448, or 113%, to $47,975 as compared to the prior year period primarily due to approximately $24,900 in costs in the current year quarter related to the Merger, including the impact of executive separation agreements.
Operating income
Operating income for the three months ended September 30, 2021 decreased $44,658, or 65.7%, to $23,278 as compared to the prior year period due to the increase in selling, general and administrative expenses and lower revenues and, to a lesser extent, the increase in direct operating expenses, as discussed above.
Adjusted operating income
Adjusted operating income for the three months ended September 30, 2021 decreased $18,598, or 25%, to $55,793 as compared to the prior year period. The decrease in adjusted operating income was lower than the decrease in operating income of $44,658 primarily due to acquisition-related costs of $23,200 recorded in the current year period and the increase in share-based compensation of $2,847 mainly related to the impact of executive separation agreements in connection with the Merger, which are excluded in the calculation of adjusted operating income,
Tao Group Hospitality
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income (loss) to adjusted operating income (loss) for the Company’s Tao Group Hospitality segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
| Revenues | | $ | 119,464 | | | $ | 7,221 | | | $ | 112,243 | | | NM |
| Direct operating expenses | | 61,093 | | | 9,828 | | | 51,265 | | | NM |
| Selling, general and administrative expenses | | 34,094 | | | 7,603 | | | 26,491 | | | NM |
| Depreciation and amortization | | 6,378 | | | 1,046 | | | 5,332 | | | NM |
| Impairment of long-lived assets | | 7,818 | | | — | | | 7,818 | | | NM |
| | | | | | | | |
| Operating income (loss) | | $ | 10,081 | | | $ | (11,256) | | | $ | 21,337 | | | NM |
| Reconciliation to adjusted operating income (loss): | | | | | | | | |
| | | | | | | | |
| Share-based compensation | | 1,911 | | | 1,096 | | | | | |
| Depreciation and amortization | | 6,378 | | | 1,046 | | | | | |
| Impairment of long-lived assets | | 7,818 | | | — | | | | | |
| | | | | | | | |
| Adjusted operating income (loss) | | $ | 26,188 | | | $ | (9,114) | | | $ | 35,302 | | | NM |
_________________
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Factors Affecting Results of Operations
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. In the prior year period, due to government actions taken in response to the COVID-19 pandemic, virtually all of Tao Group Hospitality’s venues closed for approximately three months starting in mid-March. Certain venues then resumed limited operations, subject to significant regulatory requirements, which included limits on capacity, curfews and social distancing requirements for outdoor and indoor dining. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information.
As of September 30, 2021, 51 of Tao Group Hospitality’s venues were open for outdoor dining, limited or full capacity indoor dining (depending on the market), and delivery/takeout (23 legacy Tao Group Hospitality venues and 28 Hakkasan venues acquired in connection with the April 27, 2021 transaction), inclusive of Tao Asian Bistro & Lounge at Mohegan Sun, a venue that first opened in March 2021, while 10 venues remained closed (five legacy Tao Group Hospitality venues and five Hakkasan venues). Our venues continue to be operating under various governmental safety protocols such as vaccine mandates, curfews, capacity limitations and social distancing depending on the location.
Revenues
Revenues for the three months ended September 30, 2021 increased $112,243 to $119,464 as compared to the prior year period attributable to the following:
| | | | | | | | | | |
| | | | |
| Increase in revenues due to Hakkasan, acquired in April 2021 | | | | $ | 59,352 | |
| Increase in revenues at venues subject to capacity restrictions in the prior year period | | | | 26,273 | |
| Increase in revenues at venues that were temporarily closed in the prior year period as a result of the COVID-19 pandemic | | | | 25,548 | |
| Other net increases | | | | 1,070 | |
| | | | $ | 112,243 | |
Direct operating expenses
Direct operating expenses for the three months ended September 30, 2021 increased $51,265 to $61,093 as compared to the prior year period attributable to the following:
| | | | | | | | | | |
| | | | |
| Increase in direct operating expenses due to Hakkasan, acquired in April 2021 | | | | $ | 27,866 | |
| Increase in the costs of food, beverage and venue entertainment as a result of resuming operations compared with the prior year period’s closure of certain venues and capacity restrictions due to the COVID-19 pandemic | | | | 10,165 | |
| Increase in employee compensation and related benefits as a result of resuming operations compared with the prior year period’s reduction in headcount resulting from the COVID-19 pandemic | | | | 10,110 | |
| Increase in rent expense, primarily due to rent concessions in the prior year period resulting from the COVID-19 pandemic | | | | 2,679 | |
| Other net increases | | | | 445 | |
| | | | $ | 51,265 | |
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2021, increased $26,491 to $34,094 as compared to the prior year period. The increases were primarily due to higher (i) selling, general, and administrative expenses of $14,723 incurred by Hakkasan, acquired in April 2021, (ii) employee compensation and related benefits, inclusive of an increase in share-based compensation, of $4,186, (iii) professional fees, restaurant expenses, as well as supplies, utilities, general liability insurance, pre-opening expenses and repairs and maintenance of $3,855, (iv) marketing costs of $2,133, and (v) various other increases, primarily related to the prior year period’s temporary office closure. All increases were significantly driven by the acquisition of Hakkasan in April 2021 and the prior year period’s operations being disrupted from the COVID-19 pandemic.
Depreciation and amortization
Depreciation and amortization for the three months ended September 30, 2021 increased $5,332 to $6,378 as compared to the prior year period primarily due to Hakkasan, acquired in April 2021.
Impairment of long-lived assets
Impairment of long-lived assets for the three months ended September 30, 2021 of $7,818 was due to decisions made by management to cease operations at certain Hakkasan venues subsequent to the Hakkasan acquisition date, resulting in the impairment of the respective right-of-use asset and a leasehold improvement.
Operating income (loss)
Operating income for the three months ended September 30, 2021 was $10,081 as compared to the operating loss of $11,256 in the prior year period, an improvement in operating income of $21,337. The increase in operating income was primarily due to increased revenues, partially offset by an increase in direct operations, selling, general and administrative expenses, depreciation and amortization and impairment of long-lived assets, as discussed above. All increased operations were significantly driven by the acquisition of Hakkasan in April 2021 and the prior year period disruptions caused by the COVID-19 pandemic.
Adjusted operating income (loss)
Adjusted operating income for the three months ended September 30, 2021 was $26,188 as compared to an adjusted operating loss of $9,114 in the prior year period, an improvement of $35,302. The increase in adjusted operating income was higher as compared to the increase in operating income primarily due to increased depreciation and amortization and impairment of long-lived assets, as discussed above.
