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, the success of the merger with MSG Networks Inc. ("MSG Networks")
and our ability to realize the benefits of the merger, 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
and our plans to pursue additional debt financing and negotiate amendments to
the National Properties Term Loan Facility or Tao Group Hospitality's credit
facility. 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;
•risks related to the Merger, as defined herein, with MSG Networks, including,
but not limited to: failure to realize the expected benefits of the Merger,
business disruption following the Merger and the risk of any litigation relating
to the Merger?
•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, league 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;
•our ability to successfully design, construct, finance and operate new
entertainment venues in Las Vegas 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 Starring the Radio City Rockettes ("Christmas
Spectacular"), the sports teams whose games are played at The Garden and
broadcast on our networks and other entertainment and other events which are
presented in our venues or broadcast on our networks;
•the demand for our MSG Networks programming among cable, satellite, telephone
and other platforms ("Distributors") and the subscribers thereto, and our
ability to enter into and renew affiliation agreements with Distributors, or to
do so on favorable terms, as well as the impact of consolidation among
Distributors;
•the ability of our Distributors to maintain, or minimize declines in,
subscriber levels;
•the impact of subscribers selecting Distributors' packages that do not include
our networks or Distributors that do not carry our networks at all;
•the security of our MSG Networks program signal and electronic data;
•the on-ice and on-court performance of the professional sports teams whose
games we broadcast on our networks and host in our venues;
•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
our networks;
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•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; •changes in laws, guidelines, bulletins, directives, policies and agreements, and regulations under which we operate; •any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, including theNational Basketball Association ("NBA"),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 MSG Sphere; •business, reputational and litigation risk if there is a 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 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 ofBoston 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, including the Merger with MSG Networks and our acquisition of Hakkasan through Tao Group Hospitality; •the operating and financial performance of our strategic acquisitions and investments, including those we do not control; •the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire; •the impact of governmental regulations or laws, changes in how those regulations and laws are interpreted, including 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 redesignNew 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; •the tax-free treatment of the Entertainment Distribution (as defined below); •our ability to achieve the intended benefits of the Entertainment Distribution and the Merger with MSG Networks; •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 52 --------------------------------------------------------------------------------
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•the additional factors described under "Part I - Item 1A. Risk Factors" included in this Annual Report on 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 audited consolidated and combined financial statements and footnotes thereto included in Item 8 of this Annual Report on Form 10-K 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 21 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of the Company's segment reporting. Following the Merger with MSG Networks, the Company has a third segment related to that business. Although we have included selected information related to that business herein, because the Merger was completed after the fiscal year end, we will not begin fully reporting on the MSG Networks segment until the first quarter of Fiscal Year 2022. Our 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 results of operations for the years endedJune 30, 2021 and 2020 on both a (i) consolidated and combined basis and (ii) segment basis. Our reportable segments during these periods were Entertainment and Tao Group Hospitality. Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for the years endedJune 30, 2021 and 2020. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations and off balance sheet arrangements that existed atJune 30, 2021 . 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 includes a discussion of accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are discussed in the notes to our consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K. Business OverviewMSG Entertainment is a leader in live entertainment comprised of iconic venues; marquee entertainment brands; regional sports and entertainment networks; popular dining and nightlife offerings; and a premier music festival. We manage our business through the following operating segments: Entertainment: This segment includes our portfolio of the following venues:Madison Square Garden ("The Garden"),Hulu Theater atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre , andThe Chicago Theatre . In addition, the Company has unveiled its vision for state-of-the-art venues, called MSG Sphere, and its currently building its first venue inLas Vegas . Also included in this segment is the original production, the Christmas Spectacular, as well as the Company's controlling interest in BCE, the entertainment production company that owns and operates theBoston Calling Music Festival . The Entertainment segment also includes our booking business, which features a variety of live entertainment and sports experiences. Tao Group Hospitality: This segment features the Company's controlling interest in Tao Group Hospitality, a hospitality group with globally-recognized entertainment dining and nightlife brands including: Tao, Marquee, Lavo, Beauty & Essex, Cathédrale, Hakkasan, and Omnia. Tao Group Hospitality operates 61 entertainment dining and nightlife venues spanning 23 markets across five continents. OnApril 27, 2021 , in connection withTao Group Hospitality's venue expansion plans, Tao 53 --------------------------------------------------------------------------------
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Group Sub-Holdings LLC , a subsidiary of Tao Group Hospitality and an indirect subsidiary of the Company, entered into a Transaction Agreement pursuant to whichTao Group Sub-Holdings LLC acquired the business ("Hakkasan") ofHakkasan USA, Inc. ("Hakkasan Parent"). Pursuant to the Transaction Agreement, Hakkasan Parent contributed its interest in the Hakkasan toTao Group Sub-Holdings LLC in exchange for approximately 18% of the common equity interests inTao Group Sub-Holdings LLC . Hakkasan consists of a global collection of 33 hospitality assets including restaurants, bars, lounges, and nightclubs that spans four continents and over 20 major cities. The Company also owned and operated the Forum inInglewood, CA untilMay 2020 . See Note 3 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion related to the disposition of the Forum. Merger with MSG Networks Inc. OnJuly 9, 2021 , the Company completed its previously announced acquisition of MSG Networks pursuant to that certain Agreement and Plan of Merger, dated as ofMarch 25, 2021 (the "Merger Agreement"), among the Company,Broadway Sub Inc. , aDelaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"), and MSG Networks. Merger Sub merged with and into MSG Networks (the "Merger"), with MSG Networks surviving and continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of the Company. OnJuly 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 has 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 ("MSGN Class B Common Stock" and, together with MSGN Class A Common Stock, "MSGN 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" and, together with Class A Common Stock, "Common Stock") such that each holder of record of shares of MSGN Class B Common Stock has 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). Beginning with the fiscal quarter endingSeptember 30, 2021 , the Merger will be accounted for as a transaction between entities under common control as the Company and MSG Networks were, prior to the Merger, each controlled by theDolan Family Group (as defined herein). Upon the closing of the Merger, the net assets of MSG Networks will be combined with those of the Company at their historical carrying amounts and the companies will be presented on a combined basis for all historical periods that the companies were under common control. As this transaction represents a change in reporting entity, the financial statements in future filings will be materially different since they will represent the combined operations of both commonly-controlled entities. MSG Networks, including MSG Network ("MSGN") and MSG+, and its companion streaming service, MSG GO, is an industry leader in sports production, and content development and distribution. The networks are widely distributed throughout all ofNew York State and significant portions ofNew Jersey andConnecticut , as well as parts ofPennsylvania . In addition, MSG GO is currently available to subscribers of all our major Distributors. MSGN and MSG+ are widely carried by major Distributors in our region, with an average combined reach of approximately 5.5 million viewing subscribers (as of the most recent available monthly information) in our Regional Territory. MSG Networks features a wide range of compelling sports content, including exclusive live local games and other programming of theNew York Knicks (the "Knicks") of theNational Basketball Association ("NBA"); theNew York Rangers (the "Rangers"),New York Islanders (the "Islanders"),New Jersey Devils (the "Devils") andBuffalo Sabres (the "Sabres") of theNational Hockey League ("NHL"); as well as significant coverage of theNew York Giants (the "Giants") andBuffalo Bills (the "Bills") of theNational Football League ("NFL") as well as other programming such asNew York Red Bulls soccer;Westchester Knicks basketball; and New York Riptide lacrosse; as well as horse racing, poker, tennis, mixed martial arts, and boxing programs. 54 --------------------------------------------------------------------------------
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Results of Operations from MSG Networks Inc.
The following section provides key highlights of the MSG Networks' results of
operations for Fiscal Year 2021 as compared to Fiscal Year 2020.
Years Ended June 30, Change
2021 2020 Amount Percentage
Revenues $ 647,510 $ 685,797 $ (38,287) (6) %
Direct operating expenses 262,859 282,837 (19,978) (7) %
Selling, general and administrative
expenses 115,339 100,829 14,510 14 %
Depreciation and amortization 7,335 7,163 172 2 %
Operating income (loss) $ 261,977 $ 294,968 $ (32,991) (11) %
MSG Networks generates revenues principally from affiliation fees charged to
Distributors for the right to carry its networks, as well as from the sale of
advertising. For Fiscal Year 2021, MSG Networks reported revenue of $647,510 , as
compared to $685,797 in Fiscal Year 2020, a decrease of $38,287 , or
approximately 6%, primarily due to decreases in affiliation fee revenue of
$44,031 , partially offset by an increase in advertising revenue of $5,096 . The
decrease in affiliation fee revenue was primarily due to (i) a less than 8%
decrease in subscribers (excluding the impact of the previously disclosed
non-renewal with a small Connecticut -based distributor as of October 1, 2020 ),
(ii) a net unfavorable affiliate adjustment of approximately $17,500 , inclusive
of approximately $14,700 for affiliate rebates recorded in Fiscal Year 2021,
and, to a lesser extent, (iii) the impact of the aforementioned non-renewal.
These decreases were partially offset by the impact of higher affiliation rates.
Based on current facts and circumstances, MSG Networks expects to record similar
accruals for potential affiliate rebates in each of the next two quarters to
what MSG Networks recorded on average per quarter during Fiscal Year 2021.
MSG Networks' direct operating expenses primarily include the cost of
professional team rights acquired under media rights agreements to telecast
various sporting events on its networks, and other direct programming and
production costs of its networks. For Fiscal Year 2021, MSG Networks' direct
operating expenses were $262,859 , as compared to $282,837 in Fiscal Year 2020, a
decrease of $19,978 or approximately 7%. The decrease was primarily due to lower
rights fees expense of $15,345 and, to a lesser extent, a decrease in other
programming and production-related costs of $4,633 . The decline in rights fees
expense was primarily due to the impact of fewer NHL and NBA games made
available for exclusive broadcast by MSG networks during the NHL and NBA's
shortened 2020-21 regular seasons and, to a lesser extent, a reduction in media
rights fees related to the 2019-20 NHL season recorded in Fiscal Year 2021. This
was partially offset by the impact of the cancellation of games during the
2019-20 NBA and NHL seasons recorded in the Fiscal Year 2020 and, to a lesser
extent, the impact of annual contractual stated rate increases under MSG
Networks' media rights agreements relating to NBA and NHL teams. The decrease in
other programming and production-related costs was primarily related to fewer
NHL and NBA telecasts in Fiscal 2021.
MSG Networks' selling, general and administrative expenses primarily consist of
administrative costs, including employee compensation and related benefits,
professional fees, as well as advertising sales commissions and advertising and
marketing costs. For Fiscal Year 2021, MSG Networks' selling general and
administrative expenses were $115,339 , as compared to $100,829 in Fiscal Year
2020, an increase of $14,510 or approximately 14%. The increase was primarily
due to (i) higher employee compensation and related benefits of $7,824
(inclusive of share-based compensation expense), (ii) approximately $4,500 of
professional fees related to the Merger recorded in the Fiscal Year 2021, and
(iii) higher advertising and marketing expenses of $3,397 , partially offset by
other decreases.
For Fiscal Year 2021, MSG Networks' operating income was $261,977 , as compared
to $294,968 for Fiscal Year 2020, a decrease of $32,991 , or 11%. The decrease
was primarily due to the decrease in revenues and higher selling, general and
administrative expenses (inclusive of share-based compensation expense),
partially offset by the decrease in direct operating expenses, as discussed
above.
The key financial measure used by MSG Networks to evaluate its performance is
adjusted operating income, which is consistent with the measure used by the
Company with the exception of the treatment in the amortization for capitalized
cloud computing arrangement costs. See "- Results of Operations - Consolidated
and Combined Results of Operations - Adjusted operating income" for further
details.
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The following is a reconciliation of MSG Networks operating income to adjusted
operating income:
Years Ended June 30, Change
2021 2020 Amount Percentage
Operating income $ 261,977 $ 294,968 $ (32,991) (11) %
Share-based compensation 17,667 19,235
Depreciation and amortization 7,335 7,163
Adjusted operating income $ 286,979 $ 321,366 $ (34,387) (11) %
MSG Networks' adjusted operating income was $286,979 for Fiscal Year 2021, as
compared to $321,366 in Fiscal Year 2020, a decrease of $34,387 , or 11%,
primarily due to the decrease in revenues and increase in selling, general and
administrative expenses (excluding share-based compensation expense), partially
offset by the decrease in direct operating expenses.
Impact of the COVID-19 Pandemic on Our Business
For the majority of Fiscal Year 2021, substantially all of the Entertainment
business operations were suspended and Tao Group Hospitality was operating at
significantly reduced capacity and demand. While operations have started to
resume, it is not clear when we will fully return to normal operations.
