UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
________________________
(Mark One)
| | | | | | | | |
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20202021
OR
| | | | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-39245
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 84-3755666 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | | | | |
Two Penn Plaza | New York | , | NY | | 10121 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 465-6000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock | MSGE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐☑ | | Accelerated filer | ☐ |
Non-accelerated filer | ☑☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☑☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares of common stock outstanding as of January 29, 2021:31, 2022:
| | | | | | | | |
Class A Common Stock par value $0.01 per share | — | 19,618,32427,340,882 | |
Class B Common Stock par value $0.01 per share | — | 4,529,5176,866,754 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
INDEX TO FORM 10-Q
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
| | | December 31, 2020 | | June 30, 2020 | | December 31, 2021 | | June 30, 2021 |
| | (Unaudited) | | | |
ASSETS | ASSETS | | ASSETS | | | | |
Current Assets: | Current Assets: | | Current Assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 1,451,352 | | | $ | 906,555 | | Cash and cash equivalents | | $ | 1,258,105 | | | $ | 1,516,992 | |
Restricted cash | Restricted cash | | 26,207 | | | 17,749 | | Restricted cash | | 23,914 | | | 22,984 | |
Short-term investments | | 0 | | | 337,192 | | |
| Accounts receivable, net | Accounts receivable, net | | 73,711 | | | 57,184 | | Accounts receivable, net | | 190,491 | | | 184,613 | |
| Net related party receivables | Net related party receivables | | 31,170 | | | 23,062 | | Net related party receivables | | 48,929 | | | 31,916 | |
Prepaid income taxes | | Prepaid income taxes | | 1,850 | | | 12,772 | |
Prepaid expenses | Prepaid expenses | | 56,066 | | | 62,127 | | Prepaid expenses | | 69,476 | | | 67,445 | |
| Other current assets | Other current assets | | 23,787 | | | 22,633 | | Other current assets | | 42,637 | | | 36,014 | |
| Total current assets | Total current assets | | 1,662,293 | | | 1,426,502 | | Total current assets | | 1,635,402 | | | 1,872,736 | |
| Investments in nonconsolidated affiliates | Investments in nonconsolidated affiliates | | 49,626 | | | 52,622 | | Investments in nonconsolidated affiliates | | 46,412 | | | 49,221 | |
Property and equipment, net | Property and equipment, net | | 1,837,072 | | | 1,646,115 | | Property and equipment, net | | 2,474,693 | | | 2,156,292 | |
Right-of-use lease assets | Right-of-use lease assets | | 198,464 | | | 220,328 | | Right-of-use lease assets | | 470,253 | | | 280,579 | |
Amortizable intangible assets, net | Amortizable intangible assets, net | | 144,658 | | | 150,426 | | Amortizable intangible assets, net | | 182,006 | | | 198,274 | |
Indefinite-lived intangible assets | Indefinite-lived intangible assets | | 63,801 | | | 63,801 | | Indefinite-lived intangible assets | | 63,801 | | | 63,801 | |
Goodwill | Goodwill | | 74,309 | | | 74,309 | | Goodwill | | 500,181 | | | 502,195 | |
Other assets | Other assets | | 91,616 | | | 85,103 | | Other assets | | 150,326 | | | 166,781 | |
Total assets | Total assets | | $ | 4,121,839 | | | $ | 3,719,206 | | Total assets | | $ | 5,523,074 | | | $ | 5,289,879 | |
| See accompanying notes to unaudited consolidated and combined financial statements. | |
See accompanying notes to unaudited consolidated financial statements. | | See accompanying notes to unaudited consolidated financial statements. |
| MADISON SQUARE GARDEN ENTERTAINMENT CORP. | CONSOLIDATED BALANCE SHEETS (Continued) | |
CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued) | | CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued) |
(in thousands, except per share data) | (in thousands, except per share data) | (in thousands, except per share data) |
| | December 31, 2020 | | June 30, 2020 | | December 31, 2021 | | June 30, 2021 |
| | (Unaudited) | | | |
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY |
Current Liabilities: | Current Liabilities: | | Current Liabilities: | |
Accounts payable | Accounts payable | | $ | 4,952 | | | $ | 17,258 | | Accounts payable | | $ | 43,815 | | | $ | 26,644 | |
Net related party payables, current | Net related party payables, current | | 16,428 | | | 18,418 | | Net related party payables, current | | 56,597 | | | 23,173 | |
Current portion of long-term debt, net of deferred financing costs | Current portion of long-term debt, net of deferred financing costs | | 5,115 | | | 5,429 | | Current portion of long-term debt, net of deferred financing costs | | 56,483 | | | 53,973 | |
| Income taxes payable | | Income taxes payable | | 406 | | | 2,527 | |
Accrued liabilities: | Accrued liabilities: | | Accrued liabilities: | |
Employee related costs | Employee related costs | | 50,977 | | | 68,837 | | Employee related costs | | 73,078 | | | 91,853 | |
Other accrued liabilities | Other accrued liabilities | | 114,326 | | | 125,452 | | Other accrued liabilities | | 268,135 | | | 210,749 | |
Operating lease liabilities, current | Operating lease liabilities, current | | 54,963 | | | 53,388 | | Operating lease liabilities, current | | 65,663 | | | 73,423 | |
Collections due to promoters | Collections due to promoters | | 19,876 | | | 31,879 | | Collections due to promoters | | 49,513 | | | 37,877 | |
| Deferred revenue | Deferred revenue | | 205,641 | | | 189,308 | | Deferred revenue | | 256,154 | | | 209,651 | |
| Total current liabilities | Total current liabilities | | 472,278 | | | 509,969 | | Total current liabilities | | 869,844 | | | 729,870 | |
| Long-term debt, net of deferred financing costs | Long-term debt, net of deferred financing costs | | 649,445 | | | 28,126 | | Long-term debt, net of deferred financing costs | | 1,606,759 | | | 1,650,628 | |
Operating lease liabilities, noncurrent | Operating lease liabilities, noncurrent | | 155,440 | | | 174,219 | | Operating lease liabilities, noncurrent | | 450,019 | | | 233,556 | |
Defined benefit and other postretirement obligations | Defined benefit and other postretirement obligations | | 25,103 | | | 26,132 | | Defined benefit and other postretirement obligations | | 52,653 | | | 54,179 | |
Other employee related costs | Other employee related costs | | 13,481 | | | 15,591 | | Other employee related costs | | 17,814 | | | 21,193 | |
Collections due to promoters, noncurrent | Collections due to promoters, noncurrent | | 5,179 | | | 0 | | Collections due to promoters, noncurrent | | — | | | 6,625 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 12,927 | | | 12,450 | | Deferred tax liabilities, net | | 181,214 | | | 200,325 | |
Other liabilities | Other liabilities | | 78,138 | | | 78,279 | | Other liabilities | | 74,952 | | | 75,263 | |
Total liabilities | Total liabilities | | 1,411,991 | | | 844,766 | | Total liabilities | | 3,253,255 | | | 2,971,639 | |
Commitments and contingencies (see Note 10) | | 0 | | 0 | |
Commitments and contingencies (see Note 11) | | Commitments and contingencies (see Note 11) | | 0 | | 0 |
Redeemable noncontrolling interests | Redeemable noncontrolling interests | | 14,543 | | | 20,600 | | Redeemable noncontrolling interests | | 142,004 | | | 137,834 | |
Madison Square Garden Entertainment Corp. Stockholders’ Equity: | Madison Square Garden Entertainment Corp. Stockholders’ Equity: | | Madison Square Garden Entertainment Corp. Stockholders’ Equity: | |
Class A Common stock, par value $0.01, 120,000 shares authorized; 19,613 and 19,493 shares outstanding as of December 31, 2020 and June 30, 2020, respectively | | 196 | | | 195 | | |
Class B Common stock, par value $0.01, 30,000 shares authorized; 4,530 shares outstanding as of December 31, 2020 and June 30, 2020 | | 45 | | | 45 | | |
Preferred stock, par value $0.01, 15,000 shares authorized; NaN outstanding as of December 31, 2020 and June 30, 2020 | | 0 | | | 0 | | |
Class A Common stock, par value $0.01, 120,000 shares authorized; 27,327 and 27,093 shares outstanding as of December 31, 2021 and June 30, 2021, respectively | | Class A Common stock, par value $0.01, 120,000 shares authorized; 27,327 and 27,093 shares outstanding as of December 31, 2021 and June 30, 2021, respectively | | 273 | | | 271 | |
Class B Common stock, par value $0.01, 30,000 shares authorized; 6,867 shares outstanding as of December 31, 2021 and June 30, 2021 | | Class B Common stock, par value $0.01, 30,000 shares authorized; 6,867 shares outstanding as of December 31, 2021 and June 30, 2021 | | 69 | | | 69 | |
Preferred stock, par value $0.01, 15,000 shares authorized; none outstanding as of December 31, 2021 and June 30, 2021 | | Preferred stock, par value $0.01, 15,000 shares authorized; none outstanding as of December 31, 2021 and June 30, 2021 | | — | | | — | |
Additional paid-in capital | Additional paid-in capital | | 2,782,042 | | | 2,751,318 | | Additional paid-in capital | | 2,317,415 | | | 2,294,775 | |
| Retained earnings | | (72,768) | | | 141,936 | | |
Accumulated deficit | | Accumulated deficit | | (173,302) | | | (96,341) | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (25,381) | | | (51,857) | | Accumulated other comprehensive loss | | (32,632) | | | (30,272) | |
Total Madison Square Garden Entertainment Corp. stockholders’ equity | Total Madison Square Garden Entertainment Corp. stockholders’ equity | | 2,684,134 | | | 2,841,637 | | Total Madison Square Garden Entertainment Corp. stockholders’ equity | | 2,111,823 | | | 2,168,502 | |
Nonredeemable noncontrolling interests | Nonredeemable noncontrolling interests | | 11,171 | | | 12,203 | | Nonredeemable noncontrolling interests | | 15,992 | | | 11,904 | |
Total equity | Total equity | | 2,695,305 | | | 2,853,840 | | Total equity | | 2,127,815 | | | 2,180,406 | |
Total liabilities, redeemable noncontrolling interests and equity | Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,121,839 | | | $ | 3,719,206 | | Total liabilities, redeemable noncontrolling interests and equity | | $ | 5,523,074 | | | $ | 5,289,879 | |
See accompanying notes to unaudited consolidated and combined financial statements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| December 31, | | December 31, | | December 31, | | December 31, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Revenues (a) | Revenues (a) | | $ | 23,137 | | | $ | 394,072 | | | $ | 37,515 | | | $ | 572,035 | | Revenues (a) | | $ | 516,439 | | | $ | 168,752 | | | $ | 810,949 | | | $ | 339,298 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Direct operating expenses (b) | Direct operating expenses (b) | | 35,464 | | | 210,194 | | | 69,623 | | | 341,716 | | Direct operating expenses (b) | | 296,258 | | | 92,497 | | | 462,019 | | | 191,728 | |
Selling, general and administrative expenses (c) | Selling, general and administrative expenses (c) | | 74,950 | | | 86,854 | | | 135,275 | | | 174,621 | | Selling, general and administrative expenses (c) | | 162,277 | | | 96,018 | | | 337,116 | | | 177,675 | |
Depreciation and amortization | Depreciation and amortization | | 23,875 | | | 27,434 | | | 50,457 | | | 54,254 | | Depreciation and amortization | | 30,533 | | | 25,677 | | | 59,963 | | | 54,087 | |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | (7,979) | | | — | | | (161) | | | — | |
Restructuring charges | Restructuring charges | | 1,372 | | | 0 | | | 21,299 | | | — | | Restructuring charges | | — | | | 1,372 | | | — | | | 21,299 | |
Operating income (loss) | Operating income (loss) | | (112,524) | | | 69,590 | | | (239,139) | | | 1,444 | | Operating income (loss) | | 35,350 | | | (46,812) | | | (47,988) | | | (105,491) | |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Loss in equity method investments | Loss in equity method investments | | (1,568) | | | (1,170) | | | (3,264) | | | (2,643) | | Loss in equity method investments | | (1,774) | | | (1,568) | | | (2,981) | | | (3,264) | |
Interest income | Interest income | | 349 | | | 6,268 | | | 644 | | | 13,583 | | Interest income | | 773 | | | 837 | | | 1,548 | | | 1,609 | |
Interest expense | Interest expense | | (7,675) | | | (144) | | | (8,084) | | | (1,249) | | Interest expense | | (8,167) | | | (5,262) | | | (17,415) | | | (10,535) | |
Miscellaneous income (loss), net | | (7,362) | | | 9,355 | | | 26,862 | | | 16,386 | | |
Miscellaneous income (expense), net | | Miscellaneous income (expense), net | | (17,100) | | | (7,568) | | | (19,647) | | | 26,449 | |
| | (16,256) | | | 14,309 | | | 16,158 | | | 26,077 | | | (26,268) | | | (13,561) | | | (38,495) | | | 14,259 | |
Income (loss) from operations before income taxes | Income (loss) from operations before income taxes | | (128,780) | | | 83,899 | | | (222,981) | | | 27,521 | | Income (loss) from operations before income taxes | | 9,082 | | | (60,373) | | | (86,483) | | | (91,232) | |
Income tax expense | | (323) | | | (1,255) | | | (486) | | | (1,440) | | |
Income tax benefit (expense) | | Income tax benefit (expense) | | (4,063) | | | 298 | | | 14,847 | | | (9,159) | |
Net income (loss) | Net income (loss) | | (129,103) | | | 82,644 | | | (223,467) | | | 26,081 | | Net income (loss) | | 5,019 | | | (60,075) | | | (71,636) | | | (100,391) | |
Less: Net income (loss) attributable to redeemable noncontrolling interests | Less: Net income (loss) attributable to redeemable noncontrolling interests | | (3,342) | | | 885 | | | (7,231) | | | 249 | | Less: Net income (loss) attributable to redeemable noncontrolling interests | | 2,642 | | | (3,342) | | | 4,854 | | | (7,231) | |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | (902) | | | 453 | | | (1,532) | | | 493 | | Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 106 | | | (902) | | | 471 | | | (1,532) | |
Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (124,859) | | | $ | 81,306 | | | $ | (214,704) | | | $ | 25,339 | | Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | 2,271 | | | $ | (55,831) | | | $ | (76,961) | | | $ | (91,628) | |
| Basic and diluted income (loss) per common share attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (5.17) | | | $ | 3.39 | | | $ | (8.91) | | | $ | 1.06 | | |
| Basic earnings (loss) per common share attributable to Madison Square Garden Entertainment Corp.’s stockholders | | Basic earnings (loss) per common share attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | 0.07 | | | $ | (1.64) | | | $ | (2.25) | | | $ | (2.70) | |
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | | Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | | $ | 0.07 | | | $ | (1.64) | | | $ | (2.25) | | | $ | (2.70) | |
Weighted-average number of common shares outstanding: | Weighted-average number of common shares outstanding: | | Weighted-average number of common shares outstanding: | |
Basic and diluted (d) | | 24,146 | | | 23,992 | | | 24,108 | | | 23,992 | | |
| Basic | | Basic | | 34,278 | | | 34,021 | | | 34,186 | | | 33,961 | |
Diluted | | Diluted | | 34,436 | | | 34,021 | | | 34,186 | | | 33,961 | |
_________________
(a)Includes revenues from related parties of $5,262$30,702 and $984$4,638 for the three months ended December 31, 20202021 and 2019,2020, respectively, and $9,280$34,889 and $7,459$7,461 for the six months ended December 31, 20202021 and 2019,2020, respectively.
(b)Includes net charges from related parties of $15$37,027 and $23,976 $35,270for the three months ended December 31, 20202021 and 2019,2020, respectively, and$96 $79,360 and $40,405$75,186 for the six months ended December 31, 20202021 and 2019,2020, respectively.
(c)Includes net charges to related parties of $(10,086)$(9,526) and $(31,974) $(10,491)for the three months ended December 31, 20202021 and 2019,2020, respectively, and $(21,969)$(16,786) and $(65,757)$(20,538) for the six months ended December 31, 20202021 and 2019,2020, respectively.
(d)On April 17, 2020 (the “Entertainment Distribution Date”), 23,992 common shares were distributed to Madison Square Garden Sports Corp. (“MSG Sports,” formerly known as The Madison Square Garden Company) stockholders as of April 13, 2020. This share amount is being utilized for the calculation of basic and diluted loss per common share attributable to Madison Square Garden Entertainment Corp.’s stockholders for the six months ended December 31, 2019 because Madison Square Garden Entertainment Corp. was a wholly-owned subsidiary of MSG Sports prior to the Entertainment Distribution Date.
See accompanying notes to unaudited consolidated and combined financial statements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | | | Six Months Ended |
| | | | | December 31, | | | | December 31, |
| | | | | 2020 | | | 2019 | | | | 2020 | | | | 2019 |
Net income (loss) | | | | | $ | (129,103) | | | | | $ | 82,644 | | | | | $ | (223,467) | | | | | $ | 26,081 | |
Other comprehensive income, before income taxes: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Amortization of actuarial loss included in net periodic benefit cost | | | | | 290 | | | | | 346 | | | | | 642 | | | | | 685 | |
Cumulative translation adjustments | | | | | 11,883 | | | | | 23,186 | | | | | 25,834 | | | | | 13,168 | |
Other comprehensive income, before income taxes | | | | | 12,173 | | | | | 23,532 | | | | | 26,476 | | | | | 13,853 | |
Income tax expense related to items of other comprehensive income | | | | | 0 | | | | | 0 | | | | | 0 | | | | | 0 | |
Other comprehensive income, net of income taxes | | | | | 12,173 | | | | | 23,532 | | | | | 26,476 | | | | | 13,853 | |
Comprehensive income (loss) | | | | | (116,930) | | | | | 106,176 | | | | | (196,991) | | | | | 39,934 | |
Less: Comprehensive income (loss) attributable to redeemable noncontrolling interests | | | | | (3,342) | | | | | 885 | | | | | (7,231) | | | | | 249 | |
Less: Comprehensive income (loss) attributable to nonredeemable noncontrolling interests | | | | | (902) | | | | | 453 | | | | | (1,532) | | | | | 493 | |
Comprehensive income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | | | | $ | (112,686) | | | | | $ | 104,838 | | | | | $ | (188,228) | | | | | $ | 39,192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | | Six Months Ended |
| | | | December 31, | | | | December 31, |
| | | | 2021 | | | | 2020 | | | | 2021 | | | | 2020 |
Net income (loss) | | | | $ | 5,019 | | | | | $ | (60,075) | | | | | $ | (71,636) | | | | | $ | (100,391) | |
Other comprehensive income (loss), before income taxes: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Amortization of prior service credit included in net periodic benefit cost | | | | 510 | | | | | 416 | | | | | 1,020 | | | | | 894 | |
Cumulative translation adjustments | | | | 2,486 | | | | | 11,883 | | | | | (3,932) | | | | | 25,834 | |
Other comprehensive income (loss), before income taxes | | | | 2,996 | | | | | 12,299 | | | | | (2,912) | | | | | 26,728 | |
Income tax benefit (expense) related to items of other comprehensive income (loss) | | | | (568) | | | | | (3,733) | | | | | 552 | | | | | (6,465) | |
Other comprehensive income (loss), net of income taxes | | | | 2,428 | | | | | 8,566 | | | | | (2,360) | | | | | 20,263 | |
Comprehensive income (loss) | | | | 7,447 | | | | | (51,509) | | | | | (73,996) | | | | | (80,128) | |
Less: Net income (loss) attributable to redeemable noncontrolling interests | | | | 2,642 | | | | | (3,342) | | | | | 4,854 | | | | | (7,231) | |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | | | 106 | | | | | (902) | | | | | 471 | | | | | (1,532) | |
Comprehensive income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | | | $ | 4,699 | | | | | $ | (47,265) | | | | | $ | (79,321) | | | | | $ | (71,365) | |
See accompanying notes to unaudited consolidated and combined financial statements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | Six Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net income (loss) | | $ | (223,467) | | | $ | 26,081 | | |
Adjustment to reconcile net income (loss) to net cash (used in) provided by operating activities: | | |
Net loss | | Net loss | | $ | (71,636) | | | $ | (100,391) | |
Adjustment to reconcile net loss to net cash provided by (used in) operating activities: | | Adjustment to reconcile net loss to net cash provided by (used in) operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 50,457 | | | 54,254 | | Depreciation and amortization | | 59,963 | | | 54,087 | |
| Provision for deferred income taxes | | 476 | | | 515 | | |
Amortization of deferred financing costs | | Amortization of deferred financing costs | | 4,367 | | | 1,898 | |
Benefit from deferred income taxes | | Benefit from deferred income taxes | | (17,173) | | | (29,505) | |
Share-based compensation expense | Share-based compensation expense | | 35,091 | | | 20,458 | | Share-based compensation expense | | 43,699 | | | 45,984 | |
Loss in equity method investments | Loss in equity method investments | | 3,264 | | | 2,643 | | Loss in equity method investments | | 2,981 | | | 3,264 | |
| Net unrealized and realized gains on equity investments with readily determinable fair value | | (26,431) | | | (14,725) | | |
Net unrealized loss (gains) on equity investments with readily determinable fair value | | Net unrealized loss (gains) on equity investments with readily determinable fair value | | 19,615 | | | (26,431) | |
Provision for credit losses | Provision for credit losses | | 770 | | | 4,450 | | Provision for credit losses | | 1,236 | | | 495 | |
| Other non-cash adjustments | Other non-cash adjustments | | 1,354 | | | 707 | | Other non-cash adjustments | | 2,202 | | | 263 | |
Change in assets and liabilities: | Change in assets and liabilities: | | Change in assets and liabilities: | |
Accounts receivable, net | | (17,296) | | | (8,959) | | |
Accounts receivable | | Accounts receivable | | (20,857) | | | (9,821) | |
Receivables from related parties, net of payables | Receivables from related parties, net of payables | | (10,098) | | | 9,316 | | Receivables from related parties, net of payables | | 16,411 | | | (2,049) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | (2,264) | | | (23,217) | | Prepaid expenses and other assets | | (11,504) | | | (9,173) | |
Accounts payable | Accounts payable | | (12,306) | | | 17,924 | | Accounts payable | | 17,796 | | | (12,614) | |
| Prepaid/payable for income taxes | | Prepaid/payable for income taxes | | 8,044 | | | 2,033 | |
Accrued and other liabilities | Accrued and other liabilities | | (27,676) | | | 19,582 | | Accrued and other liabilities | | 5,133 | | | (32,420) | |
Collections due to promoters, including noncurrent portion | Collections due to promoters, including noncurrent portion | | (6,824) | | | (6,397) | | Collections due to promoters, including noncurrent portion | | 5,011 | | | (6,824) | |
Deferred revenue | Deferred revenue | | 14,658 | | | (2,913) | | Deferred revenue | | 47,016 | | | 14,077 | |
Operating lease right-of-use assets and lease liabilities | Operating lease right-of-use assets and lease liabilities | | 4,660 | | | 4,039 | | Operating lease right-of-use assets and lease liabilities | | 20,482 | | | 4,660 | |
Net cash (used in) provided by operating activities | | $ | (215,632) | | | $ | 103,758 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | $ | 132,786 | | | $ | (102,467) | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Capital expenditures | Capital expenditures | | $ | (219,296) | | | $ | (208,028) | | Capital expenditures | | $ | (313,076) | | | $ | (221,829) | |
Capitalized interest | | Capitalized interest | | (19,926) | | | (7,911) | |
| Purchase of short-term investments | | 0 | | | (106,063) | | |
| Proceeds from maturity of short-term investments | Proceeds from maturity of short-term investments | | 339,110 | | | 106,587 | | Proceeds from maturity of short-term investments | | — | | | 339,110 | |
| Proceeds from sale of equity securities | Proceeds from sale of equity securities | | 20,583 | | | 0 | | Proceeds from sale of equity securities | | — | | | 20,583 | |
| Proceeds from sale of nonconsolidated affiliate | | 0 | | | 18,000 | | |
Loan repayment received from subordinated debt | | 0 | | | 58,735 | | |
| Cash received for notes receivable | Cash received for notes receivable | | 6,328 | | | 750 | | Cash received for notes receivable | | — | | | 6,328 | |
Other investing activities | Other investing activities | | (43) | | | 413 | | Other investing activities | | 470 | | | (43) | |
Net cash provided by (used in) investing activities | | $ | 146,682 | | | $ | (129,606) | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | $ | (332,532) | | | $ | 136,238 | |
| See accompanying notes to unaudited consolidated and combined financial statements. | |
See accompanying notes to unaudited consolidated financial statements. | | See accompanying notes to unaudited consolidated financial statements. |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
| | | Six Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from issuance of term loan, net of issuance discount | Proceeds from issuance of term loan, net of issuance discount | | $ | 630,500 | | | $ | 0 | | Proceeds from issuance of term loan, net of issuance discount | | $ | — | | | $ | 630,500 | |
Proceeds from revolving credit facility | Proceeds from revolving credit facility | | 6,500 | | | 0 | | Proceeds from revolving credit facility | | — | | | 6,500 | |
Taxes paid in lieu of shares issued for equity-based compensation | Taxes paid in lieu of shares issued for equity-based compensation | | (5,975) | | | 0 | | Taxes paid in lieu of shares issued for equity-based compensation | | (15,240) | | | (8,123) | |
Noncontrolling interest holders’ capital contribution | Noncontrolling interest holders’ capital contribution | | 500 | | | 2,000 | | Noncontrolling interest holders’ capital contribution | | 4,677 | | | 500 | |
Distributions to noncontrolling interest holders | Distributions to noncontrolling interest holders | | 0 | | | (535) | | Distributions to noncontrolling interest holders | | (1,060) | | | — | |
Distribution to related parties associated with the settlement of certain share-based awards | | Distribution to related parties associated with the settlement of certain share-based awards | | (516) | | | — | |
| Repayment of revolving credit facility | | — | | | (15,000) | | |
Principal repayment on long-term debt | | (2,500) | | | (3,750) | | |
Repayments of revolving credit facility | | Repayments of revolving credit facility | | (15,000) | | | — | |
Principal repayments on long-term debt | | Principal repayments on long-term debt | | (30,500) | | | (16,250) | |
| Payments for financing costs | Payments for financing costs | | (14,615) | | | 0 | | Payments for financing costs | | — | | | (14,615) | |
Net transfers from (to) Madison Square Garden Sports Corp. and its subsidiaries | | 0 | | | (23,600) | | |
Net cash provided by (used in) financing activities | | $ | 614,410 | | | $ | (40,885) | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | $ | (57,639) | | | $ | 598,512 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | Effect of exchange rates on cash, cash equivalents and restricted cash | | 7,795 | | | 1,693 | | Effect of exchange rates on cash, cash equivalents and restricted cash | | (572) | | | 7,795 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 553,255 | | | (65,040) | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | | (257,957) | | | 640,078 | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | | 924,304 | | | 1,092,065 | | Cash, cash equivalents and restricted cash at beginning of period | | 1,539,976 | | | 1,121,141 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | | $ | 1,477,559 | | | $ | 1,027,025 | | Cash, cash equivalents and restricted cash at end of period | | $ | 1,282,019 | | | $ | 1,761,219 | |
Non-cash investing and financing activities: | Non-cash investing and financing activities: | | | | | Non-cash investing and financing activities: | | | | |
| Investments and loans to nonconsolidated affiliates | | Investments and loans to nonconsolidated affiliates | | $ | 675 | | | $ | — | |
| Capital expenditures incurred but not yet paid | Capital expenditures incurred but not yet paid | | $ | 76,945 | | | $ | 46,151 | | Capital expenditures incurred but not yet paid | | $ | 154,131 | | | $ | 79,478 | |
Share-based compensation capitalized in property and equipment | Share-based compensation capitalized in property and equipment | | $ | 2,784 | | | $ | 2,482 | | Share-based compensation capitalized in property and equipment | | $ | 1,763 | | | $ | 2,784 | |
|
See accompanying notes to unaudited consolidated and combined financial statements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ AND DIVISIONAL EQUITY
AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
| | | | Three Months Ended December 31, 2020 | | Three Months Ended December 31, 2021 |
| | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficits) | | Accumulated Other Comprehensive Income (Loss) | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests | | Common Stock Issued | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of September 30, 2020 | | $ | 241 | | | $ | 2,757,155 | | | $ | 52,091 | | | $ | (37,554) | | | $ | 2,771,933 | | | $ | 11,773 | | | $ | 2,783,706 | | | $ | 17,298 | | |
Balance as of September 30, 2021 | | Balance as of September 30, 2021 | | $ | 342 | | | $ | 2,293,157 | | | $ | (175,573) | | | $ | (35,060) | | | $ | 2,082,866 | | | $ | 13,141 | | | $ | 2,096,007 | | | $ | 140,410 | |
| Net loss | | — | | | — | | | (124,859) | | | — | | | (124,859) | | | (902) | | | (125,761) | | | (3,342) | | |
Net income | | Net income | | — | | | — | | | 2,271 | | | — | | | 2,271 | | | 106 | | | 2,377 | | | 2,642 | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | 12,173 | | | 12,173 | | | — | | | 12,173 | | | — | | Other comprehensive income | | — | | | — | | | — | | | 2,428 | | | 2,428 | | | — | | | 2,428 | | | — | |
Comprehensive loss | | — | | | — | | | — | | | — | | | (112,686) | | | (902) | | | (113,588) | | | (3,342) | | |
Comprehensive income | | Comprehensive income | | — | | | — | | | — | | | — | | | 4,699 | | | 106 | | | 4,805 | | | 2,642 | |
Share-based compensation | Share-based compensation | | — | | | 24,892 | | | — | | | — | | | 24,892 | | | — | | | 24,892 | | | — | | Share-based compensation | | — | | | 24,595 | | | — | | | — | | | 24,595 | | | — | | | 24,595 | | | — | |
Accretion of put options | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 587 | | |
Tax withholding associated with shares issued for equity-based compensation | Tax withholding associated with shares issued for equity-based compensation | | — | | | (5) | | | — | | | — | | | (5) | | | — | | | (5) | | | — | | Tax withholding associated with shares issued for equity-based compensation | | — | | | (337) | | | — | | | — | | | (337) | | | — | | | (337) | | | — | |
| | Accretion of put options | | Accretion of put options | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 587 | |
Contributions from noncontrolling interest holders | Contributions from noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | 300 | | | 300 | | | — | | Contributions from noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | 3,805 | | | 3,805 | | | — | |
| Balance as of December 31, 2020 | | $ | 241 | | | $ | 2,782,042 | | | $ | (72,768) | | | $ | (25,381) | | | $ | 2,684,134 | | | $ | 11,171 | | | $ | 2,695,305 | | | $ | 14,543 | | |
Distributions to noncontrolling interest holders | | Distributions to noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | (1,060) | | | (1,060) | | | (1,635) | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | | $ | 342 | | | $ | 2,317,415 | | | $ | (173,302) | | | $ | (32,632) | | | $ | 2,111,823 | | | $ | 15,992 | | | $ | 2,127,815 | | | $ | 142,004 | |
| See accompanying notes to unaudited consolidated and combined financial statements. | |
See accompanying notes to unaudited consolidated financial statements. | | See accompanying notes to unaudited consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP. |
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ AND DIVISIONAL EQUITY |
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) |
(Unaudited) |
(in thousands) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended December 31, 2019 |
| | | | | | | | | | MSG Sports Corp.’s Investment | | Accumulated Other Comprehensive Income (Loss) | | Total Company Divisional Equity | | Non - redeemable Noncontrolling Interests | | Total Divisional Equity | | Redeemable Noncontrolling Interests |
Balance as of September 30, 2019 | | | | | | | | | | $ | 2,539,552 | | | $ | (56,602) | | | $ | 2,482,950 | | | $ | 15,539 | | | $ | 2,498,489 | | | $ | 66,991 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 81,306 | | | — | | | 81,306 | | | 453 | | | 81,759 | | | 885 | |
Other comprehensive income | | | | | | | | | | — | | | 23,532 | | | 23,532 | | | — | | | 23,532 | | | — | |
Comprehensive income | | | | | | | | | | — | | | — | | | 104,838 | | | 453 | | | 105,291 | | | 885 | |
Net increase in Madison Square Garden Sports Corp. Investment | | | | | | | | | | 22,789 | | | — | | | 22,789 | | | — | | | 22,789 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Contribution from noncontrolling interest holders | | | | | | | | | | — | | | — | | | — | | | 2,000 | | | 2,000 | | | — | |
Distributions to noncontrolling interest holders | | | | | | | | | | — | | | — | | | — | | | (535) | | | (535) | | | — | |
Balance as of December 31, 2019 | | | | | | | | | | $ | 2,643,647 | | | $ | (33,070) | | | $ | 2,610,577 | | | $ | 17,457 | | | $ | 2,628,034 | | | $ | 67,876 | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated and combined financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) |
(Unaudited) |
(in thousands) |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 |
| | Common Stock Issued | | Additional Paid-In Capital | | | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Loss | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of September 30, 2020 | | $ | 340 | | | $ | 2,294,072 | | | | | $ | 16,345 | | | | | $ | (37,295) | | | $ | 2,273,462 | | | $ | 11,773 | | | $ | 2,285,235 | | | $ | 17,298 | |
| | | | | | | | | | | | | | | | | | | | |
Reversal of valuation allowance | | | | | | | | 1,415 | | | | | — | | | 1,415 | | | — | | | 1,415 | | | — | |
Net loss | | — | | — | | | | (55,831) | | | | | — | | | (55,831) | | | (902) | | | (56,733) | | | (3,342) | |
Other comprehensive income | | — | | — | | | | — | | | | | 8,566 | | | 8,566 | | | — | | | 8,566 | | | — | |
Comprehensive loss | | — | | | — | | | | | — | | | | | — | | | (47,265) | | | (902) | | | (48,167) | | | (3,342) | |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | — | | | 31,158 | | | | | — | | | | | — | | | 31,158 | | | — | | | 31,158 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Tax withholding associated with shares issued for equity-based compensation | | — | | | (53) | | | | | — | | | | | — | | | (53) | | | — | | | (53) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Accretion of put options | | — | | | — | | | | | — | | | | | — | | | — | | | — | | | — | | | 587 | |
Contribution from noncontrolling interest holders | | — | | | — | | | | | — | | | | | — | | | — | | | 300 | | | 300 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | | $ | 340 | | | $ | 2,325,177 | | | | | $ | (38,071) | | | | | $ | (28,729) | | | $ | 2,258,717 | | | $ | 11,171 | | | $ | 2,269,888 | | | $ | 14,543 | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP. |
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ AND DIVISIONAL EQUITY |
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) |
(Unaudited) |
(in thousands) |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended December 31, 2020 |
| | Common Stock Issued | | Additional Paid-In Capital | | | | Retained Earnings (Accumulated Deficits) | | | | Accumulated Other Comprehensive Income (Loss) | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of June 30, 2020 | | $ | 240 | | | $ | 2,751,318 | | | | | $ | 141,936 | | | | | $ | (51,857) | | | $ | 2,841,637 | | | $ | 12,203 | | | $ | 2,853,840 | | | $ | 20,600 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | — | | | — | | | | | (214,704) | | | | | — | | | (214,704) | | | (1,532) | | | (216,236) | | | (7,231) | |
Other comprehensive income | | — | | | — | | | | | — | | | | | 26,476 | | | 26,476 | | | — | | | 26,476 | | | — | |
Comprehensive loss | | — | | | — | | | | | — | | | | | — | | | (188,228) | | | (1,532) | | | (189,760) | | | (7,231) | |
Share-based compensation | | — | | | 36,700 | | | | | — | | | | | — | | | 36,700 | | | — | | | 36,700 | | | |
Accretion of put options | | — | | | — | | | | | — | | | | | — | | | — | | | — | | | — | | | 1,174 | |
Tax withholding associated with shares issued for equity-based compensation | | 1 | | | (5,976) | | | | | — | | | | | — | | | (5,975) | | | — | | | (5,975) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Contributions from noncontrolling interest holders | | — | | | — | | | | | — | | | | | — | | | — | | | 500 | | | 500 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | | $ | 241 | | | $ | 2,782,042 | | | | | $ | (72,768) | | | | | $ | (25,381) | | | $ | 2,684,134 | | | $ | 11,171 | | | $ | 2,695,305 | | | $ | 14,543 | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated and combined financial statements. |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended December 31, 2021 |
| | Common Stock Issued | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of June 30, 2021 | | $ | 340 | | | $ | 2,294,775 | | | $ | (96,341) | | | $ | (30,272) | | | $ | 2,168,502 | | | $ | 11,904 | | | $ | 2,180,406 | | | $ | 137,834 | |
| | | | | | | | | | | | | | | | |
Net (loss) income | | — | | | — | | | (76,961) | | | — | | | (76,961) | | | 471 | | | (76,490) | | | 4,854 | |
Other comprehensive loss | | — | | | — | | | — | | | (2,360) | | | (2,360) | | | — | | | (2,360) | | | — | |
Comprehensive (loss) income | | — | | | — | | | — | | | — | | | (79,321) | | | 471 | | | (78,850) | | | 4,854 | |
Share-based compensation | | — | | | 44,287 | | | — | | | — | | | 44,287 | | | — | | | 44,287 | | | — | |
Tax withholding associated with shares issued for equity-based compensation | | 2 | | | (15,242) | | | — | | | — | | | (15,240) | | | — | | | (15,240) | | | — | |
Adjustment of redeemable noncontrolling interest for change in ownership | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,500) | |
| | | | | | | | | | | | | | | | |
Redeemable noncontrolling interest adjustment to redemption fair value | | — | | | (6,178) | | | — | | | — | | | (6,178) | | | — | | | (6,178) | | | 7,566 | |
Accretion of put options | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,174 | |
Contributions from noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | 4,677 | | | 4,677 | | | — | |
Distributions to noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | (1,060) | | | (1,060) | | | (1,635) | |
Distribution to related parties associated with the settlement of certain share-based awards | | — | | | (227) | | | — | | | — | | | (227) | | | — | | | (227) | | | (289) | |
Balance as of December 31, 2021 | | $ | 342 | | | $ | 2,317,415 | | | $ | (173,302) | | | $ | (32,632) | | | $ | 2,111,823 | | | $ | 15,992 | | | $ | 2,127,815 | | | $ | 142,004 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements. |
|
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| | | | | | | | | | | | | | | | | | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP. | | | | |
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ AND DIVISIONAL EQUITY | | | | |
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | | | | |
(Unaudited) | | | | |
(in thousands) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Six Months Ended December 31, 2019 | | | | |
| | | | | | | | | | MSG Sports’ Investment | | Accumulated Other Comprehensive Income (Loss) | | Total Company Divisional Equity | | Non - redeemable Noncontrolling Interests | | Total Divisional Equity | | Redeemable Noncontrolling Interests | | | | |
Balance as of June 30, 2019 | | | | | | | | | | $ | 2,618,971 | | | $ | (46,923) | | | $ | 2,572,048 | | | $ | 13,790 | | | $ | 2,585,838 | | | $ | 67,627 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 25,339 | | | — | | | 25,339 | | | 493 | | | 25,832 | | | 249 | | | | | |
Other comprehensive income | | | | | | | | | | — | | | 13,853 | | | 13,853 | | | — | | | 13,853 | | | — | | | | | |
Comprehensive income | | | | | | | | | | — | | | — | | | 39,192 | | | 493 | | | 39,685 | | | 249 | | | | | |
Net decrease in Madison Square Garden Sports Corp. Investment | | | | | | | | | | (663) | | | — | | | (663) | | | — | | | (663) | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Contributions from noncontrolling interest holders | | | | | | | | | | — | | | — | | | — | | | 3,709 | | | 3,709 | | | — | | | | | |
Distributions to noncontrolling interest holders | | | | | | | | | | — | | | — | | | — | | | (535) | | | (535) | | | 0 | | | | | |
Balance as of December 31, 2019 | | | | | | | | | | $ | 2,643,647 | | | $ | (33,070) | | | $ | 2,610,577 | | | $ | 17,457 | | | $ | 2,628,034 | | | $ | 67,876 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated and combined financial statements. | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP. | | | | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | | | |
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | | | | |
(Unaudited) | | | | |
(in thousands) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended December 31, 2020 | | | | |
| | Common Stock Issued | | Additional Paid-In Capital | | | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Loss | | Total Madison Square Garden Entertainment Corp. Stockholders’ Equity | | Non - redeemable Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests | | | | |
Balance as of June 30, 2020 | | $ | 338 | | | $ | 2,285,709 | | | | | $ | 50,246 | | | | | $ | (48,992) | | | $ | 2,287,301 | | | $ | 12,203 | | | $ | 2,299,504 | | | $ | 20,600 | | | | | |
Cumulative effect of adoption of ASU 2016-13, credit losses | | | | | | | | (480) | | | | | — | | | (480) | | | | | (480) | | | | | | | |
Reversal of valuation allowance | | — | | | — | | | | | 3,791 | | | | | — | | | 3,791 | | | — | | | 3,791 | | | — | | | | | |
Net loss | | — | | — | | | | (91,628) | | | | | — | | | (91,628) | | | (1,532) | | | (93,160) | | | (7,231) | | | | | |
Other comprehensive income | | — | | — | | | | — | | | | | 20,263 | | | 20,263 | | | — | | | 20,263 | | | — | | | | | |
Comprehensive loss | | | | | | | | | | | | — | | | (71,365) | | | (1,532) | | | (72,897) | | | (7,231) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | — | | | 47,593 | | | | | — | | | | | — | | | 47,593 | | | — | | | 47,593 | | | — | | | | | |
Tax withholding associated with shares issued for equity-based compensation | | 2 | | | (8,125) | | | | | — | | | | | — | | | (8,123) | | | — | | | (8,123) | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accretion of put options | | — | | | — | | | | | — | | | | | — | | | — | | | — | | | — | | | 1,174 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Contributions from noncontrolling interest holders | | — | | | — | | | | | — | | | | | — | | | — | | | 500 | | | 500 | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | | $ | 340 | | | $ | 2,325,177 | | | | | $ | (38,071) | | | | | $ | (28,729) | | | $ | 2,258,717 | | | $ | 11,171 | | | $ | 2,269,888 | | | $ | 14,543 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements. | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
All amounts included in the following notes to consolidated and combined financial statements (unaudited) are presented in thousands, except per share data or as otherwise noted.
Note 1. Description of Business and Basis of Presentation
Description of BusinessEntertainment Distribution and Merger with MSG Networks Inc.
Madison Square Garden Entertainment Corp. (together with its subsidiaries, the “Company” or “MSG Entertainment”), is a leader in live experiences comprised of iconic venues; marquee entertainment content; popular dining and nightlife offerings; and a premier music festival. Utilizing the Company’s powerful brands and live entertainment expertise, the Company delivers unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences. The Company’s portfolio of venues includes: Madison Square Garden (“The Garden”), Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, and The Chicago Theatre. In addition, the Company is constructing a state-of-the-art venue, MSG Sphere, in Las Vegas and plans to build a second MSG Sphere in London, pending necessary approvals. The Company also includes the original production, the Christmas Spectacular Starring the Radio City Rockettes (“Christmas Spectacular”), as well as Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival, and Tao Group Holdings LLC (“Tao Group Hospitality”), a hospitality group with globally-recognized entertainment dining and nightlife brands.
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden, Hulu Theater at Madison Square Garden and The Chicago Theatre. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City. Additionally, Tao Group Hospitality operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Chicago, Australia, and Singapore.
The Company, formerly named MSG Entertainment Spinco, Inc., was incorporated on November 21, 2019 as a direct, wholly ownedwholly-owned subsidiary of Madison Square Garden Sports Corp. (“MSG Sports” or “Former Parent”), formerly known as The Madison Square Garden Company. On March 31, 2020, MSG Sports’ board of directors approved the distribution of all the outstanding common stock of MSG Entertainment to MSG Sports’ stockholders (the “Entertainment Distribution”), which occurred on April 17, 2020 (the “Entertainment Distribution Date”). See Note 1 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K, as amended by Form 10-K/A filed on February 9, 2022 (the “Form 10-K”) for more information regarding the Entertainment Distribution.
Following the Entertainment Distribution, the Company has 2 reportable segments (the Entertainment business and the Tao Group Hospitality business) as a result of certain changes in the financial information that is provided to its Chief Operating Decision Maker (“CODM”). Additionally, as As part of the Entertainment Distribution, the Company has entered into various agreements with MSG Sports as detailed in Note 17.18.
BasisOn July 9, 2021, the Company completed its previously announced acquisition of PresentationMSG Networks Inc. pursuant to the Agreement and Plan of Merger, dated as of March 25, 2021 (the “Merger Agreement”), among the Company, Broadway Sub Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and MSG Networks Inc. Merger Sub merged with and into MSG Networks Inc. (the “Merger”), with MSG Networks Inc. surviving and continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of the Company. On July 9, 2021, at the effective time of the Merger (the “Effective Time”), (i) each share of Class A common stock, par value $0.01 per share, of MSG Networks Inc. (“MSGN Class A Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class A common stock, par value $0.01 per share, of the Company (“Class A Common Stock”) such that each holder of record of shares of MSGN Class A Common Stock had the right to receive, in the aggregate, a number of shares of Class A Common Stock equal to the total number of shares of MSGN Class A Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share and (ii) each share of Class B common stock, par value $0.01 per share, of MSG Networks Inc. (“MSGN Class B Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class B common stock, par value $0.01 per share, of the Company (“Class B Common Stock”) such that each holder of record of shares of MSGN Class B Common Stock had the right to receive, in the aggregate, a number of shares of Class B Common Stock equal to the total number of shares of MSGN Class B Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share, in each case except for Excluded Shares (as defined in the Merger Agreement). The Company issued 7,476 shares of the Class A Common Stock and 2,337 shares of Class B Common Stock on July 9, 2021 to holders of MSGN Class A Common Stock and MSGN Class B Common Stock, respectively, which shares are reflected as outstanding for all periods presented.
