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 and COVID-19 variants on our future operations, the potential for future impairment charges, the timing and costs of new venue construction and the development of related content, our plans to pursue additional debt financing and negotiate amendmentsor to refinance our existing debt, our expansion plan for Tao Group Hospitality’s credit facility, increased investment in personnel, contentHospitality, and technology for the MSG Spheres,ability to successfully implement cost reductions and increased expenses of being a standalone public company.reduce or defer certain discretionary capital projects. 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 theany impacts of the COVID-19 pandemic (including COVID-19 variants) as well as renewed actions taken in response by governmental authorities or certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues, to the extent applicable;
•the effect of any postponements or cancellations by third-parties or the Company as a result of the COVID-19 pandemic due to operational challenges and other health and safety concerns (such as the partial cancellation of the 2021 production of the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”));
•the extent to which attendance at our venues may be impacted by government actions, continuing health concerns by potential attendees and reduced tourism;
•the substantial amount of debt we have incurred, the ability of our subsidiaries to make payments on, or repay or refinance, such debt under their respective credit facilities, and our ability to obtain additional financing, to the extent required;
•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, if any, at games of the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the government mandated suspensionNew York Rangers (the “Rangers”) of the National Hockey League (the “NHL”);
•our ability to successfully implement cost reductions and reduce or defer certain discretionary capital projects;
•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 inflation 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 branded locations, and other events which are presented in our venues or broadcast on our networks; •the demand for MSG Networks programming among cable, satellite, fiber-optic and other platforms that distribute its networks (“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; •our ability to develop and successfully execute MSG Networks’ strategy for a direct-to-consumer offering; •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;
•MSG Networks’ ability to renew or replace our media rights agreements with professional sports teams;
•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 NBA and 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 MSG 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;branded locations;
•the ability of BCE to profitably operate its future festivals andto 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;
the operating and financial performance of our strategic acquisitions and investments, including those we do not control;
•our internal control environment and our ability to identify any future material weaknesses;
•the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire;acquire, including those related to the Company’s acquisition of MSG Networks Inc. (the “Merger”);
•the impact of governmental regulations or laws, including changes in how those regulations and laws are interpreted, andas 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 default by our subsidiaries under their respective credit facilities;•the impact of sports league rules, regulations and/or agreements and changes thereto;
•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;
•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; and
lack of operating history as an operating company and costs associated with being an independent public company; and
•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, 2022 filed on August 19, 2022 (the “2022 Form 10-K”).
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 in the Company’s Information StatementForm 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.
The Company has three reportable segments (Entertainment, Tao Group Hospitality, and MSG Networks).
UnlessThe Entertainment segment includes the context otherwise requires, all references to “we,” “us,” “our,” or the “Company” refer collectively toCompany’s portfolio of venues: 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, 2020, the Company operates and reports financial information as one reportable segment. Following the Entertainment Distribution on April 17, 2020, the Company will have two 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,Garden”), Hulu Theater at Madison Square Garden (“Hulu Theater”), Radio City Music Hall, the Beacon Theatre, and The Chicago Theatre. In addition, the Company is constructing ahas unveiled its vision for state-of-the-art venue,venues, called MSG Sphere, and is currently building its first such venue in Las Vegas and plans to build a second MSG Sphere in London.Vegas. The CompanyEntertainment segment also includes the original production, theChristmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”), as well as BCE,Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival,Festival. This segment also includes our bookings business, which features a variety of live entertainment and sports experiences.
The MSG Networks segment 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. MSG Networks serves the New York Designated Market Area, as well as other portions of New York, New Jersey, Connecticut and Pennsylvania and features a wide range of sports content, including live local games and other programming of the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”), New York Islanders (the “Islanders”), New Jersey Devils (the “Devils”) and Buffalo Sabres (the “Sabres”) of the National Hockey League (the “NHL”), as well as significant coverage of the New York Giants (the “Giants”) and Buffalo Bills (the “Bills”) of the National Football League (the “NFL”).
The Tao Group Hospitality segment features the Company’s controlling interest in TAO Group Holdings LLC (“Tao Group Hospitality”), a hospitality group with globally-recognized entertainment dining and nightlife brands.
brands including: Tao, Marquee, Lavo, Beauty & Essex, Cathédrale, Hakkasan and Omnia. Tao Group Hospitality’s Operating ResultsHospitality operates over 70 entertainment dining and nightlife branded locations within 60 venues in over 20 markets across five continents.
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 accuracyconducts a significant portion 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, 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, 2019 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 functionsat venues 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, headcountit either owns 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.operates under long-term leases. 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 atowns 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,leases Radio City Music Hall and the Beacon Theatre and The Chicago Theatre;
rent payments under the Arena License Agreements (defined below);
sponsorships, suite licenses and in-venue advertising;
ourTheatre. Additionally, Tao Group Hospitality diningoperates various restaurants, nightlife and nightlife business;hospitality venues under long-term leases 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 management 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 subsidiary 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 NBASouthern California, London, Singapore, Sydney and the New York Rangers (the “Rangers”) of the NHL to play their home games at The Garden. Under the Arena License Agreements, the Knicksvarious other domestic 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.international locations.
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:
Results of Operations. This section provides an analysis of our unaudited results of operations for the three and nine months ended March 31, 2020September 30, 2022 and 2019.2021 on both a (i) consolidated basis and (ii) segment basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the ninethree months ended March 31, 2020September 30, 2022 and 2019,2021, 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 Entertainment and Tao Group Hospitality.MSG Networks segments.
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 2023. This section should be read together with our critical accounting policies, which are discussed in our Form 10-K 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 combinedcondensed consolidated financial statements (“financial statements”) of the Company’s audited combined financial statements and notes thereto for the fiscal year ended June 30, 2019Company included in the Information Statement.therein.
CombinedFactors Affecting Results of Operations
Impact of the COVID-19 Pandemic on Our Business
The Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three months ended September 30, 2022, as compared to the prior year period, which was impacted by (i) fewer ticketed events at our performance venues due to the lead-time required to book touring acts and artists, (ii) a residual impact of reductions in MSG Networks media rights fees related to the shortened 2020-21 NHL season and (iii) certain regulatory requirements, including vaccination/mask requirements for our performance, entertainment dining and nightlife venues, which contributed to certain Tao Group Hospitality branded locations remaining closed during the period. See Note 1, Impact of the COVID-19 Pandemic, to the consolidated and combined financial statements included in the 2022 Form 10-K for more information regarding the impact of the COVID-19 pandemic on our business.
It is unclear to what extent COVID-19 concerns, including with respect to new variants, could result in new government or league-mandated capacity or other restrictions or vaccination/mask requirements or impact the use of and/or demand for our performance, entertainment dining and nightlife venues, demand for our sponsorship and advertising assets, deter our employees and vendors from working at our venues (which may lead to difficulties in staffing) or otherwise materially impact our operations.
In addition to the above, the operating results of our segments are largely dependent on our ability to attract concerts and other events to our venues, as well as customers to our entertainment and nightlife offerings, revenues under various agreements entered into with MSG Sports, the continuing popularity of the Christmas Spectacular, the affiliation agreements MSG Networks negotiates with Distributors, the number of Distributor subscribers that receive our networks, and the advertising rates we charge advertisers. Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams whose games we broadcast on our networks and host in our venues.
