SPHERE ENTERTAINMENT CO.
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"), including the impact of the COVID-19 pandemic on our future
operations, our anticipated operational cash burn on a go-forward basis,
cost-cutting measures the Company may or may not pursue to preserve cash and
financial flexibility, the potential for future impairment charges, the timing
and costs of new venue construction, our plans to negotiate amendments to Tao
Group Hospitality's credit facility, and increased expenses of being a
standalone public company. Words such as "expects," "anticipates," "believes,"
"estimates," "may," "will," "should," "could," "potential," "continue,"
"intends," "plans," and similar words and terms used in the discussion of future
operating and future financial performance identify forward-looking statements.
Investors are cautioned that such forward-looking statements are not guarantees
of future performance, results or events and involve risks and uncertainties and
that actual results or developments may differ materially from the
forward-looking statements as a result of various factors. Factors that may
cause such differences to occur include, but are not limited to:
•our ability to effectively manage the impacts of the COVID-19 pandemic and the
actions taken in response by governmental authorities and certain professional
sports leagues, including ensuring compliance with rules and regulations imposed
upon our venues as they are permitted to reopen;
•the extent to which attendance at our venues following their reopening will be
suppressed due to government actions and continuing health concerns by potential
attendees;
•the impact on the payments we receive under the Arena License Agreements as a
result of government-mandated capacity restrictions and social-distancing
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;
•our ability to successfully design, construct, finance and operate new 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 and other entertainment and sports events which are
presented in our venues;
•the level of our capital expenditures and other investments;
•general economic conditions, especially in the New York City , Las Vegas ,
Chicago and London metropolitan areas where we have (or plan to have)
significant business activities;
•the demand for sponsorship arrangements and for advertising;
•competition, for example, from other venues and other sports and entertainment
and nightlife options, including the construction of new competing venues;
•changes in laws, guidelines, bulletins, directives, policies and agreements or
regulations under which we operate;
•any economic, social or political actions, such as boycotts, protests, work
stoppages or campaigns by labor organizations;
•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;
•business, reputational and litigation risk if there is a security incident
resulting in loss, disclosure or misappropriation of stored personal 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 to attract attendees and performers to its future festivals;
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•the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions; •our ability to successfully integrate acquisitions, new venues or new businesses into our operations; •the operating and financial performance of our strategic acquisitions and investments, including those we do not control; •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 and the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses; •the impact of any government plans to redesignNew York City's Pennsylvania Station ; •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; •our ability to achieve the intended benefits of the Entertainment Distribution; •the performance byMSG Sports of its obligations under various agreements with the Company related to the Entertainment Distribution and ongoing commercial arrangements; •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 endedJune 30, 2020 and this Quarterly Report on Form 10-Q under "Part II - Item 1A. Risk Factors." 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 endedJune 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 toMadison 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 endedApril 17, 2020 , the Company operated and reported financial information as one reportable segment. Following the Entertainment Distribution onApril 17, 2020 , the Company has two segments (the Entertainment business and the Tao Group Hospitality business). See Note 18 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 endedDecember 31, 2020 and 2019 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 endedDecember 31, 2020 and 2019, as well as certain contractual obligations and off-balance sheet arrangements. 47
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Seasonality of Our Business. This section discusses the seasonal performance of our Entertainment and Tao Group Hospitality segments. Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, recently issued accounting pronouncements not yet adopted by the Company, as well as the results of the Company's annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of Fiscal Year 2021. 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 endedJune 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; 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 atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre andThe Chicago Theatre . In addition, the Company is constructing a state-of-the-art venue, MSG Sphere, inLas Vegas and plans to build a second MSG Sphere inLondon , pending necessary approvals. The Company also includes the original production, the Christmas Spectacular, as well as BCE, the entertainment production company that owns and operates theBoston Calling Music Festival , and Tao Group Hospitality, a hospitality group with globally-recognized entertainment dining and nightlife brands. Factors Affecting Results of Operations Basis of Presentation The consolidated statements of operations for the three and six months endedDecember 31, 2020 is presented on a consolidated basis, as the Company became a standalone public company onApril 17, 2020 . The Company's combined statement of operations for the three and six months endedDecember 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 ("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 endedDecember 31, 2019 include allocations for certain support functions that were provided on a centralized basis byMSG 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 the combined statements of operations for the three and six months endedDecember 31, 2019 in order to properly burden all business units comprisingMSG 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 andMSG 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 andMSG Sports . Revenue sharing expenses attributable toMSG 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 additional information on revenue recognition. Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by the Company and may not reflect its combined results of operations, financial position and cash flows had it been a 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. 48
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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 inmid-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'sTrey Anastasio live from theBeacon Theatre , as of the date of this filing no events are permitted at The Garden,Hulu Theater atMadison Square Garden ,Radio City Music Hall and theBeacon Theatre . Although events are permitted atThe 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 leastMarch 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 ofNew York State's recent announcement that, startingFebruary 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 2020Boston Calling Music Festival . The Company andMSG 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 ofOrlando for the NBA andEdmonton andToronto 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 throughNovember 2020 . While the NBA began its 2020-21 regular season inDecember 2020 , and the NHL began its 2020-21 regular season inJanuary 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 inDecember 2020 . However, in light ofNew York State's recent announcement thatNew York arenas with capacities of over 10,000 people can re-open beginningFebruary 23, 2021 , with limited capacities and safety protocols, we expect to have limited fans in attendance for home games beginning with the Knicks onFebruary 23rd and the Rangers onFebruary 26th , as permitted under these new guidelines. Even though limited numbers of fans are expected to be permitted to attend home games startingFebruary 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. Due to government actions taken in response to the COVID-19 pandemic, virtually all ofTao Group Hospitality's venues were closed for approximately three months starting in mid-March, and Avenue and Vandal inNew York were permanently closed inApril 2020 andJune 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 ofDecember 31, 2020 , eight ofTao 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, 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 Agreements and we are not generating revenue from: •events at The Garden,Hulu Theater atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre andThe Chicago Theatre ; •suite licenses; and •the 2020 production of the Christmas Spectacular. While we have reduced certain operating expenses as a result of the COVID-19 pandemic (including (i) direct event expenses at our performance venues during the period our business operations are suspended, (ii) advertising 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 reductions are not nearly enough to fully offset revenue losses. 49
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We are building a state-of-the-art venue in
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Consolidated and Combined Results of Operations Comparison of the Three and Six Months EndedDecember 31, 2020 versus the Three and Six Months EndedDecember 31, 2019 The table below sets forth, for the periods presented, certain historical financial information.
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