The Merger has been accounted for as a transaction between entities under common control as the Company and MSG Networks Inc. were, prior to the Merger, each controlled by the Dolan Family Group (as defined herein). Upon the closing of the Merger, the net assets of MSG Networks Inc. were combined with those of the Company at their historical carrying amounts and the companies have been presented on a combined basis for all historical periods that the companies were under common control. As a result, all prior period balances in these consolidated financial statements (including share activities) were retrospectively adjusted as if MSG Entertainment and MSG Networks Inc. had been operating as a single company.
Description of Business
The Company reports onis a fiscal year basis ending on June 30th. In these consolidatedleader in live experiences comprised of iconic venues; marquee entertainment brands; regional sports and combined financial statements, the years ended on June 30, 2021entertainment networks; popular dining and 2020 are referred to as “Fiscal Year 2021,”nightlife offerings; and “Fiscal Year 2020,” respectively.
Subsequent to the Entertainment Distribution,a premier music festival. Utilizing the Company’s balance sheets as of December 31, 2020powerful brands and June 30, 2020 and for the statement of operations for the three and six months ended December 31, 2020 are presented on a consolidated basis, aslive entertainment expertise, the Company became a standalone public company on April 17, 2020. delivers unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences.
The Company is comprised of 3 reportable segments: Entertainment, MSG Networks and Tao Group Hospitality.
•The Entertainment segment includes the Company’s financial statements prior to April 17, 2020 that are included inportfolio of venues: Madison Square Garden (“The Garden”), Hulu Theater at Madison Square Garden, Radio City Music Hall, the results of operations for the year ended June 30, 2020,Beacon Theatre, and the interim periods therein, were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of MSG Sports (“combined financial statements”). These financial statements reflect the combined historical results of operations, financial position and cash flows ofThe Chicago Theatre. In addition, the Company has unveiled its vision for state-of-the-art venues, called MSG Sphere, and is currently building its first such venue in accordance with U.S. generally accepted accounting principles (“GAAP”) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 1-B, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity, and Article 10 of Regulation S-X ofLas Vegas. The Entertainment segment also includes the SEC for interim financial information. References to GAAP issued byoriginal production, the Financial Accounting Standards Board (“FASB”) in these footnotes are to the FASB Accounting Standards Codification, also referred to as the “Codification” or “ASC.”
See Note 1 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2020 included in the Company’s Annual Report on Form 10-K for more information regarding the assumptions underlying the combined financial statements and additional details on the preparation of such combined financial statements.Christmas
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Management believesSpectacular Starring the Radio City Rockettes (“Christmas Spectacular”), as well as Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the assumptions underlyingBoston Calling Music 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 combinedCompany’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 (“DMA”), as well as other portions of New York, New Jersey, Connecticut and Pennsylvania and features a wide range of sports content, including exclusive live local games and other programming of the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”), New York Islanders, New Jersey Devils and Buffalo Sabres of the National Hockey League (the “NHL”), as well as significant coverage of the New York Giants and Buffalo Bills of the National Football League.
•The Tao Group Hospitality segment features the Company’s controlling interest in TAO Group Holdings LLC, a hospitality group with globally-recognized entertainment dining and nightlife brands including: Tao, Marquee, Lavo, Beauty & Essex, Cathédrale, Hakkasan and Omnia.
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden, Hulu Theater at Madison Square Garden and The Chicago Theatre. The Company leases Radio City Music Hall and the Beacon Theatre. Additionally, Tao Group Hospitality operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in Las Vegas, New York, Southern California, London, Singapore, Sydney and various other domestic and international locations.
Basis of Presentation
The Company reports on a fiscal year basis ending on June 30th (“Fiscal Year”). In these consolidated financial statements, including the assumptions regarding allocating general corporate expenses,year ending on June 30, 2022 is referred to as “Fiscal Year 2022,” and the years ended on June 30, 2021 and 2020 are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by the Companyreferred to as “Fiscal Year 2021” and may not reflect its combined results of operations, financial position, and cash flows had it been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company is unable to quantify the amounts that it would have recorded during the historical periods on a stand-alone basis as it is not practicable to do so. See Note 17 for more information regarding allocations of certain costs from the Company to MSG Sports.
Unaudited Interim Financial Statements“Fiscal Year 2020”, respectively.
The accompanying interim consolidated and combined financial statements have been prepared in accordance with GAAPU.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instruction of Rule 10-01 of Regulation S-X of Securities and Exchange Commission (“SEC”), and should be read in conjunction with the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K.10-K and the Company’s consolidated financial statements and notes thereto for the three months ended September 30, 2021 included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2021, as amended by Form 10-Q/A filed on February 9, 2022. The consolidated and combined financial statements as of December 31, 20202021 and for the three and six months ended December 31, 20202021 and 20192020 presented herein are unaudited; however, in the opinion of management, the financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year. The Company’s dependence on revenues fromAs a result of the production of the Christmas Spectacularand arena license fees from MSG Sports in connection with the Knicks and Rangers use of the Garden, the Company generally means it earns a disproportionate share of its annual revenues in the second quarterand third quarters of its fiscal year. In addition, the Company’s operating results insince the third and fourth quartersquarter of Fiscal Year 2020 and the first and second quarters of Fiscal Year 2021 werehave been negatively impacted due to the COVID-19 pandemic.
ImpactAs discussed above, the Merger has been accounted for as a transaction between entities under common control and resulted in a change in reporting entity for purposes of U.S. GAAP. The results of operations for the eight days ended July 8, 2021 from MSG Networks were immaterial and the Company has included these results in the period for the six months ended December 31, 2021. The following table provides the impact of the COVID-19 Pandemic
The Company’schange in reporting entity on the results of operations for the three and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and actions takensix months ended December 31, 2020 in response by governmental authorities and certain professional sports leagues. As of the date of this Quarterly Report on Form 10-Q, virtually all of the Entertainment business’ operations have been suspended and Tao Group Hospitality is operating at significantly reduced capacity and demand. It is not clear when we will be permitted or able to resume normal business operations.
As a result of government-mandated assembly limitations and closures, our performance venues were closed in mid-March 2020, and, subject to limited exceptions, such as the use of The Garden for Knicks and Rangers (as defined below) home games without fans in attendance and our virtual residency in Fall 2020 featuring Phish’s Trey Anastasio live from the Beacon Theatre, as of the date of this filing no events are permitted to be held at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre. Although events are permitted at The Chicago Theatre, current government-mandated capacity restrictions and other safety requirements make it economically unfeasible to do so. Other than Knicks and Rangers home games at the Garden, all events at our venues have been postponed or canceled through at least March 2021, and will likely be impacted through the rest of 2021. We are not recognizing revenue from events that have been canceled or postponed and, while events have been rescheduled into the second half of calendar year 2021, it is unclear whether and to what extent those events will take place. We are actively monitoring government regulations and guidance, and when such regulations permit, and there is an opportunity to reopen our venues for events safely and on economically feasible terms, we expect that we would do so.
The impact to our operations included the cancellation of both the 2020 production of the Christmas Spectacular and the 2020 Boston Calling Music Festival.
The Company has long-term arena license agreements (the “Arena License Agreements”accordance with Accounting Standards Codification (“ASC”) with MSG Sports that require the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”) to play their home games at The Garden.
While the NBA began its 2020-21 regular season in December 2020 and the NHL began its 2020-21 regular season in January 2021, the Knicks and Rangers are currently playing home games at The Garden without fans in attendance due to government-mandated assembly restrictions. Even if fans are permitted to attend in the future, capacity restrictions, use limitations and social distancing requirements may remain in place through, at least, the rest of Fiscal Year 2021, which would continue to affect the payments we receive under the Arena License Agreements.Subtopic 250-10-50-6:
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Due | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, 2020 |
Decrease in net loss attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | 61,472 | | | $ | 115,165 | |
Decrease in other comprehensive income | | $ | (3,607) | | | $ | (6,213) | |
Decrease in net loss per common share attributable to Madison Square Garden Entertainment Corp.’s stockholders (basic and diluted) | | $ | 3.25 | | | $ | 5.88 | |
Impact of the COVID-19 Pandemic
The Company’s operations and operating results have been, and continue to governmentbe, materially impacted by the COVID-19 pandemic (including COVID-19 variants) and actions taken in response by governmental authorities and certain professional sports leagues. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended, MSG Networks aired substantially fewer games and Tao Group Hospitality was operating at significantly reduced capacity and demand. While operations have resumed, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our performance venues were closed beginning in March 2020. Use of The Garden resumed for Knicks and Rangers home games without fans in December 2020 and January 2021, respectively, and was available at 10% seating capacity from February through May 2021 with certain safety protocols and social distancing. Beginning in May 2021, all of our New York performance venues were permitted to host guests at full capacity, subject to certain restrictions, and effective June 2021, The Chicago Theatre was permitted to host events without restrictions. Effective August 17, 2021, all workers and customers in New York City indoor dining, indoor fitness and indoor entertainment facilities, including our venues, were subject to certain vaccination requirements. Following updated regulations, effective January 3, 2022 for the Chicago Theatre, and January 29, 2022 for our New York venues, all guests five and older, as well as employees, are required to provide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine (although specific performers may require enhanced protocols). Children under age 5 can attend events with a vaccinated adult, but ages 2 to 4 need to wear a mask while inside our venues. In addition, effective August 20, 2021 and continuing, masks are required for all individuals in indoor public spaces in Chicago, including our venues.
For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or cancelled. For the six months ended December 31, 2021 and as of this date, live events have been permitted to be held at all of our performance venues and we are continuing to host and book new events. As a result of an increase in cases of a COVID-19 variant, select bookings were postponed or cancelled at our performance venues in the second quarter of Fiscal Year 2022. Variants of COVID-19 that arise in the future may result in additional postponements or cancellations of bookings at our performance venues.
The impact of the COVID-19 pandemic virtually all of Tao Group Hospitality’s venues were closed for approximately three months starting in mid-March, and Avenue and Vandal in New York were permanently closed in April and June, respectively. Tao Group Hospitality has resumed limitedon our operations at certain venues, subject to significant regulatory requirements, including limits on capacity, curfews and social distancing requirements for outdoor and indoor dining. As of December 31, 2020, eight of Tao Group Hospitality’s venues were open for outdoor dining and/or limited capacity indoor dining, four were open for delivery and/or takeout only, while sixteen venues remained closed.
The COVID-19 pandemic has materially impacted our revenues, most significantly because, asalso included (i) the partial cancellation of the date2021 production of this filing, we are generating substantially reduced sponsorship and advertising revenue as well as reduced payments under the Arena License Agreements and we are not generating revenue from:
•events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall,Christmas Spectacular, (ii) the Beacon Theatre and The Chicago Theatre;
•suite licenses; and
•cancellation of the 2020 production of the Christmas Spectacular, and (iii) the cancellation of both the 2020 and 2021 Boston Calling Music Festivals.
The Company has long-term arena license agreements (the “Arena License Agreements”) with MSG Sports that require the Knicks and Rangers to play their home games at The Garden. As discussed above, capacity restrictions, use limitations and social distancing requirements were in place for the entirety of the Knicks and Rangers 2020-21 regular seasons, which materially impacted the payments we received under the Arena License Agreements for Fiscal Year 2021. On July 1, 2021, the Knicks and Rangers began paying the full amounts provided for under their respective Arena License Agreements and full 82-game regular seasons for the 2021-22 NBA and NHL seasons are scheduled.
The COVID-19 pandemic is having and will likely continue to have a significant and negative impact on our operations and financial performance. As a result we have taken severalof the COVID-19 pandemic and league and government actions to improve our financial flexibility, reduce operating costsrelating thereto, MSG Networks aired substantially fewer NBA and preserve liquidity.
•We have revised our processes and construction schedule for MSG Sphere, providing for a substantially reduced spend inNHL telecasts during Fiscal Year 2021, as compared with Fiscal Year 2019 (the last full fiscal year not impacted by COVID-19), and consequently experienced a lengthened timetable that enablesdecrease in revenues, including a material decrease in advertising revenue. The absence of live sports games also resulted in a decrease in certain MSG Networks expenses, including rights fees, variable production expenses, and advertising sales commissions. MSG Networks has resumed airing full regular season telecast schedules for its five professional teams across both the Company to preserve cash in the near-term. We now expect to open MSG Sphere in Las Vegas in calendar year 2023;
•In connection with our extended construction timeline, we have reduced our expected near-term spending on technologyNBA and content development for MSG Sphere;
•At the end of May 2020, we ended all financial support that was previously provided for certain event-level employees at the Company’s performance venues,NHL, and, as a result, virtually all venue employees, approximately 6,000 in total, are effectively furloughed;
•At the end of March 2020, Tao Group Hospitality eliminated essentially all of its venue line staff and manager positions, with limited numbers of employees returning as operations slowly resume. In August 2020, Tao Group Hospitality reduced its corporate workforce, and made additional reductions in venue and corporate positions during the second quarter of Fiscal Year 2021;
•We reduced our regular full-time workforce by approximately 350 positions in August, with a modest additional reduction in November 2020;
•We have implemented and are continuing to pursue additional comprehensive cost reduction measures, including terminating certain third-party services, negotiating reduced rates and/or reduced service levels with third parties, and pursuing targeted savings and reductions in spending on marketing and travel and entertainment, and deferring or limiting non-essential operating or other discretionary expenses;
•We have successfully negotiated certain relief and deferral of cash payments from landlords and other vendors. Conversations with third parties are ongoing as we continue to pursue additional options, some of which may or may not be successful; and
•In November 2020, MSG National Properties, LLC (“MSG National Properties”)advertising revenue and certain of our subsidiaries entered into a five-year $650,000 senior secured term loan facility (“National Properties Term Loan Facility”). See Note 12 for further details of National Properties Term Loan Facility.operating expenses, including rights fees expense, reflect the same.
Disruptions caused by the COVID-19 pandemic have had and are likely to continue to have, a significant and negative impact on Tao Group Hospitality’s operations and financial performance. In August 2020, Tao Group Hospitality entered into an amendmentperformance for Fiscal Year 2021. Due to government actions taken in response to the Tao Senior Credit Agreement, which suspended certain financial covenants through December 31, 2021 and increased the minimum liquidity requirement. In addition, in connection with the amendment, our wholly owned subsidiary MSG Entertainment Group, LLC (“MSG Entertainment Group”) entered into a guarantee agreement, which also included a minimum liquidity requirement for MSG Entertainment Group. See Note 12 for more information regarding the amendment to the Tao Senior Credit Agreement. If recovery from theCOVID-19 pandemic, takes longer than currently estimated, Tao Group Hospitality
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
may need to seek covenant waivers in the future.virtually all of Tao Group Hospitality's failure to obtain debt covenant waivers could trigger a violation of these covenants and lead to default and acceleration of all of its outstanding debt, which could have a material adverse effect onHospitality’s venues were closed for approximately three months starting in March 2020. Additionally, three venues were permanently closed. Throughout Fiscal Year 2021, Tao Group Hospitality conducted limited operations at certain venues, subject to significant regulatory requirements, including capacity limits, curfews and social distancing requirements for outdoor and indoor dining. Tao Group Hospitality’s operations fluctuated throughout Fiscal Year 2021 and during the Company.first two quarters of Fiscal Year 2022 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. Following updated regulations applicable to indoor dining facilities and entertainment venues, effective January 3, 2022 for Chicago, and January 29, 2022 for New York, all guests five and older, as well as employees, are required to provide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine. In addition, certain jurisdictions have reinstated safety protocols, such as mask mandates in Nevada and Chicago, but Tao Group Hospitality is continuing to operate without capacity restrictions in domestic and key international markets.
See Note 1It is unclear how long and to what extent COVID-19 concerns, including with respect to new variants, will continue to impact government and league-mandated capacity restrictions or vaccination/mask requirements, the use of and/or demand for our entertainment and 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.
Impairment and other (gains) loss, net
For the three months ended December 31, 2021, the Company recorded other gains of $7,979 primarily from extinguishments and modification of lease liabilities associated with certain Hakkasan venues and a gain on disposal of one of the Hakkasan venues. For the three months ended September 30, 2021, Tao Group Hospitality recorded an impairment charge for long-lived assets of $7,818 due to decisions made by management to cease operations at certain Hakkasan venues subsequent to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2020 includedHakkasan acquisition date, resulting in the Company’s Annual Report on Form 10-K forimpairment of the respective right-of-use asset and a leasehold improvement. There were no other impairment charges recorded by the Company for Tao Group Hospitality in Fiscal Year 2020. There was no impairment charge recorded by the Company for the three and six months ended December 31, 2020. However, the2021. The duration and impact of the COVID-19 pandemic may result in future impairment charges that management will evaluate as facts and circumstances evolve over time. Refer to Note 78, Note 9 and Note 910 for further detail of the Company’s intangible assets, long-lived assets and goodwill.
Note 2. Accounting Policies
Principles of Consolidation and Combination
For the periods prior to the Entertainment Distribution, the combined financial statements include assets and liabilities that were historically held at Former Parent’s corporate level but were specifically identifiable or otherwise attributable to the Company. All intercompany transactions between the Company and Former Parent have been included in the combined financial statements as components of MSG Sports’ investment. Expenses related to corporate allocations prior to the Entertainment Distribution were considered to be effectively settled in the combined financial statements at the time the transaction was recorded, with the offset recorded against MSG Sports’ investment. All significant intracompany transactions and accounts within the Company's consolidated and combined financial statements have been eliminated.
After the Entertainment Distribution, theThe consolidated financial statements of the Company include the accounts of Madison Square Garden Entertainment Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In addition, the consolidated and combined financial statements of the Company include the accounts from Tao Group Hospitality and BCE, in which the Company has controlling voting interests. The Company’s consolidation criteria are based on authoritative accounting guidance for voting interest or variable interest entities. Tao Group Hospitality and BCE are consolidated with the equity owned by other stockholders shown as redeemable or nonredeemable noncontrolling interests in the accompanying consolidated balance sheets, and the other stockholders’ portion of net income (loss) and other comprehensive income (loss) shown as net income (loss) or comprehensive income (loss) attributable to redeemable or nonredeemable noncontrolling interests in the accompanying consolidated and combined statements of operations and consolidated and combined statements of comprehensive income (loss), respectively.
See Note 2 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K regarding the classification of redeemable noncontrolling interests of Tao Group Hospitality and the elimination of the three-month lag in the consolidation of Tao Group Hospitality in Fiscal Year 2020.
Hospitality.
Use of Estimates
The preparation of the accompanying consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the provision for credit losses, valuation of accounts receivable, investments, goodwill, intangible assets, other long-lived assets, pension and other postretirement benefit obligations and the related net periodic benefit cost, tax accruals and other liabilities. In addition, estimates are used in revenue recognition, rights fees, income tax, performance and share-based compensation, depreciation and amortization, litigation matters and other matters, as well as in the valuation of contingent consideration and noncontrolling interests resulting from business combination transactions. Management believes its use of estimates in the financial statements to be reasonable.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and, as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s financial statements in future periods.
Summary of Significant Accounting Policies
Revenue Recognition — Media Affiliation Fee and Advertising Revenues
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2016,The MSG Networks segment generates revenues principally from affiliation fees charged to cable, satellite, telephone and other platforms (“Distributors”) for the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses. ASU No. 2016-13 replacedright to carry its networks, as well as from the incurred loss impairment methodologysale of advertising, largely derived from the sale of inventory in previous GAAP with a methodology that requiresits live professional sports programming. Due to the reflection of expected credit lossesCOVID-19 pandemic, the NBA and consideration of a broader range of reasonableNHL 2020-21 regular seasons were delayed and supportable information to determine credit loss estimates at inception. In May 2019,primarily occurred during the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC Topic 326 to provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, to provide clarification guidance in a number of areas, including: (i) expected recoveries for purchased financial assets with credit deterioration, (ii) transition relief for troubled debt restructuring, (iii) disclosures related to accrued interest receivables,third and (iv) financial assets secured by collateral maintenance provisions. For most financial instruments, the standard requires the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which will generally result in the earlier recognition of credit losses on financial instruments. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments — Credit Losses and Leases, which includes amendments pursuant to SEC Staff Accounting Bulletin No. 119. This standard was adopted by the Company in the first quarterfourth quarters of Fiscal Year 2021. The adoption of2021 and will affect the standard did not have an impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s broader disclosure framework project. ASU No. 2018-13 removes, modifies and adds certain disclosures providing greater focus on requirements that clearly communicate the most important information to the users of the financial statements with respect to fair value measurements. Most of the disclosure requirements in ASU No. 2018-13 are required to be applied on a retrospective basis except for the guidance related to (i) unrealized gains and losses included in other comprehensive income, (ii) disclosure related to range and weighted average Level 3 unobservable inputs and (iii) narrative disclosure requirements on measurement uncertainty, which are required to be applied on a prospective basis. This standard was adopted by the Companycomparability in the first quartersecond, third and the fourth fiscal quarters of Fiscal Year 2021.2022.
Affiliation fee revenue is earned from Distributors for the right to carry the segment’s networks under contracts, commonly referred to as “affiliation agreements.” The adoptionperformance obligation under its affiliation agreements is satisfied as MSG Networks provides its programming over the term of the standard did not have an impact onaffiliation agreement.
Affiliation fee is the Company’s consolidated financial statements.
In August 2018,predominant revenue stream of the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework-ChangesMSG Networks segment. Substantially all of the MSG Networks’ affiliation agreements are sales-based and usage-based royalty arrangements, the revenue for which is recognized as the sale or usage occurs. The transaction price is represented by affiliation fees that are generally based upon contractual rates applied to the Disclosure Requirements for Defined Benefit Plans. ASU No. 2018-14 removes certain disclosures that arenumber of the Distributor’s subscribers who receive or can receive the MSG Networks programming. Such subscriber information is generally not considered cost beneficial, clarifies certain required disclosuresreceived until after the close of the reporting period, and adds additional disclosures. This standard was adopted byin these cases, the Company inestimates the first quarternumber of Fiscal Year 2021. The adoptionsubscribers. Historical adjustments to recorded estimates have not been material.
In addition to affiliation fee revenue, the MSG Networks segment also earns advertising revenue primarily through the sale of commercial time and other advertising inventory during its live professional sports programming. In general, these advertising arrangements either do not exceed one year or are primarily multi-year media banks, the standard did not have an impact on the Company’s consolidated financial statements.
elements of which are agreed upon each year. Advertising revenue is recognized as advertising is aired. In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also specifies that the balance sheet, income statement, and statement of cash flows presentation of capitalized implementation costs and the related amortization should align with the presentation of the hosting (service) element of the arrangement. This standard was adopted bycertain advertising arrangements, the Company inguarantees specified viewer ratings for its programming. In such cases, the first quarter of Fiscal Year 2021. The adoption ofpromise to deliver the standard did not have an impact onguaranteed viewer ratings by airing the Company’s consolidated financial statements. However,advertising represents MSG Networks’ performance obligation. A contract liability is recognized as deferred revenue to the extent futureany guaranteed viewer ratings are not met and the customer is expected to exercise a contractual right for additional advertising time. The related revenue is subsequently recognized as revenue either when MSG Networks provides the required additional advertising time, or additional performance requirements become remote, which may be at the time the guarantee obligation contractually expires.
Direct Operating Expenses
Direct operating expenses from the MSG Networks segment primarily represent media rights fees and other direct programming and production costs, incurred in a cloud computing arrangement are capitalizable,such as the corresponding amortization will be included in “Direct operating expenses” or “Selling, generalsalaries of on-air personalities, producers, directors, technicians, writers and administrative expenses” in the consolidated statements of operations dependingother creative staff, as well as expenses associated with location costs, remote facilities and maintaining studios, origination, and transmission services and facilities. The professional team media rights acquired under media rights agreements to telecast various sporting events and other programming for exhibition on the nature ofsegment’s networks are typically expensed on a straight-line basis over the related arrangement, rather than “Depreciation and amortization.”applicable annual contract or license period.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In November 2018,Advertising Expenses
Advertising costs are typically charged to expense when incurred. The MSG Networks segment enters into nonmonetary transactions, primarily with its Distributors (see discussion below), that involve the FASB issued ASU No. 2018-17, Targeted Improvementsexchange of advertising and promotional benefits, for the segment’s services. Total advertising costs, which includes the aforementioned nonmonetary transactions and are classified in selling, general and administrative expenses, were $11,102 and $16,229 for the three and six months ended December 31, 2021, respectively, and $3,667 and $8,469 for the three and six months ended December 31, 2020, respectively.
Noncash Consideration
The MSG Networks segment enters into nonmonetary transactions, primarily with its Distributors, that involve the exchange of products or services, such as advertising and promotional benefits, for the segment’s services. For arrangements that are subject to Related Party Guidance for Variable Interest Entities. ASU No. 2018-17 amendssales based and usage-based royalty guidance, MSG Networks measures noncash consideration that it receives at fair value as the variable interest entities (“VIE”) guidance to alignsale or usage occurs. For other arrangements, the evaluation of a decision maker’s or service provider’s fee in assessing a variable interest withMSG Networks segment measures the guidance in the primary beneficiary test. Specifically, indirect interests held by a related party that is under common control are to be considered on a proportionate basis, rather than in their entirety, when assessing whether the fee qualifies as a variable interest. The proportionate basis approach is consistent with the treatment of indirect interests held by a related party under common control when evaluating the primary beneficiary of a VIE. When a decision maker or service provider has an interest in a related party, regardless of whether they are under common control, they consider that related party’s interest in a VIE on a proportionate basis throughout the VIE model, for both the assessment of a variable interest and the determination of a primary beneficiary. This standard was adopted by the Company in the first quarter of Fiscal Year 2021. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. ASU No. 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC Topic 606 when the counterparty is a customer. In addition, ASU No. 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard was adopted by the Company in the first quarter of Fiscal Year 2021. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 — Financial Instruments. This ASU provides narrow-scope amendments to help apply these recent standards. This standard was adopted by the Company in the first quarter of Fiscal Year 2021 in connection with the adoption of ASU No. 2016-13 discussed above. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-08, Compensation — Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements — Share-Based Consideration Payable to a Customer. This ASU requires that share-based payment awards issued to a customer in connection with a revenue arrangement be recorded as a reduction of the transaction price in revenue. The amount recorded as a reduction of the transaction price is measured using the grant-dateestimated fair value of the award and is classified in accordance with ASC Topic 718. Changes innoncash consideration that it receives at contract inception. If the measurementMSG Networks segment cannot reasonably estimate the fair value of the share-based payments afternoncash consideration, the grant date that are due tosegment measures the formfair value of the consideration are not includedindirectly by reference to the standalone selling price of the services promised to the customer in exchange for the consideration as revenues.
Interest Capitalization
For significant long term construction projects, such as MSG Sphere, the Company begins to capitalize qualified interest costs once activities necessary to get the asset ready for its intended use have commenced. The Company calculates qualified interest capitalization using the average amount of accumulated expenditures during the period the asset is being prepared for its intended use and a capitalization rate which is derived from the Company’s weighted average borrowing rate during such time, in the transaction priceabsence of specific borrowings related to the significant long term construction projects. The Company ceases capitalization on any portions substantially completed and are recorded elsewhere inready for their intended use. See Note 8 for further details on interest capitalization during the statement of operations. The award is measuredthree and classified under ASC Topic 718 for its entire life, unless the award is modified after it vestssix months ended December 31, 2021 and the grantee is no longer a customer. This standard was adopted by the Company in the first quarter of Fiscal Year 2021. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.2020.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with ASC Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under ASC Topic 815. This standard was adopted by the Company in the first quarter of Fiscal Year 2021. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet
Recently Adopted Accounting Pronouncements
In December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. The new guidance is effective forThis standard was adopted by the Company in the first quarter of fiscal year 2022, with early adoption permitted.Fiscal Year 2022. The adoption of the standard is not expected to have a materialhad no impact on the Company’s consolidated financial statements.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Recently Issued Accounting Pronouncements Not Yet AdoptedIn March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 3. Acquisition
Acquisition of Hakkasan
See Note 3 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2021 included in the Company’s Annual Report on Form 10-K regarding the details of Tao Group Hospitality’s acquisition of the business (“Hakkasan”) of Hakkasan USA, Inc., a Delaware corporation (“Hakkasan Parent”) on April 27, 2021. During the three months ended September 30, 2021, the Company completed the finalization of a working capital adjustment and net debt against agreed upon targets. As a result, the initial determination of approximately 18% noncontrolling interest ownership
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
of common equity interests in Tao Group Sub-Holdings LLC owned by the Hakkasan Parent was subsequently revised to approximately 15%. The Company continues to own a 77.5% controlling interest in Tao Group Holdings LLC, which, after the ownership adjustments, translates to an approximately 66% indirect controlling interest in Tao Group Sub-Holdings LLC. Tao Group Hospitality’s results will continue to be consolidated in the financial results of the Company.
The Company’s purchase price allocation and measurement period adjustment for the Hakkasan acquisition is presented below:
| | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Recognized as of Acquisition Date (as previously reported) | | Measurement Period Adjustment (a) | | Fair Value Recognized as of September 30, 2021 as adjusted (b) | | |
Cash and cash equivalents | | $ | 16,737 | | | $ | — | | | $ | 16,737 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Property and equipment, net | | 33,393 | | | — | | | 33,393 | | | |
Right-of-use lease assets | | 44,818 | | | — | | | 44,818 | | | |
Amortizable intangible assets, net | | 47,170 | | | (7,020) | | | 40,150 | | | |
| | | | | | | | |
| | | | | | | | |
Other assets | | 12,641 | | | — | | | 12,641 | | | |
| | | | | | | | |
Accrued expenses and other current liabilities | | (15,957) | | | 1,534 | | | (14,423) | | | |
Operating lease liabilities | | (52,025) | | | — | | | (52,025) | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other liabilities | | (13,655) | | | — | | | (13,655) | | | |
Total identifiable net assets acquired | | 73,122 | | | (5,486) | | | 67,636 | | | |
Goodwill | | 3,378 | | | (2,014) | | | 1,364 | | | |
Redeemable noncontrolling interests | | $ | (76,500) | | | $ | 7,500 | | | $ | (69,000) | | | |
_________________
(a)During the three months ended September 30, 2021, the Company recorded an adjustment to reflect a measurement period adjustment. Upon the finalization of the closing statement during the first quarter of Fiscal Year 2022, the noncontrolling interest owned by Hakkasan Parent in Tao Group Sub-Holdings LLC was reduced from approximately 18% as initially estimated to approximately 15%. Such change resulted in a decrease in the Company’s redeemable noncontrolling interest of $7,500, a decrease in Goodwill of $480, and a decrease in amortizable intangibles of approximately $7,020 related to trade names and venue management contracts. Additionally, the Company wrote-off a previously reported accrual of $1,534, which resulted in an additional decrease in Goodwill of $1,534.
(b)No additional adjustments were recorded during the three months ended December 31, 2021.
Note 3.4. Revenue Recognition
Contracts with Customers
See Note 4 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K and “— Note 2. Accounting Policies — Summary of Significant Accounting Policies — Revenue Recognition — Media Affiliation Fee and Advertising Revenues” for more information regarding the details of the Company’s revenue recognition policies. All revenue recognized in the consolidated and combined statements of operations is considered to be revenue from contracts with customers in accordance with ASC Topic 606, except for $2,333 and $3,081 of revenues from Arena License Agreements, leases and subleases whichthat are accounted for in accordance with ASC Topic 842 of $29,196 and $31,512 for the three and sixmonths ended December 31, 2021, respectively, and $2,334 and $3,082 for the three and sixmonths ended December 31, 2020, respectively.
The following table presents the activity in the allowance for credit losses for the six months ended December 31, 2020, respectively. For the three and six months ended December 31, 2020, the Company did not have any material provision for credit losses on receivables or contract assets arising from contracts with customers. The allowance for credit losses associated with contracts with customers was $9,222 and $9,135 as2021:
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | |
Beginning balance, June 30, 2021 | | $ | 6,449 | |
Provision for expected credit losses | | 1,236 | |
Write-offs | | (1,760) | |
| | |
Ending balance, December 31, 2021 | | $ | 5,925 | |
Disaggregation of Revenue
The following table disaggregatestables disaggregate the Company’s revenue by major source and reportable segment based upon the timing of transfer of goods or services to the customer, in accordance with ASC Subtopic 606-10-50-5, for the three and six months ended December 31, 20202021 and 2019:2020:
| | | | Three Months Ended | | Three Months Ended |
| | December 31, 2020 | | December 31, 2021 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | Event-related and entertainment dining and nightlife offerings (a) | | $ | 1,002 | | | $ | 9,179 | | | $ | (43) | | | $ | 10,138 | | Event-related and entertainment dining and nightlife offerings (a) | | $ | 155,476 | | | $ | — | | | $ | 108,241 | | | $ | (657) | | | $ | 263,060 | |
Sponsorship, signage and suite licenses (b) | Sponsorship, signage and suite licenses (b) | | 6,064 | | | 414 | | | 21 | | | 6,499 | | Sponsorship, signage and suite licenses (b) | | 50,979 | | | 1,787 | | | 490 | | | (521) | | | 52,735 | |
Other (c) | | 3,270 | | | 898 | | | (1) | | | 4,167 | | |
Media related, primarily from affiliation agreements (c) | | Media related, primarily from affiliation agreements (c) | | — | | | 156,202 | | | — | | | — | | | 156,202 | |
Other (d) | | Other (d) | | 11,959 | | | 1,992 | | | 8,355 | | | (7,060) | | | 15,246 | |
Total revenues from contracts with customers | Total revenues from contracts with customers | | $ | 10,336 | | | $ | 10,491 | | | $ | (23) | | | $ | 20,804 | | Total revenues from contracts with customers | | $ | 218,414 | | | $ | 159,981 | | | $ | 117,086 | | | $ | (8,238) | | | $ | 487,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended |
| | December 31, 2019 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | | $ | 242,545 | | | $ | 63,256 | | | $ | (83) | | | $ | 305,718 | |
Sponsorship, signage and suite licenses (b) | | 74,630 | | | 39 | | | (220) | | | 74,449 | |
Other (c) | | 8,195 | | | 5,809 | | | (99) | | | 13,905 | |
Total revenues from contracts with customers | | $ | 325,370 | | | $ | 69,104 | | | $ | (402) | | | $ | 394,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2020 |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | | $ | 1,001 | | | $ | — | | | $ | 9,179 | | | $ | (43) | | | $ | 10,137 | |
Sponsorship, signage and suite licenses (b) | | 6,064 | | | 408 | | | 414 | | | 21 | | | 6,907 | |
Media related, primarily from affiliation agreements (c) | | — | | | 145,364 | | | — | | | — | | | 145,364 | |
Other (d) | | 3,270 | | | 467 | | | 898 | | | (625) | | | 4,010 | |
Total revenues from contracts with customers | | $ | 10,335 | | | $ | 146,239 | | | $ | 10,491 | | | $ | (647) | | | $ | 166,418 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | Six Months Ended | | Six Months Ended |
| | December 31, 2020 | | December 31, 2021 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | Event-related and entertainment dining and nightlife offerings (a) | | $ | 1,729 | | | $ | 14,839 | | | $ | (43) | | | $ | 16,525 | | Event-related and entertainment dining and nightlife offerings (a) | | $ | 177,492 | | | $ | — | | | $ | 216,931 | | | $ | (838) | | | $ | 393,585 | |
Sponsorship, signage and suite licenses (b) | Sponsorship, signage and suite licenses (b) | | 8,524 | | | 486 | | | (211) | | | 8,799 | | Sponsorship, signage and suite licenses (b) | | 57,956 | | | 2,423 | | | 625 | | | (521) | | | 60,483 | |
Other (c) | | 6,890 | | | 2,387 | | | (167) | | | 9,110 | | |
Media related, primarily from affiliation agreements (c) | | Media related, primarily from affiliation agreements (c) | | — | | | 296,673 | | | — | | | — | | | 296,673 | |
Other (d) | | Other (d) | | 14,889 | | | 2,358 | | | 18,994 | | | (7,545) | | | 28,696 | |
Total revenues from contracts with customers | Total revenues from contracts with customers | | $ | 17,143 | | | $ | 17,712 | | | $ | (421) | | | $ | 34,434 | | Total revenues from contracts with customers | | $ | 250,337 | | | $ | 301,454 | | | $ | 236,550 | | | $ | (8,904) | | | $ | 779,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Six Months Ended |
| | December 31, 2019 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | | $ | 325,259 | | | $ | 115,597 | | | $ | (96) | | | $ | 440,760 | |
Sponsorship, signage and suite licenses (b) | | 110,068 | | | 223 | | | (437) | | | 109,854 | |
Other (c) | | 9,695 | | | 11,901 | | | (175) | | | 21,421 | |
Total revenues from contracts with customers | | $ | 445,022 | | | $ | 127,721 | | | $ | (708) | | | $ | 572,035 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Six Months Ended |
| | December 31, 2020 |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Event-related and entertainment dining and nightlife offerings (a) | | $ | 1,729 | | | $ | — | | | $ | 14,839 | | | $ | (43) | | | $ | 16,525 | |
Sponsorship, signage and suite licenses (b) | | 8,524 | | | 692 | | | 486 | | | (211) | | | 9,491 | |
Media related, primarily from affiliation agreements (c) | | — | | | 302,015 | | | — | | | — | | | 302,015 | |
Other (d) | | 6,890 | | | 895 | | | 2,387 | | | (1,986) | | | 8,186 | |
Total revenues from contracts with customers | | $ | 17,143 | | | $ | 303,602 | | | $ | 17,712 | | | $ | (2,240) | | | $ | 336,217 | |
_________________
(a)Consists of (i) ticket sales and other ticket-related revenues, (ii) Tao Group Hospitality’s entertainment dining and nightlife offerings, (iii) venue license fees from third-party promoters, and (iv) food, beverage and merchandise sales. Event-related revenues and entertainment dining and nightlife offerings are recognized at a point in time. As such, these revenues have been included in the same category in the table above.
(b)See Note 4 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K for further details on the pattern of recognition of sponsorship, signage and suite license revenues.
(c)See “— Note 2. Accounting Policies — Summary of Significant Accounting Policies — Revenue Recognition — Media Affiliation Fee and Advertising Revenues” for further details on the pattern of recognition of Media affiliation fee and advertising revenues in the MSG Networks segment.
(d)Primarily consists of (i) revenues from sponsorship sales and representation agreements with MSG Sports,, (ii) advertising commission revenue from MSG Networks Inc. (“MSG Networks”), and (ii) Tao Group Hospitality’s managed venue revenues.revenues, and (iii) advertising commission revenues recognized by the Entertainment segment from the MSG Networks segment of $6,985 and $7,395 for the three and six months ended December 31, 2021, respectively, and $624 and $1,819 for the three and six months ended December 31, 2020, respectively, that are eliminated in consolidation.
In addition to the disaggregation of the Company’s revenue by major source based upon the timing of transfer of goods or services to the customer disclosed above, the following table disaggregatestables disaggregate the Company’s consolidated and combined revenues by type of goods or services in accordance with the required entity-wide disclosure requirements of FASB ASC Subtopic 280-10-50-38 to 40 and the disaggregation of revenue required disclosures in accordance with ASC Subtopic 606-10-50-5 for the three and six months ended December 31, 20202021 and 2019:
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months ended |
| | December 31, 2020 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 968 | | | $ | 0 | | | $ | 0 | | | $ | 968 | |
Sponsorship and signage, suite, and advertising commission revenues | | 9,130 | | | 0 | | | 21 | | | 9,151 | |
Revenues from entertainment dining and nightlife offerings (b) | | 0 | | | 10,491 | | | (44) | | | 10,447 | |
Food, beverage and merchandise revenues | | 0 | | | 0 | | | 0 | | | 0 | |
Other | | 238 | | | 0 | | | 0 | | | 238 | |
Total revenues from contracts with customers | | $ | 10,336 | | | $ | 10,491 | | | $ | (23) | | | $ | 20,804 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months ended |
| | December 31, 2019 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 199,969 | | | $ | 0 | | | $ | 0 | | | $ | 199,969 | |
Sponsorship and signage, suite, and advertising commission revenues | | 85,250 | | | 0 | | | (220) | | | 85,030 | |
Revenues from entertainment dining and nightlife offerings (b) | | 0 | | | 69,104 | | | (83) | | | 69,021 | |
Food, beverage and merchandise revenues | | 34,470 | | | 0 | | | 0 | | | 34,470 | |
Other | | 5,681 | | | 0 | | | (99) | | | 5,582 | |
Total revenues from contracts with customers | | $ | 325,370 | | | $ | 69,104 | | | $ | (402) | | | $ | 394,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Six Months Ended |
| | December 31, 2020 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 1,698 | | | $ | 0 | | | $ | 0 | | | $ | 1,698 | |
Sponsorship and signage, suite, and advertising commission revenues | | 14,989 | | | 0 | | | (211) | | | 14,778 | |
Revenues from entertainment dining and nightlife offerings (b) | | 0 | | | 17,712 | | | (210) | | | 17,502 | |
Food, beverage and merchandise revenues | | 0 | | | 0 | | | 0 | | | 0 | |
Other | | 456 | | | 0 | | | 0 | | | 456 | |
Total revenues from contracts with customers | | $ | 17,143 | | | $ | 17,712 | | | $ | (421) | | | $ | 34,434 | |
2020:
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | Six Months Ended | | Three Months ended |
| | December 31, 2019 | | December 31, 2021 |
| | Entertainment | | Tao Group Hospitality | | Eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | Ticketing and venue license fee revenues (a) | | $ | 261,116 | | | $ | 0 | | | $ | 0 | | | $ | 261,116 | | Ticketing and venue license fee revenues (a) | | $ | 109,141 | | | $ | — | | | $ | — | | | $ | — | | | $ | 109,141 | |
Sponsorship and signage, suite, and advertising commission revenues(b) | Sponsorship and signage, suite, and advertising commission revenues(b) | | 123,395 | | | 0 | | | (437) | | | 122,958 | | Sponsorship and signage, suite, and advertising commission revenues(b) | | 70,602 | | | — | | | — | | | (7,506) | | | 63,096 | |
Revenues from entertainment dining and nightlife offerings (b)(c) | Revenues from entertainment dining and nightlife offerings (b)(c) | | 0 | | | 127,721 | | | (96) | | | 127,625 | | Revenues from entertainment dining and nightlife offerings (b)(c) | | — | | | — | | | 117,086 | | | (732) | | | 116,354 | |
Food, beverage and merchandise revenues | Food, beverage and merchandise revenues | | 50,741 | | | 0 | | | 0 | | | 50,741 | | Food, beverage and merchandise revenues | | 37,765 | | | — | | | — | | | — | | | 37,765 | |
Media networks revenues (d) | | Media networks revenues (d) | | — | | | 159,981 | | | — | | | — | | | 159,981 | |
Other | Other | | 9,770 | | | 0 | | | (175) | | | 9,595 | | Other | | 906 | | | — | | | — | | | — | | | 906 | |
Total revenues from contracts with customers | Total revenues from contracts with customers | | $ | 445,022 | | | $ | 127,721 | | | $ | (708) | | | $ | 572,035 | | Total revenues from contracts with customers | | $ | 218,414 | | | $ | 159,981 | | | $ | 117,086 | | | $ | (8,238) | | | $ | 487,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Three Months ended |
| | December 31, 2020 |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 968 | | | $ | — | | | $ | — | | | $ | — | | | $ | 968 | |
Sponsorship and signage, suite, and advertising commission revenues (b) | | 9,130 | | | — | | | — | | | (604) | | | 8,526 | |
Revenues from entertainment dining and nightlife offerings (c) | | — | | | — | | | 10,491 | | | (43) | | | 10,448 | |
Food, beverage and merchandise revenues | | — | | | — | | | — | | | — | | | — | |
Media networks revenues (d) | | — | | | 146,239 | | | — | | | — | | | 146,239 | |
Other | | 237 | | | — | | | — | | | — | | | 237 | |
Total revenues from contracts with customers | | $ | 10,335 | | | $ | 146,239 | | | $ | 10,491 | | | $ | (647) | | | $ | 166,418 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Six Months Ended |
| | December 31, 2021 |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 125,977 | | | $ | — | | | $ | — | | | $ | — | | | $ | 125,977 | |
Sponsorship and signage, suite, and advertising commission revenues (b) | | 81,415 | | | — | | | — | | | (7,916) | | | 73,499 | |
Revenues from entertainment dining and nightlife offerings (c) | | — | | | — | | | 236,550 | | | (988) | | | 235,562 | |
Food, beverage and merchandise revenues | | 41,688 | | | — | | | — | | | — | | | 41,688 | |
Media networks revenues (d) | | — | | | 301,454 | | | — | | | — | | | 301,454 | |
Other | | 1,257 | | | — | | | — | | | — | | | 1,257 | |
Total revenues from contracts with customers | | $ | 250,337 | | | $ | 301,454 | | | $ | 236,550 | | | $ | (8,904) | | | $ | 779,437 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Six Months Ended |
| | December 31, 2020 |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Eliminations | | Total |
Ticketing and venue license fee revenues (a) | | $ | 1,698 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,698 | |
Sponsorship and signage, suite, and advertising commission revenues (b) | | 14,989 | | | — | | | — | | | (2,031) | | | 12,958 | |
Revenues from entertainment dining and nightlife offerings (c) | | — | | | — | | | 17,712 | | | (209) | | | 17,503 | |
Food, beverage and merchandise revenues | | — | | | — | | | — | | | — | | | — | |
Media networks revenues (d) | | — | | | 303,602 | | | — | | | — | | | 303,602 | |
Other | | 456 | | | — | | | — | | | — | | | 456 | |
Total revenues from contracts with customers | | $ | 17,143 | | | $ | 303,602 | | | $ | 17,712 | | | $ | (2,240) | | | $ | 336,217 | |
_________________
(a)Amounts include ticket sales, including other ticket-related revenue, and venue license fees from the Company’s events such as (i) concerts, (ii) the presentation of the Christmas Spectacular, and (iii) other live entertainment and sporting events.
