Sphere Entertainment (SPHR) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited consolidated financial statements and detailed notes for Q3 2021 and 2020, covering financial position, operations, cash flows, and equity Consolidated Balance Sheets Consolidated balance sheets show slight asset and liability increases from June to September 2021, with cash and cash equivalents decreasing | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $5,279,366 | $5,240,651 | | Total Liabilities | $3,090,902 | $2,962,743 | | Total Equity | $2,048,054 | $2,140,074 | | Cash and cash equivalents | $1,331,450 | $1,516,992 | Consolidated Statements of Operations Revenues significantly increased for Q3 2021, but operating and net losses widened, leading to a higher loss per common share | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Revenues | $294,510 | $170,546 | | Operating loss | $(83,338) | $(58,679) | | Net loss | $(84,276) | $(40,606) | | Basic and diluted loss per common share | $(2.55) | $(1.06) | Consolidated Statements of Comprehensive Loss Consolidated comprehensive loss increased for Q3 2021 due to a higher net loss and a shift from other comprehensive income to loss | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net loss | $(84,276) | $(40,606) | | Other comprehensive income (loss), net of income taxes | $(4,788) | $11,697 | | Comprehensive loss | $(89,064) | $(28,909) | | Comprehensive loss attributable to Madison Square Garden Entertainment Corp.'s stockholders | $(91,641) | $(24,390) | Consolidated Statements of Cash Flows Operating cash flow improved to minimal use, but investing and financing activities significantly increased cash outflow for Q3 2021 | Cash Flow Activity | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,338) | $(95,582) | | Net cash (used in) provided by investing activities | $(136,976) | $192,589 | | Net cash used in financing activities | $(44,797) | $(15,996) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(184,497) | $86,825 | Consolidated Statements of Stockholders' Equity and Redeemable Noncontrolling Interests Stockholders' equity decreased and redeemable noncontrolling interests increased from June to September 2021, due to net and comprehensive losses | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Total Madison Square Garden Entertainment Corp. stockholders' equity | $2,034,913 | $2,128,170 | | Redeemable noncontrolling interests | $140,410 | $137,834 | | Nonredeemable noncontrolling interests | $13,141 | $11,904 | | Total equity | $2,048,054 | $2,140,074 | Notes to Consolidated Financial Statements (Unaudited) Detailed notes for unaudited consolidated financial statements, covering business, accounting policies, acquisitions, revenue, debt, and segment information Note 1. Description of Business and Basis of Presentation Post-merger with MSG Networks Inc., the company operates three segments, all still materially impacted by the COVID-19 pandemic - The Company completed its acquisition of MSG Networks Inc. on July 9, 2021, which was accounted for as a transaction between entities under common control[30][31] - The Company is comprised of three reportable segments: Entertainment (venues, Christmas Spectacular, MSG Sphere), MSG Networks (regional sports and entertainment networks), and Tao Group Hospitality (entertainment dining and nightlife)[33][38] - COVID-19 pandemic materially impacted operations in Fiscal Year 2021, leading to suspended Entertainment operations, fewer MSG Networks games, and reduced capacity for Tao Group Hospitality. While operations have resumed, a full return to normal is uncertain[40][41][45][46] Note 2. Accounting Policies Updated accounting policies reflect MSG Networks segment specifics for revenue and expenses, with ASU 2019-12 adopted and ASU 2020-04 under evaluation - MSG Networks segment generates revenue primarily from affiliation fees (sales-based and usage-based royalty arrangements) and advertising sales, recognized as programming is provided or advertising is aired[57][58][60] - Direct operating expenses for MSG Networks primarily include media rights fees and other programming/production costs, expensed straight-line over the contract period[61] - The Company adopted ASU No. 2019-12 (Income Taxes) in Q1 FY2022 with no impact on financial statements and is evaluating ASU 2020-04 (Reference Rate Reform)[65][66] Note 3. Acquisition Hakkasan acquisition's purchase price allocation finalized, revising noncontrolling interest to 15% and decreasing related assets and liabilities - The noncontrolling interest ownership in Tao Group Sub-Holdings LLC (from Hakkasan acquisition) was revised from approximately 18% to 15% during the three months ended September 30, 2021[67][70] | Adjustment Impact (in