EX-99.1 2 d520024dex991.htm EX-99.1 EX-99.1

ZUFFA PARENT, LLC

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     June 30, 2023     December 31, 2022  

Assets

     

Current assets:

     

Cash and cash equivalents

    $ 172,822     $ 180,574  

Accounts receivable (1)

      49,024       45,448  

Other current assets (2)

      68,731       42,278  
  

 

 

    

 

 

  

Total current assets

      290,577       268,300  
  

 

 

    

 

 

  

Property, buildings and equipment, net

      174,022       175,048  

Intangible assets, net

      452,381       475,765  

Operating lease right-of-use assets

      22,169       23,276  

Goodwill

      2,602,639       2,602,639  

Investments

      4,436       5,416  

Other assets

      29,968       30,286  
  

 

 

    

 

 

  

Total assets

    $ 3,576,192     $ 3,580,730  
  

 

 

    

 

 

  

Liabilities, Redeemable Non-controlling Interests and Members’ Equity

     

Current liabilities:

     

Accounts payable

    $ 10,124     $ 16,842  

Accrued liabilities

      90,964       108,189  

Current portion of long-term debt

      22,514       22,683  

Current portion of operating lease liabilities

      1,897       1,793  

Deferred revenue (3)

      79,537       71,624  

Other current liabilities (4)

      20,496       9,048  
  

 

 

    

 

 

  

Total current liabilities

      225,532       230,179  
  

 

 

    

 

 

  

Long-term debt

      2,725,067       2,736,315  

Long-term operating lease liabilities

      21,727       22,594  

Other long-term liabilities (5)

      6,246       12,818  
  

 

 

    

 

 

  

Total liabilities

      2,978,572       3,001,906  
  

 

 

    

 

 

  

Commitments and contingencies (Note 11)

     

Redeemable non-controlling interests

      10,696       9,908  

Members’ equity:

     

Members’ capital

      587,161       568,070  

Accumulated other comprehensive (loss) income

      (237 )      846  
  

 

 

    

 

 

  

Total members’ equity

      586,924       568,916  
  

 

 

    

 

 

  

Total liabilities, redeemable non-controlling interests and members’ equity

    $ 3,576,192     $ 3,580,730  
  

 

 

    

 

 

  

 

(1)

Net of allowance for doubtful accounts of $338 and $2,355, respectively, and related party receivables of $38 and $323, respectively

(2)

Including related party receivables of $38,756 and $24,431, respectively, and prepaid contract costs to related party of $381 and $258, respectively

(3)

Including related party accounts of $809 and $672, respectively

(4)

Including related party payables of $18,645 and $7,728, respectively

(5)

Including related party payables of $1,008 and $0, respectively

See accompanying notes to consolidated financial statements

 

F-2

ZUFFA PARENT, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,		  
     2023     2022  

Revenue (1)

    $ 611,915     $ 527,677  

Operating expenses:

     

Direct operating costs (2)

      171,941       143,864  

Selling, general and administrative expenses (3)

      119,822       99,210  

Depreciation and amortization

      30,202       29,998  
  

 

 

    

 

 

  

Total operating expenses

      321,965       273,072  
  

 

 

    

 

 

  

Operating income

      289,950       254,605  

Other expense:

     

Interest expense, net

      (111,803 )      (55,448 ) 

Other expense, net

      (864 )      (844 ) 
  

 

 

    

 

 

  

Income before income taxes and equity losses of affiliates

      177,283       198,313  

Provision for income taxes

      6,499       7,446  
  

 

 

    

 

 

  

Income before equity losses of affiliates

      170,784       190,867  

Equity losses of affiliates, net of tax

      980       —    
  

 

 

    

 

 

  

Net income

      169,804       190,867  

Less: Net income attributable to redeemable non-controlling interests

      788       1,007  
  

 

 

    

 

 

  

Net income attributable to Zuffa Parent, LLC

    $ 169,016     $ 189,860  
  

 

 

    

 

 

  

 

(1)

Including related party revenue of $8,412 and $5,248, respectively

(2)

Including related party expenses of $8,304 and $7,253, respectively

(3)

Including related party expenses of $12,764 and $12,673, respectively

See accompanying notes to consolidated financial statements

 

F-3

ZUFFA PARENT, LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,		  
     2023     2022  

Net income

    $ 169,804     $ 190,867  

Other comprehensive income, net of tax:

     

Foreign currency translation adjustments

      (1,132 )      220  

Cash flow hedges:

     

