Sphere Entertainment (SPHR) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's discussion and analysis of financial condition Item 1. Financial Statements This section presents the unaudited consolidated and combined financial statements for periods ended December 31, 2020, and June 30, 2020 Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity as of December 31, 2020, and June 30, 2020 Consolidated Balance Sheets (in thousands) | Metric | December 31, 2020 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------------- | :------------------------------- | :--------------------------- | | Cash and cash equivalents | $1,451,352 | $906,555 | | Total current assets | $1,662,293 | $1,426,502 | | Total assets | $4,121,839 | $3,719,206 | | Total current liabilities | $472,278 | $509,969 | | Long-term debt, net | $649,445 | $28,126 | | Total liabilities | $1,411,991 | $844,766 | | Total equity | $2,695,305 | $2,853,840 | - Total assets increased by $402.6 million from June 30, 2020, to December 31, 2020, primarily driven by an increase in cash and cash equivalents and construction in progress[9] - Long-term debt significantly increased from $28.1 million to $649.4 million, reflecting new financing activities[12] Consolidated Statements of Operations This statement details revenues, expenses, and net income or loss for the three and six months ended December 31, 2020 and 2019 Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :-------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Revenues | $23,137 | $394,072 | $37,515 | $572,035 | | Operating income (loss) | $(112,524) | $69,590 | $(239,139) | $1,444 | | Net income (loss) | $(129,103) | $82,644 | $(223,467) | $26,081 | | Basic and diluted EPS | $(5.17) | $3.39 | $(8.91) | $1.06 | - Revenues for the three months ended December 31, 2020, decreased by 94% YoY, and for the six months ended December 31, 2020, decreased by 93% YoY, primarily due to the COVID-19 pandemic's impact on operations[14] - The company reported significant operating and net losses for both the three and six months ended December 31, 2020, a stark contrast to the income reported in the prior year periods[14] Consolidated Statements of Comprehensive Loss This statement presents net income or loss and other comprehensive income or loss for the three and six months ended December 31, 2020 and 2019 Consolidated Statements of Comprehensive Loss (in thousands) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :-------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income (loss) | $(129,103) | $82,644 | $(223,467) | $26,081 | | Other comprehensive income, net of income taxes | $12,173 | $23,532 | $26,476 | $13,853 | | Comprehensive income (loss) | $(116,930) | $106,176 | $(196,991) | $39,934 | - Comprehensive loss for the three and six months ended December 31, 2020, was $(116.9) million and $(197.0) million, respectively, primarily driven by the net losses[15] - Other comprehensive income included significant cumulative translation adjustments, which were $11.9 million for the three months and $25.8 million for the six months ended December 31, 2020[15] Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the six months ended December 31, 2020 and 2019 Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :-------------------- | :---------------------------- | :---------------------------- | | Net cash (used in) provided by operating activities | $(215,632) | $103,758 | | Net cash provided by (used in) investing activities | $146,682 | $(129,606) | | Net cash provided by (used in) financing activities | $614,410 | $(40,885) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $553,255 | $(65,040) | - Operating activities used $215.6 million in cash for the six months ended December 31, 2020, a significant decrease from $103.8 million provided in the prior year, mainly due to higher operating loss and changes in working capital[18][288] - Investing activities provided $146.7 million, a reversal from $129.6 million used in the prior year, primarily due to proceeds from short-term investment maturities[18][289] - Financing activities provided $614.4 million, a substantial increase from $40.9 million used in the prior year, driven by proceeds from the National Properties Term Loan Facility[20][290] Consolidated Statements of Equity and Redeemable Noncontrolling Interests This statement outlines changes in stockholders' equity and noncontrolling interests for periods ended December 31, 2020, and June 30, 2020 Consolidated Statements of Equity and Redeemable Noncontrolling Interests (in thousands) | Metric (in thousands) | December 31, 2020 | June 30, 2020 | | :-------------------- | :---------------- | :------------ | | Total Madison Square Garden Entertainment Corp. stockholders' equity | $2,684,134 | $2,841,637 | | Total equity | $2,695,305 | $2,853,840 | - Total