thousands) | Amount | | :--- | :--- | | Decrease in Redeemable Noncontrolling Interest | $7,500 | | Decrease in Goodwill | $2,014 | | Decrease in Amortizable Intangibles | $7,020 | Note 4. Revenue Recognition Total revenues from customer contracts significantly increased year-over-year, with deferred revenue also rising from advance payments | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Total revenues from contracts with customers | $292,194 | $169,798 | | Contract Balance (in thousands) | September 30, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Deferred revenue, including non-current portion | $266,941 | $210,187 | - The estimated revenue expected to be recognized from remaining performance obligations as of September 30, 2021, is $535,727 thousand, primarily from sponsorship, suite licenses, and non-variable affiliation fee arrangements[79][80] Note 5. Computation of Earnings (Loss) per Common Share Basic and diluted loss per common share increased to $(2.55) for Q3 2021, with all restricted stock units and stock options excluded | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net loss attributable to Madison Square Garden Entertainment Corp.'s stockholders | $(86,853) | $(36,087) | | Basic and diluted loss per common share | $(2.55) | $(1.06) | Note 6. Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents, and restricted cash decreased to $1.36 billion as of September 30, 2021, from $1.54 billion in June | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,331,450 | $1,516,992 | | Restricted cash | $24,029 | $22,984 | | Total cash, cash equivalents and restricted cash | $1,355,479 | $1,539,976 | Note 7. Investments in Nonconsolidated Affiliates Investments in nonconsolidated affiliates include equity method and fair value securities; Q3 2021 recorded an unrealized loss, a shift from prior year's gain | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Unrealized gain (loss) on equity investments with readily determinable fair value | $(2,460) | $33,658 | | Investment Type | September 30, 2021 (in thousands) | | :--- | :--- | | Equity method investments (SACO, Others) | $41,263 | | Equity securities without readily determinable fair values | $6,877 | | Total investments in nonconsolidated affiliates | $48,140 | Note 8. Property and Equipment Net property and equipment increased from June to September 2021, driven by MSG Sphere construction, with a Tao Group Hospitality impairment charge | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Property and equipment, net | $2,226,175 | $2,107,064 | | Construction in progress | $1,284,278 | $1,145,297 | - Tao Group Hospitality recorded an impairment charge of $3,269 thousand for leasehold improvements for the three months ended September 30, 2021, due to decisions to cease operations at certain Hakkasan venues[95] Note 9. Leases Operating lease ROU assets and total lease liabilities significantly increased from June to September 2021 due to new leases and an ROU asset impairment | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Right-of-use lease assets (Operating leases) | $413,463 | $280,579 | | Total lease liabilities | $450,140 | $306,979 | - The Company recorded new operating lease liabilities of $167,070 thousand for the three months ended September 30, 2021, primarily from the renewal of the Radio City Music Hall lease and a venue associated with MSG Sphere[103] - A non-cash impairment charge of $4,549 thousand was recorded for right-of-use lease assets associated with certain Hakkasan venues due to management decisions to cease operations[105] Note 10. Goodwill and Intangible Assets Goodwill slightly decreased due to a Hakkasan adjustment; annual impairment tests for goodwill and indefinite-lived intangibles found no impairments | Metric | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Total Goodwill | $500,181 | $502,195 | | Indefinite-lived intangible assets | $63,801 | $63,801 | | Amortizable intangible assets, net | $186,169 | $198,274 | - The Company performed its annual impairment tests for goodwill and indefinite-lived intangible assets as of August 31, 2021, and found no impairments for any reporting units or assets[112][113] Note 11. Commitments and Contingencies Contractual obligations increased post-MSG Networks merger due to media rights. Ongoing legal complaints allege fiduciary duty breaches and misleading disclosures, with potential liability undeterminable | Contractual Obligations (MSG Networks Segment) | Amount (in thousands) | | :--- | :--- | | Total | $3,646,250 | - Fifteen complaints were filed in connection with the MSG Networks merger, alleging materially incomplete/misleading information and breaches of fiduciary duties by the Board and majority stockholders[118][120][121] - Most