Our Company’s future performance is dependent in part on general economic conditions and the effect of these conditions on our customers. Weak economic conditions may lead to lower demand for our entertainment and nightlife offerings and programming content, suite licenses and tickets to our live productions, concerts, family shows and other events, which would also negatively affect concession and merchandise sales, lower levels of sponsorship and venue signage and decrease advertising revenues. These conditions may also affect the number of concerts, family shows and other events that take place in the future. An economic downturn could adversely affect our business and results of operations.
Due largely to our media rights agreements with the NBA and NHL teams appearing on our networks and the generally recurring nature of our affiliation fee revenue, the MSG Networks segment has consistently produced operating profits for a number of years. Advertising revenues are less predictable and can vary based upon a number of factors, including general economic conditions and team performance.
The Company continues to explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time. Our results will also be affected by investments in, and the success of, new productions.
Consolidated Results of Operations
Comparison of the Three and Nine Months EndedMarch 31, 2020 September 30, 2022 versus the Three and Nine Months EndedMarch 31, 2019 September 30, 2021
The tabletables below setsset 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 |
| | 2022 | | 2021 | | Amount | | Percentage |
Revenues | | $ | 401,218 | | | $ | 294,510 | | | $ | 106,708 | | | 36 | % |
Direct operating expenses | | (253,901) | | | (165,761) | | | (88,140) | | | 53 | % |
Selling, general and administrative expenses | | (164,410) | | | (174,839) | | | 10,429 | | | (6) | % |
Depreciation and amortization | | (29,755) | | | (29,430) | | | (325) | | | 1 | % |
Impairment and other gains (losses), net | | 2,000 | | | (7,818) | | | 9,818 | | | NM |
| | | | | | | | |
Operating loss | | (44,848) | | | (83,338) | | | 38,490 | | | 46 | % |
Interest income | | 3,954 | | | 775 | | | 3,179 | | | NM |
Interest expense | | (2,167) | | | (9,248) | | | 7,081 | | | 77 | % |
Other income (expense), net | | 1,525 | | | (3,754) | | | 5,279 | | | 141 | % |
Loss from operations before income taxes | | (41,536) | | | (95,565) | | | 54,029 | | | 57 | % |
Income tax (expense) benefit | | (2,507) | | | 18,910 | | | (21,417) | | | (113) | % |
Net loss | | (44,043) | | | (76,655) | | | 32,612 | | | 43 | % |
Less: Net income attributable to redeemable noncontrolling interests | | 1,124 | | | 2,212 | | | (1,088) | | | (49) | % |
Less: Net (loss) income attributable to nonredeemable noncontrolling interests | | (410) | | | 365 | | | (775) | | | NM |
Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (44,757) | | | $ | (79,232) | | | $ | 34,475 | | | 44 | % |
_________________
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
Revenues forThe Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three months ended March 31, 2020 decreased $50,157, or 20%, to $199,861 as compared to the prior year period. Revenues for the nine months ended March 31, 2020 decreased $65,346, or 8%, to $767,038 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. |
The 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, 2020September 30, 2022, as compared to the prior year period, which was impacted by (i) fewer ticketed events at our performance venues due to the lead-time required to book touring acts and artists, (ii) a residual impact of reductions in MSG Networks media rights fees related to the shortened 2020-21 NHL season and (iii) certain regulatory requirements, including vaccination/mask requirements for our performance, entertainment dining and nightlife venues, which contributed to certain Tao Group Hospitality branded locations remaining closed during the impactperiod. See “— Introduction — Factors Affecting Results of Operations — Impact of the recognitionCOVID-19 Pandemic on Our Business” for more information. Also, see “ — Factors Affecting Results of additional revenue duringOperations” under Business Segment Results for more information surrounding the prior year period asfactors affecting comparability of each business segment’s results.
The following is a resultsummary of changes in our segments’ operating results for the ticketing agreement renewal during the third quarter of fiscal year 2019. For the ninethree months ended March 31, 2020, the decrease in event-related revenues from concerts was primarily due to (i) lower per-event revenues prior to the temporary closure of venues on March 12, 2020 September 30, 2022 as compared to the prior year period, (ii)which are discussed below under “Business Segment Results.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Changes attributable to | | Revenues | | Direct operating expenses | | Selling, general and administrative expenses | | Depreciation and amortization | | Impairment and other gains (losses), net | | | | Operating income (loss) |
Entertainment segment | | $ | 112,863 | | | $ | (65,463) | | | $ | (10,400) | | | $ | 373 | | | 2,000 | | | | | $ | 39,373 | |
MSG Networks segment | | (18,994) | | | (6,997) | | | 30,159 | | | 179 | | | — | | | | | 4,347 | |
Tao Group Hospitality segment (a) | | 13,187 | | | (15,484) | | | (9,452) | | | (252) | | | 7,818 | | | | | (4,183) | |
Purchase accounting adjustments | | — | | | (501) | | | — | | | (625) | | | — | | | | | (1,126) | |
Inter-segment eliminations | | (348) | | | 305 | | | 122 | | | — | | | — | | | | | 79 | |
| | $ | 106,708 | | | $ | (88,140) | | | $ | 10,429 | | | $ | (325) | | | $ | 9,818 | | | | | $ | 38,490 | |
Impairment and other gains (losses), net
Impairment and other gains (losses), netfor the impact of the temporary closure of venues since March 12, 2020 duethree months ended September 30, 2022, increased $9,818, 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 offset by additional events held at the Company’s venues prior to the temporary closure of venues on March 12, 2020$2,000 as compared to the prior year period.
The decrease in suite license revenues for the three and nine months ended March 31, 2020 wasperiod primarily due to the impactreceipt of the temporary closure of venues since March 12, 2020 due to COVID-19. As further described in Note 3insurance proceeds related to the Company’s audited combined financial statements for the year ended June 30, 2019 includedcreative studio 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.
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 inventoryBurbank, CA in the current year period as compared to an impairment loss in the prior year period.period related to the extinguishment of right-of use assets and a leasehold improvement in connection with operations at certain venues of Hakkasan USA, Inc. (“Hakkasan”).
Interest income
The decrease in event-related revenues from other live sporting events Interest incomefor the three months ended March 31, 2020 was primarily dueSeptember 30, 2022, increased $3,179, 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,$3,954 as compared to the prior year period was primarily due to higher per-show ticket-related revenue from an increase inrates and average per-show paid attendance, higher average ticket prices and higher ticket-related fees 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 third quarter of fiscal year 2019.investment balances.
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, 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 outsourced in the prior year period.Interest expense
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 SpectacularInterest expense 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, 2020September 30, 2022, decreased $25,901,$7,081, or 16%77%, 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$2,167 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 absencehigher amount of interest income earned on loans extendedcost capitalization related to AMSGE and Tribeca EnterprisesMSG Sphere construction. The Company capitalized $20,466 of interest for the three months ended September 30, 2022 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$9,326 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 interestOther income (expense), net
Other income (expense), netfor the ninethree months ended March 31, 2020September 30, 2022, increased $3,444,$5,279, or 29%141%, to $15,388$1,525 as compared to the prior year period, primarily due to lower interest expensean increase in net unrealized and realized gains of approximately $3,300 associated with Tao Group Hospitality, partially offset by lower interest income as a resultthe Company’s investments in DraftKings Inc. and Townsquare Media, Inc., and an unrealized gain of (i) lower interest rates, (ii) a change inapproximately $2,000 associated with an equity investment mix, and (iii) lower interest earned on loans extended to AMSGE and Tribeca Enterprises.