As a result of government-mandated assembly limitations and closures, all of our
performance venues were closed beginning in mid-March 2020 . Use of The Garden
resumed for Knicks and Rangers home games without fans in December 2020 and
January 2021 , respectively, and, beginning on February 23, 2021 , The Garden was
permitted to host fans at games at 10% seating capacity with certain safety
protocols, such as proof of full vaccination or a negative COVID-19 test and
social distancing. Starting April 1, 2021 , our other New York performance
venues, Hulu Theater at Madison Square Garden , Radio City Music Hall and the
Beacon Theatre , were also permitted to reopen at 10% capacity with certain
safety protocols. Although live events were permitted at our venues,
government-mandated capacity restrictions and other safety requirements made it
economically unfeasible to do so for most events at that time. Effective May 19,
2021 , all of our New York 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. As a result, The Garden
hosted three Knicks playoff games with approximately 15,000-16,000 fans in
attendance per game during Fiscal Year 2021, and we welcomed the Foo Fighters on
June 20, 2021 for the first live event at The Garden with 100% capacity since
our venues were shut down in March 2020 . In addition, on June 19, 2021 , Radio
City Music Hall opened its doors for the first time in over a year to host the
Tribeca Festival's closing night film, Untitled: Dave Chappelle Documentary,
with 100% capacity. The Beacon Theatre hosted its first ticketed event, at 100%
capacity, on June 22, 2021 with the first of two shows from Trey Anastasio , and
Hulu Theater at Madison Square Garden hosted its first ticketed event, at 100%
capacity, with a boxing/hip-hop event on August 3, 2021 . For all events hosted
at our New York venues with 100% capacity prior to August 17, 2021 , guests were
required to provide proof of full vaccination or a negative COVID-19 test,
depending on the requirements of that venue and/or preference of the performer.
Effective August 17, 2021 , all workers and customers in New York City indoor
dining, indoor fitness and indoor entertainment facilities are required to show
proof of at least one vaccination shot. In addition, effective August 20, 2021 ,
face coverings are required for all individuals in indoor public spaces in
Chicago , including our venues. For Fiscal Year 2021, the majority of ticketed
events at our venues were postponed or canceled and, while live events are
permitted to be held at all of our performance venues as of the date of this
filing and we are continuing to host and book new events, due to the lead-time
required to book touring acts and artists, which is the majority of our
business, we expect that our bookings will continue to be impacted through the
2021 calendar year. We continue to actively pursue one-time or multi-night
performances at our venues as the touring market ramps up.
The impact to our operations also included the cancellation of the 2020
production of the Christmas Spectacular and both the 2020 and 2021 Boston
Calling Music Festivals. While the 2021 production of the Christmas Spectacular
is currently on-sale, the current production is scheduled for 163 shows, as
compared with 199 shows for the 2019 production, which was the last production
presented prior to the impact of the COVID-19 pandemic.
The Company has long-term arena license agreements (the "Arena License
Agreements") with MSG Sports that require the Knicks and Rangers to play their
home games at The Garden.
As discussed above, capacity restrictions, use limitations and social distancing
requirements were in place for the entirety of the Knicks and Rangers 2020-21
regular seasons, which materially impacted the payments we received under the
Arena License Agreements for Fiscal Year 2021. On July 1, 2021 , the Knicks and
Rangers began paying the full amounts provided for under their respective Arena
License Agreements. The NBA and NHL have each announced that they intend to
return to traditional October to April regular season schedule, with full
82-game regular seasons, for the 2021-22 season.
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Disruptions caused by the COVID-19 pandemic had a significant and negative impact onTao Group Hospitality's operations and financial performance for Fiscal Year 2021. Due to government actions taken in response to the COVID-19 pandemic, virtually all ofTao Group Hospitality's venues were closed for approximately three months starting inmid-March 2020 , and Avenue and Vandal inNew York were permanently closed inApril 2020 andJune 2020 , respectively. In addition, Avenue inLos Angeles was permanently closed inMay 2021 . 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 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. As ofJune 30, 2021 , 51 ofTao Group Hospitality's venues were open for outdoor dining, limited or full capacity indoor dining (depending on the market), and delivery/takeout (23 legacy Tao Group Hospitality venues and 28 Hakkasan venues acquired in connection with theApril 27, 2021 transaction), inclusive of Tao Asian Bistro & Lounge atMohegan Sun , a new venue that first opened its doors inMarch 2021 , while 10 venues remained closed (five legacy Tao Group Hospitality venues and five Hakkasan venues). Of the 51 Tao Group Hospitality venues currently operating, 29 areU.S. -based and operating without capacity restrictions (21 Tao Group Hospitality legacy venues and eight Hakkasan venues) and 22 are international (two Tao Group Hospitality legacy venues and 20 Hakkasan venues) and operating under various governmental safety protocols such as curfews, capacity limitations and social distancing. EffectiveAugust 17, 2021 , workers and customers inNew York City indoor dining facilities are required to show proof of at least one vaccination shot. In addition, certainU.S. jurisdictions have reinstated safety protocols, such as the mask mandates inNevada andChicago , but not otherwise limiting capacity. MSG Networks depends on the appeal of its live programming to viewing subscribers of its networks and to its advertisers. 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. During Fiscal Year 2021, the COVID-19 pandemic materially impacted our revenues, most significantly because, for the majority of the year, we were not generating revenue from (i) ticketed events at The Garden,Hulu Theater atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre andThe Chicago Theatre , (ii) suite licenses, (iii) the 2020 production of the Christmas Spectacular and (iv) the 2021Boston Calling Music Festival . In addition, we generated substantially reduced revenue in connection with (i) sponsorship and advertising, (ii) payments under the Arena License Agreements, (iii) food and beverage concessions and catering services at Knicks and Rangers games and (iv) non-ticketed events such as the Big East Tournament inMarch 2021 . As a result of the material impact COVID-19 had on our revenues during Fiscal Year 2021, we took several actions to improve our financial flexibility, reduce operating costs and preserve liquidity, including (i) revising our construction schedule for MSG Sphere, with an anticipated opening date of calendar year 2023, (ii) making significant cuts in both venue and corporate headcounts, and (iii) having our wholly-owned subsidiary,MSG National Properties, LLC ("MSG National Properties ") enter into a five-year$650,000 senior secured term loan facility ("National Properties Term Loan Facility"). See Note 14 to the audited consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the National Properties Term Loan Facility. InAugust 2020 , Tao Group Hospitality entered into an amendment to the Tao Senior Credit Agreement, which suspended certain financial covenants throughDecember 31, 2021 and increased the minimum liquidity requirement. In addition, in connection with the amendment, our wholly owned subsidiaryMSG Entertainment Group, LLC ("MSG Entertainment Group ") entered into a guarantee agreement, which also included a minimum liquidity requirement forMSG Entertainment Group . See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding the amendment to the Tao Senior Credit Agreement. Tao Group Hospitality will likely need to seek covenant waivers in the future.Tao Group Hospitality's failure to obtain debt covenant waivers could trigger a violation of these covenants and lead to default, acceleration of all of its outstanding debt and a demand for payment under the guarantee ofMSG Entertainment Group , which would negatively impact the liquidity of Tao Group Hospitality and the Company. The Company is building its first MSG Sphere inLas Vegas . This is a complex construction project with cutting-edge technology, which relies on subcontractors obtaining components from a variety of sources around the world. InApril 2020 , the Company announced that it was suspending construction of MSG Sphere due to COVID-19 related factors that were outside of its control, including supply chain issues. As the ongoing effects of the pandemic continued to impact its business operations, inAugust 2020 , the Company disclosed that it had resumed full construction with a lengthened timetable to better preserve cash through the COVID-19 pandemic. The Company remains committed to bringing MSG Sphere toLas Vegas and expects to open the venue in calendar year 2023. 57 --------------------------------------------------------------------------------
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A subsidiary of the Company is party to the Arena License Agreements with subsidiaries ofMSG 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 endingJune 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 endingJune 30, 2021 was approximately$22,500 for the Knicks and approximately$16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. The teams are not required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event (including when events at The Garden were suspended by government mandate as a result of the COVID-19 pandemic). As a result, we did not receive any license fee payments under the Arena License Agreements from the period following the Entertainment Distribution throughNovember 2020 . 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%. If, due to a force majeure event, capacity at The Garden is limited to less than full capacity but over 1,000 attendees, rent payments due under the Arena License Agreements are payable by the Knicks and the Rangers and payments may be reduced in accordance with terms of the Arena License Agreements or as otherwise agreed by the parties. 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. The Company recorded$21,345 of revenues under Arena License Agreements for Fiscal Year 2021. OnJuly 1, 2021 , the Knicks and Rangers began paying the full license fee payments provided for under their respective Arena License Agreements. For more information about the risks to the Company as a result of the COVID-19 pandemic and its impact on our operating results, see "Part I - Item 1A. Risk Factors - General Risk Factors - Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Actions Taken in Response by Governmental Authorities andCertain Professional Sports Leagues." 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 theTao Group Hospitality reporting unit, which required the Company to assess the carrying value ofTao 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. See "- Results of Operations - Comparison of the Year EndedJune 30, 2021 versus the Year EndedJune 30, 2020 - Consolidated and Combined Results of Operations - Business Segment Results - Tao Group Hospitality - Impairment for intangibles, long-lived assets, and goodwill" for further details on the impairment charges recorded for Fiscal Year 2020. There has been no indicator of impairment 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. Description of Our Segments Entertainment Our Entertainment segment, which represented approximately 45% of our consolidated revenues for Fiscal Year 2021, is one of the country's leaders in live entertainment. Entertainment produces, presents and hosts live entertainment events, including (i) concerts, (ii) other live events such as family shows, performing arts events and special events and (iii) sports events, in our diverse collection of venues. Those venues include The Garden,Hulu Theater atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre , andThe Chicago Theatre . The scope of our collection of venues enables us to showcase acts that cover a wide spectrum of genres and popular appeal. Although we primarily license our venues to third-party promoters for a fee, we also promote or co-promote shows. If we serve as promoters or co-promoters of a show, we have economic risk relating to the event. Our Entertainment segment also creates, produces and/or presents live productions that are performed in the Company's venues. This includes the Christmas Spectacular, which is the top grossing live holiday family show inNorth America , featuring the Rockettes. The Christmas Spectacular has been performed atRadio City Music Hall for 87 years. InJuly 2016 , the Company acquired a controlling interest in BCE, the entertainment production company that owns and operates theBoston Calling Music Festival . This company is part of the Entertainment segment. InNovember 2017 , the Company acquired a 100% controlling interest in Obscura, a creative studio, recognized for its work in designing and 58 --------------------------------------------------------------------------------
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developing next-generation immersive experiences. Revenues generated by Obscura's third-party production business (and related costs) are reflected in the Entertainment segment. In Fiscal Year 2019, the Company decided to wind down this third-party productions business to focus on MSG Sphere development. Revenue Sources - Entertainment The Company's Entertainment segment earns revenue from several primary sources: ticket sales to our audiences for live events that we produce or promote/co-promote, license fees for our venues paid by third-party promoters or licensees in connection with events that we do not produce or promote/co-promote, facility and ticketing fees, concessions, sponsorships and signage, suite license fees at The Garden, merchandising and tours at certain of our venues. The amount of revenue and expense recorded by the Company for a given event depends to a significant extent on whether the Company is promoting or co-promoting the event or is licensing a venue to a third-party orMSG Sports . See "Venue License Fees" section below for further discussion of our venue licensing arrangements withMSG Sports . Ticket Sales and Suite Licenses For our productions and for entertainment events in our venues that we promote, we recognize revenues from the sale of tickets to our audiences. We sell tickets to the public through our box office, via our websites and ticketing agencies and through group sales. The amount of revenue we earn from ticket sales depends on the number of shows and the mix of events that we promote, the capacity of the venue used, the extent to which we can sell to fully utilize the capacity and our ticket prices. During Fiscal Year 2017, we implemented significant changes to how we sell Christmas Spectacular tickets. By eliminating block sales to third party brokers, we brought a significant number of tickets back in-house, which created the opportunity for more customers to buy tickets to the production directly from us. The Garden has 21 Event Level suites, 58 Lexus Madison Level suites, 18 Signature Level suites, theMadison Club , Suite Sixteen and The Loft. Suite licenses at The Garden are generally sold to corporate customers with the majority being multi-year licenses. The Company licenses Suite Sixteen to Tao Group Hospitality in exchange for license fee payments. Under standard suite licenses, the licensees pay an annual license fee, which varies depending on the location of the suite. The license fee includes, for each seat in the suite, tickets for events at The Garden for which tickets are sold to the general public, subject to certain exceptions. In addition, suite holders separately pay for food and beverage service in their suites at The Garden. Revenues from the sale of suite licenses are shared between the Company andMSG Sports . Revenues for the Company's suite license arrangements are recorded on a gross basis, as the Company is the principal in such transactions and controls the related goods or services until transfer to the customer.MSG Sports' share of the Company's suite license revenue is recognized in the consolidated and combined statements of operations as a component of direct operating expenses. The revenue sharing expense recognized by the Company forMSG Sports' share of suite license revenue at The Garden is based on a 67.5% allocation toMSG Sports pursuant to the Arena License Agreements. Venue License Fees For entertainment events held at our venues that we do not produce, promote or co-promote, we typically earn revenue from venue license fees charged to the third-party promoter or producer of the event. The amount of license fees we charge varies by venue, as well as by the size of the production and the number of days utilized, among other factors. Our fees typically include both the cost of renting space in our venues and costs for providing event staff, such as front-of-house and back-of-house staff, including stagehands, electricians, laborers, box office staff, ushers and security as well as production services such as staging, lighting and sound. In connection with the Entertainment Distribution, the Company entered into Arena License Agreements withMSG Sports that, among other things, require the Knicks and the Rangers to play their home games at The Garden in exchange for fixed monthly license fees over the term of the agreement. The Company accounts for these license fees as operating lease revenue given that the Company providesMSG 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 a straight-line basis over the term of the Arena License Agreements. In the case of the Arena License Agreements, the terms relate to non-consecutive periods of use whenMSG Sports uses the Arena generally for their preseason and regular season home games, and operating lease revenue will therefore be recognized ratably as events occur. The Arena License Agreements allow for certain reductions in the license fees during periods when The Garden is not available for use due to a force majeure event. As a result of the government-mandated suspension of events at The Garden due to the impact of the COVID-19 pandemic, at the beginning of Fiscal Year 2021, The Garden was not available for use. 