disclosure actions were voluntarily dismissed, but consolidated derivative and class action lawsuits are ongoing, with the company currently unable to determine a range of potential liability[119][127][128][129][130] Note 12. Fair Value Measurements Fair value assets, mainly cash equivalents and equity investments, decreased from June to September 2021; long-term debt uses Level II inputs | Asset Type | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Total assets measured at fair value | $1,249,909 | $1,447,993 | - The company's long-term debt is classified within Level II of the fair value hierarchy, valued using quoted indices of similar securities with readily observable inputs[138] Note 13. Credit Facilities Details of MSG Networks, National Properties, and Tao credit facilities are provided; all were covenant compliant as of September 30, 2021, with Tao's covenants suspended due to COVID-19 | Credit Facility | Outstanding Balance (Sep 30, 2021, in thousands) | FY2022 Remainder Repayments (in thousands) | | :--- | :--- | :--- | | MSG Networks Senior Secured Credit Facilities | $1,035,375 | $37,125 | | National Properties Term Loan Facility | $645,125 | $4,875 | | Tao Credit Facilities | $27,500 | $5,000 | | Total | $1,708,000 | $47,000 | - All credit facilities (MSG Networks, National Properties, Tao) were in compliance with their respective covenants as of September 30, 2021[141][152][156] - The Tao Senior Credit Agreement's financial maintenance covenants were suspended through December 31, 2021, due to COVID-19, with an increased minimum liquidity requirement for Tao Group Hospitality and a guarantee from MSG Entertainment Group[156][331] Note 14. Pension Plans and Other Postretirement Benefit Plan The company sponsors defined benefit pension and postretirement plans; pension costs decreased, postretirement costs slightly increased, and defined contribution expenses rose | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net periodic (benefit) cost - Pension Plans | $90 | $172 | | Net periodic (benefit) cost - Postretirement Plans | $45 | $41 | | Expenses - Savings Plans | $2,019 | $1,405 | | Expenses - Union Savings Plan | $14 | $9 | Note 15. Share-based Compensation Share-based compensation expense increased for Q3 2021; post-MSG Networks merger, all RSUs and stock options converted to Company Class A Common Stock awards | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Share-based compensation expense | $19,528 | $16,156 | | Capitalized share-based compensation expense | $751 | $866 | - At the effective time of the MSG Networks merger, each RSU and stock option for MSG Networks Inc. common stock was converted into 0.172 RSUs/options for the Company's Class A Common Stock[174] - All outstanding performance-based vesting RSU or stock option awards for which the performance period had not been completed were converted into time-based vesting awards[174] Note 16. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased from June to September 2021, primarily due to translation adjustments and other comprehensive loss | Component | September 30, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Balance as of period end | $(35,060) | $(30,272) | | Other comprehensive income (loss) before reclassifications | $(6,418) | N/A | | Income tax benefit (expense) | $1,120 | N/A | Note 17. Income Taxes The company reported an income tax benefit for Q3 2021, a significant change from prior year's expense, driven by state tax benefits and rate changes, offset by merger costs | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Income tax benefit (expense) | $20,615 | $(9,392) | - The income tax benefit in the current period was primarily due to state income tax benefit ($9,131k) and a tax benefit from a change in estimated applicable tax rate ($1,711k)[184] - Offsetting factors included tax expense for writing off deferred tax for merger transaction costs ($9,823k) and nondeductible officers' compensation ($2,859k)[184] Note 18. Related Party Transactions The company engages in various transactions with related parties, including MSG Sports and Dolan family entities; related party revenues increased for Q3 2021 - The Dolan Family Group collectively beneficially owned 100% of the Company's Class B Common Stock and approximately 5.0% of Class A Common Stock, representing about 72.6% of aggregate voting power[189] - Key related party arrangements include media rights agreements with MSG Sports, sponsorship sales, arena license agreements for The Garden, and a Transition Services Agreement for corporate functions[190] | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Revenues from related parties | $4,187 | $2,823 | Note 19. Segment Information The company operates three segments: Entertainment, MSG