Change in net unrealized gains

      201       3,275  

Amortization of cash flow hedge fair value to net income

      (152 )      (152 ) 
  

 

 

    

 

 

  

Total comprehensive income, net of tax

      168,721       194,210  

Less: Comprehensive income attributable to redeemable non-controlling interests

      788       1,007  
  

 

 

    

 

 

  

Comprehensive income attributable to Zuffa Parent, LLC

    $ 167,933     $ 193,203  
  

 

 

    

 

 

  

See accompanying notes to consolidated financial statements

 

F-4

ZUFFA PARENT, LLC

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

(In thousands)

(Unaudited)

 

     Common
Units		     Accumulated Other
Comprehensive
Income/(Loss)		     Total
Members’
Equity		  

Balance as of December 31, 2021

    $ 1,251,416     $ (2,524 )    $ 1,248,892  

Comprehensive income

      189,860       3,343       193,203  

Accretion of redeemable non-controlling interests

      1,007       —         1,007  

Distributions

      (67,937 )      —         (67,937 ) 

Contributions

      12,544       —         12,544  
  

 

 

    

 

 

    

 

 

  

Balance as of June 30, 2022

    $ 1,386,890     $ 819     $ 1,387,709  
  

 

 

    

 

 

    

 

 

  

 

     Common
Units		     Accumulated Other
Comprehensive
Income/(Loss)		     Total
Members’
Equity		  

Balance as of December 31, 2022

    $ 568,070     $ 846     $ 568,916  

Comprehensive income

      169,016       (1,083 )      167,933  

Distributions

      (161,509 )      —         (161,509 ) 

Contributions

      11,584       —         11,584  
  

 

 

    

 

 

    

 

 

  

Balance as of June 30, 2023

    $ 587,161     $ (237 )    $ 586,924  
  

 

 

    

 

 

    

 

 

  

See accompanying notes to consolidated financial statements

 

F-5

ZUFFA PARENT, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months
Ended June 30,		  
     2023     2022  

Operating activities

     

Net income

    $ 169,804     $ 190,867  

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and amortization

      30,202       29,998  

Net provision for allowance for doubtful accounts

      89       547  

Equity losses of affiliates

      980       —    

Amortization of content costs

      7,960       6,858  

Amortization and write-off of original issue discount and deferred financing costs

      5,207       5,119  

Equity-based compensation expense

      11,584       12,544  

Income taxes

      1,132       2,003  

Other, net

      (213 )      (120 ) 

Changes in operating assets and liabilities:

     

Accounts receivable

      (3,665 )      (28,515 ) 

Other current assets

      (26,405 )      16,085  

Other noncurrent assets

      (7,479 )      (8,315 ) 

Accounts payable and accrued liabilities

      (20,518 )      (14,316 ) 

Deferred revenue

      1,362       27,509  

Other liabilities

      10,639       (1,769 ) 
  

 

 

    

 

 

  

Net cash provided by operating activities

      180,679       238,495  
  

 

 

    

 

 

  

Investing activities

     

Purchase of property and equipment

      (9,088 )      (6,984 ) 

Capitalized software development costs

      (116 )      (328 ) 

Proceeds from sale of assets

      —         8  

Investments in affiliates, net

      —         (250 ) 
  

 

 

    

 

 

  

Net cash used in investing activities

      (9,204 )      (7,554 ) 
  

 

 

    

 

 

  

Financing activities

     

Payments on borrowings

      (16,300 )      (16,300 ) 

Redemption of profits units

      —         (2,877 ) 

Payments for financing costs

      (286 )      —    

Distributions to members

      (161,509 )      (67,937 ) 
  

 

 

    

 

 

  

Net cash used in financing activities

      (178,095 )      (87,114 ) 
  

 

 

    

 

 

  

Effects of exchange rate movements on cash

      (1,132 )      220  

(Decrease) increase in cash and cash equivalents

      (7,752 )      144,047  

Cash and cash equivalents, beginning of period

      180,574       874,688  
  

 

 

    

 

 

  

Cash and cash equivalents, end of period

    $ 172,822     $ 1,018,735  
  

 

 

    

 

 

  

Supplemental disclosures:

     

Cash paid for interest

    $ 103,499     $ 51,547  

Cash paid for taxes

      7,057       7,269  

Non-cash investing and financing activities:

     

Capital expenditures included in current liabilities

    $ 335     $ 305  

Accretion of redeemable non-controlling interests

      —         (1,007 ) 

