Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39795
RESERVOIR MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware
83-3584204
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
200 Varick Street
Suite 801
New York, New York 10014
(Address of principal executive offices, including zip code)
(212) 675-0541
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on whichregistered
Common Stock, $0.0001 par value per share (the “Common Stock”)
RSVR
The Nasdaq Stock Market LLC
Warrants to purchase one share of CommonStock, each at an exercise price of $11.50 per share
RSVRW
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 26, 2024, there were 65,078,938 shares of Common Stock of Reservoir Media, Inc. issued and outstanding.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
Part I. Financial Information
1
Item 1. Financial Statements
Condensed Consolidated Statements of (Loss) Income for the Three Months Ended June 30, 2024 and 2023 (unaudited)
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended June 30, 2024 and 2023 (unaudited)
2
Condensed Consolidated Balance Sheets as of June 30, 2024 and March 31, 2024 (unaudited)
3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended June 30, 2024 and 2023 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2024 and 2023 (unaudited)
5
Notes to Condensed Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
Item 4. Controls and Procedures
Part II. Other Information
30
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
31
Part III. Signatures
32
i
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
RESERVOIR MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In U.S. dollars, except share data)
(Unaudited)
Three Months Ended June 30,
2024
2023
Revenues
$
34,316,843
31,836,586
Costs and expenses:
Cost of revenue
13,281,116
13,471,597
Amortization and depreciation
6,384,757
6,055,568
Administration expenses
9,689,437
9,164,500
Total costs and expenses
29,355,310
28,691,665
Operating income
4,961,533
3,144,921
Interest expense
(5,059,398)
(4,733,533)
Loss on foreign exchange
(59,463)
(29,936)
(Loss) gain on fair value of swaps
(490,295)
1,845,387
Other (expense) income, net
(99,522)
62
(Loss) income before income taxes
(747,145)
226,901
Income tax (benefit) expense
(293,968)
62,348
Net (loss) income
(453,177)
164,553
Net loss attributable to noncontrolling interests
106,522
112,780
Net (loss) income attributable to Reservoir Media, Inc.
(346,655)
277,333
(Loss) earnings per common share (Note 13):
Basic
(0.01)
—
Diluted
Weighted average common shares outstanding (Note 13):
64,970,693
64,572,432
64,998,544
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In U.S. dollars)
Other comprehensive income:
Translation adjustments
34,852
1,139,476
Total comprehensive (loss) income
(418,325)
1,304,029
Comprehensive loss attributable to noncontrolling interests
Total comprehensive (loss) income attributable to Reservoir Media, Inc.
(311,803)
1,416,809
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
March 31,
Assets
Current assets
Cash and cash equivalents
16,358,506
18,132,015
Accounts receivable
32,081,489
33,227,382
Current portion of royalty advances
12,917,635
13,248,008
Inventory and prepaid expenses
6,163,776
6,300,915
Total current assets
67,521,406
70,908,320
Intangible assets, net
634,724,872
640,222,000
Equity method and other investments
1,355,019
1,451,924
Royalty advances, net of current portion and reserves
50,747,131
56,527,557
Property, plant and equipment, net
520,220
551,410
Operating lease right of use assets, net
6,736,634
6,988,340
Fair value of swap assets
5,141,819
5,753,488
Other assets
1,410,949
1,131,529
Total assets
768,158,050
783,534,568
Liabilities
Current liabilities
Accounts payable and accrued liabilities
5,123,049
9,015,939
Royalties payable
38,656,663
40,395,205
Accrued payroll
883,248
2,043,772
Deferred revenue
1,102,261
1,163,953
Other current liabilities
6,371,704
7,313,615
Income taxes payable
541,503
439,152
Total current liabilities
52,678,428
60,371,636
Secured line of credit
324,127,393
330,791,607
Deferred income taxes
30,028,349
30,471,978
Operating lease liabilities, net of current portion
6,431,339
6,720,287
Fair value of swap liability
121,374
Other liabilities
469,589
572,705
Total liabilities
413,735,098
429,049,587
Contingencies and commitments (Note 15)
Shareholders’ Equity
Preferred stock, $0.0001 par value 75,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2024 and March 31, 2024
Common stock, $0.0001 par value; 750,000,000 shares authorized, 65,078,938 shares issued and outstanding at June 30, 2024; 64,826,864 shares issued and outstanding at March 31, 2024
