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 pending Merger with MSG Networks, our anticipated operational
cash burn on a go-forward basis, cost-cutting measures the Company may or may
not pursue to preserve cash and financial flexibility, the potential for future
impairment charges, the timing and costs of new venue construction, our plans to
negotiate amendments to Tao Group Hospitality's credit facility, and increased
expenses of being a standalone public company. Words such as "expects,"
"anticipates," "believes," "estimates," "may," "will," "should," "could,"
"potential," "continue," "intends," "plans," and similar words and terms used in
the discussion of future operating and future financial performance identify
forward-looking statements. Investors are cautioned that such forward-looking
statements are not guarantees of future performance, results or events and
involve risks and uncertainties and that actual results or developments may
differ materially from the forward-looking statements as a result of various
factors. Factors that may cause such differences to occur include, but are not
limited to:
•our ability to effectively manage the impacts of the COVID-19 pandemic and the
actions taken in response by governmental authorities and certain professional
sports leagues, including ensuring compliance with rules and regulations imposed
upon our venues as they are permitted to reopen;
•risks related to the pending Merger, as defined herein, with MSG Networks,
including, but not limited to: disruption of management time from ongoing
business operations due to the Merger, the risk of any litigation relating to
the Merger and the risk that the parties may not be able to satisfy the
conditions to the completion of the Merger in a timely manner or at all?
•the extent to which attendance at our venues following their reopening will be
suppressed due to government actions and continuing health concerns by potential
attendees;
•the impact on the payments we receive under the Arena License Agreements as a
result of government-mandated capacity restrictions and social-distancing
requirements at Knicks and Rangers games;
•the level of our expenses and our operational cash burn rate, including our
corporate expenses as a stand-alone publicly traded company;
•our ability to successfully design, construct, finance and operate new venues
in Las Vegas, London and other markets, and the investments, costs and timing
associated with those efforts, including the impact of the temporary suspension
of construction and any other construction delays and/or cost overruns;
•the level of our revenues, which depends in part on the popularity of the
Christmas Spectacular and other entertainment and sports events which are
presented in our venues;
•the level of our capital expenditures and other investments;
•general economic conditions, especially in the New York City, Las Vegas,
Chicago and London metropolitan areas where we have (or plan to have)
significant business activities;
•the demand for sponsorship arrangements and for advertising;
•competition, for example, from other venues and other sports and entertainment
and nightlife options, including the construction of new competing venues;
•changes in laws, guidelines, bulletins, directives, policies and agreements or
regulations under which we operate;
•any economic, social or political actions, such as boycotts, protests, work
stoppages or campaigns by labor organizations;
•seasonal fluctuations and other variations in our operating results and cash
flow from period to period;
•the successful development of new live productions or attractions, enhancements
or changes to existing productions and the investments associated with such
development, enhancements, or changes, as well as investment in personnel,
content and technology for the MSG Spheres;
•business, reputational and litigation risk if there is a security incident
resulting in loss, disclosure or misappropriation of stored personal information
or other breaches of our information security;
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•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 and the Hakkasan
Business entertainment dining and nightlife venues, as well as their existing
brands, and the ability to successfully open and operate new entertainment
dining and nightlife venues;
•the ability of BCE to attract attendees and performers to its future festivals;
•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 recent acquisition of the Hakkasan
Business through Tao Group Hospitality;
•the operating and financial performance of our strategic acquisitions and
investments, including those we do not control;
•the costs associated with, and the outcome of, litigation and other proceedings
to the extent uninsured, including litigation or other claims against companies
we invest in or acquire;
•the impact of governmental regulations or laws, including changes in how those
regulations and laws are interpreted and the continued benefit of certain tax
exemptions and the ability to maintain necessary permits or licenses;
•the impact of any government plans to redesign New York City's Pennsylvania
Station;
•the substantial amount of debt incurred, and any default, by our subsidiaries
under their respective credit facilities;
•financial community and rating agency perceptions of our business, operations,
financial condition and the industries in which we operate;
•the ability of our investees and others to repay loans and advances we have
extended to them;
•our status as an emerging growth company;
•the tax-free treatment of the Entertainment Distribution;
•our ability to achieve the intended benefits of the Entertainment Distribution;
•the performance by MSG Sports of its obligations under various agreements with
the Company related to the Entertainment Distribution and ongoing commercial
arrangements;
•lack of operating history as an operating company and costs associated with
being an independent public company; and
•the additional factors described under "Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended June 30, 2020 and this Quarterly Report
on Form 10-Q under "Part II - Item 1A. Risk Factors."