Liquidity and Capital Resources
Overview
OurThe Company’s operations and operating results have been, and may continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by the governmentgovernmental authorities and certain professional sports leagues. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended, MSG Networks aired substantially fewer games and Tao Group Hospitality was operating at significantly reduced capacity and demand. While operations have resumed, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our performance venues were closed beginning in mid-March 2020. Use of The Garden resumed for Knicks and Rangers home games without fans in December 2020 and January 2021, respectively, and was available at 10% seating capacity from mid-February through mid-May 2021 with certain safety protocols and social distancing. Beginning in mid-May 2021, all of our New York performance venues were permitted to host guests at full capacity, subject to certain restrictions, and effective June 2021, The Chicago Theatre was permitted to host events without restrictions.For all events hosted at our New York performance venues with 100% capacity prior to August 17, 2021, guests were required to provide proof of full vaccination or a negative COVID-19 test, depending on the requirements of that venue and/or preference of the performer. Effective August 17, 2021, all workers and customers in New York City indoor dining, indoor fitness and indoor entertainment facilities are required to show proof of at least one vaccination shot. Guests are also required to wear masks unless they show proof that they are fully vaccinated (although specific performers may require enhanced protocols). Children under age 12 can attend events with a vaccinated adult, but ages 2 to 11 need to wear a mask while inside our venues. In addition, effective August 20, 2021, masks are required for all individuals in indoor public spaces in Chicago, including our venues.
For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or canceled and, while live events are permitted to be held at all of our performance venues as of the date of this Quarterly Report on Form 10-Q, nearly allfiling and we are continuing to host and book new events, due to the lead-time required to book touring acts and artists, which is the majority of our Entertainment business, we expect that our bookings will continue to be impacted through the 2021 calendar year. We continue to actively pursue one-time or multi-night performances at our venues as the touring market ramps up.
The impact to our operations have been suspendedalso included the cancellation of the 2020 production of the Christmas Spectacular and it both the 2020 and 2021 Boston Calling Music Festivals. While the 2021 production of the Christmas Spectacular is not clear when those operations will resume. currently on-sale, the current production is scheduled for 160 shows, as compared with 199 shows for the 2019 production, which was the last production presented prior to the impact of the COVID-19 pandemic.
The Company has long-term arena license agreements (the “Arena License Agreements”) with MSG Sports that require the Knicks and Rangers to play their home games at The Garden. As discussed above, capacity restrictions, use limitations and social distancing requirements were in place for the entirety of the Knicks and Rangers 2020-21 regular seasons, which materially impacted the payments we received under the Arena License Agreements for Fiscal Year 2021. On July 1, 2021, the Knicks and Rangers began paying the full amounts provided for under their respective Arena License Agreements and full 82-game regular seasons for the 2021-22 NBA and NHL seasons are scheduled.
As a result of the COVID-19 pandemic and league and government mandated assembly limitationsactions relating thereto, MSG Networks aired substantially fewer NBA and closures,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 has resumed airing full regular season telecast schedules for its five professional teams across both the NBA and NHL, and, as result, expects a return to normalized levels of advertising revenue and certain operating expenses, including rights fees expense.
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. Due to government actions taken in response to the COVID-19 pandemic, virtually all of our scheduled events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre are postponed or cancelled through June, the 2020 Boston Calling music festival, which had been slatedTao Group Hospitality’s venues were closed for Memorial Day weekend, has also been cancelled, and virtually allapproximately three months starting in mid-March 2020. Additionally, three venues were permanently closed. Throughout Fiscal Year 2021, Tao Group Hospitality conducted limited operations at certain venues, subject to significant regulatory requirements, including capacity limits, curfews and social distancing requirements for outdoor and indoor dining. Tao Group Hospitality’s operations fluctuated throughout Fiscal Year 2021 and during the first quarter of Fiscal Year 2022 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. Effective August 17, 2021, workers and customers in New York City indoor dining facilities are currently closed. The NBArequired to show proof of at least one vaccination shot. In addition, certain jurisdictions have reinstated safety protocols, such as mask mandates in Nevada and the NHL suspended their 2019-20 seasons on March 11Chicago, but Tao Group Hospitality is continuing to operate without capacity restrictions in domestic and 12, 2020, respectively. No Knicks or Rangers games are currently being played, and it is uncertain if the current seasons will resume. For more information about the impacts and risks to the Company as a result of COVID-19, see “— Impact of COVID-19 on Our Business” and “Item 1A. Risk Factors — Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government Actions Taken in Response.”key international markets.
It is unclear how long and to what extent COVID-19 concerns, including with respect to new variants, will continue to impact government and league-mandated capacity restrictions, the use of and/or demand for our entertainment and dining and nightlife venues, and demand for our sponsorship and advertising assets, or deter our employees and vendors from working at our venues (which may lead to difficulties in staffing).
Our primary sources of liquidity are cash and cash equivalents, and cash flows from the operations of our businesses.businesses and available borrowing capacity under our MSGN Credit Agreement. Our principal uses of cash include working capital-related items (including funding our operations), capital spending (including our planned construction of large-scale venuesMSG Sphere at The Venetian in Las Vegas, and London)as described below), borrowings by Madison Square Garden Sports Corp. under the DDTL Facilities,debt service, investments and related loans and advances that we may fund from time to time, repayment of debt, and mandatory purchases from prior acquisitions. 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.
We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity, including approximately $1,004,000$1,331,450 in cash and cash equivalents and $331,000 of short-term investments as of March 31, 2020,September 30, 2021, to over the next 12 months, fund our operations, make committed funds available to Madison Square Garden Sports Corp. underservice the DDTLMSGN Credit Agreement, the National Properties Term Loan Facility, the Tao Credit Facilities, and pursue the development of the new venues discussed below. Cash and cash equivalents as of March 31, 2020 includes unrestricted cash and cash equivalents of $100,000 which was retained by Madison Square Garden Sports Corp. atbelow over the time of the Madison Square Garden Entertainment Corp. spin-off.next 12 months. See Note 1113 to the combinedconsolidated financial statements included in “Part I —“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of the Company’s short-term investments.MSGN Credit Agreement, the National Properties Term Loan Facility and the Tao Revolving Credit Facilities. Our cash and cash equivalents include approximately $223,000$283,000 in advance cash proceeds — primarily related to tickets, suites, and, sponsorships — all of which would be addressed, to thea lesser extent, necessary, through refunds, credits, make-goods and/or rescheduled dates.sponsorships.
In connection with the Entertainment Distribution and as an additional source of liquidity for Madison Square Garden Sports Corp. in response to the COVID-19 pandemic, on April 17, 2020, a subsidiary of the Company entered into the DDTL Facilities with subsidiaries of Madison Square Garden Sports Corp. Pursuant to the DDTL Facilities, two of Madison Square Garden Sports Corp.’s subsidiaries, MSG NYK Holdings, LLC and MSG NYR Holdings, LLC will be able to draw up to $110,000 and $90,000, respectively, for general corporate purposes until October 17, 2021, subject to the terms and conditions of the DDTL Facilities. Each DDTL Facility bears interest at a rate equal to LIBOR plus 2.00%, or at the option of Madison Square Garden Sports Corp., a base rate plus 1.00%. If Madison Square Garden Sports Corp. draws down on one or both DDTL Facilities, the outstanding principal balance of each term loan will be due, together with any unpaid interest thereon, on October 17, 2021. If Madison Square Garden Sports Corp. were to fully draw on the DDTL Facilities, the Company’s cash balance would decrease by $200,000. For more information on the DDTL Facilities, see Note 17 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
On March 31, 2020, the Company’s Board of Directors authorized, effective following the Entertainment Distribution, a share repurchase program to repurchase up to $350 million$350,000 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 transactions, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. No shares have been repurchased to date.