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due to governmental restrictions. The restrictions were partially lifted duringFebruary 2021 with limited fans permitted to attend (10% capacity). Facility and Ticketing Fees For all public and ticketed events held in our venues aside fromMSG Sports home games, we also earn additional revenues on substantially all tickets sold, whether we promote/co-promote the event or license the venue to a third party. These revenues are earned in the form of certain fees and assessments, including the facility fees we charge, and vary by venue. Concessions We sell food and beverages during substantially all events held at our venues. In addition to concession-style sales of food and beverages, which represent the majority of our concession revenues, we also generate revenue from catering for our suites at The Garden. In connection with the Entertainment Distribution, the Company andMSG Sports entered into the Arena License Agreements related to the use of The Garden byMSG Sports , under which the Company will share withMSG Sports revenues and related expenses associated with sales of food and beverages (including suite catering) during Knicks and Rangers games at The Garden. Revenue generated from in-venue food and beverage sales atMSG Sports' events is recognized by the Company on a gross basis, with a corresponding revenue sharing expense forMSG Sports' share of such sales recorded within direct operating expense. The Arena License Agreements require the Company to pay 50% of the net proceeds generated from in-venue food and beverage sales toMSG Sports . Merchandise We earn revenues from the sale of merchandise relating to our proprietary productions and other live entertainment events that take place at our venues. The majority of our merchandise revenues are generated through on-site sales during performances of our productions and other live events. We also generate revenues from the sales of our Christmas Spectacular merchandise, such as ornaments and apparel, through traditional retail channels. Revenues associated with Christmas Spectacular merchandise are generally recorded on gross basis (as principal). Typically, revenues from our merchandise sales at our non-proprietary events relate to sales of merchandise provided by the artist, the producer or promoter of the event and are generally subject to a revenue sharing arrangement, and are generally recorded on net basis (as agent). As a result of the Arena License Agreements entered in connection with the Entertainment Distribution, the Company receives 30% of revenues, net of taxes and credit card fees, recorded on a net basis (agent), from the sale ofMSG Sports teams merchandise sold at The Garden. Venue Signage and Sponsorship We earn revenues through the sale of signage space and sponsorship rights in connection with our venues, productions and other live entertainment events. Signage revenues generally involve the sale of advertising space at The Garden during entertainment events and otherwise in our venues. Sponsorship agreements may require us to use the name, logos and other trademarks of sponsors in our advertising and in promotions for our venues, productions and other live entertainment events. Sponsorship arrangements may be exclusive within a particular sponsorship category or non-exclusive and generally permit a sponsor to use the name, logos and other trademarks of our productions, events and venues in connection with their own advertising and in promotions in our venues or in the community. Prior to the Entertainment Distribution, revenue was generally recorded on a gross basis as the Company is the principal in such arrangements and controls the related goods or services until transfer to the customer for sponsorship agreements entered into by the Company or that have performance obligations satisfied solely by the Company.MSG Sports' share of the Company's sponsorship and signage revenue is recognized in the combined statements of operations as a component of direct operating expenses. The revenue sharing expense has been specifically identified where possible, with the remainder allocated proportionally based upon revenue. In connection with the Entertainment Distribution, under the Arena License Agreements, the Company shares certain sponsorship and signage revenues withMSG Sports . Under these agreementsMSG Sports has the rights to sponsorship and signage revenue that is specific to Knicks and Rangers events. In addition, in connection with the Entertainment Distribution, the Company andMSG Sports entered into sponsorship sales representation agreements, under which the Company has the right and obligation to sell and service sponsorships for the sports teams ofMSG Sports , in exchange for a commission. 60 --------------------------------------------------------------------------------
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Advertising Sales ("Ad Sales") Commission
In addition to the advertising sponsorship sales representation agreements with
MSG Sports discussed above, the Company and MSG Networks are parties to an
advertising sales representation agreement. Pursuant to the agreement, the
Company has the exclusive right and obligation to sell advertising
availabilities of MSG Networks. The Company is entitled to and earns commission
revenue on such sales. The expense associated with advertising personnel is
recognized in selling, general and administrative expenses. For Fiscal Year 2021
and Fiscal Year 2020, the Company recognized approximately $13,700 and $12,600
of revenues, respectively, under the advertising sales representation agreement
with MSG Networks. In connection with the Merger with MSG Networks, these
revenues will be eliminated retrospectively on a consolidated basis beginning
Fiscal Year 2022.
Expenses - Entertainment
Our Entertainment segment's principal expenses are payments made to performers
of our productions, staging costs and day-of-event costs associated with events,
and advertising costs. In addition, expenses in our Entertainment segment
include costs associated with the ownership, lease, maintenance and operation of
our venues, along with our corporate and other supporting functions.
Depreciation expense on property and equipment related to the Company's
performing venues and offices is also included in the Entertainment segment's
results.
Performer Payments
Our proprietary productions are performed by talented actors, dancers, singers,
musicians and entertainers. In order to attract and retain this talent, we are
required to pay our performers an amount that is commensurate with both their
abilities and the demand for their services from other entertainment companies.
Our productions typically feature ensemble casts (such as the Rockettes), where
most of our performers are paid based on a standard "scale," pursuant to
collective bargaining agreements we negotiate with the performers' unions.
Certain performers, however, have individually negotiated contracts.
Staging Costs
Staging costs for our proprietary events as well as other events that we promote
include the costs of sets, lighting, display technologies, special effects,
sound and all of the other technical aspects involved in presenting a live
entertainment event. These costs vary substantially depending on the nature of
the particular show, but tend to be highest for large-scale theatrical
productions, such as the Christmas Spectacular. For concerts we promote, the
performer usually provides a fully-produced show. Along with performer salaries,
the staging costs associated with a given production are an important factor in
the determination of ticket prices.
Day-of-Event Costs
For days in which our Entertainment segment stages its productions, promotes an
event or provides one of our venues to a third-party promoter under a license
fee arrangement, the event is charged the variable costs associated with such
event, including box office staff, stagehands, ticket takers, ushers, security,
and other similar expenses. In situations where we provide our venues to a
third-party promoter under a license fee arrangement, day-of-event costs are
typically included in the license fees charged to the promoter. In connection
with the Entertainment Distribution, the Company and MSG Sports entered into the
Arena License Agreements related to the use of The Garden by MSG Sports , under
which the Company is reimbursed for day-of-event costs (as defined under the
Arena License Agreements). The Company records such reimbursements as reductions
to direct operating expenses.
Venue Usage
The Company's consolidated and combined financial statements include expenses
associated with the ownership, maintenance and operation of The Garden, which
the Company and MSG Sports use in their respective operations. Historically, the
Company did not charge rent expense to MSG Sports for use of The Garden.
However, for purposes of the Company's combined financial statements, a portion
of the historical depreciation expense as well as other non-event related venue
operations costs have been allocated to MSG Sports , in order to properly burden
all business units comprising MSG Sports' historical operations related to use
of The Garden. This allocation was based on event count and revenue, which the
Company's management believes is a reasonable allocation methodology. This
allocation is reported as a reduction of direct operating expense in the
combined statements of operations.
In connection with the Entertainment Distribution, the Company and MSG Sports
entered into Arena License Agreements related to the use of The Garden by MSG
Sports as discussed under Venue License Fees.
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Revenue Sharing Expenses As discussed above,MSG Sports' share of the Company's suites licenses, venue signage and certain sponsorship and concessions revenue is reflected within direct operating expense as revenue sharing expenses. For periods prior to the Entertainment Distribution, such amounts were either specifically identified where possible or allocated proportionally within the combined financial statements. Marketing and Advertising Costs We incur significant costs promoting our productions and other events through various advertising campaigns, including advertising on outdoor platforms and in newspapers, on television and radio, and on social and digital platforms. In light of the intense competition for entertainment events, such expenditures are a necessity to drive interest in our productions and encourage members of the public to purchase tickets to our shows. Tao Group Hospitality Our Tao Group Hospitality segment, which represented approximately 55% of our consolidated revenues for Fiscal Year 2021, consists of our controlling interest in Tao Group Hospitality (including Hakkasan since the acquisition inApril 2021 ), which strengthened the Company's portfolio of live offerings with a complementary hospitality group with widely-recognized brands that include: Tao, Marquee, Lavo, Beauty & Essex, Cathédrale, Hakkasan and Omnia. Revenue Sources - Tao Group Hospitality Revenues earned from dining, nightlife and hospitality offerings through Tao Group Hospitality are recognized when food, beverages and/or services are provided to the customer as that is the point at which the related performance obligation is satisfied. In addition, management fee revenues which are earned in accordance with specific venue management agreements are recorded over the period in which the management services are performed as that reflects the measure of progress toward satisfaction of the Company's venue management performance obligations. Expenses - Tao Group Hospitality Entertainment Dining and Nightlife Offerings Costs The Tao Group Hospitality restaurants and nightlife and hospitality venues incur costs for providing food and beverage as well as banquet hosting services to customers. Dining and nightlife offering costs primarily include the following: •labor costs, consisting of restaurant management salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits; •food and beverage costs; •operating costs, consisting of entertainment and performers, maintenance, utilities, bank and credit card charges, and any other restaurant-level expenses; and •occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, insurance premiums and taxes. Other Expenses The Company's selling, general and administrative expenses primarily consist of administrative costs, including compensation, professional fees, as well as sales and marketing costs, including non-event related advertising expenses. Operating expenses in the Company's Entertainment segment also include corporate overhead costs and venue operating expenses. Venue operating expenses include the non-event related costs of operating the Company's performance venues, and include such costs as rent for the Company's leased venues, real estate taxes, insurance, utilities, repairs and maintenance, and labor related to the overall management of the venues. Depreciation expense on property and equipment related to The Garden,Hulu Theater atMadison Square Garden and the Forum (prior to its sale inMay 2020 ) is reported in the Entertainment segment. In addition, the Company incurs non-capitalizable content development and technology costs associated with the Company's MSG Sphere initiative and these costs are reported in the Entertainment segment. Factors Affecting Operating Results In addition to the discussion under the section "Impact of the COVID-19 Pandemic on Our Business" above, the operating results of our segments are largely dependent on our ability to: attract concerts and other events to our venues, as well as 62 --------------------------------------------------------------------------------
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customers to our entertainment and nightlife offerings; revenues under various agreements entered withMSG Sports in connection with the Entertainment Distribution; the continuing popularity of the Christmas Spectacular atRadio City Music Hall ; the affiliation agreements MSG Networks negotiates with Distributors; the number of subscribers of certain Distributors; and the advertising rates we charge advertisers. Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams whose games we broadcast on our networks and host in our venues. Our Company's future performance is dependent in part on general economic conditions and the effect of these conditions on our customers. Weak economic conditions may lead to lower demand for our entertainment and nightlife offerings and programming content, suite licenses and tickets to our live productions, concerts, family shows and other events, which would also negatively affect concession and merchandise sales, lower levels of sponsorship and venue signage and decrease advertising revenues. These conditions may also affect the number of concerts, family shows and other events that take place in the future. An economic downturn could adversely affect our business and results of operations. The Company continues to explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time. Our results will also be affected by investments in, and the success of, new productions. Disruptions caused by the COVID-19 pandemic had a significant and negative impact onTao Group Hospitality's operations and financial performance for Fiscal Year 2021. See "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our Business" for more information. Factors Affecting Comparability OnApril 27, 2021 , Tao Group Hospitality acquired a controlling interest in Hakkasan, a global business in the hospitality industry that includes a collection of restaurants, bars, lounges, and nightclubs resulting in approximately two months of Fiscal Year 2021 operations that were absent in the prior year. OnJuly 9, 2021 , the Merger with MSG Networks was completed. Beginning with the fiscal quarter endingSeptember 30, 2021 , the Merger will be accounted for as a transaction between entities under common control as the Company and MSG Networks were, prior to the Merger, each controlled by theDolan Family Group (as defined herein). Upon the closing of the Merger, the net assets of MSG Networks will be combined with those of the Company at their historical carrying amounts and the companies will be presented on a combined basis for all historical periods that the companies were under common control. As this transaction represents a change in reporting entity, the financial statements in future filings will be materially different since they will represent the combined operations of both commonly-controlled entities. See "- Item 8 Financial Statements and Supplementary Data - Consolidated and Combined Financial Statements - Notes to Consolidated and Combined Financial Statements - Note 1. Description of Business and Basis of Presentation" for more information regarding the Merger. Due to these factors and the impact of COVID-19 Pandemic discussed above, Fiscal Year 2021 results are not comparable to the prior year and are not indicative of future results. Purchase Accounting Adjustments In connection with the acquisitions completed in fiscal years 2018 and 2017, as well as the Hakkasan acquisition through Tao Group Hospitality in Fiscal Year 2021, the Company recorded certain fair value adjustments related to acquired assets and liabilities in accordance with ASC Topic 805, Business Combinations. For the Company's acquisitions, the Company recognized fair value adjustments primarily for (i) recognition of intangible assets such as trade names, venue management contracts, favorable leases, and festival rights, (ii) step-up of property and equipment, (iii) step-up of inventory, (iv) unfavorable lease obligation, (v) goodwill, and (vi) internally-developed software. The aforementioned fair value adjustments, except for goodwill, will be expensed as incremental non-cash expenses in the Company's consolidated and combined statements of operations based on their estimated useful lives ("Purchase Accounting Adjustments"). With the exception of impairment of goodwill, the Company does not allocate any Purchase Accounting Adjustments to the reporting segments and reports any Purchase Accounting Adjustments as reconciliation items in reporting segment operating results. See "- Item 8 Financial Statements and Supplementary Data - Consolidated and Combined Financial Statements - Notes to Consolidated and Combined Financial Statements - Note 21. Segment Information" for more information on the presentation of Purchase Accounting Adjustments. Investments in Nonconsolidated Affiliates InJuly 2018 , the Company acquired a 30% interest in SACO, a global provider of high-performance LED video lighting and media solutions for a total consideration of approximately$47,244 . The Company is utilizing SACO as a preferred display technology provider for MSG Sphere and is benefiting from agreed upon commercial terms. 63 --------------------------------------------------------------------------------
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In addition, the Company also has other investments in various entertainment,
hospitality companies and related technology companies, accounted for under the
equity method. See Note 8 to the consolidated and combined financial statements
included in Item 8 of this Annual Report on Form 10-K for more information on
our investments in nonconsolidated affiliates.
