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 ofMadison 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 toTao 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 inLas 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 theNew York City ,Las Vegas ,Chicago andLondon 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; 51
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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 redesignNew York City's Pennsylvania Station ; •the substantial amount of debt incurred, and any default, by our subsidiaries under their respective credit facilities; •financial community and rating agency perceptions of our business, operations, financial condition and the industries in which we operate; •the ability of our investees and others to repay loans and advances we have extended to them; •our status as an emerging growth company; •the tax-free treatment of the Entertainment Distribution; •our ability to achieve the intended benefits of the Entertainment Distribution; •the performance byMSG Sports of its obligations under various agreements with the Company related to the Entertainment Distribution and ongoing commercial arrangements; •lack of operating history as an operating company and costs associated with being an independent public company; and •the additional factors described under "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedJune 30, 2020 and this Quarterly Report on Form 10-Q under "Part II - Item 1A. Risk Factors." We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted. Introduction This MD&A is provided as a supplement to, and should be read in conjunction with, the Company's unaudited financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company's Annual Report on Form 10-K for the year endedJune 30, 2020 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to "we," "us," "our," "MSG Entertainment ," or the "Company" refer collectively toMadison Square Garden Entertainment Corp. , a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are conducted. Through the period endedApril 17, 2020 , the Company operated and reported financial information as one reportable segment. Following the Entertainment Distribution onApril 17, 2020 , the Company has two segments (the Entertainment business and the Tao Group Hospitality business). See Note 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. 52
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Results of Operations. This section provides an analysis of our unaudited results of operations for the three and nine months endedMarch 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 endedMarch 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 endedJune 30, 2020 under "Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recently Issued Accounting Pronouncements and Critical Accounting Policies - Critical Accounting Policies" and in the notes to the consolidated and combined financial statements of the Company included therein. Business Overview The Company is a leader in live experiences comprised of iconic venues; marquee entertainment content; popular dining and nightlife offerings; and a premier music festival that, together, entertain millions of guests each year. Utilizing our powerful brands and live entertainment expertise. The Company's portfolio of venues includes: The Garden,Hulu Theater atMadison Square Garden ,Radio City Music Hall , theBeacon Theatre andThe Chicago Theatre . In addition, the Company is constructing a state-of-the-art venue, MSG Sphere, inLas Vegas and plans to build a second MSG Sphere inLondon , pending necessary approvals. The Company also includes the original production, the Christmas Spectacular, as well as BCE, the entertainment production company that owns and operates theBoston Calling Music Festival , and Tao Group Hospitality, a hospitality group with globally-recognized entertainment dining and nightlife brands. Merger Agreement with MSG Networks Inc. OnMarch 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 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. 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 beforeDecember 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 . 53
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Factors Affecting Results of Operations Basis of Presentation The consolidated statements of operations for the three and nine months endedMarch 31, 2021 is presented on a consolidated basis, as the Company became a standalone public company onApril 17, 2020 . The Company's combined statement of operations for the three and nine months endedMarch 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 endedMarch 31, 2020 include allocations for certain support functions that were provided on a centralized basis byMSG Sports and not historically recorded at the business unit level, such as expenses related to finance, human resources, information technology, and venue operations, among others. As part of the Entertainment Distribution, certain corporate and operational support functions were transferred to the Company and therefore, charges were reflected in the combined statements of operations for the three and nine months endedMarch 31, 2020 in order to properly burden all business units comprisingMSG Sports' historical operations. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined revenues, headcount or other measures of the Company andMSG Sports , which were recorded as a reduction of either direct operating expenses or selling, general and administrative expense. In addition, certain of the Company's contracts with its customers for suite license, sponsorship and venue signage arrangements contain performance obligations that are fulfilled by both the Company andMSG Sports . Revenue sharing expenses attributable toMSG Sports have primarily been recorded on the basis of specific identification where possible, with the remainder allocated proportionately as a component of direct operating expenses within the consolidated and combined statements of operations. See Note 3 to the consolidated and combined financial statements included in "- Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for additional information on revenue recognition. Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by the Company and may not reflect its combined results of operations, financial position and cash flows had it been a separate, stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a separate, stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Impact of COVID-19 on Our BusinessThe 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 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, capped at 10% of seating capacity. StartingApril 1, 2021 , our otherNew York performance venues,Hulu Theater atMadison Square Garden ,Radio City Music Hall and theBeacon 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. EffectiveMay 19, 2021 , capacity restrictions at The Garden and our otherNew 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 leastMay 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. 54
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The Company andMSG 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 inDecember 2020 andJanuary 2021 , respectively, and, beginning onFebruary 23, 2021 , games were played with limited fans in attendance, capped at 10% of seating capacity due to government-mandated assembly restrictions. EffectiveMay 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 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. 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. EffectiveMay 1, 2021 ,Las Vegas restaurant capacity increased to 80% and it was announced thatNew York City restaurant capacity will increase to 75% beginning onMay 7, 2021 , before going to 100% onMay 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 ofMarch 31, 2021 , 18 ofTao Group Hospitality's venues were open for outdoor dining, limited capacity indoor dining, and delivery/takeout (including Tao Asian Bistro & Lounge atMohegan Sun , which opened inMarch 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 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 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 inMarch 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 inLas 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. 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 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 toLas 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 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 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 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. When the NBA began its 2020-21 regular season inDecember 2020 and the NHL began its 2020-21 regular season inJanuary 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 onFebruary 23, 2021 , The Garden was permitted to host fans at games, capped at 10% of seating capacity, which affected the payments we received 55
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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 endedMarch 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 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. 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 EndedMarch 31, 2021 versus the Three and Nine Months EndedMarch 31, 2020 The table below sets forth, for the periods presented, certain historical financial information.
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