(b)Amounts include (i) revenues from sponsorship sales and representation agreements with MSG Sports and (ii) advertising commission revenues recognized by the Entertainment segment from the MSG Networks segment of $6,985 and $7,395 for the three and six months ended December 31, 2021, respectively, and $624 and $1,819 for the three and six months ended December 31, 2020, respectively, that are eliminated in consolidation.
(c)Primarily consist of revenues from (i) entertainment dining and nightlife offerings and (ii) venue management agreements.
(d)Primarily consist of affiliation fees from Distributors and, to a lesser extent, advertising revenues through the sale of commercial time and other advertising inventory during MSG Networks programming.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed receivables, contract assets and contract liabilities on the consolidated balance sheets. The following table provides information about contract balances from the Company’s contracts with customers as of December 31, 20202021 and June 30, 2020:2021:
| | | December 31, | | June 30, | | December 31, | | June 30, |
| | 2020 | | 2020 | | 2021 | | 2021 |
Receivables from contracts with customers, net (a) | Receivables from contracts with customers, net (a) | | $ | 75,367 | | | $ | 59,828 | | Receivables from contracts with customers, net (a) | | $ | 195,945 | | | $ | 185,112 | |
Contract assets, current (b) | Contract assets, current (b) | | 8,718 | | | 3,850 | | Contract assets, current (b) | | 10,204 | | | 7,052 | |
Contract assets, non-current (b) | | Contract assets, non-current (b) | | 296 | | | 87 | |
Deferred revenue, including non-current portion (c) | Deferred revenue, including non-current portion (c) | | 207,770 | | | 193,112 | | Deferred revenue, including non-current portion (c) | | 257,054 | | | 210,187 | |
_________________
(a)Receivables from contracts with customers, which are reported in Accounts receivable, net and Net related party receivables in the Company’s consolidated balance sheets, represent the Company’s unconditional rights to consideration under its contracts with customers. As of December 31, 20202021 and June 30, 2020,2021, the Company’s receivables from contracts with customers above included $1,656$11,239 and $2,644,$4,848, respectively, related to various related parties. See Note 1718 for further details on related party arrangements.
(b)Contract assets, which are reported as Other current assets or Other assets (non-current portion) in the Company’s consolidated balance sheets, primarily relate to the Company’s rights to consideration for goods or services transferred to customers, for which the Company does not have an unconditional right to bill as of the reporting date. Contract assets are transferred to accounts receivable once the Company’s right to consideration becomes unconditional.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(c)Deferred revenue primarily relates to the Company’s receipt of consideration from customers in advance of the Company’s transfer of goods or services to those customers. Deferred revenue is reduced and the related revenue is recognized once the underlying goods or services are transferred to a customer. Revenue recognized for the six months ended December 31, 20202021 relating to the contract liability balance (primarily deferred revenue balancerevenue) as of June 30, 20202021 was $5,069.$86,108.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Transaction Price Allocated to the Remaining Performance Obligations
The following table depicts the estimated revenue expected to be recognized, based on current projections and expectations of our business resuming, in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2020.2021. This primarily relates to performance obligations under sponsorship and suite license arrangements and to a lesser extent, non-variable affiliation fee arrangements that have original expected durations longer than one year.year and the consideration is not variable. For arrangements with variable consideration, such variability is based on the Company’s ability to deliver the underlying benefits as dictated by the related contractual provisions. In developing the estimated revenue, the Company applies the allowable practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
| | | | | | | | |
Fiscal Year 20212022 (remainder) | | $ | 8,253 | |
Fiscal Year 2022 | | 114,652114,338 | |
Fiscal Year 2023 | | 77,938170,402 | |
Fiscal Year 2024 | | 54,456143,572 | |
Fiscal Year 2025 | | 45,422101,341 | |
Fiscal Year 2026 | | 72,543 | |
Thereafter | | 53,68888,109 | |
| | $ | 354,409690,305 | |
Note 4. Restructuring Charges5. Computation of Earnings (Loss) per Common Share
The Company’s operations have been disrupted since March 2020 duefollowing table presents a reconciliation of weighted-average shares used in the calculations of basic and diluted earnings (loss) per common share attributable to the COVID-19 pandemic. As a direct response to this disruption, on August 4, 2020, the Company implemented cost savings initiatives in order to streamline operations and preserve liquidity. These measures included a reduction in full-time workforce of approximately 350 employees in August and 10 employees in November for a total expense of $21,299. Company’s stockholders (“EPS”).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted-average shares (denominator): | | | | | | | | |
Weighted-average shares for basic EPS (a) | | 34,278 | | | 34,021 | | | 34,186 | | | 33,961 | |
Dilutive effect of shares issuable under share-based compensation plans (a) | | 158 | | | — | | | — | | | — | |
Weighted-average shares for diluted EPS | | 34,436 | | | 34,021 | | | 34,186 | | | 33,961 | |
Weighted-average anti-dilutive shares (b) | | 668 | | | — | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
_________________
(a)For the three and six months ended December 31, 2020 and six months endedDecember 31, 2021 and 2020, all restricted stock units and stock options were excluded from the above table because the Company recordedreported a totalnet loss for the periods presented and, therefore, their impact on reported loss per share would have been antidilutive. See Note 15 for further detail.
(b)For the three months ended December 31, 2021, weighted-average anti-dilutive shares primarily consisted of $1,372approximately 630 units of stock options and $21,299, respectively, for restructuring charges related to termination benefits provided to employeeswere excluded in the Entertainment reportable segment and these are reflected in restructuring charges incalculation of diluted earnings per share because their effect would have been anti-dilutive. An anti-dilutive option exists when the accompanying consolidated and combined statementsaverage stock price for the period is less than the exercise price of operations.the option.
The Company’s restructuring accrual activity through December 31, 2020 is as follows:22
| | | | | | | | |
June 30, 2020 | | $ | 0 | |
Restructuring charges | | 21,299 | |
Payments | | (19,442) | |
December 31, 2020 | | $ | 1,857 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 5.6. Cash, Cash Equivalents and Restricted Cash
The following table provides a summary of the amounts recorded as cash, cash equivalents and restricted cash.
| | | As of | | As of |
| | December 31, 2020 | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 | | December 31, 2021 | | June 30, 2021 | | December 31, 2020 | | June 30, 2020 |
Captions on the consolidated balance sheets: | Captions on the consolidated balance sheets: | | | | | | | | | Captions on the consolidated balance sheets: | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 1,451,352 | | | $ | 906,555 | | | $ | 1,009,127 | | | $ | 1,082,055 | | Cash and cash equivalents | | $ | 1,258,105 | | | $ | 1,516,992 | | | $ | 1,735,012 | | | $ | 1,103,392 | |
Restricted cash (a) | Restricted cash (a) | | 26,207 | | | 17,749 | | | 17,898 | | | 10,010 | | Restricted cash (a) | | 23,914 | | | 22,984 | | | 26,207 | | | 17,749 | |
Cash, cash equivalents and restricted cash on the consolidated and combined statements of cash flows | | $ | 1,477,559 | | | $ | 924,304 | | | $ | 1,027,025 | | | $ | 1,092,065 | | |
Cash, cash equivalents and restricted cash on the consolidated statements of cash flows | | Cash, cash equivalents and restricted cash on the consolidated statements of cash flows | | $ | 1,282,019 | | | $ | 1,539,976 | | | $ | 1,761,219 | | | $ | 1,121,141 | |
_________________
(a)See Note 2 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K for more information regarding the nature of restricted cash. In addition, the restricted cash balance as of December 31, 2020included a deposit in a reserve account of approximately $8,100 associated with credit facilities of Tao Group Hospitality. See Note 12 for further details on the amendment to the Tao Senior Credit Agreement in August 2020.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 6.7. Investments in Nonconsolidated Affiliates
The Company’s investments in nonconsolidated affiliates, which are accounted for under the equity method of accounting and equity investments without readily determinable fair values in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures and ASC Topic 321, Investments - Equity Securities, respectively, consisted of the following:
| | | Ownership Percentage | | Investment | | Ownership Percentage | | Investment |
December 31, 2020 | | | | | |
December 31, 2021 | | December 31, 2021 | | | | |
Equity method investments: | Equity method investments: | | Equity method investments: | |
SACO Technologies Inc. (“SACO”) | SACO Technologies Inc. (“SACO”) | | 30 | % | | $ | 38,232 | | SACO Technologies Inc. (“SACO”) | | 30 | % | | $ | 33,731 | |
Others | Others | | 7,894 | | Others | | 5,674 | |
Equity securities without readily determinable fair values (a) | Equity securities without readily determinable fair values (a) | | 3,500 | | Equity securities without readily determinable fair values (a) | | 7,007 | |
Total investments in nonconsolidated affiliates | Total investments in nonconsolidated affiliates | | $ | 49,626 | | Total investments in nonconsolidated affiliates | | $ | 46,412 | |
| June 30, 2020 | | |
June 30, 2021 | | June 30, 2021 | |
Equity method investments: | Equity method investments: | | Equity method investments: | |
SACO | SACO | | 30 | % | | $ | 40,461 | | SACO | | 30 | % | | $ | 36,265 | |
| Others | Others | | 8,661 | | Others | | 6,204 | |
Equity securities without readily determinable fair values (a) | Equity securities without readily determinable fair values (a) | | 3,500 | | Equity securities without readily determinable fair values (a) | | 6,752 | |
Total investments in nonconsolidated affiliates | Total investments in nonconsolidated affiliates | | $ | 52,622 | | Total investments in nonconsolidated affiliates | | $ | 49,221 | |
_________________
(a)In accordance with the ASC Topic 321, Investments - Equity Securities, the Company applies the measurement alternative to its equity investments without readily determinable fair values. Under the measurement alternative, equity securities without readily determinable fair values are accounted for at cost, adjusted for impairment and changes resulting from observable price fluctuations in orderly transactions for the identical or a similar investment of the same issuer, which is classified within Level III of the fair value hierarchy.issuer. For the three and six months ended December 31, 2021 and 2020, the Company did not have impairment charges or change in carrying value recorded to its equity securities without readily determinable fair values. For the six months ended December 31, 2019, the Company recorded an impairment charge of $533 to an equity investment without readily determinable fair value.
Equity Investments with Readily Determinable Fair Value
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In addition to the investments discussed above, the Company holds investments of (i) 3,208 shares of the common stock of Townsquare Media, Inc. (“Townsquare”), and (ii) 894869 shares of common stock of DraftKings Inc. (“DraftKings”). Townsquare is a media, entertainment and digital marketing solutions company that is listed on the New York Stock Exchange (“NYSE”) under the symbol “TSQ.” DraftKings is a fantasy sports contest and sports gambling provider that is listed on the NASDAQ Stock Market (“NASDAQ”) under the symbol “DKNG” for its common stock. The fair value of the Company’s investments in Class A common stock of Townsquare and Class A common stock of DraftKings are determined based on quoted market prices in active markets on the NYSE and NASDAQ, respectively, which are classified within Level I of the fair value hierarchy.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Class C common stock of Townsquare, the Company is entitled to convert at any time all or any part of the Company’s shares into an equal number of shares of Class A common stock of Townsquare, subject to restrictions set forth in Townsquare’s certificate of incorporation.The cost basis and the carrying fair value of these investments, which are reported under Other assets in the accompanying consolidated balance sheets as of December 31, 20202021 and June 30, 2020,2021, are as follows:
| | | December 31, 2020 | | December 31, 2021 |
Equity Investment with Readily Determinable Fair Values | Equity Investment with Readily Determinable Fair Values | | Shares / Units Held | | Cost Basis | | Carrying value / Fair value | Equity Investment with Readily Determinable Fair Values | | Shares / Units Held | | Cost Basis | | Carrying value / Fair value |
Townsquare common stock | | 3,208 | | | $ | 23,222 | | | $ | 21,366 | | |
Townsquare Class A common stock | | Townsquare Class A common stock | | 583 | | | $ | 4,221 | | | $ | 7,773 | |
Townsquare Class C common stock | | Townsquare Class C common stock | | 2,625 | | | 19,001 | | | 34,992 | |
DraftKings common stock | DraftKings common stock | | 894 | | | 6,209 | | | 41,647 | | DraftKings common stock | | 869 | | | 6,036 | | | 23,884 | |
| Total | Total | | $ | 29,431 | | | $ | 63,013 | | Total | | $ | 29,258 | | | $ | 66,649 | |
| | | June 30, 2020 | | June 30, 2021 |
Equity Investment with Readily Determinable Fair Values | Equity Investment with Readily Determinable Fair Values | | Shares / Units Held | | Cost Basis | | Carrying value / Fair value | Equity Investment with Readily Determinable Fair Values | | Shares / Units Held | | Cost Basis | | Carrying value / Fair value |
Townsquare common stock | | 3,208 | | | $ | 23,222 | | | $ | 14,340 | | |
Townsquare Class A common stock | | Townsquare Class A common stock | | 583 | | | $ | 4,221 | | | $ | 7,435 | |
Townsquare Class C common stock | | Townsquare Class C common stock | | 2,625 | | | 19,001 | | | 33,469 | |
DraftKings common stock | DraftKings common stock | | 1,280 | | | 8,798 | | | 42,589 | | DraftKings common stock | | 869 | | | 6,036 | | | 45,360 | |
DraftKings warrants | | 9 | | | 22 | | | 132 | | |
Total | Total | | $ | 32,042 | | | $ | 57,061 | | Total | | $ | 29,258 | | | $ | 86,264 | |
For
The following table summarizes the realized and unrealized gain (loss) on equity investments with readily determinable fair value for the three and six months ended December 31, 2020, the Company sold 395 shares2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gain — Townsquare | | $ | 834 | | | $ | 6,416 | | | $ | 1,861 | | | $ | 7,026 | |
Unrealized gain (loss) — DraftKings | | (17,989) | | | (10,984) | | | (21,476) | | | 22,064 | |
Realized loss — DraftKings | | — | | | (2,659) | | | — | | | (2,659) | |
| | $ | (17,155) | | | $ | (7,227) | | | $ | (19,615) | | | $ | 26,431 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Table of common stock of DraftKings for cash proceeds of $20,583 and recorded a realized loss of $2,659. For the three and six months ended December 31, 2020, the Company recorded a net unrealized loss of $4,568 and a net unrealized gain of $29,090, respectively, on the investments in DraftKings and Townsquare. For the three and six months ended December 31, 2019, the Company recorded an unrealized gain of $9,432 and $14,725, respectively, on the investment in Townsquare.Contents
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 7.8. Property and Equipment
As of December 31, 20202021 and June 30, 2020,2021, property and equipment consisted of the following assets:following:
| | | | December 31, 2020 | | June 30, 2020 | | December 31, 2021 | | June 30, 2021 |
Land | Land | | $ | 149,771 | | | $ | 141,638 | | Land | | $ | 148,919 | | | $ | 150,750 | |
Buildings | Buildings | | 994,826 | | | 993,206 | | Buildings | | 997,216 | | | 996,295 | |
Equipment | Equipment | | 361,948 | | | 345,314 | | Equipment | | 414,243 | | | 405,835 | |
Aircraft | Aircraft | | 38,090 | | | 38,090 | | Aircraft | | 38,090 | | | 38,090 | |
Furniture and fixtures | Furniture and fixtures | | 42,059 | | | 42,389 | | Furniture and fixtures | | 38,806 | | | 40,660 | |
Leasehold improvements | Leasehold improvements | | 169,648 | | | 170,585 | | Leasehold improvements | | 227,349 | | | 214,678 | |
Construction in progress(a) | Construction in progress(a) | | 895,542 | | | 685,382 | | Construction in progress(a) | | 1,546,952 | | | 1,194,525 | |
| | 2,651,884 | | | 2,416,604 | | | 3,411,575 | | | 3,040,833 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | | (814,812) | | | (770,489) | | Less accumulated depreciation and amortization | | (936,882) | | | (884,541) | |
| | $ | 1,837,072 | | | $ | 1,646,115 | | | $ | 2,474,693 | | | $ | 2,156,292 | |
_________________
(a)Interest is capitalized during the construction period for significant long term construction projects. The Company capitalizes interest within the Entertainment segment in connection with the construction of MSG Sphere in Las Vegas. For the three and six months ended December 31, 2021, the company capitalized $10,600 and $19,926 of interest, respectively. As disclosed on the Company’s Form 10-K/A filed on February 9, 2022 for the Fiscal Year 2021, the Company determined that the application of ASC Topic 835-20 (Capitalization of Interest) required that a portion of the interest incurred under the Company’s credit facilities should have been capitalized during the periods that the Company had been capitalizing costs related to MSG Sphere at the Venetian (the “accounting error”), which capitalization of such costs began in 2017. As a result, the previously reported consolidated statements of operation of the Company for the three and six months ended December 31, 2020 have been revised to correct this immaterial accounting error by decreasing the Company’s previously reported interest expense by $7,566 and $7,911, respectively.
The increase in Construction in progress is primarily associated with the development and construction of MSG SpheresSphere in Las Vegas and London.Vegas. The property and equipment balances above include $76,945$154,131 and $78,618$106,990 of capital expenditure accruals (primarily related to MSG Sphere construction) as of December 31, 20202021 and June 30, 2020,2021, respectively, which are reflected in Other accrued liabilities in the accompanying consolidated balance sheets.
Depreciation and amortization expense on property and equipment was $20,991$26,100 and $22,490$51,221 for the three and six months ended December 31, 20202021, respectively, and 2019, respectively. For$21,928 and $46,589 for the three and six months ended December 31, 2020, and 2019, depreciation and amortization expense on property and equipment was $44,689 and $46,405, respectively.
During the three months ended September 30, 2021, Tao Group Hospitality recorded an impairment charge for leasehold improvements of $3,269 due to decisions made by management to cease operations at certain venues subsequent to Hakkasan acquisition date.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 8.9. Leases
The Company’s leases primarily consist of certain live-performance venues, entertainment dining and nightlife venues, corporate office space, storage and, to a lesser extent, office and other equipment. The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the lease term is assessed based on the date when the underlying asset is made available by the lessor for the Company’s use. The Company’s assessment of the lease term reflects the non-cancellable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain not to exercise, as well as periods covered by renewal options which the Company is reasonably certain to exercise. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated and combined statements of operations and consolidated and combined statements of cash flows over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of the fixed minimum payment obligations over the lease term. A corresponding ROUright-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received.
The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as the Company has elected to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from ROU assets associated with operating leases and are included within Property and equipment, net on the Company’s consolidated balance sheet. For purposes of measuring the present value of the Company’s fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in the underlying leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment surrounding the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less (“short-term leases”), any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the consolidated balance sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. In addition, the Company excluded its ground lease with Las Vegas Sands Corp. (“Sands”) associated with MSG Sphere in Las Vegas from the ROU asset and lease liability balance recorded on the consolidated balance sheet as the ground lease will have no fixed rent. Under the ground lease agreement, Sands will receive priority access to purchase tickets to events at the venue for inclusion in hotel packages or other uses, as well as certain rent-free use of the venue to support its Expo Center business. However, ifIf certain return objectives are achieved, Sands will receive 25% of the after-tax cash flow in excess of such objectives. The ground lease is for a term of 50 years, commencing upon substantial completion of the MSG Sphere.
As of December 31, 2020,2021, the Company’s existing operating leases, which are recorded on the accompanying financial statements, have remaining lease terms ranging from 10 months0.3 years to 1820.1 years. In certain instances, leases include options to renew, with varying option terms in each case. The exercise of lease renewal options is generally at the Company’s discretion and is considered in the Company’s assessment of the respective lease term. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
The following table summarizes the ROU assets and lease liabilities recorded on the Company’s consolidated balance sheets as of December 31, 2021 and June 30, 2021:
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following table summarizes the ROU assets and lease liabilities recorded on the Company’s consolidated balance sheets as of December 31, 2020 and June 30, 2020:
| | | Line Item in the Company’s Consolidated Balance Sheet | | December 31, 2020 | | June 30, 2020 | | | Line Item in the Company’s Consolidated Balance Sheet | | December 31, 2021 | | June 30, 2021 | |
Right-of-use assets: | Right-of-use assets: | | | | | | | | Right-of-use assets: | | | | | | | |
Operating leases | Operating leases | | Right-of-use lease assets | | $ | 198,464 | | | $ | 220,328 | | | Operating leases | | Right-of-use lease assets | | $ | 470,253 | | | $ | 280,579 | | |
Lease liabilities: | Lease liabilities: | | | | | | Lease liabilities: | | | | | |
Operating leases, current | Operating leases, current | | Operating lease liabilities, current | | $ | 54,963 | | | $ | 53,388 | | | Operating leases, current | | Operating lease liabilities, current | | $ | 65,663 | | | $ | 73,423 | | |
Operating leases, noncurrent | Operating leases, noncurrent | | Operating lease liabilities, noncurrent | | 155,440 | | | 174,219 | | | Operating leases, noncurrent | | Operating lease liabilities, noncurrent | | 450,019 | | | 233,556 | | |
Total lease liabilities | Total lease liabilities | | | $ | 210,403 | | | $ | 227,607 | | | Total lease liabilities | | $ | 515,682 | | | $ | 306,979 | | |
The following table summarizes the activity recorded within the Company’s consolidated and combined statements of operations for the three and six months ended December 31, 20202021 and 2019:2020:
| | | | Three Months Ended | | Three Months Ended |
| | Line Item in the Company’s Consolidated and Combined Statement of Operations | | December 31, | | Line Item in the Company’s Consolidated and Combined Statement of Operations | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Operating lease cost | Operating lease cost | | Direct operating expenses | | $ | 6,545 | | | $ | 11,333 | | Operating lease cost | | Direct operating expenses | | $ | 10,324 | | | $ | 6,545 | |
Operating lease cost | Operating lease cost | | Selling, general and administrative expenses | | 5,029 | | | 5,102 | | Operating lease cost | | Selling, general and administrative expenses | | 7,723 | | | 6,410 | |
Short-term lease cost | | Direct operating expenses | | 0 | | | 12 | | |
| | Variable lease cost | Variable lease cost | | Direct operating expenses | | 271 | | | 1,696 | | Variable lease cost | | Direct operating expenses | | 1,006 | | | 315 | |
Variable lease cost | Variable lease cost | | Selling, general and administrative expenses | | 15 | | | 14 | | Variable lease cost | | Selling, general and administrative expenses | | 15 | | | 15 | |
Total lease cost | Total lease cost | | $ | 11,860 | | | $ | 18,157 | | Total lease cost | | $ | 19,068 | | | $ | 13,285 | |
| | | Six Months Ended | | Six Months Ended |
| | Line Item in the Company’s Consolidated and Combined Statement of Operations | | December 31, | | Line Item in the Company’s Consolidated Statement of Operations | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Operating lease cost | | Direct operating expenses | | $ | 12,952 | | | $ | 19,574 | | |
Operating lease cost | | Selling, general and administrative expenses | | 10,124 | | | 9,917 | | |
Short-term lease cost | | Direct operating expenses | | 0 | | | 348 | | |
Lease cost, operating leases | | Lease cost, operating leases | | Direct operating expenses | | $ | 21,960 | | | $ | 12,952 | |
Lease cost, operating leases | | Lease cost, operating leases | | Selling, general and administrative expenses | | 14,144 | | | 12,903 | |
| | Variable lease cost | Variable lease cost | | Direct operating expenses | | 547 | | | 3,230 | | Variable lease cost | | Direct operating expenses | | 2,092 | | | 591 | |
Variable lease cost | Variable lease cost | | Selling, general and administrative expenses | | 38 | | | 27 | | Variable lease cost | | Selling, general and administrative expenses | | 29 | | | 38 | |
| Total lease cost | Total lease cost | | $ | 23,661 | | | $ | 33,096 | | Total lease cost | | $ | 38,225 | | | $ | 26,484 | |
Supplemental Information
For the six months ended December 31, 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $25,272.$30,282 and $28,261, respectively. For the six months ended December 31, 2021, the Company recorded new operating lease liabilities of $321,863 arising from obtaining right-of-use lease assets including (i) the renewal of the Radio City Music Hall and Beacon Theatre leases, and to a lesser extent, reflecting (ii) leases associated with MSG Sphere development, net of tenant incentives, (iii) a lease agreement with the existing landlord for the Company’s New York corporate office space, which extended the term for certain existing office space in use, and (iv) an aviation lease. For the six months ended December 31, 2021, the Company received approximately $12,800 of the aforementioned tenant incentives, through a cash receipt from the landlord and payments by the landlord for capital expenditures on behalf of the Company. For the six months ended December 31, 2020, the Company did not haveenter into new operatingleases.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In November 2021, the Company executed an agreement with the existing landlord for its New York corporate office space pursuant to which it will be relocating from the space that the Company currently occupies to newly renovated office space within the same building. The Company will not be involved in the design or construction of the new space for purposes of the Company’s buildout prior to obtaining possession, which is expected to occur in Fiscal Year 2024. Upon obtaining possession of the space, the new lease is expected to result in an additional lease obligation and right of use asset. While lease payments under the new lease agreement will be recognized as a lease expense on a straight-line basis over the lease term, the Company will begin paying full rent in the second half of Fiscal Year 2026 due to certain tenant incentives included in the arrangement. Base rent payments will increase every five years beginning in Fiscal Year 2031 in accordance with the terms of the lease. The Company anticipates entering into a new sublease agreement with MSG Sports for a lease term equivalent to the November 2021 agreement that the Company entered into with the existing landlord. The future lease payments related to this new lease for the next five fiscal years and thereafter are expected to be as follows:
| | | | | | | | |
| | |
Fiscal Year 2022 | | $ | — | |
Fiscal Year 2023 | | — | |
Fiscal Year 2024 | | — | |
Fiscal Year 2025 | | 10,121 | |
Fiscal Year 2026 | | 19,023 | |
Thereafter (Fiscal Year 2027 to Fiscal Year 2046) | | 1,026,207 | |
Total lease payments | | $ | 1,055,351 | |
During the three months ended September 30, 2021, a non-cash impairment charge of $4,549 was recorded for the right-of-use lease assets associated with certain Hakkasan venues of Tao Group Hospitality due to decisions made by management to cease operations at certain venues subsequent to the Hakkasan acquisition date. For the three months ended December 31, 2021, the Company recorded a net gain of approximately $5,900 principally from extinguishments and modification of lease liabilities arising from obtaining right-of-use lease assets.associated with certain Hakkasan venues of Tao Group Hospitality.
TheAs of December 31, 2021, the weighted average remaining lease term for operating leases recorded on the accompanying consolidated balance sheet as of December 31, 2020 was 5.712.2 years. The weighted average discount rate was 9.27%6.41% as of December 31, 20202021 and represented the Company’s estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of either (i) adoption of the standard, (ii) upon entering a new lease or (ii)(iii) the period in which the lease term expectation was modified.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Maturities of operating lease liabilities as of December 31, 20202021 are as follows:
| | | | | | | | | | | | |
| | | | | | |
Fiscal Year 20212022 (remainder) | | $ | 25,11528,220 | |
Fiscal Year 2022 | | 60,298 | |
Fiscal Year 2023 | | 56,80178,709 | | | | | |
Fiscal Year 2024 | | 38,52980,196 | | | | | |
Fiscal Year 2025 | | 23,35657,624 | | | | | |
Fiscal Year 2026 | | 34,293 | | | | | |
Thereafter | | 90,972479,386 | | | | | |
Total lease payments | | 295,071758,428 | | | | | |
Less imputed interest | | 84,668242,746 | | | | | |
Total lease liabilities(a) | | $ | 210,403515,682 | | | | | |
________________
(a)Operating lease payments exclude minimum lease payments related to a location associated with the entertainment dining and nightlife offerings as the Company has not yet taken possession of the space.
Lessor Arrangements
In connection with the Entertainment Distribution, the Company entered into Arena License Agreements with MSG Sports that, among other things, require the Knicks and the Rangers to play their home games at The Garden in exchange for fixed monthlyannual license fees scheduled to be paid monthly over the term of the agreements. The Company accounts for these license fees as operating lease revenue given that the Company provides MSG Sports with the right to direct the use of and obtain substantially all of the economic benefit from The Garden during Knicks and Rangers home games. Operating lease revenue is recognized on
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
a straight-line basis over the lease term, adjusted pursuant to the terms of the Arena License Agreements. In the case of the Arena License Agreements, the lease terms relate to non-consecutive periods of use when MSG Sports uses The Garden for their professional sports teams’ home games, and operating lease revenue is therefore recognized ratably as events occur.
The Arena License Agreements provide that license fees are not required to be paid by MSG Sports during periods when The Garden is unavailable for use due to a force majeure event. As a result of government-mandated suspension of events at The Garden beginning on March 13, 2020 due to the impact of the COVID-19 pandemic, The Garden was not available for use by MSG Sports from the effective date of the Arena License Agreements through the first quarter of Fiscal Year 2021, and, accordingly, the Company did not record any operating lease revenue for this arrangement during the first quarter of Fiscal Year 2021. During a portionUse of the three months ended December 31, 2020, The Garden reopenedresumed for games of the Knicks and the Rangers buthome games without fans were not permitted to attend due to governmental restrictions. The Knicks played four games at The Garden in December 2020 and theJanuary 2021, respectively, and was available at 10% seating capacity from February through May 2021 when it became available at 100% seating capacity. The Company recorded $1,585$27,854 and $29,182 of revenues under the Arena License Agreements for the three and six months ended December 31, 2021, respectively, and $1,585 for the three and six months ended December 31, 2020. In addition, the Company recorded otherrevenues from third party and related party lease and sublease revenuesarrangements of $748$1,342 and $1,496$2,330 for the three and six months ended December 31, 2021, respectively, and $749 and $1,497 for the three and six months ended December 31, 2020, respectively.
Note 9.10. Goodwill and Intangible Assets
The carrying amount of goodwill as of December 31, 2021 and June 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Entertainment | | MSG Networks | | Tao Group Hospitality | | Total | | | | | | | | | | | | | | | |
Balance as of June 30, 2021 | | $ | 74,309 | | | $ | 424,508 | | | $ | 3,378 | | | $ | 502,195 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Measurement period adjustment (a) | | — | | | — | | | (2,014) | | | (2,014) | | | | | | | | | | | | | | | | |
Balance as of December 31, 2021 | | $ | 74,309 | | | $ | 424,508 | | | $ | 1,364 | | | $ | 500,181 | | | |
_________________
(a)During the three months ended September 30, 2021, the Company recorded an adjustment to reflect a measurement period adjustment in connection with the acquisition of Hakkasan by Tao Group Hospitality. Upon the finalization of the closing statement during the first quarter of Fiscal Year 2022, the noncontrolling interest owned by Hakkasan Parent in Tao Group Sub-Holdings LLC was reduced from approximately 18% as initially estimated to approximately 15%. Such change resulted in a decrease in the Company’s redeemable noncontrolling interest of $7,500, a decrease in Goodwill of $480 as included above, and a decrease in amortizable intangibles of approximately $7,020 related to trade names and venue management contracts. Additionally, the Company wrote-off a previously reported accrual of $1,534, which resulted in an additional decrease in Goodwill of $1,534, also included above. See Note 103 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K regarding the details of the $88,583 goodwill impairment inacquisition of Hakkasan. No additional adjustments were recorded during the Tao Group Hospitality segment in Fiscal Year 2020. The carrying amount of goodwill as ofthree months ended December 31, 2020 and June 30, 2020 was $74,309, all of which is within the Entertainment segment. 2021 .
During the first quarter of Fiscal Year 2021,2022, the Company performed its annual impairment test of goodwill and determined that there were 0no impairments of goodwill identified as of the impairment test date.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The carrying amount of indefinite-lived intangible assets, all of which are within the Entertainment segment, as of December 31, 20202021 and June 30, 20202021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Trademarks | | | | $ | 61,881 | | | | | | | | | | | | | | | | |
Photographic related rights | | | | 1,920 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total | | | | $ | 63,801 | | | |
During the first quarter of Fiscal Year 2021,2022, the Company performed its annual impairment test of indefinite-lived intangible assets and determined that there were 0no impairments of indefinite-lived intangibles identified as of the impairment test date.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company’s intangible assets subject to amortization are as follows:
| December 31, 2020 | | Gross | | Accumulated Amortization | | Net | |
December 31, 2021 | | December 31, 2021 | | Gross | | Accumulated Amortization | | Net |
Trade names | Trade names | | $ | 97,530 | | | $ | (23,066) | | | $ | 74,464 | | Trade names | | $ | 113,333 | | | $ | (28,292) | | | $ | 85,041 | |
Venue management contracts | Venue management contracts | | 79,000 | | | (17,872) | | | 61,128 | | Venue management contracts | | 85,763 | | | (20,572) | | | 65,191 | |
| Affiliate relationships | | Affiliate relationships | | 83,044 | | | (57,951) | | | 25,093 | |
| Non-compete agreements | Non-compete agreements | | 9,000 | | | (6,131) | | | 2,869 | | Non-compete agreements | | 9,000 | | | (7,696) | | | 1,304 | |
Festival rights | Festival rights | | 8,080 | | | (2,426) | | | 5,654 | | Festival rights | | 8,080 | | | (2,966) | | | 5,114 | |
Other intangibles | Other intangibles | | 4,217 | | | (3,674) | | | 543 | | Other intangibles | | 4,217 | | | (3,954) | | | 263 | |
| | $ | 197,827 | | | $ | (53,169) | | | $ | 144,658 | | | $ | 303,437 | | | $ | (121,431) | | | $ | 182,006 | |
| June 30, 2020 | | Gross | | Accumulated Amortization | | Net | |
June 30, 2021 | | June 30, 2021 | | Gross | | Accumulated Amortization | | Net |
Trade names | Trade names | | $ | 97,530 | | | $ | (20,774) | | | $ | 76,756 | | Trade names | | $ | 121,000 | | | $ | (25,605) | | | $ | 95,395 | |
Venue management contracts | Venue management contracts | | 79,000 | | | (15,590) | | | 63,410 | | Venue management contracts | | 85,700 | | | (17,518) | | | 68,182 | |
| Affiliate relationships | | Affiliate relationships | | 83,044 | | | (56,221) | | | 26,823 | |
| Non-compete agreements | Non-compete agreements | | 9,000 | | | (5,348) | | | 3,652 | | Non-compete agreements | | 9,000 | | | (6,913) | | | 2,087 | |
Festival rights | Festival rights | | 8,080 | | | (2,156) | | | 5,924 | | Festival rights | | 8,080 | | | (2,696) | | | 5,384 | |
Other intangibles | Other intangibles | | 4,217 | | | (3,533) | | | 684 | | Other intangibles | | 4,217 | | | (3,814) | | | 403 | |
| | $ | 197,827 | | | $ | (47,401) | | | $ | 150,426 | | | $ | 311,041 | | | $ | (112,767) | | | $ | 198,274 | |
Amortization expense for intangible assets was $2,884$4,433 and 4,944$8,742 for the three months ended December 31, 2020 and 2019, respectively. For the six months ended December 31, 20202021, respectively, and 2019, amortization expense$3,749 and $7,498 for intangible assets was $5,768three and $7,849,six month ended December 31, 2020, respectively.
Note 10.11. Commitments and Contingencies
Commitments
As more fully described inSee Note 1112 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K for details on the Company’s off-balance sheet commitments. The Company’s off-balance sheet commitments consist primarilyas of long-term noncancelable operating lease agreements primarily for Company venues, including Tao Group Hospitality venues, and various corporate offices. See Note 8 for more details aboutJune 30, 2021 included a total of $3,646,250 of contract obligations (primarily related to media rights agreements) from the lease liabilities. Except for the National Properties Term Loan Facility entered into in November 2020 and the cancellation in November 2020MSG Networks segment, as a result of the separate delayed draw term loan credit agreements (the “DDTL Facilities”) entered into on April 17, 2020 between a wholly-owned subsidiary ofMerger, as follows:
| | | | | | | | |
Fiscal Year 2022 | | $ | 276,707 | |
Fiscal Year 2023 | | 273,370 | |
Fiscal Year 2024 | | 253,485 | |
Fiscal Year 2025 | | 246,013 | |
Fiscal Year 2026 | | 249,584 | |
Thereafter | | 2,347,091 | |
| | $ | 3,646,250 | |
During the Company as lenderthree and each of MSG NYK Holdings, LLC and MSG NYR Holdings, LLC, subsidiaries of MSG Sports,six months ended December 31, 2021, the Company did not have any material changes in its non-cancelable contractual obligations since the end of Fiscal Year 2020 other than activities in the ordinary course of business. See Notes 12 and 17Note 13 for further details of National Properties Term Loan Facility repayment requirementsthe principal repayments required under the Company’s various credit facilities, including the MSG Networks Senior Secured Credit Facilities, and Note 9 for details on the cancellation ofcommitments under the DDTL Facilities, respectively.Company’s lease obligations.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Legal Matters
Fifteen complaints were filed in connection with the Merger by purported stockholders of the Company and MSG Networks Inc.
Nine of these complaints involved allegations of materially incomplete and misleading information set forth in the joint proxy statement/prospectus filed by the Company and MSG Networks Inc. in connection with the Merger. As a result of supplemental disclosures made by the Company and MSG Networks Inc. on July 1, 2021, all of the disclosure actions were voluntarily dismissed with prejudice prior to or shortly following the consummation of the Merger.
On May 27, 2021, a complaint captioned Hollywood Firefighters’ Pension Fund et al. v. James Dolan, et al., 2021-0468-KSJM, was filed in the Court of Chancery of the State of Delaware by purported stockholders of the Company against the Company, its Board of Directors (the “Board”), certain Dolan family stockholders and MSG Networks Inc. The complaint purported to allege derivative claims on behalf of the Company and claims on behalf of a putative class of Company stockholders concerning the Merger. Plaintiffs alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the Delaware General Corporation Law (the “DGCL”), that the Board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the Merger were misleading or incomplete. Plaintiffs sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiffs’ attorneys’ fees. On June 15, 2021, plaintiffs filed a brief in support of their motion seeking a preliminary injunction enjoining the Company’s stockholder vote and consummation of the Merger, which the defendants opposed. The Court of Chancery denied the plaintiffs’ preliminary injunction motion on July 2, 2021.
On June 9, 2021, a complaint captioned Timothy Leisz v. MSG Networks Inc. et al., 2021-0504-KSJM, was filed in the Court of Chancery of the State of Delaware by a purported stockholder of MSG Networks Inc. against MSG Networks Inc., the MSG Networks Inc. board of directors, certain Dolan family stockholders and the Company. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The MSG Networks Inc. plaintiff alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the DGCL, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the merger were misleading or incomplete. Plaintiff sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiff’s attorneys’ fees. On June 21, 2021, plaintiff filed a brief in support of his motion seeking a preliminary injunction enjoining the MSG Networks Inc. stockholder vote and consummation of the Merger, which defendants opposed. The Court of Chancery denied the plaintiff’s preliminary injunction motion on July 2, 2021.
On July 6, 2021, a complaint captioned Stevens et al. v. Dolan et al., 2021-0575, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages in the event the transaction was consummated, and plaintiffs’ attorneys’ fees.
On July 6, 2021, a complaint captioned The City of Boca Raton Police and Firefighters’ Retirement System v. MSG Networks Inc., 2021-0578, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against MSG Networks Inc. The complaint purported to seek to enforce plaintiff’s right to inspect certain of MSG Networks Inc.’s books and records under Section 220 of the DGCL. The complaint was voluntarily dismissed on August 10, 2021.
On August 11, 2021, a stockholder derivative complaint captioned City of Miramar Retirement Plan and Trust Fund for General Employees et al. v. Dolan et al., 2021-0692 was filed in the Court of Chancery of the State of Delaware by purported stockholders of the Company. The complaint purported to allege derivative claims on behalf of the Company and direct claims on behalf of a putative class of Company stockholders. Plaintiffs alleged that the Board and the Company’s majority stockholders violated their fiduciary duties by failing to protect the Company’s interest in connection with the Merger. Plaintiffs sought, among other relief, an award of damages to the purported class and Company including interest, and plaintiffs’ attorneys’ fees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
On August 31, 2021, a complaint captioned Murray v. Dolan et al., 2021-0748, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The complaint purported to allege claims on behalf of a putative class of MSG Networks stockholders concerning the Merger. Plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages, and plaintiffs’ attorneys’ fees.
All of the above complaints have since either been dismissed or consolidated into one of two litigations.
On September 10, 2021, the Court of Chancery entered an order consolidating the complaints in the Hollywood Firefighters and City of Miramar actions. The new consolidated action is captioned: In re Madison Square Garden Entertainment Corp. Stockholders Litigation, C.A. 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 derivative allegations for breach of fiduciary duties that were present in the Hollywood Firefighters and City of Miramar complaints and abandons the direct claims in those prior complaints. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. The Company and other defendants filed answers to the complaint on December 30, 2021, and are currently engaged in responding to the consolidated plaintiffs’ discovery requests. Pursuant to the indemnity rights in its bylaws and Delaware law, 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 the complaints in the Leisz, Stevens, City of Boca Raton, and Murray complaints. The new consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. 2021-0575-KSJM. The consolidated plaintiffs filed their Verified Consolidated Stockholder Class Action Complaint on October 29, 2021. The complaint asserts claims on behalf of a putative class of former MSG Networks Inc. stockholders against each member of the board of directors of MSG Networks Inc. prior to the Merger. Plaintiffs allege that the MSG Networks Inc. board of directors and majority stockholders breached their fiduciary duties in negotiating and approving the Merger. The Company is not named as a defendant.Pursuant to the indemnity rights in its bylaws and Delaware law, 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. 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 and are currently engaged in responding to the plaintiffs’ discovery requests.
We are currently unable to determine a range of potential liability, if any, with respect to these Merger-related claims. Accordingly, no accrual for these matters has been made in our consolidated financial statements.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance)insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
Note 11.12. Fair Value Measurements
The following table presents the Company’s assets that are measured at fair value within Level I of the fair value hierarchy on a recurring basis which include cash equivalents, short-term investments and an equity investment with readily determinable fair value:
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy | | December 31, 2020 | | June 30, 2020 |
Assets: | | | | | | |
| | | | | | |
Money market accounts | | I | | $ | 198,051 | | | $ | 0 | |
Time deposits | | I | | 481,011 | | | 777 | |
U.S. treasury bills | | I | | 314,998 | | | 999,887 | |
Equity investments with readily determinable fair value | | I | | 63,013 | | | 57,061 | |
Total assets measured at fair value | | | | $ | 1,057,073 | | | $ | 1,057,725 | |
All assets listed above are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s commercial paper,These assets include (i) cash equivalents in money market accounts and time deposits, and U.S. treasury bills approximates fair value due to their short-term maturities. See Note 6 for more information on the Company’s(ii) equity investments with readily determinable fair value.value:
The carrying value and fair value of the Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | June 30, 2020 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets | | | | | | | | |
Notes receivable (a) | | $ | 0 | | | $ | 0 | | | $ | 6,328 | | | $ | 6,328 | |
Short-term investments (a) | | — | | | — | | | 337,192 | | | 337,192 | |
Equity investments with readily determinable fair value (b) | | 63,013 | | | 63,013 | | | 57,061 | | | 57,061 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Current and non-current portion of long-term debt under National Properties Term Loan Facility (c) | | $ | 650,000 | | | $ | 657,313 | | | $ | — | | | $ | — | |
Current and non-current portion of long term debt under Tao Credit Facilities (c) | | 37,750 | | | 37,723 | | | 33,750 | | | 32,367 | |
| | | | | | | | | | | | | | | | | | | | |
| | Line Item on Consolidated Balance Sheet | | December 31, 2021 | | June 30, 2021 |
Assets: | | | | | | |
| | | | | | |
Money market accounts and time deposits(a) | | Cash and cash equivalents | | $ | 1,107,768 | | | $ | 1,361,729 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Equity investments with readily determinable fair value (b) | | Other assets | | 66,649 | | | 86,264 | |
Total assets measured at fair value | | | | $ | 1,174,417 | | | $ | 1,447,993 | |
_________________(a)As of June 30, 2020, the Company’s notes receivable were invested with banking institutions as collateral for issuances of letters of credit. In addition, the Company’s short-term investments consisted of investments that (i) had original maturities of greater than three months and (ii) could be converted into cash by the Company within one year. The Company’s short-term investments as of June 30, 2020 included $299,942 in U.S. treasury bills and $37,250 in term deposits. The short-term investments in U.S. treasury bills were classified within Level I of the fair value hierarchy. The Company’s notes receivable and short-term investments in term deposits were carried at cost, including interest accruals, which approximated fair value and were classified within Level I of the fair value hierarchy. For the six months ended December 31, 2020, the changes in term deposits and notes receivable were all related to the settlement upon those investments expirations. No gain or loss was recognized on those notes receivable and term deposits for the six months ended December 31, 2020.