We disclaim any obligation to update or revise the forward-looking statements
contained herein, except as otherwise required by applicable federal securities
laws.
All dollar amounts included in the following MD&A are presented in thousands,
except as otherwise noted.
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction
with, the Company's unaudited financial statements and accompanying notes
thereto included in this Quarterly Report on Form 10-Q, as well as the Company's
Annual Report on Form 10-K for the year ended June 30, 2020 to help provide an
understanding of our financial condition, changes in financial condition and
results of operations. Unless the context otherwise requires, all references to
"we," "us," "our," "MSG Entertainment," or the "Company" refer collectively to
Madison Square Garden Entertainment Corp., a holding company, and its direct and
indirect subsidiaries through which substantially all of our operations are
conducted. Through the period ended April 17, 2020, the Company operated and
reported financial information as one reportable segment. Following the
Entertainment Distribution on April 17, 2020, the Company has two segments (the
Entertainment business and the Tao Group Hospitality business). See Note 19 to
the consolidated and combined financial statements included in "- Item 1.
Financial Statements" of this Quarterly Report on Form 10-Q for further
discussion of the Company's segment reporting.
This MD&A is organized as follows:
Business Overview. This section provides a general description of our business,
as well as other matters that we believe are important in understanding our
results of operations and financial condition and in anticipating future trends.
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Results of Operations. This section provides an analysis of our unaudited
results of operations for the three and nine months ended March 31, 2021 and
2020 on both a consolidated and combined basis and a segment basis.
Liquidity and Capital Resources. This section provides a discussion of our
financial condition and liquidity, an analysis of our cash flows for the nine
months ended March 31, 2021 and 2020, as well as certain contractual obligations
and off-balance sheet arrangements.
Seasonality of Our Business. This section discusses the seasonal performance of
our Entertainment and Tao Group Hospitality segments.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This
section discusses accounting pronouncements that have been adopted by the
Company, recently issued accounting pronouncements not yet adopted by the
Company, as well as the results of the Company's annual impairment testing of
goodwill and identifiable indefinite-lived intangible assets performed during
the first quarter of Fiscal Year 2021. This section should be read together with
our critical accounting policies, which are discussed in our Annual Report on
Form 10-K for the year ended June 30, 2020 under "Item. 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recently Issued Accounting Pronouncements and Critical Accounting Policies -
Critical Accounting Policies" and in the notes to the consolidated and combined
financial statements of the Company included therein.
Business Overview
The Company is a leader in live experiences comprised of iconic venues; marquee
entertainment content; popular dining and nightlife offerings; and a premier
music festival that, together, entertain millions of guests each year. Utilizing
our powerful brands and live entertainment expertise. The Company's portfolio of
venues includes: The Garden, Hulu Theater at Madison Square Garden, Radio City
Music Hall, the Beacon Theatre and The Chicago Theatre. In addition, the Company
is constructing a state-of-the-art venue, MSG Sphere, in Las Vegas and plans to
build a second MSG Sphere in London, pending necessary approvals. The Company
also includes the original production, the Christmas Spectacular, as well as
BCE, the entertainment production company that owns and operates the Boston
Calling Music Festival, and Tao Group Hospitality, a hospitality group with
globally-recognized entertainment dining and nightlife brands.