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Results of Operations Comparison of the Year EndedJune 30, 2021 versus the Year EndedJune 30, 2020 Consolidated and Combined Results of Operations The table below sets forth, for the periods presented, certain historical financial information. Years Ended June 30, Change (a) 2021 2020 Amount Percentage Revenues$ 180,401 $ 762,936 $ (582,535) (76) % Direct operating expenses 171,924 508,122 (336,198) (66) % Selling, general and administrative expenses ("SG&A") 322,714 344,637 (21,923) (6) % Depreciation and amortization 114,664 104,899 9,765 9 % Impairment for intangibles, long-lived assets, and goodwill - 105,817 (105,817) (100) % Gain on disposal of assets held for sale and associated settlements (b) - (240,783) 240,783 100 % Restructuring charges (b) 21,299 - 21,299 NM Operating loss (450,200) (59,756) (390,444) NM Other income (expense): Loss in equity method investments (6,858) (4,433) (2,425) (55) % Interest income (expense), net (33,825) 15,693 (49,518) NM Miscellaneous income, net 51,062 38,855 12,207 31 % Loss from operations before income taxes (439,821) (9,641) (430,180) NM Income tax benefit (expense) 9,371 (5,046) 14,417 NM Net loss (430,450) (14,687) (415,763) NM Less: Net loss attributable to redeemable noncontrolling interests (16,269) (30,387) 14,118 46 % Less: Net loss attributable to nonredeemable noncontrolling interests (2,099) (1,534) (565) (37) % Net income (loss) attributable toMadison Square Garden Entertainment Corp.'s stockholders$ (412,082) $ 17,234 $ (429,316) NM
NM - Percentage is not meaningful
(a)The consolidated statements of operations for Fiscal Year 2021 and the activities fromApril 18, 2020 toJune 30, 2020 included on the statement of operations for Fiscal Year 2020 are presented on a consolidated basis, as the Company became a standalone public company onApril 17, 2020 . The financial information for the period ofJuly 1, 2019 toApril 17, 2020 that is included in the Company's combined statements of operations for Fiscal Year 2020 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. In addition, the Company's operating results were materially impacted during Fiscal Year 2021 and part of Fiscal Year 2020 by the COVID-19 pandemic and government actions taken in response. See "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our Business" for more information. (b)See "Business Segment Results - Entertainment" for a more detailed discussion of the company's gain on disposal of assets held for sale and associated settlements and impairment for intangibles, long-lived assets, and goodwill in Fiscal Year 2020. 65
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The following is a summary of changes in segments' operating results for Fiscal Year 2021 as compared to Fiscal Year 2020.
Gain on
disposal of
Impairment for assets held for
Direct Depreciation intangibles, sale and
Changes attributable operating and long-lived assets, associated Restructuring
to Revenues expenses (b) SG&A (c) amortization and goodwill settlements charges Operating loss
Entertainment
segment(a) $ (502,927) $ (285,554) $ (13,338) $ (4,147) $ - $ 240,783 $ 21,299 $ (461,970)
Tao Group Hospitality
segment (a) (80,035) (50,047) (9,015) 799 (94,946) - - 73,174
Purchase accounting
adjustments - (1,027) (6) 13,113 (10,871) - - (1,209)
Inter-segment
eliminations 427 430 436 - - - - (439)
$ (582,535) $ (336,198) $ (21,923) $ 9,765 $ (105,817) $ 240,783 $ 21,299 $ (390,444)
(a)See "Business Segment Results" for a more detailed discussion of the
operating results of our segments.
(b)Direct operating expenses primarily include:
•event costs related to the presentation, production and marketing of our
events;
•revenue sharing expenses associated with the venue-related signage, sponsorship
and suite license fee revenues that are attributable to MSG Sports ;
•venue lease, maintenance and other operating expenses, net of recovery charges
for venue usage from MSG Sports for hosting the home games of the Knicks and
Rangers at The Garden;
•the cost of concessions, merchandise and food and beverage sold at our venues;
and
•restaurant operating expenses, inclusive of labor costs.
(c)SG&A primarily consist of administrative costs, including compensation,
professional fees, sales and marketing costs, including non-event related
advertising expenses, and business development costs, as well as costs
associated with the development of MSG Sphere, including technology and content
development costs.
Depreciation and amortization
Depreciation and amortization for Fiscal Year 2021 increased $9,765 , or 9%, to
$114,664 as compared to Fiscal Year 2020 primarily due to (i) $14,280 of
accelerated amortization expense recorded during the third quarter of Fiscal
Year 2021 for certain Tao Group Hospitality venue management contracts that were
converted to operating leases, and (ii) higher depreciation expense of $3,820
for equipment used in the development of the MSG Sphere. The increase was
partially offset by the full depreciation and amortization of certain assets in
The Garden of $3,013 and lower depreciation and amortization of $5,827
associated with the Forum as the recording of depreciation ceased on March 24,
2020 when the venue was classified as assets held for sale.
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Impairment for intangibles, long-lived assets, and goodwill At the onset of the COVID-19 pandemic in Fiscal Year 2020, the disruptions caused by the pandemic directly impacted the Company's projected cash flows resulting in operating disruptions. These disruptions along with the deteriorating macroeconomic conditions and industry/market considerations, were considered a "triggering event" for the Company's Tao Group Hospitality reporting unit, which required the Company to assess the carrying value of its goodwill for that reporting unit for impairment. In connection with the goodwill impairment test, the Company also evaluated the intangibles and long-lived assets for the Tao Group Hospitality reporting unit for impairment. Based on this evaluation, the Company recorded a non-cash impairment charge of$105,817 for Fiscal Year 2020, which consisted of the following: Tao Group Purchase Hospitality accounting Segment adjustments Total Intangibles $ -$ 3,541 $ 3,541 Long-lived assets 6,363 7,330 13,693 Goodwill 88,583 - 88,583$ 94,946 $ 10,871 $ 105,817 Loss in equity method investments Loss in equity method investments for Fiscal Year 2021 increased$2,425 , or 55%, to$6,858 as compared to a loss of$4,433 in Fiscal Year 2020. The year-over-year increase is primarily due to higher loss in an investment held by Tao Group Hospitality, primarily as a result of an impairment charge recorded by the investee. In addition, the loss in equity method investments in the current year reflected higher inter-entity profit eliminations recorded in connection with the capital expenditure purchases for MSG Sphere. Interest income (expense), net Interest expense, net for Fiscal Year 2021 was$33,825 as compared to net interest income of$15,693 in Fiscal Year 2020, a decrease of net interest income of$49,518 . The decrease in net interest income in the current year was primarily due to (i) higher interest expense in the current year associated with the National Properties Term Loan Facility of$33,481 , (ii) lower interest income of$16,720 as the Company shifted its investments intoU.S. Treasury Bills, money market funds, and time deposits, which yield a lower interest rate, and, to a lesser extent, the absence of interest income earned on a loan extended toThe Azoff Company as compared to prior year since the loan was repaid during the second quarter of Fiscal Year 2020. Miscellaneous income, net Miscellaneous income, net for Fiscal Year 2021 increased$12,207 , or 31%, to$51,062 as compared to$38,855 in Fiscal Year 2020. The increase was primarily due to the net realized and unrealized gains recognized on the Company's investment in DraftKings Inc. ("DraftKings") and Townsquare Media, Inc. ("Townsquare") of 13,550. See Note 8 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion. Income taxes Income tax benefit for Fiscal Year 2021 of$9,371 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) increase in valuation allowance of$121,216 , (ii) tax expense of$5,311 related to nondeductible officers' compensation, and (iii) tax expense of$3,857 relating to noncontrolling interests, partially offset by state income tax benefit of$44,848 . See Note 19 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the components of income tax and a reconciliation of the statutory federal rate to the effective tax rate. Income tax expense for Fiscal Year 2020 of$5,046 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) state income tax expense of$4,016 , (ii) tax expense of$6,704 relating to noncontrolling interests, (iii) tax expense of$6,961 relating to nondeductible transaction costs, and (iv) tax expense of$4,407 related to nondeductible officers' compensation, partially offset by a decrease in valuation allowance of$14,220 . 67 --------------------------------------------------------------------------------
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Adjusted operating income The Company evaluates segment performance based on several factors, of which the key financial measure is their operating income (loss) before (i) adjustments to remove the impact of non-cash straight-line leasing revenue associated with the Arena License Agreements withMSG Sports , (ii) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, (iii) amortization for capitalized cloud computing arrangement costs (see Note 2. Summary of Significant Accounting Policies to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further details), (iv) share-based compensation expense or benefit, (v) restructuring charges or credits, and (vi) gains or losses on sales or dispositions of businesses and associated settlements, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of 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). See Note 21. Segment Information to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the definition of adjusted operating income (loss). The Company has presented the components that reconcile operating income (loss) to adjusted operating income (loss). 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. The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company's performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance, and evaluates management's effectiveness with specific reference to these indicators. Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss). The following is a reconciliation of operating loss to adjusted operating loss: Years Ended June 30, Change 2021 2020 Amount Percentage Operating loss$ (450,200) $ (59,756) $ (390,444) NM Non-cash portion of arena license fees from MSG Sports (13,026)
-
Share-based compensation 52,917
42,190
Depreciation and amortization (a) 114,664
104,899
Restructuring charges 21,299
-
Impairment of intangibles, long-lived assets and goodwill -
105,817
Gain on disposal of assets held for sale and associated settlements -
(240,783)
Other purchase accounting adjustments 3,334 4,367 Adjusted operating loss$ (271,012) $ (43,266) $ (227,746) NM ________________ NM - Percentage is not meaningful (a)Depreciation and amortization included purchase accounting adjustments of$25,567 and$12,454 for the years endedJune 30, 2021 and 2020, respectively. The increase in purchase accounting adjustments related depreciation and amortization for Fiscal Year 2021 include$14,280 of accelerated amortization expense for certain Tao Group Hospitality venue management contracts that were converted to operating leases. 68 --------------------------------------------------------------------------------
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Adjusted operating loss for Fiscal Year 2021 increased$227,746 to adjusted operating loss of$271,012 as compared to Fiscal Year 2020. The net increase was attributable to the following: Increase in adjusted operating loss of the Entertainment segment$ 210,655 Increase in adjusted operating loss of the Tao Group Hospitality segment 16,652 Inter-segment eliminations 439$ 227,746
Net loss attributable to redeemable and nonredeemable noncontrolling interests
For Fiscal Year 2021, the Company recorded a net loss attributable to redeemable noncontrolling interests of$16,269 and a net loss attributable to nonredeemable noncontrolling interests of$2,099 as compared to net loss attributable to redeemable noncontrolling interests of$30,387 and net loss attributable to nonredeemable noncontrolling interests of$1,534 for Fiscal Year 2020. These amounts represent the share of net loss of Tao Group Hospitality and BCE that is not attributable to the Company. In addition, the net loss attributable to redeemable and nonredeemable noncontrolling interests includes a proportional share of expenses related to purchase accounting adjustments. Business Segment Results Entertainment The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income (loss) to adjusted operating loss for the Company's Entertainment segment. Years Ended June 30, Change 2021 2020 Amount Percentage Revenues$ 82,281 $ 585,208 $ (502,927) (86) % Direct operating expenses 103,089 388,643 (285,554) (73) % Selling, general and administrative expenses 268,705 282,043 (13,338) (5) % Depreciation and amortization 80,142 84,289 (4,147) (5) % Restructuring charges 21,299 - 21,299 NM Gain on disposal of assets held for sale and associated settlements - (240,783) 240,783 NM Operating income (loss)$ (390,954) $ 71,016 $ (461,970) NM Reconciliation to adjusted operating loss: Non-cash portion of arena license fees from MSG Sports (13,026) - Share-based compensation 47,633 41,227 Depreciation and amortization 80,142 84,289 Restructuring charges 21,299 - Gain on disposal of assets held for sale and associated settlements - (240,783) Adjusted operating loss$ (254,906) $ (44,251) $ (210,655) NM ----- NM - Percentage is not meaningful Factors Affecting Results of Operations Carve-out Financial Statements The consolidated statement of operations for Fiscal Year 2021 and the activities fromApril 18, 2020 toJune 30, 2020 included on the statement of operations for Fiscal Year 2020 are prepared on a consolidated basis, as the Company became a standalone public company onApril 17, 2020 . The Company's financial information for the period ofJuly 1, 2019 toApril 17, 2020 that is included in the results of operations for Fiscal Year 2020 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 as carve-out financial statements as the Company was not a standalone public company prior to the Entertainment Distribution. The financial information for the period ofJuly 1, 2019 toApril 17, 2020 that is included in the results of operations for Fiscal Year 2020, include allocations for certain support functions that were provided on a centralized basis and not historically recorded at the business unit level byMSG Sports , such as expenses related to executive management, finance, legal, human resources, 69 --------------------------------------------------------------------------------
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government affairs, information technology, and venue operations among others. As part of the Entertainment Distribution, certain corporate and operational support functions were transferred to the Company and therefore, charges were reflected in order to properly burden all business units 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 . 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 The Entertainment segment 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. See "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our Business" for more information. Revenues Revenues for Fiscal Year 2021 decreased$502,927 , or 86%, to$82,281 as compared to Fiscal Year 2020. The net decrease was attributable to the following: Decrease in event-related revenues, as discussed below$ (212,899) 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
(128,488)
Decrease in suite license fee revenues due to the government-mandated closures and restrictions on the use of our venues beginning inMarch 2020 as a result of the COVID-19 pandemic.