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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(a)The carrying amount of the Company’s cash equivalents in money market accounts and time deposits approximate fair value due to their short-term maturities.
(b)See Note 67 for more information on the Company’s equity investments with readily determinable fair value assets under Level Iin Townsquare and DraftKings.
In addition to the table above, the carrying value and fair value of the fair value hierarchy.Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | June 30, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Liabilities | | | | | | | | |
Current and non-current portion of long-term debt under the MSG Networks Term Loan Facility (a) | | $ | 1,023,000 | | | $ | 1,012,770 | | | $ | 1,047,750 | | | $ | 1,042,510 | |
Current and non-current portion of long-term debt under the National Properties Term Loan Facility (a) | | $ | 643,500 | | | $ | 658,783 | | | $ | 646,750 | | | $ | 669,386 | |
Current and non-current portion of long-term debt under the Tao Credit Facilities (a) | | $ | 26,250 | | | $ | 26,315 | | | $ | 43,750 | | | $ | 43,851 | |
_________________
(c)(a)On October 11, 2019, MSGN Holdings, L.P., certain MSGN Holdings, L.P. subsidiaries and certain MSG Networks Inc. subsidiaries entered into an amended and restated credit facility consisting of a $1,100,000 five-year term loan facility and a $250,000 five-year revolving credit facility. On May 23, 2019, Tao Group Intermediate Holdings LLC and Tao Group Operating LLC entered into a $40,000 five-year term loan facility and a $25,000 five-year term revolving facility. In November 2020, MSG National Properties and certain subsidiaries of the Company entered into the National Properties Term Loan Facility, providing a five-year $650,000 term loan facility. The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted indices of similar securities for which the inputs are readily observable. See Note 1213 for more information and outstanding balances on this long-term debt.
Note 12.13. Credit Facilities
MSG Networks Senior Secured Credit Facilities
On September 28, 2015, MSGN Holdings, L.P. (”MSGN L.P.”), MSGN Eden, LLC, an indirect subsidiary of the Company (through the Merger) and the general partner of MSGN L.P., Regional MSGN Holdings LLC, an indirect subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “MSGN Holdings Entities”), and certain subsidiaries of MSGN L.P. entered into a credit agreement (the “MSGN Former Credit Agreement”) with a syndicate of lenders. The MSGN Former Credit Agreement provided MSGN L.P. with senior secured credit facilities that consisted of: (a) an initial $1,550,000 term loan facility and (b) a $250,000 revolving credit facility.
On October 11, 2019, MSGN L.P., the MSGN Holdings Entities and certain subsidiaries of MSGN L.P. amended and restated the MSGN Former Credit Agreement in its entirety (the “MSGN Credit Agreement”). The MSGN Credit Agreement provides MSGN L.P. with senior secured credit facilities (as amended, the “MSG Networks Senior Secured Credit Facilities”) consisting of: (i) an initial $1,100,000 term loan facility (the “MSGN Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “MSGN Revolving Credit Facility”), each with a term of five years. Proceeds from the MSGN Term Loan Facility were used by MSGN L.P. to repay outstanding indebtedness under the MSGN Former Credit Agreement. Up to $35,000 of the MSGN Revolving Credit Facility is available for the issuance of letters of credit. Subject to the satisfaction of certain conditions and limitations, the MSGN Credit Agreement allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans.
Borrowings under the MSGN Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio) (the “MSGN Base Rate”), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined
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based on a total net leverage ratio) (the “MSGN Eurodollar Rate”). Upon a payment default in respect of principal, interest or other amounts due and payable under the MSGN Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. The MSGN Credit Agreement requires that MSGN L.P. pay a commitment fee ranging from 0.225% to 0.30% (determined based on a total net leverage ratio) in respect of the average daily unused commitments under the MSGN Revolving Credit Facility. MSGN L.P. will also be required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit. The interest rate on the MSGN Term Loan Facility as of December 31, 2021 was 1.60%.
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. All borrowings under the MSGN Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of December 31, 2021, the MSGN Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the covenants. As of December 31, 2021, there were no letters of credit issued and outstanding under the MSGN Revolving Credit Facility. As of December 31, 2021, there was $1,023,000 outstanding under the MSGN Term Loan Facility, and no borrowings under the MSGN Revolving Credit Facility.
All obligations under the MSGN Credit Agreement are guaranteed by the MSGN Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “MSGN Subsidiary Guarantors,” and together with the MSGN Holdings Entities, the “MSGN Guarantors”). All obligations under the MSGN Credit Agreement, including the guarantees of those obligations, are secured by certain assets of MSGN L.P. and each MSGN Guarantor (collectively, “MSGN Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each MSGN Subsidiary Guarantor held directly or indirectly by MSGN L.P.
Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily repay outstanding loans under the MSGN Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurodollar loans). 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.
In addition to the financial covenants discussed above, the MSGN Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants, and events of default. The MSGN Credit Agreement contains certain restrictions on the ability of MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the MSGN Credit Agreement, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) changing their lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The MSGN Holdings Entities are also subject to customary passive holding company covenants. The Merger did not result in a change of control or acceleration of debt payments under the MSGN Credit Agreement.
National Properties Term Loan Facility
On November 12, 2020, 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 5-year $650,000 senior secured term loan facility (the “National Properties Term Loan Facility”). The proceeds of the National Properties Term Loan Facility may be used to fund working capital needs, for general corporate purposes of MSG National Properties and its subsidiaries, and to make distributions to MSG Entertainment Group.
The National Properties Term Loan Facility includes a minimum liquidity covenant, pursuant to which MSG National Properties and its restricted subsidiaries are required to maintain a specified minimum level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter. Following
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the first anniversary of the closing of the facility in November 2021, the minimum liquidity level was reduced to $200,000. If at any time the total leverage ratio of MSG National Properties and its restricted subsidiaries is less than 5.00 to 1.00 as of the end of any four consecutive fiscal quarter period or MSG National Properties obtains an investment grade rating, the minimum liquidity level is permanently reduced to $50,000. As of December 31, 2021, the trailing twelve month AOI (as defined under the National Properties Term Loan Facility) for MSG National Properties and its restricted subsidiaries was negative and therefore, the minimum liquidity level continues to be $200,000.
Subject to customary notice and minimum amount conditions, the Company may voluntarily repay outstanding loans under the National Properties Term Loan Facility at any time, in whole or in part (subject to customary breakage costs with respect to LIBOR loans) subject to a prepayment premium equal to (i) for the initial 18 month period following the facility’s effective date, 2.0% of the principal amount prepaid plus the amount of interest that would have been payable on such principal amount from the date of such prepayment through the end of such 18-month period, (ii) after the initial 18 month period but on or prior to the three year anniversary of the effective date, 2.0% of the principal amount prepaid, (iii) after the three year anniversary but on or prior to the four year anniversary of the effective date, 1.0% of the principal amount prepaid and (iv) after the 4th anniversary, —%. The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments in an aggregate amount equal to 1.00% per annum (0.25% per quarter), with the balance due at the maturity of the facility. The National Properties Term Loan Facility will mature on November 12, 2025. Borrowings under the National Properties Term Loan Facility bear interest at a floating rate, which at the option of MSG National Properties may be either (i) a base rate plus a margin of 5.25% per annum or (ii) LIBOR, with a floor of 0.75%, plus a margin of 6.25% per annum. The interest rate on the National Properties Term Loan Facility as of December 31, 2021 was 7.00%. As of December 31, 2021, there was $643,500 outstanding under the National Properties Term Loan Facility.
All obligations under the National Properties Term Loan Facility are guaranteed by MSG Entertainment Group and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own The Garden, BCE and certain other excluded subsidiaries (the “Subsidiary Guarantors”).
All obligations under the National Properties Term Loan Facility, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theatre. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to a specified percentage of excess cash flow in any fiscal year and 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), in each case subject to certain exceptions.
In addition to the minimum liquidity covenant, the National Properties Term Loan Facility and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default.
The National Properties Term Loan Facility contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the National Properties Term Loan Facility, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix) merge or consolidate; and (x) make certain dispositions. As of December 31, 2021, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Term Loan Facility.
Tao Credit Facilities
On May 23, 2019, Tao Group Intermediate Holdings LLC (“TAOIH” or “Intermediate Holdings”) and Tao Group Operating LLC (“TAOG” or “Senior Borrower”), entered into a credit agreement (the “Tao Senior Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and a letter of credit issuer, and the lenders party thereto. Together the Tao Senior Credit Agreement and a $49,000 intercompany subordinated credit agreement that matures in August 2024 (the “Tao Subordinated Credit Agreement”) between a subsidiary of the Company and Tao Group Sub-Holdings LLC, a subsidiary
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of Tao Group Hospitality, replaced the Senior Borrower’s prior credit agreement dated January 31, 2017 (“2017 Tao Credit Agreement”). On June 15, 2020, the Company entered into the second amendment to the Tao Subordinated Credit Agreement, which provided an additional $22,000 of intercompany loan borrowing availability under the Tao Subordinated Credit Agreement. The net intercompany loan outstanding balancesbalance under the Tao Subordinated Credit Agreement, as amended, were $62,000 and $49,000was $63,000 as of December 31, 2020 and June 30, 2020, respectively.2021. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement, as amended, have been eliminated in the consolidated and combined financial statements in accordance with ASC Topic 810, Consolidation.
The Tao Senior Credit Agreement provides TAOG with senior secured credit facilities (the “Tao Senior Secured Credit Facilities”) consisting of: (i) an initial $40,000 term loan facility with a term of five years (the “Tao Term Loan Facility”) and (ii) a $25,000 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. All borrowings under the Tao Revolving Credit Facility, including, without limitation, amounts drawn under the revolving line of credit are subject to the satisfaction of customary conditions. 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 and in respect of a certain reserve account, each as discussed below).
The Tao Senior Credit Agreement requires Intermediate HoldingsTAOIH to comply with a maximum total leverage ratio of 4.00:1.00 and a maximum senior leverage ratio of 3.00:1.00 from the closing date until December 31, 2021 and a maximum total leverage ratio of 3.50:1.00 and a maximum senior leverage ratio of 2.50:1.00 from and after December 31, 2021. In addition, there is a minimum fixed charge coverage ratio of 1.25:1.00 for TAOIH. On August 6, 2020, TAOG and TAOIH entered into an amendment to the Tao Senior Credit Agreement, which suspended the application of the financial maintenance covenants thereunder, modified certain restrictive covenants therein through December 31, 2021, modified the applicable interest rates and increased the minimum liquidity requirement for the outstanding balance of $33,750 under the Tao Term Loan Facility and for the $25,000 availability under the Tao Revolving Credit Facility. As of January 1, 2022, such financial maintenance and restrictive covenant suspensions are no longer in effect. TAOIH and its restricted subsidiaries must maintain a minimum consolidated liquidity, consisting of cash and cash equivalents and available revolving commitments, at all times of $10,000. In addition, in connection with the amendment, the Company, through its direct wholly owned subsidiary, MSG Entertainment Group, entered into a guarantee and reserve account agreement (i) to guarantee the obligations of TAOG under the Tao Senior Credit Agreement, (ii) to establish and grant a security interest in a reserve account that initially held a deposit of approximately $9,800 and (iii) with a covenant to maintain a minimum liquidity requirement of no less than $75,000 at all times. The balance held in the reserve account was approximately $8,100$1,600 as of December 31, 2020.2021. As of December 31, 2020,2021, TAOG, TAOIH and the restricted subsidiaries were in compliance with the covenants of the Tao Senior Credit Agreement.
All obligations under the Tao Senior Credit Agreement are guaranteed by MSG Entertainment Group, TAOIH and TAOIH’s existing and future direct and indirect domestic subsidiaries (other than (i) TAOG, (ii) domestic subsidiaries substantially all of whose assets consist of controlled foreign corporations and (iii) subsidiaries designated as immaterial subsidiaries or unrestricted subsidiaries) (the “Tao Subsidiary Guarantors”,Guarantors,” and together with TAOIH, the “Tao Guarantors”). All obligations under the Tao Senior Credit Agreement, including the guarantees of those obligations, are secured by the reserve account noted above and substantially all of the assets of TAOG and each Tao Guarantor (collectively, “Tao Collateral”), including, but not
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limited to, a pledge of the equity interests in TAOG held directly by TAOIH and the equity interests in each Tao Subsidiary Guarantor held directly or indirectly by TAOIH.
Borrowings under the Tao Senior Credit Agreement bear interest at a floating rate, which at the option of the Senior Borrower may be either (a) a base rate plus an additional rate ranging from 1.50% to 2.50% per annum (determined based on a total leverage ratio) (the “Base“Tao Base Rate”), or (b) a Eurocurrency rate plus an additional rate ranging from 2.50% to 3.50% per annum (determined based on a total leverage ratio) (the “Eurocurrency“Tao Eurocurrency Rate”), provided that through December 31, 2021, the additional rate used in calculating the floating rate is (i) 1.50% per annum for borrowings bearing the Tao Base Rate, and (ii) 2.50% per annum for borrowings bearing the Eurocurrency Rate. The Tao Senior Credit Agreement requires TAOG to pay a commitment fee of 0.50% in respect of the daily unused commitments under the Tao Revolving Credit Facility. TAOG is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the Tao Senior Credit Agreement. The interest rate on the Tao Senior Credit Agreement as of December 31, 20202021 was 2.65%2.61%. There was $6,500 and 0no borrowing outstanding under the Tao Revolving Credit Facility as of December 31, 2020 and June 30, 2020, respectively.2021. Tao Group Hospitality utilized $750 of the Tao Revolving Credit Facility for issuance of letters of credit and the remaining borrowing available as of December 31, 20202021 was $17,750.
During the six months ended$24,250. As of December 31, 2020 and 2019, the Company made interest payments of $554 and $1,218, respectively,2021, there was $26,250 outstanding under the Tao Senior Credit Agreement.Term Loan Facility.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In addition to the financial covenants described above, the Tao Senior Credit Agreement and the related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Tao Senior Credit Agreement contains certain restrictions on the ability of TAOIH, TAOG and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Tao Senior Credit Agreement, including, without limitation, the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) engaging in certain transactions with affiliates; (vi) amending specified agreements; (vii) merging or consolidating; (viii) making certain dispositions; and (ix) entering into agreements that restrict the granting of liens. Intermediate Holdings is subject to a customary passive holding company covenant.
Subject to customary notice and minimum amount conditions, TAOG may voluntarily prepayrepay outstanding loans under the Tao Senior Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). The initial Tao Term Loan Facility amortizes quarterly in accordance with its terms from June 30, 2019 through March 31, 2024 with a final maturity date on May 23, 2024. 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.
See Note 13 toPrincipal Repayments
Long-term debt maturities over the Company’s audited consolidated and combined financial statements and notes theretonext five years for the year ended June 30, 2020 included inoutstanding balance under the Company’s Annual Report on Form 10-K for more information regarding the Company’s debt maturities for the TaoMSG Networks Senior Secured Credit Facilities.
National Properties Term Loan Facility
On November 12, 2020, MSG National Properties, an indirect, wholly-owned subsidiary of the Company, MSG Entertainment Group and certain subsidiaries of MSG National Properties entered into a five-year $650,000 senior secured term loan facility (the “National Properties Term Loan Facility”). The proceeds of theFacilities, National Properties Term Loan Facility may be used to fund working capital needs, for general corporate purposesand Tao Credit Facilities as of MSG National Properties and its subsidiaries, and to make distributions to MSG Entertainment Group.December 31, 2021 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | MSG Networks Senior Secured Credit Facilities | | National Properties Term Loan Facility | | Tao Credit Facilities | | Total |
Fiscal Year 2022 (remainder) | | $ | 24,750 | | | 3,250 | | | $ | 3,750 | | | $ | 31,750 | |
Fiscal Year 2023 | | 66,000 | | | 6,500 | | | 10,000 | | | 82,500 | |
Fiscal Year 2024 | | 82,500 | | | 6,500 | | | 12,500 | | | 101,500 | |
Fiscal Year 2025 | | 849,750 | | | 6,500 | | | — | | | 856,250 | |
Fiscal Year 2026 | | — | | | 620,750 | | | — | | | 620,750 | |
Thereafter | | — | | | — | | | — | | | — | |
| | $ | 1,023,000 | | | $ | 643,500 | | | $ | 26,250 | | | $ | 1,692,750 | |
The following table summarizes the outstanding balances under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility includes a minimum liquidity covenant, pursuant to which MSG National Properties and its restricted subsidiaries are required to maintain a specified minimum levelTao Credit Facilities as well as the related deferred financing costs in the accompanying consolidated balance sheets as of average daily liquidity, consisting of cashDecember 31, 2021 and cash equivalents and available revolving commitments, over the last month of each quarter. From the closing date until the first anniversary of the National Properties Term Loan Facility, the minimum liquidity threshold is $450,000, which is reduced each quarter by the amount of cash usage, subject to a minimum liquidity floor of $200,000. After the first anniversary, the minimum liquidity level is reduced to $200,000. If at any time the total leverage ratio of MSG NationalJune 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | June 30, 2021 |
| | Principal | | Unamortized Deferred Financing Costs | | Net (a) | | Principal | | Unamortized Deferred Financing Costs | | Net (a) |
Current portion | | | | | | | | | | | | |
MSG Networks Senior Secured Credit Facilities | | $ | 49,500 | | | $ | (1,244) | | | $ | 48,256 | | | $ | 49,500 | | | $ | (1,255) | | | $ | 48,245 | |
National Properties Term Loan Facility | | 6,500 | | | (6,783) | | | (283) | | | 6,500 | | | (6,783) | | | (283) | |
Tao Term Loan Facility | | 8,750 | | | (240) | | | 8,510 | | | 6,250 | | | (239) | | | 6,011 | |
Current portion of long-term debt, net of deferred financing costs | | $ | 64,750 | | | $ | (8,267) | | | $ | 56,483 | | | $ | 62,250 | | | $ | (8,277) | | | $ | 53,973 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Properties and its restricted subsidiaries is less than 5.00 to 1.00 as of the end of any four consecutive fiscal quarter period or MSG National Properties obtains an investment grade rating, the minimum liquidity level is permanently reduced to $50,000.
The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments in an aggregate amount equal to 1.00% per annum (0.25% per quarter), with the balance due at the maturity of the facility. The National Properties Term Loan Facility will mature on November 12, 2025. Borrowings under the National Properties Term Loan Facility bear interest at a floating rate, which at the option of MSG National Properties may be either (i) a base rate plus a margin of 5.25% per annum or (ii) LIBOR, with a floor of 0.75%, plus a margin of 6.25% per annum. The interest rate on the National Properties Term Loan Facility as of December 31, 2020 was 7.00%. During the six months ended December 31, 2020, the Company was not required to make interest or principal payments under the National Properties Term Loan Facility.
All obligations under the National Properties Term Loan Facility are guaranteed by MSG Entertainment Group and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own The Garden, BCE and certain other excluded subsidiaries (the “Subsidiary Guarantors”). All obligations under the National Properties Term Loan Facility, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theater. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to a specified percentage of excess cash flow in any fiscal year and 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), in each case subject to certain exceptions.
In addition to the minimum liquidity covenant, the National Properties Term Loan Facility and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. The National Properties Term Loan Facility contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the National Properties Term Loan Facility, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix) merge or consolidate; and (x) make certain dispositions. As of December 31, 2020, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Term Loan Facility.
As of December 31, 2020, the principal repayments required for the next five years under the National Properties Term Loan Facility are as follows:
| | | | | | | | |
Fiscal Year 2021 (remainder) | | $ | 3,250 | |
Fiscal Year 2022 | | 6,500 | |
Fiscal Year 2023 | | 6,500 | |
Fiscal Year 2024 | | 6,500 | |
Fiscal Year 2025 | | 6,500 | |
Thereafter | | 620,750 | |
| | $ | 650,000 | |
Deferred Financing Costs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | June 30, 2021 |
| | Principal | | Unamortized Deferred Financing Costs | | Net (a) | | Principal | | Unamortized Deferred Financing Costs | | Net (a) |
Noncurrent portion | | | | | | | | | | | | |
MSG Networks Senior Secured Credit Facilities | | $ | 973,500 | | | $ | (2,095) | | | $ | 971,405 | | | $ | 998,250 | | | $ | (2,715) | | | $ | 995,535 | |
National Properties Term Loan Facility | | 637,000 | | | (19,427) | | | 617,573 | | | 640,250 | | | (22,819) | | | 617,431 | |
Tao Term Loan Facility | | 17,500 | | | (356) | | | 17,144 | | | 22,500 | | | (475) | | | 22,025 | |
Tao Revolving Credit Facility | | — | | | — | | | — | | | 15,000 | | | — | | | 15,000 | |
Long-term debt, net of deferred financing costs | | $ | 1,628,000 | | | $ | (21,878) | | | $ | 1,606,122 | | | $ | 1,676,000 | | | $ | (26,009) | | | $ | 1,649,991 | |
_________________In connection with the National Properties Term Loan Facility, the Company incurred a $19,500 original issue discount and $14,417 of issuance costs (collectively, “deferred financing costs”). The deferred financing costs are amortized, as interest expense, over the term of the National Properties Term Loan Facility on a straight-line basis, which approximates the effective interest method.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following table summarizes the outstanding balances under the Tao Term Loan Facility, the Tao Revolving Credit Facility and the National Properties Term Loan Facility, as well as the related deferred financing costs in the accompanying consolidated balance sheets as of December 31, 2020 and June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | June 30, 2020 |
| | Principal | | Unamortized Deferred Financing Costs | | Net (a) | | Principal | | Unamortized Deferred Financing Costs | | Net (a) |
Current portion | | | | | | | | | | | | |
Tao Term Loan Facility | | $ | 5,000 | | | $ | (239) | | | $ | 4,761 | | | $ | 5,000 | | | $ | (208) | | | $ | 4,792 | |
| | | | | | | | | | | | |
National Properties Term Loan Facility | | 6,500 | | | (6,783) | | | (283) | | | — | | | — | | | — | |
Current portion of long-term debt, net of deferred financing costs (a) | | $ | 11,500 | | | $ | (7,022) | | | $ | 4,478 | | | $ | 5,000 | | | $ | (208) | | | $ | 4,792 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | June 30, 2020 |
| | Principal | | Unamortized Deferred Financing Costs | | Net | | Principal | | Unamortized Deferred Financing Costs | | Net |
Noncurrent portion | | | | | | | | | | | | |
Tao Term Loan Facility | | $ | 26,250 | | | $ | (595) | | | $ | 25,655 | | | $ | 28,750 | | | $ | (624) | | | $ | 28,126 | |
Tao Revolving Credit Facility (b) | | 6,500 | | | 0 | | | 6,500 | | | — | | | — | | | — | |
National Properties Term Loan Facility | | 643,500 | | | (26,210) | | | 617,290 | | | — | | | — | | | — | |
Long-term debt, net of deferred financing costs | | $ | 676,250 | | | $ | (26,805) | | | $ | 649,445 | | | $ | 28,750 | | | $ | (624) | | | $ | 28,126 | |
_________________
(a)In addition to the outstanding balance associated with the MSG Networks Senior Secured Credit Facilities, the Tao Term Loan Facility, the Tao Revolving Credit Facility and the National Properties Term Loan Facility disclosed above, the Company’s current portion of long-term debt, net of deferred financing costs in the accompanying consolidated balance sheets of $1,606,759 and $1,650,628 as of December 31, 2021 and June 30, 2021, respectively, also includes $637 related to a note with respect to a loan received by BCE from its noncontrolling interest holder that is duematures in April 2021 as of December 31, 2020 and June 30, 2020.2023.
(b)Unamortized deferred financing costs associated with MSGN Revolving Credit Facility and Tao Revolving Credit Facility are presented under the captions Other current assets and Other assets in the accompanying consolidated balance sheets.
Supplemental cash flows information
During the six months ended December 31, 2021 and 2020, interest payments and loan principal repayments made by the Company under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility, and Tao Senior Credit Agreement for term loan and revolving credit facilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest Payments (a) | | Loan Principal Repayments |
| | Six Months Ended | | Six Months Ended |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 |
MSG Networks Senior Secured Credit Facilities | | $ | 8,886 | | | $ | 9,584 | | | $ | 24,750 | | | $ | 13,750 | |
National Properties Term Loan Facility | | 23,141 | | | — | | | 3,250 | | | — | |
Tao Credit Facilities | | 415 | | | 554 | | | 17,500 | | | 2,500 | |
| | $ | 32,442 | | | $ | 10,138 | | | $ | 45,500 | | | $ | 16,250 | |
_________________
(a)See Note 2 and Note 8 for further details on interest capitalization during the three and six months ended December 31, 2021, and 2020. Interest payments, net of capitalized interest, were $12,516 and $2,227 for the six months ended December 31, 2021 and 2020.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 13.14. Pension Plans and Other Postretirement Benefit Plan
See Note 14 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K for more information regarding the Company’s defined benefit pension plans (“MSGE Pension Plans”), postretirement benefit plan (“MSGE Postretirement Plan”), The Madison Square Garden 401(k) Savings Plan and the MSG Sports & Entertainment, LLC Excess Savings Plan (collectively, the “Savings Plans”), and The Madison Square Garden 401(k) Union Plan (the “Union Savings Plan”). The Company’s
Through the Merger, the Company also sponsors (i) a non-contributory, qualified defined benefit pension plan covering certain of its union employees, (ii) an unfunded non-contributory, non-qualified frozen excess cash balance plan covering certain employees who participated in an underlying qualified plan, and (iii) an unfunded noncontributory, non-qualified frozen defined benefit pension plan for the benefit of certain employees who participated in an underlying qualified plan (collectively the “MSGN Pension Plans”, and together with MSGE Pension Plans, the “Pension Plans”). MSG Networks also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 (the “MSGN Postretirement Plan”, and together with MSGE Postretirement Plan, are considered “Shared Plans.”the “Postretirement Plans”).
Defined Benefit Pension Plans and Postretirement Benefit Plan
The following tables present components of net periodic benefit cost for the Pension Plans and Postretirement PlanPlans included in the accompanying consolidated and combined statements of operations for the three and six months ended December 31, 20202021 and 2019.2020. Service cost is recognized in direct operating expenses and selling, general and administrative expenses. All other components of net periodic benefit cost are reported in miscellaneous expense, net. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Pension Plans | | Postretirement Plan |
| | Three Months Ended | | Three Months Ended |
| | December 31, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | | $ | 118 | | | $ | 123 | | | $ | 16 | | | $ | 22 | |
Interest cost | | 1,190 | | | 1,101 | | | 20 | | | 19 | |
Expected return on plan assets | | (1,719) | | | (1,509) | | | — | | | — | |
Recognized actuarial loss | | 501 | | | 396 | | | 9 | | | 20 | |
| | | | | | | | |
| | | | | | | | |
Net periodic benefit cost | | $ | 90 | | | $ | 111 | | | $ | 45 | | | $ | 61 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Pension Plans | | Postretirement Plan |
| | Three Months Ended | | Three Months Ended |
| | December 31, | | December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | | $ | 22 | | | $ | 20 | | | $ | 13 | | | $ | 17 | |
Interest cost | | 845 | | | 1,328 | | | 10 | | | 27 | |
Expected return on plan assets | | (1,324) | | | (1,328) | | | 0 | | | 0 | |
Recognized actuarial loss | | 270 | | | 344 | | | 20 | | | 2 | |
| | | | | | | | |
| | | | | | | | |
Net periodic benefit cost | | $ | (187) | | | $ | 364 | | | $ | 43 | | | $ | 46 | |
Contributory charge to MSG Sports for participation in the Shared Plans and allocation of costs related to the corporate employees (a) | | 0 | | | (52) | | | 0 | | | (8) | |
Net periodic benefit cost reported in consolidated and combined statements of operations | | $ | (187) | | | $ | 312 | | | $ | 43 | | | $ | 38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Postretirement Plan |
| | Six Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | | $ | 42 | | | $ | 48 | | | $ | 26 | | | $ | 35 | |
Interest cost | | 1,690 | | | 2,656 | | | 20 | | | 55 | |
Expected return on plan assets | | (2,648) | | | (2,659) | | | 0 | | | 0 | |
Recognized actuarial loss | | 602 | | | 680 | | | 40 | | | 5 | |
| | | | | | | | |
| | | | | | | | |
Net periodic (benefit) cost | | $ | (314) | | | $ | 725 | | | $ | 86 | | | $ | 95 | |
Contributory charge to MSG Sports for participation in the Shared Plans and allocation of costs related to the corporate employees (a) | | 0 | | | (102) | | | 0 | | | (16) | |
Net periodic (benefit) cost reported in consolidated and combined statements of operations | | $ | (314) | | | $ | 623 | | | $ | 86 | | | $ | 79 | |
________________ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Postretirement Plans |
| | Six Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | | $ | 236 | | | $ | 244 | | | $ | 32 | | | $ | 44 | |
Interest cost | | 2,380 | | | 2,203 | | | 40 | | | 38 | |
Expected return on plan assets | | (3,438) | | | (3,018) | | | — | | | — | |
Recognized actuarial loss | | 1,002 | | | 854 | | | 18 | | | 40 | |
| | | | | | | | |
| | | | | | | | |
Net periodic (benefit) cost | | $ | 180 | | | $ | 283 | | | $ | 90 | | | $ | 122 | |
| | | | | | | | |
| | | | | | | | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(a)The pension expense related to employees of other MSG Sports businesses participating in any of these plans is reflected as a contributory charge from the Company to MSG Sports, resulting in a decrease to the expense recognized in the consolidated and combined statements of operations.
Defined Contribution Pension Plans
For the three and six months ended December 31, 20202021 and 2019,2020, expenses related to the Savings Plans and Union Savings Plan included in the accompanying consolidated and combined statements of operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings Plans | | Union Savings Plan |
Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
December 31, | | December 31, | | December 31, | | December 31, |
2020 | | 2019 (a) | | 2020 | | 2019 (a) | | 2020 | | 2019 | | 2020 | | 2019 |
$ | 1,457 | | | $ | 2,435 | | | $ | 2,647 | | | $ | 4,595 | | | $ | 10 | | | $ | 31 | | | $ | 19 | | | $ | 53 | |
_________________
(a)The amounts include expenses of $891 and $1,752 related to the MSG Sports’ corporate employees which were allocated to the Company during the three and six months ended December 31, 2019, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings Plans | | Union Savings Plan |
Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
December 31, | | December 31, | | December 31, | | December 31, |
2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
$ | 2,475 | | | $ | 1,672 | | | $ | 4,494 | | | $ | 3,077 | | | $ | 7 | | | $ | 10 | | | $ | 21 | | | $ | 19 | |
Note 14.15. Share-based Compensation
See Note 15 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K for more information regarding MSG Sports equity award programs (the “MSG Sports Stock Plans”) and MSG Entertainment equity award programs. Prior to the Merger, share-based compensation awards were also granted under the MSG Networks Inc. 2010 Employee Stock Plan, as amended, and the MSG Networks Inc. 2010 Stock Plan for Non-Employee Directors (collectively, “MSGN Equity Incentive Plans”). Upon exercise of stock options or vesting of time-based restricted stock units and performance condition based restricted stock units, collectively referred to as “RSUs,” under MSGN Equity Incentive Plans, shares were either issued from MSG Networks Inc.’s unissued reserved stock or from treasury stock.
At the Effective Time, each RSU for MSG Networks Inc.’s common stock was converted into 0.172 RSUs for the Company’s Class A Common Stock and each outstanding stock option for MSG Networks Inc.’s common stock was converted into 0.172 options for Class A Common Stock. The exercise price of stock options was adjusted by dividing the exercise price of the MSG Networks Inc.’s stock options by 0.172 (rounded up to the nearest whole cent). All outstanding performance-based vesting RSU or stock option awards for which the performance period had not been completed were converted into time-based (nonperformance based) vesting RSUs or stock option awards, respectively, based on the 100% target number of shares included in the terms of the original award (“Performance Award Conversion”).
Share-based compensation expense was $23,562$24,171 and $10,373$43,699 for the three months ended December 31, 2020 and 2019, respectively, and $35,091 and $20,458 for the six months ended December 31, 20202021, respectively, and 2019, respectively. In addition, capitalized share-based compensation expense was $2,784$29,828 and $2,482 for the six months ended December 31, 2020 and 2019, respectively. These amounts reflect only the expenses for the awards provided to the Company’s direct employees, net of expenses related to the Company’s corporate employees who participate in the MSG Sports Stock Plans that were charged to MSG Sports. The Company recorded previously unrecognized share-based compensation expense of $11,129$45,984 for the three and six months ended December 31, 2020, associated withrespectively. In addition, capitalized share-based compensation expense was $1,763 and $2,784 for the cancellationsix months ended December 31, 2021 and 2020, respectively.
RSUs and stock options information is presented herein as if the Company and MSG Networks Inc. had been combined for all periods presented, unless otherwise noted.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Restricted Stock Units Award Activity
The following table summarizes activity related to holders (including the(i) Company employees and (ii) MSG Sports employees)employees that received share-based awards prior to the Entertainment Distribution) of the Company’s restricted stock units and performance restricted stock units, collectively referred to as “RSUs,”RSUs for the six months ended December 31, 2020:2021:
| | | Number of | | Weighted-Average Fair Value Per Share at Date of Grant | | Number of | | Weighted-Average Fair Value Per Share at Date of Grant |
| | Nonperformance Based Vesting RSUs (In Thousands) | | Performance Based Vesting RSUs (In Thousands) | | | Nonperformance Based Vesting RSUs (In Thousands) | | Performance Based Vesting RSUs (In Thousands) | |
Unvested award balance, June 30, 2020 | 277 | | | 328 | | | $ | 75.34 | | |
Unvested award balance, June 30, 2021 | | Unvested award balance, June 30, 2021 | 683 | | | 701 | | | $ | 76.15 | |
Granted | Granted | 387 | | | 328 | | | $ | 71.60 | | Granted | 445 | | | 422 | | | $ | 79.07 | |
Performance Award Conversion | | Performance Award Conversion | 223 | | | (223) | | | $ | 82.63 | |
Vested | Vested | (134) | | | (85) | | | $ | 69.00 | | Vested | (332) | | | (77) | | | $ | 87.42 | |
Forfeited | Forfeited | (26) | | | (29) | | | $ | 72.63 | | Forfeited | (9) | | | (12) | | | $ | 74.87 | |
Cancelled | — | | | (32) | | | $ | 88.58 | | |
Unvested award balance, December 31, 2020 | 504 | | | 510 | | | $ | 73.80 | | |
| Unvested award balance, December 31, 2021 | | Unvested award balance, December 31, 2021 | 1,010 | | | 811 | | | $ | 75.02 | |
The fair value of RSUs that vested during the six months ended December 31, 20202021 was $16,251.$32,734. Upon delivery, RSUs granted under the Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations. To fulfill the
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
employees’ required statutory tax withholding obligations for the applicable income and other employment taxes, 81195 of these RSUs, with an aggregate value of $5,976,$15,652, were retained by the Company during the six months ended December 31, 2020,2021, of which 86 of these RSUs, with an aggregate value of $575,$477, related to MSG Sports employees.
Stock Options Award Activity
Compensation expense for the Company’s existing stock options is determined based on the grant date fair value of the award calculated using the Black-Scholes options-pricing model. Stock options generally vest over a three year service period and expire 7.5 to 10 years from the date of grant.
The following table summarizes activity related to the Company’s stock options held by employees for the six months ended December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Number of Time Vesting Options (In Thousands) | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value (In Thousands) |
Balance as of June 30, 2020 | 543 | | | $ | 99.68 | | | | | |
| | | | | | | |
Cancelled | (449) | | | $ | 107.07 | | | | | |
Balance as of December 31, 2020 | 94 | | | $ | 64.36 | | | 6.96 | | $ | 3,817 | |
Exercisable as of December 31, 2020 | 94 | | | $ | 64.36 | | | 6.96 | | $ | 3,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Number of Time Vesting Options (In Thousands) | | Number of Performance Based Vesting Options (In Thousands) | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value (In Thousands) |
Balance as of June 30, 2021 | 409 | | | 315 | | | $ | 103.88 | | | | | |
| | | | | | | | | |
Performance Award Conversion | 315 | | | (315) | | | $ | 109.76 | | | | | |
| | | | | | | | | |
Balance as of December 31, 2021 | 724 | | | — | | | $ | 103.88 | | | 3.96 | | $ | 561 | |
Exercisable as of December 31, 2021 | 597 | | | — | | | $ | 108.29 | | | 3.70 | | $ | 561 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 15.16. Accumulated Other Comprehensive Loss
The following table details the components of accumulated other comprehensive loss:
| | | | Three Months Ended December 31, 2020 | | Three Months Ended December 31, 2021 |
| | Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss | | Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of September 30, 2020 | $ | (38,970) | | | $ | 1,416 | | | $ | (37,554) | | |
Balance as of September 30, 2021 | | Balance as of September 30, 2021 | $ | (45,009) | | | $ | 9,949 | | | $ | (35,060) | |
Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | — | | | 11,883 | | | 11,883 | | Other comprehensive income before reclassifications | — | | | 2,486 | | | 2,486 | |
Amounts reclassified from accumulated other comprehensive loss (a) | Amounts reclassified from accumulated other comprehensive loss (a) | 290 | | | 0 | | | 290 | | Amounts reclassified from accumulated other comprehensive loss (a) | 510 | | | — | | | 510 | |
| Income tax expense | | Income tax expense | (97) | | | (471) | | | (568) | |
Other comprehensive income | Other comprehensive income | 290 | | | 11,883 | | | 12,173 | | Other comprehensive income | 413 | | | 2,015 | | | 2,428 | |
Balance as of December 31, 2020 | $ | (38,680) | | | $ | 13,299 | | | $ | (25,381) | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | $ | (44,596) | | | $ | 11,964 | | | $ | (32,632) | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Three Months Ended December 31, 2019 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of September 30, 2019 | $ | (41,741) | | | $ | (14,861) | | | $ | (56,602) | |
Other comprehensive income before reclassifications | — | | | 23,186 | | | 23,186 | |
Amounts reclassified from accumulated other comprehensive loss (a) | 346 | | | 0 | | | 346 | |
| | | | | |
Other comprehensive income | 346 | | | 23,186 | | | 23,532 | |
Balance as of December 31, 2019 | $ | (41,395) | | | $ | 8,325 | | | $ | (33,070) | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Three Months Ended December 31, 2020 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of September 30, 2020 | $ | (38,452) | | | $ | 1,157 | | | $ | (37,295) | |
Other comprehensive income before reclassifications | — | | | 11,883 | | | 11,883 | |
Amounts reclassified from accumulated other comprehensive loss (a) | 416 | | | — | | | 416 | |
Income tax expense | (1,562) | | | (2,171) | | | (3,733) | |
Other comprehensive income (loss) | (1,146) | | | 9,712 | | | 8,566 | |
Balance as of December 31, 2020 | $ | (39,598) | | | $ | 10,869 | | | $ | (28,729) | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended December 31, 2021 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of June 30, 2021 | $ | (45,425) | | | $ | 15,153 | | | $ | (30,272) | |
Other comprehensive loss before reclassifications | — | | | (3,932) | | | (3,932) | |
Amounts reclassified from accumulated other comprehensive loss (a) | 1,020 | | | — | | | 1,020 | |
Income tax benefit (expense) | (191) | | | 743 | | | 552 | |
Other comprehensive income (loss) | 829 | | | (3,189) | | | (2,360) | |
Balance as of December 31, 2021 | $ | (44,596) | | | $ | 11,964 | | | $ | (32,632) | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended December 31, 2020 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of June 30, 2020 | $ | (39,322) | | | $ | (12,535) | | | $ | (51,857) | |
Other comprehensive income before reclassifications | 0 | | | 25,834 | | | 25,834 | |
Amounts reclassified from accumulated other comprehensive loss (a) | 642 | | | 0 | | | 642 | |
| | | | | |
Other comprehensive income | 642 | | | 25,834 | | | 26,476 | |
Balance as of December 31, 2020 | $ | (38,680) | | | $ | 13,299 | | | $ | (25,381) | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended December 31, 2019 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of June 30, 2019 | $ | (42,080) | | | $ | (4,843) | | | $ | (46,923) | |
Other comprehensive income before reclassifications | 0 | | | 13,168 | | | 13,168 | |
Amounts reclassified from accumulated other comprehensive loss (a) | 685 | | | 0 | | | 685 | |
| | | | | |
Other comprehensive income | 685 | | | 13,168 | | | 13,853 | |
Balance as of December 31, 2019 | $ | (41,395) | | | $ | 8,325 | | | $ | (33,070) | |
________________ | | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended December 31, 2020 |
| Pension Plans and Postretirement Plan | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance as of June 30, 2020 | $ | (38,767) | | | $ | (10,225) | | | $ | (48,992) | |
Other comprehensive income before reclassifications | — | | | 25,834 | | | 25,834 | |
Amounts reclassified from accumulated other comprehensive loss (a) | 894 | | | — | | | 894 | |
Income tax expense | (1,725) | | | (4,740) | | | (6,465) | |
Other comprehensive income (loss) | (831) | | | 21,094 | | | 20,263 | |
Balance as of December 31, 2020 | $ | (39,598) | | | $ | 10,869 | | | $ | (28,729) | |
_____________(a)Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net unrecognized prior service credit included in net periodic benefit cost, which is reflected under Miscellaneous income (expense), net in the accompanying consolidated and combined statements of operations.
Note 16.17. Income Taxes
For the periods prior to the Entertainment Distribution, the Company did not file separatefiled consolidated income tax returns as the Company was included in the tax grouping of otherwith MSG Sports entities within the respective entity’s tax jurisdiction.Sports. The income tax provision included in these periods has been calculated using the separate return basis, as if the Company filed a separate tax return. In addition, although the Company and MSG Networks did not file consolidated returns for periods prior to the Merger, income tax expense or benefit and deferred tax assets and liabilities have been presented on a combined basis for all historical periods, as described in Note 1.
Income tax expense for the three months ended December 31, 20202021 of $323$4,063 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to (i) tax expense of $2,910 related to nondeductible officers’ compensation and, (ii) state income tax expense of $3,107 primarily offset by (x) tax benefit of $1,378 resulting from a decrease in the valuation allowance, (y) tax benefit of $1,015 resulting from federal tax credits and (z) tax benefit of $577 related to noncontrolling interests.
Income tax benefit for the six months ended December 31, 2021 of $14,847 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) tax expensesexpense of (i) $35,819$9,048 to write off the deferred tax for certain transaction costs associated with the Merger, (ii) tax expense of $5,769 related to an increase in valuation allowance, (ii) $2,337 resulting from the acceleration of share-basednondeductible officers’ compensation, expense in connection with the cancellation of certain awards, and (iii) $891 related to noncontrolling interests, partially offset by (w) state income tax benefit of $12,705.$5,067, (x) tax benefit of $2,460 resulting from a decrease in the valuation allowance, (y) tax benefit of $1,987 resulting from a change in the estimated applicable tax rate used to measure deferred taxes and (z) tax benefit of $1,118 related to noncontrolling interests.
Income tax expensebenefit for the sixthree months ended December 31, 2020 of $486$298 differs from income tax benefitbenefits derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) tax expensesexpense of (i) $64,251 related to$11,021 resulting from an increase in the valuation allowance, (ii) $2,337 resulting from the accelerationtax expense of share-based compensation expense in connection with the cancellation of certain awards, (iii) $1,840$4,056 related to noncontrolling interests, and (iv) $1,669 resulting from nondeductible officers’ compensation and (iii) tax expense of $891 relating to noncontrolling interests, partially offset by state income tax benefit of $22,519.$3,531.
ForIncome tax expense for the six months ended December 31, 2020 the Company made income tax payments of $15,526 related to taxable income recognized in the fourth quarter of Fiscal Year 2020.