Miscellaneous income (expense), netwithout readily determinable fair value.
Net miscellaneousIncome tax (expense) benefit
Income tax expense for the three months ended March 31, 2020 was $17,381 as comparedSeptember 30, 2022 of $2,507 differs from the income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) tax expense of $4,984 related to share-based payment awards, (ii) tax expense of $1,961 resulting from a change in the estimated applicable tax rate used to measure deferred taxes and (iii) tax expense of $1,065 related to nondeductible officers’ compensation, partially offset by a tax benefit of $2,071 related to a net miscellaneousfederal income tax refund and a tax benefit of $4,613$1,905 resulting from a decrease in the prior year period. Net miscellaneous expensevaluation allowance.
Income tax benefit for the ninethree months ended March 31, 2020 decreased $1,225, or 30%,September 30, 2021 of $18,910 differs from the income tax benefit derived from applying the statutory federal rate of 21% to $2,893the pretax loss primarily due to (i) tax expense of $9,823 to write off the deferred tax for certain transaction costs associated with the Merger and (ii) tax expense of $2,859 related to nondeductible officers’ compensation, partially offset by (i) state income tax benefit of $8,174 and (ii) tax benefit of $1,711 resulting from a change in the estimated applicable tax rate used to measure deferred taxes.
Adjusted operating income (loss) (“AOI”)
The following is a reconciliation of operating loss to adjusted operating income for the three months ended September 30, 2022 as compared to the prior year period. The changeperiod:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2022 | | 2021 | | Amount | | Percentage |
Operating loss | | $ | (44,848) | | | $ | (83,338) | | | $ | 38,490 | | | 46 | % |
Non-cash portion of arena license fees from MSG Sports | | (519) | | | (543) | | | 24 | | | 4 | % |
Share-based compensation | | 15,188 | | | 19,528 | | | (4,340) | | | (22) | % |
Depreciation and amortization (a) | | 29,755 | | | 29,430 | | | 325 | | | 1 | % |
| | | | | | | | |
Impairment and other (gains) losses, net | | (2,000) | | | 7,818 | | | (9,818) | | | NM |
Merger and acquisition related costs | | 4,650 | | | 37,192 | | | (32,542) | | | (87) | % |
Amortization for capitalized cloud computing costs | | 121 | | | 85 | | | 36 | | | 42 | % |
| | | | | | | | |
Other purchase accounting adjustments | | 586 | | | 85 | | | 501 | | | NM |
Remeasurement of deferred compensation plan liabilities | | (154) | | | — | | | (154) | | | NM |
Adjusted operating income | | $ | 2,779 | | | $ | 10,257 | | | $ | (7,478) | | | (73) | % |
_________________(a) Depreciation and amortization includes purchase accounting adjustments of $2,224 and $1,599 for the three months ended March 31, 2020 was primarily due to the unrealized loss of $17,196 related to the Company’s investment in Townsquare in the current year period as compared to an unrealized gain of $5,261 in the prior year period. See Note 6September 30, 2022 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 16 to the combined 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)
The Company evaluates performance based on several factors, of which the key financial measure is adjusted operating income (loss), which is a non-GAAP financial measure. We define adjusted operating income (loss) as operating income (loss) before 1) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, 2) share-based compensation expense or benefit, 3) restructuring charges or credits, 4) gains or losses on sales or dispositions of businesses and 5) the impact of purchase accounting adjustments related to business acquisitions. Because it is based upon operating income (loss), adjusted operating income (loss) also excludes interest expense (including cash interest expense) and other non-operating income and expense items. We believe that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of our business without regard to the settlement of an obligation that is not expected to be made in cash.
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) to adjusted operating income (loss) for the three and nine months ended March 31, 2020 as compared to the prior year periods:
|
| | | | | | | | | | | | | | |
| | 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 isAbsolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningfulmeaningful.
| |
(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. |
Adjusted operating lossincome for the three months ended March 31, 2020 was $7,230 as comparedSeptember 30, 2022 decreased $7,478, to 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%, to $70,244 as compared to the prior year period.$2,779. The decreasesnet decrease in adjusted operating income were lower than the increases in operating losses primarily duewas attributable to the impairment of intangibles, long-lived assets and goodwill.following:
| | | | | | | | |
| | Three Months Ended |
Changes attributable to | | September 30, 2022 |
Entertainment segment | | $ | 26,952 | |
MSG Networks segments | | (22,901) | |
Tao Group Hospitality segment | | (11,608) | |
Inter-segment eliminations | | 79 | |
| | $ | (7,478) | |
Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests
For the three months ended March 31, 2020,September 30, 2022, the Company recorded $22,447$1,124 of net lossincome 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$410 of net loss attributable to nonredeemable noncontrolling interests including $57 of PPA Expenses as compared to $7$2,212 of net lossincome attributable to redeemable noncontrolling interests including $1,595 of PPA Expenses and $680$365 of net lossincome 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, 2021. These amounts represent the share of net lossincome (loss) from the Company’s investments in Tao Group Hospitality and BCE that are not attributable to the Company.
Liquidity and Capital Resources
Business Segment Results
Entertainment
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating loss to adjusted operating loss for the Company’s Entertainment segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2022 | | 2021 | | Amount | | Percentage |
Revenues | | $ | 147,102 | | | $ | 34,239 | | | $ | 112,863 | | | NM |
Direct operating expenses | | (101,765) | | | (36,302) | | | (65,463) | | | 180 | % |
Selling, general and administrative expenses | | (103,362) | | | (92,962) | | | (10,400) | | | 11 | % |
Depreciation and amortization | | (19,283) | | | (19,656) | | | 373 | | | (2) | % |
Impairment and other gains | | 2,000 | | | — | | | 2,000 | | | NM |
| | | | | | | | |
Operating loss | | $ | (75,308) | | | $ | (114,681) | | | $ | 39,373 | | | 34 | % |
Reconciliation to adjusted operating loss: | | | | | | | | |
Non-cash portion of arena license fees from MSG Sports | | (519) | | | (543) | | | 24 | | | (4) | % |
Share-based compensation | | 11,432 | | | 10,143 | | | 1,289 | | | 13 | % |
Amortization for capitalized cloud computing arrangement costs | | 77 | | | 41 | | | 36 | | | 88 | % |
Merger and acquisition related costs | | 2,749 | | | 13,992 | | | (11,243) | | | (80) | % |
Depreciation and amortization | | 19,283 | | | 19,656 | | | (373) | | | (2) | % |
Impairment and other gains | | (2,000) | | | — | | | (2,000) | | | NM |
Remeasurement of deferred compensation plan liabilities | | (154) | | | — | | | (154) | | | NM |
Adjusted operating loss | | $ | (44,440) | | | $ | (71,392) | | | $ | 26,952 | | | 38 | % |
_________________
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
For the three months ended September 30, 2021, the Entertainment segment operations and operating results have been, and continue to be,were materially impacted by the COVID-19 pandemic, including as a result of the lead-time required to book touring acts and actions takenartists, which is the majority of our Entertainment business. As of this date, live events are permitted to be held at all of our performance venues without capacity restrictions and we are continuing to host and book new events. 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, 2022 increased $112,863 to $147,102 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
Increase in event-related revenues, as discussed below | | $ | 80,633 | |
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, as discussed below | | 18,329 | |
| | |
Increase in suite license fee revenues, due to the return of live events at the Company’s venues during the current year period as compared to limited live events held in the prior year period due to the COVID-19 pandemic | | 8,438 | |
Increase in venue-related signage and sponsorship revenues primarily due to the return of live events at the Company’s venues during the current year period as compared to limited live events held in the prior year period due to the COVID-19 pandemic | | 3,726 | |
Other net increases | | 1,737 | |
| | $ | 112,863 | |
For the three months ended September 30, 2022, the increase in responseevent-related revenues reflects (i) higher revenues from concerts of $80,200, and (ii) higher revenues from other sporting and live entertainment events of $433, primarily due to the return of events to the Company’s venues during the current year period as compared to limited live 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 both of the three months ended September 30, 2022 and September 30, 2021, respectively, the Rangers hosted two preseason home games. The 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 Licenses Agreements primarily reflects an increase in suite license fee revenues due to the return of live events at The Garden during the current year period as compared to limited live events held in the prior year period due to the COVID-19 pandemic.