(85,900)
Decrease in venue-related signage and sponsorship revenues due to the impact of carve-out financial statement assumptions in Fiscal Year 2020 as well as the impact of government-mandated closures and restrictions on the use of our venues beginning inMarch 2020 as a result of the COVID-19 pandemic
(65,196)
Absence of revenues from the Forum due to its disposition in
(45,719)
Increase in arena license fees from
21,345
Increase in revenues from Sponsorship Sales and Service Representation Agreements
with
11,280
Other net increases 2,650
$ (502,927)
The decrease in event-related revenues reflects (i) lower revenues from concerts
of $158,580 during Fiscal Year 2021 and (ii) lower revenues from other live
entertainment and sporting events of $54,319 during Fiscal Year 2021. Both of
these declines were 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.
See "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our
Business" for more information.
The arena license fee revenues from MSG Sports in Fiscal Year 2021 were due to
The Garden reopening for the Knicks games in December 2020 and the Rangers games
in January 2021 with limited or no fans. There were no arena license fees
recorded prior to the Entertainment Distribution.
The increase in revenues from the Company's Sponsorship Sales and Service
Representation Agreements and Arena License Agreements with MSG Sports reflects
the impact of entering into these agreements in connection with, and effective
as of, the Entertainment Distribution.
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Direct operating expenses Direct operating expenses for Fiscal Year 2021 decreased$285,554 , or 73%, to$103,089 as compared to Fiscal Year 2020. The net decrease was attributable to the following: Decrease in event-related direct operating expenses from (i) concerts of$85,449 during Fiscal Year 2021 and (ii) other live entertainment and sporting events of$39,057 , both due to government-mandated closures and restrictions on the use of our venues beginning inMarch 2020 as a result of the COVID-19 pandemic$ (124,506) Decrease in direct operating expenses associated with suite license operations primarily due to the impact of lower revenue sharing expenses withMSG Sports corresponding to the lower suite revenue during Fiscal Year 2020 due to government-mandated closures and restrictions on the use of our venues beginning inMarch 2020 as a result of the COVID-19 pandemic (58,096) Decrease in direct operating expenses associated with venue-related signage and sponsorship primarily due to the impact of lower revenue sharing expense withMSG Sports of$52,052 as a part of carve-out financial assumptions in Fiscal Year 2020. (53,392) 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 (50,714)
Decrease in direct operating expenses associated with the Forum due to its
disposition in
(26,576)
Increase in direct operating expenses associated with hosting the Knicks and the
Rangers games, including expenses not reimbursable by MSG Sports pursuant to the
Arena License Agreements 3,118
Other net increases, primarily due to the absence of venue operating costs carve-out adjustments in Fiscal Year 2020
24,612
$ (285,554)
Selling, general and administrative expenses
Selling, general and administrative expenses for Fiscal Year 2021 decreased
$13,338 , or 5%, to $268,705 as compared to Fiscal Year 2020. The decrease was
primarily due to (i) a net decrease in employee compensation and related
benefits of $34,835 , primarily as a result of the Company's full-time workforce
reduction in August 2020 , and (ii) lower net professional fees of $25,368
associated with litigation, MSG Sphere content development and corporate
development. The decrease was partially offset by an incremental expense for
share-based compensation of $11,129 associated with the cancellation of certain
awards pursuant to a settlement agreement and other net increases, and $15,614
of professional fees associated with the Company's merger with MSG Networks and
the impact of the Company's spin-off from MSG Sports , which impacted the
year-over-year comparability of certain results since the prior year operating
results were prepared under a carve-out basis.
See "- Restructuring charges" below for further discussion on the Company's
full-time workforce reduction in August 2020 . See Note 16 to the consolidated
and combined financial statements included in Item 8 of this Annual Report on
Form 10-K for further discussion of the Company's reversal of share-based
compensation expenses in the second quarter of Fiscal Year 2021.
Depreciation and amortization
Depreciation and amortization decreased $4,147 , or 5%, to $80,142 as compared to
Fiscal Year 2020 primarily due to certain assets in The Garden being fully
depreciated and amortized of $3,013 and lower depreciation and amortization of
$5,827 associated with the Forum as the recording of depreciation ceased on
March 24, 2020 when the venue was classified as assets held for sale, partially
offset by higher depreciation expense for equipment of $3,820 used in the
development of MSG Sphere.
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. For Fiscal Year 2021, the Company recorded total
restructuring charges of $21,299 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 .
Gain on disposal of assets held for sale and associated settlement
In May 2020 , pursuant to a Membership Interest Purchase Agreement (the "MIPA")
that a subsidiary of the Company entered into on March 24, 2020 , the Company
sold the Forum, and the parties settled related litigation for cash
consideration in the amount of $400,000 . In connection with this transaction,
the Company recorded a gain of $240,783 in the fourth quarter of Fiscal Year
2020, which included $140,495 attributable to the Forum associated settlement.
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Operating income (loss) Operating loss for Fiscal Year 2021 increased$461,970 to$390,954 as compared to operating income of$71,016 in Fiscal Year 2020. The increase in operating loss was 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 loss Adjusted operating loss for Fiscal Year 2021 increased$210,655 to$254,906 as compared to Fiscal Year 2020. The increase in adjusted operating loss was less than the increase in operating loss of$461,970 primarily due to (i) the gain on disposal of the Forum inInglewood and associated settlement of$240,783 being excluded in the calculation of adjusted operating loss. Tao Group Hospitality The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating loss to adjusted operating income (loss) for the Company's Tao Group Hospitality segment. Years Ended June 30, Change 2021 2020 Amount Percentage Revenues$ 100,166 $ 180,201 $ (80,035) (44) % Direct operating expenses 66,591 116,638 (50,047) (43) % Selling, general and administrative expenses 54,034 63,049 (9,015) (14) % Depreciation and amortization 8,955 8,156 799 10 % Impairment for intangibles, long-lived assets, and goodwill - 94,946 (94,946) (100) % Operating loss$ (29,414) $ (102,588) $ 73,174 71 % Reconciliation to adjusted operating income (loss): Share-based compensation 5,284 963 Depreciation and amortization 8,955 8,156 Impairment for intangibles, long-lived assets, and goodwill -
94,946
Adjusted operating income (loss)$ (15,175) $ 1,477 $ (16,652) NM Factors Affecting Results of Operations Disruptions caused by the COVID-19 pandemic had a significant and negative impact onTao Group Hospitality's operations and financial performance for Fiscal Year 2021. See "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our Business" for more information. Revenues Revenues for Fiscal Year 2021 decreased$80,035 , or 44%, to$100,166 as compared to the prior year. The net decrease was attributable to the following: Decrease in revenues due to the closure of certain venues as a result of the COVID-19 pandemic$ (57,874) Decrease in revenues due to capacity restrictions at re-opened venues
(36,743)
Decrease in revenues associated with the permanent closing of Vandal and
Avenue in
(12,619)
Increase in revenues due to the Hakkasan acquisition in
27,604
Other net decreases (403)
$ (80,035)
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Direct operating expenses Direct operating expenses for Fiscal Year 2021 decreased$50,047 , or 43%, to$66,591 as compared to the prior year. The net decrease was attributable to the following: 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
(23,370)
Decrease in direct operating expenses associated with rent expense, primarily due to rent concessions received and the permanent closure of Vandal and Avenue (7,514) Increase in direct operating expenses due to the Hakkasan acquisition inApril 2021
12,278
Other net decreases, due to lower credit card fees (6,525)
$ (50,047)
Selling, general and administrative expenses
Selling, general and administrative expenses for Fiscal Year 2021 decreased
$9,015 , or 14%, to $54,034 as compared to Fiscal Year 2020 primarily due to (i)
lower restaurant expenses and supplies, public relations costs, repairs and
maintenance, utilities, and general liability insurance of $8,894 , (ii) lower
marketing costs of $8,255 , (iii) various other decreases, primarily related to
temporary office closure and the absence of bad debt expense incurred in the
prior year, and (iv) employee compensation and related benefits, inclusive of an
increase in share-based compensation, of $981 . These decreases were partially
offset by Hakkasan selling, general and administrative expenses of $8,019
incurred since the acquisition in April 2021 and professional fees, primarily
related to the acquisition of Hakkasan, of $3,686 .
Depreciation and amortization
Depreciation and amortization for Fiscal Year 2021 increased $799 , or 10%, to
$8,955 as compared to Fiscal Year 2020 primarily due to an increase in venues
due to the Hakkasan acquisition in April 2021 , as well as capital expenditures.
Impairment for intangibles, long-lived assets, and goodwill
In the prior year, the disruptions caused by the COVID-19 pandemic directly
impacted the Company's projected cash flows resulting in operating disruptions.
This disruption along with the deteriorating macroeconomic conditions and
industry/market considerations, were considered a "triggering event" for the
Company's Tao Group Hospitality reporting unit, which required the Company to
assess the carrying value of Tao Group Hospitality's intangible assets,
long-lived assets and goodwill for impairment. Based on this evaluation, the
Company recorded a non-cash impairment charge of $94,946 during the third and
fourth quarters of Fiscal Year 2020, which included (i) an impairment charge of
$88,583 related to goodwill and (ii) impairment charges associated with Vandal
and Avenue in New York of $6,363 for certain long-lived assets (including net
impact of right-of-use assets and liabilities associated with leases).
In addition, during Fiscal Year 2020, the Company also recorded a non-cash
impairment charge of $10,871 under purchase price adjustment primarily
associated with right-of-use lease assets and a tradename. See Note 21 to the
consolidated and combined financial statements included in Item 8 of this Annual
Report on Form 10-K for further detail.
Operating loss
Operating loss for Fiscal Year 2021 decreased $73,174 , or 71% , to $29,414 as
compared to Fiscal Year 2020 was primarily due to the absence of the prior year
impairment of intangibles, long-lived assets and goodwill, as well as decreases
in direct operating expenses and selling, general and administrative expenses,
partially offset by lower revenues, as discussed above.
Adjusted operating income (loss)
Adjusted operating loss for Fiscal Year 2021 was $15,175 as compared to adjusted
operating income of $1,477 in the prior year period, a decrease of $16,652 . The
increase in adjusted operating loss was higher as compared to the decrease in
operating loss primarily due to the impairment charges of $94,946 for certain
long-lived assets and goodwill in the prior year, partially offset by the
increase in share-based compensation as discussed above.