Merger Agreement with MSG Networks Inc.
On March 25, 2021, the Company, MSG Networks, and Merger Sub, entered into the
Merger Agreement. Pursuant to the Merger Agreement, Merger Sub will merge with
and into MSG Networks with MSG Networks surviving and continuing as the
surviving corporation in the merger. If the Merger is completed, (i) each share
of MSGN Class A Common Stock, issued and outstanding immediately prior to the
effective time of the Merger will be automatically converted into the right to
receive a number of shares of the Company's Class A Common Stock such that each
holder of record of shares of MSGN Class A Common Stock will have the right to
receive, in the aggregate, such number of shares of the Company's 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 MSGN Class B
Common Stock, issued and outstanding immediately prior to the effective time
will be automatically converted into the right to receive, in the aggregate, a
number of shares of the Company's Class B Common Stock such that each holder of
record of shares of MSGN Class B Common Stock will have the right to receive, in
the aggregate, a number of shares of the Company's 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 shares held by the
Company, Merger Sub or any of the Company's subsidiaries or MSG Networks or any
of MSG Networks subsidiaries as treasury stock (in each case not held on behalf
of third parties).
The Merger will be accounted for as a transaction between entities under common
control as the Company and MSG Networks are each controlled by the Dolan 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.
The Merger was recommended to the Company's Board of Directors for approval by a
special committee composed solely of independent, disinterested directors,
advised by independent financial and legal advisors. The closing of the Merger
is expected to occur in the third calendar quarter of 2021, subject to the
satisfaction of certain regulatory approvals and other customary closing
conditions. The Merger Agreement provides certain termination rights for each of
the Company and MSG Networks, including, among others, if the consummation of
the Merger does not occur on or before December 20, 2021. Should certain events
occur under the specified circumstances outlined in the Merger Agreement, the
Company will be required to pay MSG Networks a termination fee of $21,200.
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Factors Affecting Results of Operations
Basis of Presentation
The consolidated statements of operations for the three and nine months ended
March 31, 2021 is presented on a consolidated basis, as the Company became a
standalone public company on April 17, 2020. The Company's combined statement of
operations for the three and nine months ended March 31, 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 ("combined basis") as the Company
was not a standalone public company prior to the Entertainment Distribution.
The combined statements of operations for the three and nine months ended March
31, 2020 include allocations for certain support functions that were provided on
a centralized basis by MSG Sports and not historically recorded at the business
unit level, such as expenses related to finance, human resources, information
technology, and venue operations, among others.
As part of the Entertainment Distribution, certain corporate and operational
support functions were transferred to the Company and therefore, charges were
reflected in the combined statements of operations for the three and nine months
ended March 31, 2020 in order to properly burden all business units comprising
MSG Sports' historical operations. These expenses were allocated on the basis of
direct usage when identifiable, with the remainder allocated on a pro-rata basis
of combined revenues, headcount or other measures of the Company and MSG Sports,
which were recorded as a reduction of either direct operating expenses or
selling, general and administrative expense.
In addition, certain of the Company's contracts with its customers for suite
license, sponsorship and venue signage arrangements contain performance
obligations that are fulfilled by both the Company and MSG Sports. Revenue
sharing expenses attributable to MSG Sports have primarily been recorded on the
basis of specific identification where possible, with the remainder allocated
proportionately as a component of direct operating expenses within the
consolidated and combined statements of operations. See Note 3 to the
consolidated and combined financial statements included in "- Item 1. Financial
Statements" of this Quarterly Report on Form 10-Q for additional information on
revenue recognition.
Management believes the assumptions underlying the combined financial
statements, including the assumptions regarding allocating general corporate
expenses, are reasonable. Nevertheless, the combined financial statements may
not include all of the actual expenses that would have been incurred by the
Company and may not reflect its combined results of operations, financial
position and cash flows had it been a separate, stand-alone company during the
periods presented. Actual costs that would have been incurred if the Company had
been a separate, stand-alone company would depend on multiple factors, including
organizational structure and strategic decisions made in various areas,
including information technology and infrastructure.
