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Description of Business and Basis of Presentation
12 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business and Basis of Presentation Description of Business and Basis of Presentation
The Entertainment Distribution
Madison Square Garden Entertainment Corp. (together with its subsidiaries, the “Company” or “MSG Entertainment”), formerly named MSG Entertainment Spinco, Inc., was incorporated on November 21, 2019 as a direct, wholly owned subsidiary of Madison Square Garden Sports Corp. (“MSG Sports” or “Former Parent”), formerly known as The Madison Square Garden Company. On March 31, 2020, MSG Sports’ board of directors approved the distribution of all the outstanding common stock of MSG Entertainment to MSG Sports’ stockholders (the “Entertainment Distribution”), which occurred on April 17, 2020 (the “Entertainment Distribution Date”). In the Entertainment Distribution, stockholders of MSG Sports received (a) one share of the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”), for every share of MSG Sports Class A common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on April 13, 2020 (the “Record Date”), and (b) one share of the Company’s Class B common stock, par value $0.01 per share (“Class B Common Stock”), for every share of MSG Sports Class B common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on the Record Date.
Description of Business
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. Utilizing the Company’s powerful brands and live entertainment expertise, the Company delivers unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences. The Company’s portfolio of venues includes: Madison Square Garden (“The Garden”), Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre in New York City, and The Chicago Theatre in Chicago. For all periods presented, the Company’s venues also included the Forum in Inglewood, CA, which was sold on May 1, 2020 (see Note 2 for further details). In addition, the Company is constructing a state-of-the-art venue, MSG Sphere, in Las Vegas and plans to build a second MSG Sphere in London, pending necessary approvals. The Company also includes the original production, the Christmas Spectacular Starring the Radio City Rockettes (“Christmas Spectacular”), as well as Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival, and Tao Group Holdings LLC (“Tao Group Hospitality”), a hospitality group with globally-recognized entertainment, dining, and nightlife brands.
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden and Hulu Theater at Madison Square Garden and The Chicago Theatre. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City. Additionally, Tao Group Hospitality operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Chicago, Australia, and Singapore.
Following the Entertainment Distribution on April 17, 2020, the Company has two segments (the Entertainment business and the Tao Group Hospitality business) as a result of certain changes in the financial information that is provided to its Chief Operating Decision Maker (“CODM”). Additionally, as part of the Entertainment Distribution, the Company has entered into various agreements with MSG Sports as detailed in Note 19.
Basis of Presentation
Subsequent to the Entertainment Distribution, the Company’s financial statements as of June 30, 2020 and for the period from April 18, 2020 to June 30, 2020 included in the fiscal year ended June 30, 2020 are presented on a consolidated basis, as the Company became a standalone public company on April 17, 2020. The Company’s combined financial statements as of June 30, 2019 and for the years ended June 30, 2019 and 2018, as well as the financial information from July 1, 2019 through April 17, 2020 that is included in the results of operations for the year ended June 30, 2020, were prepared on a standalone basis derived from the consolidated financial statements and accounting records of Former Parent and are presented as carve-out financial statements as the Company was not a standalone public company prior to the Entertainment Distribution. These combined financial statements reflect the combined historical results of operations, financial position and cash flows of Former Parent’s sports and entertainment businesses, as well as its venues and joint ventures (“combined financial statements”), in accordance with U.S. generally accepted accounting principles (“GAAP”) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 1-B, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity. References to GAAP issued by the Financial Accounting Standards
Board (“FASB”) in these footnotes are to the FASB Accounting Standards Codification, also referred to as the “Codification” or “ASC.”
Historically, separate financial statements were not prepared for the Company as it had not operated as a stand-alone business separate from MSG Sports. The combined financial statements include certain assets and liabilities that were historically held by MSG Sports or by other MSG Sports subsidiaries but were specifically identifiable or otherwise attributable to the Company. All significant intercompany transactions between MSG Sports and the Company have been included as components of MSG Sports Corp. Investment in the combined financial statements, as they were considered effectively settled upon effectiveness of the Entertainment Distribution. The combined financial statements have been reflected on a historical cost basis. As immediately prior to the Entertainment Distribution, all of the assets and liabilities presented were wholly-owned by MSG Sports and were transferred to the Company at a carry-over basis.
The financial information from July 1, 2019 through April 17, 2020 that is included in the results of operations for the year ended June 30, 2020 and the combined statements of operations for the years ended June 30, 2019 and 2018 include allocations for certain support functions that were provided on a centralized basis and not historically recorded at the business unit level by MSG Sports, such as expenses related to executive management, finance, legal, human resources, government affairs, information technology, and venue operations, among others. As part of the Entertainment Distribution, certain corporate and operational support functions were transferred to the Company and therefore, charges were reflected in order to properly burden all business units comprising MSG Sports’ historical operations. These expenses have been allocated to MSG Sports 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 or MSG Sports, which are recorded as a reduction of either direct operating expenses or selling, general and administrative expense. In addition, certain of the Company’s contracts with its customers for suite license, sponsorship, and venue signage arrangements contain performance obligations that are fulfilled by both the Company and MSG Sports. Revenue sharing expenses attributable to MSG Sports have primarily been recorded on the basis of specific identification where possible, with the remainder allocated proportionately as a component of direct operating expenses within the combined statements of operations.