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Comparison of the Year EndedJune 30, 2020 versus the Year EndedJune 30, 2019 The Company has applied theSecurities and Exchange Commission's recently adopted FAST Act Modernization and Simplification of Regulation S-K, which permits the discussion to be limited to the two most recent fiscal years. The aforementioned discussion and analysis deals with comparisons of material changes in the consolidated financial statements for Fiscal Year 2021 and Fiscal Year 2020. For the comparison of Fiscal Year 2020 and Fiscal Year 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our 2020 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onAugust 31, 2020 . 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. For the majority of Fiscal Year 2021, substantially all of the Entertainment business operations were suspended and Tao Group Hospitality was operating at significantly reduced capacity and demand. Although operations are resuming, 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 inmid-March 2020 . Use of The Garden resumed for Knicks and Rangers home games without fans inDecember 2020 andJanuary 2021 , respectively, and, beginning onFebruary 23, 2021 , The Garden was permitted to host fans at games at 10% seating capacity with certain safety protocols, such as proof of full vaccination or a negative COVID-19 test and social distancing. StartingApril 1, 2021 , our otherNew York performance venues,Hulu Theater atMadison Square Garden ,Radio City Music Hall and theBeacon Theatre , were also permitted to reopen at 10% capacity with certain safety protocols. Although live events were permitted at our venues, government-mandated capacity restrictions and other safety requirements made it economically unfeasible to do so for most events at that time. EffectiveMay 19, 2021 , all of ourNew York venues were permitted to host guests at full capacity, subject to certain restrictions, and effectiveJune 2021 ,The Chicago Theatre was permitted to host events without restrictions. As a result, The Garden hosted three Knicks playoff games with approximately 15,000-16,000 fans in attendance per game during Fiscal Year 2021, and we welcomed the Foo Fighters onJune 20, 2021 for the first live event at The Garden with 100% capacity since our venues were shut down inMarch 2020 . In addition, onJune 19, 2021 ,Radio City Music Hall opened its doors for the first time in over a year to host the Tribeca Festival's closing night film, Untitled: Dave Chappelle Documentary, with 100% capacity.The Beacon Theatre hosted its first ticketed event, at 100% capacity, onJune 22, 2021 with the first of two shows fromTrey Anastasio , andHulu Theater atMadison Square Garden hosted its first ticketed event, at 100% capacity, with a boxing/hip-hop event onAugust 3, 2021 . For all events hosted at ourNew York venues with 100% capacity prior toAugust 17, 2021 , guests were required to provide proof of full vaccination or a negative COVID-19 test, depending on the requirements of that venue and/or preference of the performer. EffectiveAugust 17, 2021 , all workers and customers inNew York City indoor dining, indoor fitness and indoor entertainment facilities are required to show proof of at least one vaccination shot. In addition, effectiveAugust 20, 2021 , face coverings are required for all individuals in indoor public spaces inChicago , including our venues. For Fiscal Year 2021, the majority of ticketed events at our venues were postponed or canceled and, while live events are permitted to be held at all of our performance venues as of the date of this filing and we are continuing to host and book new events, due to the lead-time required to book touring acts and artists, which is the majority of our business, we expect that our bookings will continue to be impacted through the 2021 calendar year. We continue to actively pursue one-time or multi-night performances at our venues as the touring market ramps up. The impact to our operations also included the cancellation of the 2020 production of the Christmas Spectacular and both the 2020 and 2021 Boston Calling Music Festivals. While the 2021 production of the Christmas Spectacular is currently on-sale, the current production is scheduled for 163 shows, as compared with 199 shows for the 2019 production, which was the last production presented prior to the impact of the COVID-19 pandemic. The Company has long-term arena license agreements (the "Arena License Agreements") withMSG 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. OnJuly 1, 2021 , the Knicks and Rangers began paying the full amounts provided for under their respective Arena License Agreements. The NBA and NHL have each announced that they intend to return to traditional October to April regular season schedule, with full 82-game regular seasons, for the 2021-22 season. Disruptions caused by the COVID-19 pandemic had a significant and negative impact onTao Group Hospitality's operations and financial performance for Fiscal Year 2021. Due to government actions taken in response to the COVID-19 pandemic, virtually 74 --------------------------------------------------------------------------------
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all ofTao Group Hospitality's venues were closed for approximately three months starting inmid-March 2020 , and Avenue and Vandal inNew York were permanently closed inApril 2020 andJune 2020 , respectively. In addition, Avenue inLos Angeles was permanently closed inMay 2021 . 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 as certain markets lifted restrictions, imposed restrictions, and changed operational requirements over time. As ofJune 30, 2021 , 51 ofTao Group Hospitality's venues were open for outdoor dining, limited or full capacity indoor dining (depending on the market), and delivery/takeout (23 legacy Tao Group Hospitality venues and 28 Hakkasan venues acquired in connection with theApril 27, 2021 transaction), inclusive of Tao Asian Bistro & Lounge atMohegan Sun , a new venue that first opened its doors inMarch 2021 , while 10 venues remained closed (five legacy Tao Group Hospitality venues and five Hakkasan venues). Of the 51 Tao Group Hospitality venues currently operating, 29 areU.S. -based and operating without capacity restrictions (21 Tao Group Hospitality legacy venues and eight Hakkasan venues) and 22 are international (two Tao Group Hospitality legacy venues and 20 Hakkasan venues) and operating under various governmental safety protocols such as curfews, capacity limitations and social distancing. EffectiveAugust 17, 2021 , workers and customers inNew York City indoor dining facilities are required to show proof of at least one vaccination shot. In addition, certainU.S. jurisdictions have reinstated safety protocols, such as the mask mandates inNevada andChicago , but not otherwise limiting capacity. MSG Networks depends on the appeal of its live programming to viewing subscribers of its networks and to its advertisers. 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. For more information about the impacts and risks to the Company as a result of the COVID-19 pandemic, see "- Introduction - Business Overview - Impact of the COVID-19 Pandemic on Our Business" and "Part I - Item 1A. Risk Factors - General Risk Factors - Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Actions Taken in Response by Governmental Authorities and Certain Professional Sports Leagues." As a result of the material impact COVID-19 had on our revenues during Fiscal Year 2021, we took several actions to improve our financial flexibility, reduce operating costs and preserve liquidity, including (i) revising our construction schedule for MSG Sphere, with an anticipated opening date of calendar year 2023, (ii) making significant cuts in both venue and corporate headcounts, and (iii) having our wholly-owned subsidiary,MSG National Properties, LLC ("MSG National Properties ") enter into a five-year$650,000 senior secured term loan facility ("National Properties Term Loan Facility"). See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the National Properties Term Loan Facility. InAugust 2020 , Tao Group Hospitality entered into an amendment to the Tao Senior Credit Agreement, which suspended certain financial covenants throughDecember 31, 2021 and increased the minimum liquidity requirement. In addition, in connection with the amendment, our wholly owned subsidiaryMSG Entertainment Group, LLC ("MSG Entertainment Group ") entered into a guarantee agreement, which also included a minimum liquidity requirement forMSG Entertainment Group . See Note 14 for more information regarding the amendment to the Tao Senior Credit Agreement. Tao Group Hospitality will likely need to seek covenant waivers in the future.Tao Group Hospitality's failure to obtain debt covenant waivers could trigger a violation of these covenants and lead to default, acceleration of all of its outstanding debt and a demand for payment under the guarantee ofMSG Entertainment Group , which would negatively impact the liquidity of Tao Group Hospitality and the Company. Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our businesses and available borrowing capacity under our MSGN Credit Agreement (as defined herein). Our principal uses of cash include working capital-related items (including funding our operations), capital spending (including our construction of a large-scale venue inLas Vegas ), debt service, investments and related loans and advances that we may fund from time to time, 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, challengingU.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$1,169,000 in cash and cash equivalents as ofJune 30, 2021 , to fund our operations, service the National Properties Term Loan Facility and the MSGN Credit Agreement, and pursue the development of the new venues discussed below over the next 12 months. In addition, MSG Networks had approximately$348,000 in cash and cash equivalents 75 --------------------------------------------------------------------------------
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as ofJune 30, 2021 . See "Contractual Obligations" section below for further detail on our off-balance sheet and on-balance sheet commitments. Our cash and cash equivalents include approximately$233,000 in advance cash proceeds - primarily related to 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. OnMarch 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 and acquisitions.Tao Group Hospitality's operations have been materially impacted by COVID-19. See "- Introduction -Business Overview - Impact of the COVID-19 Pandemic on Our Business." We expect that the Company will increase the availability under its subordinated loan withTao Group Hospitality, which will provide additional capital necessary, together with cash-on-hand,Tao Group Hospitality's revolving credit facility and existing committed capital from the Company, to fundTao Group Hospitality's operations and service its debt obligations over the next 12 months. MSG Spheres The Company has made significant progress on MSG Sphere at The Venetian, its state-of-the-art entertainment venue under construction inLas Vegas . See "Part I - Item 1. Our Business - Our Performance Venues - MSG Sphere." The Company expects the venue to have a number of significant revenue streams, including a wide variety of content such as attractions, concert residencies, corporate and select sporting events, as well as sponsorship and premium hospitality opportunities. As a result, we anticipate that MSG Sphere at The Venetian will generate substantial revenue and adjusted operating income on an annual basis. Our cost estimate, as ofJune 2021 , inclusive of core technology and soft costs, for MSG Sphere at The Venetian is approximately$1,865,000 . This cost estimate is net of$75,000 that the Sands has agreed to pay to defray certain construction costs and also excludes the impacts of changes in inflation and significant capitalized and non-capitalized costs for items such as content creation, internal labor, and furniture and equipment. Relative to our cost estimate above, our actual construction costs for MSG Sphere at The Venetian incurred throughJune 30, 2021 were approximately$850,000 , which is net of$65,000 received from Sands during Fiscal Year 2021. In addition, the amount of construction costs incurred as ofJune 30, 2021 includes approximately$98,000 of accrued expenses that were not yet paid as of that date. As with any major construction project, the construction of MSG Sphere is subject to potential unexpected delays, costs or other complications. MSG Sphere at The Venetian is a complex construction project with cutting-edge technology that relies on subcontractors obtaining components from a variety of sources around the world. InApril 2020 , the Company announced that it was suspending construction of MSG Sphere due to COVID-19 related factors that were outside of its control, including supply chain issues. As the ongoing effects of the pandemic continued to impact its business operations, inAugust 2020 , the Company disclosed that it resumed full construction with a lengthened timetable in order to better preserve cash through the COVID-19 pandemic. The Company remains committed to bringing MSG Sphere toLas Vegas and expects to open the venue in calendar year 2023. InDecember 2020 , the Company terminated its construction agreement with AECOM and assumed the role of construction manager to gain greater transparency and control over the construction process, including direct engagement and supervision of subcontractors. AECOM continues to support MSG Sphere at The Venetian through a services agreement that facilitates their ongoing involvement through MSG Sphere's completion. As the construction manager of the project, we aim to aggressively manage the cost of the project in this volatile environment to minimize any potential cost increases. 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 access additional 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 utilize several options, such as non-recourse debt financing, joint ventures, equity partners and a managed venue model. 76 --------------------------------------------------------------------------------
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For additional information regarding the Company's capital expenditures related to MSG Sphere, see Note 21 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K. InFebruary 2018 , we announced the purchase of land inStratford ,London , which we expect will become home to a future MSG Sphere. The Company submitted a planning application to the local planning authority inMarch 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 National Properties Term Loan Facility OnNovember 12, 2020 ,MSG National Properties , an indirect, wholly-owned subsidiary of the Company,MSG Entertainment Group, LLC ("MSG Entertainment Group ") and certain subsidiaries ofMSG National Properties entered into a five-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 ofMSG National Properties and its subsidiaries, and to make distributions toMSG Entertainment Group . The National Properties Term Loan Facility includes a minimum liquidity covenant, pursuant to whichMSG National Properties and its restricted subsidiaries are required to maintain a specified minimum level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter. From the closing date until the first anniversary of the National Properties Term Loan Facility, the minimum liquidity threshold is$450,000 , which is reduced each quarter by the amount of cash usage, subject to a minimum liquidity floor of$200,000 . After the first anniversary, the minimum liquidity level is reduced to$200,000 . If at any time the total leverage ratio ofMSG 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 orMSG 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 onNovember 12, 2025 . Borrowings under the National Properties Term Loan Facility bear interest at a floating rate, which at the option ofMSG 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 ofJune 30, 2021 was 7.00%. During Fiscal Year 2021,MSG National Properties made principal payments of$3,250 under the National Properties Term Loan Facility All obligations under the National Properties Term Loan Facility are guaranteed byMSG Entertainment Group andMSG 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 ofMSG 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 byMSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests inRadio City Music Hall and theBeacon 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 ofMSG 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 ofMSG 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 ofJune 30, 2021 ,MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Term Loan Facility. 77 --------------------------------------------------------------------------------
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Tao Credit Facilities OnMay 23, 2019 ,Tao Group Intermediate Holdings LLC ("TAOIH" or "Intermediate Holdings ") andTao Group Operating LLC ("TAOG" or "Senior Borrower"), entered into a credit agreement (the "Tao Senior Credit Agreement") withJPMorgan 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 inAugust 2024 (the "Tao Subordinated Credit Agreement") between a subsidiary of the Company andTao Group Sub-Holdings LLC , a subsidiary of Tao Group Hospitality, replaced the Senior Borrower's prior credit agreement datedJanuary 31, 2017 ("2017 Tao Credit Agreement"). OnJune 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 balances under the Tao Subordinated Credit Agreement, as amended, were$63,000 and$49,000 as ofJune 30, 2021 and 2020, respectively. 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. Disruptions caused by the COVID-19 pandemic have had, and are likely to continue to have, a significant and negative impact onTao Group Hospitality's operations and financial performance. OnAugust 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 throughDecember 31, 2021 , modified the applicable interest rates and increased the minimum liquidity requirement for the outstanding balance of$33,750 under the Tao Term Loan Facility and for the$25,000 availability under the Tao Revolving Credit Facility. In addition, in 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$4,800 as ofJune 30, 2021 . As ofJune 30, 2021 , TAOG, TAOIH and the restricted subsidiaries were in compliance with the covenants of the Tao Senior Credit Agreement. If recovery from the pandemic takes longer than currently estimated,Tao Group Hospitality will likely 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, acceleration of all of its outstanding debt and a demand for payment under the guarantee ofMSG Entertainment Group , which would negatively impact the liquidity of Tao Group Hospitality and the Company. OnMay 23, 2019 ,MSG Entertainment Holdings LLC , a subsidiary of the Company, andTao 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 onAugust 22, 2024 (the "Tao Subordinated Credit Agreement"). OnJune 15, 2020 , the Tao Subordinated Credit Agreement was amended to provide an additional$22,000 of borrowing capacity. As ofJune 30, 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 and combined financial statements in accordance with ASC Topic 810, Consolidation. During Fiscal Year 2021,Tao Group Hospitality made principal payments of$5,000 under the Tao Senior Credit Agreement. See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for additional information such as repayments of$8,250 made in Fiscal Year 2021 and scheduled repayment requirement of$12,750 in Fiscal Year 2022 on the National Properties Term Loan Facility and Tao Senior Secured Credit Facilities. MSGN Credit Facility OnSeptember 28, 2015 ,MSGN Holdings, L.P. ("MSGN L.P. "), an indirect wholly-owned subsidiary of MSG Networks,MSGN Eden, LLC , an indirect subsidiary of MSG Networks and the general partner ofMSGN L.P. ,Regional MSGN Holdings LLC , a direct subsidiary of MSG Networks and the limited partner ofMSGN L.P. (collectively withMSGN Eden, LLC , the "Holdings Entities"), and certain subsidiaries ofMSGN L.P. entered into a credit agreement (the "Former Credit Agreement") with a syndicate of lenders.MSGN L.P. , the Holdings Entities and certain subsidiaries ofMSGN L.P. amended and restated the Former Credit Agreement effectiveOctober 11, 2019 (the "MSGN Credit Agreement"). The MSGN Credit Agreement providesMSGN L.P. with 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. MSG Networks has made principal repayments aggregating to$52,250 throughJune 30, 2021 under the MSGN Credit Agreement. The MSGN Term Loan Facility amortized quarterly in accordance with its terms. As ofJune 30, 2021 , there was 78 --------------------------------------------------------------------------------
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$1,047,750 outstanding under the MSGN Term Loan Facility, and no borrowings under the MSGN Revolving Credit Facility. As ofJune 30, 2021 , theHoldings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the financial covenants of the MSGN Credit Agreement. The scheduled repayment for Fiscal Year 2022 is$49,500 . Letters of Credit The Company uses letters of credit to support its business operations. As ofJune 30, 2021 , the Company had a total of$4,226 of letters of credit outstanding, which included two outstanding letters of credit for an aggregate of$750 issued under the Tao Revolving Credit Facility. Cash Flow Discussion As ofJune 30, 2021 , cash, cash equivalents and restricted cash totaled$1,191,744 , as compared to$924,304 as ofJune 30, 2020 and$1,092,065 as ofJune 30, 2019 . The following table summarizes the Company's cash flow activities for the years endedJune 30, 2021 and 2020: Years EndedJune 30, 2021 2020 Net loss $
(430,450)
132,793 122,357
Subtotal $ (297,657) $ 107,670
Changes in working capital assets and liabilities 8,177 (11,639)
Net cash provided by (used in) operating activities $ (289,480) $ 96,031
Net cash used in investing activities (84,440) (389,657)
Net cash provided by financing activities 633,333 122,938
Effect of exchange rates on cash, cash equivalents and restricted cash
8,027 2,927
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 267,440 $ (167,761)
Operating Activities
Net cash used in operating activities for Fiscal Year 2021 increased by $385,511
to $289,480 as compared to the prior year primarily due to a higher operating
loss in the current year and changes in working capital assets and liabilities,
which included higher collections due to promoters, partially offset by lower
cash receipts from collections of accounts receivables and payments for certain
prepaid insurance.
