Reservoir Media, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2022; filed February 8, 2023. Reservoir is an independent music company with Music Publishing and Recorded Music segments, representing more than 140,000 compositions and over 36,000 sound recordings. Comparisons below are with the corresponding 2021 periods; prior-year figures were revised for disclosed accounting errors.
Financial performance and position
- Revenue: Third-quarter revenue was $29.9 million, up 16%; nine-month revenue was $87.5 million, up 20%. Nine-month Music Publishing revenue rose 17% to $60.7 million, Recorded Music rose 22% to $24.0 million, and other revenue rose to $2.8 million. Digital revenue increased 24% in the quarter and 26% year to date.
- Profit and margins: Operating income increased 71% to $4.6 million for the quarter and 17% to $12.5 million for nine months. Net loss attributable to Reservoir was $4.4 million for the quarter, versus $1.2 million income a year earlier; nine-month income was $0.2 million, down from $4.2 million. Consolidated OIBDA, a non-GAAP measure, rose 33% to $10.1 million for the quarter and 18% to $28.8 million for nine months. OIBDA margin was 34% for the quarter (30% prior year) and 33% for nine months (34% prior year). Cost of revenue was 39% of revenue for the quarter and 41% year to date, versus 44% and 43%, respectively.
- Cash flow: For the nine months, operating cash flow was $26.2 million, compared with $12.9 million; investing cash outflow was $45.4 million, compared with $158.6 million, mainly reflecting lower catalog acquisition spending; financing inflow was $19.2 million, compared with $152.5 million, which included the prior-year business combination and PIPE proceeds. Cash ended at $17.0 million, down from $17.8 million at March 31, 2022.
- Debt and liquidity: At December 31, gross borrowings under the secured revolving facility were $298.8 million and debt net of issuance costs was $292.2 million. Remaining facility availability was $151.2 million. The company reported $47.1 million of current liabilities and $64.1 million of current assets. Management said operating cash flows, cash and facility availability should support operations and obligations over the next 12 months.
Changes, outlook, and significant items
- Revenue growth reflected digital streaming, catalog acquisitions, U.S. mechanical royalties, and stronger touring and merchandise activity in the artist-management business. Nine-month Recorded Music revenue included $10.5 million from Tommy Boy, acquired in 2021.
- On December 16, 2022, the company amended its credit facility: capacity increased from $350 million to $450 million, maturity was extended to December 16, 2027, and the interest-rate terms changed to a base-rate or SOFR-based option. The amendment removed the total-leverage covenant and revised other financial covenants. Reservoir recorded a $0.9 million debt-extinguishment loss and capitalized about $3.5 million of new financing costs. In January 2023, swaps were changed from LIBOR to SOFR.
- Reservoir reported compliance with its fixed-charge coverage covenant (5.2x versus a 1.10x minimum) and senior-debt-to-library-value covenant (reported below 30.3%, versus a 45% limit). Substantially all relevant tangible and intangible assets secure the facility; covenant noncompliance could permit lenders to demand repayment, subject to cure rights.
- Quarter and nine-month tax expense included a $3.7 million charge from changing the estimated U.K. deferred-tax rate from 19% to 25%. The July 2022 U.S. Copyright Royalty Board ruling affirming higher mechanical royalty rates for 2018–2022 also led to updated royalty estimates and revenue recognized for prior-period performance obligations.
- No numeric earnings or revenue guidance is provided. Management expects to continue seeking opportunistic debt maturity extensions and says liquidity should cover foreseeable needs. The filing notes potential effects from COVID-19, foreign-exchange movements, interest rates, piracy, industry format changes, and economic conditions.
- The company corrected prior-period accounting errors concerning pre-acquisition catalog royalties. Management said the errors were not material to the previously issued periods individually or in aggregate, but revised the comparative statements in this filing.
- Disclosure controls were deemed ineffective because of previously identified material weaknesses involving segregation of duties, qualified accounting personnel, and risk assessment/control design. Management stated the current financial statements are fairly stated in all material respects and remediation is ongoing. No material litigation or material change in risk factors was reported.
Most important facts for investors to verify
- Whether revenue growth, particularly digital, U.S. publishing and artist-management revenue, persists and converts to cash.
- How the higher U.K. deferred-tax estimate, mechanical-royalty ruling, and associated royalty costs affect future earnings and cash flows.
- Debt balances, borrowing availability, interest-rate exposure, swap coverage, and continued compliance with facility covenants.
- Progress in remediating internal-control material weaknesses and the reliability of future reporting, given the corrected prior-period errors.
- Catalog acquisition spending, returns on acquired rights, and the effects of currency movements and continuing post-pandemic industry changes.