Direct operating expenses
Direct operating expenses for the three months ended September 30, 2022 increased $65,463 to $101,765 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
| | |
| | |
| | |
Increase in event-related direct operating expenses, as discussed below | | $ | 42,041 | |
Increase in direct operating expenses associated with revenue or profit sharing expense from signage, suites licenses and sales of food, beverage and merchandise with MSG Sports pursuant to the Arena License Agreements, as discussed below | | 17,716 | |
Increase in direct operating expenses associated with venue operating costs inclusive of higher variable expenses due to the return of events to the Company’s venues during the current year period as compared to limited live events held in the prior year period as a result of the COVID-19 pandemic | | 4,496 | |
Other net increases | | 1,210 | |
| | $ | 65,463 | |
For the three months ended September 30, 2022, the increase in event-related direct operating expenses reflects (i) higher direct operating expenses from concerts of $41,507, and (ii) higher direct operating expenses from other sporting and live entertainment events of $534, primarily due to the return of events to the Company’s venues during the current year period as compared to limited live events held in the prior year period due to the COVID-19 pandemic.
The increase in direct operating expenses associated with revenue or profit sharing expense from signage, suites licenses, and sales of food, beverage and merchandise with MSG Sports pursuant to the Arena Licenses Agreements primarily reflects an increase in suite license fee revenues subject to revenue sharing due to the return of live events at The Garden during the current year period as compared to limited live events held in the prior year period due to the COVID-19 pandemic.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2022 increased $10,400, or 11% to $103,362 as compared to the prior year period. The increase primarily reflects higher employee compensation and related benefits of $10,361, primarily due to Company’s MSG Sphere initiative, and higher other general administrative expenses of $5,946, partially offset by lower professional fees of $5,908.
Impairment and other gains
For the three months ended September 30, 2022, the Company recorded net gains of $2,000 from the receipt of insurance proceeds related to the Company’s creative studio in Burbank, CA.
Operating loss
Operating loss for the three months ended September 30, 2022, was $75,308 as compared to a loss of $114,681 in the prior year period, an improvement of $39,373, or 34%. The improvement in operating loss was primarily due to an increase in revenues, partially offset by higher direct operating expenses and selling, general and administrative expenses, as discussed above.
Adjusted operating loss
Adjusted operating loss for the three months ended September 30, 2022 was $44,440 as compared to adjusted operating loss of $71,392 in the prior year period, an improvement of $26,952, or 38%. The improvement in adjusted operating loss was primarily due to an increase in revenues, partially offset by higher direct operating expenses and selling, general and administrative expenses.
MSG Networks
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Networks segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2022 | | 2021 | | Amount | | Percentage |
Revenues | | $ | 122,479 | | | $ | 141,473 | | | $ | (18,994) | | | (13) | % |
Direct operating expenses | | (75,420) | | | (68,423) | | | (6,997) | | | 10 | % |
Selling, general and administrative expenses | | (17,816) | | | (47,975) | | | 30,159 | | | (63) | % |
Depreciation and amortization | | (1,618) | | | (1,797) | | | 179 | | | (10) | % |
| | | | | | | | |
| | | | | | | | |
Operating income | | $ | 27,625 | | | $ | 23,278 | | | $ | 4,347 | | | 19 | % |
Reconciliation to adjusted operating income: | | | | | | | | |
| | | | | | | | |
Share-based compensation | | 1,704 | | | 7,474 | | | (5,770) | | | (77) | % |
Depreciation and amortization | | 1,618 | | | 1,797 | | | (179) | | | (10) | % |
Amortization for capitalized cloud computing arrangement costs | | 44 | | | 44 | | | — | | | — | % |
Merger and acquisition related costs | | 1,901 | | | 23,200 | | | (21,299) | | | (92) | % |
| | | | | | | | |
| | | | | | | | |
Adjusted operating income | | $ | 32,892 | | | $ | 55,793 | | | $ | (22,901) | | | (41) | % |
_________________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, the 2020-21 season was shortened and resulted in reductions in media rights fees which had a residual impact reflected in the three months ended September 30, 2021. 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, 2022, MSG Networks generated total revenues of $122,479, a decrease of $18,994, or 13%, as compared to the prior year quarter. The changes in revenues were attributable to the following:
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
| | |
Decrease in affiliation fee revenue | | $ | (18,962) | |
Decrease in advertising revenue | | (89) | |
Other net increases | | 57 | |
| | $ | (18,994) | |
For the three months ended September 30, 2022, affiliation fee revenue decreased $18,962, primarily due to the impact of the non-renewal of MSG Networks’ carriage agreement with Comcast Corporation (“Comcast”) as of October 1, 2021, and a decrease in subscribers of approximately 9% (excluding the impact of the non-renewal with Comcast). These decreases were partially offset by the governmentabsence of net unfavorable affiliate adjustments of approximately $6,200 recorded in the prior year quarter and the impact of higher affiliation rates.
Effective October 1, 2021, Comcast’s license to carry MSG Networks expired and MSG Networks has not been carried by Comcast since that date. Comcast’s non-carriage has reduced MSG Networks’ subscribers by approximately 10% and has reduced MSG Networks’ revenue by a comparable percentage. In addition, MSG Networks’ segment operating income and AOI have been 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, 2022 increased $6,997 to $75,420 as compared to the prior year period. The increases were attributable to the following:
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
| | |
Increase due to higher rights fees expense primarily due to the absence of reductions in media rights fees related to the shortened 2020-21 NHL season recorded in the prior year quarter and the impact of annual contractual rate increases in the current year period | | $ | 5,933 | |
Increase in other programming and productions costs | | 1,064 | |
| | |
| | $ | 6,997 | |
Selling, general and administrative expenses
For the three months ended September 30, 2022, selling, general and administrative expenses of $17,816 decreased $30,159 as compared to the prior year quarter. This primarily reflects a decrease of $23,000 in expenses related to the acquisition of MSG Networks by MSG Entertainment in July 2021, as well as lower advertising and marketing expenses of $3,489 and lower employee compensation and related benefits of $3,223.