Capital contribution from parent for equity-based compensation

      11,584       12,544  

See accompanying notes to consolidated financial statements

 

F-6

ZUFFA PARENT, LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

DESCRIPTION OF BUSINESS

Business and Organization

Zuffa Parent, LLC and its subsidiaries (collectively the “Company”, “Zuffa”, “UFC”, or “we”) is an integrated media and entertainment company, principally engaged in the development, production, sales and marketing of media and consumer products featuring the Ultimate Fighting Championship® (UFC®) and related brands. Zuffa Parent, LLC was formed on July 27, 2016, is headquartered in Las Vegas, Nevada and wholly-owns Zuffa, LLC, which is the operating entity for the Ultimate Fighting Championship.

On August 18, 2016, a buyer group that included Endeavor Operating Company, LLC (“EOC”), affiliates of Silver Lake Partners (“SLP”), affiliates of Kohlberg Kravis Roberts & Co. (“KKR”) and certain other investors (including certain existing owners as rollover investors) (the “buyer group”) acquired 100% of the equity interests of Zuffa, (the “EOC Transaction”). In connection with the acquisition, EOC was deemed to be the accounting acquirer under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”) as EOC had a controlling financial interest.

In August 2017, EOC purchased the common equity interests of certain existing shareholders of the Company for $373.7 million, which included EOC exercising its call option to purchase a portion of a rollover seller’s Class B Common Units for $18.8 million. After giving effect to these transactions, EOC’s common ownership interest in the Company was 50.1%.

In May 2021, substantially simultaneous with the closing of Endeavor Group Holdings Inc.’s (“EGH”) initial public offering (the “EGH IPO”), EOC acquired the remaining equity interests in the Company resulting in EOC directly or indirectly owning 100% of the equity interests of Zuffa (the “UFC Buyout”). In addition, prior to the close of the EGH IPO, the holders of UFC profits units received EOC common units or Endeavor Manager LLC common units in exchange for such UFC profits units.

In April 2023, EGH entered into a transaction agreement to form a new publicly traded company (“New PubCo”) with World Wrestling Entertainment, Inc (“WWE”) relating to the combination of the UFC and WWE businesses. Upon close, which is expected in late 2023, (A) EGH and/or its subsidiaries will hold (1) a 51.0% controlling non-economic voting interest in New PubCo and (2) a 51.0% economic interest in an operating subsidiary (“HoldCo”), which will own all of the assets of the UFC and WWE businesses, and (B) the stockholders of WWE will hold (1) a 49.0% voting interest in New PubCo and (2) a 100.0% economic interest in New PubCo, which will in turn hold a 49.0% economic interest in Holdco.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and should be read in conjunction with the Company’s consolidated financial statements and accompanying footnotes for the year ended December 31, 2022. Certain information and note disclosures normally included in the annual financial statements have been condensed or omitted from these interim financial statements. The interim consolidated financial statements as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 are unaudited; however, in the opinion of management, such interim consolidated financial statements reflect all adjustments, consisting solely of normal and recurring adjustments, necessary for a fair statement of its financial position, results of operations, and cash flows for the interim periods presented.

 

F-7

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying disclosures.

Significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, the allowance for doubtful accounts, content cost amortization and impairment, the fair value of the Company’s reporting unit and the assessment of goodwill, other intangible assets and long-lived assets for impairment, redeemable non-controlling interests, the fair value of equity-based compensation, income taxes and contingencies.

Management evaluates these estimates using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s consolidated financial statements in future periods.

Recently Adopted Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. This ASU clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets, expanding the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. The amendments in this update were effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2023 with no material effect on the Company’s financial position or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. Adoption of the expedients and exceptions was permitted upon issuance of this update through December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848, in order to defer the sunset date of ASC 848 until December 31, 2024. The Company adopted this guidance on April 1, 2023 with no material effect on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718). This ASU amends or supersedes various SEC paragraphs within the FASB Accounting Standards Codification to conform to past SEC announcements and guidance issued by the SEC. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.

 

F-8

3.

REVENUE

Disaggregated Revenue

The following table presents the Company’s revenue disaggregated by primary revenue sources (in thousands):

 

     Six months ended
June 30,		  
     2023      2022  

Revenue:

      

Media Rights and Content

    $ 435,771      $ 386,035  

Live Event (1)

      63,795        40,626  

Sponsorship

      84,209        75,260  

Consumer Products Licensing

      28,140        25,756  
  

 

 

     

 

 

  

Total Revenue

    $ 611,915      $ 527,677  
  

 

 

     

 

 

  

(1) - The Company presents taxes assessed by governmental authorities related to ticket revenue on a gross basis when imposed concurrent with a revenue-producing transaction. Such ticket taxes aggregated to $2.4 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively.