Income tax expense for the three months ended December 31, 2019 of $1,255$9,159 differs from income tax expensebenefits derived from applying the statutory federal rate of 21% to the pretax incomeloss primarily due to (i) tax expense of $18,561 resulting from an increase in the valuation allowance, (ii) tax expense of $6,921 resulting from a change in the estimated applicable tax benefitrate used to measure deferred taxes, (iii) tax expense of $5,512 related to a decrease in valuation allowancenondeductible officers’ compensation, and (iv) tax expense of $27,074,$1,840 related to noncontrolling interests, partially offset by state income tax expensebenefit of $9,621$5,267.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax asset will not be realized. As of December 31, 2021, based on current facts and circumstances, management believes that it is more likely than not that the Company will not realize the benefit for a portion of its deferred tax expenseasset.Accordingly, a partial valuation allowance has been recorded as of $1,318 resulting from nondeductible officers’ compensation.December 31, 2021.The Company will continue to assess the realizability of its deferred tax assets on a quarterly basis.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Income tax expense forDuring the six months ended December 31, 2019 of $1,440 differs from2021 the Company received income tax expense derived from applyingrefunds, net of payments, of $7,063. During the statutory federal rate of 21% tosix months ended December 31, 2020, the pretax income primarily due to a tax benefit of $8,922 related to a decrease in the valuation allowance and excess tax benefit of $2,481 related to share-based compensation awards, partially offset by stateCompany made income tax expensepayments (net) of $4,323 and tax expense of $2,550 from nondeductible officers’ compensation.
Prior to the Entertainment Distribution, the Company and MSG Sports entered into a Tax Disaffiliation Agreement (“TDA”). Under the TDA, MSG Sports will generally be responsible for all U.S. federal, state, local and other applicable income taxes of the Company for any taxable period or portion of such period ending on or before the Entertainment Distribution Date.$52,147.
Note 17.18. Related Party Transactions
As of December 31, 2020,2021, members of the Dolan family including trusts for members of the Dolan family (collectively, the “Dolan Family Group”), for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, collectively beneficially owned 100% of the Company’s outstanding Class B Common Stock and approximately 3.1%5.0% of the Company’s outstanding Class A Common Stock.Stock (inclusive of options exercisable within 60 days of the date hereof). Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 70.7%72.6% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG Sports MSG Networks and AMC Networks Inc. (“AMC Networks”).
Current Related Party Arrangements
The Company is party to the following agreements and/or arrangements with MSG Sports:
•Media rights agreements with MSG Sports pursuant to which the Company has the exclusive media rights to Knicks and Rangers games in their local markets.
•Sponsorship sales and service representation agreements pursuant to which the Company has the exclusive right and obligation to sell MSG Sports’ sponsorships for an initial stated term of ten years for a commission;
•TeamA team sponsorship allocation agreement, pursuant to which MSG Sports continues receiving an allocation of sponsorship and signage revenues associated with the sponsorship agreements that existed at the Entertainment Distribution Date;
•Arena License Agreements pursuant to which the Company (i) provides MSG Sports the right to use The Garden for games of the Knicks and Rangers for a 35-year term in exchange for venue license fees, (ii) shares revenues collected for suite licenses, (iii) operates and manages the sale of the sports teams merchandise at The Garden for a commission, (iv) operates and manages the sale of food and beverage concessionssales and catering services during the Knicks and Rangers games for a portion of net profits (as defined under the Arena License Agreements), (v) provides day of game services that were historically provided prior to the Entertainment Distribution, and (vi) provides other general services within The Garden;
•Transition Services Agreement (the “TSA”) pursuant to which the Company provides certain corporate and other transition services to MSG Sports, such as information technology, accounting, accounts payable, payroll, tax, certain legal functions, human resources, insurance and risk management, government affairs, investor relations, corporate communications, benefit plan administration and reporting, and internal audit functions as well as certain marketing functions, in exchange for service fees. MSG Sports also provides certain transition services to the Company, in exchange for service fees;
•Sublease agreement, pursuant to which the Company subleases office space to MSG Sports;
•Group ticket sales representation agreement, pursuant to which the Company appointed MSG Sports as its sales and service representative to sell group ticket packages related to Company events in exchange for a commission;
•Single night rental commission agreement, pursuant to which MSG Sports may, from time to time, sell (or make referrals for sales of) licenses for the use of suites at The Garden for individual Company events in exchange for a commission;
•The DDTL Facilities providing for a $110,000 and $90,000 senior unsecured delayed draw term loan facilities, for the Knicks and Rangers, respectively, which were terminated on November 6, 2020;
•Aircraft time sharing agreements (discussed below); and
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
•Other agreements with MSG Sports entered into in connection with the Entertainment Distribution such as a distribution agreement, a tax disaffiliation agreement, an employee matters agreement, a trademark license agreement and certain other arrangements.
In addition, the Company has various agreements with MSG Networks, including an advertising sales representation agreement and a services agreement (the “MSG Networks Services Agreement”). Pursuant to the advertising sales representation agreement, the Company has the exclusive right and obligation to sell advertising on behalf
Table of MSG Networks in exchange for a commission. Pursuant to the MSG Networks Services Agreement, effective July 1, 2020, the Company provides certain services to MSG Networks, such as information technology, accounts payable and payroll, human resources, and other corporate functions, as well as the executive support services described below, in exchange for service fees. MSG Networks also provides certain services to the Company, in exchange for service fees.Contents
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Further, the Company shares certain executive support costs, including office space, executive assistants, security and transportation costs, for (i) the Company’s Executive Chairman and Chief Executive Officer with MSG Sports and MSG Networks, (ii) the Company’s President with MSG Sports and (iii)(ii) the Company’s Vice Chairman with MSG Sports MSG Networks and AMC Networks.
The Company is a party to various aircraft arrangements. Pursuant to certain Aircraft Support Services Agreements (the “Support Agreements”), the Company provides certain aircraft support services to entities controlled by (i) James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and a director, (ii) Charles F. Dolan, a director, and certain of his children, who are siblings of James L. Dolan, specifically: Thomas C. Dolan (a director of the Company), Deborah Dolan-Sweeney, Patrick F. Dolan, Marianne Dolan Weber (a director of the Company), and Kathleen M. Dolan, and (iii) Patrick F. Dolan, the son of Charles F. Dolan and brother of James L. Dolan. The Aircraft Support Services Agreement with the entity controlled by James L. Dolan is no longer effective as of December 21, 2021.
The Company entered into reciprocal time sharing/dry lease agreements with each of (i) Quart 2C, LLC (“Q2C”), a company controlled by James L. Dolan and Kristin A. Dolan, his spouse and a director of the Company, and (ii) Charles F. Dolan and Sterling2k LLC (collectively, “CFD”), an entity owned and controlled by Deborah Dolan-Sweeney, the daughter of Charles F. Dolan and the sister of James L. Dolan, pursuant to which the Company has agreed from time to time to make its aircraft available to each of Q2C and CFD, and Q2C, and CFD have agreed from time to time to make their aircraft available to the Company. Pursuant to the terms of the agreements, Q2C and/or CFD may lease on a non-exclusive, “time sharing” basis, the Company’s Gulfstream Aerospace G550certain Company aircraft. The reciprocal dry lease agreement between the Company and Q2C is no longer effective as of December 21, 2021.
The Company is also party to a dry lease agreement and a time sharing agreement with Brighid Air, LLC (“Brighid Air”), a company owned and controlled by Patrick F. Dolan, the son of Charles F. Dolan and the brother of James L. Dolan, pursuant to which the Company may lease on a non-exclusive basis Brighid Air’sAir has agreed from time to time to make its Bombardier BD100-1A10 Challenger 350 aircraft (the “Challenger”). available to the Company on a non-exclusive basis. In connection with the dry lease agreement, the Company also entered into a Flight Crew Services Agreement (the “Flight Crew Agreement”) with Dolan Family Office, LLC (“DFO”), an entity owned and controlled by Charles F. Dolan, pursuant to which the Company may utilize pilots employed by DFO for purposes of flying the Challenger when the Company is leasing that aircraft under the Company’s dry lease agreement with Brighid Air.
The Company and each of MSG Sports MSG Networks and AMC Networks are party to certain aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make aircraft available to MSG Sports MSG Networks and/or AMC Networks for lease on a “time sharing” basis. Additionally, the Company, MSG Sports MSG Networks and AMC Networks have agreed on an allocation of the costs of certain aircraft and helicopter use by their shared executives.
In addition to the aircraft arrangements described above, certain executives of the Company are party to aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make certain aircraft available for lease on a “time sharing” basis for personal use in exchange for payment of actual expenses of the flight (as listed in the agreement).
From time to time the Company enters into arrangements with 605, LLC. James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and a director, and his spouse, Kristin A. Dolan (a director of the Company), own 50% of 605, LLC. Kristin A. Dolan is also the founder and Chief Executive Officer of 605, LLC. 605, LLC provides audience measurement and data analytics services to the Company and its subsidiaries in the ordinary course of business.
As of December 31, 20202021 and June 30, 2020,2021, BCE had $637 of notes payable with respect to a loan received by BCE from its noncontrolling interest holder. See Note 1213 for further information.
The Company has also entered into certain commercial agreements with its equity method investment nonconsolidated affiliates in connection with MSG Sphere. For the six months ended December 31, 2021 and 2020, the Company recorded $36,741 and $20,742, respectively, of capital expenditures in connection with services provided to the Company under these agreements. As of December 31, 2021 and June 30, 2021, accrued capital expenditures associated with related parties were $20,606 and $6,921, respectively, and are reported under other accrued liabilities in the accompanying consolidated balance sheets.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company has also entered into certain commercial agreements with its nonconsolidated affiliates in connection with MSG Sphere. For the six months ended December 31, 2020 and 2019, the Company recorded approximately $24,989 and $7,370, respectively, of capital expenditures in connection with services provided to the Company under these agreements. As of December 31, 2020 and June 30, 2020, accrued capital expenditures associated with related parties were $9,151 and $2,121, respectively, and are reported under other accrued liabilities in the accompanying consolidated balance sheets.
Revenues and Operating Expenses (Credits)
The following table summarizes the composition and amounts of the transactions with the Company’s affiliates. These amounts are reflected in revenues and operating expenses in the accompanying consolidated and combined statements of operations for the three and six months ended December 31, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | $ | 5,262 | | | $ | 984 | | | $ | 9,280 | | | $ | 7,459 | |
Operating expenses (credits): | | | | | | | | |
Revenue sharing expenses | | $ | 15 | | | $ | 47,214 | | | $ | 96 | | | $ | 65,502 | |
Allocation of charges for venue usage to MSG Sports | | 0 | | | (20,025) | | | 0 | | | (22,104) | |
Corporate general and administrative expenses, net — MSG Sports | | (8,445) | | | (32,720) | | | (18,625) | | | (63,813) | |
Corporate general and administrative expenses, net — MSG Networks | | (2,334) | | | (2,602) | | | (4,877) | | | (5,204) | |
| | | | | | | | |
Advertising expenses | | 0 | | | 101 | | | 0 | | | 144 | |
Other operating expenses, net | | 693 | | | 34 | | | 1,533 | | | 123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenues | | $ | 30,702 | | | $ | 4,638 | | | $ | 34,889 | | | $ | 7,461 | |
Operating expenses (credits): | | | | | | | | |
Direct operating — media rights fees | | $ | 40,813 | | | $ | 34,422 | | | $ | 81,258 | | | $ | 73,963 | |
Direct operating — revenue sharing expenses | | $ | 1,131 | | | $ | 15 | | | 1,985 | | | 96 | |
| | | | | | | | |
Direct operating — reimbursement under Arena License Arrangement | | (6,125) | | | (351) | | | (6,465) | | | (1,241) | |
General and administrative with MSG Sports — net of TSA credits | | (10,513) | | | (10,273) | | | (19,729) | | | (20,453) | |
| | | | | | | | |
| | | | | | | | |
Direct operating — origination, master control and technical services | | 1,208 | | | 1,184 | | | 2,416 | | | 2,368 | |
| | | | | | | | |
| | | | | | | | |
Other operating expenses, net | | 987 | | | (218) | | | 3,109 | | | (85) | |
Revenues
Revenues from related parties primarily consist of commissions earned in connection with the advertising sales representation agreement pursuant to which the Company has the exclusive right and obligation to sell MSG Networks’ advertising availabilities. In addition, amounts disclosed above for Fiscal Year 2021 include the Company’s revenues from sponsorship sales and representation agreements with MSG Sports in connection with the Entertainment Distribution.
In connection with the Entertainment Distribution, the Company entered into Arena License Agreements with MSG Sports that, among other things, require the Knicks and the Rangers to play their home games at The Garden in exchange for fixed monthlyannual license fees scheduled to be paid monthly over the term of the agreements. The Company accounts for these license fees as operating lease revenue given that the Company provides MSG Sports with the right to direct the use of and obtain substantially all of the economic benefit from The Garden during Knicks and Rangers home games, as further detailed in Note 8.9, operating lease revenue is recognized on a straight-line basis over the lease term, adjusted pursuant to the terms of the Arena License Agreements. In the case of the Arena License Agreements, the lease terms relate to non-consecutive periods of use when MSG Sports uses The Garden for their professional sports teams’ home games, and operating lease revenue is therefore recognized ratably as events occur.
The Arena License Agreements provide that license fees are not required to be paid by MSG Sports during periods when The Garden is unavailable for use due to a force majeure event. As a result of government-mandated suspension of events at The Garden beginning onin March 13, 2020 through the first half of Fiscal Year 2021 due to the impact of the COVID-19 pandemic, The Garden was either not available for use by MSG Sports from the effective date of the Arena License Agreements through the first quarter of Fiscal Year 2021 and, accordingly, the Company did not record any operating lease revenueor available for this arrangement during the first quarter of Fiscal Year 2021. During a portion of the three months ended December 31, 2020,Knicks home games without fans in attendance. The Garden reopened for games of the Knicks and the Rangers but fans were not permitted to attend due to governmental restrictions. The Knicks played four games at The GardenKnicks’2020-2021 pre/regular season began in December 2020 and the Company recorded $1,585 of operating lease revenue for this arrangement for the three and six months ended December 31, 2020. The Rangers resumed playing home games at The Garden in January 2021. The Company recorded $27,854 and $29,182 of revenues under the Arena License Agreements. Agreements for the three and six months ended December 31, 2021, respectively.
In addition to the Company recorded $611 and $1,229 of sublease revenueArena License Agreements discussed above, the Company’s revenues from related parties primarily reflected sponsorship sales and service representation agreements with MSG Sports of $4,831 and $7,179 during the three and six months ended December 31, 2021, respectively and $2,441 and $4,646 during the three and six months ended December 31, 2020, respectively.The Company also earned sublease revenue from related parties of $611 and $1,222 during the three and six months ended December 31, 2021, respectively and $611 and $1,223 during the three and six months ended December 31, 2020, respectively. These related party revenues were partially offset by approximately $3,002 and $3,126 of merchandise revenue sharing with MSG Sports during the three and six months ended December 31, 2021, respectively.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Media Rights Fees
MSG Networks’ media rights agreements with MSG Sports, effective as of July 1, 2015, provide the MSG Networks segment with the exclusive media rights to Knicks and Rangers games in their local markets.
Revenue Sharing Expenses
Prior to the Entertainment Distribution, revenue sharing expensesIn connection with MSG Sports included the Company’s suite license arrangements and venue signage and sponsorship agreements entered into by the Company and sales of in-venue food and beverages were recorded on a gross basis. MSG Sports’ share of the Company’s revenue related to such arrangements is recognized as a component of direct operating expenses. After the Entertainment Distribution, revenue sharing expenses include MSG Sports’ share of the Company’s suite license arrangements and certain venue signage agreements entered into by the Company.
Allocation of Charges for Venue UsageCompany, as well as profit sharing expenses related to MSG Sports
For purposes of the Company’s combined financial statements prior to the Entertainment Distribution, the Company allocated to MSG Sports certain expenses for the usage of The Garden, which are reported as a reduction of direct operating expensein-venue food and beverage sales in the accompanying consolidated and combined statements of operations.
Fees recognized by the Company under the Arena License Agreementsconnection with MSG Sports for use of The Garden are reported as operating lease revenues in accordance with ASC Topic 842, Leases. Because The Garden was closed by government mandate, the Company did not recognize operating lease revenue under the Arena License Agreements for the three months ended September 30, 2020. During a portion of the three months ended December 31, 2020, The Garden reopened for games of the Knicks and the Rangers and the Company recorded $1,585 of revenues under the Arena License Agreements.
Corporate General and Administrative Expenses, net — MSG Sports
Prior to the Entertainment Distribution, allocations of corporate overhead and shared services expense were recorded by both the Company andwith MSG Sports for corporate and operational functions based on direct usage or the relative proportion— Net of revenue, headcount or other measures of the Company or MSG Sports. TSA Credits
The Company’s corporate overhead expenses that are charged to MSG Sports are primarily related to centralized functions, including executive management, finance, treasury, tax, internal audit, legal, information technology, accounting, accounts payable, payroll, tax, legal, human resources, insurance and risk management, functions. After the Entertainment Distribution,investor relations, corporate generalcommunications, benefit plan administration and reporting, and internal audit.
General and administrative operating expenses net –with MSG Sports, reflectsnet of TSA credits included in the table above primarily reflect charges from the Company to MSG Sports pursuant to the TSA of $8,710$10,513 and $19,773$19,729 for the three and six months ended December 31, 2021, respectively, and $10,273 and $20,452 for the three and six months ended December 31, 2020, respectively.
Corporate GeneralDirect Operating — Origination, Master Control and Administrative Expenses, net — MSGTechnical Services
AMC Networks
The Company’s corporate overhead expenses that are charged provides certain origination, master control, and technical services to MSG Networks are primarily related to centralized functions, including executive compensation, finance, treasury, tax, internal audit, legal, information technology, human resources and risk management functions.
Corporate general and administrative expenses, net – MSG Networks reflects charges from the Company to MSG Networks under the MSG Networks Services Agreement of $2,374 and $2,641 for the three months ended December 31, 2020 and 2019, respectively. For the six months ended December 31, 2020 and 2019, corporate general and administrative expenses, net – MSG Networks reflects charges from the Company to MSG Networks under the MSG Networks Services Agreement of $4,748 and $5,282, respectively.
Advertising Expenses
The Company incurs advertising expenses for services rendered by its related parties, primarily MSG Networks, most of which are related to the utilization of advertising and promotional benefits by the Company.segment.
Other Operating Expenses, net
The Company and its related parties enter into transactions with each other in the ordinary course of business. Amounts charged to the Company for other transactions with its related parties are net of amounts charged by the Company to the Knickerbocker Group, LLC, an entity owned by James L. Dolan, the Executive Chairman, Chief Executive Officer and a director of the Company, for office space and the cost of certain technology services. In addition, other operating expenses include net charges relating to (i) reciprocal aircraft arrangements between the Company and each of Q2C and CFD, and (ii) time sharing and/or dry lease agreements with MSG Sports, MSGAMC Networks and AMC Networks.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Nonoperating Expense
Miscellaneous expense, net includes a contributory charge toBrighid Air and (iii) commission under the group ticket sales representation agreement with MSG Sports related to the participation of MSG Sports and corporate employees in the Shared Plans and Postretirement Plan, of $56 and $111 for the three and six months ended December 31, 2019, respectively.
Cash Management
MSG Sports uses a centralized approach to cash management and financing of operations.Sports. The Company and other MSG Sports or MSG Sports subsidiaries’ cash was available for use and was regularly “swept” historically. Transfers of cash both to and from MSG Sports are included as components of MSG Sports Investment on the combined statements of divisional equity and redeemable noncontrolling interests. The main components of the net transfers (to)/from MSG Sports are cash pooling/general financing activities, various expense allocations to/from MSG Sports, and receivables/payables from/to MSG Sports deemed to be effectively settled upon the distribution of the Company by MSG Sports.
Related Party Transactions
In connection with the Entertainment Distribution,reciprocal aircraft arrangement between the Company and MSG Sports entered into arrangements with respect to transition services and a number of ongoing commercial relationships, including Arena License Agreements with MSG Sports requiring the KnicksQ2C and the Rangers to play their home games at The Garden. Additionally, on April 17, 2020, subsidiariesrelated aircraft support services arrangement between them was no longer effective as of MSG Sports, MSG NYK Holdings, LLC and MSG NYR Holdings, LLC, entered into the DDTL Facilities with a wholly-owned subsidiary of the Company as lender. The DDTL Facilities provided for a $110,000 and $90,000 senior unsecured delayed draw term loan facilities, for MSG NYK Holdings, LLC and MSG NYR Holdings, LLC, respectively. On November 6, 2020, each of MSG NYK Holdings, LLC and MSG NYR Holdings, LLC delivered notice to the Company that they had secured third-party debt and, as a result, all commitments under their applicable DDTL Facilities were terminated.December 21, 2021.
Note 18.19. Segment Information
The Company is comprised of 23 reportable segments: Entertainment, MSG Networks and Tao Group Hospitality. In determining its reportable segments, the Company assessed the guidance of ASC 280-10-50-1, which provides the definition of a reportable segment. In accordance with the FASB’s guidance, the Company takes into account whether two or more operating segments can be aggregated together as one reportable segment as well as the type of discrete financial information that is available and regularly reviewed by its CODM.Chief Operating Decision Maker (“CODM”). The Company has evaluated this guidance and determined that there are two3 reportable segments. In addition, the Company incurs non-capitalizable content development and technology costs associated with the Company’s MSG Sphere initiative, which are reported in “Entertainment.” In addition to event-related operating expenses, Entertainment also includes other expenses such as (a) corporate and supporting department operating costs that are attributable to MSG Sphere development and (b) non-event related operating expenses for the Company’s venues such as (i) rent for the Company’s leased venues, (ii) real estate taxes, (iii) insurance, (iv) utilities, (v) repairs and maintenance, (vi) labor related to the overall management of the venues, and (vii) depreciation and amortization expense related to the Company’s performance venues and certain corporate property, equipment and leasehold improvements. Additionally, the Company does not allocate any purchase accounting adjustments related to business acquisitions to the reporting segments.
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company evaluates segment performance based on several factors, of which the key financial measure is operating income (loss) before (i) adjustments to remove the impact of non-cash straight-line leasing revenue associated with the Arena License Agreements with MSG Sports, (ii) depreciation, amortization and impairments of property and equipment, goodwill and intangible assets, (iii) amortization for capitalized cloud computing arrangement costs, (see Note 2 for further details), (iv) share-based compensation expense or benefit, (v) restructuring charges or credits, (vi) merger and (vi)acquisition-related costs, including litigation expenses, (vii) gains or losses on sales or dispositions of businesses and associated settlements, and (viii) the impact of purchase accounting adjustments related to business acquisitions, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of the items discussed above, the impact of purchase accounting adjustments related to business acquisitions is also excluded in evaluating the Company’s consolidated and combined adjusted operating income (loss). Because it is based upon operating income (loss), adjusted operating income (loss) also excludes interest expense (including cash interest expense) and other non-operating income and expense items. Management believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. In addition, the Company believes that given the length of the Arena License Agreements and resulting magnitude of the difference in leasing revenue recognized and cash revenue received, the exclusion of non-cash leasing revenue provides investors with a clearer picture of the Company's operating performance. We eliminate merger and acquisition-related costs because the Company does not consider such costs to be indicative of the ongoing operating performance of the Company as they result from an event that is of a non-recurring nature, thereby enhancing comparability.
The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated and
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
combined basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance, and evaluates management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other 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).
Information as to the operations of the Company’s reportable segments is set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | Three Months Ended December 31, 2020 |
| | | Entertainment | | Tao Group Hospitality | | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total |
Revenues | | | $ | 12,669 | | | $ | 10,491 | | | | | $ | 0 | | | $ | (23) | | | $ | 23,137 | |
Direct operating expenses | | | 23,409 | | | 10,980 | | | | | 924 | | | 151 | | | 35,464 | |
Selling, general and administrative expenses |
| | 65,730 | | | 9,131 | | | | | 0 | | | 89 | | | 74,950 | |
Depreciation and amortization | | | 19,246 | | | 1,563 | | | | | 3,066 | | | 0 | | | 23,875 | |
| | | | | | | | | | | | | |
Restructuring charges | | | 1,372 | | | — | | | | | — | | | 0 | | | 1,372 | |
Operating loss | | | $ | (97,088) | | | $ | (11,183) | | | | | $ | (3,990) | | | $ | (263) | | | $ | (112,524) | |
Loss in equity method investments | | | | | | | | | | | | | (1,568) | |
Interest income | | | | | | | | | | | | | 349 | |
Interest expense | | | | | | | | | | | | | (7,675) | |
Miscellaneous expense, net | (a) | | | | | | | | | | | | (7,362) | |
Loss from operations before income taxes | | | | | | | | | | | | | $ | (128,780) | |
Reconciliation of operating loss to adjusted operating loss: | | | | |
Operating loss | | | $ | (97,088) | | | $ | (11,183) | | | | | $ | (3,990) | | | $ | (263) | | | $ | (112,524) | |
Add back: | | | | | | | | | | | | | |
Non-cash portion of arena license fees from MSG Sports | | | (1,176) | | | — | | | | | — | | | — | | | (1,176) | |
Share-based compensation | | | 22,374 | | | 1,188 | | | | | 0 | | | 0 | | | 23,562 | |
Depreciation and amortization | | | 19,246 | | | 1,563 | | | | | 3,066 | | | 0 | | | 23,875 | |
| | | | | | | | | | | | | |
Restructuring charges | | | 1,372 | | | 0 | | | | | 0 | | | 0 | | | 1,372 | |
Other purchase accounting adjustments | | | — | | | — | | | | | 924 | | | — | | | 924 | |
Adjusted operating loss | | | $ | (55,272) | | | $ | (8,432) | | | | | $ | 0 | | | $ | (263) | | | $ | (63,967) | |
Other information: | | | | | | | | | | | | | |
Capital expenditures | | | $ | 106,945 | | | $ | 293 | | | | | $ | 0 | | | $ | 0 | | | $ | 107,238 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | Three Months Ended December 31, 2019 | | Three Months Ended December 31, 2021 |
| | Entertainment | | Tao Group Hospitality | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Purchase accounting adjustments | | Inter-segment eliminations | | Total |
Revenues | Revenues | | $ | 325,370 | | | $ | 69,104 | | | | $ | 0 | | | $ | (402) | | | $ | 394,072 | | Revenues | | $ | 247,610 | | | $ | 159,981 | | | $ | 117,086 | | | $ | — | | | $ | (8,238) | | | $ | 516,439 | |
Direct operating expenses | Direct operating expenses | | 168,241 | | | 41,159 | | | | 1,068 | | | (274) | | | 210,194 | | Direct operating expenses | | 147,343 | | | 85,924 | | | 60,880 | | | 3,038 | | | (927) | | | 296,258 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 68,869 | | | 18,038 | | | | 0 | | | (53) | | | 86,854 | | Selling, general and administrative expenses |
| | 91,516 | | | 37,192 | | | 40,685 | | | — | | | (7,116) | | | 162,277 | |
Depreciation and amortization | Depreciation and amortization | | 21,128 | | | 2,411 | | | | 3,895 | | | 0 | | | 27,434 | | Depreciation and amortization | | 19,024 | | | 1,756 | | | 6,243 | | | 3,510 | | | — | | | 30,533 | |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | — | | | — | | | (7,443) | | | (536) | | | — | | | (7,979) | |
| Operating income (loss) | Operating income (loss) | | $ | 67,132 | | | $ | 7,496 | | | | $ | (4,963) | | | $ | (75) | | | $ | 69,590 | | Operating income (loss) | | $ | (10,273) | | | $ | 35,109 | | | $ | 16,721 | | | $ | (6,012) | | | $ | (195) | | | $ | 35,350 | |
Loss in equity method investments | Loss in equity method investments | | | | | | | | | | | (1,170) | | Loss in equity method investments | | | | | | | | | | | | (1,774) | |
Interest income | Interest income | | | | 6,268 | | Interest income | | 773 | |
Interest expense | Interest expense | | | | (144) | | Interest expense | | (8,167) | |
Miscellaneous income, net | (a) | | | | 9,355 | | |
Miscellaneous expense, net | | Miscellaneous expense, net | (a) | | (17,100) | |
Income from operations before income taxes | Income from operations before income taxes | | | | $ | 83,899 | | Income from operations before income taxes | | $ | 9,082 | |
Reconciliation of operating income (loss) to adjusted operating income (loss): | | | |
Reconciliation of operating loss to adjusted operating income (loss): | | Reconciliation of operating loss to adjusted operating income (loss): | | |
Operating income (loss) | Operating income (loss) | | $ | 67,132 | | | $ | 7,496 | | | | $ | (4,963) | | | $ | (75) | | | $ | 69,590 | | Operating income (loss) | | $ | (10,273) | | | $ | 35,109 | | | $ | 16,721 | | | $ | (6,012) | | | $ | (195) | | | $ | 35,350 | |
Add back: | Add back: | | | | Add back: | |
| Non-cash portion of arena license fees from MSG Sports | | Non-cash portion of arena license fees from MSG Sports | | (11,346) | | | — | | | — | | | — | | | — | | | (11,346) | |
Share-based compensation | Share-based compensation | | 10,373 | | | 0 | | | | 0 | | | 0 | | | 10,373 | | Share-based compensation | | 16,155 | | | 6,058 | | | 1,958 | | | — | | | — | | | 24,171 | |
Depreciation and amortization | Depreciation and amortization | | 21,128 | | | 2,411 | | | | 3,895 | | | 0 | | | 27,434 | | Depreciation and amortization | | 19,024 | | | 1,756 | | | 6,243 | | | 3,510 | | | — | | | 30,533 | |
| Amortization for capitalized cloud computing costs | | Amortization for capitalized cloud computing costs | | (34) | | | 44 | | | — | | | — | | | — | | | 10 | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 1,456 | | | 875 | | | — | | | — | | | — | | | 2,331 | |
Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | — | | | — | | | (7,443) | | | (536) | | | — | | | (7,979) | |
| Other purchase accounting adjustments | Other purchase accounting adjustments | | — | | | — | | | | 1,068 | | | — | | | 1,068 | | Other purchase accounting adjustments | | — | | | — | | | — | | | 3,038 | | | — | | | 3,038 | |
Adjusted operating income (loss) | Adjusted operating income (loss) | | $ | 98,633 | | | $ | 9,907 | | | | $ | 0 | | | $ | (75) | | | $ | 108,465 | | Adjusted operating income (loss) | | $ | 14,982 | | | $ | 43,842 | | | $ | 17,479 | | | $ | — | | | $ | (195) | | | $ | 76,108 | |
Other information: | Other information: | | | | | | | | | | | | Other information: | | | | | | | | | | | | |
Capital expenditures | Capital expenditures | | $ | 120,529 | | | $ | 1,139 | | | | $ | 0 | | | $ | 0 | | | $ | 121,668 | | Capital expenditures | | $ | 166,218 | | | $ | 600 | | | $ | 8,987 | | | $ | — | | | $ | — | | | $ | 175,805 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | Six Months Ended December 31, 2020 | | Three Months Ended December 31, 2020 |
| | Entertainment | | Tao Group Hospitality | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | Purchase accounting adjustments | | Inter-segment eliminations | | Total |
Revenues | Revenues | | $ | 20,224 | | | $ | 17,712 | | | | $ | 0 | | | $ | (421) | | | $ | 37,515 | | Revenues | | $ | 12,669 | | | $ | 146,239 | | | $ | 10,491 | | | $ | — | | | $ | (647) | | | $ | 168,752 | |
Direct operating expenses | Direct operating expenses | | 47,024 | | | 20,808 | | | | 1,848 | | | (57) | | | 69,623 | | Direct operating expenses | | 23,409 | | | 57,033 | | | 10,980 | | | 924 | | | 151 | | | 92,497 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 118,380 | | | 16,734 | | | | 0 | | | 161 | | | 135,275 | | Selling, general and administrative expenses | | 65,730 | | | 21,692 | | | 9,131 | | | — | | | (535) | | | 96,018 | |
Depreciation and amortization | Depreciation and amortization | | 41,260 | | | 2,609 | | | | 6,588 | |
| 0 | | | 50,457 | | Depreciation and amortization | | 19,246 | | | 1,802 | | | 1,563 | | | 3,066 | | | — | | | 25,677 | |
| Restructuring charges | Restructuring charges | | 21,299 | | | — | | | | — | | | — | | | 21,299 | | Restructuring charges | | 1,372 | | | — | | | — | | | — | | | — | | | 1,372 | |
Operating loss | | $ | (207,739) | | | $ | (22,439) | | | | $ | (8,436) | | | $ | (525) | | | $ | (239,139) | | |
Operating income (loss) | | Operating income (loss) | | $ | (97,088) | | | $ | 65,712 | | | $ | (11,183) | | | $ | (3,990) | | | $ | (263) | | | $ | (46,812) | |
Loss in equity method investments | Loss in equity method investments | | | | | | | | | | | (3,264) | | Loss in equity method investments | | | | | | | | | | | | (1,568) | |
Interest income | Interest income | | | | 644 | | Interest income | | 837 | |
Interest expense | Interest expense | | | | (8,084) | | Interest expense | | (5,262) | |
Miscellaneous income, net | (a) | | | | 26,862 | | |
Miscellaneous expense, net | | Miscellaneous expense, net | (a) | | (7,568) | |
Loss from operations before income taxes | Loss from operations before income taxes | | | | $ | (222,981) | | Loss from operations before income taxes | | $ | (60,373) | |
Reconciliation of operating loss to adjusted operating loss: | | | |
Operating loss | | $ | (207,739) | | | $ | (22,439) | | | | $ | (8,436) | | | $ | (525) | | | $ | (239,139) | | |
Reconciliation of operating loss to adjusted operating income (loss): | | Reconciliation of operating loss to adjusted operating income (loss): | | |
Operating income (loss) | | Operating income (loss) | | $ | (97,088) | | | $ | 65,712 | | | $ | (11,183) | | | $ | (3,990) | | | $ | (263) | | | $ | (46,812) | |
Add back: | Add back: | | | | Add back: | |
Non-cash portion of arena license fees from MSG Sports | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | | — | | | — | | | (1,176) | | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | — | | | — | | | — | | | (1,176) | |
Share-based compensation | Share-based compensation | | 32,807 | | | 2,284 | | | | 0 | | | 0 | | | 35,091 | | Share-based compensation | | 22,374 | | | 6,266 | | | 1,188 | | | — | | | — | | | 29,828 | |
Depreciation and amortization | Depreciation and amortization | | 41,260 | | | 2,609 | | | | 6,588 | | | 0 | | | 50,457 | | Depreciation and amortization | | 19,246 | | | 1,802 | | | 1,563 | | | 3,066 | | | — | | | 25,677 | |
| Restructuring charges | Restructuring charges | | 21,299 | | | 0 | | | | 0 | | | 0 | | | 21,299 | | Restructuring charges | | 1,372 | | | — | | | — | | | — | | | — | | | 1,372 | |
Other purchase accounting adjustments | Other purchase accounting adjustments | | — | | | — | | | | 1,848 | | | — | | | 1,848 | | Other purchase accounting adjustments | | — | | | — | | | — | | | 924 | | | — | | | 924 | |
Adjusted operating loss | | $ | (113,549) | | | $ | (17,546) | | | | $ | 0 | | | $ | (525) | | | $ | (131,620) | | |
Adjusted operating income (loss) | | Adjusted operating income (loss) | | $ | (55,272) | | | $ | 73,780 | | | $ | (8,432) | | | $ | — | | | $ | (263) | | | $ | 9,813 | |
Other information: | Other information: | | | | | | | | | | | | Other information: | | | | | | | | | | | | |
Capital expenditures | Capital expenditures | | $ | 218,344 | | | $ | 952 | | | | $ | 0 | | | $ | 0 | | | $ | 219,296 | | Capital expenditures | | $ | 106,945 | | | $ | 792 | | | $ | 293 | | | $ | — | | | $ | — | | | $ | 108,030 | |
|
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | Six Months Ended December 31, 2019 | | Six Months Ended December 31, 2021 |
| | Entertainment | | Tao Group Hospitality | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total | | Entertainment | | MSG Networks | | Tao Group Hospitality | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total |
Revenues | Revenues | | $ | 445,022 | | | $ | 127,721 | | | | $ | 0 | | | $ | (708) | | | $ | 572,035 | | Revenues | | $ | 281,849 | | | $ | 301,454 | | | $ | 236,550 | | | | $ | — | | | $ | (8,904) | | | $ | 810,949 | |
Direct operating expenses | Direct operating expenses | | 263,201 | | | 76,826 | | | | 2,182 | | | (493) | | | 341,716 | | Direct operating expenses | | 183,645 | | | 154,347 | | | 121,973 | | | | 3,123 | | | (1,069) | | | 462,019 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 139,218 | | | 35,462 | | | | 6 | | | (65) | | | 174,621 | | Selling, general and administrative expenses | | 184,478 | | | 85,167 | | | 74,779 | | | | — | | | (7,308) | | | 337,116 | |
Depreciation and amortization | Depreciation and amortization | | 42,915 | | | 4,590 | | | | 6,749 | | | 0 | | | 54,254 | | Depreciation and amortization | | 38,680 | | | 3,553 | | | 12,621 | | | | 5,109 | |
| — | | | 59,963 | |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | — | | | — | | | 375 | | | | (536) | | | — | | | (161) | |
| Operating income (loss) | Operating income (loss) | | $ | (312) | | | $ | 10,843 | | | | $ | (8,937) | | | $ | (150) | | | $ | 1,444 | | Operating income (loss) | | $ | (124,954) | | | $ | 58,387 | | | $ | 26,802 | | | | $ | (7,696) | | | $ | (527) | | | $ | (47,988) | |
Loss in equity method investments | Loss in equity method investments | | | | | | | | | | | (2,643) | | Loss in equity method investments | | | | | | | | | | | | | (2,981) | |
Interest income | Interest income | | | | 13,583 | | Interest income | | | | 1,548 | |
Interest expense | Interest expense | | | | (1,249) | | Interest expense | | | | (17,415) | |
Miscellaneous income, net | (a) | | | | 16,386 | | |
Income from operations before income taxes | | | | $ | 27,521 | | |
Reconciliation of operating income (loss) to adjusted operating income (loss): | | | |
Miscellaneous expense, net | | Miscellaneous expense, net | (a) | | | | (19,647) | |
Loss from operations before income taxes | | Loss from operations before income taxes | | | | $ | (86,483) | |
Reconciliation of operating loss to adjusted operating income (loss): | | Reconciliation of operating loss to adjusted operating income (loss): | | |
Operating income (loss) | Operating income (loss) | | $ | (312) | | | $ | 10,843 | | | | $ | (8,937) | | | $ | (150) | | | $ | 1,444 | | Operating income (loss) | | $ | (124,954) | | | $ | 58,387 | | | $ | 26,802 | | | | $ | (7,696) | | | $ | (527) | | | $ | (47,988) | |
Add back: | Add back: | | | | Add back: | | | |
| Non-cash portion of arena license fees from MSG Sports | | Non-cash portion of arena license fees from MSG Sports | | (11,889) | | | — | | | — | | | | — | | | — | | | (11,889) | |
Share-based compensation | Share-based compensation | | 20,430 | | | 28 | | | | 0 | | | 0 | | | 20,458 | | Share-based compensation | | 26,298 | | | 13,532 | | | 3,869 | | | | — | | | — | | | 43,699 | |
Depreciation and amortization | Depreciation and amortization | | 42,915 | | | 4,590 | | | | 6,749 | | | 0 | | | 54,254 | | Depreciation and amortization | | 38,680 | | | 3,553 | | | 12,621 | | | | 5,109 | | | — | | | 59,963 | |
| Amortization for capitalized cloud computing costs | | Amortization for capitalized cloud computing costs | | 7 | | | 88 | | | — | | | | — | | | — | | | 95 | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 15,448 | | | 24,075 | | | — | | | | — | | | — | | | 39,523 | |
Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | — | | | — | | | 375 | | | | (536) | | | — | | | (161) | |
Restructuring charges | | Restructuring charges | | — | | | — | | | — | | | | — | | | — | | | — | |
Other purchase accounting adjustments | Other purchase accounting adjustments | | — | | | — | | | | 2,188 | | | — | | | 2,188 | | Other purchase accounting adjustments | | — | | | — | | | — | | | | 3,123 | | | — | | | 3,123 | |
Adjusted operating income (loss) | Adjusted operating income (loss) | | $ | 63,033 | | | $ | 15,461 | | | | $ | 0 | | | $ | (150) | | | $ | 78,344 | | Adjusted operating income (loss) | | $ | (56,410) | | | $ | 99,635 | | | $ | 43,667 | | | | $ | — | | | $ | (527) | | | $ | 86,365 | |
Other information: | Other information: | | | | | | | | | | Other information: | | | | | | | | | | | | | |
Capital expenditures | Capital expenditures | | $ | 205,686 | | | $ | 2,342 | | | | $ | 0 | | | $ | 0 | | | $ | 208,028 | | Capital expenditures | | $ | 299,756 | | | $ | 2,049 | | | $ | 11,271 | | | | $ | — | | | $ | — | | | $ | 313,076 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | Six Months Ended December 31, 2020 |
| | | Entertainment | | MSG Networks | | Tao Group Hospitality | | | | Purchase accounting adjustments | | Inter-segment eliminations | | Total |
Revenues | | | $ | 20,224 | | | $ | 303,602 | | | $ | 17,712 | | | | | $ | — | | | $ | (2,240) | | | $ | 339,298 | |
Direct operating expenses | | | 47,024 | | | 122,105 | | | 20,808 | | | | | 1,848 | | | (57) | | | 191,728 | |
Selling, general and administrative expenses | | | 118,380 | | | 44,219 | | | 16,734 | | | | | — | | | (1,658) | | | 177,675 | |
Depreciation and amortization | | | 41,260 | | | 3,630 | | | 2,609 | | | | | 6,588 | | | — | | | 54,087 | |
| | | | | | | | | | | | | | | |
Restructuring charges | | | 21,299 | | | — | | | — | | | | | — | | | — | | | 21,299 | |
Operating income (loss) | | | $ | (207,739) | | | $ | 133,648 | | | $ | (22,439) | | | | | $ | (8,436) | | | $ | (525) | | | $ | (105,491) | |
Loss in equity method investments | | | | | | | | | | | | | | | (3,264) | |
Interest income | | | | | | | | | | | | | | | 1,609 | |
Interest expense | | | | | | | | | | | | | | | (10,535) | |
Miscellaneous income, net | (a) | | | | | | | | | | | | | | 26,449 | |
Loss from operations before income taxes | | | | | | | | | | | | | | | $ | (91,232) | |
Reconciliation of operating loss to adjusted operating income (loss): | | | | |
Operating income (loss) | | | $ | (207,739) | | | $ | 133,648 | | | $ | (22,439) | | | | | $ | (8,436) | | | $ | (525) | | | $ | (105,491) | |
Add back: | | | | | | | | | | | | | | | |
Non-cash portion of arena license fees from MSG Sports | | | (1,176) | | | — | | | — | | | | | — | | | — | | | (1,176) | |
Share-based compensation | | | 32,807 | | | 10,893 | | | 2,284 | | | | | — | | | — | | | 45,984 | |
Depreciation and amortization | | | 41,260 | | | 3,630 | | | 2,609 | | | | | 6,588 | | | — | | | 54,087 | |
Impairment and other (gains) loss, net | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Restructuring charges | | | 21,299 | | | — | | | — | | | | | — | | | — | | | 21,299 | |
Other purchase accounting adjustments | | | — | | | — | | | — | | | | | 1,848 | | | — | | | 1,848 | |
Adjusted operating income (loss) | | | $ | (113,549) | | | $ | 148,171 | | | $ | (17,546) | | | | | $ | — | | | $ | (525) | | | $ | 16,551 | |
Other information: | | | | | | | | | | | | | | | |
Capital expenditures | | | $ | 218,344 | | | $ | 2,533 | | | $ | 952 | | | | | $ | — | | | $ | — | | | $ | 221,829 | |
MADISON SQUARE GARDEN ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
_________________
(a)Miscellaneous income (expense), net includes the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Unrealized and unrealized gain (loss) on equity investments with readily determinable fair value | | $ | (7,227) | | | $ | 9,432 | | | $ | 26,431 | | | $ | 14,725 | |
Non-service cost components of net periodic pension and postretirement benefit costs | | 178 | | | (317) | | | 294 | | | (626) | |
Dividend income from equity investments | | 0 | | | 240 | | | 0 | | | 481 | |
Measurement alternative adjustments for equity investments without readily determinable fair value | | 0 | | | 0 | | | 0 | | | (532) | |
Others, net. (For the six months ended December 31, 2019, the balance primarily reflected the impact of the elimination of Tao Group Hospitality’s three-month lag in Fiscal Year 2020) | | (313) | | | 0 | | | 137 | | | 2,338 | |
Total | | $ | (7,362) | | | $ | 9,355 | | | $ | 26,862 | | | $ | 16,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gain (loss) on equity investments with readily determinable fair value, see Note 7 for further details. | | $ | (17,155) | | | $ | (7,227) | | | $ | (19,615) | | | $ | 26,431 | |
Non-service cost components of net periodic pension and postretirement benefit costs | | (8) | | | (28) | | | (16) | | | (119) | |
| | | | | | | | |
| | | | | | | | |
Others, net | | 63 | | | (313) | | | (16) | | | 137 | |
Total | | $ | (17,100) | | | $ | (7,568) | | | $ | (19,647) | | | $ | 26,449 | |
Concentration of Risk
Substantially all revenues and assets of the Company’s reportable segments are attributed to or located in the United States. A majority of the Company’s revenue and assets are concentrated in the New York City metropolitan area.