Tao Group Hospitality’s principal uses of cash include working capital related-items (including funding its operations), investments in new venues, tax-related cash distributions, interest expense payments and repayment of debt. Tao Group Hospitality plans to continue to grow its business through the opening of new venues and acquisitions.
MSG SpheresSphere
The Company has made significant progress on MSG Sphere at The Venetian, its state-of-the-art entertainment venue under construction in Las Vegas.
The Company expects the venue to have a number of significant revenue streams, including a wide variety of content such as attractions, concert residencies and corporate and select sporting events, as well as sponsorship and premium hospitality opportunities. As a result, we anticipate that MSG Sphere at The Venetian will generate substantial revenue and adjusted operating income on an annual basis.
Our currentMSG Sphere at The Venetian is a complex construction project that has become even more challenging due to the global impact of COVID-19. In April 2020, the Company announced that it was suspending construction due to COVID-19-related factors outside of its control, including supply chain issues. As the ongoing effects of the pandemic continued to impact its business operations, in August 2020, the Company disclosed that it resumed construction with a lengthened timetable. The Company remains committed to bringing MSG Sphere to Las Vegas and expects to open the venue in calendar year 2023. As with any major construction project, the construction of MSG Sphere is subject to potential delays, unexpected complications or cost fluctuations.
On August 23, 2021, we announced that our cost estimate inclusive of core technology and soft costs, for MSG Sphere at The Venetian iswas approximately $1,660,000.$1,865,000. This cost estimate iswas net of $75,000 that the Las Vegas Sands Corp. has agreed to pay to defray certain construction costs and also excludes the impacts of changes in inflation and significant capitalized and non-capitalized costs for items such as content creation, internal labor, and furniture and equipment. Relative to our current cost estimate above, our actual construction costs for MSG Sphere at The Venetian incurred through March 31, 2020September 30, 2021 were approximately $349,000, $976,000,
which is net of $65,000 received from Las Vegas Sands Corp. during the nine months ended March 31, 2020.Sands. In addition, the amount of construction costs incurred as of March 31, 2020September 30, 2021 includes approximately $67,600$121,000 of accrued expenses that were not yet paid as of that date. As with any major construction project, the construction of MSG Sphere is subject to potential unexpected delays, costs or other complications.
The MSG Sphere at The Venetian is a complex construction project with cutting-edge technology that relies on subcontractors obtaining components from a variety of sources around the world. The effects of COVID-19 have resulted in significant impediments to construction that are beyond our control, including disruptions to our supply chain. As a result, in April 2020, we implemented a temporary suspension of construction, and we expect to incur additional expenses related to stopping and re-starting construction. At this time, we are unable to determine the full impact of the COVID-19 related disruptions, however they may impact our cost estimates. The Company remains committed to building a state-of-the-art venue in Las Vegas and looks forward to quickly and efficiently resuming construction as soon as practicable. As a result of this delay, we do not expect to achieve our goal of opening the venue in calendar year 2021.
See Exhibit 10.18 to Amendment No. 1 to the Company’s registration statement on Form 10 filed on March 18, 2020 for a copy of the Construction Agreement, dated May 31, 2019, by and between MSG Las Vegas, LLC and Hunt Construction Group Inc. (AECOM).
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to a future MSG Sphere. Cost estimates for MSG Sphere in London are still in development as the Company continues to refine its design, which it currently expects will be substantially similar to MSG Sphere in Las Vegas, including having approximately the same seating capacity. The Company submitted a planning application to the local planning authority in March 2019 and the planning application process has continued in 2020. The Company is using this time to continue building on its design and construction learnings in Las Vegas, which it will leverage in London. And as we work through this planning application and design process, we expect our timeline will evolve and, therefore, we do not have a target opening date at this time.
With regard to MSG Sphere at The Venetian, the Company plans to finance the construction of the venue from cash-on-hand and cash flows from operations, as well as additional debt financing. The Company expects to incur $400,000 of new long-term financing by a subsidiary of the Company that indirectly owns an interest in its venues, which is expected to be comprised of a term loan of $225,000 and a revolving credit facility with $175,000 of borrowing capacity.operations. If the Company’s cash-on-hand and cash flows from operations are not sufficient to finance the remaining construction costs of MSG Sphere at The Venetian, the Company would need to completeaccess additional debt financing.capital, including potential incremental debt. There is no assurance that the Company will be able to obtain such capital.
While the Company plans to self-fund the construction of MSG Sphere at The Venetian, under the right terms it would consider third-party financing alternatives. The Company’s intention for any future venues is to explore otherutilize several options, includingsuch as non-recourse debt financing, joint ventures, equity partners and a managed venue model.
TableIn February 2018, we announced the purchase of Contentsland in Stratford, London, which we expect will become home to a future MSG Sphere. The Company submitted a planning application to the local planning authority in March 2019 and that process, which will require 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.
Tao Group Hospitality
Liquidity
Tao Group Hospitality’s principal uses of cash include working capital related-items, investments in new venues, tax-related cash distributions, interest expense payments,We will continue to explore additional domestic and repayments of debt. Tao Group Hospitality plans to grow its business through the opening of new venues. Tao Group Hospitality’s business and liquidity have been materially impacted by the COVID-19 pandemic, and all Tao Group Hospitality venues are currently closed. However,international markets where we believe that Tao Group Hospitality has sufficient liquidity from cash-on-hand, its revolving credit facility and committed capital fromnext-generation venues such as the Company to fund its operations and service its debt obligations and pursue new business opportunities over the next 12 months.MSG Sphere can be successful.
Financing Agreements
On May 23, 2019, TAOIHMSGN Credit Facility
MSG Networks has made principal repayments aggregating to $64,625 through September 30, 2021 under the MSGN Credit Agreement. The MSGN Term Loan Facility amortizes quarterly in accordance with its terms. As of September 30, 2021, there was $1,035,375 outstanding under the MSGN Term Loan Facility, and TAOG, entered intono borrowings under the Tao SeniorMSGN Revolving Credit AgreementFacility. As of September 30, 2021, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with JPMorgan Chase Bank, N.A.the covenants of the MSGN Credit Agreement. The scheduled repayments for the remainder of Fiscal Year 2022 are $37,125.
National Properties Term Loan Facility
The National Properties Term Loan Facility includes a minimum liquidity covenant, pursuant to which MSG National Properties and its restricted subsidiaries are required to maintain a specified minimum level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter. From the closing date until the first anniversary of the National Properties Term Loan Facility, the minimum liquidity threshold is $450,000, which is reduced each quarter by the amount of cash usage, subject to a minimum liquidity floor of $200,000. After the first anniversary, the minimum liquidity level is reduced to $200,000. If at any time the total leverage ratio of MSG National Properties and its restricted subsidiaries is less than 5.00 to 1.00 as of the end of any four consecutive fiscal quarter periods or MSG National Properties obtains an investment grade rating, the minimum liquidity level is permanently reduced to $50,000.