Remaining Performance Obligations

The following table presents the aggregate amount of transaction price allocated to remaining performance obligations for contracts greater than one year with unsatisfied or partially satisfied performance obligations as of June 30, 2023 (in thousands). The transaction price related to these future obligations does not include any variable consideration.

 

     Year Ending
December 31,		  

Remainder of 2023

    $ 482,379  

2024

      888,337  

2025

      892,779  

2026

      156,067  

2027

      118,284  

Thereafter

      75,148  
  

 

 

  

Total

    $ 2,612,995  
  

 

 

  

Revenue from Prior Period Performance Obligations

The Company recognized a $0.8 million and $2.1 million net increase of revenue from performance obligations satisfied in prior periods during the six months ended June 30, 2023 and 2022, respectively. The amount recognized from prior period performance obligations reflects changes in estimated sales and usage based pay-per-view and consumer products licensing royalty revenue due to updated information. Additionally, this amount includes incremental revenues earned from performance obligations satisfied in prior periods.

Contract Liabilities (Deferred Revenue)

The Company records deferred revenue when cash payments are received or due in advance of our performance. Our deferred revenue balance primarily relates to advance payments received related to our content distribution rights agreements, our consumer product licensing agreements and our sponsorship arrangements, and our six- and twelve-month memberships for UFC Fight Pass. Deferred revenue is included in the current liabilities section and in other long-term liabilities in the consolidated balance sheets.

 

F-9

The following table presents the Company’s deferred revenue as of June 30, 2023 and December 31, 2022 (in thousands):

 

Description

    As of
December 31,
2022		      Additions      Deductions      Foreign
Exchange		      As of
June 30,
2023		  

Deferred revenue - current

    $ 71,624      $ 430,347      $ (422,602 )     $ 168      $ 79,537  

Deferred revenue - noncurrent

    $ 11,060      $ —        $ (6,551 )     $ —        $ 4,509  

 

4.

SUPPLEMENTARY DATA

Allowance for Doubtful Accounts

The changes in the allowance for doubtful accounts are as follows (in thousands):

 

     As of
December 31,
2022		      Charged to
Costs and
Expenses		      Deductions      Foreign
Exchange		      As of
June 30,
2023		  

Six Months Ended June 30, 2023

    $ 2,355      $ 83      $ (2,100 )     $ —        $ 338  

Film and Television Costs

The following table presents the Company’s unamortized content costs (in thousands):

 

     June 30,
2023		      December 31,
2022		  

Licensed and acquired program rights, net of accumulated amortization

    $ 21,067      $ 20,548  

Produced programming:

      

Released, net of accumulated amortization

      4,491        5,699  

In production

      805        557  
  

 

 

     

 

 

  

Total film and television costs

    $ 26,333      $ 26,804  
  

 

 

     

 

 

  

The Company amortized $8.0 million and $6.9 million during the six months ended June 30, 2023 and 2022, respectively. These amounts are included in direct operating costs in the consolidated statements of operations.

Accrued Liabilities

The following is a summary of accrued liabilities (in thousands):

 

     June 30,
2023		      December 31,
2022		  

Interest

    $ 39,522      $ 35,502  

Operating payables

      34,152        41,896  

Payroll-related costs

      13,147        27,271  

Other

      4,143        3,520  
  

 

 

     

 

 

  

Total accrued liabilities

    $ 90,964      $ 108,189  
  

 

 

     

 

 

  

 

5.

GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying value of the Company’s goodwill was $2,602.6 million as of June 30, 2023 and December 31, 2022. There were no additions, nor were there any dispositions or impairments to goodwill during the six months ended June 30, 2023 and 2022.

 

F-10

Goodwill as of June 30, 2023 and December 31, 2022 reflects goodwill resulting from the Company’s election to apply pushdown accounting in its separate financial statements to reflect EGH’s new basis of accounting in the Company’s assets and liabilities, including goodwill.