Accounts receivable, net on the accompanying consolidated balance sheets as of December 31, 2021 and June 30, 2021 include amounts due from the following individual customers, all derived from the MSG Networks segment, which accounted for the noted percentages of the gross balance:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | June 30, 2021 |
Customer A (a) | | 15 | % | | 1 | % |
Customer B | | 14 | % | | 15 | % |
Customer C | | 13 | % | | 17 | % |
Customer D | | 10 | % | | 16 | % |
| | | | |
_________________
(a) A receivable from Customer A as of December 31,2021 is primarily due to timing of cash receipts.
Revenues in the accompanying consolidated statements of operations for the three and six months ended December 31, 2021 and 2020 include amounts from the following individual customers, which accounted for the noted percentages of the total:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 |
Customer 1 | | 9 | % | | 24 | % | | 11 | % | | 25 | % |
Customer 2 | | 8 | % | | 24 | % | | 10 | % | | 24 | % |
| | | | | | | | |
| | | | | | | | |
The accompanying consolidated balance sheets as of December 31, 2021 and June 30, 2021 include the following approximate amounts that are recorded in connection with the Company’s license agreement with the New Jersey Devils:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | June 30, 2021 |
Prepaid expenses | | $ | 3,200 | | | $ | 1,400 | |
Other current assets | | 3,000 | | | 3,700 | |
Other assets | | 30,100 | | | 31,100 | |
| | $ | 36,300 | | | $ | 36,200 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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. and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” “MSG Entertainment,” or the “Company”“Company��), including the impact of the COVID-19 pandemic and COVID-19 variants on our future operations, our anticipated operational cash burn on a go-forward basis, cost-cutting measuresability to realize the Company may or may not pursue to preserve cash and financial flexibility,benefits of the potential for future impairment charges,Merger with MSG Networks, the timing and costs of new venue construction, our plans to negotiate amendments toexpansion plan for Tao Group Hospitality’s credit facility,Hospitality, and increased expensesthe status of being a standalone public company.the non-carriage of MSG Networks by Comcast Corporation (“Comcast”). Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
•our ability to effectively manage the impacts of the COVID-19 pandemic and(including COVID-19 variants) as well as the actions taken in response by governmental authorities and certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues as they are permitted to reopen;continue to operate;
•the effect of any show postponements or cancellations by third-parties or the Company as a result of the COVID-19 pandemic due to operational challenges and other health and safety concerns (such as the partial cancellation of the 2021 production of the Christmas Spectacular);
•the extent to which attendance at our venues following their reopening willmay be suppressed due toimpacted by government actions, and continuing health concerns by potential attendees;attendees and reduced tourism;
•risks related to the Merger, as defined herein, with MSG Networks Inc., including, but not limited to: failure to realize the expected benefits of the Merger, business disruption following the Merger and the risk of the litigation relating to the Merger;
•the impact on the payments we receive under the Arena License Agreements as a result of government-mandated capacity restrictions, andleague restrictions and/or social-distancing or vaccination requirements at Knicks and Rangers games;
•the level of our expenses and our operational cash burn rate, including our corporate expenses as a stand-alone publicly traded company;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 temporary suspension of construction and any other 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 other entertainmentbroadcast on our networks, the appeal of our Tao Group Hospitality venues, and sportsother events which are presented in our venues or broadcast on our networks;
•the demand for MSG Networks programming among cable, satellite, telephone and other platforms (“Distributors”) and the subscribers thereto, and our ability to enter into and renew affiliation agreements with Distributors, or to do so on favorable terms, as well as the impact of consolidation among Distributors;
•the ability of our Distributors to maintain, or minimize declines in, subscriber levels;
•the impact of subscribers selecting Distributors’ packages that do not include our networks or Distributors that do not carry our networks at all;
•the security of our MSG Networks program signal and electronic data;
•the on-ice and on-court performance of the professional sports teams whose games we broadcast on our networks and host in our venues;
•the level of our capital expenditures and other investments;
•general economic conditions, especially in the New York City, Las Vegas, Chicago and London metropolitan areas where we have (or plan to have) significant business activities;
•the demand for sponsorship arrangements and advertising and viewer ratings for advertising;our networks;
•competition, for example, from other venues and other sports and entertainment and nightlife options and other regional sports and entertainment networks, including the construction of new competing venues;
•the relocation or insolvency of professional sports teams with which we have a media rights agreement;
•our ability to maintain, obtain or produce content, together with the cost of such content;
•our ability to renew or replace our media rights agreements with professional sports teams through MSG Networks Inc.;
•changes in laws, guidelines, bulletins, directives, policies and agreements, orand regulations under which we operate;
•any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations;organizations, including the unions representing players and officials of the National Basketball Association (“NBA”) and National Hockey League (“NHL”), or other work stoppage due to COVID-19 or otherwise;
•seasonal fluctuations and other variations in our operating results and cash flow from period to period;
•the successful development of new live productions or attractions, enhancements or changes to existing productions and the investments associated with such development, enhancements, or changes, as well as investment in personnel, content and technology for the MSG Spheres;Sphere;
•business, reputational and litigation risk if there is a cyber or other security incident resulting in loss, disclosure or misappropriation of stored personal information, disruption of our Networks business or disclosure of confidential information or other breaches of our information security;
•activities or other developments (such as pandemics, including the COVID-19 pandemic) that discourage or may discourage congregation at prominent places of public assembly, including our venues;
•the continued popularity and success of Tao Group Hospitality entertainment dining and nightlife venues, as well as its existing brands, and the ability to successfully open and operate new entertainment dining and nightlife venues;
•the ability of BCE Boston Calling Events, LLC (“BCE”)to attract attendees and performers to its future festivals;
•the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions;
•our ability to successfully integrate acquisitions, new venues or new businesses into our operations;operations, including the Merger with MSG Networks Inc. and our acquisition of Hakkasan through Tao Group Hospitality;
•the operating and financial performance of our strategic acquisitions and investments, including those we do not control;
•our internal control environment, remediation of the material weakness, 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;
•the impact of governmental regulations or laws, including changes in how those regulations and laws are interpreted, andincluding with respect to the legalization of sports gaming, as well as the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses;
•the impact of any government plans to redesign New York City’s Pennsylvania Station;
•the impact of sports league rules, regulations and/or agreements and changes thereto;
•the substantial amount of debt incurred, and any default, by our subsidiaries under their respective credit facilities;
•financial community and rating agency perceptions of our business, operations, financial condition and the industries 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;Distribution (as defined below);
•our ability to achieve the intended benefits of the Entertainment Distribution;Distribution and the Merger with MSG Networks;
•the performance by MSG Sports of its obligations under various agreements with the Company related to the Entertainment Distribution and ongoing commercial arrangements;arrangements, including the Arena License Agreements;
•lack of operating history as an operating company and costs associated with being an independent public company; and
•the additional factors described under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020 and this Quarterly2021, as amended by the Company’s Annual Report on Form 10-Q under “Part II — Item 1A. Risk Factors.”10-K/A filed on February 9, 2022 (the “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 Annual Report on Form 10-K for the year ended June 30, 2020 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “MSG Entertainment,” or the “Company” refer collectively to Madison Square Garden Entertainment Corp., a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are conducted. Through the period ended April 17, 2020, the Company operated and reported financial information as one reportable segment. Following the Entertainment Distribution on April 17, 2020 and the Merger on July 9, 2021, the Company has twothree segments (the Entertainment business, and the Tao Group Hospitality business, and the MSG Networks business). See Note 1819 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion of the Company’s segment reporting.
This MD&A is organized as follows:
Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our unaudited results of operations for the three and six months ended December 31, 20202021 and 20192020 on both a consolidated and combined basis and a segment basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the six months ended December 31, 20202021 and 2019,2020, as well as certain contractual obligations and off-balance sheet arrangements.
Seasonality of Our Business. This section discusses the seasonal performance of our Entertainment and Tao Group Hospitality segments.segment.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, recently issued accounting pronouncements not yet adopted by the Company, as well as the results of the Company’s annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2021.2022. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year ended June 30, 2020 under “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 consolidated and combined financial statements of the Company included therein.
Business Overview
The Company is a leader in live experiences comprised of iconic venues; marquee entertainment content;brands; regional sports and entertainment networks; 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’s portfolio of venues includes: The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre. In addition, the Company is constructing aunveiled 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, pending necessary approvals.Vegas. The Company also includes the original production, the Christmas Spectacular, as well as BCE, the entertainment production company that owns and operates the Boston Calling Music Festival,Festival. MSG Networks produces, develops and acquires content for multiple distribution platforms, including content originating from the Company’s venues, and is comprised of the Company’s regional sports and entertainment networks, MSG Network and MSG+, a companion streaming app, MSG GO, and other digital properties. Tao Group Hospitality is a hospitality group with globally-recognized entertainment dining and nightlife brands.
Merger with MSG Networks Inc.
On July 9, 2021, the Company completed its previously announced acquisition of MSG Networks Inc. pursuant to that certain Agreement and Plan of Merger, dated as of March 25, 2021 (the “Merger Agreement”), among the Company, Broadway Sub Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and MSG Networks Inc. Merger Sub merged with and into MSG Networks Inc. (the “Merger”), with MSG Networks Inc. surviving and continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of the Company. On July 9, 2021, at the effective time of the Merger (the “Effective Time”), (i) each share of Class A common stock, par value $0.01 per share, of MSG Networks (“MSGN Class A Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class A common stock, par value $0.01 per share, of the Company (“Class A Common Stock”) such that each holder of record of shares of MSGN Class A Common Stock had the right to receive, in the aggregate, a number of shares of Class A Common Stock equal to the total number of shares of MSGN Class A Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share and (ii) each share of Class B common stock, par value $0.01 per share, of MSG Networks Inc. (“MSGN Class B Common Stock”) issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive a number of shares of Class B common stock, par value $0.01 per share, of the Company (“Class B Common Stock”) such that each holder of record of shares of MSGN Class B Common Stock had the right to receive, in the aggregate, a number of shares of Class B Common Stock equal to the total number of shares of MSGN Class B Common Stock held of record immediately prior to the Effective Time multiplied by 0.172, with such product rounded up to the next whole share, in each case except for Excluded Shares (as defined in the Merger Agreement). The Company issued 7,476 shares of the Class A Common Stock and 2,337 shares of Class B Common Stock on July 9, 2021 to holders of MSGN Class A Common Stock and MSGN Class B Common Stock, respectively, which shares are reflected as outstanding for all periods presented.
Beginning this fiscal year, the Merger has been accounted for as a transaction between entities under common control as the Company and MSG Networks Inc. were, prior to the Merger, each controlled by the Dolan Family Group (as defined herein). Upon the closing of the Merger, the net assets of MSG Networks Inc. were combined with those of the Company at their historical carrying amounts and the companies have been presented on a combined basis for all historical periods that the companies were under common control.
Factors Affecting Results of Operations
BasisImpact of Presentationthe COVID-19 Pandemic on Our Business
The consolidated statementsCompany’s operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic (including COVID-19 variants) and actions taken in response by governmental authorities and certain professional sports leagues. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended, MSG Networks aired substantially fewer games and Tao Group Hospitality was operating at significantly reduced capacity and demand. While operations have resumed, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our performance venues were closed beginning in March 2020. Use of The Garden resumed for Knicks and Rangers home games without fans in December 2020 and January 2021, respectively, and was available at 10% seating capacity from February through May 2021 with certain safety protocols and social distancing. Beginning in May 2021, all of our New York performance venues were permitted to host guests at full capacity, subject to certain restrictions, and effective June 2021, The Chicago Theatre was permitted to host events without restrictions. Effective August 17, 2021, all workers and customers in New York City indoor dining, indoor fitness and indoor entertainment facilities, including our venues, were subject to certain vaccination requirements. Following updated regulations, effective January 3, 2022 for the threeChicago Theatre, and January 29, 2022 for our New York venues, all guests five and older, as well as employees, are required to provide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine (although specific performers may require enhanced protocols). Children under age 5 can attend events with a vaccinated adult, but ages 2 to 4 need to wear a mask while inside our venues. In addition, effective August 20, 2021 and continuing, masks are required for all individuals in indoor public spaces in Chicago, including our venues.
For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or cancelled. For the six months ended December 31, 2021 and as of this date, live events have been permitted to be held at all of our performance venues and we are continuing to host and book new events. As a result of an increase in cases of a COVID-19 variant, select bookings were postponed or cancelled at our performance venues in the second quarter of Fiscal Year 2022. Variants of COVID-19 that arise in the future may result in additional postponements or cancellations of bookings at our performance venues.
The impact of the COVID-19 pandemic on our operations also included (i) the partial cancellation of the 2021 production of the Christmas Spectacular, (ii) the cancellation of the 2020 production of the Christmas Spectacular, and (iii) the cancellation of both the 2020 and 2021 Boston Calling Music Festivals.
The Company has long-term arena license agreements (the “Arena License Agreements”) with MSG Sports that require the Knicks and Rangers to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers pay an annual license fee in connection with their respective use of The Garden. The teams are not required to pay the license fee during a period in which The Garden is presented onunavailable for home games due to a consolidated basis,force majeure event (including when events at The Garden were suspended by government mandate as a result of the Company becameCOVID-19 pandemic). As a standalone public company on April 17, 2020. The Company’s combined statement of operations forresult, we did not receive any license fee payments under the three and six months ended December 31, 2019 was prepared on a standalone basis derivedArena License Agreements from the consolidated financial statements and accounting records of the Company’s former parent, MSG Sports, and is presented on the basis of carve-out financial statements (“combined basis”) as the Company was not a standalone public company prior to the Entertainment Distribution.
The combined statements of operations for the three and six months ended December 31, 2019 include allocations for certain support functions that were provided on a centralized basis by MSG Sports and not historically recorded at the business unit level, such as expenses related to finance, human resources, information technology, and venue operations, among others.
As part ofperiod following the Entertainment Distribution certain corporatethrough November 2020.On July 1, 2021, the Knicks and operational support functions were transferredRangers began paying the full amounts provided for under their respective Arena License Agreements and full 82-game regular seasons for the 2021-22 NBA and NHL seasons are scheduled. See “Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Revenue Sources — Entertainment — Venue License Fees” on the Company’s Form 10-K and Note 9 to the Company and therefore, charges were reflected in the combined statements of operations for the three and six months ended December 31, 2019 in order to properly burden all business units comprising MSG Sports’ historical operations. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined revenues, headcount or other measures of the Company and MSG Sports, which were 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 MSG Sports. Revenue sharing expenses attributable to MSG Sports 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 consolidated and combined statements of operations. See Note 3 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additionalfurther 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 separate, stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a separate, stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
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 governmental authorities and certain professional sports leagues. As of the date of this Quarterly Report on Form 10-Q, virtually all of the Entertainment business’ operations have been suspended and Tao Group Hospitality is operating at significantly reduced capacity and demand. It is not clear when we will be permitted or able to resume normal business operations.
As a result of government-mandated assembly limitations and closures, our performance venues were closed in mid-March 2020, and, subject to limited exceptions, such as the use of The Garden for Knicks and Rangers home games without fans in attendance, and our virtual residency in Fall 2020 featuring Phish’s Trey Anastasio live from the Beacon Theatre, as of the date of this filing no events are permitted at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre. Although events are permitted at The Chicago Theatre, current government-mandated capacity restrictions and other safety requirements make it economically unfeasible to do so. Other than Knicks and Rangers home games at The Garden, all events at our venues have been postponed or canceled through at least March 2021 and will likely be impacted through the rest of Fiscal Year 2021. We are not recognizing revenue from events that have been canceled or postponed and, while events have been rescheduled into the second half of calendar year 2021, it is unclear whether and to what extent those events will take place. We are actively monitoring government regulations and guidance, including the impact of New York State’s recent announcement that, starting February 23, 2021, arenas with capacities of over 10,000 people may reopen at 10% capacity with certain safety protocols, such as testing and social distancing requirements. When there is an opportunity to safely and economically welcome guests back to The Garden for events at increased capacity, as well as at our other venues that remain closed, we expect to do so. The impact to our operations included the cancellation of both the 2020 production of the Christmas Spectacular and the 2020 Boston Calling Music Festival.
The Company and MSG Sports are party to the Arena License Agreements, which require the Knicks and the Rangers to play their home games at The Garden. In March, the NBA and the NHL announced that their 2019-20 seasons were suspended, and subsequently announced in June and May, respectively, plans for a return to play in the designated cities of Orlando for the NBA and Edmonton and Toronto for the NHL. With The Garden closed by government mandate for the remainder of the NBA and NHL 2019-20 seasons, MSG Sports made no payments under the Arena License Agreements for the period following the Entertainment Distribution through November 2020. While the NBA began its 2020-21 regular season in December 2020, and the NHL began its 2020-21 regular season in January 2021, the Knicks and Rangers are currently playing home games at The Garden without fans in attendance due to government-mandated assembly restrictions. Four Knicks home games were played at The Garden in December 2020. However, in light of New York State’s recent announcement that New York arenas with capacities of over 10,000 people can re-open beginning February 23, 2021, with limited capacities and safety protocols, we expect to have limited fans in attendance for home games beginning with the Knicks on February 23rd and the Rangers on February 26th, as permitted under these new guidelines. Even though limited numbers of fans are expected to be permitted to attend home games starting February 23rd, capacity restrictions, use limitations and social distancing requirements may remain in place through, at least, the rest of Fiscal Year 2021, which would continue to affect the payments we receiverecognition under the Arena License Agreements.
As a result of the COVID-19 pandemic and league and government actions relating thereto, MSG Networks aired substantially fewer NBA and NHL telecasts during Fiscal Year 2021, as compared with Fiscal Year 2019 (the last full fiscal year not impacted by COVID-19), and consequently experienced a decrease in revenues, including a material decrease in advertising revenue. The absence of live sports games also resulted in a decrease in certain MSG Networks expenses, including rights fees, variable production expenses, and advertising sales commissions. MSG Networks has resumed airing full regular season telecast schedules for its five professional teams across both the NBA and NHL, and, as a result, our advertising revenue and certain operating expenses, including rights fees expense, reflect the same.
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. Due to governmentgovernment actions taken in response to the COVID-19 pandemic, virtually all of Tao Group Hospitality’s venues were closed for approximately three months starting in mid-March, and Avenue and Vandal in New YorkMarch 2020. Additionally, three venues were permanently closed in April 2020 and June 2020, respectively.closed. Throughout Fiscal Year 2021, Tao Group Hospitality has resumedconducted limited operations at certain venues, subject to significant regulatory requirements, including capacity limits, on capacity, curfews and social distancing requirements for outdoor and indoor dining. As of December 31, 2020, eight of Tao Group Hospitality’s operations fluctuated throughout Fiscal Year 2021 and during the first two quarters of Fiscal Year 2022 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. Following updated regulations applicable to indoor dining facilities and entertainment venues, were openeffective January 3, 2022 for outdoor diningChicago, and January 29, 2022 for New York, all guests five and older, as well as employees, are required to provide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine. In addition, certain jurisdictions have reinstated safety protocols, such as mask mandates in Nevada and Chicago, but Tao Group Hospitality is continuing to operate without capacity restrictions in domestic and key international markets.
It is unclear how long and to what extent COVID-19 concerns, including with respect to new variants, will continue to impact government and league-mandated capacity restrictions or vaccination/mask requirements, the use of and/or limited capacity indoordemand for our entertainment and dining four were openand nightlife venues, demand for delivery and/or takeout only, while sixteen venues remained closed.
The COVID-19 pandemic has materially impacted our revenues, most significantly because, as of the date of this filing, we are generating substantially reduced sponsorship and advertising revenue as well as reduced payments under the Arena License Agreementsassets, deter our employees and we are not generating revenue from:vendors from working at our venues (which may lead to difficulties in staffing) or otherwise materially impact our operations.
•events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre;
•suite licenses; and
•the 2020 production of the Christmas Spectacular.
While we have reduced certain operating expenses asAs a result of the material impact COVID-19 pandemic (includinghad on our revenues during Fiscal Year 2021, we took several actions to improve our financial flexibility, reduce operating costs and preserve liquidity, including (i) direct event expenses atrevising our performance venues duringconstruction schedule for MSG Sphere (which has an anticipated opening date in the period our business operations are suspended,second half of calendar year 2023), (ii) advertisingmaking significant cuts in both Entertainment and promotional spending for suspended and canceled games and events, (iii) reduction in corporate work-force and (iv) certain direct operating and SG&A expenses, including at our Tao Group Hospitality business), these expense reductionsvenue and corporate headcounts, and (iii) having our wholly-owned subsidiary, MSG National Properties, LLC (“MSG National Properties”) enter into a five-year $650,000 senior secured term loan facility (“National Properties Term Loan Facility”). See Note 13 to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details on the National Properties Term Loan Facility.
In August 2020, Tao Group Hospitality entered into an amendment to the Tao Senior Credit Agreement, which suspended certain financial covenants through December 31, 2021 and increased the minimum liquidity requirement. As of January 1, 2022, such financial maintenance and restrictive covenant suspensions are not nearly enoughno longer in effect. In addition, in connection with the amendment, our wholly-owned subsidiary MSG Entertainment Group, LLC (“MSG Entertainment Group”) entered into a guarantee agreement, which also included a minimum liquidity requirement for MSG Entertainment Group. See Note 13 to fully offset revenue losses.the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information regarding the amendment to the Tao Senior Credit Agreement. Tao Group Hospitality may need to seek covenant waivers in the future. Tao Group Hospitality’s failure to obtain debt covenant waivers could trigger a violation of
We arethese covenants and lead to default, acceleration of all of its outstanding debt and a demand for payment under the guarantee of MSG Entertainment Group, which would negatively impact the liquidity of Tao Group Hospitality and the Company.
The Company is building a state-of-the-art venueits first MSG Sphere in Las Vegas, called MSG Sphere.Vegas. This is a complex construction project with cutting-edge technology, thatwhich relies on subcontractors obtaining components from a variety of sources around the world. In April 2020, the Company announced that it was suspending construction of MSG Sphere due to COVID-19 related factors that were outside of its control, including supply chain issues. As the ongoing effects of the pandemic have continued to impact its business operations, in August 2020, the Company has revised its processes anddisclosed that it had resumed full construction schedule, and has resumed work with a lengthened timetable that enables the Company to better preserve cash inthrough the near-term.COVID-19 pandemic. The Company remains committed to bringing MSG Sphere to Las Vegas and based on its new construction schedule, expects to open the venue in the second half of calendar year 2023.
A subsidiaryIn December 2020, the Company terminated its construction agreement with AECOM and assumed the role of construction manager to gain greater transparency and control over the construction process, including direct engagement and supervision of subcontractors. AECOM continues to support MSG Sphere at The Venetian through a services agreement that facilitates their ongoing involvement through MSG Sphere’s completion. As the construction manager of the Company is partyproject, we aim to aggressively manage the cost of the project in this volatile environment to minimize any potential cost increases.
For more information about the risks to the Arena License Agreements with subsidiaries of MSG Sports that require the Knicks and the Rangers to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers pay an annual license fee in connection with their respective use of The Garden. For each, the license fee for the initial contract year ending June 30, 2020 was to be prorated based on the number of games scheduled to be played at The Garden between the Entertainment 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. The teams are not required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event (including when events at The Garden were suspended by government mandateCompany as a result of the disruptions causedCOVID-19 pandemic and its impact on our operating results, see “Part I — Item 1A. Risk Factors—General Risk Factors— Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 pandemic)Pandemic and Actions Taken in Response by Governmental Authorities and Certain Professional Sports Leagues.” of the Form 10-K.
Factors Related to the MSG Networks Business
As a result,further discussed under Note 2 to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, the financial performance of MSG Networks business is affected by the affiliation agreements the Company negotiates with Distributors (including rates, terms, and conditions as well as the ability to renew such agreements), the number of subscribers of our Distributors that receive MSG Networks, and also by the advertising rates we did not receive any license fee payments undercharge advertisers. Certain of these factors in turn depend on the Arena License Agreements frompopularity and/or performance of the period followingprofessional sports teams carried on the Entertainment Distribution through November 2020. WhileCompany’s networks as well as the NBA began its 2020-21 regular season in December 2020cost and the NHL began its 2020-21 regular season in January 2021, the Knicks and Rangers are currently playing home games at The Garden without fans in attendance due to government-mandated assembly restrictions, which affects the payments we receive under the Arena License Agreements. If, due to a force majeure event, 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 80%. After The Garden reopens for gamesattractiveness of the Knicks and the Rangers following a force majeure event, future rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers and payments may be partially reduced in accordance with terms of the Arena License Agreements if The Garden opens with materially limited capacity greater than 1,000 attendees. The Company recorded $1,585 of revenues under Arena License Agreements for the three and six months ended December 31, 2020.
Additionally, as a result of operating disruptions due to the COVID-19 pandemic, the Company’s projected cash flows were directly impacted. These disruptions along with the deteriorating macroeconomic conditions and industry and 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 total impairment charge of $105,817 in Fiscal Year 2020.
There has been no triggering event identified by the Company for the Entertainment reporting unit due to the COVID-19 pandemic. However, the duration and impact of the COVID-19 pandemic may result in future impairment charges that management will evaluate as facts and circumstances evolve over time.
Consolidated and Combined Results of Operations
Comparison of the Three and Six Months Ended December 31, 20202021 versus the Three and Six Months Ended December 31, 20192020
The table below sets forth, for the periods presented, certain historical financial information. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | | | |
| | December 31, | | Change (a) |
| | 2021 | | 2020 | | Amount | | Percentage |
Revenues | | $ | 516,439 | | | $ | 168,752 | | | $ | 347,687 | | | NM |
| | | | | | | | |
Direct operating expenses | | 296,258 | | | 92,497 | | | 203,761 | | | NM |
Selling, general and administrative expenses | | 162,277 | | | 96,018 | | | 66,259 | | | 69 | % |
Depreciation and amortization | | 30,533 | | | 25,677 | | | 4,856 | | | 19 | % |
Impairment and other (gains) loss, net | | (7,979) | | | — | | | (7,979) | | | NM |
Restructuring charges | | — | | | 1,372 | | | (1,372) | | | NM |
Operating income (loss) | | 35,350 | | | (46,812) | | | 82,162 | | | NM |
Other expense: | | | | | | | | |
Loss in equity method investments | | (1,774) | | | (1,568) | | | (206) | | | 13 | % |
Interest expense, net (a) | | (7,394) | | | (4,425) | | | (2,969) | | | (67) | % |
Miscellaneous expense, net | | (17,100) | | | (7,568) | | | (9,532) | | | (126) | % |
Income (loss) from operations before income taxes | | 9,082 | | | (60,373) | | | 69,455 | | | NM |
Income tax benefit (expense) | | (4,063) | | | 298 | | | (4,361) | | | NM |
Net income (loss) | | 5,019 | | | (60,075) | | | 65,094 | | | NM |
Less: Net income (loss) attributable to redeemable noncontrolling interests | | 2,642 | | | (3,342) | | | 5,984 | | | NM |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 106 | | | (902) | | | 1,008 | | | NM |
Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | 2,271 | | | $ | (55,831) | | | $ | 58,102 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Six Months Ended | | | | |
| | December 31, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
Revenues | | $ | 810,949 | | | $ | 339,298 | | | $ | 471,651 | | | 139 | % |
| | | | | | | | |
Direct operating expenses | | 462,019 | | | 191,728 | | | 270,291 | | | 141 | % |
Selling, general and administrative expenses | | 337,116 | | | 177,675 | | | 159,441 | | | 90 | % |
Depreciation and amortization | | 59,963 | | | 54,087 | | | 5,876 | | | 11 | % |
Impairment and other (gains) loss, net | | (161) | | | — | | | (161) | | | NM |
Restructuring charges | | — | | | 21,299 | | | (21,299) | | | NM |
Operating loss | | (47,988) | | | (105,491) | | | 57,503 | | | 55 | % |
Other income (expense): | | | | | | | | |
Loss in equity method investments | | (2,981) | | | (3,264) | | | 283 | | | 9 | % |
Interest expense, net (a) | | (15,867) | | | (8,926) | | | (6,941) | | | (78) | % |
Miscellaneous income (expense), net | | (19,647) | | | 26,449 | | | (46,096) | | | NM |
Loss from operations before income taxes | | (86,483) | | | (91,232) | | | 4,749 | | | 5 | % |
Income tax benefit (expense) | | 14,847 | | | (9,159) | | | 24,006 | | | NM |
Net loss | | (71,636) | | | (100,391) | | | 28,755 | | | 29 | % |
Less: Net income (loss) attributable to redeemable noncontrolling interests | | 4,854 | | | (7,231) | | | 12,085 | | | NM |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | 471 | | | (1,532) | | | 2,003 | | | NM |
Net loss attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (76,961) | | | $ | (91,628) | | | $ | 14,667 | | | 16 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | December 31, | | Change (a) |
| | 2020 | | 2019 | | Amount | | Percentage |
Revenues | | $ | 23,137 | | | $ | 394,072 | | | $ | (370,935) | | | (94) | % |
| | | | | | | | |
Direct operating expenses | | 35,464 | | | 210,194 | | | (174,730) | | | (83) | % |
Selling, general and administrative expenses (“SG&A”) | | 74,950 | | | 86,854 | | | (11,904) | | | (14) | % |
Depreciation and amortization | | 23,875 | | | 27,434 | | | (3,559) | | | (13) | % |
| | | | | | | | |
Restructuring charges | | 1,372 | | | — | | | 1,372 | | | NM |
Operating income (loss) | | (112,524) | | | 69,590 | | | (182,114) | | | NM |
Other income (expense): | | | | | | | | |
Loss in equity method investments | | (1,568) | | | (1,170) | | | (398) | | | (34) | % |
Interest income (expense), net | | (7,326) | | | 6,124 | | | (13,450) | | | NM |
Miscellaneous income (expense), net | | (7,362) | | | 9,355 | | | (16,717) | | | NM |
Income (loss) from operations before income taxes | | (128,780) | | | 83,899 | | | (212,679) | | | NM |
Income tax expense | | (323) | | | (1,255) | | | 932 | | | 74 | % |
Net income (loss) | | (129,103) | | | 82,644 | | | (211,747) | | | NM |
Less: Net income (loss) attributable to redeemable noncontrolling interests | | (3,342) | | | 885 | | | (4,227) | | | NM |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | (902) | | | 453 | | | (1,355) | | | NM |
Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (124,859) | | | $ | 81,306 | | | $ | (206,165) | | | NM |
_________________
(a)As disclosed on the Company’s Form 10-K/A filed on February 9, 2022 for the Fiscal Year 2021, the Company determined that the application of ASC Topic 835-20 (Capitalization of Interest) required that a portion of the interest incurred under the Company’s credit facilities should have been capitalized during the periods that the Company had been capitalizing costs related to MSG Sphere at the Venetian (the “accounting error”), which capitalization of such costs began in 2017. As a result, the previously reported consolidated statements of operation of the Company for the three and six months ended December 31, 2020 have been revised to correct this immaterial accounting error by decreasing the Company’s previously reported interest expense by $7,566 and $7,911, respectively.
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 and six months ended December 31, 2021 and 2020, the Company’s operations and operating results were materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information. Also, see “ — Factors Affecting Results of Operations” under Business Segment Results for more information surrounding the factors affecting comparability of each business segment’s results.
Depreciation and amortization
Depreciation and amortization for the three months ended December 31, 2021 was $30,533 as compared to $25,677 in the prior year period, an increase of $4,856, or 19% primarily due to the acquisition of Hakkasan in April 2021. For the six months ended December 31, 2021, depreciation and amortization was $59,963 as compared to $54,087 in the prior year period, an increase of $5,876, or 11% primarily due to the acquisition of Hakkasan in April 2021, partially offset by lower depreciation expense due to certain assets in The Garden being fully depreciated and amortized and disposal of certain assets in the prior year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | December 31, | | Change (a) |
| | 2020 | | 2019 | | Amount | | Percentage |
Revenues | | $ | 37,515 | | | $ | 572,035 | | | $ | (534,520) | | | (93) | % |
| | | | | | | | |
Direct operating expenses | | 69,623 | | | 341,716 | | | (272,093) | | | (80) | % |
Selling, general and administrative expenses | | 135,275 | | | 174,621 | | | (39,346) | | | (23) | % |
Depreciation and amortization | | 50,457 | | | 54,254 | | | (3,797) | | | (7) | % |
| | | | | | | | |
Restructuring charges | | 21,299 | | | — | | | 21,299 | | | NM |
Operating income (loss) | | (239,139) | | | 1,444 | | | (240,583) | | | NM |
Other income (expense): | | | | | | | | |
Loss in equity method investments | | (3,264) | | | (2,643) | | | (621) | | | (23) | % |
Interest income (expense), net | | (7,440) | | | 12,334 | | | (19,774) | | | NM |
Miscellaneous income, net | | 26,862 | | | 16,386 | | | 10,476 | | | 64 | % |
Income (loss) from operations before income taxes | | (222,981) | | | 27,521 | | | (250,502) | | | NM |
Income tax expense | | (486) | | | (1,440) | | | 954 | | | 66 | % |
Net income (loss) | | (223,467) | | | 26,081 | | | (249,548) | | | NM |
Less: Net income (loss) attributable to redeemable noncontrolling interests | | (7,231) | | | 249 | | | (7,480) | | | NM |
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | | (1,532) | | | 493 | | | (2,025) | | | NM |
Net income (loss) attributable to Madison Square Garden Entertainment Corp.’s stockholders | | $ | (214,704) | | | $ | 25,339 | | | $ | (240,043) | | | NM |
Impairment and other (gains) loss, netFor the three months ended December 31, 2021, impairment and other (gains) loss of $7,979 principally reflects gains from extinguishments and modification of lease liabilities in the Tao Group Hospitality segment associated with certain Hakkasan venues and a gain on disposal of one of the Hakkasan venues.
The following is a summary of changes in operating income (loss) by segment for the three and six months ended December 31, 2021 as compared to the prior year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | For the Three Months Ended December 31, 2021 |
Changes attributable to | | | | | | | | | | | | | | Operating income (loss) |
Entertainment segment (a) | | | | | | | | | | | | | | $ | 86,815 | |
MSG Networks segment (a) | | | | | | | | | | | | | | (30,603) | |
Tao Group Hospitality segment (a) | | | | | | | | | | | | | | 27,904 | |
Purchase accounting adjustments | | | | | | | | | | | | | | (2,022) | |
Inter-segment eliminations | | | | | | | | | | | | | | 68 | |
MSG Entertainment Corp. total | | | | | | | | | | | | | | $ | 82,162 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | For the Six Months Ended December 31, 2021 |
Changes attributable to | | | | | | | | | | | | | | Operating income (loss) |
Entertainment segment (a) | | | | | | | | | | | | | | $ | 82,785 | |
MSG Networks segment (a) | | | | | | | | | | | | | | (75,261) | |
Tao Group Hospitality segment (a) | | | | | | | | | | | | | | 49,241 | |
Purchase accounting adjustments | | | | | | | | | | | | | | 740 | |
Inter-segment eliminations | | | | | | | | | | | | | | (2) | |
MSG Entertainment Corp. total | | | | | | | | | |
| | | | $ | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | 57,503 | |
_________________
NM — Percentage is not meaningful
(a)The consolidated statements of operations for the three and six months ended December 31, 2020 are presented on a consolidated basis, as the Company became a standalone public company on April 17, 2020. The Company’s combined statements of operations for the three and six months ended December 31, 2019 were prepared on a standalone basis derived from the consolidated financial statements and accounting records of the Company’s former parent, MSG Sports, and are presented on the basis of carve-out financial statements as the Company was not a standalone public company prior to the Entertainment Distribution. In addition, the Company’s operating results were materially impacted during the three and six months ended December 31, 2020 by the COVID-19 pandemic and government actions taken in response. See “— Introduction — Factors Affecting Results of Operations — Basis of Presentation” and “— Introduction — Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” for more information.
The following is a summary of changes in segments’ operating results for the three and six months ended December 31, 2020 as compared to the prior year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended December 31, 2020 |
Changes attributable to | | Revenue | | Direct operating expenses | | SG&A | | Depreciation and amortization | | | | Restructuring charges | | Operating income (loss) |
Entertainment segment (a) | | $ | (312,701) | | | $ | (144,832) | | | $ | (3,139) | | | $ | (1,882) | | | | | $ | 1,372 | | | $ | (164,220) | |
Tao Group Hospitality segment (a) | | (58,613) | | | (30,179) | | | (8,907) | | | (848) | | | | | — | | | (18,679) | |
Purchase accounting adjustments | | — | | | (144) | | | — | | | (829) | | | | | — | | | 973 | |
Inter-segment eliminations | | 379 | | | 425 | | | 142 | | | — | | | | | — | | | (188) | |
MSG Entertainment Corp. total | | $ | (370,935) | | | $ | (174,730) | | | $ | (11,904) | | | $ | (3,559) | | | | | $ | 1,372 | | | $ | (182,114) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended December 31, 2020 |
Changes attributable to | | Revenue | | Direct operating expenses | | SG&A | | Depreciation and amortization | | | | Restructuring charges | | Operating income (loss) |
Entertainment segment (a) | | $ | (424,798) | | | $ | (216,177) | | | $ | (20,838) | | | $ | (1,655) | | | | | $ | 21,299 | | | $ | (207,427) | |
Tao Group Hospitality segment (a) | | (110,009) | | | (56,018) | | | (18,728) | | | (1,981) | | | | | — | | | (33,282) | |
Purchase accounting adjustments | | — | | | (334) | | | (6) | | | (161) | | | | | — | | | 501 | |
Inter-segment eliminations | | 287 | | | 436 | | | 226 | | | — | | | | | — | | | (375) | |
MSG Entertainment Corp. total | | $ | (534,520) | | | $ | (272,093) | | | $ | (39,346) | | | $ | (3,797) | | | | | $ | 21,299 | | | $ | (240,583) | |
_________________
(a)See “Business Segment Results” for a more detailed discussion of the operating results of our segments.
Loss in equity method investmentsInterest expense, net
Loss in equity method investmentsNet interest expense was $7,394 for the three months ended December 31, 2020 increased $398, or 34% to $1,5682021, as compared to $4,425 in the prior year period, a net increase of $2,969, or 67%. The increase was primarily due to the entry into the National Properties Term Loan Facility on November 12, 2020, which resulted in an increase of interest expense of approximately $5,990. The increase was partially offset by higher interest capitalization related to construction of approximately $3,000. The Company capitalized $10,600 of interest for the three months ended December 31, 2021 as compared to $7,566 in the prior year period.
For the six months ended December 31, 2020, loss in equity method investments increased $621, or 23%, to $3,2642021, net interest expense was $15,867 as compared to the prior year period. The year-over-year increase was primarily due to higher inter-entity profit eliminations recorded in the current year periods in connection with the capital expenditure purchases for MSG Sphere. See Note 16 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of these arrangements with nonconsolidated affiliates.
Interest income (expense), net
Interest expense, net for the three months ended December 31, 2020 was $7,326 as compared to net interest income of $6,124$8,926 in the prior year period, a decreasenet increase of net interest incomeexpense of $13,450. For$6,941 or 78%. The increase was primarily due to the entry into the National Properties Term Loan Facility on November 12, 2020, which resulted in an increase of interest expense by approximately $19,260. The increase was partially offset by higher interest capitalization related to construction of approximately $12,030. The Company capitalized $19,926 of interest for the six months ended December 31, 2020, net interest expense was $7,4402021 as compared to net interest income of $12,334$7,911 in the prior year period, a decrease of net interest income of $19,774. The decreases in net interest income in the current year periods were primarily due to (i) lower interest income as the Company shifted its investments into U.S. Treasury Bills in the current year period, which yield a lower interest rate, (ii) higher interest expense in the current year periods associated with the National Properties Term Loan Facility, and to a lesser extent, (iii) the absence of interest income earned on a loan extended to The Azoff Company as compared to the prior year periods since the loan was repaid during the second quarter of Fiscal Year 2020.period.
Miscellaneous income (expense), net
MiscellaneousNet miscellaneous expense net for the three months ended December 31, 20202021 was $7,362$17,100, as compared to net miscellaneous income of $9,355 in the prior year period, a decrease of $16,717, primarily due to (i) unrealized and realized loss associated with the investment in DraftKings for the three months ended December 31, 2020 and, to a lesser extent, (ii) lower unrealized gains associated with the investment in Townsquare in the current year period. For the six months ended December 31, 2020, net miscellaneous income was $26,862, as compared to $16,386$7,568 in the prior year period, an increase of $10,476,$9,532, or 126%, primarily due to higher net gain onan increase in unrealized loss of $7,005 associated with the investmentsCompany’s investment in DraftKings partially offset by lowerInc. (“DraftKings”), for, which the Company recorded an unrealized gainsloss of $17,989 for the three months ended December 31, 2021 as compared to an unrealized loss of $10,984 in the prior year period.
For the six months ended December 31, 2021, net miscellaneous expense was $19,647 as compared to net miscellaneous income of 26,449, a decrease of $46,096, primarily due to the unrealized loss associated with the investment in TownsquareDraftKings of $21,476 for the six months ended December 31, 2021 as compared to an unrealized gain of $22,064 in the currentprior year period. See Note 6 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information related to the Company’s investments in DraftKings and Townsquare.
Income taxes
See Note 1617 to the consolidated and combined financial statements included in “— 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 following are the reconciliations of operating income (loss) to adjusted operating income (loss) for the three and six months ended December 31, 20202021 as compared to the prior year period:
| | | | Three Months Ended | | | Three Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Operating income (loss) | Operating income (loss) | | $ | (112,524) | | | $ | 69,590 | | | $ | (182,114) | | | NM | Operating income (loss) | | $ | 35,350 | | | $ | (46,812) | | | $ | 82,162 | | | NM |
Non-cash portion of arena license fees from MSG Sports | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | Non-cash portion of arena license fees from MSG Sports | | (11,346) | | | (1,176) | | |
Share-based compensation | Share-based compensation | | 23,562 | | | 10,373 | | | Share-based compensation | | 24,171 | | | 29,828 | | |
Depreciation and amortization (a) | Depreciation and amortization (a) | | 23,875 | | | 27,434 | | | Depreciation and amortization (a) | | 30,533 | | | 25,677 | | |
| Amortization for capitalized cloud computing costs | | Amortization for capitalized cloud computing costs | | 10 | | | — | | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 2,331 | | | — | | |
Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | (7,979) | | | — | | |
Restructuring charges | Restructuring charges | | 1,372 | | | — | | | Restructuring charges | | — | | | 1,372 | | |
Other purchase accounting adjustments | Other purchase accounting adjustments | | 924 | | | 1,068 | | | Other purchase accounting adjustments | | 3,038 | | | 924 | | |
Adjusted operating income (loss) | | $ | (63,967) | | | $ | 108,465 | | | $ | (172,432) | | | NM | |
Adjusted operating income | | Adjusted operating income | | $ | 76,108 | | | $ | 9,813 | | | $ | 66,295 | | | NM |
| | | Six Months Ended | | | Six Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Operating income (loss) | | $ | (239,139) | | | $ | 1,444 | | | $ | (240,583) | | | NM | |
Operating loss | | Operating loss | | $ | (47,988) | | | $ | (105,491) | | | $ | 57,503 | | | 55 | % |
Non-cash portion of arena license fees from MSG Sports | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | Non-cash portion of arena license fees from MSG Sports | | (11,889) | | | (1,176) | | |
Share-based compensation | Share-based compensation | | 35,091 | | | 20,458 | | | Share-based compensation | | 43,699 | | | 45,984 | | |
Depreciation and amortization (a) | Depreciation and amortization (a) | | 50,457 | | | 54,254 | | | Depreciation and amortization (a) | | 59,963 | | | 54,087 | | |
| Amortization for capitalized cloud computing costs | | Amortization for capitalized cloud computing costs | | 95 | | | — | | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 39,523 | | | — | | |
Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | (161) | | | — | | |
Restructuring charges | Restructuring charges | | 21,299 | | | — | | | Restructuring charges | | — | | | 21,299 | | |
Other purchase accounting adjustments | Other purchase accounting adjustments | | 1,848 | | | 2,188 | | | Other purchase accounting adjustments | | 3,123 | | | 1,848 | | |
Adjusted operating income (loss) | | $ | (131,620) | | | $ | 78,344 | | | $ | (209,964) | | | NM | |
Adjusted operating income | | Adjusted operating income | | $ | 86,365 | | | $ | 16,551 | | | $ | 69,814 | | | NM |
_________________
(a) Depreciation and amortization includes purchase accounting adjustments of $3,066$3,510 and $3,895$3,066 for the three months ended December 31, 20202021 and 2019,2020, respectively, and $6,588$5,109 and $6,749$6,588 for the six months ended December 31, 20202021 and 2019,2020, respectively.
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Adjusted operating lossincome for the three months endedDecember 31, 2020 increased $172,4322021 improved $66,295, to $63,967 as compared to adjusted operating income of $108,465 in the prior year period.$76,108. For the six months ended December 31, 2020, adjusted operating loss increased $209,964 to $131,620 as compared to2021, adjusted operating income of $78,344 in the prior year period. Theincreased $69,814, to $86,365. These increases in adjusted operating lossincome were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Six Months Ended December 31, 2020 |
Increase in adjusted operating loss of the Entertainment segment (a) | | $ | (153,905) | | | $ | (176,582) | |
Increase in adjusted operating loss of the Tao Group Hospitality segment (a) | | (18,339) | | | (33,007) | |
Inter-segment eliminations | | (188) | | | (375) | |
| | $ | (172,432) | | | $ | (209,964) | |
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Increase in adjusted operating income of the Entertainment segment (a) | | $ | 70,254 | | | $ | 57,139 | |
Decrease in adjusted operating income of the MSG Networks segments (a) | | (29,938) | | | (48,536) | |
Increase in adjusted operating income of the Tao Group Hospitality segment (a) | | 25,911 | | | 61,213 | |
Inter-segment eliminations | | 68 | | | (2) | |
| | $ | 66,295 | | | $ | 69,814 | |
_________________
(a)See “ — Business Segment Results” for a more detailed discussion of the operating results of our segments.
Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests
For the three months endedDecember 31, 2020,2021, the Company recorded $2,642 of net income attributable to redeemable noncontrolling interests and $106 of net income attributable to nonredeemable noncontrolling interests as compared to $3,342 of net loss attributable to redeemable noncontrolling interests and $902 of net loss attributable to nonredeemable noncontrolling interests as compared to $885for the three months ended December 31, 2020. For the six months ended December 31, 2021, the Company recorded $4,854 of net income attributable to redeemable noncontrolling interests and $453$471 of net income attributable to nonredeemable noncontrolling interests for the three months ended December 31, 2019. For the six months ended December 31, 2020, the Company recordedas compared to $7,231 of net loss attributable to redeemable noncontrolling interests and $1,532 of net loss attributable to nonredeemable noncontrolling interests as compared to $249 of net income attributable to redeemable noncontrolling interests and $493 of net income attributable to nonredeemable noncontrolling interests for the six months ended December 31, 2019.2020. These amounts represent the share of net income (loss) from the Company’s investments in Tao Group Hospitality and BCE that are not attributable to the Company.
Business Segment Results
Entertainment
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating loss to adjusted operating income (loss) for the Company’s Entertainment segment.
| | | | Three Months Ended | | | Three Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Revenues | Revenues | | $ | 12,669 | | | $ | 325,370 | | | $ | (312,701) | | | (96) | % | Revenues | | $ | 247,610 | | | $ | 12,669 | | | $ | 234,941 | | | NM |
Direct operating expenses | Direct operating expenses | | 23,409 | | | 168,241 | | | (144,832) | | | (86) | % | Direct operating expenses | | 147,343 | | | 23,409 | | | 123,934 | | | NM |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 65,730 | | | 68,869 | | | (3,139) | | | (5) | % | Selling, general and administrative expenses | | 91,516 | | | 65,730 | | | 25,786 | | | 39 | % |
Depreciation and amortization | Depreciation and amortization | | 19,246 | | | 21,128 | | | (1,882) | | | (9) | % | Depreciation and amortization | | 19,024 | | | 19,246 | | | (222) | | | (1) | % |
| Restructuring charges | Restructuring charges | | 1,372 | | | — | | | 1,372 | | | NM | Restructuring charges | | — | | | 1,372 | | | (1,372) | | | NM |
Operating income (loss) | | $ | (97,088) | | | $ | 67,132 | | | $ | (164,220) | | | NM | |
Operating loss | | Operating loss | | $ | (10,273) | | | $ | (97,088) | | | $ | 86,815 | | | 89 | % |
Reconciliation to adjusted operating income (loss): | Reconciliation to adjusted operating income (loss): | | Reconciliation to adjusted operating income (loss): | |
Non-cash portion of arena license fees from MSG Sports | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | Non-cash portion of arena license fees from MSG Sports | | (11,346) | | | (1,176) | | |
Share-based compensation | Share-based compensation | | 22,374 | | | 10,373 | | | Share-based compensation | | 16,155 | | | 22,374 | | |
Amortization for capitalized cloud computing arrangement costs | | Amortization for capitalized cloud computing arrangement costs | | (34) | | | — | | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 1,456 | | | — | | |
Depreciation and amortization | Depreciation and amortization | | 19,246 | | | 21,128 | | | Depreciation and amortization | | 19,024 | | | 19,246 | | |
| Restructuring charges | Restructuring charges | | 1,372 | | | — | | | Restructuring charges | | — | | | 1,372 | | |
Adjusted operating income (loss) | Adjusted operating income (loss) | | $ | (55,272) | | | $ | 98,633 | | | $ | (153,905) | | | NM | Adjusted operating income (loss) | | $ | 14,982 | | | $ | (55,272) | | | $ | 70,254 | | | NM |
| | | | Six Months Ended | | | Six Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Revenues | Revenues | | $ | 20,224 | | | $ | 445,022 | | | $ | (424,798) | | | (95) | % | Revenues | | $ | 281,849 | | | $ | 20,224 | | | $ | 261,625 | | | NM |
Direct operating expenses | Direct operating expenses | | 47,024 | | | 263,201 | | | (216,177) | | | (82) | % | Direct operating expenses | | 183,645 | | | 47,024 | | | 136,621 | | | NM |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 118,380 | | | 139,218 | | | (20,838) | | | (15) | % | Selling, general and administrative expenses | | 184,478 | | | 118,380 | | | 66,098 | | | 56 | % |
Depreciation and amortization | Depreciation and amortization | | 41,260 | | | 42,915 | | | (1,655) | | | (4) | % | Depreciation and amortization | | 38,680 | | | 41,260 | | | (2,580) | | | (6) | % |
| Restructuring charges | Restructuring charges | | 21,299 | | | — | | | 21,299 | | | NM | Restructuring charges | | — | | | 21,299 | | | (21,299) | | | NM |
Operating loss | Operating loss | | $ | (207,739) | | | $ | (312) | | | $ | (207,427) | | | NM | Operating loss | | $ | (124,954) | | | $ | (207,739) | | | $ | 82,785 | | | 40 | % |
Reconciliation to adjusted operating income (loss): | | |
Reconciliation to adjusted operating loss: | | Reconciliation to adjusted operating loss: | |
Non-cash portion of arena license fees from MSG Sports | Non-cash portion of arena license fees from MSG Sports | | (1,176) | | | — | | | Non-cash portion of arena license fees from MSG Sports | | (11,889) | | | (1,176) | | |
Share-based compensation | Share-based compensation | | 32,807 | | | 20,430 | | | Share-based compensation | | 26,298 | | | 32,807 | | |
Depreciation and amortization | Depreciation and amortization | | 41,260 | | | 42,915 | | | Depreciation and amortization | | 38,680 | | | 41,260 | | |
Amortization for capitalized cloud computing costs | | Amortization for capitalized cloud computing costs | | 7 | | | — | | |
Merger and acquisition related costs | | Merger and acquisition related costs | | 15,448 | | | — | | |
| Restructuring charges | Restructuring charges | | 21,299 | | | — | | | Restructuring charges | | — | | | 21,299 | | |
Adjusted operating income (loss) | | $ | (113,549) | | | $ | 63,033 | | | $ | (176,582) | | | NM | |
Adjusted operating loss | | Adjusted operating loss | | $ | (56,410) | | | $ | (113,549) | | | $ | 57,139 | | | 50 | % |
_________________
NM — Percentage isAbsolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningfulmeaningful.
Factors Affecting Results of Operations
Carve-out Financial Statements
The consolidated statement of operations for the three and six months ended December 31, 2020 is presented on a consolidated basis, as the Company became a standalone public company on April 17, 2020. The Company's combined statement of operations for the three months ended December 31, 2019 was prepared on a standalone basis derived from the consolidated financial statements and accounting records of the Company’s former parent, MSG Sports, and is presented on the basis of carve-out financial statements as the Company was not a standalone public company prior to the Entertainment Distribution.
The combined statements of operations for the three and six months ended December 31, 2019 include allocations for certain support functions that were provided on a centralized basis by MSG Sports and not historically recorded at the business unit level, such as expenses related to finance, human resources, 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 MSG Sports’ historical operations. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined revenues, headcount or other measures of the Company and MSG Sports.
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 separate, standalone company during the periods presented. Actual costs that would have been incurred if the Company had been a separate, standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
Impact of the COVID-19 Pandemic
TheFor the six months ended December 31, 2021 and 2020, the Entertainment segment operations and operating results have been, and continue to be,were materially impacted by the COVID-19 pandemic and the actions taken in response by governmental authorities and certain professional sports leagues. Asauthorities. While the number of events held at the date of this Quarterly Report on Form 10-Q, virtually all of our Entertainment business’ operations have been suspended with the exception of hosting the Knicks and Rangers at The Garden without live audiences. ItCompany’s venues has started to increase, it is not clear when wethe Company will be permitted or ablefully return to resume normal business operations. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business”Business” for further discussions.more information.
Revenues
Revenues for the three months ended December 31, 2021 increased $234,941 to $247,610 as compared to the prior year period. For the six months ended December 31, 2021, revenues increased $261,625 to $281,849 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Increase in event-related revenues, as discussed below | | $ | 79,972 | | | $ | 100,632 | |
| | | | |
Increase in revenues from the Christmas Spectacular given the cancellation of the 2020 production as a result of the COVID-19 pandemic | | 55,328 | | | 55,209 | |
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 | | 45,285 | | | 47,011 | |
Increase in arena license fees from MSG Sports pursuant to the Arena License Agreements, as discussed below | | 26,268 | | | 27,596 | |
Increase in suite license fee revenues, as a result of no live events held in the prior year periods due to the COVID-19 pandemic | | 13,080 | | | 13,459 | |
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 no live events held in the prior year periods due to the COVID-19 pandemic | | 4,634 | | | 7,297 | |
Increase in revenues from Sponsorship Sales and Service Representation Agreements with MSG Sports | | 2,391 | | | 2,534 | |
Increase in inter-segment revenues on advertising sales commission from MSG Networks, which are eliminated in consolidation | | 6,357 | | | 5,572 | |
Other net increases | | 1,626 | | | 2,315 | |
| | $ | 234,941 | | | $ | 261,625 | |
For the three and six months ended December 31, 2021, the increase in event-related revenues reflects (i) higher revenues from concerts of $58,104 and $74,605, respectively, and (ii) higher revenues from other sporting and live entertainment events of $21,868 and $26,027, respectively, primarily due to the return of events to the Company’s venues during the current year period as compared to no 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 the three and six months ended December 31, 2021, the Knicks and Rangers hosted a combined 35 and 37 pre-season and regular season games without any capacity restrictions. As a result, the Company recorded $27,854 and $29,182 in arena license fees under the Arena License Agreements for the three and six months ended December 31, 2021. In the prior year, the Knicks began their season in December 2020 and played four pre-season and regular season home games in the Fiscal Year 2021 second quarter without fans in attendance due to government-mandated assembly restrictions at that time. As capacity at The Garden was limited to 1,000 or fewer attendees, the amounts payable to the Company under the Arena License Agreement with the Knicks were reduced by 80%. As a result, the Company recorded $1,585 in arena license fees under the Arena License Agreement with the Knicks for the three and six months ended December 31, 2020. In the prior year, the Rangers played no home games and the Company recorded no arena license fees under the Arena License Agreement with the Rangers. The Rangers’ 2020-21 season began subsequently in January 2021.
RevenuesFor the three and six months ended December 31, 2021, the increase in revenues from the presentation of the Christmas Spectacular was due to the cancellation of the 2020 production in the prior year periods. During the production’s 2021 holiday season run, the Company welcomed over 400,000 guests across 101 performances, all of which took place in the Fiscal Year 2022 second quarter.
Direct operating expenses
RevenuesDirect operating expenses for the three months ended December 31, 2020 decreased $312,701, or 96.1%,2021 increased $123,934 to $12,669$147,343 as compared to the prior year period. For the six months ended December 31, 2020, revenues decreased $424,798, or 95%,2021, direct operating expenses increased $136,621 to $20,224$183,645 as compared to the prior year period. The net decreasesincreases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Six Months Ended December 31, 2020 |
Decrease in revenues from the Christmas Spectacular due to the cancellation of the 2020 holiday season production as a result of the COVID-19 pandemic | | $ | (122,789) | | | $ | (122,818) | |
Decrease in event-related revenues, as discussed below | | (102,916) | | | (173,267) | |
Decrease in suite license fee revenues, as discussed below | | (36,107) | | | (55,693) | |
Decrease in venue-related signage and sponsorship revenues due to the impact of carve-out financial assumptions on the prior year period as well as the impact of government-mandated closures and restrictions on the use of our venues beginning in March 2020 as a result of the COVID-19 pandemic | | (26,920) | | | (38,472) | |
Absence of revenues from the Forum due to its disposition in May 2020 | | (21,275) | | | (33,076) | |
Decrease in revenues from advertising sales commission from MSG Networks, as discussed below | | (5,428) | | | (4,660) | |
Increase in revenues from Sponsorship Sales and Service Representation Agreements with MSG Sports, as discussed below | | 2,441 | | | 4,646 | |
Increase in arena license fees from MSG Sports pursuant to the Arena License Agreements | | 1,585 | | | 1,585 | |
Other net decreases | | (1,292) | | | (3,043) | |
| | $ | (312,701) | | | $ | (424,798) | |
The decrease in event-related revenues reflects (i) lower revenues from concerts of $67,534 and $133,169 for | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Increase in event-related direct operating expenses, as discussed below | | $ | 41,844 | | | $ | 51,570 | |
Increase in direct operating expenses associated with the Christmas Spectacular given the cancellation of the 2020 production as a result of the COVID-19 pandemic | | 38,923 | | | 39,522 | |
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 | | 32,697 | | | 33,978 | |
Increase in direct operating expenses associated with the Arena License Agreements | | 5,630 | | | 6,173 | |
Increase in direct operating expenses associated with venue operating costs | | 2,622 | | | 5,348 | |
Other net increases | | 2,218 | | | 30 | |
| | $ | 123,934 | | | $ | 136,621 | |
For the three and six months ended December 31, 2020,2021, the increase in event-related direct operating expenses reflects (i) higher direct operating expenses from concerts of $28,981 and $36,246, respectively, and (ii) lower revenueshigher direct operating expenses from other sporting and live entertainment and sporting events of $35,382$12,863 and $40,097$15,324, respectively, primarily due to the return of events to the Company’s venues during the current year period as compared to no 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 December 31, 2021 increased $25,786, or 39% to $91,516 as compared to the prior year period. The increase primarily reflects (i) higher employee compensation and related benefits of $14,105, which is net of a decrease in share-based compensation of $6,241, and (ii) an increase in professional fees of $7,766, inclusive of costs for MSG Sphere development. For the six months ended December 31, 2020, respectively, both due2021, selling, general and administrative expenses increased $66,098, or 56%, to government-mandated closures$184,478 as compared to the prior year period. This increase primarily reflects (i) higher employee compensation and restrictions on the userelated benefits of our venues beginning in March 2020 as$32,867, which is net of a result of the COVID-19 pandemic.
The decrease in suite license fee revenues was dueshare-based compensation of $6,699, and (ii) an increase in professional fees of $22,567, inclusive of expenses in the current year period related to government-mandated closuresthe Company’s acquisition of MSG Networks Inc. of $13,992 and, restrictions onto a lesser extent, initiatives for MSG Sphere development.
Depreciation and amortization
Depreciation and amortization for the use of our venues beginning in March 2020 as a result of the COVID-19 pandemic. During the three and six months ended December 31, 2020,2021, decreased $2,580, or 6% to $38,680 as compared to the prior year period primarily due to lower depreciation expense as a result of certain assets in The Garden remained closedbeing fully depreciated and amortized, and disposal of certain assets in the prior year period.
Operating loss
Operating loss for entertainment events butthe three months ended December 31, 2021 was permitted$10,273 as compared to host four Knicks home games, which$97,088 in the prior year period, a decrease in operating loss of $86,815, or 89%. For the six months ended December 31, 2021, operating loss was $124,954 as compared to $207,739 in the prior year period, a decrease in operating loss of $82,785 or 40%. The decreases in operating loss were played without fans in attendanceprimarily due to government-mandated attendance restrictions.increases in revenues offset by higher direct operating expenses and selling, general and administrative expenses and, to a lesser extent, the impact of restructuring charges in the prior year periods, as discussed above.
Adjusted operating income (loss)
Adjusted operating income for the three months ended December 31, 2021 was $14,982 as compared to adjusted operating loss of $55,272 in the prior year period, an increase in adjusted operating income of $70,254. The increase in adjusted operating income was lower than the decrease in operating loss of $86,815 primarily due to (i) the increase in adjustments for the non-cash portion of arena license fees from MSG Sports of $10,170, and (ii) a decrease in share-based compensation of $6,219, both of which are excluded in the calculation of adjusted operating income (loss). For the six months ended December 31, 2021, adjusted operating loss was $56,410 as compared to $113,549 in the prior year period, a decrease in adjusted operating loss of $57,139. The decrease in adjusted operating loss was lower than the decrease in operating loss of $82,785 primarily due to (i) restructuring charges of $21,299 in the prior year period as compared to merger and acquisition related costs of $15,448 in the current year period, (ii) the increase in adjustments for the non-cash portion of arena license fees from MSG Sports of $10,713, and (iii) a decrease in share-based compensation of $6,509, which are excluded in the calculation of adjusted operating loss.
MSG Networks
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Networks segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | December 31, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
Revenues | | $ | 159,981 | | | $ | 146,239 | | | $ | 13,742 | | | 9 | % |
Direct operating expenses | | 85,924 | | | 57,033 | | | 28,891 | | | 51 | % |
Selling, general and administrative expenses | | 37,192 | | | 21,692 | | | 15,500 | | | 71 | % |
Depreciation and amortization | | 1,756 | | | 1,802 | | | (46) | | | (3) | % |
| | | | | | | | |
| | | | | | | | |
Operating income | | $ | 35,109 | | | $ | 65,712 | | | $ | (30,603) | | | (47) | % |
Reconciliation to adjusted operating income: | | | | | | | | |
| | | | | | | | |
Share-based compensation | | 6,058 | | | 6,266 | | | | | |
Depreciation and amortization | | 1,756 | | | 1,802 | | | | | |
Amortization for capitalized cloud computing arrangement costs | | 44 | | | — | | | | | |
Merger and acquisition related costs | | 875 | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
Adjusted operating income | | $ | 43,842 | | | $ | 73,780 | | | $ | (29,938) | | | (41) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | December 31, | | Change |
| | 2021 | | 2020 | | Amount | | Percentage |
Revenues | | $ | 301,454 | | | $ | 303,602 | | | $ | (2,148) | | | (1) | % |
Direct operating expenses | | 154,347 | | | 122,105 | | | 32,242 | | | 26 | % |
Selling, general and administrative expenses | | 85,167 | | | 44,219 | | | 40,948 | | | 93 | % |
Depreciation and amortization | | 3,553 | | | 3,630 | | | (77) | | | (2) | % |
| | | | | | | | |
| | | | | | | | |
Operating income | | $ | 58,387 | | | $ | 133,648 | | | $ | (75,261) | | | (56) | % |
Reconciliation to adjusted operating income: | | | | | | | | |
| | | | | | | | |
Share-based compensation | | 13,532 | | | 10,893 | | | | | |
Depreciation and amortization | | 3,553 | | | 3,630 | | | | | |
Amortization for capitalized cloud computing arrangement costs | | 88 | | | — | | | | | |
Merger and acquisition related costs | | 24,075 | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
Adjusted operating income | | $ | 99,635 | | | $ | 148,171 | | | $ | (48,536) | | | (33) | % |
_________________NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Factors Affecting Results of Operations
Due to the COVID-19 pandemic, in March 2020, the 2019-20 NHL and NBA seasons were suspended. The leagues resumed play during the summer of 2020, with the Rangers and Islanders participating in the NHL’s return to play and the Islanders advancing to the 2019-20 playoffs. The NHL and NBA resumed play several months later and subsequently completed their shortened 2019-20 seasons in September and October 2020, respectively, which impactedresulted in a delayed start to the start of each league’sshortened 2020-21 regular season. The Knicks’NBA and NHL seasons. For the 2021-22 seasons, MSG Networks has resumed airing full regular season begantelecast schedules for its five professional teams across both the NBA and NHL. See “— Introduction — Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on December 23, 2020, while the Rangers’ regular season started on January 14, 2021. ForOur Business” for more information.
Revenues
Revenues for the three andmonths ended December 31, 2021 increased $13,742, or 9% to $159,981 as compared to the prior year period. Revenues for the six months ended December 31, 2020,2021 decreased $2,148, or 1%, to $301,454 as compared to the prior year period. The changes in revenues were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| | | | |
Decrease in affiliation fee revenue | | $ | (16,114) | | | $ | (28,379) | |
Increase in advertising revenue | | 28,307 | | | 24,745 | |
Other net increases | | 1,549 | | | 1,486 | |
| | $ | 13,742 | | | $ | (2,148) | |
For the three months ended December 31, 2021, the decrease in advertising sales commissions from MSG Networksaffiliation fee revenue was primarily due to the delayed startimpact of (i) the non-renewal of MSG Networks’ carriage agreement with Comcast as of October 1, 2021 and (ii) a decrease in subscribers of approximately 7% (excluding the impact of the NBAnon-renewal with Comcast). These decreases were partially offset by (i) the net impact of higher affiliation rates and NHL 2020-21 regular seasons.(ii) a decrease in net unfavorable affiliate adjustments of approximately $3,100. For the six months ended December 31, 2020,2021, the decrease in advertising sales commissionsaffiliation fee revenue was primarily due to the impact of (i) the non-renewal of MSG Networks’ carriage agreement with Comcast as of October 1, 2021, (ii) a decrease in subscribers of approximately 6.5% (excluding the impact of the non-renewal with Comcast), and (iii) an increase in net unfavorable affiliate adjustments of approximately $2,200. These decreases were partially offset by 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. The financial impact of Comcast’s non-carriage of MSG Networks will depend on many factors including if, when and on what terms Comcast and the Rangers’ participationCompany reach a new carriage agreement and the extent to which Comcast subscribers switch to other Distributors that carry MSG Networks. Comcast’s non-carriage has reduced MSG Networks’ subscribers by approximately 10% and, subject to the foregoing factors, has and is expected to reduce MSG Networks’ revenue by a comparable percentage for so long as MSG Networks’ carriage agreement with Comcast is not renewed. In addition, during any period of non-carriage, MSG Networks’ segment operating income and AOI have been and are expected to be reduced by an amount that is approximately equal to the dollar amount of the reduced revenue.
For the three months ended December 31, 2021, the increase in advertising revenue primarily reflects a greater number of live NBA and NHL telecasts as compared with the prior year period. As a result of the delayed start to the 2020-21 NBA and NHL seasons due to the COVID-19 pandemic, MSG Networks telecast nine NBA games and no NHL games in the NHL’s return-to-play forprior year period, as compared with a regular NBA and NHL telecast schedule in the 2019-20 season.
Thecurrent year period. For the six months ended December 31, 2021, the increase in revenues from the Company’s Sponsorship Salesadvertising revenue primarily reflects a greater number of live NBA and Service Representation Agreements and Arena License Agreements with MSG Sports reflects the impact of these agreements which were entered into in connection with, and effective as of, the Entertainment Distribution. The arena license fee revenues from MSG SportsNHL telecasts in the current year period were dueas compared with the prior year period. As a result of the impact of the COVID-19 pandemic to The Garden reopening for KnicksNBA and NHL seasons, MSG Networks telecast nine NBA games and 14 NHL games in December 2020.the prior year period, as compared with a regular NBA and NHL telecast schedule in the current year period.
Direct operating expenses
Direct operating expenses for the three months ended December 31, 2020 decreased $144,832,2021 increased $28,891, or 86%51%, to $23,409.$85,924 as compared to the prior year period. For the six months ended December 31, 2020,2021, direct operating expenses decreased $216,177,increased $32,242, or 82%26%, to $47,024$154,347 as compared to the prior year period. For the three and six months ended December 31, 2021, the increase was primarily due to higher rights fees expenses of $20,358 and $22,901, respectively, and, to a lesser extent, an increase in other programming and production-related costs of $8,286 and $9,052, respectively. The net decreasesincreases in rights fees were attributableprimarily due to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Six Months Ended December 31, 2020 |
Decrease in event-related direct operating expenses from (i) concerts of $33,112 and $70,234 for the three and six months ended December 31, 2020, respectively, and (ii) other live entertainment and sporting events of $22,413 and $28,020, respectively both due to government-mandated closures and restrictions on the use of our venues beginning in March 2020 as a result of the COVID-19 pandemic | | $ | (55,525) | | | $ | (98,254) | |
Decrease in direct operating expenses associated with the Christmas Spectacular due to the cancellation of the 2020 holiday season production as a result of the COVID-19 pandemic | | (47,647) | | | (47,518) | |
Decrease in direct operating expenses associated with suite license operations primarily due to the impact of lower revenue sharing expenses with MSG Sports due to government-mandated closures and restrictions on the use of our venues beginning in March 2020 as a result of the COVID-19 pandemic | | (24,128) | | | (37,539) | |
Decrease in direct operating expenses associated with venue-related signage and sponsorship primarily due to the impact of lower revenue sharing expense with MSG Sports of $23,374 and $28,354 for the three and six months ended December 31, 2020, respectively | | (23,568) | | | (29,786) | |
Decrease in direct operating expenses associated with the Forum due to its disposition in May 2020 | | (11,248) | | | (18,125) | |
Other net increases, primarily due to the absence of venue operating costs carve-out adjustments in prior year periods | | 17,284 | | | 15,045 | |
| | $ | (144,832) | | | $ | (216,177) | |
impact of (i) lower media rights fees in the prior year periods as a result of the rights fees reductions related to the shortened 2020-21 NHL seasons, (ii) the impact in the prior year periods of the delayed start of the 2020-21 NBA and NHL regular seasons, and (iii) annual contractual rate increases. The increase in other programming and production-related costs was primarily due to the impact of a regular NBA and NHL telecast schedule in the current year period, as compared to the prior year period in which due to the impact of the COVID-19 pandemic to NBA and NHL seasons, MSG Networks telecast nine NBA games and 14 NHL games.Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended December 31, 2020 decreased $3,139,2021 increased $15,500, or 5%71%, to $65,730$37,192 as compared to the prior year period. For the six months ended December 31, 2021, selling, general and administrative expenses increased $40,948, or 93%, to $85,167 as compared to the prior year period. The increase in selling, general and administrative expenses was primarily due to higher (i) advertising, and marketing expenses of approximately $7,000 for the three and six months ended December 31, 2021, and (ii) advertising sales commissions of approximately $6,400 and $5,600 for the three and six months ended December 31, 2021, respectively. In addition, for the six months ended December 31, 2021, the increase in selling, general and administrative expenses also reflected approximately $25,700 of merger and acquisition costs that occurred primarily during the first quarter of Fiscal Year 2022, inclusive of the impact of executive separation agreements.
Operating income
Operating income for the three months ended December 31, 2021 decreased $30,603, or 47% to $35,109 as compared to the prior year period. The decrease in operating income for three months ended December 31, 2021 was primarily due to lower professional fees of $4,621 associated with litigationthe increase in direct operating expenses and, MSG Sphere content developmentto a lesser extent, the increase in selling, general and administrative expenses, partially offset by anthe increase in employee compensation and related benefits of $886 primarily as a result of an incremental expense for share-based compensation of $11,129 associated with the cancellation of certain awards pursuant to the settlement agreement more fully described in Note 14 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, which was largely offset as a result of the Company’s full-time workforce reduction in August 2020.
revenues. For the six months ended December 31, 2020, selling, general and administrative expenses2021, operating income decreased $20,838,$75,261, or 15%56%, to $118,380$58,387 as compared to the prior year period. ForThe decrease in operating income for the three and six months ended December 31, 2020, the decreases were2021 was primarily due to (i) lower professional fees of $16,028 associated with litigation, MSG Sphere content developmentthe increase in selling, general and corporate development,administrative expenses and (ii)direct operating expenses and, to a netlesser extent the decrease in employee compensation and related benefits of $3,010 respectively, primarilyrevenues.
Adjusted operating income
Adjusted operating income for the three months ended December 31, 2021 decreased $29,938, or 41%, to $43,842 as a result ofcompared to the Company’s full-time workforce reduction in August 2020 and partially offset by an incremental expense for share-based compensation of $11,129 associatedprior year period, which is consistent with the cancellationdecrease in operating income of certain awards pursuant to the settlement agreement.
See “— Restructuring charges” below for further discussion on the Company’s full-time workforce reduction in August 2020. See Note 14 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion of the Company’s reversal of share-based compensation expenses in the second quarter of Fiscal Year 2021.
Restructuring charges
The Company's operations have been disrupted since March 2020 due to the COVID-19 pandemic. As a direct response to this disruption, the Company implemented cost savings initiatives in order to streamline operations and preserve liquidity.$30,603, as discussed above. For the three and six months ended December 31, 2020,2021, adjusted operating income decreased $48,536, or 33%, to $99,635 as compared to the Companyprior year period. The decrease in adjusted operating income for the six months ended December 31, 2021 was lower than the decrease in operating income of $75,261 primarily due to the merger and acquisition-related costs of $24,075 recorded total restructuring chargesin the current year period, which are excluded in the calculation of $1,372 and $21,299, respectively, related to termination benefits provided to employees associated with a full-time workforce reduction of approximately 350 employees in August 2020 and 10 employees in November 2020.adjusted operating income.
Operating loss
Operating loss for the three months ended December 31, 2020 was $97,088 as compared to operating income of $67,132 in the prior year period, an increase in operating loss of $164,220. For the six months ended December 31, 2020, operating loss was $207,739 as compared to $312 in the prior year period, an increase in operating loss of $207,427. The decreases were primarily due to a decrease in revenues and the impact of restructuring charges, partially offset by lower direct operating expenses and selling, general and administrative expenses, as discussed above.
Adjusted operating income (loss)
Adjusted operating loss for the three months ended December 31, 2020 was $55,272 as compared to adjusted operating income of $98,633 in the prior year period, an increase in adjusted operating loss of $153,905. The increase in adjusted operating loss was higher than the increase in operating loss of $164,220 primarily due to an increase in share-based compensation of $12,001, including an incremental expense of $11,129 in the current year period associated with the cancellation of certain awards pursuant to the settlement agreement that is excluded in the calculation of adjusted operating loss. For the six months ended December 31, 2020, adjusted operating loss was $113,549 as compared to adjusted operating income of $63,033 in the prior year period, an increase in adjusted operating loss of $176,582. The increase in adjusted operating loss was less than the increase in operating loss of $207,427 primarily due to (i) the restructuring charges of $21,299 and (ii) an increase in share-based compensation of $12,377, including an incremental expense of $11,129 in the current year period associated with the cancellation of certain awards pursuant to the settlement agreement that are excluded in the calculation of adjusted operating loss.
Tao Group Hospitality
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income (loss) to adjusted operating income (loss) for the Company’s Tao Group Hospitality segment.
| | | | Three Months Ended | | | Three Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Revenues | Revenues | | $ | 10,491 | | | $ | 69,104 | | | $ | (58,613) | | | (85) | % | Revenues | | $ | 117,086 | | | $ | 10,491 | | | $ | 106,595 | | | NM |
Direct operating expenses | Direct operating expenses | | 10,980 | | | 41,159 | | | (30,179) | | | (73) | % | Direct operating expenses | | 60,880 | | | 10,980 | | | 49,900 | | | NM |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 9,131 | | | 18,038 | | | (8,907) | | | (49) | % | Selling, general and administrative expenses | | 40,685 | | | 9,131 | | | 31,554 | | | NM |
Depreciation and amortization | Depreciation and amortization | | 1,563 | | | 2,411 | | | (848) | | | (35) | % | Depreciation and amortization | | 6,243 | | | 1,563 | | | 4,680 | | | NM |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | (7,443) | | | — | | | (7,443) | | | NM |
| Operating income (loss) | Operating income (loss) | | $ | (11,183) | | | $ | 7,496 | | | $ | (18,679) | | | NM | Operating income (loss) | | $ | 16,721 | | | $ | (11,183) | | | $ | 27,904 | | | NM |
Reconciliation to adjusted operating income (loss): | Reconciliation to adjusted operating income (loss): | | Reconciliation to adjusted operating income (loss): | |
| Share-based compensation | Share-based compensation | | 1,188 | | | — | | | Share-based compensation | | 1,958 | | | 1,188 | | |
Depreciation and amortization | Depreciation and amortization | | 1,563 | | | 2,411 | | | Depreciation and amortization | | 6,243 | | | 1,563 | | |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | (7,443) | | | — | | |
| Adjusted operating income (loss) | Adjusted operating income (loss) | | $ | (8,432) | | | $ | 9,907 | | | $ | (18,339) | | | NM | Adjusted operating income (loss) | | $ | 17,479 | | | $ | (8,432) | | | $ | 25,911 | | | NM |
| | | Six Months Ended | | | Six Months Ended | |
| | December 31, | | Change | | December 31, | | Change |
| | 2020 | | 2019 | | Amount | | Percentage | | 2021 | | 2020 | | Amount | | Percentage |
Revenues | Revenues | | $ | 17,712 | | | $ | 127,721 | | | $ | (110,009) | | | (86) | % | Revenues | | $ | 236,550 | | | $ | 17,712 | | | $ | 218,838 | | | NM |
Direct operating expenses | Direct operating expenses | | 20,808 | | | 76,826 | | | (56,018) | | | (73) | % | Direct operating expenses | | 121,973 | | | 20,808 | | | 101,165 | | | NM |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 16,734 | | | 35,462 | | | (18,728) | | | (53) | % | Selling, general and administrative expenses | | 74,779 | | | 16,734 | | | 58,045 | | | NM |
Depreciation and amortization | Depreciation and amortization | | 2,609 | | | 4,590 | | | (1,981) | | | (43) | % | Depreciation and amortization | | 12,621 | | | 2,609 | | | 10,012 | | | NM |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | 375 | | | — | | | 375 | | | NM |
| Operating income (loss) | Operating income (loss) | | $ | (22,439) | | | $ | 10,843 | | | $ | (33,282) | | | NM | Operating income (loss) | | $ | 26,802 | | | $ | (22,439) | | | $ | 49,241 | | | NM |
Reconciliation to adjusted operating income (loss): | Reconciliation to adjusted operating income (loss): | | Reconciliation to adjusted operating income (loss): | |
| Share-based compensation | Share-based compensation | | 2,284 | | | 28 | | | Share-based compensation | | 3,869 | | | 2,284 | | |
Depreciation and amortization | Depreciation and amortization | | 2,609 | | | 4,590 | | | Depreciation and amortization | | 12,621 | | | 2,609 | | |
| Impairment and other (gains) loss, net | | Impairment and other (gains) loss, net | | 375 | | | — | | |
| Adjusted operating income (loss) | Adjusted operating income (loss) | | $ | (17,546) | | | $ | 15,461 | | | $ | (33,007) | | | NM | Adjusted operating income (loss) | | $ | 43,667 | | | $ | (17,546) | | | $ | 61,213 | | | NM |
_________________
NM — Percentage isAbsolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningfulmeaningful.
Factors Affecting Results of Operations
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. In the prior year period, due to government actions taken in response to the COVID-19 pandemic in 2020, virtually all of Tao Group Hospitality’s venues closed for approximately three months starting in March. Certain venues then resumed limited operations, subject to significant regulatory requirements, which included limits on capacity, curfews and social distancing requirements for outdoor and indoor dining. See “— Introduction —Factors Affecting Results of Operations — Impact of the COVID-19 Pandemic on Our Business” for more information.
As of December 31, 2021, 53 of Tao Group Hospitality’s venues (24 legacy Tao Group Hospitality venue and 29 Hakkasan venues acquired in connection with the April 27, 2021 transaction) were open for outdoor dining, limited or full capacity indoor dining (depending on the market), and delivery/takeout, inclusive of Tao Asian Bistro & Lounge at Mohegan Sun, a venue that first opened in March 2021, while six venues remained closed (four legacy Tao Group Hospitality venues and two Hakkasan
Factors Affecting Resultsvenues). Our venues continue to be operating under various governmental safety protocols such as vaccine mandates, curfews, capacity limitations and social distancing depending on the location.
Revenues
Revenues for the three months ended December 31, 2021 increased $106,595 to $117,086 as compared to the prior year period. For the six months ended December 31, 2021, revenues increased $218,838 to $236,550 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Increase in revenues due to Hakkasan, acquired in April 2021 | | $ | 51,579 | | | $ | 110,931 | |
Increase in revenues at venues subject to capacity restrictions in the prior year period (a) | | 36,455 | | | 62,728 | |
Increase in revenues at venues that were temporarily closed in the prior year period as a result of the COVID-19 pandemic | | 17,243 | | | 42,791 | |
Other net increases | | 1,318 | | | 2,388 | |
| | $ | 106,595 | | | $ | 218,838 | |
_________________(a) Includes the increases in revenues from converting previously managed venues to self-operated venues of Operations$9,291 and $20,222 for the three and six months ended December 31, 2021 as compared to the prior year periods.
Direct operating expenses
Direct operating expenses for the three months ended December 31, 2021 increased $49,900 to $60,880 as compared to the prior year period. For the six months ended December 31, 2021, direct operating expenses increased $101,165, to $121,973 as compared to the prior year period. The net increases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Increase in direct operating expenses due to Hakkasan, acquired in April 2021 | | $ | 24,614 | | | $ | 52,480 | |
Increase in employee compensation and related benefits as a result of resuming operations compared with the prior year period’s reduction in headcount resulting from the COVID-19 pandemic | | 11,578 | | | 21,688 | |
Increase in the costs of food, beverage and venue entertainment as a result of resuming operations compared with the prior year period’s closure of certain venues and capacity restrictions due to the COVID-19 pandemic | | 10,855 | | | 21,020 | |
Increase in rent expense, primarily due to rent concessions in the prior year period resulting from the COVID-19 pandemic | | 2,603 | | | 5,282 | |
Other net increases | | 250 | | | 695 | |
| | $ | 49,900 | | | $ | 101,165 | |
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended December 31, 2021 increased $31,554 to $40,685 as compared to the prior year period. For the six months ended December 31, 2021, selling, general and administrative expenses increased $58,045 to $74,779 as compared to the prior year period. For the three and six months ended December 31, 2021, the increases were primarily due to higher (i) expenses from the Hakkasan operations acquired in April 2021 of $15,973 and $30,696, respectively, (ii) employee compensation and related benefits, inclusive of an increase in share-based compensation, of $6,454 and $10,640, respectively, (iii) professional fees and restaurant expenses, as well as supplies, utilities, general liability insurance, pre-opening expenses and repairs and maintenance of $4,521 and $8,376, respectively, and (iv) marketing costs of $2,357 and $4,490, respectively. All increases were significantly driven by the acquisition of Hakkasan in April 2021.
Depreciation and amortization
Depreciation and amortization for the three months ended December 31, 2021 increased $4,680 to $6,243 as compared to the prior year period. For the six months ended December 31, 2021, depreciation and amortization increased $10,012 to $12,621 as compared to the prior year period. The increases were primarily due to acquisition of Hakkasan in April 2021.
Impairment and other (gains) loss, net
For the three months ended December 31, 2021, the Company recorded net gains of $7,443 principally from extinguishments and modification of lease liabilities associated with certain Hakkasan venues.
Operating income (loss)
Operating income for the three months ended December 31, 2021 was $16,721 as compared to an operating loss of $11,183 in the prior year period, an increase in operating income of $27,904. For the six months ended December 31, 2021, operating income was $26,802 as compared to an operating loss of $22,439 in the prior year period, an increase in operating income of $49,241. The increases in operating income for the three and six months ended December 31, 2021 were primarily due to the acquisition of Hakkasan in April 2021 and increased revenues, partially offset by an increase in direct operations, selling, general and administrative expenses, depreciation and amortization and impairment of long-lived assets, as discussed above. All increased operations were significantly driven by the acquisition of Hakkasan in April 2021 and the prior year period disruptions caused by the COVID-19 pandemic.
Adjusted operating income (loss)
Adjusted operating income for the three months ended December 31, 2021 was $17,479 as compared to adjusted operating loss $8,432 in the prior year period, an increase in adjusted operating income of $25,911. For the six months ended December 31, 2021, adjusted operating income was $43,667, as compared to adjusted operating loss of $17,546 in the prior year period, an increase in adjusted operating income of $61,213. The increase in adjusted operating income for the three months ended December 31, 2021 was lower as compared to the increase in operating income primarily due to the net recovery of impairment of long-lived assets, offset by the higher depreciation and amortization, as discussed above. For the six months ended December 31, 2021, the increase in adjusted operating income was higher than the increase in operating income primarily due to increased depreciation and amortization, as discussed above.
Liquidity and Capital Resources
Overview
The Company’s operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic (including COVID-19 variants) and actions taken in response by governmental authorities and certain professional sports leagues. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended, MSG Networks aired substantially fewer games and Tao Group Hospitality was operating at significantly reduced capacity and demand. While operations have resumed, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our performance venues were closed beginning in March 2020. Use of The Garden resumed for Knicks and Rangers home games without fans in December 2020 and January 2021, respectively, and was available at 10% seating capacity from February through May 2021 with certain safety protocols and social distancing. Beginning in May 2021, all of our New York performance venues were permitted to host guests at full capacity, subject to certain restrictions, and effective June 2021, The Chicago Theatre was permitted to host events without restrictions. Effective August 17, 2021, all workers and customers in New York City indoor dining, indoor fitness and indoor entertainment facilities, including our venues, were subject to certain vaccination requirements. Following updated regulations, effective January 3, 2022 for the Chicago Theatre, and January 29, 2022 for our New York venues, all guests five and older, as well as employees, are required to provide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine (although specific performers may require enhanced protocols). Children under age 5 can attend events with a vaccinated adult, but ages 2 to 4 need to wear a mask while inside our venues. In addition, effective August 20, 2021 and continuing, masks are required for all individuals in indoor public spaces in Chicago, including our venues.
For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or cancelled. For the six months ended December 31, 2021 and as of this date, live events have been permitted to be held at all of our performance venues and we are continuing to host and book new events. As a result of an increase in cases of a COVID-19 variant, select bookings were postponed or cancelled at our performance venues in the second quarter of Fiscal Year 2022. Variants of COVID-19 that arise in the future may result in additional postponements or cancellations of bookings at our performance venues.
The impact of the COVID-19 pandemic on our operations also included (i) the partial cancellation of the 2021 production of the Christmas Spectacular, (ii) the cancellation of the 2020 production of the Christmas Spectacular, and (iii) the cancellation of both the 2020 and 2021 Boston Calling Music Festivals.
The Company has Arena License Agreements with MSG Sports that require the Knicks and Rangers to play their home games at The Garden. As discussed above, capacity restrictions, use limitations and social distancing requirements were in place for the entirety of the Knicks and Rangers 2020-21 regular seasons, which materially impacted the payments we received under the Arena License Agreements for Fiscal Year 2021. On July 1, 2021, the Knicks and Rangers began paying the full amounts provided for under their respective Arena License Agreements and full 82-game regular seasons for the 2021-22 NBA and NHL seasons are scheduled.
As a result of the COVID-19 pandemic and league and government actions relating thereto, MSG Networks aired substantially fewer NBA and NHL telecasts during Fiscal Year 2021, as compared with Fiscal Year 2019 (the last full fiscal year not impacted by COVID-19), and consequently experienced a decrease in revenues, including a material decrease in advertising revenue. The absence of live sports games also resulted in a decrease in certain MSG Networks expenses, including rights fees, variable production expenses, and advertising sales commissions. MSG Networks has resumed airing full regular season telecast schedules for its five professional teams across both the NBA and NHL, and, as a result, our advertising revenue and certain operating expenses, including rights fees expense, reflect the same.
Disruptions caused by the COVID-19 pandemic had a significant and negative impact on Tao Group Hospitality’s operations and financial performance for Fiscal Year 2021. Due to governmentgovernment actions taken in response to the COVID-19 pandemic, virtually all of Tao Group Hospitality’s venues were closed for approximately three months starting in mid-March and Avenue and Vandal in New YorkMarch 2020. Additionally, three venues were permanently closed in April 2020 and June 2020, respectively.closed. Throughout Fiscal Year 2021, Tao Group Hospitality has resumedconducted limited operations at certain venues, subject to significant regulatory requirements, including capacity limits, on capacity, curfews and social distancing requirements for outdoor and indoor dining. As of December 31, 2020, eight of Tao Group Hospitality’s venues were open for outdoor dining and/or limited capacityoperations fluctuated throughout Fiscal Year 2021 and during the first two quarters of Fiscal Year 2022 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. Following updated regulations applicable to indoor dining four were openfacilities and entertainment venues, effective January 3, 2022 for delivery and/or takeout only, while sixteen venues remained closed.
