Reservoir Media, Inc. — Form 10-Q
Reporting period: Quarter ended December 31, 2021 (fiscal Q3); comparisons are with the three and nine months ended December 31, 2020. The filing was signed February 8, 2022. Reservoir operates Music Publishing and Recorded Music businesses. The July 2021 business combination with Roth CH Acquisition II was accounted for as a reverse recapitalization, with Reservoir Holdings, Inc. as accounting predecessor.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Revenue | $27.1 million (+26%) | $21.6 million | $74.3 million (+32%) | $56.2 million |
| Operating income | $4.0 million (-19%) | $4.9 million | $12.2 million (+6%) | $11.5 million |
| Net income | $2.4 million (approximately flat) | $2.4 million | $5.4 million (+28%) | $4.2 million |
| Net income attributable to Reservoir | $2.1 million (-5%) | $2.3 million | $5.3 million (+26%) | $4.2 million |
| Diluted EPS | $0.03 | $0.05 | $0.09 | $0.09 |
Quarterly gross margin, calculated as revenue less cost of revenue, was approximately 58%, compared with 55%; operating margin was approximately 15%, compared with 23%. Management-reported OIBDA, a non-GAAP measure, was $9.0 million for the quarter (+11%) and $26.0 million for the nine months (+18%); OIBDA margin declined to 33% from 37% for the quarter and to 35% from 39% year to date. Management attributed the margin pressure mainly to higher public-company and acquisition-related administration costs. Amortization and depreciation rose 58% for the quarter and 32% year to date, primarily reflecting acquired catalogs.
Quarterly Music Publishing revenue rose 4% to $18.4 million; Recorded Music revenue rose 147% to $8.1 million. For the nine months, Publishing revenue increased 13% to $52.8 million and Recorded Music increased 135% to $20.4 million. Recorded Music growth was driven in part by Tommy Boy, acquired in June 2021 for approximately $100 million, and by streaming and physical releases. Publishing growth included stronger synchronization and other revenue; performance revenue remained affected by pandemic-related disruption. A one-time digital licensing settlement benefited the prior-year quarter, making that comparison less representative.
Cash flow, debt and liquidity
- Cash flow, nine months: Operating cash flow was $14.4 million, down from $17.3 million, primarily due to increased working-capital use, including royalty advances. Investing cash outflow was $160.1 million, mainly for music catalog acquisitions, versus $107.3 million. Financing cash inflow was $152.5 million, including $141.1 million of net business-combination and PIPE proceeds and net borrowings.
- Balance sheet at December 31: Cash and equivalents were $14.6 million; current assets were $50.8 million and current liabilities $41.9 million. Debt carrying value, net of deferred financing costs, was $225.3 million. The company reported $231.6 million drawn under its senior secured revolver and approximately $210.6 million of net debt under its stated definition.
- Credit facility: The December 2021 amendment increased commitments to $350 million; maturity is October 16, 2024. Borrowings bear base rate plus 1.25% or LIBOR plus 2.25%, and substantially all tangible and intangible assets secure the facility. Management reported covenant compliance at quarter-end and approximately $118.4 million of nominal undrawn capacity, subject to facility terms and borrowing conditions.
- Management said existing operations should be supported for the next 12 months by operating cash flows, available cash and facility borrowings. No dividends were paid in the quarter; facility covenants restrict dividends.
Material changes, outlook and risks
- The July 28, 2021 business combination and $150 million gross PIPE materially changed the capital structure. Common shares outstanding increased to 64.1 million at December 31 from 28.5 million at March 31; share-count differences affect per-share and period comparisons.
- Catalog acquisitions totaled approximately $160.6 million during the nine months, including Tommy Boy. Intangible assets, net, increased to $538.8 million from $393.2 million at March 31.
- No quantified revenue or earnings guidance is provided. Management expects to pursue acquisitions and may seek to extend or refinance debt, depending on market conditions, liquidity and contractual restrictions.
- COVID-19 continued to affect performance royalties, synchronization activity and physical-product release schedules. Management said the duration and extent of future effects remain uncertain and could reduce revenue and cash flow or affect impairment assessments.
- Interest-rate and foreign-exchange exposures remain; interest-rate swaps partially mitigate floating-rate exposure. Swap fair value was a $1.7 million liability at quarter-end, with fair-value gains included in earnings.
- Disclosure controls were deemed ineffective because of previously identified material weaknesses involving segregation of duties, qualified accounting personnel and risk assessment/control design. Management said it was hiring personnel and evolving processes; the weaknesses were not yet fully remediated. Management nevertheless concluded the interim financial statements were fairly stated in all material respects.
- A copyright-lien lawsuit was settled after quarter-end: the prior owners paid the settlement, the liens were released, and Reservoir and its subsidiary were not required to pay. The company reported no proceedings it believed would have a material adverse effect as of the filing date.
Important facts for investors to verify
- How much of reported revenue growth and future cash generation is attributable to acquired catalogs, particularly Tommy Boy, versus organic performance.
- Whether higher administration costs and amortization continue to weigh on operating income and OIBDA margins.
- Current revolver utilization, interest expense, covenant headroom and refinancing plans ahead of the October 2024 maturity.
- Progress in remediating the disclosed material weaknesses in internal control and disclosure controls.
- Ongoing effects of COVID-19, royalty-advance recoverability, catalog impairment assumptions and exposure to interest-rate and currency movements.