equity decreased from $2,853.8 million at June 30, 2020, to $2,695.3 million at December 31, 2020, primarily due to net loss attributable to stockholders[29] - Share-based compensation contributed $36.7 million to additional paid-in capital for the six months ended December 31, 2020[29] Notes to Consolidated and Combined Financial Statements This section provides detailed explanations and disclosures supporting the consolidated and combined financial statements Note 1. Description of Business and Basis of Presentation This note describes MSG Entertainment's core business, its spin-off, and the significant impact of the COVID-19 pandemic - MSG Entertainment is a leader in live experiences, operating iconic venues like Madison Square Garden, Radio City Music Hall, and the Beacon Theatre, and is constructing MSG Sphere in Las Vegas and planning one in London[35] - The company was spun off from Madison Square Garden Sports Corp. on April 17, 2020, and now operates with two reportable segments: Entertainment and Tao Group Hospitality[37][38] - The COVID-19 pandemic has materially impacted operations, leading to venue closures, event cancellations (e.g., Christmas Spectacular, Boston Calling Music Festival), and significantly reduced capacity for Tao Group Hospitality[43][44][45][47] Note 2. Accounting Policies This note details accounting principles, consolidation methods, and recently adopted accounting standards used in financial statements - The financial statements are prepared on a consolidated basis post-Entertainment Distribution (April 17, 2020) and a combined basis prior to that date, reflecting allocations from the former parent, MSG Sports[40][52] - The company consolidates Tao Group Hospitality and Boston Calling Events, LLC, where it holds controlling voting interests, with other stockholders' equity shown as noncontrolling interests[53] - Several new accounting standards (ASU 2016-13, 2018-13, 2018-14, 2018-15, 2018-17, 2018-18, 2019-04, 2019-08, 2020-01) were adopted in Q1 Fiscal Year 2021, none of which had a material impact on the consolidated financial statements, except for ASU 2018-15 which may reclassify future amortization of cloud computing costs[57][58][59][60][61][62][63][64][65] Note 3. Revenue Recognition This note provides a breakdown of revenue sources and the COVID-19 pandemic's impact on the company's revenue recognition Revenue from Contracts with Customers (in thousands) | Revenue Source (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :---------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Event-related and entertainment dining and nightlife offerings | $10,138 | $305,718 | $16,525 | $440,760 | | Sponsorship, signage and suite licenses | $6,499 | $74,449 | $8,799 | $109,854 | | Other | $4,167 | $13,905 | $9,110 | $21,421 | | Total revenues from contracts with customers | $20,804 | $394,072 | $34,434 | $572,035 | - Total revenues from contracts with customers decreased significantly by 94.7% for the three months and 94% for the six months ended December 31, 2020, compared to the prior year, primarily due to the COVID-19 pandemic's impact on event-related and entertainment dining/nightlife offerings[69][70][72] - Deferred revenue, representing consideration received in advance, increased from $193.1 million at June 30, 2020, to $207.8 million at December 31, 2020[75] Note 4. Restructuring Charges This note details restructuring charges incurred due to employee termination benefits as part of COVID-19 cost-saving initiatives - The company incurred restructuring charges of $1.4 million for the three months and $21.3 million for the six months ended December 31, 2020[79] - These charges are related to termination benefits for approximately 350 employees in August 2020 and 10 employees in November 2020, as part of cost-saving initiatives due to the COVID-19 pandemic[79] Note 5. Cash, Cash Equivalents and Restricted Cash This note provides a breakdown of cash, cash equivalents, and restricted cash balances and their changes over the period Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric (in thousands) | December 31, 2020 | June 30, 2020 | | :-------------------- | :---------------- | :------------ | | Cash and cash equivalents | $1,451,352 | $906,555 | | Restricted cash | $26,207 | $17,749 | | Total cash, cash equivalents and restricted cash | $1,477,559 | $924,304 | - Total cash, cash equivalents, and restricted cash increased by $553.3 million from June 30, 2020, to December 31, 2020[82] - Restricted cash as of December 31, 2020, included an $8.1 million deposit in a reserve account associated with Tao Group Hospitality's credit facilities[82] Note 6. Investments in Nonconsolidated Affiliates This note details the company's equity method investments and equity securities, including fair value measurements and sales Investments in Nonconsolidated