6,508
6,483
Additional paid-in capital
341,744,622
341,388,351
Retained earnings
15,051,002
15,397,657
Accumulated other comprehensive loss
(3,762,881)
(3,797,733)
Total Reservoir Media, Inc. shareholders’ equity
353,039,251
352,994,758
Noncontrolling interest
1,383,701
1,490,223
Total shareholders’ equity
354,422,952
354,484,981
Total liabilities and shareholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended June 30, 2024
Common Stock
Accumulated other
Additional paid-in
Retained
comprehensive
Noncontrolling
Shareholders’
Shares
Amount
capital
earnings
loss
interests
equity
Balance, March 31, 2024
64,826,864
Share-based compensation
1,048,520
Stock option exercises
3,550
18,140
Vesting of restricted stock units, net of shares withheld for employee taxes
248,524
25
(1,432,889)
(1,432,864)
Reclassification of liability-classified awards to equity-classified awards
722,500
Net loss
(106,522)
Other comprehensive income
Balance, June 30, 2024
65,078,938
For the Three Months Ended June 30, 2023
Balance, March 31, 2023
64,441,244
6,444
338,460,789
14,752,720
(4,855,329)
1,297,899
349,662,523
713,802
207,733
21
(689,176)
(689,155)
664,167
Net income (loss)
(112,780)
Balance, June 30, 2023
64,648,977
6,465
339,149,582
15,030,053
(3,715,853)
1,185,119
351,655,366
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:
Amortization of intangible assets
6,326,863
5,997,512
Depreciation of property, plant and equipment
57,894
58,056
1,273,674
914,426
Amortization of deferred financing costs
335,786
334,121
Loss (gain) on fair value of swaps
490,295
(1,845,387)
Loss from equity affiliates
100,000
(446,780)
Changes in operating assets and liabilities:
1,145,893
(759,449)
137,139
369,841
Royalty advances
6,121,523
(2,960,260)
Other assets and liabilities
(100,897)
188,150
Accounts payable, accrued expenses and deferred revenue
(4,796,318)
(3,323,134)
(1,738,542)
(9,520)
102,351
9,754
Net cash provided by (used for) operating activities
8,555,704
(861,337)
Cash flows from investing activities:
Purchases of music catalogs
(1,871,957)
(15,134,924)
Purchase of property, plant and equipment
(26,704)
(91,660)
Net cash used for investing activities
(1,898,661)
(15,226,584)
Cash flows from financing activities:
Proceeds from secured line of credit
3,000,000
14,000,000
Repayments of secured line of credit
(10,000,000)
Proceeds from stock option exercises
Taxes paid related to net share settlement of restricted stock units
Deferred financing costs paid
(16,904)
Net cash (used for) provided by financing activities
(8,414,724)
13,293,941
Foreign exchange impact on cash
(15,828)
142,000
Decrease in cash and cash equivalents
(1,773,509)
(2,651,980)
Cash and cash equivalents beginning of period
14,902,076
Cash and cash equivalents end of period
12,250,096
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
NOTE 1. DESCRIPTION OF BUSINESS
Reservoir Media, Inc., a Delaware corporation (the “Company”), is an independent music company based in New York City, New York and with offices in Los Angeles, Nashville, Toronto, London and Abu Dhabi.
Following a business combination between Roth CH Acquisition II Co. (“ROCC”) and Reservoir Holdings, Inc., a Delaware corporation (“RHI”), on July 28, 2021 (the “Business Combination”), the Company’s legal name became “Reservoir Media, Inc.” The common stock, $0.0001 par value per share, of the Company (the “Common Stock”) and warrants are traded on The Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbols “RSVR” and “RSVRW,” respectively.
The Company is a holding company that conducts substantially all of its business operations through a subsidiary of RHI, Reservoir Media Management, Inc. (“RMM”), and RMM’s subsidiaries The Company’s activities are organized into two operating segments: Music Publishing and Recorded Music. Operations of the Music Publishing segment involve the acquisition of interests in music catalogs from which royalties are earned as well as signing songwriters to exclusive agreements which give the Company an interest in the future delivery of songs. The publishing catalog includes ownership or control rights to more than 150,000 musical compositions that span across historic pieces, motion picture scores and current award-winning hits. Operations of the Recorded Music segment include the ownership of over 36,000 sound recordings and involve the acquisition of sound recording catalogs as well as the discovery and development of recording artists and the marketing, distribution, sale and licensing of the music catalog.