Networks, and Tao Group Hospitality, with performance evaluated by adjusted operating income; consolidated adjusted operating income increased - The Company's three reportable segments are Entertainment, MSG Networks, and Tao Group Hospitality[213] - Segment performance is evaluated using 'adjusted operating income (loss)', which excludes non-cash straight-line leasing revenue, depreciation, amortization, impairment, share-based compensation, restructuring charges, and M&A-related costs[214] | Segment | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Entertainment Adjusted Operating Loss | $(71,392) | $(58,277) | | MSG Networks Adjusted Operating Income | $55,793 | $74,391 | | Tao Group Hospitality Adjusted Operating Income (Loss) | $26,188 | $(9,114) | | Total Adjusted Operating Income | $10,257 | $6,738 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and operations, highlighting COVID-19 impacts, MSG Networks merger, segment performance, liquidity, and MSG Sphere progress Introduction This introduction outlines the MD&A structure and confirms the company's three reportable segments post-merger - The MD&A provides an understanding of the company's financial condition, changes in financial condition, and results of operations[233] - Following the Entertainment Distribution and the MSG Networks merger, the Company operates with three segments: Entertainment, Tao Group Hospitality, and MSG Networks[233] Business Overview The company leads in live experiences, including venues, entertainment, regional sports networks, and dining. The MSG Networks merger integrated it as a wholly-owned subsidiary - The Company is a leader in live experiences, comprising iconic venues (The Garden, Radio City Music Hall, MSG Sphere), marquee entertainment brands (Christmas Spectacular, Boston Calling), regional sports and entertainment networks (MSG Network, MSG+), and popular dining and nightlife offerings (Tao Group Hospitality)[237] - The acquisition of MSG Networks Inc. on July 9, 2021, was accounted for as a transaction between entities under common control, with MSG Networks Inc.'s net assets combined at historical carrying amounts for all historical periods[238][240] Factors Affecting Results of Operations COVID-19 continues to materially impact operations. MSG Sphere construction resumed, targeting a 2023 opening. MSG Networks' performance is affected by affiliation agreements, subscribers, and advertising - COVID-19 pandemic continues to materially impact operations, with venue closures, capacity restrictions, and event cancellations affecting Entertainment, MSG Networks, and Tao Group Hospitality[241][242][243][244][247][248] - Construction of MSG Sphere in Las Vegas was suspended in April 2020 due to COVID-19, resumed in August 2020 with a lengthened timetable, and is now expected to open in calendar year 2023[253][254] - MSG Networks' financial performance is influenced by affiliation agreements with distributors, subscriber numbers, advertising rates, and the popularity/performance of professional sports teams[258] Consolidated Results of Operations Consolidated revenues significantly increased for Q3 2021, but operating and net losses widened; adjusted operating income rose 52%, driven by Tao Group Hospitality | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $294,510 | $170,546 | $123,964 | 73% | | Operating loss | $(83,338) | $(58,679) | $(24,659) | (42)% | | Net loss | $(84,276) | $(40,606) | $(43,670) | (108)% | | Adjusted operating income | $10,257 | $6,738 | $3,519 | 52% | - The increase in net interest expense by $12,943 thousand was primarily due to the National Properties Term Loan Facility, which was entered into in the second quarter of Fiscal Year 2021[266] - Miscellaneous income (expense), net, decreased by $36,564 thousand, primarily due to an unrealized loss on DraftKings investments in the current period compared to an unrealized gain in the prior year[267] Business Segment Results Entertainment revenues increased but operating loss widened. MSG Networks saw revenue decline and decreased operating income. Tao Group Hospitality reported significant revenue growth and operating income Entertainment Entertainment revenues significantly increased due to event resumption and higher arena license fees, but rising expenses led to increased operating and adjusted operating losses | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $34,239 | $7,555 | $26,684 | NM | | Operating loss | $(114,681) | $(110,651) | $(4,030) | (4)% | | Adjusted operating loss | $(71,392) | $(58,277) | $(13,115) | (23)% | - Event-related revenues increased by $20,660 thousand, primarily from concerts ($16,501k) and other sporting/live entertainment events ($4,159k), due to the return of events