Investing Activities
Net cash used in investing activities for Fiscal Year 2021 decreased by $305,217
to $84,440 as compared to the prior year primarily due to the absence of cash
used to purchase short-term investments in the prior year period, as well as
higher proceeds from the maturity of short-term investments in the current year.
Financing Activities
Net cash provided by financing activities for Fiscal Year 2021 increased by
$510,395 to $633,333 as compared to the prior year due to the proceeds received
in the current year from (i) the National Properties Term Loan Facility, (ii) a
cash contribution received from non-controlling interest owner from the Hakkasan
acquisition in April 2021 , and (iii) borrowings under the Tao Revolving Credit
Facility, partially offset by the absence of net transfers from MSG Sports and
its subsidiaries prior to the Entertainment Distribution.
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Contractual Obligations
As of
Payments Due by Period
Year Years Years More Than
Total 1 2-3 4-5 5 Years
Leases (a) $ 410,377 $ 71,346 $ 124,559 $
63,999
-
Other (c) (d) 120,425 120,132 236 57 -
$ 1,221,939 $ 204,228 $ 175,932 $ 691,306 $ 150,473 _________________
(a)Includes contractually obligated minimum lease payments for operating leases having an initial noncancelable term in excess of one year for the Company's venues, including the Tao Group Hospitality venues and various corporate offices. These commitments are presented exclusive of the imputed interest used to reflect the payment's present value. See Note 10 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information. Lease liabilities as ofJune 30, 2021 above did not include$293,458 of lease payments, of which$1,125 is expected to be due in Fiscal Year 2022, for additional lease obligations related to the amendment and extension of theRadio City Music Hall lease agreement inJuly 2021 and a new lease inBurbank, California for premises that the Company has not taken possession of yet. (b)See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information surrounding the principal repayments required under the Tao Senior Secured Credit Facilities and a note with respect to a$637 loan received by BCE from its noncontrolling interest holder that is due inApril 2023 . (c)Includes accrued expense of approximately$98,000 associated with the development and construction of MSG Sphere inLas Vegas , all due within Fiscal Year 2022. (d)Pension obligations have been excluded from the table above as the timing of the future cash payments is uncertain. See Note 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information on the future funding requirements under our pension obligations. Tao Group Hospitality equityholders have the right to put their equity interests in Tao Group Hospitality to a subsidiary of the Company. The purchase price is at fair market value subject, in certain cases, to a floor. Consideration paid upon the exercise of such put right shall be, at the Company's option, in cash, debt, or our Class A Common Stock, subject to certain limitations. In addition,Hakkasan USA, Inc. , a minority interest holder inTao Group Sub-Holdings LLC , a subsidiary of Tao Group Hospitality, following the Hakkasan acquisition, has the right to put its equity interest inTao Group Sub-Holdings LLC toTao Group Hospitality for fair market value (subject to a floor value determined based upon a multiple of trailing EBITDA) beginning in 2026 and each second year thereafter by providing notice during a 30 day window startingJune 1, 2025 (and each secondJune 1 thereafter). Consideration paid upon exercise of the put right shall be, at the option of Tao Group Hospitality, in cash, debt, or stock of the Company or its successor, subject to certain limitations. Additionally, Tao Group Hospitality may elect to satisfy this put obligation through a sale ofTao Group Sub-Holdings LLC or a going public transaction with respect toTao Group Sub-Holdings LLC . Off Balance Sheet Arrangements The Company's off balance sheet arrangements primarily include (i) commitments of approximately$1,025,000 related to MSG Sphere inLas Vegas , for which the timing of future cash payments is uncertain and may change as the development and construction progresses, (ii)$60,310 of commitments for capital expenditures, equipment purchases, and services agreements, of which, approximately$46,777 will incur in Fiscal Year 2022, and (iii) letters of credit of$4,226 obtained by the Company as collateral for lease agreements of the Company and Tao Group Hospitality. In addition, the Company and a subsidiary of the Las Vegas Sands Corp. entered into a 50-year ground lease inLas Vegas pursuant to which the Company has agreed to construct a large-scale venue. 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 itsExpo Convention Center business. The ground lease has no fixed rent, however, if certain return objectives are achieved, Sands will receive 25% of the after-tax cash flow in excess of such objectives. See "Part I - Item 1. Business - Our Business - Our Performance Venues - MSG Sphere." 80 --------------------------------------------------------------------------------
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Seasonality of Our Business The dependence on revenues from the Christmas Spectacular generally means the Company's Entertainment segment earns a disproportionate share of its revenues and operating income in the second quarter of the Company's fiscal year. As a result of COVID-19, the Company canceled the 2020 production of the Christmas Spectacular, and accordingly, such seasonality is not indicative for Fiscal Year 2021. 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 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements. Critical Accounting Policies The preparation of the Company's 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 amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Management believes its use of estimates in the consolidated and combined financial statements to be reasonable. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Arrangements with Multiple Performance Obligations The Company enters into arrangements with multiple performance obligations, such as multi-year sponsorship agreements which may derive revenues for both the Company as well asMSG Sports within a single arrangement. The Company also derives revenue from similar types of arrangements which are entered into byMSG Sports . Payment terms for such arrangements can vary by contract, but payments are generally due in installments throughout the contractual term. The performance obligations included in each sponsorship agreement vary and may include advertising and other benefits such as, but not limited to, signage at The Garden and the Company's other venues, digital advertising, and event or property specific advertising, as well as non-advertising benefits such as suite licenses and event tickets. To the extent the Company's multi-year arrangements provide for performance obligations that are consistent over the multi-year contractual term, such performance obligations generally meet the definition of a series as provided for under the accounting guidance. If performance obligations are concluded to meet the definition of a series, the contractual fees for all years during the contract term are aggregated and the related revenue is recognized proportionately as the underlying performance obligations are satisfied. The timing of revenue recognition for each performance obligation is dependent upon the facts and circumstances surrounding the Company's satisfaction of its respective performance obligation. The Company allocates the transaction price for such arrangements to each performance obligation within the arrangement based on the estimated relative standalone selling price of the performance obligation. The Company's process for determining its estimated standalone selling prices involves management's judgment and considers multiple factors including company specific and market specific factors that may vary depending upon the unique facts and circumstances related to each performance obligation. Key factors considered by the Company in developing an estimated standalone selling price for its performance obligations include, but are not limited to, prices charged for similar performance obligations, the Company's ongoing pricing strategy and policies, and consideration of pricing of similar performance obligations sold in other arrangements with multiple performance obligations. The Company may incur costs such as commissions to obtain its multi-year sponsorship agreements. The Company assesses such costs for capitalization on a contract by contract basis. To the extent costs are capitalized, the Company estimates the useful life of the related contract asset which may be the underlying contract term or the estimated customer life depending on the facts and circumstances surrounding the contract. The contract asset is amortized over the estimated useful life. Impairment of Long-Lived and Indefinite-Lived AssetsThe 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. 81 --------------------------------------------------------------------------------
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The Company's long-lived and indefinite-lived assets accounted for approximately 63% of the Company's consolidated total assets as ofJune 30, 2021 and consisted of the following: Goodwill$ 77,687 Indefinite-lived intangible assets
63,801
Amortizable intangible assets, net of accumulated amortization 171,451
Property and equipment, net 2,099,347
Right-of-use lease assets 268,568
$ 2,680,854
In assessing the recoverability of the Company's long-lived and indefinite-lived
assets when there is an indicator of potential impairment, the Company must make
estimates and assumptions regarding future cash flows and other factors to
determine the fair value of the respective assets. These estimates and
assumptions could have a significant impact on whether an impairment charge is
recognized and also the magnitude of any such charge. Fair value estimates are
made at a specific point in time, based on relevant information. These estimates
are subjective in nature and involve significant uncertainties and judgments and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. If these estimates or material related
assumptions change in the future, the Company may be required to record
impairment charges related to its long-lived and/or indefinite-lived assets.
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 June 30, 2021 , the
Company has two operating and reportable segments, Entertainment and Tao Group
Hospitality, consistent with the way management makes decisions and allocates
resources to the business.
The goodwill balance reported on the Company's consolidated balance sheet as of
June 30, 2021 by reporting unit was as follows:
Entertainment $ 74,309
Tao Group Hospitality 3,378
$ 77,687
The Company has the option to perform a qualitative assessment to determine if
an impairment is more likely than not to have occurred. If the Company can
support the conclusion that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, the Company would not need
to perform a quantitative impairment test for that reporting unit. If the
Company cannot support such a conclusion or the Company does not elect to
perform the qualitative assessment, the first step of the 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 the
Company's Entertainment reporting unit for Fiscal Year 2021 impairment test.