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 stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company is unable to quantify the amounts that it would have recorded during the historical periods on a stand-alone basis as it is not practicable to do so. See Note 20 for more information regarding allocations of certain costs from the Company to MSG Sports.
After the Distribution, the Company has been providing certain of these services to MSG Sports through a transition services agreement (“TSA”). As part of the Entertainment Distribution, certain employees providing support functions were transferred to the Company.
MSG Sports uses a centralized approach to cash management and financing of operations. Cash is managed centrally with net earnings reinvested and working capital requirements met from existing liquid funds. The Company’s and MSG Sports’ cash was available for use and was regularly “swept” historically. Most of the cash and cash equivalents held at the corporate level by MSG Sports were attributed to the Company for each of the periods presented, and as such, cash was held in accounts legally owned by the Company. Therefore, such amounts were attributed to the combined balance sheets for each period presented. Transfers of cash both to and from MSG Sports are included as components of the MSG Sports Corp. Investment in the accompanying combined statements of divisional equity and redeemable noncontrolling interests. In connection with the Entertainment Distribution, the Company received $816,896 of cash and cash equivalents from MSG Sports.
MSG Sports’ net investment in the Company has been presented as a component of divisional equity in the combined financial statements. Distributions made by MSG Sports to the Company or to MSG Sports from the Company are recorded as transfers to and from MSG Sports, and the net amount is presented on the combined statements of cash flows as “Net transfers to/from MSG Sports and MSG Sports subsidiaries.”
As of the Entertainment Distribution date, MSG Sports’ net investment in the Company was contributed to Former Parent’s stockholders through the distribution of all the common stock of the Company. The par value of the Company’s stock was recorded as a component of common stock, with the remaining balance recorded as additional paid-in capital in the consolidated and combined balance sheet on the Entertainment Distribution Date.
For purposes of the combined financial statements, income tax expense has been recorded as if the Company filed tax returns on a standalone basis separate from Former Parent. This separate return methodology applies to accounting guidance for income taxes in the combined financial statements as if the Company was a standalone public company for the periods prior to the Entertainment Distribution. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of the Company’s actual tax balances prior to or subsequent to the Entertainment Distribution. Prior to the Entertainment Distribution, the Company's operating results were included in Former Parent’s consolidated U.S. federal and state income tax returns. Pursuant to rules promulgated by the Internal Revenue Service and various state taxing authorities, the Company expects to file its initial U.S. income tax return for the period from April 18, 2020 through June 30, 2020. The calculation of the Company’s income taxes involves considerable judgment and use of both estimates and allocations.
Reclassifications
Certain reclassifications have been made in order to conform to the current period’s presentation. The reclassifications primarily relate to the elimination of a three-month lag on reporting Tao Group Hospitality in the Company’s consolidation policy. See Note 2. Summary of Significant Accounting PoliciesBusiness Combinations and Noncontrolling Interests and Note 22. Interim Financial Information (Unaudited) for further details.
Impact of the COVID-19 Pandemic
Our operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and actions taken in response by governmental authorities and certain professional sports leagues. As of the date of this Annual Report on Form 10-K, virtually all of our 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, events are currently prohibited at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre. Virtually all events at our venues have been postponed or cancelled through at least September, and will likely be impacted through the remainder of the year. We are not recognizing revenue from those events and, while events are being rescheduled into calendar year 2021, it is unclear whether and to what extent those events will take place. The 2020 Boston Calling Music Festival, which had been slated for Memorial Day weekend, was also cancelled. On August 4, 2020, the Company announced that it cancelled the 2020 production of the Christmas Spectacular.
The Company has long-term arena license agreements (the “Arena License Agreements”) with MSG Sports that require the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”) and the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”) to continue to play their home games at The Garden.
In March, the NBA and the NHL announced that their 2019-20 seasons were suspended, and subsequently announced in June and May, respectively, plans for a return to play in the designated cities of Orlando for the NBA and Edmonton and Toronto for the NHL. With The Garden unavailable to hold events, MSG Sports made no payments under the Arena License Agreements for the period following the Entertainment Distribution through June 30, 2020.