post-COVID-19[275] - Selling, general and administrative expenses increased by $40,312 thousand, primarily due to a $18,763 thousand increase in employee compensation and related benefits and $13,992 thousand in merger and acquisition-related costs[278] MSG Networks MSG Networks revenues decreased 10% due to lower affiliation fees and advertising; SG&A surged from merger costs, leading to a significant drop in operating income | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $141,473 | $157,363 | $(15,890) | (10)% | | Operating income | $23,278 | $67,936 | $(44,658) | (66)% | | Adjusted operating income | $55,793 | $74,391 | $(18,598) | (25)% | - Affiliation fee revenue decreased by $12,265 thousand, primarily due to a 6.5% subscriber decline and a $5,200 thousand increase in net affiliate adjustments[285] - Selling, general and administrative expenses increased by $25,448 thousand, primarily due to approximately $24,900 thousand in costs related to the Merger, including executive separation agreements[290] - Comcast's non-carriage of MSG Networks, effective October 1, 2021, reduced MSG Networks' subscribers by approximately 10% and is expected to reduce revenue and operating income by a comparable percentage[288] Tao Group Hospitality Tao Group Hospitality saw substantial revenue increase and a shift to operating income, driven by the Hakkasan acquisition and post-COVID-19 recovery, offset by increased expenses | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $119,464 | $7,221 | $112,243 | NM | | Operating income (loss) | $10,081 | $(11,256) | $21,337 | NM | | Adjusted operating income (loss) | $26,188 | $(9,114) | $35,302 | NM | - Revenue increase was primarily due to the Hakkasan acquisition ($59,352k), increased revenues at venues previously under capacity restrictions ($26,273k), and venues temporarily closed ($25,548k)[297] - Direct operating expenses increased by $51,265 thousand, largely due to Hakkasan ($27,866k), increased food/beverage costs ($10,165k), and higher employee compensation ($10,110k) as operations resumed[298] - An impairment charge of $7,818 thousand for long-lived assets was recorded due to decisions to cease operations at certain Hakkasan venues[301] Liquidity and Capital Resources The company maintains sufficient liquidity from cash, operations, and credit facilities, funding the MSG Sphere project. Debt facilities are compliant, but cash decreased from investing and financing Overview Primary liquidity sources are cash, operating cash flows, and borrowing capacity, used for working capital, capital spending, and debt service; sufficient liquidity is expected - Primary liquidity sources include cash and cash equivalents, cash flows from operations, and available borrowing capacity under MSGN Credit Agreement[312] - Principal uses of cash include working capital, capital spending (MSG Sphere), debt service, and investments[312] - As of September 30, 2021, the company had $1,331,450 thousand in cash and cash equivalents and believes it has sufficient liquidity for the next 12 months[313] MSG Sphere MSG Sphere in Las Vegas is progressing, with a 2023 opening and an estimated cost of $1.87 billion, $976 million incurred; self-funding is planned, with a London Sphere also envisioned - MSG Sphere at The Venetian in Las Vegas is expected to open in calendar year 2023[318] | Metric | Amount (in thousands) | | :--- | :--- | | Cost estimate (inclusive of core technology and soft costs) | ~$1,865,000 | | Actual construction costs incurred (through Sep 30, 2021) | ~$976,000 | - The company plans to finance MSG Sphere construction from cash-on-hand and cash flows from operations, but may access additional capital if needed. A future MSG Sphere is also planned for Stratford, London[321][322][324] Financing Agreements All credit facilities (MSG Networks, National Properties, Tao) were covenant compliant as of September 30, 2021; Tao's covenants remain suspended due to COVID-19 | Credit Facility | Outstanding Balance (Sep 30, 2021, in thousands) | FY2022 Remainder Repayments (in thousands) | | :--- | :--- | :--- | | MSG Networks Senior Secured Credit Facilities | $1,035,375 | $37,125 | | National Properties Term Loan Facility | $645,125 | $4,875 | | Tao Term Loan Facility | $27,500 | $5,000 | - All credit facilities were in compliance with their respective covenants as of September 30, 2021[326][329][331] - The Tao Senior Credit Agreement's financial maintenance covenants were suspended through December 31, 2021, due to COVID-19 disruptions, with a minimum liquidity requirement and a guarantee from MSG Entertainment Group[331] Cash Flow Discussion Net cash used in operating activities significantly decreased due to improved working capital; investing and financing activities