Reservoir Media, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the three and six months ended September 30, 2021 (the second quarter and first half of fiscal 2022). Reservoir is an independent music company with Music Publishing and Recorded Music segments, managing more than 130,000 musical compositions and over 36,000 sound recordings.
On July 28, 2021, the company completed its business combination with Roth CH Acquisition II and began trading as Reservoir Media. The transaction was accounted for as a reverse recapitalization, so historical results reflect Reservoir Holdings as the accounting predecessor. Comparisons are also affected by the June 2021 acquisition of Tommy Boy Music.
Financial results and key metrics
| Metric | Three months ended Sep. 30, 2021 | Three months ended Sep. 30, 2020 | Six months ended Sep. 30, 2021 | Six months ended Sep. 30, 2020 |
|---|---|---|---|---|
| Revenue | $30.4 million | $21.0 million | $47.2 million | $34.6 million |
| Operating income | $7.9 million | $5.3 million | $8.2 million | $6.6 million |
| Net income | $4.5 million | $2.8 million | $3.0 million | $1.8 million |
| Net income attributable to Reservoir | $4.6 million | $2.8 million | $3.2 million | $1.9 million |
| Basic and diluted EPS | $0.08 | $0.06 | $0.06 | $0.04 |
| OIBDA and OIBDA margin | $12.7 million; 42% | $9.2 million; 44% | $17.0 million; 36% | $13.9 million; 40% |
OIBDA is a non-GAAP measure defined by the company as operating income before depreciation and amortization. Operating income margin was approximately 26% for the quarter and 17% for the six-month period. Cost of revenue was 40% of revenue for the quarter and 42% for the six months, compared with 39% and 41%, respectively, in the prior-year periods.
- Revenue mix: Quarterly Music Publishing revenue rose 26% to $22.1 million; Recorded Music rose 149% to $8.1 million. For the six months, Music Publishing increased 19% to $34.4 million and Recorded Music increased 127% to $12.3 million.
- Revenue drivers: Digital revenue grew 67% for the quarter and 48% for the six months, which management attributed principally to streaming growth and acquisitions. Synchronization revenue also increased. Performance and mechanical publishing revenues declined, which the company attributed in part to pandemic effects.
- Profitability: Quarterly operating income rose 49%, and net income rose 61%. Six-month operating income rose 24% and net income rose 64%. OIBDA margin declined in both comparisons, reflecting higher administration and royalty/recorded music costs.
- Cash flow: Six-month operating cash flow was $1.7 million, down from $6.8 million. Investing cash outflow was $128.4 million, mainly for catalog acquisitions, versus $86.0 million. Financing cash inflow was $131.8 million, including $141.1 million of net business-combination and PIPE proceeds. Cash increased $3.6 million to $12.8 million.
- Debt and liquidity: At September 30, debt carrying value, net of financing costs, was $203.9 million; the facility borrowings were $209.6 million. The new senior secured revolving facility has commitments of $248.75 million and matures October 16, 2024. Cash was $12.8 million, and the company reported net debt of $191.2 million using its stated definition. Current assets were $49.3 million and current liabilities $33.9 million.
- Other balance-sheet items: Total assets were $601.7 million, including $511.1 million of net intangible assets; shareholders’ equity was $338.8 million. Publishing and recorded music catalog acquisitions totaled $128.1 million during the six months, including the approximately $100 million Tommy Boy acquisition.
Material changes versus the prior comparable period
- Tommy Boy contributed $3.6 million of Recorded Music revenue in the six-month period, according to the filing. Its acquisition and increased Chrysalis physical sales were major drivers of Recorded Music growth; the acquisition also increased amortization and artist royalty costs.
- The July business combination and $150 million PIPE raised equity capital; net proceeds from the combination and PIPE were reported as $141.1 million after costs. Common shares outstanding increased from approximately 28.5 million at March 31 to 64.1 million at September 30. The prior RHI preferred stock converted into common stock.
- Administration expenses rose 58% for the quarter and 57% for the six months. Management cited public-company readiness and acquisition-related costs. The prior-year six-month comparison included a $617,000 benefit from forgiveness of a Paycheck Protection Program loan.
- Interest expense increased 24% for the quarter and 25% for the six months, principally reflecting higher debt balances, partly offset by lower rates and refinancing. The company recognized gains on interest-rate swaps of $0.7 million for the quarter and $1.2 million for the six months.
Outlook, risks, contingencies, and unusual items
- Management said available cash, operating cash flows, and borrowing availability were expected to support operations, debt service, working capital, and capital spending for at least the next 12 months. It also said it expects to pursue refinancing or maturity extensions opportunistically. The filing provides no numerical revenue or earnings guidance.
- The company was in compliance with its credit-facility financial covenants at September 30. Covenants include a maximum total leverage ratio of 6.00:1.00, minimum fixed-charge coverage of 1.25:1.00, and a senior-debt-to-library-value test. Substantially all tangible and intangible assets secure the facility; covenant failure could permit lenders to accelerate repayment, subject to cure rights.
- COVID-19 continued to affect performance-related revenue, synchronization activity, and physical product schedules. Management said the duration and extent of further effects were uncertain and could affect revenue, cash flow, and impairment assessments.
- Disclosure controls and procedures were deemed ineffective because of previously identified material weaknesses involving segregation of duties and qualified accounting personnel, and risk assessment/control design. Management stated the financial statements were fairly stated and described remediation efforts, including hiring accounting personnel.
- A copyright-related lawsuit alleges rights to broker a past catalog sale and seeks, among other relief, enforcement of a claimed lien. The company said a loss was not reasonably possible, considers the claims without merit, and intends to defend itself. It reported no legal proceedings it believes could have a material adverse effect.
- In October 2021, the company granted 247,045 restricted stock units with an aggregate grant-date fair value of approximately $2.2 million, expected to be recognized over the next two fiscal quarters.
Most important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to Tommy Boy and other catalog acquisitions, and how those catalogs perform after integration.
- Whether digital and synchronization growth can offset continued weakness in performance and mechanical publishing revenue, and whether physical sales remain strong.
- Whether operating cash flow improves as catalog spending and royalty advances continue; assess acquisition returns against the associated debt and amortization burden.
- Debt headroom, interest-rate exposure, swap coverage and maturity/refinancing plans, including continued compliance with facility covenants.
- Progress in remediating the disclosed material weaknesses and the potential consequences if control deficiencies persist.
- Potential outcomes of the copyright litigation and whether any new loss estimate or material exposure emerges.