Impact of COVID-19 on Our Business
The Company's operations and operating results have been, and continue to be,
materially impacted by the COVID-19 pandemic and actions taken in response by
governmental authorities and certain professional sports leagues. As of the date
of this Quarterly Report on Form 10-Q, substantially all of the Entertainment
business' operations have been suspended and Tao Group Hospitality is operating
at significantly reduced capacity and demand. It is not clear when we will be
permitted or able to resume normal business operations.
As a result of government-mandated assembly limitations and closures, our
performance venues were closed in mid-March 2020. 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, capped at 10% of seating capacity. 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 permitted to reopen at 10%
capacity with certain safety protocols, such as proof of a negative COVID-19
test or full vaccination and social distancing. Effective May 19, 2021, capacity
restrictions at The Garden and our other New York performance venues will be
increased up to 30%. Although live events are permitted to be held at all of our
performance venues as of the date of this filing, current government-mandated
capacity restrictions and other safety requirements make it economically
unfeasible to do so for most events. Other than Knicks and Rangers home games,
and select non-ticketed events at The Garden, such as the Big East Tournament,
all ticketed events at our venues have been postponed or canceled through at
least May 2021, and will likely be impacted through the rest of Fiscal Year
2021. We are not recognizing revenue from events that have been canceled or
postponed and, while events have been rescheduled into Fiscal Year 2022, it is
unclear whether and to what extent those events will take place. We are actively
monitoring government regulations and guidance, and when such regulations
permit, and there is an opportunity to reopen our performance venues for events
safely and on economically feasible terms, we expect that we would do so.
The impact to our operations included the cancellation of the 2020 production of
the Christmas Spectacular and both the 2020 and 2021 Boston Calling Music
Festivals.
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The Company and MSG Sports are party to the Arena License Agreements, which
require the Knicks and Rangers to play their home games at The Garden. As noted
above, the Knicks and Rangers began playing home games at The Garden without
fans in December 2020 and January 2021, respectively, and, beginning on February
23, 2021, games were played with limited fans in attendance, capped at 10% of
seating capacity due to government-mandated assembly restrictions. Effective May
19, 2021, such capacity is permitted to be increased up to 30%. Capacity
restrictions, use limitations and social distancing requirements are expected to
remain in place through, at least, the conclusion of the Knicks and Rangers
2020-21 seasons, which would continue to affect the payments we receive under
the Arena License Agreements.
Due to government actions taken in response to the COVID-19 pandemic, virtually
all of Tao Group Hospitality's venues were closed for approximately three months
starting in mid-March 2020, and Avenue and Vandal in New York were permanently
closed in April 2020 and June 2020, respectively. Tao Group Hospitality
continues to increase operations at certain venues, subject to significant
regulatory requirements, including limits on capacity, curfews and social
distancing requirements for outdoor and indoor dining. Effective May 1, 2021,
Las Vegas restaurant capacity increased to 80% and it was announced that New
York City restaurant capacity will increase to 75% beginning on May 7, 2021,
before going to 100% on May 19, 2021, subject to social distancing requirements,
which may impact actual capacity levels. While venue re-openings are increasing
across the markets in which Tao Group Hospitality operates, government
requirements remain uncertain and subject to change. As of March 31, 2021, 18 of
Tao Group Hospitality's venues were open for outdoor dining, limited capacity
indoor dining, and delivery/takeout (including Tao Asian Bistro & Lounge at
Mohegan Sun, which opened in March 2021), while 11 venues remained closed.