substantially increased cash usage | Cash Flow Activity | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,338) | $(95,582) | | Net cash used in investing activities | $(136,976) | $192,589 | | Net cash used in financing activities | $(44,797) | $(15,996) | | Net decrease (increase) in cash, cash equivalents and restricted cash | $(184,497) | $86,825 | - The decrease in net cash used in operating activities was primarily due to changes in working capital, including higher cash collection from deferred revenue and accounts receivables[338] - The increase in net cash used in investing activities was mainly due to the absence of proceeds from short-term investment maturities in the prior year and increased capital expenditures[339] Seasonality of Our Business The Entertainment segment typically sees higher revenues and operating income in Q2 and Q3, driven by the Christmas Spectacular and arena license fees, leading to lower Q1 performance - The Entertainment segment generally earns a disproportionate share of its annual revenues and operating income in the second and third fiscal quarters[341][342] - This seasonality is driven by the Christmas Spectacular production and arena license fees from MSG Sports for Knicks and Rangers home games[341] Recently Issued Accounting Pronouncements and Critical Accounting Policies Annual impairment tests for goodwill and indefinite-lived intangible assets as of August 31, 2021, found no impairments, based on macroeconomic, industry, cost, and financial factors - The Company performed its annual impairment tests for goodwill and identifiable indefinite-lived intangible assets as of August 31, 2021[345][348][350] - No impairments of goodwill or indefinite-lived intangibles were identified for any reporting units or assets[348][350] - The qualitative assessment for impairment considered macroeconomic conditions, industry/market factors, cost factors, overall financial performance, and company-specific events[347][349] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from floating-rate credit facilities, with a 100 bps increase raising annual interest expense by $12.77 million. Foreign currency risk from GBP for London MSG Sphere could impact net asset value by $9 million - The company has interest rate risk exposure from floating-rate borrowings under MSG Networks Senior Secured Credit Facilities, National Properties Term Loan Facility, and Tao Senior Secured Credit Facilities[352][354] - A hypothetical 100 basis point increase in floating interest rates would increase annual interest expense by $12,773 thousand[355] - The company is exposed to foreign currency exchange rate risk, primarily to the British pound sterling, related to its London MSG Sphere development. A hypothetical 5% fluctuation in the GBP/USD exchange rate would change net asset value by approximately $9,000 thousand[356] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control - The company's disclosure controls and procedures were effective as of September 30, 2021[357] - No material changes occurred in the company's internal control over financial reporting during the fiscal quarter ended September 30, 2021[358] PART II. OTHER INFORMATION Item 1. Legal Proceedings Multiple legal complaints related to the MSG Networks merger, alleging incomplete disclosures and fiduciary duty breaches, are ongoing, with potential liability undeterminable - Fifteen complaints were filed in connection with the MSG Networks merger, alleging materially incomplete/misleading information and breaches of fiduciary duties[361][363][364][365] - Nine disclosure actions were voluntarily dismissed with prejudice prior to or shortly after the merger[362] - Consolidated derivative and class action lawsuits are ongoing, and the company is currently unable to determine a range of potential liability, thus no accrual has been made in the financial statements[370][371][372][373] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has an authorized share repurchase program for up to $350 million of Class A Common Stock, with no shares repurchased to date - The company has an authorized share repurchase program for up to $350 million of its Class A Common Stock[375] - No shares have been repurchased under this program as of September 30, 2021[375] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including stock plans, employment agreements, corporate policies, and SOX certifications - The exhibits include MSG Networks Inc. 2010 Employee Stock Plan, forms of Restricted Stock Units Agreements, an Employment Agreement for Andrea Greenberg, and the Policy Concerning Certain Matters Relating to Madison Square Garden Sports Corp. and AMC Networks Inc.[377] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are also included[377]