Operating income
For the three months ended September 30, 2022, operating income of $27,625 increased $4,347, or 19%, as compared to the prior year quarter, primarily due to the decrease in selling, general and administrative expenses (including the impact of lower acquisition-related costs), partially offset by the decrease in revenues and the increase in direct operating expenses.
Adjusted operating income
For the three months ended September 30, 2022, adjusted operating income of $32,892 decreased $22,901, or 41%, as compared to the prior year quarter, primarily due to the decrease in revenues and higher direct operating expenses, partially offset by lower selling, general and administrative expenses.
Tao Group Hospitality
The tables below set forth, for the periods presented, certain professional sports leagues.historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s Tao Group Hospitality segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | Change |
| | 2022 | | 2021 | | Amount | | Percentage |
Revenues | | $ | 132,651 | | | $ | 119,464 | | | $ | 13,187 | | | 11 | % |
Direct operating expenses | | (76,577) | | | (61,093) | | | (15,484) | | | 25 | % |
Selling, general and administrative expenses | | (43,546) | | | (34,094) | | | (9,452) | | | 28 | % |
Depreciation and amortization | | (6,630) | | | (6,378) | | | (252) | | | 4 | % |
Impairment and other losses | | — | | | (7,818) | | | 7,818 | | | NM |
| | | | | | | | |
Operating income | | $ | 5,898 | | | $ | 10,081 | | | $ | (4,183) | | | (41) | % |
Reconciliation to adjusted operating income: | | | | | | | | |
| | | | | | | | |
Share-based compensation | | 2,052 | | | 1,911 | | | 141 | | | 7 | % |
Depreciation and amortization | | 6,630 | | | 6,378 | | | 252 | | | 4 | % |
| | | | | | | | |
Impairment and other losses | | — | | | 7,818 | | | (7,818) | | | NM |
| | | | | | | | |
Adjusted operating income | | $ | 14,580 | | | $ | 26,188 | | | $ | (11,608) | | | (44) | % |
_________________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
For the three months ended September 30, 2021, Tao Group Hospitality’s operations and operating results were impacted by the COVID-19 pandemic, including as a result certain regulatory requirements, including and vaccination/mask requirements, which contributed to certain branded locations remaining closed during the period. As of September 30, 2022 and as of the date of this Quarterly Report on Form 10-Q, nearly allfiling, Tao Group Hospitality’s domestic venues no longer require guests to provide proof of our business operations have been suspendedCOVID19 vaccination before entering, and it is not clear when those operations will resume. As a result of government mandated assembly limitations and closures, 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 slated for Memorial Day weekend, has also been cancelled, and virtually all Tao Group Hospitality venues are currently closed. The NBA andis operating without capacity restrictions in all markets. See “— Introduction —Factors Affecting Results of Operations — Impact of the NHL suspended their 2019-20 seasonsCOVID-19 Pandemic on March 11 and 12, 2020, respectively. No KnicksOur Business” for more information.
Revenues
Revenues for the three months ended September 30, 2022 increased $13,187, or Rangers games are currently being played, and it is uncertain if the current seasons will resume. For more information about the impacts and risks11%, to $132,651 as compared to the Companyprior year period. The net increases were attributable to the following:
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
Increase in revenues associated with new venue openings | | $ | 7,536 | |
Increase in revenues associated with venues that were temporarily closed in the prior year as a result of the COVID-19 pandemic | | 3,604 | |
Increase in revenues for comparable venues that opened more than 15 months ago | | 1,477 | |
Other net increases | | 570 | |
| | $ | 13,187 | |
The increase in revenues associated with new venue openings of $7,536 was primarily due to the opening of Lavo Ristorante in Los Angeles, a venue that first opened in March 2022; Lavo San Diego which first opened in June 2022 following the rebranding of a legacy Hakkasan venue; and Tao Beach in Las Vegas which reopened in April 2022 following a multi-year renovation.
The increase in revenues associated with venues that were temporarily closed in the prior year as a result of the COVID-19 see “— Impactpandemic of COVID-19 on Our Business”$3,604 was due to Avenue and “Item 1A. Risk Factors — Marquee Singapore which reopened in April and July 2022, respectively, Herringbone Waikiki which reopened in November 2021, and Marquee Sydney which reopened in December 2021.
Direct operating expenses
Direct operating expenses for the three months ended September 30, 2022 increased $15,484, or 25%, to $76,577 as compared to the prior year period. The net increases were attributable to the following:Our Operations
| | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
Increase in employee compensation and related benefits reflecting the impact of increased staffing as the business returns to normal operations and new venue openings | | $ | 7,934 | |
Increase in the costs of food and beverage due to the impact of inflation, new venue openings, and higher comparable venue revenues | | 4,090 | |
Increase in rent expense | | 2,034 | |
Other net increases, including higher venue entertainment costs | | 1,426 | |
| | $ | 15,484 | |
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2022 increased $9,452, or 28%, to $43,546 as compared to the prior year period. For the three months ended September 30, 2022, the net increases were primarily due to (i) higher employee compensation and related benefits of $6,629 reflecting the impact of increased staffing as the business returns to normal operations and (ii) a net increase of $1,896 in restaurant expenses, as well as supplies, utilities, general liability insurance, pre-opening expenses, and repairs and maintenance, and marketing expenses.
Impairment and other losses
For the three months ended September 30, 2022, the Company recorded no impairment and other losses as compared to an impairment of $7,818 related to the extinguishment of right-of-use assets and a leasehold improvement in connection with operations at certain Hakkasan venues in the prior year period.
Operating Results Have Been,income
Operating income for the three months ended September 30, 2022 was $5,898 as compared to $10,081 in the prior year period, a decrease of $4,183, or 41%. This decrease was primarily due to an increase in direct operations and Continueselling, general and administrative expenses partially offset by increased revenues and the absence of impairment and other losses.
Adjusted operating income
Adjusted operating income for the three months ended September 30, 2022 was $14,580 as compared to be, Materially Impacted$26,188 in the prior year period, a decrease of $11,608, or 44%. The decrease in adjusted operating income for the three months ended September 30, 2022 was due to higher direct operating and selling, general and administrative expenses partially offset by increased revenues.
Liquidity and Capital Resources
Overview
The Company’s operations and operating results were not materially impacted by the COVID-19 pandemic during the three months ended September 30, 2022, as compared to the prior year period, which was impacted by (i) fewer ticketed events at our performance venues due to the lead-time required to book touring acts and artists, (ii) a residual impact of reductions in MSG Networks media rights fees related to the shortened 2020-21 NHL season and (iii) certain regulatory requirements, including vaccination/mask requirements for our performance, entertainment dining and nightlife venues, which contributed to certain Tao Group Hospitality branded locations remaining closed during the period. See Note 1, Impact of the COVID-19 Pandemic, to the consolidated and Government Actions Takencombined financial statements included in Response.the 2022 Form 10-K for more information regarding the impact of the COVID-19 pandemic on our business.
It is unclear to what extent COVID-19 concerns, including with respect to new variants, could result in new government or league-mandated capacity or other restrictions or vaccination/mask requirements or impact the use of and/or demand for our performance, entertainment dining and nightlife venues, demand for our sponsorship and advertising assets, deter our employees and vendors from working at our venues (which may lead to difficulties in staffing) or otherwise materially impact our operations.