The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments in an aggregate amount equal to 1.00% per annum (0.25% per quarter), with the balance due at the maturity of the facility. The National Properties Term Loan Facility will mature on November 12, 2025. Borrowings under the National Properties Term Loan Facility bear interest at a floating rate, which at the option of MSG National Properties may be either (i) a base rate plus a margin of 5.25% per annum or (ii) LIBOR, with a floor of 0.75%, plus a margin of 6.25% per annum. The interest rate on the National Properties Term Loan Facility as of September 30, 2021 was 7.00%. As of September 30, 2021, there was $645,125 outstanding under the National Properties Term Loan Facility. The scheduled repayments for the remainder of Fiscal Year 2022 are $4,875.
In addition to the minimum liquidity covenant, the National Properties Term Loan Facility and the lenders party thereto. The Tao Senior Credit Agreement provides TAOGrelated security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. As of September 30, 2021, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Term Loan Facility.
Tao Senior Secured Credit Facilities consisting of: (i) an initial $40,000 term loan facility with a term
As of five years and (ii) the Tao Revolving Credit Facility. The Tao Senior Secured Credit Facilities were obtained without recourse to the Company or any of its affiliates (other than TAOG, TAOIH and its subsidiaries). ThereSeptember 30, 2021, there was no$27,500 outstanding amount drawn on the Tao Term Loan Facility. The scheduled repayments for the remainder of Fiscal Year 2022 are $5,000. As of September 30, 2021, Tao Group Hospitality utilized $750 of the Tao Revolving Credit Facility asfor issuance of March 31, 2020. Asletters of March 31,credit and the remaining borrowing available was $24,250.
Disruptions caused by the COVID-19 pandemic have had, and are likely to continue to have, a significant and negative impact on Tao Group Hospitality’s operations and financial performance. On August 6, 2020, TAOIH wasand TAOG entered into an amendment to the Tao Senior Credit Agreement, which suspended the application of the financial maintenance covenants thereunder through December 31, 2021, modified certain restrictive covenants therein through December 31, 2021, modified the applicable interest rates and increased the minimum liquidity requirement for the outstanding balance of $33,750 under the Tao Term Loan Facility and for the $25,000 availability under the Tao Revolving Credit Facility. In addition, in complianceconnection with the required financial covenants.
Taoamendment, the Company, through its direct subsidiary, MSG Entertainment Group, Hospitality has financed its operationsentered into a guarantee and reserve account agreement (i) to guarantee the obligations of TAOG under the Tao Senior Credit Agreement, including(ii) to establish and grant a security interest in a reserve account that initially held a deposit of approximately $9,800 and (iii) with a covenant to maintain a minimum liquidity requirement of no less than $75,000 at all times. The balance held in the $25,000 revolving credit facility.reserve account was approximately $3,200 as of September 30, 2021. As a result of September 30, 2021, TAOG, TAOIH and the COVID-19 effects, Tao Group Hospitality will not berestricted subsidiaries were in compliance with the required financial covenants underof the Tao Senior Credit Agreement as of June 30, 2020 absent an amendment or waiver, and it has entered into discussions with its senior secured lenders to obtain such an amendment or waiver. If Tao Group Hospitality cannot obtain an amendment or waiver from its lenders, it may not have access to the revolving credit facility under the Tao Senior Credit Agreement to finance its operations and expansion strategy, and may not be able to secure alternative sources of third-party financing. In such event, the Company has committed to provide Tao Group Hospitality with capital to service its debt obligations.Agreement.
On May 23, 2019, a subsidiary of the Company and a subsidiary of Tao Group Hospitality entered intoJune 15, 2020, the Tao Subordinated Credit Agreement providing for a credit facilitywas amended to provide an additional $22,000 of $49,000 that matures in August 2024. Duringborrowing capacity. As of September 30, 2021, the nine months ended March 31, 2020, Tao Group Hospitality repaid $5,000outstanding balance under the Tao Subordinated Credit Agreement.Agreement was $63,000. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement have been eliminated in the combinedconsolidated financial statements in accordance with ASC Topic 810, Consolidation. If recovery from the pandemic takes longer than currently estimated, Tao Group Hospitality may need to seek covenant waivers in the future. Tao Group Hospitality’s failure to obtain covenant waivers could trigger a violation of these covenants and lead to default and acceleration of all of its outstanding debt, which could have a material adverse effect on liquidity.
See Note 1213 to the combinedconsolidated financial statements included in “Part I -“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements.
Bilateral Letters of Credit Lines
The Company has established bilateral credit lines with a bank to issueuses letters of credit into support of the Company’sits business operations. The Company pays fees for the letters of credit that are credited against interest income the Company receives in return from its investments in notes receivable with the same bank. As of March 31, 2020,September 30, 2021, the Company had $11,079a total of $7,806 of letters of credit outstanding, pursuant to which fees were credited against a note investment, which included two letters of credit for an aggregate of $750 pertaining toissued under the Tao Group Hospitality as of December 29, 2019.Revolving Credit Facility.
Sale of the Forum
On March 24, 2020, the Company, through three of its wholly-owned subsidiaries, MSG National Properties, LLC (the “Seller”), MSG Entertainment Group, LLC (“Seller Parent”), and MSG Forum, LLC (“MSG Forum”), entered into the MIPA with CAPSS LLC (the “Buyer”) and Polpat LLC. Pursuant to the MIPA, (i) the Seller agreed to sell 100% of the membership interests of MSG Forum to the Buyer, (ii) MSG Forum, Seller Parent, the Buyer and certain other parties agreed to mutually release all claims and counterclaims at issue in the previously disclosed lawsuit against the City of Inglewood and other defendants, including the Buyer, related to the planned new Los Angeles Clippers arena project of the Buyer, as well as other related litigations, and (iii) the Buyer agreed to pay the Seller cash consideration, which was deposited in escrow prior to closing, of $400,000, subject to certain adjustments. On May 1, 2020, the Company completed the transaction. The transaction resulted in an approximately $322,000 increase in cash to the Company after transaction costs and income tax. The $322,000 includes approximately $64,000 of net working capital adjustments, resulting in net cash proceeds to the Company of approximately $258,000 (which amount remains subject to change).
Contractual Obligations
Our contractual obligations as of the fiscal year ended June 30, 2019 are summarized in the table of contractual obligations disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in the Information Statement.
The Company adopted ASU No. 2016-02, Leases (Topic 842), on July 1, 2019. As a result, the contractual obligations related to future lease payments, which were historically reported as off-balance sheet commitments, are now reflected on the combined balance sheet as lease liabilities as of March 31, 2020. See Note 8 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more details about the lease liabilities. Except as described above with respect to lease accounting, the Company did not have any material changes in its contractual obligations since the end of fiscal year 2019Fiscal Year 2021 other than (i) a total of approximately $3,646,250 in contract obligations (primarily related to media rights agreements) that are now included as a part of the Company’s contractual obligation in connection with the Merger with MSG Networks on July 9, 2021, and (ii) activities in the ordinary course of business. See Notes 11to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details on the timing and amount of payments under various media rights agreements.