Revenues
RevenuesChicago, and January 29, 2022 for the three months ended December 31, 2020 decreased $58,613, or 85%, to $10,491 as compared to the prior year period. For the six months ended December 31, 2020, revenues decreased $110,009, or 86%, to $17,712 as compared to the prior year period. The net decreases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Six Months Ended December 31, 2020 |
Decrease in revenues due to capacity restrictions at re-opened venues | | $ | (34,337) | | | $ | (55,245) | |
Decrease in revenues due to the closure of certain venues as a result of the COVID-19 pandemic | | (19,666) | | | (45,368) | |
Decrease in revenues associated with the permanent closing of Vandal and Avenue in New York | | (5,375) | | | (9,413) | |
Other net increases | | 765 | | | 17 | |
| | $ | (58,613) | | | $ | (110,009) | |
Direct operating expenses
Direct operating expenses for the three months ended December 31, 2020 decreased $30,179, or 73%, to $10,980 as compared to the prior year period. For the six months ended December 31, 2020, direct operating expenses decreased $56,018, or 73%, to $20,808 as compared to the prior year period. The net decreases were attributable to the following:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2020 | | Six Months Ended December 31, 2020 |
Decrease in employee compensation and related benefits as a result of (i) a reduction in headcount at re-opened venues, (ii) the elimination of venue line staff and manager positions at closed venues, and (iii) the permanent closure of Vandal and Avenue, all as a result of the COVID-19 pandemic | | $ | (12,303) | | | $ | (23,918) | |
Decrease in (i) costs of food and beverage, and (ii) costs of venue entertainment, both as a result of the closure of certain venues, capacity restrictions at re-opened venues and the permanent closure of Vandal and Avenue, all due to the COVID-19 pandemic | | (11,430) | | | (22,219) | |
Decrease in direct operating expenses associated with rent expense, primarily due to rent concessions received and the permanent closure of Vandal and Avenue | | (2,797) | | | (5,337) | |
Decrease in provisions for doubtful accounts | | (2,313) | | | (2,058) | |
Other net decreases, primarily due to lower credit card fees | | (1,336) | | | (2,486) | |
| | $ | (30,179) | | | $ | (56,018) | |
Selling, generalNew York, all guests five and administrative expenses
Selling, general and administrative expenses for the three months ended December 31, 2020 decreased $8,907, or 49%, to $9,131 as compared to the prior year period. For the six months ended December 31, 2020, selling, general and administrative expenses decreased $18,728, or 53%, to $16,734 as compared to the prior year period. For the three and six months ended December 31, 2020, the decreases were primarily due to lower (i) marketing cost of $3,237 and $6,699, respectively, and (ii) employee compensation and related benefits, inclusive of an increase in share-based compensation, of $1,868 and $3,289, respectively,older, as well as other net decreases including expenses relatedemployees, are required to restaurant expensesprovide proof that they have received two doses of a two-shot COVID-19 vaccine or one dose of a single-shot vaccine. In addition, certain jurisdictions have reinstated safety protocols, such as mask mandates in Nevada and supplies, general liability insurance, repairs and maintenance, and utilities.
Operating income (loss)
Operating loss for the three months ended December 31, 2020 was $11,183 as compared to operating income of $7,496 in the prior year period, a decrease of $18,679. For the six months ended December 31, 2020, operating loss was $22,439 as compared to operating income of $10,843 in the prior year period, a decrease of $33,282. For the three and six months ended December 31, 2020, the decreases were primarily due to lower revenues, partially offset by decreases in direct operating expenses and selling, general and administrative expenses, as discussed above.
Adjusted operating income (loss)
Adjusted operating loss for the three months ended December 31, 2020 was $8,432 as compared to adjusted operating income of $9,907 in the prior year period, a decrease of $18,339. For the six months ended December 31, 2020, adjusted operating loss was $17,546, as compared to adjusted operating income of $15,461 in the prior year period, a decrease of $33,007. The adjusted operating loss was less than the operating loss, due to higher share-based compensation, partially offset by less depreciation and amortization.
Liquidity and Capital Resources
Overview
Our operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities and certain professional sports leagues. As of the date of this Quarterly Report on Form 10-Q, virtually all of our Entertainment business’ operations have been suspended andChicago, but Tao Group Hospitality is operating at significantly reducedcontinuing to operate without capacity restrictions in domestic and demand. key international markets.
It is not clear when we will be permitted or able to resume normal business operations.
As a result of government-mandated assembly limitations and closures, our performance venues were closed in mid-March 2020, and, subject to limited exceptions, such as the use of The Garden for Knicks and Rangers home games without fans in attendance and our virtual residency in Fall 2020 featuring Phish’s Trey Anastasio live from the Beacon Theatre, as of the date of this filing no events are permitted to be held at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre. Although events are permitted at The Chicago Theatre, current government-mandated capacity restrictions and other safety requirements make it economically unfeasible to do so. Other than Knicks and Rangers home games at The Garden, all events at our venues have been postponed or canceled through at least March 2021, and will likely be impacted through the rest of Fiscal Year 2021. We are not recognizing revenue from events that have been canceled or postponed and, while events have been rescheduled into the second half of calendar year 2021, it is unclear whetherhow long and to what extent those eventsCOVID-19 concerns, including with respect to new variants, will take place. We are actively monitoringcontinue to impact government regulations and guidance, includingleague-mandated capacity restrictions or vaccination/mask requirements, the impactuse of New York State’s recent announcement that, starting February 23, 2021, arenas with capacities of over 10,000 people may reopen at 10% capacity with certain safety protocols, such as testingand/or demand for our entertainment and social distancing requirements. When there is an opportunity to safelydining and economically welcome guests back to The Gardennightlife venues, demand for events at increased capacity, as well asour sponsorship and advertising assets, deter our employees and vendors from working at our other venues that remain closed, we expect(which may lead to do so.difficulties in staffing) or otherwise materially impact our operations.
The impact to our operations included the cancellation of both the 2020 production of the Christmas Spectacular and the 2020 Boston Calling Music Festival. While the NBA began its 2020-21 regular season in December 2020 and the NHL began its 2020-21 regular season in January 2021, the Knicks and Rangers are currently playing home games at The Garden without fans in attendance due to government-mandated assembly restrictions. However, in light of New York State’s recent announcement that New York arenas with capacities of over 10,000 people can re-open beginning February 23, 2021, with limited capacities and safety protocols, we expect to have limited fans in attendance for home games beginning with the Knicks on February 23rd and the Rangers on February 26th, as permitted under these new guidelines. Even though limited numbers of fans are expected to be permitted to attend home games starting February 23rd, capacity restrictions, use limitations and social distancing requirements may remain in place through, at least, the rest of Fiscal Year 2021, which would continue to affect the payments we receive under the Arena License Agreements.
The COVID-19 pandemic is having and will likely continue to have a significant and negative impact on our operations and financial performance. As a result, we have taken several actions to improve our financial flexibility, reduce operating costs and preserve liquidity:
•We have revised our processes and construction schedule for MSG Sphere, providing for a substantially reduced spend in Fiscal Year 2021 and a lengthened timetable that enables the Company to preserve cash in the near-term. We now expect to open MSG Sphere in Las Vegas in calendar year 2023;
•In connection with our extended construction timeline, we have reduced our expected near-term spending on technology and content development for MSG Sphere;
•At the end of May 2020, we ended all financial support that was previously provided for certain event-level employees at the Company’s performance venues, and as a result virtually all venue employees, approximately 6,000 in total, are effectively furloughed;
•At the end of March 2020, Tao Group Hospitality eliminated essentially all of its venue line staff and manager positions, with limited numbers of employees returning as operations slowly resume. In August 2020, Tao Group Hospitality reduced its corporate workforce, and made additional reductions in venue and corporate positions during the second quarter of Fiscal Year 2021;
•We reduced our regular full-time workforce by approximately 350 positions in August, with a modest additional reduction in November 2020;
•We have implemented and are continuing to pursue additional comprehensive cost reduction measures, including terminating certain third-party services, negotiating reduced rates and/or reduced service levels with third parties, and pursuing targeted savings and reductions in spending on marketing and travel and entertainment, and deferring or limiting non-essential operating or other discretionary expenses;
•We have successfully negotiated certain relief and deferral of cash payments from landlords and other vendors. Conversations with third parties are ongoing as we continue to pursue additional options, some of which may or may not be successful; and
•In November 2020, MSG National Properties, LLC (“MSG National Properties”) and certain of our subsidiaries entered into a five-year $650,000 senior secured term loan facility.
The Company has moved to align its costs with its expectation of having limited revenue during Fiscal Year 2021. Taking into account the workforce reductions and cost saving initiatives noted above, although this amount will fluctuate, the Company estimates its monthly operational cash burn rate will average approximately $25,000 on a go-forward basis for the duration of Fiscal Year 2021. We define operational cash burn rate as revenue less direct operating and SG&A expenses (excluding share-based compensation). Excluded from operational cash burn are (i) severance costs, (ii) capital expenditures, (iii) capitalized spending on content and technology related to MSG Sphere and (iv) working capital adjustments.
Our primary sources of liquidity are cash and cash equivalents, and cash flows from the operations of our businesses. On November 12, 2020, MSG National Properties businesses and certain ofavailable borrowing capacity under our subsidiaries entered into a five year $650 million senior secured term loan facility (the “National Properties Term Loan Facility”).MSGN Credit Agreement. Our principal uses of cash include working capital-related items (including funding our operations), capital spending (including our construction of large-scale venuesMSG Sphere at The Venetian in Las Vegas, and London)as described below), debt service, investments and related loans and advances that we may fund from time to time, repayment of debt, and mandatory purchases from prior acquisitions. We may also use cash to repurchase our common stock. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic and market conditions could adversely impact our ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity, including approximately $1,451,000$1,258,105 in cash and cash equivalents as of December 31, 2020,2021, to fund our operations, service the MSGN Credit Agreement, the National Properties Term Loan Facility, the Tao Credit Facilities, and pursue the development of the new venues discussed below overfor the next 12 months.foreseeable future. See Note 13 to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of the MSGN Credit Agreement, the National Properties Term Loan Facility and the Tao Revolving Credit Facilities. Our cash and cash equivalents include approximately $190,000$264,000 in advance cash proceeds — primarily related to tickets, suites, tickets and, to a lesser extent, sponsorships — all of which would be addressed, to the extent necessary, through credits, make-goods, refunds and/or rescheduled dates.sponsorships.
In connection with the Entertainment Distribution and as an additional source of liquidity for MSG Sports in response to the COVID-19 pandemic, on April 17, 2020, a subsidiary of the Company entered into separate delayed draw term loan credit agreements (the “DDTL Facilities”) with subsidiaries of MSG Sports. The DDTL Facilities, permitted two of MSG Sports’ subsidiaries, MSG NYK Holdings, LLC and MSG NYR Holdings, LLC 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. On November 6, 2020, each of MSG NYK Holdings, LLC and MSG NYR Holdings, LLC delivered notice to the Company that they had secured third-party debt and, as a result, all commitments under their applicable DDTL Facilities were terminated.
On March 31, 2020, the Company’s Board of Directors authorized, effective following the Entertainment Distribution, a share repurchase program to repurchase up to $350,000 of the Company’s Class A Common Stock. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market transactions, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. No shares have been repurchased to date.
Tao Group Hospitality’s principal uses of cash include working capital related-items (including funding its operations), investments in new venues, tax-related cash distributions, interest expense payments and repayment of debt. Tao Group Hospitality plans to continue to grow its business through the opening of new venues. With the onset of the pandemic, Tao Group Hospitality’s business was also materially impacted by the COVID-19 related restrictions imposed by statevenues and local officials, which included limiting restaurants and bars to take-out and delivery service only and requiring the closure of nightlife establishments. As a result of these restrictions, virtually all of Tao’s venues were closed for approximately three months starting in mid-March, and Avenue and Vandal in New York were permanently closed in April 2020 and June 2020, respectively. Tao Group Hospitality has resumed limited operations at certain venues, subject to significant regulatory requirements, including limits on capacity, curfews and social distancing requirements for outdoor and indoor dining. As of December 31, 2020, eight of Tao Group Hospitality’s venues were open for outdoor dining and/or limited capacity indoor dining, four were open for delivery and/or takeout only, and sixteen venues remained closed. However, 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 over the next 12 months.acquisitions.
MSG SpheresSphere
The Company continues to makehas made significant progress on MSG Sphere at The Venetian, its state-of-the-art entertainment venue under construction in Las Vegas.
The Company expects the venue to have a number of significant revenue streams, including a wide variety of content such as attractions, concert residencies and corporate and select sporting events, as well as sponsorship and premium hospitality opportunities. As a result, we anticipate that MSG Sphere at The Venetian will generate substantial revenue and adjusted operating income on an annual basis.
MSG 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.
While it is always difficult to provide a definitive construction cost estimate for large-scale construction projects, it is particularly challenging for one as unique as MSG Sphere. On February 7, 2020August 23, 2021, we announced that our cost estimate inclusive of core technology and soft costs, for MSG Sphere at The Venetian was approximately $1,660,000.$1,865,000. This cost estimate iswas net of $75,000 that the Las Vegas Sands Corp. has agreed to pay to defray certain construction costs and also excludes the impacts of changes in inflation and significant capitalized and non-capitalized costs for items such as content creation, internal labor, capitalized interest, and furniture and equipment. Relative to theour cost estimate above, our actual construction costs for MSG Sphere at The Venetian incurred through December 31, 20202021 were approximately $645,000,$1,131,000, which is net of $65,000 received from Las Vegas Sands Corp in Fiscal Year 2020. TheSands. In addition, the amount of construction costcosts incurred as of $645,000 discussed above includedDecember 31, 2021 includes approximately $73,000$146,000 of accrued expenses that were not yet paid as of December 31, 2020. Given the complexity of the project, the more than two years remaining until the venue’s planned opening and the ongoing impact of the global pandemic, this cost estimate is subject to uncertainty. As with any major construction project, the construction of MSG Sphere is subject to potential delays, unexpected complications or cost fluctuations.
As previously disclosed, effective as of November 12, 2020, the Company entered into a letter agreement amending its ground lease agreement with Sands. The ground lease agreement previously required that the Company commence erection of above-grade structural steel for the MSG Sphere no later than 18 months after the date of the ground lease agreement and achieve substantial completion of the project no later than three years after the construction commencement date, subject to certain permitted extensions. The Sands Letter Agreement sets this outside completion date at September 30, 2023. There were no other material changes to the terms of the ground lease.
On December 11, 2020, the Company and Hunt Construction Group Inc. (d/b/a AECOM Hunt) (“AECOM”) entered into a Termination Agreement, effective December 12, 2020, terminating the construction agreement, dated May 31, 2019, between the Company’s wholly-owned subsidiary, MSG Las Vegas, LLC and AECOM. The Company (through one of its wholly-owned subsidiaries) is now serving as construction manager and overseeing the construction process, including the direct engagement and supervision of the subcontractors. AECOM will continue to support the MSG Sphere at The Venetian through a new services agreement that facilitates AECOM’s ongoing involvement through the MSG Sphere’s completion.
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to a future MSG Sphere, pending necessary approvals. 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 is ongoing. The Company is using this time to continue building on its
design and construction learnings in Las Vegas, which it will leverage in London, should we receive such necessary approvals. 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.date.
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. If the Company’s cash-on-hand and cash flows from operations are not sufficient to finance the remaining construction costs of MSG Sphere at The Venetian, the Company would need to pursueaccess additional 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 partnershipspartners and a managed venue management model.
For additional information regarding the Company’s capital expenditures, including those related to MSG Sphere, see Note 21 to the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2021 included in the Company’s Annual Report on Form 10-K.
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 a planning application to the local planning authority in March 2019 and that process, which will require various stages of review to be completed and approvals to be granted, is ongoing. Therefore, we do not have a definitive timeline at this time.
We will continue to explore additional domestic and international markets where we believe next-generation venues such as the MSG Sphere can be successful.
Financing Agreements
See Note 13 to the consolidated financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements.
MSGN Credit Facility
MSG Networks has made principal repayments aggregating to $77,000 through December 31, 2021 under the MSGN Credit Agreement. The MSGN Term Loan Facility amortizes quarterly in accordance with its terms. As of December 31, 2021, there was $1,023,000 outstanding under the MSGN Term Loan Facility, and no borrowings under the MSGN Revolving Credit Facility. As of December 31, 2021, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis
were in compliance with the covenants of the MSGN Credit Agreement. The scheduled repayments for the remainder of Fiscal Year 2022 are $24,750.
National Properties Term Loan Facility
On November 12, 2020, MSG National Properties, an indirect, wholly owned subsidiary of the Company, MSG Entertainment Group and certain subsidiaries of MSG National Properties entered into the National Properties Term Loan Facility. The proceeds of the National Properties Term Loan Facility may be used to fund working capital needs, for general corporate purposes of MSG National Properties and its subsidiaries, and to make distributions to MSG Entertainment Group.
The National Properties Term Loan Facility includes a minimum liquidity covenant, pursuant to which MSG National Properties and its restricted subsidiaries are required to maintain a specified minimum level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter. From the closing date untilFollowing the first anniversary of the National Properties Term Loan Facility,closing of the minimum liquidity threshold is $450,000, which is reduced each quarter by the amount of cash usage, subject to a minimum liquidity floor of $200,000. After the first anniversary,facility in November 2021, the minimum liquidity level iswas reduced to $200,000. If at any time the total leverage ratio of MSG National Properties and its restricted subsidiaries is less than 5.00 to 1.00 as of the end of any four consecutive fiscal quarter periods or MSG National Properties obtains an investment grade rating, the minimum liquidity level is permanently reduced to $50,000. As of December 31, 2021, the trailing twelve month AOI (as defined under the National Properties Term Loan Facility) for MSG National Properties and its restricted subsidiaries was negative and therefore, the minimum liquidity level continues to be $200,000.
The
MSG National Properties has made principal obligationsrepayments aggregating to $6,500 through December 31, 2021 under the National Properties Term Loan Facility, are to be repaidwhich amortizes quarterly in quarterly installments in an aggregate amount equal to 1.00% per annum (0.25% per quarter),accordance with the balance due at the maturityits terms. As of the facility. The National Properties Term Loan Facility will mature on November 12, 2025. BorrowingsDecember 31, 2021, there was $643,500 outstanding under the National Properties Term Loan Facility bear interest at a floating rate, which atFacility. The scheduled repayments for the optionremainder of MSG National Properties may be either (i) a base rate plus a margin of 5.25% per annum or (ii) LIBOR, with a floor of 0.75%, plus a margin of 6.25% per annum. The interest rate on the National Properties Term Loan Facility as of December 31, 2020 was 7.00%. During the six months ended December 31, 2020, the Company was not required to make interest or principal payments under the National Properties Term Loan Facility.Fiscal Year 2022 are $3,250.
All obligations under the National Properties Term Loan Facility are guaranteed by MSG Entertainment Group and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own Madison Square Garden (“The Garden”), BCE and certain other excluded subsidiaries (the “Subsidiary Guarantors”). All obligations under the Term Loan Facility, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theater. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to a specified percentage of excess cash flow in any fiscal year and 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), in each case subject to certain exceptions.
In addition to the minimum liquidity covenant, the National Properties Term Loan Facility and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. The Term Loan Facility contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Term Loan Facility, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix)
merge or consolidate; and (x) make certain dispositions. As of December 31, 2020,2021, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Term Loan Facility.
Tao Senior Secured Credit Facilities
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 senior secured credit facilities (the “Tao Senior Secured Credit Facilities”) consisting of: (i) an initial $40,000 term loan facility with a termAs of five years and (ii) a $25,000 revolving credit facility with a term of five years (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 and in respect of the reserve account discussed below)). ThereDecember 31, 2021, there was $6,500$26,250 outstanding amount drawn on the Tao Revolving Credit Facility asTerm Loan Facility. The scheduled repayments for the remainder of December 31, 2020.Fiscal Year 2022 are $3,750. As of December 31, 2020,2021, Tao Group Hospitality utilized $750 of the Tao Revolving Credit Facility for issuance of letters of credit and the remaining borrowing available was $17,750. The Credit Agreement matures on May 23, 2024.$24,250.
Disruptions caused by the COVID-19 pandemic have had, and are likely to continue to have, a significant and negative impact on Tao Group Hospitality’s operations and financial performance. On August 6, 2020, TAOIH and TAOG entered into an amendment to the Tao Senior Credit Agreement, which suspended the application of the financial maintenance covenants thereunder through December 31, 2021, modified certain restrictive covenants therein through December 31, 2021, modified the applicable interest rates and increased the minimum liquidity requirement.requirement for the outstanding balance of $33,750 under the Tao Term Loan Facility and for the $25,000 availability under the Tao Revolving Credit Facility. As of January 1, 2022, such financial maintenance and restrictive covenant suspensions are no longer in effect. TAOIH and its restricted subsidiaries must maintain a minimum consolidated liquidity, consisting of cash and cash equivalents and available revolving commitments, at all times of $10,000. In addition, in connection with the amendment, the Company, through its direct subsidiary, MSG Entertainment Group, entered into a guarantee and reserve account agreement (i) to guarantee the obligations of TAOG under the Tao Senior Credit Agreement, (ii) to establish and grant a security interest in a reserve account that initially held a deposit of approximately $9,800 and (iii) with a covenant to maintain a minimum liquidity requirement of no less than $75,000 at all times. The balance held in the reserve account was approximately $8,100$1,600 as of December 31, 2020.2021. As of December 31, 2020,2021, TAOG, TAOIH and the restricted subsidiaries were in compliance with the covenants of the Tao Senior Credit Agreement.
As of December 31, 2021, the outstanding balance under the Tao Subordinated Credit Agreement was $63,000. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement have been eliminated in the consolidated financial statements in accordance with ASC Topic 810, Consolidation. If recovery from the pandemic takes longer than currently estimated, Tao Group Hospitality may need to seek covenant waivers in the future. Tao Group Hospitality’s failure to obtain covenant waivers could trigger a violation of these covenants and lead to default and acceleration of all of its outstanding debt, which could have a material adverse effect on liquidity.
On May 23, 2019, MSG Entertainment Holdings LLC, a subsidiary of the Company, and Tao Group Sub Holdings LLC, a subsidiary of Tao Group Hospitality entered into a Credit Agreement providing for a credit facility of $49,000 that matures on August 22, 2024 (the “Tao Subordinated Credit Agreement”). On June 15, 2020, the Tao Subordinated Credit Agreement was amended to provide an additional $22,000 of borrowing capacity. As of December 31, 2020, the outstanding balance under the Tao Subordinated Credit Agreement was $62,000. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement have been eliminated in the consolidated and combined financial statements in accordance with ASC Topic 810, Consolidation.
See Note 12 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements.
Letters of Credit
The Company uses letters of credit to support its business operations. As of December 31, 2020,2021, the Company had $4,226a total of $8,447 of letters of credit outstanding, which included two letters of credit for an aggregate of $750 issued under the Tao Revolving Credit Facility.
Contractual Obligations
The Company did not have any material changes in its contractual obligations since the end of Fiscal Year 20202021 other than (i) the National Properties Term Loan Facility entered into on November 12, 2020, (ii) the terminationa total of approximately $3,646,250 in contract obligations (primarily related to media rights agreements) that are now included
as a part of the DDTL FacilitiesCompany’s contractual obligation in connection with the Merger with MSG Networks on November 6, 2020,July 9, 2021, and (iii)(ii) activities in the ordinary course of business. See Notes 12 and 17Note 11 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussionsfurther details on the timing and amount of the Company’s National Properties Term Loan Facility repayment requirements and the cancellation of the DDTL Facilities, respectively.payments under various media rights agreements.
Cash Flow Discussion
As of December 31, 2020,2021, cash, cash equivalents and restricted cash totaled $1,477,559,$1,282,019, as compared to $924,304$1,539,976 as of June 30, 2020.2021. The following table summarizes the Company’s cash flow activities for the six months ended December 31, 20202021 and 2019:2020:
| | | | | | | | | | | | | | |
| | Six Months Ended December 31, |
| | 2020 | | 2019 |
Net income (loss) | | $ | (223,467) | | | $ | 26,081 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | | 64,981 | | | 68,302 | |
Subtotal | | $ | (158,486) | | | $ | 94,383 | |
Changes in working capital assets and liabilities | | (57,146) | | | 9,375 | |
Net cash provided by (used in) operating activities | | $ | (215,632) | | | $ | 103,758 | |
Net cash provided by (used in) investing activities | | 146,682 | | | (129,606) | |
Net cash provided by (used in) financing activities | | 614,410 | | | (40,885) | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | 7,795 | | | 1,693 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 553,255 | | | $ | (65,040) | |
| | | | | | | | | | | | | | |
| | Six Months Ended December 31, |
| | 2021 | | 2020 |
Net loss | | $ | (71,636) | | | $ | (100,391) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | 116,890 | | | 50,055 | |
Subtotal | | $ | 45,254 | | | $ | (50,336) | |
Changes in working capital assets and liabilities | | 87,532 | | | (52,131) | |
Net cash provided by (used in) operating activities | | $ | 132,786 | | | $ | (102,467) | |
Net cash (used in) provided by investing activities | | (332,532) | | | 136,238 | |
Net cash (used in) provided by financing activities | | (57,639) | | | 598,512 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | (572) | | | 7,795 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (257,957) | | | $ | 640,078 | |
Operating Activities
Net cash used inprovided by operating activities for the six months ended December 31, 20202021 increased by $319,390$235,253 to $215,632$132,786 as compared to net cash used in operating activities of $102,467 in the prior year period primarily due to a higher operatinglower net loss in the current year period and changes in working capital assets and liabilities, which included (i) income tax paymentshigher cash collection associated with deferred revenue account including collections due to promoters, and (ii) higher increase in payables, including related party payable. Our lower net loss in the current year period reflect significant non-cash items such as (i) net unrealized loss of $19,615 as compared to net unrealized gain of $29,090 in the prior year period and (ii) payments associated with restructuring charges relatedlower deferred income taxes benefits of $17,173 in the current year period as compared to termination benefits provided to employees, and (iii) an increase$29,505 in related party receivables associated with the Transition Services Agreement pursuant to which the Company provides certain corporate and other transition services to MSG Sports in connection with the Entertainment Distribution.prior year period.
Investing Activities
Net cash provided byused in investing activities for the six months ended December 31, 20202021 increased by $276,288$468,770 to $146,682 as compared to the prior year period primarily due to proceeds from the maturity of short-term investments in the current year period, partially offset by the absence of a prior period loan repayment received from a subordinated note.
Financing Activities
Net cash provided by financing activities for the six months ended December 31, 2020 increased by $655,295 to $614,410$332,532 as compared to the prior year period primarily due to the absence of proceeds received from the maturity of short-term investments in the prior year period and, to a lesser extent, an increase in capital expenditures in the current year period.
Financing Activities
Net cash used in financing activities for the six months ended December 31, 2021 increased by $656,151 to $57,639 as compared to cash provided by financing activities of $598,512 in prior year period. The increase in net cash used in financing activity was primarily due to proceeds from National Properties Term Loan Facility of $630,500 received during the prior year period in the current year period.November 2020.
Seasonality of Our Business
The dependence on revenues the Company earns from the Christmas Spectacularand arena license fees from MSG Sports in connection with the Knicks and Rangers use of the Garden generally means the CompanyEntertainment segment earns a disproportionate share of its revenues and operating income in the second quarterand third quarters of the Company’s fiscal year. year with the first fiscal quarter being disproportionally lower.
As a result of COVID-19, the Company canceledforegoing, the 2020 productionCompany’s revenue and operating income are disproportionally higher in the fiscal second and third quarter of the Christmas Spectacular,fiscal year and accordingly, such seasonality is not expected for Fiscal Year 2021.lower in the first quarter of the fiscal year.
Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Issued Accounting Pronouncements
See Note 2 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements.
Critical Accounting Policies
The following discussion has been included to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2021. There have been no other material changes to the Company’s critical accounting policies from those set forth in Note 2. Summary of Significant Accounting Policies of the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 20202021 included in the Company’s Annual Report on Form 10-K.
Arrangements with Multiple Performance Obligations The following discussion has been included to provide the results of our annual impairment testing of goodwill and Principal versus Agent Revenue Recognition
See Note 4 toidentifiable indefinite-lived intangible assets performed during the Company’s audited consolidated and combined financial statements and notes thereto for the year ended June 30, 2020 included in the Company’s Annual Report on Form 10-K for discussionfirst quarter 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 MSG Sports for suite license arrangements and venue signage and sponsorship agreements, as well as the advertising sales representation agreement with MSG Networks.Fiscal Year 2022.
Impairment of Long-Lived and Indefinite-Lived Assets
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. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Goodwill is tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. As of December 31, 2020,2021, the Company had twothree operating and reportable segments 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.
The goodwill balance reported on the Company’s consolidated balance sheet as of December 31, 20202021 by reporting unit was as follows:
| | | | | |
Entertainment | $ | 74,309 | |
MSG Networks | 424,508 | |
Tao Group Hospitality(a) | —1,364 | |
| $ | 74,309500,181 | |
_________________
(a)As of December 31, 2020 and June 30, 2020, Tao Group Hospitality had no goodwill remaining after the impairment charges recorded during Fiscal Year 2020.
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform a quantitative impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, a quantitative goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of the fair value of the Company’s reporting units are primarily determined using discounted cash flows, comparable market transactions or other acceptable valuation techniques, including the cost approach. These valuations are based on estimates and assumptions including projected future cash flows, discount rates, cost-based assumptions, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Significant judgments inherent in a discounted cash flow analysis include the selection of the appropriate discount rate, the estimate of the amount and timing of projected future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows. The amount of an impairment loss is measured as the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
The Company elected to perform the qualitative assessment of impairment for all of the Company’s Entertainment reporting unitunits for the Fiscal Year 20212022 annual impairment test. The assessmentThese 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 2021,2022, the Company performed its most recent annual impairment testtests of goodwill and determined that there waswere no impairment of goodwill identified for any of its Entertainment reporting unitunits as of the impairment test date. Based on thethese impairment test,tests, the Company’s Entertainment reporting unitunits had a sufficient safety margin,margins, representing the excess of the estimated fair value of theeach reporting unit, derived from the most recent quantitative assessment,assessments, less its respective carrying value (including goodwill allocated to theeach respective reporting unit). The Company believes that if the fair value of the reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
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 consolidated balance sheet as of December 31, 2020:2021:
| | | | | |
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 trademarks. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair values of the intangible assets. Examples of such events and circumstances include:
•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 2021,2022, the Company performed its most recent annual impairment test of the identifiable indefinite-lived intangible assets and determined that there were no impairments identified. Based on these impairment tests, the Company’s indefinite-lived intangible assets had sufficient safety margins, representing the excess of each identifiable indefinite-lived intangible asset’s estimated fair value over its respective carrying value. The Company believes that if the fair value of an indefinite-lived intangible asset exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures regarding market risks in connection with our pension and postretirement plans. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended June 30, 2020.10-K.
Potential Interest Rate Risk Exposure
The Company, through its subsidiarysubsidiaries MSGN L.P. and MSG National Properties, and as a result of the consolidation of Tao Group Hospitality, has potential interest rate risk exposure related to borrowings incurred under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and the Tao Senior Secured Credit Facilities. Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under these credit facilities.
Borrowings under the National Properties Term Loan Facility and Tao Senior Secured Credit Facilities incur interest, depending on election by MSG National Properties and TAOG, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in the case of TAOG, an additional spread which is dependent upon the total leverage ratio at the time for Tao Senior Secured Credit Facilities. In addition, borrowings under the MSG Networks Senior Secured Credit
Facilities bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio). Accordingly, the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and the Tao Senior Secured Credit Facilities are subject to interest rate risk with respect to the tenor of any borrowings incurred. See Note 1213 to the consolidated and combined financial statements included in “— Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information on the TaoMSG Networks Senior Secured Credit Facilities, and National Properties Term Loan Facility. Facility and Tao Credit Facilities.
For the twelve months ended December 31, 2020,2021, the interest rate on the MSG Networks Senior Secured Credit Facilities ranged from 1.58% to 1.65% and was approximately 1.60% as of December 31, 2021. The interest rate on the Tao Senior Secured Credit Facilities ranged from 4.30%2.59% to 2.61%2.65% and it was approximately 2.65%2.61% as of December 31, 2020.2021. In addition, the interest rate on National Properties Term Loan Facility was 7.00% as of December 31, 20202021 and has been unchanged since inception. The effect of a hypothetical 100 basis point and a hypothetical 200 basis point increase in floating interest rates prevailing as of December 31, 20202021 and continuing for a full year would increase interest expense by $2,938 and $9,815, respectively,$12,567, on the combined outstanding balances under the MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility and Tao Senior Secured Credit Facilities.
Foreign Currency Exchange Rate 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 twelve months ended December 31, 2020,2021, the GBP/USD exchange rate ranged from 1.14911.3207 to 1.36821.4218 as compared to GBP/USD exchange rate of 1.36821.3548 as of December 31, 2020,2021, a fluctuation range of approximately 19%5%. As of December 31, 2020,2021, a uniform hypothetical 10%4% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $17,700$6,800 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) under the Securities Exchange Act, as of 1934).December 31, 2021. Based on that evaluation and as a result of the Company’smaterial weakness in our internal control over financial reporting, previously disclosed under Part II, “Item 9A, Controls and Procedures” in the Form 10-K/A filed on February 9, 2022, our Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2020 the Company’sCompany's disclosure controls and procedures were effective.not effective as of December 31, 2021.
ThereNotwithstanding the ineffective disclosure controls and procedures as a result of the identified material weakness, our Chief Executive Officer and Chief Financial Officer have concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).
Remediation Plan and Status
As of December 31, 2021, the material weakness previously disclosed has not yet been fully remediated.
In response to the material weakness in the Company’s internal control over financial reporting, management has designed and implemented control activities related to the identification, calculation, and disclosure of capitalized interest expense. We will continue to work towards full remediation of this material weakness to improve our internal control over financial reporting.
The material weakness cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the areas affected by the material weakness described above.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above, 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) under the Securities Exchange Act of 1934) during the fiscal quarter ended December 31, 20202021 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
See “Part II — Item 1. Legal Proceedings”Fifteen complaints were filed in connection with the Merger by purported stockholders of the Company and MSG Networks Inc.
Nine of these complaints involved allegations of materially incomplete and misleading information set forth in the joint proxy statement/prospectus filed by the Company and MSG Networks Inc. in connection with the Merger. As a result of supplemental disclosures made by the Company and MSG Networks Inc. on July 1, 2021, all of the disclosure actions were voluntarily dismissed with prejudice prior to or shortly following the consummation of the Merger.
On May 27, 2021, a complaint captioned Hollywood Firefighters’ Pension Fund et al. v. James Dolan, et al., 2021-0468-KSJM, was filed in the Court of Chancery of the State of Delaware by purported stockholders of the Company against the Company, its Board of Directors (the “Board”), certain Dolan family stockholders and MSG Networks Inc. The complaint purported to allege derivative claims on behalf of the Company and claims on behalf of a putative class of Company stockholders concerning the Merger. Plaintiffs alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the Delaware General Corporation Law (the “DGCL”), that the Board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the Merger were misleading or incomplete. Plaintiffs sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiffs’ attorneys’ fees. On June 15, 2021, plaintiffs filed a brief in support of their motion seeking a preliminary injunction enjoining the Company’s Quarterly Reportstockholder vote and consummation of the Merger, which the defendants opposed. The Court of Chancery denied the plaintiffs’ preliminary injunction motion on Form 10-QJuly 2, 2021.
On June 9, 2021, a complaint captioned Timothy Leisz v. MSG Networks Inc. et al., 2021-0504-KSJM, was filed in the Court of Chancery of the State of Delaware by a purported stockholder of MSG Networks Inc. against MSG Networks Inc., the MSG Networks Inc. board of directors, certain Dolan family stockholders and the Company. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The MSG Networks Inc. plaintiff alleged, among other things, that the Merger was a business combination with an interested stockholder that is not allowed under Section 203 of the DGCL, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger, and that the disclosures relating to the merger were misleading or incomplete. Plaintiff sought, among other relief, declaratory and preliminary and permanent injunctive relief enjoining the stockholder vote and consummation of the Merger, and an award of damages in the event the transaction was consummated and plaintiff’s attorneys’ fees. On June 21, 2021, plaintiff filed a brief in support of his motion seeking a preliminary injunction enjoining the MSG Networks Inc. stockholder vote and consummation of the Merger, which defendants opposed. The Court of Chancery denied the plaintiff’s preliminary injunction motion on July 2, 2021.
On July 6, 2021, a complaint captioned Stevens et al. v. Dolan et al., 2021-0575, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The complaint purported to allege claims on behalf of a putative class of MSG Networks Inc. stockholders concerning the Merger. The plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages in the event the transaction was consummated, and plaintiffs’ attorneys’ fees.
On July 6, 2021, a complaint captioned The City of Boca Raton Police and Firefighters’ Retirement System v. MSG Networks Inc., 2021-0578, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against MSG Networks Inc. The complaint purported to seek to enforce plaintiff’s right to inspect certain of MSG Networks Inc.’s books and records under Section 220 of the DGCL. The complaint was voluntarily dismissed on August 10, 2021.
On August 11, 2021, a stockholder derivative complaint captioned City of Miramar Retirement Plan and Trust Fund for General Employees et al. v. Dolan et al., 2021-0692 was filed in the Court of Chancery of the State of Delaware by purported stockholders of the Company. The complaint purported to allege derivative claims on behalf of the Company and direct claims on behalf of a putative class of Company stockholders. Plaintiffs alleged that the Board and the Company’s majority stockholders violated their fiduciary duties by failing to protect the Company’s interest in connection with the Merger. Plaintiffs sought, among other relief, an award of damages to the purported class and Company including interest, and plaintiffs’ attorneys’ fees.
On August 31, 2021, a complaint captioned Murray v. Dolan et al., 2021-0748, was filed in the Court of Chancery of the State of Delaware by purported stockholders of MSG Networks Inc. against the MSG Networks Inc. board of directors. The
complaint purported to allege claims on behalf of a putative class of MSG Networks stockholders concerning the Merger. Plaintiffs alleged, among other things, that the MSG Networks Inc. board members and majority stockholders violated their fiduciary duties in agreeing to the Merger and that the disclosures relating to the merger were misleading or incomplete. Plaintiffs sought, among other relief, an order rescinding the merger and rescinding any severance paid to James Dolan in connection with the Merger, an award of damages, and plaintiffs’ attorneys’ fees.
All of the above complaints have since either been dismissed or consolidated into one of two litigations.
On September 10, 2021, the Court of Chancery entered an order consolidating the complaints in the Hollywood Firefighters and City of Miramar actions. The new consolidated action is captioned: In re Madison Square Garden Entertainment Corp. Stockholders Litigation, C.A. 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 derivative allegations for breach of fiduciary duties that were present in the Hollywood Firefighters and City of Miramar complaints and abandons the direct claims in those prior complaints. Plaintiffs seek, among other relief, an award of damages to the Company including interest, and plaintiffs’ attorneys’ fees. The Company and other defendants filed answers to the complaint on December 30, 2021, and are currently engaged in responding to the consolidated plaintiffs’ discovery requests. Pursuant to the indemnity rights in its bylaws and Delaware law, 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 the complaints in the Leisz, Stevens, City of Boca Raton, and Murray complaints. The new consolidated action is captioned: In re MSG Networks Inc. Stockholder Class Action Litigation, C.A. 2021-0575-KSJM. The consolidated plaintiffs filed their Verified Consolidated Stockholder Class Action Complaint on October 29, 2021. The complaint asserts claims on behalf of a putative class of former MSG Networks Inc. stockholders against each member of the board of directors of MSG Networks Inc. prior to the Merger. Plaintiffs allege that the MSG Networks Inc. board of directors and majority stockholders breached their fiduciary duties in negotiating and approving the Merger. The Company is not named as a defendant.Pursuant to the indemnity rights in its bylaws and Delaware law, 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. Plaintiffs seek, among other relief, monetary damages for the quarter ended Septemberputative class and plaintiffs’ attorneys’ fees. Defendants to the MSG Networks Inc. consolidated action filed answers to the complaint on December 30, 20202021 and are currently engaged in responding to the plaintiffs’ discovery requests.
We are currently unable to determine a range of potential liability, if any, with respect to these Merger-related claims. Accordingly, no accrual for a discussion of a derivative action that was settled on June 18, 2020, which settlement became effective on October 8, 2020.these matters has been made in our consolidated financial statements.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
Item 1A. Risk Factors
We Have Substantial IndebtednessIn addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as amended by Form 10-K/A filed on February 8, 2022 (the “Form 10-K”), which could materially affect the Company’s business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing the Company. Additional risks and Are Highly Leveraged, Which Could Adversely Affect Our Business.uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or future results.
We are highly leveraged withAre Required to Assess Our Internal Control Over Financial Reporting on an Annual Basis and Our Management Has Identified a significant amountMaterial Weakness. If Our Remediation of debt and we may continue to incur additional debtthe Material Weakness Is Not Effective, or We Identify Additional Material Weaknesses or Other Adverse Findings in the future. In November 2020, MSG National Properties, LLC (“MSG National Properties”)Future, Our Ability to Report Our Financial Condition or Results of Operations Accurately or Timely May Be Adversely Affected, Which May Result in a Loss of Investor Confidence in Our Financial Reports, Significant Expenses to Remediate Any Internal Control Deficiencies, and certainUltimately Have an Adverse Effect on the Market Price of Our Common Stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our subsidiaries entered intointernal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Annually, we perform activities that include reviewing, documenting and testing our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail
to achieve and maintain an effective internal control environment, we could suffer misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could result in significant expenses to remediate any internal control deficiencies and lead to a five-year $650,000 senior secured term loan facilitydecline in our stock price.
Management of the Company evaluated an immaterial accounting error related to fund working capital needs,interest costs that should have been capitalized for general corporate purposesMSG Sphere at the Venetian in the fiscal years ended June 30, 2021, 2020 and 2019 and in the fiscal quarter ended September 30, 2021, as prescribed by Accounting Standards Codification (“ASC”) Topic 835-20 (Capitalization of MSG National Properties and its subsidiaries, and to make distributions to MSG Entertainment Group, LLC.Interest). As a result of the accounting error, the Company has re-evaluated the effectiveness of the Company’s internal control over financial reporting and identified a material weakness in the Company’s internal control over financial reporting as of June 30, 2021, September 30, 2021 and December 31, 2021. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. For further discussion regarding the accounting error and the correction of such error to the Company’s previously issued consolidated and combined financial statements, see Note 23 – Correction of Previously Issued Consolidated and Combined Financial Statements to the consolidated and combined financial statements of the Company included in the Form 10-K.
Our management may be unable to conclude in future periods that our indebtedness, wedisclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weaknesses in internal controls over financial reporting. For further discussion of the material weakness, see “Part I — Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to make interestbe disclosed by a company in those reports is accumulated and communicated to the company’s management, including its principal executive and principal payments on our borrowingsfinancial officers, as appropriate to allow timely decisions regarding required disclosure.
Management is committed to maintaining a strong internal control environment and believes its remediation efforts will represent an improvement in existing controls. Management anticipates that are significantthe new controls, as implemented and when tested for a sufficient period of time, will remediate the material weakness. We may not be successful in relationpromptly remediating the material weaknesses identified by management, or be able to our revenuesidentify and cash flows. These payments reduce our earnings and cash available for other potential business purposes. This leverage also exposes us to significant risk by limiting our flexibility in planning for, or reacting to, changes in our business (whether through competitive pressure or otherwise), the entertainment and hospitality industries and the economy at large. Although our cash flows could decrease in these scenarios, our required payments in respect of indebtedness would not decrease.
In addition, our ability to make payments on, or repay or refinance, such debt, and to fund our operating and capital expenditures, depends largely upon our future operating performance. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Furthermore, our interest expense could increase if interest rates increase because our indebtedness bears interest at floating rates or to the extent we have to refinance existing debt with higher cost debt.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows,remediate additional control deficiencies, including cash available for servicing our indebtedness, will correspondingly decrease.
In addition, in July 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced that it will no longer persuade or compel banks to submit LIBOR rates after 2021. It is unclear whether or not, at that time, a satisfactory replacement rate will be developed or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of, among other entities, large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index that measures the cost of borrowing cash overnight, backed by U.S. Treasury securities (“SOFR”). SOFR is observed and backward-looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Whether or not SOFR or any other potential alternative reference rate attains market traction as a LIBOR replacement rate remains in question. The consequences of these developments with respect to LIBOR cannot be entirely predicted but may resultmaterial weaknesses, in the level of interest payments on the portion of our indebtedness that bears interest at variable rates to be affected, which may adversely impact the amount of our interest payments under such debt.future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of December 31, 2020,2021, the Company has the availabilityability to repurchase up to $350 million of the Company’s Class A Common Stock under the Class A Common Stock share repurchase program authorized by the Company’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 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.
Item 6. Exhibits
(a)Index to Exhibits
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EXHIBIT NO. | | DESCRIPTION |
| | LetterAmendment No. 1 to Amended and Restated Credit Agreement, amending Grounddated as of October 11, 2019, by and among MSGN Holdings, L.P., certain subsidiaries of MSGN Holdings, L.P. identified therein, MSGN Eden, LLC, Regional MSGN Holdings LLC and JP Morgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, dated as of November 5, 2021. |
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101.INS101 | | XBRL Instance Document —The following materials from Madison Square Garden Entertainment Corp. Quarterly Report on Form 10-Q for the instance document does not appearquarter ended December 31, 2021, formatted in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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101.SCH | | XBRL Taxonomy Extension Schema.
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase.
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101.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.
Extensible Business Reporting Language (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated Statements of comprehensive loss, (iv) consolidated statements of cash flows, (v) consolidated statements of equity and redeemable noncontrolling interests, and (vi) notes to consolidated financial statements. |
104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 20202021 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 129th day of February 2021.2022.
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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 |