The COVID-19 pandemic has materially impacted our revenues, most significantly
because, as of the date of this filing, we are not generating revenue from (i)
ticketed events at The Garden (other than Knicks and Rangers home games), Hulu
Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and
The Chicago Theatre, (ii) suite licenses, (iii) the 2020 production of the
Christmas Spectacular and (iv) the 2021 Boston Calling Music Festival. In
addition, we are generating 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 in March
2021.
While we reduced certain operating expenses as a result of the COVID-19 pandemic
(including (i) direct event expenses at our performance venues during the period
our business operations are suspended, (ii) advertising and promotional spending
for suspended and canceled games and events, (iii) reduction in corporate
work-force and (iv) certain direct operating and SG&A expenses, including at our
Tao Group Hospitality business), these expense reductions are not nearly enough
to fully offset revenue losses.
We are building a state-of-the-art venue in Las Vegas, called MSG Sphere. This
is a complex construction project with cutting-edge technology that relies on
subcontractors obtaining components from a variety of sources around the world.
In April 2020, the Company announced that it was suspending construction of MSG
Sphere due to COVID-19 related factors that were outside of its control,
including supply chain issues. As the ongoing effects of the pandemic have
continued to impact its business operations, the Company has revised its
processes and construction schedule, and has resumed work with a lengthened
timetable that enables the Company to better preserve cash in the near-term. The
Company remains committed to bringing MSG Sphere to Las Vegas and, based on its
new construction schedule, expects to open the venue in calendar year 2023.
A subsidiary of the Company is party to the Arena License Agreements with
subsidiaries of MSG Sports that require the Knicks and the Rangers to play their
home games at The Garden. Under the Arena License Agreements, the Knicks and the
Rangers pay an annual license fee in connection with their respective use of The
Garden. For each, the license fee for the initial contract year ending June 30,
2020 was to be prorated based on the number of games scheduled to be played at
The Garden between the Entertainment Distribution Date and the end of that
contract year. The license fee for the first full contract year ending June 30,
2021 is approximately $22,500 for the Knicks and approximately $16,700 for the
Rangers, and then for each subsequent year, the license fees will be 103% of the
license fees for the immediately preceding contract year. The teams are not
required to pay the license fee during a period in which The Garden is
unavailable for home games due to a force majeure event (including when events
at The Garden were suspended by government mandate as a result of the
disruptions caused by the COVID-19 pandemic). As a result, we did not receive
any license fee payments under the Arena License Agreements from the period
following the Entertainment Distribution through November 2020. 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. When the NBA began its 2020-21 regular season in December
2020 and the NHL began its 2020-21 regular season in January 2021, the Knicks
and the Rangers initially played their respective home games at The Garden
without fans in attendance due to government-mandated assembly restrictions and,
beginning on February 23, 2021, The Garden was permitted to host fans at games,
capped at 10% of seating capacity, which affected the payments we received
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under the Arena License Agreements. The Company recorded $11,443 and $13,028 of
revenues under Arena License Agreements for the three and nine months ended
March 31, 2021, respectively.
Additionally, as a result of operating disruptions due to the COVID-19 pandemic,
the Company's projected cash flows were directly impacted. These disruptions
along with the deteriorating macroeconomic conditions and industry and market
considerations, were considered a "triggering event" for the Tao Group
Hospitality reporting unit, which required the Company to assess the carrying
value of Tao Group Hospitality's intangible assets, long-lived assets and
goodwill for impairment. Based on this evaluation, the Company recorded a total
impairment charge of $105,817 in Fiscal Year 2020.
There has been no triggering event identified by the Company for the
Entertainment reporting unit due to the COVID-19 pandemic. However, the duration
and impact of the COVID-19 pandemic may result in future impairment charges that
management will evaluate as facts and circumstances evolve over time.
Consolidated and Combined Results of Operations
Comparison of the Three and Nine Months Ended March 31, 2021 versus the Three
and Nine Months Ended March 31, 2020
The table below sets forth, for the periods presented, certain historical
financial information.

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