Cash Flow Discussion
As of March 31, 2020,September 30, 2021, cash, cash equivalents and restricted cash totaled $1,021,848,$1,355,479, as compared to $1,092,065$1,539,976 as of June 30, 2019.2021. The following table summarizes the Company’s cash flow activities for the ninethree months ended March 31, 2020September 30, 2021 and 2019:2020:
|
| | | | | | | | |
| | | Nine Months Ended March 31, |
| | | 2020 | | 2019 |
| Net income (loss) | | $ | (128,554 | ) | | $ | 36,195 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | 218,068 |
| | 102,134 |
|
| Subtotal | | $ | 89,514 |
| | $ | 138,329 |
|
| Changes in working capital assets and liabilities | | 47,437 |
| | (93,363 | ) |
| Net cash provided by operating activities | | $ | 136,951 |
| | $ | 44,966 |
|
| Net cash used in investing activities | | (477,984 | ) | | (156,851 | ) |
| Net cash provided by financing activities | | 266,900 |
| | 32,578 |
|
| Effect of exchange rates on cash, cash equivalents and restricted cash | | 3,916 |
| | 6,440 |
|
| Net decrease in cash, cash equivalents and restricted cash | | $ | (70,217 | ) | | $ | (72,867 | ) |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
| Net loss | | $ | (84,276) | | | $ | (40,606) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | 41,234 | | | 3,754 | |
| Subtotal | | $ | (43,042) | | | $ | (36,852) | |
| Changes in working capital assets and liabilities | | 40,704 | | | (58,730) | |
| Net cash used in operating activities | | $ | (2,338) | | | $ | (95,582) | |
| Net cash provided by (used in) investing activities | | (136,976) | | | 192,589 | |
| Net cash used in financing activities | | (44,797) | | | (15,996) | |
| Effect of exchange rates on cash, cash equivalents and restricted cash | | (386) | | | 5,814 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | (184,497) | | | $ | 86,825 | |
Operating Activities
Net cash provided byused in operating activities for the ninethree months ended March 31, 2020 improvedSeptember 30, 2021 decreased by $91,985$93,244 to $136,951$2,338 as compared to the prior year period primarily due to changes in working capital assets and liabilities, which includeincluded (i) higher increase in accrued and other liabilities primarily due to funds received from Las Vegas Sands Corp. in connectioncash collection associated with the ground lease in Las Vegas, (ii) lower increase in accounts receivable as a result of the temporary closure of venues due to COVID-19, and (iii) higherdeferred revenue account including collections due to promoters, as events were postponed as a result of the temporary closure of venues due to COVID-19. The increase inand (ii) higher cash provided by the changes in working capital discussed above was partially offset by the decreasecollections from net incomeaccounts receivables. Our higher operating loss in the current year period adjustedwas largely offset non-cash expenses such as (i) a net unrealized loss in the comparable period, (ii) a higher provision for non-cash items.deferred income taxes and (iii) a current period impairment of long-lived assets.
Investing Activities
Net cash used in investing activities for the ninethree months ended March 31, 2020September 30, 2021 increased by $321,133$329,565 to $477,984$136,976 as compared to the prior year period primarily due to the absence of proceeds from the maturity of short-term investments in the prior year period and, to a lesser extent, an increase in capital expenditures in the current year period.
Financing Activities
Net cash used in financing activities for the three months ended September 30, 2021 increased by $28,801 to $44,797 as compared to the prior year period primarily due to (i) an increase in purchaserepayment of short-term investmentsthe outstanding Tao Revolving Credit Facility balance in the current year period, as compared to the prior year period, (ii) higher capital expenditures in the current year period as comparedscheduled principal payments to the prior year period, of which substantially all are related to the Company’s plannedour MSG Spheres in Las Vegas and London,Networks Senior Secured Credit Facilities, and (iii) lower proceeds received from the salean increase of the Company’s 50% interesttaxes paid in AMSGE in the prior year period compared to the salelieu of the Company’s 50% interest in Tribeca in the current year period. This increase was partially offset by (i) proceeds from maturity of short-term investments, (ii) a loan repayment received from subordinated note, (iii) lower investments made in nonconsolidated affiliates in the current year period as compared to the prior year period, and (iv) acquisition of notes receivable during the prior year period as compared to none during the current year period.shares issued for share-based compensation.
Financing Activities
Net cash provided by financing activities for the nine months ended March 31, 2020 increased by $234,322 to $266,900 as compared to the prior year period primarily due to net transfers to Madison Square Garden Sports Corp. and Madison Square Garden Sports Corp.’s subsidiaries and slightly offset by a repayment on the Tao Revolving Credit Facility.
Seasonality of Our Business
The dependence on revenues the Company earns from the Christmas Spectacularand arena license fees from MSG Sports in connection with the Knicks and Rangers use of the Garden generally means the CompanyEntertainment segment earns a disproportionate share of its revenues and operating income in the second quarter of the Company’s fiscal year. In addition, while it does not have a material impact on seasonality of our business, the first and third calendar quarters are seasonally lighter quarters for Tao Group Hospitality as compared to its second and fourth calendar quarters. As the Company reports Tao Group Hospitality results of operations on a three-month lag basis, the seasonally lighter quarters for Tao Group Hospitality are reflected in the second and fourth quarters of the Company’s fiscal year. See Note 2 toyear with the combined financial statements includedfirst fiscal quarter being disproportionally lower.
As a result of the foregoing, the Company’s revenue and operating income are disproportionally higher in “Part I — Item 1. Financial Statements”the fiscal second and third quarter of this Quarterly Report on Form 10-Q for more information regarding the consolidation on a three-month lag basisfiscal year and lower in the first quarter of Tao Group Hospitality.the fiscal year.
Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Issued Accounting Pronouncements
See Note 2 to the combinedconsolidated financial statements included in “Part I —“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements.
Critical Accounting Policies
The preparation of the Company’s combined 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 combined 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:
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 2020 and our interim impairment testing of goodwill and long-lived assets during the quarter ended March 31, 2020. In addition, the Company elected to adopt ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment in the third quarter of fiscal year 2020 in connection with its interim goodwill impairment test performed as of March 31, 2020, as discussed further below. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Subsequent to the issuance of the Company’s audited combined financial statements and notes thereto for the year ended June 30, 2019 included in the Company’s Information Statement, the Company adopted the ASC Topic 842, Leasesin the first quarter of fiscal year 2020. See Note 2. Accounting Policies and Note 8. Leases to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of leases and the adoption impact.
There have been no other material changes to the Company’s critical accounting policies from those set forth in Note 2. Summary of Significant Accounting Policies of the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20192021 included in the Company’s Information Statement.Annual Report on Form 10-K. 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 2022.
Arrangements with Multiple Performance ObligationsImpairment of Long-Lived and Principal versus Agent Revenue Recognition
See Note 3. Revenue Recognition of the Company’s audited combined financial statements and notes thereto for the year ended June 30, 2019 included in the Company’s Information Statement for discussion of (i) the Company’s arrangements with multiple performance obligations, primarily multi-year sponsorship agreements and (ii) the application of principal versus agent revenue recognition guidance, and the related revenue sharing expenses attributable to Madison Square Garden Sports Corp. for suite license arrangements and venue signage and sponsorship agreements, as well as the advertising sales representation agreement with MSG Networks.