Affiliates (in thousands) | Investment Type (in thousands) | December 31, 2020 | June 30, 2020 | | :----------------------------- | :---------------- | :------------ | | Equity method investments | $46,126 | $49,122 | | Equity securities without readily determinable fair values | $3,500 | $3,500 | | Total investments in nonconsolidated affiliates | $49,626 | $52,622 | Equity Investment with Readily Determinable Fair Values (in thousands) | Equity Investment with Readily Determinable Fair Values (in thousands) | December 31, 2020 Carrying Value / Fair Value | June 30, 2020 Carrying Value / Fair Value | | :----------------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | | Townsquare common stock | $21,366 | $14,340 | | DraftKings common stock | $41,647 | $42,589 | | Total | $63,013 | $57,061 | - The company sold 395 shares of DraftKings common stock for $20.6 million, realizing a loss of $2.7 million, and recorded a net unrealized gain of $29.1 million on DraftKings and Townsquare investments for the six months ended December 31, 2020[86] Note 7. Property and Equipment This note provides details on property and equipment, including construction in progress for MSG Spheres and depreciation expenses Property and Equipment, Net (in thousands) | Asset Type (in thousands) | December 31, 2020 | June 30, 2020 | | :------------------------ | :---------------- | :------------ | | Construction in progress | $895,542 | $685,382 | | Total property and equipment, net | $1,837,072 | $1,646,115 | - Construction in progress increased by $210.2 million, primarily due to the development and construction of MSG Spheres in Las Vegas and London[87] - Depreciation and amortization expense on property and equipment was $44.7 million for the six months ended December 31, 2020, down from $46.4 million in the prior year[88] Note 8. Leases This note outlines the company's right-of-use lease assets, lease liabilities, and associated lease costs and revenues Lease Metrics (in thousands) | Lease Metric (in thousands) | December 31, 2020 | June 30, 2020 | | :-------------------------- | :---------------- | :------------ | | Right-of-use lease assets | $198,464 | $220,328 | | Total lease liabilities | $210,403 | $227,607 | Lease Cost (in thousands) | Lease Cost (in thousands) | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :------------------------ | :---------------------------- | :---------------------------- | | Total lease cost | $23,661 | $33,096 | - The company's operating lease ROU assets and liabilities decreased, with a weighted average remaining lease term of 5.7 years and a weighted average discount rate of 9.27% as of December 31, 2020[94][96] - Operating lease revenue from Arena License Agreements with MSG Sports was $1.6 million for the three and six months ended December 31, 2020, as The Garden reopened for Knicks games without fans[99] Note 9. Goodwill and Intangible Assets This note details the company's goodwill and indefinite-lived intangible assets, including impairment testing and amortization expense - Goodwill remained at $74.3 million as of December 31, 2020, all within the Entertainment segment, with no impairment identified during the annual test in Q1 Fiscal Year 2021[100] Indefinite-Lived Intangible Assets (in thousands) | Indefinite-Lived Intangible Assets (in thousands) | December 31, 2020 | | :------------------------------------------------ | :---------------- | | Trademarks | $61,881 | | Photographic related rights | $1,920 | | Total | $63,801 | - Amortization expense for intangible assets was $5.8 million for the six months ended December 31, 2020, a decrease from $7.8 million in the prior year[103] Note 10. Commitments and Contingencies This note describes the company's contractual obligations and ongoing legal matters, with no material adverse effects anticipated - The company's commitments primarily consist of long-term noncancelable operating lease agreements for venues and offices[104] - No material changes in contractual obligations since Fiscal Year 2020, except for the National Properties Term Loan Facility and the termination of Delayed Draw Term Loan Facilities (DDTL Facilities)[104] - Management does not believe that the resolution of ongoing lawsuits will have a material adverse effect on the company[105] Note 11. Fair Value Measurements This note provides details on assets and liabilities measured at fair value, categorized by the fair value hierarchy levels Assets Measured at Fair Value (in thousands) | Asset Type (in thousands) | December 31, 2020 Fair Value | | :------------------------ | :--------------------------- | | Money market accounts | $198,051 | | Time deposits | $481,011 | | U.S. treasury bills | $314,998 | | Equity investments with readily determinable fair value | $63,013 | | Total assets measured at fair value | $1,057,073 | - All assets measured at