Reservoir Media, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, the company’s first quarter of fiscal 2023. Comparisons are with the three months ended June 30, 2021. Amounts are U.S. dollars.
Business context
Reservoir is an independent music company operating in Music Publishing and Recorded Music, with rights to more than 140,000 compositions and over 36,000 sound recordings. The prior-year comparison includes Tommy Boy for only part of that period; its acquisition was completed in June 2021.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $24.3 million | $16.6 million | +46% |
| Operating income | $1.3 million | $0.2 million | +$1.1 million |
| Net income (loss) attributable to Reservoir | $76,000 | $(1.45) million | Improved by $1.53 million |
| Operating cash flow | $1.8 million | $3.7 million | Down $1.9 million |
| Capital invested in catalog acquisitions | $12.7 million | $112.2 million | Down substantially |
| OIBDA, non-GAAP | $6.7 million | $4.3 million | +56% |
| OIBDA margin, non-GAAP | 28% | 26% | +2 percentage points |
Publishing revenue rose 35% to $16.4 million, while Recorded Music revenue rose 80% to $7.6 million. Digital revenue was $13.0 million in total. Publishing growth reflected catalog acquisitions and increases in synchronization, performance and digital revenue. Recorded Music growth was driven in part by Tommy Boy, which contributed $3.7 million, as well as streaming growth and recovery in film and television synchronization activity.
Cost of revenue increased 30% to $10.0 million, but declined to 41% of revenue from 46%. Administration expense rose 63% to $7.6 million, reflecting public-company costs, higher share-based compensation and costs of building the U.S. Recorded Music platform. Amortization and depreciation increased 32% to $5.4 million. Interest expense was $3.0 million, up 7%. A $1.6 million noncash gain on interest-rate swaps contributed to the period’s near break-even net result.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $12.6 million at June 30, 2022, down from $17.8 million at March 31, 2022.
- Secured credit-facility borrowings were $282.6 million gross and $277.4 million net of financing costs. The $350 million facility had $67.4 million of remaining availability and matures October 16, 2024.
- Total assets were $683.3 million and total liabilities were $340.0 million. Net cash provided by operations was insufficient to fund $12.8 million of investing outflows; the company drew $7.0 million under its credit facility.
- Management said available cash, operating cash flows and credit-facility availability should support existing operations and obligations for the next 12 months. The company reported compliance with its financial covenants; its reported leverage ratio was 5.7x against a maximum of 7.50x.
- The company adopted lease accounting guidance on April 1, 2022, recognizing approximately $2.1 million of operating lease liabilities and corresponding right-of-use assets. A new headquarters lease is expected to commence in fiscal Q3, with approximately $8.4 million of payments over 130 months.
Changes, outlook and risks
- There is no specific earnings or revenue guidance in the filing. Management expects liquidity to fund operations and debt service and said it may pursue acquisitions, refinancing, debt repayment or maturity extensions depending on market conditions.
- The company continues to cite potential COVID-19 effects on performance, synchronization and physical-product revenue, as well as uncertainty over future revenue, cash flow and asset impairments.
- Interest-rate exposure is partly hedged with swaps; the debt facility and swaps reference LIBOR, with transition to SOFR anticipated. Foreign-exchange exposure includes the British pound and euro.
- In July 2022, the Copyright Royalty Board issued an initial ruling that may increase U.S. mechanical royalty rates for 2018–2022. Any final ruling could require retroactive adjustments by digital service providers. Reservoir had not recognized an estimate of any effect as of June 30, 2022.
- The company corrected prior-period accounting errors involving pre-acquisition catalog royalties and related receivables and royalties payable. It concluded the errors were not material to prior statements, but revised the June 2021 comparative figures in this filing.
- Management concluded disclosure controls were not effective because of previously identified material weaknesses involving segregation of duties, qualified accounting personnel and risk assessment/control design. Remediation efforts are ongoing. Management nevertheless stated the current financial statements are fairly stated in all material respects.
- The company reported no legal proceedings believed to have a material adverse effect and no material changes to its previously disclosed risk factors.
Investor verification priorities
- Assess how much of revenue growth and Recorded Music improvement is attributable to Tommy Boy and how much reflects continuing organic performance.
- Monitor operating cash flow, royalty advances and catalog acquisition spending against cash balances and debt draws.
- Review debt covenant headroom, floating-rate exposure, swap coverage and the October 2024 maturity.
- Track the final Copyright Royalty Board determination and any resulting retroactive revenue or royalty-cost adjustments.
- Follow remediation of internal-control material weaknesses and the accuracy of future catalog acquisition and royalty accounting.
- Evaluate the costs and obligations associated with the new headquarters lease and ongoing public-company expenses.