GoodwillIndefinite-Lived Assets
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, which is one level below the operating segment level. As of March 31, 2020.September 30, 2021, the Company had onethree operating and reportable segmentsegments consistent with the process the Company’s management followed in making decisions and allocating resources to the business.
For purposes of evaluating goodwill for impairment, the Company has twothree reporting units: Entertainment, MSG Networks and Tao Group Hospitality. Tao Group Hospitality was acquired after the annual goodwill impairment test for fiscal year 2017 and represents a separate reporting unit within the Company for goodwill impairment testing.
The goodwill balance reported on the Company’s combinedconsolidated balance sheet as of March 31, 2020September 30, 2021 by reporting unit was as follows:
|
| | | |
| Entertainment | $ | 74,111 |
|
| Tao Group Hospitality | 7,885 |
|
| | $ | 81,996 |
|
| | | | | |
| Entertainment | $ | 74,309 | |
| MSG Networks | 424,508 | |
| Tao Group Hospitality | 1,364 | |
| $ | 500,181 | |
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 thea quantitative goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of the fair value of the Company’s reporting units are primarily determined using discounted cash flows, and comparable market transactions.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. Subsequent to the adoption of ASU No. 2017-04 in the third quarter of fiscal year 2020, theThe amount of an impairment loss is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, determined in step one, not to exceed the carrying amount of goodwill. Prior to the adoption of ASU No. 2017-04, if the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill that would be recognized in a business combination.
The Company elected to perform the qualitative assessment of impairment for bothall of the Company’s reporting units for the fiscal year 2020Fiscal Year 2022 annual impairment tests.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 2020,Fiscal Year 2022, the Company performed its most recent annual impairment testtests of goodwill and determined that there were no impairmentsimpairment of goodwill identified for any of its reporting units as of the impairment test date. Based on these impairment tests, the Company’s Entertainment and Tao Group Hospitality reporting units had sufficient safety margins, representing the excess of the estimated fair value of each reporting unit, derived from the most recent quantitative assessments, less its respective carrying value (including goodwill allocated to each respective reporting unit). The most recent quantitative assessments were used in making this determination and due to the proximity of the acquisition date for Tao Group Hospitality to the goodwill impairment test date, the initial purchase price was assumed to be the fair value of the Tao Group Hospitality reporting unit for purposes of the goodwill impairment test. 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.
During the third quarter of fiscal year 2020, the Company’s operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by the government and certain professional sports leagues, including government mandated assembly limitations and venue, restaurant, bar and nightclub closures impacting both of the Company’s reporting units. While the Company concluded that the effects of COVID-19 would not more likely than not reduce the fair value of its Entertainment reporting unit below its carrying amount, the Company concluded a triggering event had occurred for its Tao Group Hospitality reporting unit as of March 31, 2020 as a result of COVID-19. Accordingly, the Company performed an interim quantitative impairment test as of March 31, 2020 (“interim testing date”) for the Tao Group Hospitality reporting unit, which required the Company to assess the carrying value of its long-lived assets, amortizable intangible assets and goodwill as of the interim test date.
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.
For the interim impairment test, the Company estimated the fair value of the Tao Group Hospitality reporting unit based on a discounted cash flow model (income approach). This approach relied on numerous assumptions and judgments that were subject to various risks and uncertainties. Principal assumptions utilized, all of which are considered Level III inputs under the fair value hierarchy (see Note 9 to the combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q), include the Company’s estimates of future revenue and terminal growth rates, margin assumptions and the discount rate applied to estimate future cash flows. The assumptions utilized are subject to a high degree of judgment and complexity, particularly in light of economic and operational uncertainty that exists as a result of COVID-19 as of March 31, 2020.
Based upon the results of the Company’s interim quantitative impairment test, the Company concluded that the carrying value of the Tao Group Hospitality reporting unit exceeded its estimated fair value (“Fair Value Deficit”) as of the interim testing date by $102,211. Based on the evaluation of amortizable intangible assets and other long-lived assets, the Company recorded non-cash impairment charges of $11,573, $6,399 and$3,541, for right-of-use assets, property and equipment, and certain intangible assets, respectively, which were associated with a single venue within Tao Group Hospitality. The remaining Tao Group Hospitality Fair Value Deficit was allocated to goodwill for a non-cash goodwill impairment charge of $80,698. The goodwill impairment charge was calculated as the amount that the adjusted carrying value of the reporting unit, including any goodwill, exceeded its fair value. Upon completion of the quantitative impairment test and recording of the associated impairments, as of March 31, 2020, the carrying value of the Tao Group Hospitality reporting unit equals its fair value, whereas the Company’s other reporting unit still maintain a headroom that is sufficiently in excess of its carrying values. See “Part II — Item 1A. Risk Factors” for more information about the risks to the Company’s business operations as a result of the COVID-19 pandemic.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31st 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 combinedconsolidated balance sheet as of March 31, 2020:September 30, 2021:
|
| | | |
| Trademarks | $ | 61,881 |
|
| Photographic related rights | 3,000 |
|
| | $ | 64,881 |
|
| | | | | |
| Trademarks | $ | 61,881 | |
| Photographic related rights | 1,920 | |
| $ | 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 majority of the trademarks. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair valuevalues of the intangible asset.assets. Examples of such events and circumstances include:
•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 2020,Fiscal Year 2022, the Company performed its most recent annual impairment test of the 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets, which we cannot reasonably estimate, thereThere were no material changes to the disclosures regarding market risks in connection with our pension and postretirement plans, interest rate risk exposure, foreign currency exchange rate risk,plans. See Item 7A, “Quantitative and commodity risk exposure. For sensitivity analysis and other information regarding market risks we face in connection withQualitative Disclosures About Market Risk,” of our Pension Plans and Postretirement Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies — Defined Benefit Pension Plans and Other Postretirement Benefit Plan” in the Information Statement. In addition, see Item 2, “— Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” of this QuarterlyAnnual Report on Form 10-Q10-K for discussions of disruptions caused by COVID-19. We do not have any meaningful commodity risk exposures associated with the operation of our venues.year ended June 30, 2021.
Potential Interest Rate Risk Exposure:Exposure
The Company, through its subsidiaries MSGN L.P. and MSG National Properties, and as a result of the consolidation of Tao Group Hospitality, has potential interest rate risk exposure related to borrowings incurred under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and the Tao Senior Secured Credit Facilities. Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under the Tao Senior Secured Credit Facilities.these credit facilities.
Borrowings under the National Properties Term Loan Facility and Tao Senior Secured Credit Facilities incur interest, depending on Tao Group Operating LLC’s election by MSG National Properties and TAOG, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in eachthe case of TAOG, an additional spread
which is dependent upon the total leverage ratio at
the time.time for Tao Senior Secured Credit Facilities. In addition, borrowings under the MSG Networks Senior Secured Credit Facilities bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio). Accordingly, the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and the Tao Senior Secured Credit Facilities are subject to interest rate risk with respect to the tenor of any borrowings incurred. See Note 1213 to the combinedconsolidated financial statements included in “Part I -“— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information on interest rate. the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and Tao Credit Facilities.