fair value are classified within Level I of the fair value hierarchy, reflecting quoted prices in active markets[106] - Long-term debt under the National Properties Term Loan Facility and Tao Credit Facilities is classified within Level II of the fair value hierarchy[107] Note 12. Credit Facilities This note details the company's credit agreements, including the Tao Senior Credit Agreement and the National Properties Term Loan Facility - Tao Group Hospitality's Tao Senior Credit Agreement was amended in August 2020, suspending financial covenants through December 31, 2021, and increasing minimum liquidity requirements[111] - MSG Entertainment Group guaranteed Tao Group Hospitality's obligations under the Tao Senior Credit Agreement and established a reserve account with an initial deposit of $9.8 million[111] - MSG National Properties entered into a new five-year $650 million senior secured term loan facility in November 2020, with quarterly principal repayments of 0.25% per quarter and an interest rate of 7.00% as of December 31, 2020[119][122] Debt Principal (in thousands) | Debt Type (in thousands) | December 31, 2020 Principal | | :----------------------- | :-------------------------- | | Tao Term Loan Facility | $31,250 | | Tao Revolving Credit Facility | $6,500 | | National Properties Term Loan Facility | $650,000 | | Total Principal | $687,750 | Note 13. Pension Plans and Other Postretirement Benefit Plan This note outlines the net periodic benefit costs for the company's pension and postretirement plans Net Periodic Benefit Cost (in thousands) | Net Periodic Benefit Cost (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Pension Plans | $(187) | $312 | $(314) | $623 | | Postretirement Plan | $43 | $38 | $86 | $79 | - Net periodic benefit cost for Pension Plans shifted from an expense of $312 thousand in Q2 FY2019 to a benefit of $(187) thousand in Q2 FY2021, and from an expense of $623 thousand in H1 FY2019 to a benefit of $(314) thousand in H1 FY2021[132] - Defined Contribution Pension Plans expenses were $1.5 million for Savings Plans and $10 thousand for Union Savings Plan for the three months ended December 31, 2020[133] Note 14. Share-based Compensation This note details the share-based compensation expense, including the impact of award cancellations and vested RSUs Share-based Compensation (in thousands) | Share-based Compensation (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Share-based compensation expense | $23,562 | $10,373 | $35,091 | $20,458 | | Capitalized share-based compensation expense | $2,784 | $2,482 | $2,784 | $2,482 | - Share-based compensation expense increased significantly, including an incremental $11.1 million expense for the three and six months ended December 31, 2020, due to the cancellation of certain awards related to an executive settlement[135] - The fair value of RSUs that vested during the six months ended December 31, 2020, was $16.3 million[136] Note 15. Accumulated Other Comprehensive Loss This note presents the components of accumulated other comprehensive loss, including pension adjustments and translation adjustments Accumulated Other Comprehensive Loss (in thousands) | Component (in thousands) | December 31, 2020 | June 30, 2020 | | :----------------------- | :---------------- | :------------ | | Pension Plans and Postretirement Plan | $(38,680) | $(39,322) | | Cumulative Translation Adjustments | $13,299 | $(12,535) | | Total Accumulated Other Comprehensive Loss | $(25,381) | $(51,857) | - Accumulated other comprehensive loss decreased from $(51.9) million at June 30, 2020, to $(25.4) million at December 31, 2020, primarily due to positive cumulative translation adjustments[140] - Cumulative translation adjustments contributed $25.8 million in other comprehensive income for the six months ended December 31, 2020[140] Note 16. Income Taxes This note details the income tax expense, influenced by valuation allowances and share-based compensation, and prior tax responsibilities Income Tax Expense (in thousands) | Income Tax Expense (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2109 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Income tax expense | $(323) | $(1,255) | $(486) | $(1,440) | - Income tax expense for the three and six months ended December 31, 2020, was primarily influenced by an increase in valuation allowance ($35.8 million and $64.3 million, respectively) and accelerated share-based compensation expense, partially offset by state income tax benefits[142][143] - Prior to the Entertainment Distribution, MSG Sports was responsible for the company's income taxes[147] Note 17. Related Party Transactions This note describes transactions with related parties, including the Dolan Family Group and various agreements with MSG Sports and MSG Networks - The Dolan Family Group beneficially owned 100% of Class B