Intangible Assets

The following table summarizes information relating to the Company’s identifiable intangible assets as of June 30, 2023 (in thousands):

 

     Weighted
Average
Estimated
Useful Life
(in years)		      Gross
Amount		      Accumulated
Amortization		      Carrying
Value		  

Amortized:

            

Trademarks and trade names

      18      $ 703,626      $ (268,635 )     $ 434,991  

Customer relationships

      4.5        354,510        (340,638 )       13,872  

Internally developed software

      2.9        16,228        (12,710 )       3,518  
     

 

 

     

 

 

     

 

 

  

Total intangible assets

       $ 1,074,364      $ (621,983 )     $ 452,381  
     

 

 

     

 

 

     

 

 

  

The following table summarizes information relating to the Company’s identifiable intangible assets as of December 31, 2022 (in thousands):

 

     Weighted
Average
Estimated
Useful Life
(in years)		      Gross
Amount		      Accumulated
Amortization		      Carrying
Value		  

Amortized:

            

Trademarks and trade names

      18      $ 703,626      $ (249,085 )     $ 454,541  

Customer relationships

      4.5        354,510        (337,379 )       17,131  

Internally developed software

      2.9        16,234        (12,141 )       4,093  
     

 

 

     

 

 

     

 

 

  

Total intangible assets

       $ 1,074,370      $ (598,605 )     $ 475,765  
     

 

 

     

 

 

     

 

 

  

Amortization of intangible assets was $23.4 million and $23.3 million during the six months ended June 30, 2023 and 2022, respectively, which is recognized within depreciation and amortization in the consolidated statements of operations.

 

6.

INVESTMENTS

Howler Head

The Company has an approximately 7% ownership stake in in Monkey Spirit, LLC, which owns the IP license to distribute Howler Head branded products and beverages (together, “Howler Head”). From the date of the original investment until August 2022, the investment was classified as an equity investment without a readily determinable fair value. In August 2022, the Company received an incremental share of equity in Howler Head. Subsequent to this transaction, the Company determined that it exercised significant influence over the operating and financial policies of Howler Head and as a result the investment was reclassified as an equity method investment. The Company recognized equity losses of $0.9 million for the six months ended June 30, 2023, and the investment balance was $3.3 million and $4.2 million as of June 30, 2023 and December 31, 2022, respectively.

Other Investments

During the six months ended June 30, 2023, the Company recognized equity losses of $0.1 million in its other equity method investments, which had a $0.6 million and

 

F-11

$0.7 million balance as of June 30, 2023 and December 31, 2022, respectively. The Company also had investments without a readily determinable fair value of $0.5 million as of June 30, 2023 and December 31, 2022.

 

7.

DEBT

The following is a summary of outstanding debt (in thousands):

 

     June 30,
2023		      December 31,
2022		  

Credit Facilities

      

First Lien Term Loan (due April 2026)

    $ 2,744,267      $ 2,759,767  

Secured Commercial Loans

      32,667        33,467  
  

 

 

     

 

 

  

Total principal

      2,776,934        2,793,234  

Unamortized discount

      (10,105 )       (11,791 ) 

Unamortized debt issuance cost

      (19,248 )       (22,445 ) 
  

 

 

     

 

 

  

Total debt

      2,747,581        2,758,998  

Less: current portion

      (22,514 )       (22,683 ) 
  

 

 

     

 

 

  

Total long-term debt

    $ 2,725,067      $ 2,736,315  
  

 

 

     

 

 

  

Credit Facilities

As of June 30, 2023 and December 31, 2022, the Company had $2.7 billion and $2.8 billion, respectively, outstanding under a credit agreement that was entered into in connection with the acquisition in 2016 (the “Credit Facilities”). The Credit Facilities consist of a first lien secured term loan (the “First Lien Term Loan”) and a secured revolving credit facility in an aggregate principal amount of $205.0 million, letters of credit in an aggregate face amount not in excess of $40.0 million and swingline loans in an aggregate principal amount not in excess of $15.0 million (collectively, the “Revolving Credit Facility”). The Credit Facilities are secured by liens on substantially all of the assets of the Company. In April 2023, the Company executed an amendment on the Revolving Credit Facility to extend the maturity by six months to October 29, 2024 and replace the adjusted LIBOR reference rate with Term Secured Overnight Financing Rate (“SOFR”). In June 2023, the Company executed an amendment of the First Lien Term Loan to replace the adjusted LIBOR reference rate with SOFR plus a credit spread adjustment (as defined in the credit agreement).

The financial debt covenant of the Credit Facilities did not apply as of June 30, 2023 and December 31, 2022, as the Company’s borrowings outstanding under the Revolving Credit Facility did not exceed thirty-five percent of its capacity.