”
Sources and Uses of Liquidity
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 credit facilities. 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)related original content, 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.requirements, including the construction of MSG Sphere at The Venetian. As of September 30, 2022, the Company’s unrestricted cash and cash equivalents balance, inclusive of approximately $235,000 in advance cash proceeds primarily related to tickets, suites and sponsorships, was $441,350, as compared to $828,540 as of June 30, 2022. The principal balance of the Company’s total debt outstanding as of September 30, 2022 was $1,756,898. We believe we have sufficient liquidity including approximately $1,004,000 infrom cash and cash equivalents, available borrowing capacity under our credit facilities, and $331,000 of short-term investments as of March 31, 2020,cash flows from operations (including from MSG Sphere at the Venetian) to over the next 12 months, fund our operations, make committed funds availableand service the credit facilities for the foreseeable future, as well as complete the construction of MSG Sphere at The Venetian. This includes the Company’s plans to Madison Square Garden Sports Corp. underimplement a cost reduction program across its businesses and reduce or defer certain discretionary capital projects. It also includes the DDTL Facilities, and pursueCompany’s expectation that it will utilize cash on hand to pay down a portion of MSG Networks’ term loan upon the refinancing of the loan prior to its maturity in October 2024. In addition, the Company is pursuing financing to fund the development of original content, which is expected to generate significant revenue for MSG Sphere. There is no assurance that 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. at the time of the Madison Square Garden Entertainment Corp. spin-off.Company will be able to obtain such capital. See Note 118, Credit Facilities to the combinedcondensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of the MSG Networks Credit Facilities, the National Properties Credit Facilities and the Tao Credit Facilities.
For additional information regarding the Company’s short-term investments. Our cash and cash equivalents include approximately $223,000in advance cash proceeds — primarilycapital expenditures, including those related to tickets, suites and sponsorships — all of which would be addressed,MSG Sphere, see Note 22, Segment Information to the extent necessary, through refunds, credits, make-goods and/or rescheduled dates.
In connection with the Entertainment DistributionCompany’s audited consolidated 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 and notes thereto for the year ended June 30, 2022 included in “Part I — Item 1. Financial Statements” of this Quarterlythe Company’s Annual Report on Form 10-Q.
10-K.
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.
MSG Spheres
The Company has made significant progress on MSG Sphere at The Venetian, its state-of-the-art entertainment venue under construction in Las Vegas.
See “Part I — Item 1. Our Business — Our Performance Venues — MSG Sphere” in the Company’s Annual Report on Form 10-K. 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 the second half of calendar year 2023. As with any major construction project, the construction of MSG Sphere is subject to potential delays, unexpected complications or cost fluctuations.
As of September 30, 2022, our cost estimate, inclusive of core technology and soft costs, for MSG Sphere at The Venetian iswas approximately $1,660,000.$2,175,000. This cost estimate iswas net of $75,000 that the Las Vegas Sands Corp.Venetian has agreed to pay to defray certain construction costs and also excludes significant capitalized and non-capitalized costs for items such as content creation, internal labor, capitalized interest, 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, 2022 were approximately $349,000,$1,780,000, which is net of $65,000 received from Las Vegas Sands Corp. during the nine months ended March 31, 2020.Venetian. In addition, the amount of construction costs incurred as of March 31, 2020September 30, 2022 includes approximately $67,600$226,000 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.(inclusive of the impact of the Company’s plans to implement a cost reduction program across its businesses and reduce or defer certain discretionary capital projects). The Company expectsalso continues to incur $400,000 of new long-term financing by a subsidiary of the Company that indirectly owns an interest inhave revolver capacity available under 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.facilities, if needed. If the Company’s cash-on-hand, available revolver capacity 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.
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to a future MSG Sphere. The Company submitted planning applications to the local planning authority in March 2019 and that process, which requires various stages of review to be completed and approvals to be granted, is ongoing. Therefore, we do not have a definitive timeline at this time.
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 from the Company to fund its operations and service its debt obligations and pursue new business opportunities over the next 12 months.next-generation venues such as MSG Sphere can be successful.
Financing Agreements
On May 23, 2019, TAOIH and TAOG, entered into the Tao Senior Credit Agreement with JPMorgan Chase Bank, N.A., and the lenders party thereto. The Tao Senior Credit Agreement provides TAOG with the Tao Senior SecuredSee Note 8, Credit Facilities, consisting of: (i) an initial $40,000 term loan facility with a term 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). There was no outstanding amount drawn on the Tao Revolving Credit Facility as of March 31, 2020. As of March 31, 2020, TAOIH was in compliance with the required financial covenants.
Tao Group Hospitality has financed its operations under the Tao Senior Credit Agreement, including with the $25,000 revolving credit facility. As a result of the COVID-19 effects, Tao Group Hospitality will not be in compliance with the required financial covenants under 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.
On May 23, 2019, a subsidiary of the Company and a subsidiary of Tao Group Hospitality entered into the Tao Subordinated Credit Agreement providing for a credit facility of $49,000 that matures in August 2024. During the nine months ended March 31, 2020, Tao Group Hospitality repaid $5,000 under the Tao Subordinated Credit Agreement. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement have been eliminated in the combined financial statements in accordance with ASC Topic 810, Consolidation.
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 discussions of the Company’s debt obligations and various financing agreements.
Bilateral MSG Networks Credit Facilities
MSGN Holdings, L.P. (“MSGN L.P.”), MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, an indirect subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “MSGN Holdings Entities”), and certain subsidiaries of MSGN L.P. have senior secured credit facilities pursuant to a credit agreement (as amended and restated on October 11, 2019, the “MSGN Credit Agreement”) consisting of: (i) an initial $1,100,000 term loan facility (the “MSGN Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “MSGN Revolving Credit Facility” and, together with the MSGN Term Loan Facility, the “MSG Networks Credit Facilities”), each with a term of five years. As of September 30, 2022, there were no borrowings or letters of credit issued and outstanding under the MSGN Revolving Credit Facility.
The MSGN Term Loan Facility amortizes quarterly in accordance with its terms beginning March 31, 2020 through September 30, 2024 with a final maturity date of October 11, 2024. MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including MSGN Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
The MSGN Credit Agreement generally requires the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the MSGN Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of September 30, 2022, the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the covenants.
National Properties Credit Facilities
On June 30, 2022, MSG National Properties, LLC (“MSG National Properties”) an indirect, wholly-owned subsidiary of the Company, MSG Entertainment Group, LLC (“MSG Entertainment Group”) and certain subsidiaries of MSG National
Properties entered into a credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and the lenders and L/C issuers party thereto (the “National Properties Credit Agreement”), providing for a five-year, $650,000 senior secured term loan facility (the “National Properties Term Loan Facility”) and a five-year, $100,000 revolving credit facility (the “National Properties Revolving Credit Facility” and, together with the National Properties Term Loan Facility, the “National Properties Credit Facilities”).
Up to $25,000 of the National Properties Revolving Credit Facility is available for the issuance of letters of credit. As of September 30, 2022, outstanding letters of credit were $7,860 and the remaining balance available under the National Properties Revolving Credit Facility was $63,040.