For the ninetwelve months ended March 31, 2020,September 30, 2021, the interest rate on the MSG Networks Senior Secured Credit Facilities ranged from 1.58% to 1.65% and was approximately 1.58% as of September 30, 2021. The interest rate on the Tao Senior Secured Credit Facilities ranged from 4.91%2.58% to 3.25%2.65% and it was approximately 3.28%2.59% as of March 31, 2020.September 30, 2021. In addition, the interest rate on National Properties Term Loan Facility was 7.00% as of September 30, 2021 and has been unchanged since inception. The effect of a hypothetical 100 basis point and a hypothetical 200 basis point increase in floating interest rates prevailing as of March 31, 2020September 30, 2021 and continuing for a full year would increase interest expense ofby $12,773, on the amount outstanding onbalances under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and Tao Senior Secured Credit Facilities by $350 and $700, respectively.Facilities.
Foreign Currency Exchange Rate Exposure:Exposure
We are exposed to market risk resulting from foreign currency fluctuations, primarily to the British pound sterling through our net investment position initiated with our acquisition of land in London in the second quarter of fiscal year 2018 for future MSG Sphere development and through cash and invested funds which will be deployed in the construction of our London venue. We may evaluate and decide, to the extent reasonable and practical, to reduce the translation risk of foreign currency fluctuations by entering into foreign currency forward exchange contracts with financial institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. We do not plan to enter into derivative financial instrument transactions for foreign currency speculative purposes. During the past 12twelve months ended March 31, 2020,September 30, 2021, the GBP/USD exchange rate ranged from 1.33571.2896 to 1.14911.4218 as compared to GBP/USD exchange rate of 1.24491.3477 as of March 31, 2020,September 30, 2021, a fluctuation range of approximately 7-8%5%. As of March 31, 2020,September 30, 2021, a uniform hypothetical 8%5% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $23,700$9,000 in the Company’s net asset value.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020September 30, 2021 the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act of 1934) during the fiscal quarter ended March 31, 2020September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Fifteen complaints were filed in connection with the Merger by purported stockholders of the Company and MSG Networks Inc.
Nine of these complaints involved allegations of materially incomplete and misleading information set forth in the joint proxy statement/prospectus filed by the Company and MSG Networks Inc. in connection with the Merger. As a result of supplemental disclosures made by the Company and MSG Networks Inc. on July 1, 2021, all of the disclosure actions were voluntarily dismissed with prejudice prior to or shortly following the consummation of the Merger.
On March 29, 2019, a purported stockholder of Madison Square Garden Sports Corp. filedMay 27, 2021, a complaint captioned Hollywood Firefighters’ Pension Fund et al. v. James Dolan, et al., 2021-0468-KSJM, was filed in the Court of Chancery of the State of Delaware derivativelyby purported stockholders of the Company against the Company, its Board of Directors (the “Board”), certain Dolan family stockholders and MSG Networks Inc. The complaint purported to allege derivative claims on behalf of the Company and claims on behalf of a putative class of Company stockholders concerning the Merger. Plaintiffs alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the Delaware General Corporation Law (the “DGCL”), that the Board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the Merger were misleading or incomplete. Plaintiffs sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiffs’ attorneys’ fees. On June 15, 2021, plaintiffs filed a brief in support of their motion seeking a preliminary injunction enjoining the Company’s stockholder vote and consummation of the Merger, which the defendants opposed. The Court of Chancery denied the plaintiffs’ preliminary injunction motion on July 2, 2021.
On June 9, 2021, a complaint captioned Timothy Leisz v. MSG Networks Inc. et al., 2021-0504-KSJM, was filed in the Court of Chancery of the State of Delaware by a purported stockholder of MSG Networks Inc. against MSG Networks Inc., the MSG Networks Inc. board of directors, certain Dolan family stockholders and the Company. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The MSG Networks Inc. plaintiff alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the DGCL, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the merger were misleading or incomplete. Plaintiff sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiff’s attorneys’ fees. On June 21, 2021, plaintiff filed a brief in support of his motion seeking a preliminary injunction enjoining the MSG Networks Inc. stockholder vote and consummation of the Merger, which defendants opposed. The Court of Chancery denied the plaintiff’s preliminary injunction motion on July 2, 2021.
On July 6, 2021, a complaint captioned Stevens et al. v. Dolan et al., 2021-0575, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages in the event the transaction was consummated, and plaintiffs’ attorneys’ fees.
On July 6, 2021, a complaint captioned The City of Boca Raton Police and Firefighters’ Retirement System v. MSG Networks Inc., 2021-0578, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against MSG Networks Inc. The complaint purported to seek to enforce plaintiff’s right to inspect certain of MSG Networks Inc.’s books and records under Section 220 of the DGCL. The complaint was voluntarily dismissed on August 10, 2021.
On August 11, 2021, a stockholder derivative complaint captioned City of Miramar Retirement Plan and Trust Fund for General Employees et al. v. Dolan et al., 2021-0692 was filed in the Court of Chancery of the State of Delaware by purported stockholders of the Company. The complaint purported to allege derivative claims on behalf of the Company and direct claims on behalf of a putative class of Company stockholders. Plaintiffs alleged that the Board and the Company’s majority stockholders violated their fiduciary duties by failing to protect the Company’s interest in connection with the Merger. Plaintiffs sought, among other relief, an award of damages to the purported class and Company including interest, and plaintiffs’ attorneys’ fees.
On August 31, 2021, a complaint captioned Murray v. Dolan et al., 2021-0748, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The
complaint purported to allege claims on behalf of a putative class of MSG Networks stockholders concerning the Merger. Plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages, and plaintiffs’ attorneys’ fees.
All of the above complaints have since either been dismissed or consolidated into one of two litigations.
On September 10, 2021, the Court of Chancery entered an order consolidating the complaints in the Hollywood Firefighters and City of Miramar actions. The new consolidated action is captioned: In re Madison Square Garden SportsEntertainment Corp. Stockholders Litigation, C.A. 2021-0468-KSJM. The consolidated plaintiffs filed their Verified Consolidated Derivative Complaint on October 11, 2021. The complaint retains all of the derivative allegations for breach of fiduciary duties that were present in the Hollywood Firefighters and City of Miramar complaints and abandons the direct claims in those prior complaints. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees.