These assessments considered factors such as:
•macroeconomic conditions;
•industry and market considerations;
•cost factors;
•overall financial performance of the reporting unit;
•other relevant company-specific factors such as changes in management, strategy
or customers; and
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•relevant reporting unit specific events such as changes in the carrying amount of net assets. During the first quarter of Fiscal Year 2021, the Company performed its most recent annual impairment test of goodwill and determined that there was no impairment of goodwill identified for its Entertainment reporting unit as of the impairment test date. Based on the impairment test, the Company's Entertainment reporting unit had a sufficient safety margin, representing the excess of the estimated fair value of the reporting unit, derived from the most recent quantitative assessment, less its carrying value (including goodwill allocated to the 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. Amortizable intangible assets and other long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent from cash flows from other assets and liabilities. In determining whether an impairment of long-lived assets has occurred, the Company considers both qualitative and quantitative factors. The quantitative analysis involves estimating the undiscounted future cash flows directly related to that asset group and comparing the resulting value against the carrying value of the asset group. If the carrying value of the asset group is greater than the sum of the undiscounted future cash flows, an impairment loss is recognized for the difference between the carrying value of the asset group and its estimated fair value. For the interim impairment test, the Company estimated the fair value of the Tao Group Hospitality reporting unit based on a discounted cash flow model (income approach). This approach relied on numerous assumptions and judgments that were subject to various risks and uncertainties. Principal assumptions utilized, all of which are considered Level III inputs under the fair value hierarchy (see Note 11 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K), include the Company's estimates of future revenue and terminal growth rates, margin assumptions and the discount rate applied to estimate future cash flows. The assumptions utilized were subject to a high degree of judgment and complexity, particularly in light of economic and operational uncertainty that existed as a result of the COVID-19 pandemic. Based upon the results of the Company's interim quantitative impairment test, the Company concluded that the carrying value of the Tao Group Hospitality reporting unit exceeded its estimated fair value as of the interim testing date. Based on the evaluation of amortizable intangible assets and other long-lived assets performed as of the interim testing date, as well as evaluation of subsequent activity in the fourth quarter of Fiscal Year 2020, the Company recorded non-cash impairment charges of$8,047 $5,646 , and$3,541 , for property and equipment assets, right-of-use assets net of related lease liabilities, and a tradename, respectively, which were associated with two venues within the Tao Group Hospitality reportable segment. In addition, the Company recorded a non-cash goodwill impairment charge of$88,583 for the Tao Group Hospitality reportable segment. The goodwill impairment charge was calculated as the amount that the adjusted carrying value of the reporting unit, including any goodwill, exceeded its fair value as of the interim testing date. See "Part I - Item 1A. Risk Factors - General Risk Factors - Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Actions Taken in Response by Governmental Authorities and Certain Professional Sports Leagues" for more information about the risks to the Company's business operations as a result of the COVID-19 pandemic. Identifiable Indefinite-Lived Intangible Assets Identifiable indefinite-lived intangible assets are tested annually for impairment as ofAugust 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company's consolidated balance sheet as ofJune 30, 2021 : Trademarks$ 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 value of the intangible asset. Examples of such events and circumstances include: •cost factors; 83 --------------------------------------------------------------------------------
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•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. The Company performed its most recent annual impairment test of identifiable indefinite-lived intangible assets during the first quarter of Fiscal Year 2021, and 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. Other Long-Lived Assets For other long-lived assets, including right-of-use lease assets and intangible assets that are amortized, the Company evaluates assets for recoverability when there is an indication of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value. The estimated useful lives and net carrying values of the Company's intangible assets subject to amortization as ofJune 30, 2021 are as follows: Estimated Net Carrying Useful Lives Value Trade names 2 years to 25 years$ 95,395 Venue management contracts 5.67 years to 20 years 68,182 Non-compete agreements 5.75 years 2,087 Festival rights 15 years 5,384 Other intangibles 15 years 403$ 171,451 The Company has recognized intangible assets for trade names, venue management contracts, favorable lease assets, non-compete agreements, festival rights and other intangibles as a result of purchase accounting. The Company has determined that these intangible assets have finite lives. The useful lives of the Company's long-lived assets are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. In estimating the useful lives, the Company considers factors such as, but not limited to, risk of obsolescence, anticipated use, plans of the Company, and applicable laws and permit requirements. In light of these facts and circumstances, the Company has determined that its estimated useful lives are appropriate. Leases The Company accounts for leases, in which it is the lessee, as either finance leases or operating leases. Leases with a term exceeding twelve months are recorded on the balance sheet, including those leases classified as operating leases under previous accounting guidance, through the recognition of right-of-use assets and corresponding lease liabilities. Upon adoption of the initial lease standard, the Company applied a package of practical expedients intended to ease transition for existing leases by not requiring the Company to reassess (i) its initial lease classification conclusions for existing or expired leases, (ii) whether an existing or expired contract is a lease or contains an embedded lease, and (iii) the capitalization of initial direct costs for existing or expired leases. In addition, the Company elected not to use "hindsight" in accordance with ASC Subtopic 842-10-65-1-(g) in assessing lease terms and impairment of right-of-use ("ROU") assets for existing or expired leases under the new standard. 84 --------------------------------------------------------------------------------
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Defined Benefit Pension Plans and Other Postretirement Benefit PlanThe Company utilizes actuarial methods to calculate pension and other postretirement benefit obligations and the related net periodic benefit cost which are based on actuarial assumptions. Key assumptions, the discount rates and the expected long-term rate of return on plan assets, are important elements of the plans' expense and liability measurement and we evaluate these key assumptions annually. Other assumptions include demographic factors, such as mortality, retirement age and turnover. The actuarial assumptions used by the Company may differ materially from actual results due to various factors, including, but not limited to, changing economic and market conditions. Differences between actual and expected occurrences could significantly impact the actual amount of net periodic benefit cost and the benefit obligation recorded by the Company. Material changes in the costs of the plans may occur in the future due to changes in these assumptions, changes in the number of the plan participants, changes in the level of benefits provided, changes in asset levels and changes in legislation. Our assumptions reflect our historical experience and our best estimate regarding future expectations. Accumulated and projected benefit obligations reflect the present value of future cash payments for benefits. We use the Willis Towers WatsonU.S. Rate Link: 40-90 Discount Rate Model (which is developed by examining the yields on selected highly rated corporate bonds) to discount these benefit payments on a plan by plan basis, to select a rate at which we believe each plan's benefits could be effectively settled. Additionally, the Company measures service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows ("Spot Rate Approach"). The Company believes the Spot Rate Approach provides a more accurate measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates on the yield curve. Lower discount rates increase the present value of benefit obligations and will usually increase the subsequent year's net periodic benefit cost. The weighted-average discount rates used to determine benefit obligations as ofJune 30, 2021 for the Company's Pension Plans and Postretirement Plan were 2.87% and 2.17%, respectively. A 25 basis point decrease in each of these assumed discount rates would increase the projected benefit obligations for the Company's Pension Plans and Postretirement Plan atJune 30, 2021 by$5,070 and$50 , respectively. The weighted-average discount rates used to determine service cost, interest cost and the projected benefit obligation components of net periodic benefit cost were 3.20%, 1.92% and 2.84%, respectively, for Fiscal Year 2021 for the Company's Pension Plans. The weighted-average discount rates used to determine service cost, interest cost and the projected benefit obligation components of net periodic benefit cost were 2.15%, 1.23% and 2.09%, respectively, for Fiscal Year 2021 for the Company's Postretirement Plan. A 25 basis point decrease in these assumed discount rates would increase the total net periodic benefit cost for the Company's Pension Plans by$20 and would result in no impact to the net periodic benefit cost for the Company's Postretirement Plan for Fiscal Year 2021. The expected long-term return on plan assets is based on a periodic review and modeling of the plans' asset allocation structures over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling, and are based on comprehensive reviews of historical data, forward-looking economic outlook, and economic/financial market theory. The expected long-term rate of return was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long-term period during which benefits are payable to plan participants. The expected long-term rate of return on plan assets for the Company's funded pension plans was 4.02% for Fiscal Year 2021. Performance of the capital markets affects the value of assets that are held in trust to satisfy future obligations under the Company's funded plans. Adverse market performance in the future could result in lower rates of return for these assets than projected by the Company which could increase the Company's funding requirements related to these plans, as well as negatively affect the Company's operating results by increasing the net periodic benefit cost. A 25 basis point decrease in the long-term return on pension plan assets assumption would increase net periodic pension benefit cost by$380 for Fiscal Year 2021. Another important assumption for our Postretirement Plan is healthcare cost trend rates. We developed our estimate of the healthcare cost trend rates through examination of the Company's claims experience and the results of recent healthcare trend surveys. Assumptions for healthcare cost trend rates used to determine the net periodic benefit cost and benefit obligation for our Postretirement Plan as of and for Fiscal Year 2021 are as follows: Net Periodic Benefit Benefit Cost Obligation Healthcare cost trend rate assumed for next year 6.50% 6.25%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2027 2027
GAAP includes mechanisms that serve to limit the volatility in the Company's earnings that otherwise would result from
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recording changes in the value of plan assets and benefit obligations in our consolidated and combined financial statements in the periods in which those changes occur. For example, while the expected long-term rate of return on the plans' assets should, over time, approximate the actual long-term returns, differences between the expected and actual returns could occur in any given year. These differences contribute to the deferred actuarial gains or losses, which are then amortized over time. See Note 15 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our pension plans and other postretirement benefit plan. Item 7A. 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, interest rate risk exposure, and foreign currency exchange rate risk exposure. For sensitivity analysis and other information regarding market risks we face in connection with our Pension Plans and Postretirement Plan, see "- 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 - Defined Benefit Pension Plans and Other Postretirement Benefit Plan," which information is incorporated by reference herein. Potential Interest Rate Risk Exposure: The Company, through its subsidiaryMSG National Properties and the consolidation of Tao Group Hospitality, has potential interest rate risk exposure related to borrowings incurred under the Tao Senior Secured Credit Facilities. In addition, MSG Networks had$1,047,750 outstanding as ofJune 30, 2021 under the MSGN Credit Facility. 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 andTao Senior Secured Credit Facilities incur interest, depending on election byMSG National Properties and TAOG, at a floating rate based upon LIBOR, theU.S. Federal Funds Rate or theU.S. Prime Rate, plus, in the case of TAOG, an additional spread which is dependent upon the total leverage ratio at the time forTao Senior Secured Credit Facilities. In addition, borrowings under the MSGN Credit Facility bear interest at a floating rate, which at the option ofMSGN 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 MSGN Credit Facility, the 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 14 to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for more information on the Tao Credit Facilities and National Properties Term Loan Facility. Also see "- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Agreements - MSGN Credit Facility" for more information. For Fiscal Year 2021, the interest rate on the Tao Senior Secured Credit Facilities ranged from 2.58% to 3.25% and it was approximately 2.60% as ofJune 30, 2021 . The interest rate on National Properties Term Loan Facility was 7.00% and has been unchanged since inception. For Fiscal Year 2021, the interest rate on the MSGN Credit Facility ranged from 1.59% to 1.68% and was approximately 1.60% as ofJune 30, 2021 . The effect of a hypothetical 100 basis point increase in floating interest rate prevailing as ofJune 30, 2021 and continuing for a full year would increase interest expense of the amount outstanding on the Tao Senior Secured Credit Facilities by approximately$12,966 . Foreign Currency Exchange Rate Exposure: The Company is 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 inLondon 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 ourLondon 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 Fiscal Year 2021, the GBP/USD exchange rate ranged from 1.2470 to 1.4218 as compared to GBP/USD exchange rate of 1.3836 as ofJune 30, 2021 , a fluctuation of ranging from 4% to 14%. As ofJune 30, 2021 , a uniform hypothetical 9% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately$16,157 in the Company's net asset value. Item 8. Financial Statements and Supplementary Data The Financial Statements required by this Item 8 appear beginning on page F-1 of this Annual Report on Form 10-K, and are incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 86 --------------------------------------------------------------------------------
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As previously reported on our Current Report on Form 8-K filed with theSEC onNovember 24, 2020 (the "prior 8-K"), onNovember 18, 2020 , we dismissed our former independent registered public accounting firm and appointedDeloitte & Touche LLP as our independent registered public accounting firm for the fiscal year endingJune 30, 2021 . For more information, please refer to the prior 8-K. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as ofJune 30, 2021 the Company's disclosure controls and procedures were effective. Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission . In conducting the Company's assessment of the effectiveness of its internal control over financial reporting, management elected to exclude the operations of Hakkasan within the Tao Group Hospitality segment, which was acquired by Tao Group Hospitality in the fourth quarter of Fiscal Year 2021. Hakkasan represented$165.5 million of the consolidated total assets as ofJune 30, 2021 (including$47.2 million of related intangibles and$3.4 million of goodwill which were included within the scope of the assessment) and$27.6 million of the consolidated total revenues for Fiscal Year 2021. Based on the results of this evaluation, our management concluded that our internal control over financial reporting was effective as ofJune 30, 2021 . The effectiveness of our internal control over financial reporting as ofJune 30, 2021 has been audited byDeloitte & Touche LLP , an independent registered public accounting firm, as stated in their report which is included herein. Changes in Internal Control over Financial Reporting There were no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter endedJune 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information OnAugust 18, 2021 ,Andrew Lustgarten , President of the Company, entered into certain amended and restated aircraft time sharing agreements (the "Time Sharing Agreements") pursuant to whichMr. Lustgarten may lease various Company-owned or leased aircraft for limited personal use. For any flight taken under the Time Sharing Agreements,Mr. Lustgarten will pay for the actual expenses of the flight as listed in the applicable agreement, but not to exceed the maximum amount permitted underFederal Aviation Administration rules. The above description of the Time Sharing Agreements are qualified in their entirety by reference to those agreements which are attached hereto as Exhibit 10.54, Exhibit 10.55, Exhibit 10.56 and Exhibit 10.57, respectively, and are incorporated into this Item 9B by reference. 87 --------------------------------------------------------------------------------
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