The principal obligations under the National Properties Term Loan Facility amortizes quarterly in accordance with its terms beginning March 31, 2023 through March 31, 2027, with the balance due at the maturity of the facility on June 30, 2027. The principal obligations under the National Properties Revolving Credit Facility are due at the maturity of the facility. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to the net cash proceeds of certain sales of assets or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights), subject to certain exceptions.
The National Properties Credit Agreement includes financial covenants requiring MSG National Properties and its restricted subsidiaries to maintain a specified minimum liquidity level, a specified minimum debt service coverage ratio and specified maximum total leverage ratio. The minimum liquidity level is set at $50,000, and is tested based on the level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter over the life of the National Properties Credit Facilities. The debt service coverage ratio covenant begins testing in the fiscal quarter ending December 31, 2022, and is set at a ratio of 2:1 before stepping up to 2.5:1 in the fiscal quarter ending September 30, 2024. The leverage ratio covenant begins testing in the fiscal quarter ending June 30, 2023. It is tested based on the ratio of MSG National Properties and its restricted subsidiaries’ consolidated total indebtedness to adjusted operating income, with an initial maximum ratio of 6:1, stepping down to 5.5:1 in the fiscal quarter ending June 30, 2024 and 4.5:1 in the fiscal quarter ending June 30, 2026. As of September 30, 2022, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Credit Agreement.
Tao Credit Facilities
On June 9, 2022, TAO Group Intermediate Holdings LLC (“TAOIH” or “Intermediate Holdings”) and TAO Group Operating LLC (“TAOG” or “Senior Borrower”) entered into an amended and restated credit agreement (the “Restated Tao Senior Credit Agreement”) with JPMorgan Chase Bank, N.A., as agent, and the lenders party thereto. The Restated Tao Senior Credit Agreement provides TAOG with senior secured credit facilities (the “Tao Credit Facilities”) consisting of: (i) an initial $75,000 term loan facility with a term of five years (the “Tao Term Loan Facility”) and (ii) a $60,000 revolving credit facility with a term of five years (the “Tao Revolving Credit Facility”). Up to $5,000 of the Tao Revolving Credit Facility is available for the issuance of letters of credit. As of September 30, 2022, outstanding letters of credit were $750 and the remaining borrowing available under the Tao Revolving Credit Facility was $49,250.
The Tao Term Loan Facility amortizes quarterly in accordance with its terms from June 9, 2022 through the maturity date on June 9, 2027. TAOG is required to make mandatory prepayments of the Tao Term Loan Facility from the net cash proceeds of certain sales of assets (including Tao Collateral) or casualty insurance and/or condemnation recoveries (in each case, subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
The Restated Tao Senior Credit Agreement requires TAOIH to comply with a maximum total leverage ratio of 3.50:1.00, a maximum senior leverage ratio of 2.50:1.00 and a minimum fixed charge coverage ratio of 1.25:1.00. The Restated Tao Senior Credit Agreement, among other things, (i) increased the minimum liquidity for TAOG to $20,000 and maximum capital expenditures to $30,000, with a one year carry forward of $20,000, (ii) increased the basket for the maximum amount of the incremental revolving credit facility to $50,000; and (iii) amended certain other financial covenants regarding leverage to allow up to $10,000 of cash netting. As of September 30, 2022, TAOG, TAOIH and the restricted subsidiaries were in compliance with the covenants of the Restated Tao Senior Credit Agreement.
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, 2022, the Company had $11,079a total of $9,476 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 asRevolving Credit Facility and two outstanding letters of December 29, 2019.
Salecredit for an aggregate of $7,860 issued under 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).
Revolving Credit Facility.
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 2022 other than activities in the ordinary course of business. See Note 7, Commitments and Contingencies,to the financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details on the timing and amount of payments under various media rights agreements.
Cash Flow Discussion
As of March 31, 2020,September 30, 2022, cash, cash equivalents and restricted cash totaled $1,021,848,$458,893, as compared to $1,092,065$846,010 as of June 30, 2019.2022. The following table summarizes the Company’s cash flow activities for the ninethree months ended March 31, 2020September 30, 2022 and 2019:2021:
| | | | | | | | Three Months Ended |
| | Nine Months Ended March 31, | | September 30, |
| | 2020 | | 2019 | | 2022 | | 2021 |
Net income (loss) | | $ | (128,554 | ) | | $ | 36,195 |
| |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | 218,068 |
| | 102,134 |
| |
Net loss | | Net loss | | $ | (44,043) | | | $ | (76,655) | |
Adjustments to reconcile net loss to net cash provided by operating activities | | Adjustments to reconcile net loss to net cash provided by operating activities | | 54,099 | | | 49,433 | |
Subtotal | | $ | 89,514 |
| | $ | 138,329 |
| Subtotal | | $ | 10,056 | | | $ | (27,222) | |
Changes in working capital assets and liabilities | | 47,437 |
| | (93,363 | ) | Changes in working capital assets and liabilities | | (91,239) | | | 34,210 | |
Net cash provided by operating activities | | $ | 136,951 |
| | $ | 44,966 |
| |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | | $ | (81,183) | | | $ | 6,988 | |
Net cash used in investing activities | | (477,984 | ) | | (156,851 | ) | Net cash used in investing activities | | (285,218) | | | (146,302) | |
Net cash provided by financing activities | | 266,900 |
| | 32,578 |
| |
Net cash used in financing activities | | Net cash used in financing activities | | (20,023) | | | (44,797) | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | 3,916 |
| | 6,440 |
| Effect of exchange rates on cash, cash equivalents and restricted cash | | (693) | | | (386) | |
Net decrease in cash, cash equivalents and restricted cash | | $ | (70,217 | ) | | $ | (72,867 | ) | Net decrease in cash, cash equivalents and restricted cash | | $ | (387,117) | | | $ | (184,497) | |
Operating Activities
Net cash provided byused in operating activities for the ninethree months ended March 31, 2020 improvedSeptember 30, 2022 increased by $91,985$88,171 to $136,951$81,183 as compared to the prior year period, primarily due to changes in working capital assets and liabilities, which includeincluded (i) higher increasecash payments to promoters, (ii) a decrease in accrued and other liabilities primarily due to funds received from Las Vegas Sands Corp. in connectiondeferred revenue 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,customers’ advanced payments, and (iii) higher collections due to promoters as events were postponed as a result of the temporary closure of venues due to COVID-19. The increase in cash provided by the changes in working capital discussed above wasprepaid revenue share for suite licenses, partially offset by the decrease froma lower net incomeloss in the current year period adjusted for non-cash items.period.
Investing Activities
Net cash used in investing activities for the ninethree months ended March 31, 2020September 30, 2022 increased by $321,133$138,916 to $477,984$285,218 as compared to the prior year period primarily due to (i) an increase in purchase of short-term investments in the current year period as compared to the prior year period, (ii) higher capital expenditures inmainly for the current year period as compared to the prior year period, of which substantially all are related to the Company’s planned MSG SpheresSphere in Las Vegas and London, and (iii) lower proceeds received from the sale of the Company’s 50% interest in AMSGE in the prior year period compared to the sale 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.
Financing Activities
Net cash provided byused in financing activities for the ninethree months ended March 31, 2020 increasedSeptember 30, 2022 decreased by $234,322$24,774 to $266,900$20,023 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 athe repayment onof the Tao Revolving Credit Facility.Facility in the prior year period and proceeds received from the National Properties Revolving Credit Facility in the current year period.