The Company had $10.0 million and no outstanding letters of credit as of June 30, 2023 and December 31, 2022, respectively.

Secured Commercial Loans

As of June 30, 2023 and December 31, 2022, the Company had $32.7 million and $33.5 million of secured loans outstanding, respectively, which were entered into in October 2018 in order to finance the purchase of a building and its adjacent land (the “Secured Commercial Loans”). The Secured Commercial Loans have identical terms except the $28.0 million Loan Agreement is secured by a deed of trust for the Company’s headquarters building and underlying land in Las Vegas and the $12.0 million Loan Agreement is secured by a deed of trust for the newly acquired building and its adjacent land, also located in Las Vegas. In May 2023, the Company executed an amendment of the Secured Commercial Loans to replace the LIBOR reference rate with SOFR.

 

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The Secured Commercial Loans contain a financial covenant that requires the Company to maintain a Debt Service Coverage Ratio of consolidated debt to Adjusted EBITDA as defined in the Loan Agreements of no more than 1.15-to-1 as measured on an annual basis. As of June 30, 2023 and December 31, 2022, the Company was in compliance with its financial debt covenant under the Secured Commercial Loans.

 

8.

REDEEMABLE NON-CONTROLLING INTEREST

In July 2018, the Company received an investment of $9.7 million by third parties (the “Russia Co-Investors”) in a newly formed subsidiary of the Company (the “Russia Subsidiary”) that was formed to expand the Company’s existing business in Russia and certain other countries in the Commonwealth of Independent States. The terms of this investment provide the Russia Co-Investors with a put option to sell their ownership in the Russia Subsidiary five years and six months after the consummation of the investment. The purchase price of the put option is the greater of the total investment amount, defined as the Russia Co-Investors’ cash contributions less cash distributions, or fair value. As of June 30, 2023 and December 31, 2022, the estimated redemption value was $9.9 million and $9.7 million, respectively.

The changes in carrying value of the redeemable non-controlling interest for the six months ended June 30, 2023 were as follows (in thousands):

 

Balance – December 31, 2022

    $ 9,908  

Net income attributable to non-controlling interests

      788  
  

 

 

  

Balance – June 30, 2023

    $ 10,696  
  

 

 

  

The changes in carrying value of the redeemable non-controlling interest for the six months ended June 30, 2022 were as follows (in thousands):

 

Balance – December 31, 2021

    $ 9,700  

Net income attributable to non-controlling interests

      1,007  

Accretion

      (1,007 ) 
  

 

 

  

Balance – June 30, 2022

    $ 9,700  
  

 

 

  

 

9.

DERIVATIVE FINANCIAL INSTRUMENTS

In October 2018, the Company entered into a swap for $40.0 million notional effective November 1, 2018 with a termination date of November 1, 2028. The swap requires the Company to pay a fixed rate of 4.99% and receive the total of LIBOR + 1.62%, which totaled 3.97% as of December 31, 2018. The Company entered into this swap to hedge certain of its interest rate risks on its variable rate debt. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions. The Company has designated the interest rate swap as a cash flow hedge, and all changes in fair value are recognized in other comprehensive income until the hedged interest payments affect earnings.

In May 2023, the Company amended its Secured Commercial Loans and associated interest rate swap to replace the LIBOR reference rate with Term SOFR. The swap requires the Company to pay a fixed rate of 4.99% and receive the total of SOFR + 1.70%, which totaled 6.78% as of June 30, 2023.

Prior to the May 2023 amendment, the fair value of the swap was based on commonly quoted monthly LIBOR rates. Subsequent to this amendment, the fair value of the swap is based on commonly quoted monthly Term SOFR rates. Both the LIBOR and Term SOFR reference rates are considered observable inputs representing a Level 2 measurement within the fair value hierarchy. The fair value of the swap was $0.8 million and $0.6 million as of June 30, 2023 and December 31, 2022, respectively, and was included in other assets in the consolidated balance sheets. The total change in fair value of the swap’s liability position

 

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included in accumulated other comprehensive income was a decrease of $0.2 million and $3.3 million for the six months ended June 30, 2023 and 2022, respectively. The Company reclassified $0.2 million during the six months ended June 30, 2023 and 2022, representing the amortization of the cash flow hedge fair value to net income.

 

10.

INCOME TAXES

The Company is an LLC which is treated as a partnership for U.S. federal income tax purposes and is therefore not subject to U.S. corporate income taxes. The Company’s foreign subsidiaries are subject to entity-level taxes. The Company also is subject to entity-level income taxes in certain U.S. state and local jurisdictions.