Common Stock and approximately 3.1% of Class A Common Stock, representing about 70.7% of total voting power, and also controls MSG Sports, MSG Networks, and AMC Networks[148] - Key related party arrangements include sponsorship, arena license agreements with MSG Sports, transition services agreements (TSA) with MSG Sports and MSG Networks, and various aircraft time-sharing agreements[149][150][151][152][153][154][155][156] Related Party Transactions (in thousands) | Related Party Transactions (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Revenues | $5,262 | $984 | $9,280 | $7,459 | | Revenue sharing expenses | $15 | $47,214 | $96 | $65,502 | | Corporate general and administrative expenses, net — MSG Sports | $(8,445) | $(32,720) | $(18,625) | $(63,813) | - Revenues from related parties increased significantly, primarily from advertising sales commissions and sponsorship/representation agreements with MSG Sports[161] Note 18. Segment Information This note provides financial data for the company's Entertainment and Tao Group Hospitality segments, evaluated by Adjusted Operating Income (Loss) - The company operates two reportable segments: Entertainment and Tao Group Hospitality[175] - Segment performance is evaluated based on Adjusted Operating Income (Loss), a non-GAAP measure that excludes non-cash leasing revenue, depreciation, amortization, share-based compensation, restructuring charges, and purchase accounting adjustments[176] Segment Operating Loss (in thousands) | Segment Operating Loss (in thousands) | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2020 | | :------------------------------------ | :------------------------------ | :---------------------------- | | Entertainment | $(97,088) | $(207,739) | | Tao Group Hospitality | $(11,183) | $(22,439) | Segment Adjusted Operating Loss (in thousands) | Segment Adjusted Operating Loss (in thousands) | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2020 | | :--------------------------------------------- | :------------------------------ | :---------------------------- | | Entertainment | $(55,272) | $(113,549) | | Tao Group Hospitality | $(8,432) | $(17,546) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results, highlighting the severe impact of the COVID-19 pandemic - The company's operations are materially impacted by the COVID-19 pandemic, with virtually all Entertainment business operations suspended and Tao Group Hospitality operating at significantly reduced capacity[200] - The 2020 Christmas Spectacular and Boston Calling Music Festival were canceled, and most venue events are postponed or canceled through at least March 2021[201] - MSG Sphere in Las Vegas construction was temporarily suspended and the opening is now expected in calendar year 2023, with reduced near-term spending on technology and content development[204][256] - The company estimates its monthly operational cash burn rate will average approximately $25 million for the remainder of Fiscal Year 2021, excluding severance, capital expenditures, capitalized content/technology spending for MSG Sphere, and working capital adjustments[258] Business Overview This section provides an overview of MSG Entertainment's core business in live experiences and the basis of its financial statements - MSG Entertainment is a leader in live experiences, owning and operating iconic venues (e.g., Madison Square Garden, Radio City Music Hall) and developing MSG Sphere in Las Vegas and London[194] - The company's financial statements for periods prior to April 17, 2020, are presented on a carve-out basis from MSG Sports, including allocations for centralized support functions[195][196][197] Consolidated and Combined Results of Operations This section analyzes the company's overall financial performance, including revenues, operating income, and net income, highlighting COVID-19 impacts Consolidated and Combined Results of Operations (in thousands) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change Amount | Change Percentage | | :-------------------- | :------------------------------ | :------------------------------ | :------------ | :---------------- | | Revenues | $23,137 | $394,072 | $(370,935) | (94)% | | Operating income (loss) | $(112,524) | $69,590 | $(182,114) | NM | | Net income (loss) | $(129,103) | $82,644 | $(211,747) | NM | | Adjusted operating income (loss) | $(63,967) | $108,465 | $(172,432) | NM | - The significant decline in revenues and shift to operating and net losses are primarily attributed to the COVID-19 pandemic and related government restrictions[212] - Net interest income decreased by $13.5 million for the three months and $19.8 million for the six months, due to lower interest income from a shift to lower-yield U.S. Treasury Bills and higher interest expense from the National Properties Term Loan Facility[217] - Miscellaneous income (expense), net, decreased by $16.7 million for the three months due to unrealized/realized losses on DraftKings investment and lower unrealized gains on Townsquare, but increased by $10.5 million for the six months due to higher net gains on DraftKings[218] Business Segment Results This section provides a detailed analysis of the financial performance for the Entertainment and Tao Group Hospitality segments Entertainment This section analyzes the Entertainment segment's revenues, operating income, and adjusted operating income, severely impacted by COVID-19 Entertainment Segment Results (in thousands) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change Amount | Change Percentage | | :-------------------- | :------------------------------ | :------------------------------ | :------------ | :---------------- | | Revenues | $12,669 | $325,370 | $(312,701) | (96)% | | Operating income (loss) | $(97,088) | $67,132 | $(164,220) | NM | | Adjusted operating income (loss) | $(55,272) | $98,633 | $(153,905) | NM | - Entertainment segment revenues decreased by 96.1% for the three months and 95% for the six months, primarily due to the cancellation of the Christmas Spectacular, lower event-related revenues (concerts, live entertainment), and reduced suite license and sponsorship revenues due to COVID-19[234] - Direct operating expenses decreased by 86% for the three months and 82% for the six months, reflecting lower event-related costs, Christmas Spectacular expenses, and suite license operations due to the pandemic[238] - Selling, general and administrative expenses decreased due to lower professional fees and workforce reductions, partially offset by an incremental $11.1 million share-based compensation expense from award cancellations[239][240] Tao Group Hospitality This section analyzes the Tao Group Hospitality segment's revenues and operating results, significantly affected by capacity restrictions and closures Tao Group Hospitality Segment Results (in thousands) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change Amount | Change Percentage | | :-------------------- | :------------------------------ | :------------------------------ | :------------ | :---------------- | | Revenues | $10,491 | $69,104 | $(58,613) | (85)% | | Operating income (loss) | $(11,183) | $7,496 | $(18,679) | NM | | Adjusted operating income (loss) | $(8,432) | $9,907 | $(18,339) | NM | - Tao Group Hospitality's revenues decreased by 85% for the three months and 86% for the six months, primarily due to capacity restrictions at reopened venues, closures of other venues, and permanent closures of Avenue and Vandal in New York[248] - Direct operating expenses decreased by 73% for both periods, driven by reductions in employee compensation, food/beverage costs, and rent expense due to venue closures and restrictions[249] - Selling, general and administrative expenses decreased by 49% for the three months and 53% for the six months, mainly due to lower marketing costs and reduced employee compensation[250] Liquidity and Capital Resources This section discusses the company's cash position, capital expenditure plans, and financing activities to manage liquidity - The company had $1.45 billion in cash and cash equivalents as of December 31, 2020, and believes it has sufficient liquidity to fund operations and MSG Sphere development for the next 12 months[259][260] - A $350 million share repurchase program for Class A Common Stock was authorized, but no shares have been repurchased to date[262] - The DDTL Facilities with MSG Sports subsidiaries were terminated in November 2020 as MSG Sports secured third-party debt[261] MSG Spheres This section provides updates on the construction timeline and funding strategies for the MSG Sphere projects in Las Vegas and London - MSG Sphere at The Venetian in Las Vegas is now expected to open in calendar year 2023, with construction costs incurred through December 31, 2020, totaling approximately $645 million[266][267] - The company plans to self-fund the Las Vegas Sphere's construction from cash-on-hand and cash flows, while exploring non-recourse debt, joint ventures, or equity partnerships for future venues[272][273] - A second MSG Sphere is planned for London, pending approvals, with cost estimates still in development[270] National Properties Term Loan Facility This section details the new $650 million term loan facility, its terms, and its impact on the company's liquidity - A five-year $650 million senior secured term loan facility was entered into in November 2020, with proceeds for working capital, general corporate purposes, and distributions to MSG Entertainment Group[274] - The facility includes a minimum liquidity covenant, initially $450 million, reducing over time to a floor of $50 million under certain conditions[275] - The loan bears interest at a floating rate (LIBOR or base rate plus margin), with an interest rate of 7.00% as of December 31, 2020[276] Tao Senior Secured Credit Facilities This section outlines the amended credit agreement for Tao Group Hospitality, including covenant suspensions and liquidity requirements - The Tao Senior Credit Agreement was amended in August 2020, suspending financial covenants through December 31, 2021, and increasing minimum liquidity requirements due to COVID-19 impacts[281] - MSG Entertainment Group guarantees Tao Group Hospitality's obligations and maintains a reserve account, with a minimum liquidity requirement of $75 million[281] - As of December 31, 2020, $6.5 million was outstanding on the Tao Revolving Credit Facility, with $17.75 million remaining available[280] Seasonality of Our Business This section explains the historical seasonality of revenues, particularly the Christmas Spectacular, and its disruption in FY2021 - Historically, the company earns a disproportionate share of its revenues and operating income in the second fiscal quarter due to the Christmas Spectacular[291] - This seasonality is not expected for Fiscal Year 2021 due to the cancellation of the 2020 Christmas Spectacular production caused by COVID-19[291] Recently Issued Accounting Pronouncements and Critical Accounting Policies This section discusses new accounting standards adopted and the company's critical accounting policies, including goodwill impairment testing - The company adopted ASU No. 2017-04, simplifying goodwill impairment testing by removing Step 2, now measuring impairment as the excess of carrying value over fair value[296] - Annual impairment tests for goodwill and indefinite-lived intangible assets were performed in Q1 Fiscal Year 2021, with no impairments identified for the Entertainment reporting unit or indefinite-lived intangibles[300][302] - Goodwill for the Entertainment segment was $74.3 million as of December 31, 2020, while Tao Group Hospitality had no remaining goodwill after FY2020 impairment charges[298] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines market risks, primarily interest rate fluctuations on variable-rate debt and foreign currency exchange rate changes - The company is exposed to interest rate risk from floating-rate borrowings under the National Properties Term Loan Facility and Tao Senior Secured Credit Facilities[305] - A hypothetical 100 basis point increase in floating interest rates would increase annual interest expense by $2.9 million, and a 200 basis point increase would result in a $9.8 million increase[306] - Foreign currency exchange rate exposure primarily relates to the British pound sterling for the London MSG Sphere development; a hypothetical 10% fluctuation in GBP/USD would change net asset value by approximately $17.7 million[307] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal control over financial reporting - The company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2020[308] - There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended December 31, 2020[309] PART II. OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section addresses ongoing legal matters, with management anticipating no material adverse effect from their resolution - The company is a defendant in various lawsuits, but management does not believe their resolution will have a material adverse effect[313] - A derivative action mentioned in the prior quarter's 10-Q was settled on June 18, 2020, with the settlement becoming effective on October 8, 2020[312] Item 1A. Risk Factors This section highlights key risks, including substantial indebtedness, interest rate fluctuations, and the potential impact of the LIBOR transition - The company has substantial indebtedness, including a new $650 million term loan facility, which requires significant interest and principal payments and limits financial flexibility[314] - Variable-rate indebtedness exposes the company to interest rate risk, where increases could significantly raise debt service obligations and reduce net income[316] - The discontinuation of LIBOR after 2021 and the potential transition to alternative reference rates like SOFR could impact interest payments on variable-rate debt[317] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the authorized share repurchase program for Class A Common Stock, noting no shares repurchased to date - The company has an authorized share repurchase program for up to $350 million of its Class A Common Stock[318] - No shares have been repurchased under this program as of December 31, 2020[318] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including various agreements, certifications, and XBRL taxonomy documents - Exhibits include a Letter Agreement amending the Ground Lease Agreement, CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL instance and taxonomy documents[319]