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 that 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. Similarly, MSG Networks’ advertising revenue is largely derived from the sale of inventory in “Part I — Item 1. Financial Statements”its live professional sports programming, and as such, a disproportionate share of this Quarterly Report on Form 10-Q for more information regardingrevenue has historically been earned in the consolidation onsecond and third fiscal quarters.
As a three-month lag basisresult of Tao Group Hospitality.the foregoing, the Company’s revenue and operating income are disproportionally higher in the fiscal second and third quarter of the fiscal year and lower in the first quarter of the fiscal year.
Recently Issued Accounting Pronouncements and Critical Accounting PoliciesEstimates
Recently Issued and Adopted Accounting Pronouncements
See Note 2, Accounting Policies, to the combined 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 PoliciesEstimates
The preparationThere have been no 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 in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates andnotes thereto for 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 estimatesyear ended June 30, 2022 included 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:
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 2020 and our interim impairment testingFiscal Year 2023.
Impairment 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 combined financial statements and notes thereto for the year ended June 30, 2019 included in the Company’s Information Statement.
Arrangements with Multiple Performance Obligations 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, 2022, 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 combinedcondensed consolidated balance sheet as of March 31, 2020September 30, 2022 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 2023 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 2023, the Company performed its most recent annual impairment testtests of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date. Based on 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 combinedcondensed consolidated balance sheet as of March 31, 2020:September 30, 2022:
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Trademarks | $ | 61,881 |
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Photographic related rights | 3,000 |
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| $ | 64,881 |
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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 2023, 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 with 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 Quarterly Report on Form 10-Q for discussions of disruptions caused by COVID-19. We do not have any meaningful commodity risk exposures associated with the operationQualitative Disclosures About Market Risk,” of our venues.Form 10-K.
Potential Interest Rate Risk Exposure:Exposure
The Company, through its subsidiaries, MSG National Properties and MSG Networks, and the consolidation of Tao Group Hospitality, hasis subject to potential interest rate risk exposure related to borrowings incurred under the Tao Senior Secured Credit Facilities.their respective credit facilities. Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under the Tao Senior Secured Credit Facilities.
Borrowings under the Tao Senior Secured Credit Facilities incur interest, depending on Tao Group Operating LLC’s election, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in each case, an additional spread
which is dependent upon the total leverage ratio at the time. Accordingly, the Tao Senior Secured Credit Facilities are subject to interest rate risk with respect to the tenor of any borrowings incurred. 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 additional information on interest rate. For the nine months ended March 31, 2020, the interest rate on the Tao Senior Secured Credit Facilities ranged from 4.91% to 3.25% and it was approximately 3.28% as of March 31, 2020.these credit facilities. The effect of a hypothetical 100 basis point and a hypothetical 200 basis point increase in floating interest ratesrate prevailing as of March 31, 2020September 30, 2022 and continuing for a full year would increase the Company’s interest expense of the amount outstanding on the Tao Senior Secured Credit Facilitiesoutstanding amounts under the credit facilities by $350 and $700, respectively.$35,385.
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, 2022, the GBP/USD exchange rate ranged from 1.33571.0695 to 1.14911.3967 as compared to GBP/USD exchange rate of 1.24491.3548 as of March 31, 2020,September 30, 2022, a fluctuation range of approximately 7-8%3.09%. As of March 31, 2020,September 30, 2022, a uniform hypothetical 8%14.88% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $23,700$27,000 in the Company’s net asset value.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision andOur management, with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, ofevaluated the effectiveness of the design and operation of our disclosure controls and procedures (asas defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934).Act. Based on that evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020 the Company’sCompany's disclosure controls and procedures were effective.effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act of 1934) during the fiscal quarter ended March 31, 2020September 30, 2022, 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 Company’s acquisition of MSG Networks Inc. (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.
Six complaints involved allegations of fiduciary breaches in connection with the negotiation and approval of the Merger and have since been consolidated into two remaining litigations.
On March 29, 2019, a purported stockholder of Madison Square Garden Sports Corp. filed a complaint inSeptember 10, 2021, the Court of Chancery entered an order consolidating two derivative complaints filed by purported Company stockholders. The consolidated action is captioned: In re Madison Square Garden Entertainment Corp. Stockholders Litigation, C.A. No. 2021-0468-KSJM. The consolidated plaintiffs filed their Verified Consolidated Derivative Complaint on October 11, 2021. The complaint, which names the Company as only a nominal defendant, retains all of the Statederivative claims and alleges that the members of the board of directors and controlling stockholders violated their fiduciary duties in the course of negotiating and approving the Merger. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. The Company and other defendants filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and continues to be engaged in responding to plaintiffs’ additional discovery requests. Pursuant to the indemnity rights in its bylaws and Delaware derivativelylaw, the Company is advancing the costs incurred by defendants in this action, and defendants may assert indemnification rights in respect of any adverse judgment or settlement of the action.
On September 27, 2021, the Court of Chancery entered an order consolidating four complaints filed by purported stockholders of MSG Networks Inc. The consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. No. 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 Madison Square Garden Sports Corp.,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. and the Dolan family group and againstcontrolling stockholders prior to 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 controlling 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 capacityMerger. The Company is not named as a defendant but has been subpoenaed to produce documents and testimony related to the Executive Chairman and Chief Executive Officer of Madison Square Garden Sports Corp. The complaint seeksMerger. Plaintiffs seek, among other relief, monetary damages for the putative class and plaintiffs’ attorneys’ fees. Defendants to the MSG Networks Inc. consolidated action filed answers to the complaint on December 30, 2021. The Company substantially completed its production of documents responsive to plaintiffs’ requests on June 24, 2022, and continues to be engaged in an unspecified amount fromresponding to plaintiffs’ additional discovery requests.Pursuant to the Director Defendantsindemnity rights in favor of Madison Square Garden Sports Corp.; rescission of Mr. Dolan’s employment agreements; restitutionits bylaws and disgorgementDelaware law, the Company is advancing the costs incurred by Mr. Dolandefendants in this action, and defendants may assert indemnification rights in respect of his compensation; and costs and disbursementsany adverse judgment or settlement of the action.
On September 19, 2022, the Court of Chancery approved a case schedule, governing the two consolidated actions, which set tentative trial dates 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 plaintiff andApril 2023.
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 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, 2022, 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
(a)Index to 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.SCH101 | | XBRL Taxonomy Extension Schema.
The following materials from Madison Square Garden Entertainment Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of comprehensive loss, (iv) condensed consolidated statements of cash flows, (v) condensed consolidated statements of equity and redeemable noncontrolling interests, and (vi) notes to condensed consolidated financial statements.
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101.CAL104 | | XBRL Taxonomy Extension Calculation Linkbase.
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase.
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101.LAB | | 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, 2022 formatted in Inline XBRL and contained in Exhibit 101. |
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_________________
† This exhibit is a management contract or a compensatory plan or arrangement.
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 2022.
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Madison Square Garden Entertainment Corp. |
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By: | /S/ MARK H. FITZPATRICKDAVID F. BYRNES |
| Name: | Mark H. FitzPatrickDavid F. Byrnes |
| Title: | Executive Vice President and Chief Financial Officer
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