In accordance with ASC Topic 740, Income Taxes, each interim period is considered integral to the annual period and tax expense is generally determined using an estimate of the annual effective income tax rate (“AETR”). The Company’s tax provision for interim periods is determined using an estimate of its AETR, adjusted for discrete items, if any, that are considered in the relevant period. Each quarter, the Company updates the AETR and, if the estimated effective tax rate changes, a cumulative adjustment is made. In accordance with the authoritative guidance for accounting for income taxes in interim periods, the Company computed its income tax provision for the six months ended June 30, 2023 and 2022 based upon the AETR.

The provision for income taxes for the six months ended June 30, 2023 is $6.5 million based on pretax income of $177.3 million. The provision for income taxes for the six months ended June 30, 2022 was $7.4 million based on pretax income of $198.3 million. The effective tax rate is 3.67% and 3.73% for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate between the periods differs primarily from the amount of year-to-date actual and projected pretax income (loss) for each period, and the amount of such income (loss) that is not subject to tax due to the Company’s tax structure. Any tax balances reflected on the June 30, 2023 balance sheet would be adjusted accordingly to reflect the actual financial results as of December 31, 2023.

Our effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to partnership income not subject to income tax, state and local income taxes, withholding taxes in foreign jurisdictions that are not based on net income and income subject to tax in foreign jurisdictions which differ from the U.S. federal statutory income tax rate and the relative amount of income earned in those jurisdictions.

As of June 30, 2023 and December 31, 2022, the Company had unrecognized tax benefits of $0.9 million and $0.9 million, respectively, for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities.

In December 2022, the Organization for Economic Co-operation and Development (“OECD”) proposed Global Anti-Base Erosion Rules, which provides for changes to numerous long-standing tax principles including the adoption of a global minimum tax rate of 15% for multinational enterprises (“GloBE rules”). While various jurisdictions are in the process of enacting legislation to adopt GloBE rules, only South Korea and Japan have enacted such legislation. Other countries are expected to adopt GloBE rules in 2023 with effective dates beginning in 2024. Changes in tax laws in the various countries in which the Company operates can negatively impact the Company’s results of operations and financial position in future periods. The Company will continue to monitor legislative and regulatory developments in this area.

 

11.

COMMITMENTS AND CONTINGENCIES

Claims and Litigation

The Company is involved in legal proceedings, claims and governmental investigations arising in the normal course of business. The types of allegations that arise in connection with such legal proceedings vary in nature, but can include contract, employment, tax and intellectual property matters. The Company evaluates all cases and records liabilities for losses from legal proceedings when the Company determines

 

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that it is probable that the outcome will be unfavorable and the amount, or potential range, of loss can be reasonably estimated. While any outcome related to litigation or such governmental proceedings cannot be predicted with certainty, management believes that the outcome of these matters, except as otherwise may be discussed below, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Zuffa has five related class-action lawsuits filed against it in the United States District Court for the Northern District of California (the “District Court”) between December 2014 and March 2015 by a total of eleven former UFC fighters. The complaints in the five lawsuits are substantially identical. Each alleges that Zuffa violated Section 2 of the Sherman Act by monopolizing the alleged market for the promotion of elite professional MMA bouts and monopolizing the alleged market for elite professional MMA fighters’ services. Plaintiffs claim that Zuffa’s alleged conduct injured them by artificially depressing the compensation they received for their services and their intellectual property rights, and they seek treble damages under the antitrust laws, as well as attorneys’ fees and costs, and injunctive relief. On December 14, 2020, the District Court orally indicated its intention to grant plaintiffs’ motion to certify the Bout Class (comprised of fighters who participated in bouts from December 16, 2010 to September 30, 2017) and to deny plaintiffs’ motion to certify the Identity Class (a purported class based upon the alleged expropriation and exploitation of fighter identities). On August 9, 2023, the judge issued a written order confirming this ruling. The Company will seek an appeal of this decision. On June 23, 2021, plaintiffs’ lawyers filed a new case against Zuffa and EGH alleging substantially similar claims but providing for a class period from July 1, 2017 to present. Management believes that the Company has meritorious defenses against the allegations and intends to defend itself vigorously.

The Company is involved in various other legal matters arising in the normal course of business. In the opinion of the Company, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse effect on the financial position or the results of operations of the Company.

 

12.