NOTE 2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiaries and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. All intercompany transactions and balances have been eliminated in these condensed consolidated financial statements. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s audited financial statements as of and for the fiscal years ended March 31, 2024 and 2023.
The condensed consolidated balance sheet of the Company as of March 31, 2024, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures, including certain notes required by US GAAP on an annual reporting basis.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods. The results for the three months ended June 30, 2024 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending March 31, 2025 or any other period.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Significant estimates are used for, but not limited to, determining useful lives of intangible assets, intangible asset recoverability and impairment and accrued revenue. Actual results could differ from these estimates.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Not Yet Adopted
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which expands income tax disclosures, including requiring enhanced disclosures related to the rate reconciliation and income taxes paid information. The amendments in ASU 2023-09 should be applied on a prospective basis, with retrospective application permitted. ASU 2023-09 is effective for annual periods of public business entities for fiscal years beginning after December 15, 2024 and for annual periods of entities other than public entities beginning after December 15, 2025, with early adoption permitted. The Company is currently evaluating the impact that adoption of ASU 2023-09 will have on its disclosures upon adoption.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands segment disclosures for public entities, including requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), the title and position of the CODM and an explanation of how the CODM uses reported measures of segment profit or loss in assessing segment performance and allocating resources. ASU 2023-07 also expands disclosures about a reportable segment’s profit or loss and assets in interim periods and clarifies that a public entity may report additional measures of segment profit if the CODM uses more than one measure of a segment’s profit or loss. ASU 2023-07 does not remove existing segment disclosure requirements or change how a public entity identifies its operating segments, aggregates those operating segments, or determines its reportable segments. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted, and requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impact that adoption of ASU 2023-07 will have on its disclosures upon adoption.
NOTE 4. REVENUE RECOGNITION
For the Company’s operating segments, Music Publishing and Recorded Music, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company. The Company recognized revenue of $1,163,855 and $1,295,141 from performance obligations satisfied in previous periods for the three months ended June 30, 2024 and 2023, respectively.
7
Disaggregation of Revenue
The Company’s revenue consisted of the following categories during the three months ended June 30, 2024 and 2023:
Revenue by Type
Digital
14,634,703
11,900,517
Performance
5,134,426
4,514,904
Synchronization
2,811,017
3,032,699
Mechanical
668,973
559,647
Other
751,174
783,548
Total Music Publishing
24,000,293
20,791,315
6,558,170
5,622,649
Physical
1,352,341
3,574,551
Neighboring rights
1,106,350
859,147
613,643
328,290
Total Recorded Music
9,630,504
10,384,637
Other revenue
686,046
660,634
Total revenue
Revenue by Geographical Location
United States Music Publishing
13,789,192
13,000,994
United States Recorded Music
5,696,630
5,524,763
United States other revenue
Total United States
20,171,868
19,186,391
International Music Publishing
10,211,101
7,790,321
International Recorded Music
3,933,874
4,859,874
Total International
14,144,975
12,650,195
Only the United States represented 10% or more of the Company’s total revenues in the three months ended June 30, 2024 and 2023.
Deferred Revenue
The following table reflects the change in deferred revenue during the three months ended June 30, 2024 and 2023:
June 30, 2024
June 30, 2023
Balance at beginning of period
2,151,889
Cash received during period
933,713
493,290
Revenue recognized during period
(995,405)
(1,189,250)
Balance at end of period
1,455,929
8
NOTE 5. ACQUISITIONS
In the ordinary course of business, the Company regularly acquires publishing and recorded music catalogs, which are typically accounted for as asset acquisitions. During the three months ended June 30, 2024 and 2023, the Company completed such acquisitions totaling $801,315 and $15,623,951, respectively, inclusive of deferred acquisition payments, none of which were individually significant.
NOTE 6. INTANGIBLE ASSETS
Intangible assets subject to amortization consist of the following as of June 30, 2024 and March 31, 2024:
March 31, 2024
Intangible assets subject to amortization:
Publishing and recorded music catalogs
770,493,046
769,648,966
Artist management contracts
913,272
911,740
Gross intangible assets
771,406,318
770,560,706
Accumulated amortization
(136,681,446)
(130,338,706)
Straight-line amortization expense totaled $6,326,863 and $5,997,512 in the three months ended June 30, 2024 and 2023, respectively.