With the onset of the pandemic, Tao Group Hospitality’s business was also materially impacted by COVID-19-related restrictions imposed by state and local officials, which included limiting restaurants and bars to take-out and delivery service only and requiring the closure of nightlife establishments. As a result of these restrictions, virtually all of Tao Group Hospitality’s venues were closed for approximately three months starting in mid-March. Some state and local restrictions have gradually been lifted in certain cities where Tao Group Hospitality operates, including Las Vegas, New York City, Chicago and Los Angeles, which now permit limited in-person dining (typically required to be outdoors) with capacity restrictions and social distancing requirements. Although certain Tao Group Hospitality restaurants have re-opened for take-out and delivery service, as well as limited outdoor dining where permitted, they are operating at significantly reduced capacity and demand, which, together with the closures imposed earlier in the year, has materially impacted business. In addition, these situations remain uncertain, making it possible that more stringent restrictions could be imposed again if cities experience an increase in COVID-19 cases. For example, in Los Angeles, indoor dining was permitted but then later prohibited by the State of California, forcing Tao Group Hospitality to close indoor dining at venues that had reopened. It is unclear how long, and to what extent, these restrictions will be in effect.
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/market considerations, were considered a “triggering event” for the Tao Group Hospitality reporting unit, which required the Company
to assess the carrying value of Tao Group Hospitality’s intangible assets, long-lived assets and goodwill, in that order in accordance with ASC Subtopic 350-30, for impairment. Based on this evaluation, the Company recorded a non-cash goodwill impairment charge of $88,583 during the year ended June 30, 2020 for the Tao Group Hospitality reporting unit. In addition, during the year ended June 30, 2020, the Company recorded non-cash impairment charges of $8,047 $5,646, and $3,541, for property and equipment assets, right-of-use assets net of related lease liabilities, and a tradename, respectively, which were associated with two venues within the Company’s Tao Group Hospitality reportable segment. In connection with the COVID-19-related shutdown of its venues, Tao Group Hospitality has negotiated, and continues to negotiate, rent concessions with landlords for certain of its leased venues. The Company has elected to apply the temporary practical expedient to account for such rent abatement concessions as if they were contemplated as part of the existing venue lease contracts. Accordingly, the Company accounted for such concessions as negative variable lease cost in the amount of the rent abatement concessions received during the fourth quarter of fiscal year 2020. As Tao Group Hospitality continues to review its lease contracts, it could decide to close certain venues (which may later reopen elsewhere) if the landlords are unwilling to make concessions acceptable to Tao Group Hospitality, which closures could result in additional charges related to Tao Group Hospitality’s long-lived assets.
There was no triggering event identified by the Company for the Entertainment reporting unit as of June 30, 2020. However, the duration and impact of the COVID-19 pandemic may result in additional future impairment charges that management will evaluate as facts and circumstances evolve over time. Refer to Note 10 for further detail.
The COVID-19 pandemic is having and will likely continue to have a significant and negative impact on our operations and financial performance. As a result, we have taken several actions to improve our financial flexibility, reduce operating costs and preserve liquidity.
We have revised our process and construction schedule for MSG Sphere, providing for a substantially reduced spend in fiscal year 2021 and a lengthened timetable that enables the Company to preserve cash in the near-term. We now expect to open MSG Sphere in Las Vegas in calendar year 2023;
In connection with our extended construction timeline, we have reduced our expected near-term spending on technology and content development for MSG Sphere;
At the end of May, we ended all financial support that was previously provided for certain event-level employees at the Company’s performance venues, and as a result virtually all venue employees, approximately 6,000 in total, are effectively furloughed;
At the end of March, Tao Group Hospitality eliminated essentially all of its venue line staff and manager positions with limited numbers of employees returning as operations slowly resume. In August, Tao Group Hospitality reduced its corporate workforce;
In August, we reduced our regular full-time workforce by approximately 350 positions; and
We have implemented and are continuing to pursue additional comprehensive cost reduction measures, including terminating certain third-party services, negotiating reduced rates and/or reduced service levels with third parties, and pursuing targeted savings and reductions in spending marketing and travel and entertainment, and deferring or limiting non-essential operating or other discretionary expenses.
In addition, we are continuing to explore further opportunities to preserve cash and financial flexibility:
The Company is having conversations with landlords and other vendors about relief from cash payments, some of which may not be successful; and
We are actively pursuing potential financing options, including incurring up to $500,000 of long-term debt, which is expected to be comprised of senior notes or term loan and revolver facilities.
Although Tao Group Hospitality was in compliance with the financial covenants of the Tao Senior Credit Agreement as of March 31, 2020, disruptions caused by the COVID-19 pandemic have had, and are likely to continue to have, a significant and negative impact on Tao Group Hospitality’s operations and financial performance. In August 2020, Tao Group Hospitality entered into an amendment to the Tao Senior Credit Agreement, which suspended certain financial covenants through December 31, 2021 and increased the minimum liquidity requirement. In addition, in connection with the amendment, MSG Entertainment Group, LLC, entered into a guarantee agreement, which also included a minimum liquidity requirement for MSG Entertainment Group, LLC.
If recovery from the pandemic takes longer than currently estimated, Tao Group Hospitality may need to seek covenant waivers in the future. Tao Group Hospitality's failure to obtain debt covenant waivers could trigger a violation of these covenants and lead to default and acceleration of all of its outstanding debt, which could have a material adverse effect on Tao Group Hospitality and the Company.