On September 27, 2021, the Court of Chancery entered an order consolidating the complaints in the Leisz, Stevens, City of Boca Raton, and Murray complaints. The new consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. 2021-0575-KSJM. The consolidated plaintiffs filed their Verified Consolidated Stockholder Class Action Complaint on October 29, 2021. The complaint asserts claims on behalf of a putative class of former MSG Networks Inc. stockholders against certaineach member of the board of directors of Madison Square Garden Sports Corp. who are members ofMSG Networks Inc. prior to the Dolan family group and against the directors of Madison Square Garden Sports Corp. who are members of the Compensation Committee (collectively, the “Director Defendants”). Madison Square Garden Sports Corp. is also named as a nominal defendant in the complaint. The complaint allegesMerger. Plaintiffs allege that the Director DefendantsMSG Networks Inc. board of directors and majority stockholders breached their fiduciary duties to Madison Square Garden Sports Corp. stockholders in negotiating and approving the compensation packages for James L. Dolan in his capacity as the Executive Chairman and Chief Executive Officer of Madison Square Garden Sports Corp. The complaint seeksMerger.Plaintiffs seek, among other relief, monetary damages in an unspecified amount from the Director Defendants in favor of Madison Square Garden Sports Corp.; rescission of Mr. Dolan’s employment agreements; restitution and disgorgement by Mr. Dolan in respect of his compensation; and costs and disbursements for the plaintiff. On June 5, 2019, Madison Square Garden Sports Corp.’s Board of Directors formed a Special Litigation Committee to investigate the claims made by the plaintiffputative class and plaintiffs’ attorneys’ fees.
We are currently unable to determine Madison Square Garden Sports Corp.’s response thereto. The litigationa range of potential liability, if any, with respect to these Merger-related claims. Accordingly, no accrual for these matters has been stayed while the Special Litigation Committee’s work is ongoing.made in our consolidated financial statements.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance)insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
Item 1A.2. Risk FactorsUnregistered Sales of Equity Securities and Use of Proceeds
The risk factor set forth below should be read carefully in conjunction withAs of September 30, 2021, the risk factors discussed inCompany has the ability to repurchase up to $350 million of the Company’s Information Statement, dated April 6, 2020 (the “Information Statement”), which could materially affect our business, financial condition and results of operations. The discussion in “Part I — Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q also includes additional information that may supplement or updateClass A Common Stock under the discussion of risk factors below and in our Information Statement.
OurOperations and Operating Results Have Been, and Continue to be, Materially ImpactedClass A Common Stock share repurchase program authorized by the COVID-19 PandemicCompany’s Board of Directors on March 31, 2020. 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 Government Actions Taken in Response.
An outbreakother securities laws and regulations. The timing and amount of a novel strain of coronavirus, COVID-19, in December 2019 subsequently became a pandemic after spreading to multiple countries, including the United States. As of the date of this Quarterly Reportpurchases will depend on Form 10-Q, virtually all of our business operationsmarket conditions and other factors. No shares have been suspended and it is not clear when those operations will resume.repurchased to date.
As a result of government mandated assembly limitations and closures, no events are currently permitted to be held at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre, and virtually all events at our venues are postponed or cancelled through June. The 2020 Boston Calling music festival, which had been slated for Memorial Day weekend, has also been cancelled. All NBA and NHL games have been suspended. We are not recognizing revenue from those events and it is unclear whether and to what extent those events will be rescheduled. Additionally, public officials have imposed mandates limiting restaurants and bars to only take-out and delivery service and requiring that nightlife venues close in the cities in which Tao Group Hospitality operates. As a result, virtually all Tao Group Hospitality venues are currently closed, which has materially impacted the business. It is unclear how long these restrictions will be in effect.
Even if the bans on public assembly and closures are lifted in the near future, concerns about the COVID-19 pandemic could deter artists from touring and/or substantially decrease the use of and demand for our venues. It is also possible that continuing concerns related to COVID-19 could cause professional sports teams in the United States to play games without an audience or deter our employees and vendors from working at our venues. As a result of the government mandates and possibility of continued concerns, we are facing a potentially lengthy period of time in which we are unable to host and book events due to the uncertainty around COVID-19. It is also unclear whether and to what extent COVID-19 concerns will impact the use of and/or demand for our entertainment and dining and nightlife venues, and demand for our sponsorship and advertising assets, even after the restrictions are lifted.
The impact of cancelled events, closed venues and reduced attendance, including at our dining and nightlife venues, will substantially decrease our revenues. In all cases, we will not be able to reduce our expenses, many of which are fixed over the near-term, to the same degree as our decline in revenues, which will adversely affect our results of operations and cash flow to a greater extent.
Our business is particularly sensitive to reductions in travel and discretionary consumer spending. We cannot predict the time period over which our business will be impacted by COVID-19. Over the long-term, COVID-19 could impede economic activity in impacted regions or globally, causing a global recession, leading to a further decline in discretionary spending on sports and entertainment events and other leisure activities, which could result in long-term effects on our business. For example, Tao Group Hospitality, which has dining and nightlife venues in New York City, Las Vegas, Los Angeles, Chicago, Singapore and Australia, would be adversely affected by a decline in discretionary spending.
Even after our businesses resume operations there can be no assurances that guests at our venues or vendors and employees working at our venues will not contract COVID-19 at one of our venues. Any such occurrence could result in litigation, legal and other costs and reputational risk that could materially and adversely impact our business and results of operations.
We are building the MSG Sphere in Las Vegas. This is a complex construction project with cutting-edge technology that relies on subcontractors obtaining components from a variety of sources around the world. The widespread global effects of COVID-19 have resulted in significant impediments to construction that are beyond our control, including disruptions to our supply chain. As a result, in April 2020, we implemented a temporary suspension of construction, and we expect to incur additional expense related to stopping and re-starting construction. At this time, we are unable to determine the full impact of coronavirus-related disruptions, however, they may impact our cost estimates. We remain committed to building a state-of-the-art venue in Las Vegas and look forward to quickly and efficiently resuming construction as soon as practicable. As a result of this delay, we do not expect to achieve our goal of opening the venue in calendar year 2021.
For the reasons set forth above and other reasons that may come to light as the COVID-19 outbreak and protective measures expand, we cannot reasonably estimate the impact to our future revenues, results of operations, cash flows or financial condition, but such impacts have been and will continue to be significant and could have a material adverse effect on our business, revenues, results of operations, cash flows and financial condition.
Item 6. Exhibits
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| | Membership Interest Purchase Agreement, dated March 24, 2020, by and among CAPSS LLC, Polpat LLC, MSG National Properties, LLC, MSG Entertainment Group, LLC and MSG Forum, LLC (incorporated by reference to Exhibit 10.54 to the Company’s Registration Statement on Form 10 (file No. 001-39245) filed on March 26, 2020).
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101.INS | | XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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101.SCH | | XBRL Taxonomy Extension Schema.
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase.
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101.DEF101 | | XBRL Taxonomy Extension Definition Linkbase.
The following materials from Madison Square Garden Entertainment Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated Statements of comprehensive loss, (iv) consolidated statements of cash flows, (v) consolidated statements of equity and redeemable noncontrolling interests, and (vi) notes to consolidated financial statements.
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101.LAB104 | | XBRL Taxonomy Extension Label Linkbase.
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase.
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104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020September 30, 2021 formatted in Inline XBRL and contained in Exhibit 101.
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+ Certain confidential information - identified by bracketed asterisks “[*****]” - has been omitted from this exhibit pursuant to Item 601(b)(10) of Regulation S-K because it is both (i) not material and (ii) would be competitively harmful to the Registrant if publicly disclosed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 159th day of May 2020.November 2021.
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| Madison Square Garden Entertainment Corp. |
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| By: | /S/ MARK H. FITZPATRICK |
| Name: | Mark H. FitzPatrick |
| Title: | Executive Vice President and
Chief Financial Officer
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