NOTE 7. ROYALTY ADVANCES
The Company made royalty advances totaling $2,396,796 and $6,199,316 during the three months ended June 30, 2024 and 2023, respectively, recoupable from the writer’s or artist’s share of future royalties otherwise payable, in varying amounts. Advances expected to be recouped within the next twelve months are classified as current assets, with the remainder classified as noncurrent assets, net of reserves for amounts that may not be recoverable.
The following table reflects the change in royalty advances, net during the three months ended June 30, 2024 and 2023:
69,775,565
66,926,500
Additions
2,396,796
6,199,316
Recoupments
(8,507,595)
(3,239,056)
63,664,766
69,886,760
NOTE 8. SECURED LINE OF CREDIT
Long-term debt consists of the following:
328,828,409
335,828,410
Debt issuance costs, net
(4,701,016)
(5,036,803)
9
Credit Facilities
RMM is party to a credit agreement (as amended or supplemented from time to time, the “RMM Credit Agreement”) governing RMM’s $450,000,000 senior secured revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility also includes an “accordion feature” that permits RMM to seek additional commitments in an amount not to exceed $150,000,000. The maturity date of the loans advanced under the Senior Credit Facility is December 16, 2027.
The interest rate on borrowings under the Senior Credit Facility is equal to, at our option, either (i) the sum of a base rate plus a margin of 1.00% or (ii) the sum of a SOFR rate plus a margin of 2.00%, in each case subject to a 0.25% increase based on a consolidated net senior debt to library value ratio. RMM is also required to pay an unused fee in respect of unused commitments under the Senior Credit Facility, if any, at a rate of 0.25% per annum. Substantially all tangible and intangible assets of the Company, RHI, RMM and the other subsidiary guarantors are pledged as collateral to secure the obligations of RMM under the RMM Credit Agreement.
The RMM Credit Agreement contains customary covenants limiting the ability of the Company, RHI, RMM and certain of its subsidiaries to, among other things, incur debt or liens, merge or consolidate with others, make investments, make cash dividends, redeem or repurchase capital stock, dispose of assets, enter into transactions with affiliates or enter into certain restrictive agreements. In addition, the Company, on a consolidated basis with its subsidiaries, must comply with financial covenants requiring the Company to maintain (i) a fixed charge coverage ratio of not less than 1.10:1.00 for each four fiscal quarter period, and (ii) a consolidated senior debt to library value ratio of 0.45:1.00, subject to certain adjustments. If RMM does not comply with the covenants in the RMM Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Senior Credit Facility.
As of June 30, 2024, the Senior Credit Facility had a borrowing capacity of $450,000,000, with remaining borrowing availability of $121,171,591.
Interest Rate Swaps
At June 30, 2024, RMM had the following interest rate swaps outstanding, under which it pays a fixed rate and receives a floating interest payment from the counterparty based on SOFR with reference to notional amounts adjusted to match the amended scheduled principal repayments pursuant to the Senior Credit Facility:
Notional
Pay
Amount at
Fixed
Effective Date
Rate
Maturity
March 10, 2022
7,625,000
1.533
%
September 2024
87,501,612
1.422
December 31, 2021
54,873,388
0.972
September 30, 2024
100,000,000
2.946
December 2027
50,000,000
3.961
NOTE 9. INCOME TAXES
Income tax (benefit) expense for the three months ended June 30, 2024 and 2023 was $(293,968) (39.3% effective tax rate) and $62,348 (27.5% effective tax rate), respectively. During the three months ended June 30, 2024, the Company recorded an incremental tax benefit of approximately $103,000 to its deferred tax liabilities related to certain international intangible assets. Additionally, the effective tax rates during these periods reflect the amount and mix of income from multiple tax jurisdictions.