RELATED PARTY TRANSACTIONS

EGH and its subsidiaries (collectively, the “Group”) provide various services to the Company:

The Company is charged an annual management fee of $25.0 million for services provided by the Group. For the six months ended June 30, 2023 and 2022, the Company incurred management fee charges of $12.5 million and $12.5 million and commissions fees of $1.6 million and $1.0 million, respectively, which are included in selling, general and administrative expenses and direct operating costs, respectively, in the consolidated statements of operations. The Company believes the annual management fee is a reasonable allocation of costs related to representation, executive leadership, back-office and corporate functions and other services provided by the Group. The Company also reimburses the Group for third party costs they incur on the Company’s behalf. The Company reimbursed $5.4 million and $2.6 million of such costs during the six months ended June 30, 2023 and 2022, respectively. The Company also receives revenue from the Group for the exhibition of UFC events as well as for other licensing arrangements. The Company recognized $6.5 million and $3.8 million of revenue for these transactions during the six months ended June 30, 2023 and 2022, respectively. Third-party costs of $14.9 million were incurred by the Group on behalf of the Company in connection with the transaction agreement entered into in April 2023 (see Note 1) during the six months ended June 30, 2023. The Company will reimburse the Group for such services. The Company had a net receivable balance of $5.5 million and $10.4 million due from these parties as of June 30, 2023 and December 31, 2022, respectively.

The Company also procured $3.4 million and $2.8 million in production and consulting services from the Group for the six months ended June 30, 2023 and 2022, respectively. The Company had a $1.0 million and $2.6 million payable balance due to these parties as of June 30, 2023 and December 31, 2022, respectively.

 

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The Company uses Endeavor Streaming, a Group company, to manage the video platform and billing for its over-the-top subscription service UFC Fight Pass and digital pay-per-view service UFC.TV. Endeavor Streaming collects revenue paid by the end-user for these products and then remits payment to the Company net of fees on revenue generated using the Endeavor Streaming platform. As of June 30, 2023 and December 31, 2022, the Company had a $13.4 million and $6.2 million receivable from Endeavor Streaming, respectively, which is included in other current assets in the consolidated balance sheets. Additionally, the Company pays Endeavor Streaming fees for revenue generated using Endeavor Streaming’s platform, as well as for work performed in updating and maintaining the video platform. These fees are deferred over the period of the subscription, which ranges from one to twelve months for UFC Fight Pass and are recognized at the time of the live event for UFC.TV. As of June 30, 2023 and December 31, 2022, the Company had $0.4 million and $0.3 million in deferred fees and a $0.6 million and $0.8 million payable related to such fees, respectively, which is included in other current assets and other current liabilities, respectively, in the consolidated balance sheets. The Company recognized $3.4 million and $3.2 million of fees and $0.1 million and $0.2 million of maintenance expenses to Endeavor Streaming during the six months ended June 30, 2023 and 2022, respectively, which is included in direct operating costs and selling, general and administrative expenses, respectively, in the consolidated statements of operations.

The Company has a $2.7 million receivable from Endeavor Streaming for sales tax owed to various taxing authorities in territories where Endeavor Streaming has sold UFC Fight Pass and UFC.TV to its end-users as of June 30, 2023 and December 31, 2022. This receivable is included in other current assets in the Company’s consolidated balance sheets. The Company recorded a corresponding $2.7 million payable to those taxing authorities as of June 30, 2023 and December 31, 2022, which is included in accrued liabilities in the Company’s consolidated balance sheets.

The Company entered into various other transactions with entities affiliated with EGH throughout the normal course of business. During the six months ended June 30, 2023 and 2022, the Company recognized $1.4 million and $1.4 million in revenues, respectively, and none and $0.2 million in direct operating costs, respectively, from these transactions.

The Company recognized $0.3 million and less than $0.1 million of revenue during the six months ended June 30, 2023 and 2022, respectively, from promotional services provided to its equity method investee, Howler Head, in connection to its equity investment in the entity discussed in Note 7 above. The Company had deferred revenue of $1.7 million and $2.0 million as of June 30, 2023 and December 31, 2022, respectively, related to this arrangement. Additionally the Company had receivables from Howler Head of less than $0.1 million and $0.2 million as of June 30, 2023 and December 31, 2022, respectively, which are related to amounts owed for certain reimbursable expenses incurred during each period.

 

13.

SUBSEQUENT EVENTS

Subsequent events were evaluated through August 10, 2023, which is the date the consolidated financial statements were issued.

The Company concluded that no other events have occurred that would require recognition or disclosure in the consolidated financial statements.

 

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