10
NOTE 10. SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid and income taxes paid for the three months ended June 30, 2024 and 2023 were comprised of the following:
Interest paid
4,842,444
4,333,987
Income taxes paid
44,212
58,157
Non-cash investing and financing activities for the three months ended June 30, 2024 and 2023 were comprised of the following:
Acquired intangible assets included in other liabilities
1,355,000
NOTE 11. WARRANTS
As of June 30, 2024, the Company’s outstanding warrants included 5,750,000 publicly-traded warrants (the “Public Warrants”), which were issued during ROCC’s initial public offering on December 15, 2020, and 137,500 warrants sold in a private placement to ROCC’s sponsor (the “Private Warrants” and together with the Public Warrants, the “Warrants”), which were assumed by the Company in connection with the Business Combination and exchanged into warrants for shares of Common Stock. Each whole Warrant entitles the registered holder to purchase one whole share of Common Stock at a price of $11.50 per share, provided that the Company has an effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder.
The Warrants will expire on July 28, 2026, which is five years after the completion of the Business Combination, or earlier upon redemption or liquidation. The Company may redeem the outstanding Public Warrants in whole, but not in part, at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if and only if the last sale price of Common Stock equals or exceeds $18.00 per share for any 20-trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the registered holders.
NOTE 12. SHARE-BASED COMPENSATION
Share-based compensation expense totaled $1,273,674 ($990,251, net of taxes) and $914,426 ($704,234, net of taxes) during the three months ended June 30, 2024 and 2023, respectively. Share-based compensation expense is classified as “Administration expenses” in the accompanying condensed consolidated statements of income.
During the three months ended June 30, 2024 and 2023, the Company granted restricted stock units (“RSUs”) to satisfy previous obligations to issue a variable number of equity awards based on a fixed monetary amount. Prior to the issuance of these RSUs, the Company classified these awards as liabilities. Upon issuance of the RSU’s the awards became equity-classified as they no longer met the criteria to be liability-classified and as a result liabilities of $722,500 and $664,167 were reclassified from accounts payable and accrued liabilities to additional paid-in capital during the three months ended June 30, 2024 and 2023, respectively.
11
NOTE 13. (LOSS) EARNINGS PER SHARE
The following table summarizes the basic and diluted (loss) earnings per common share calculation for the three months ended June 30, 2024 and 2023:
Three Months Ended
Basic (loss) earnings per common share
Weighted average common shares outstanding - basic
(Loss) earnings per common share - basic
Diluted (loss) earnings per common share
Weighted average effect of potentially dilutive securities:
Effect of dilutive stock options and RSUs
426,112
Weighted average common shares outstanding - diluted
(Loss) earnings per common share - diluted
Because of their anti-dilutive effect, 7,799,897 shares of Common Stock equivalents, comprised of 1,277,332 stock options, 635,065 RSUs and 5,887,500 warrants have been excluded from the diluted earnings per share calculation for the three months ended June 30, 2024. Because of their anti-dilutive effect, 5,953,199 shares of Common Stock equivalents, comprised of 65,699 RSUs and 5,887,500 warrants have been excluded from the diluted earnings per share calculation for the three months ended June 30, 2023.
NOTE 14. FINANCIAL INSTRUMENTS
The Company is exposed to the following risks related to its financial instruments:
Credit risk arises from the possibility that the Company’s debtors may be unable to fulfill their financial obligations. Revenues earned from publishing and distribution companies are concentrated in the music and entertainment industry. The Company monitors its exposure to credit risk on a regular basis.
(b)
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates on its Senior Credit Facility. As described in Note 8, “Secured Line of Credit,” the Company entered into interest rate swap agreements to partially reduce its exposure to fluctuations in interest rates on its Credit Facilities.
The fair value of the outstanding interest rate swaps consisted of a $5,141,819 asset as of June 30, 2024 and a $5,753,488 asset and a $121,374 liability at March 31, 2024. Fair value is determined using Level 2 inputs, which are based on quoted prices and market observable data of similar instruments. The change in the unrealized fair value of the swaps during the three months ended June 30, 2024 of $490,295 was recorded as a Loss on fair value of swaps. The change in the unrealized fair value of the swaps during the three months ended June 30, 2023 of $1,845,387 was recorded as a Gain on fair value of swaps.
12
(c)
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in fluctuations of currency rates on its revenue from royalties, writers’ fees and its subsidiaries’ operations.
(d)
Financial Instruments
Financial instruments not described elsewhere include cash, accounts receivable, accounts payable, accrued liabilities and the Company’s secured line of credit. The carrying values of these instruments as of June 30, 2024 do not differ materially from their respective fair values due to the immediate or short-term duration of these items or their bearing market-related rates of interest.
NOTE 15. CONTINGENCIES AND COMMITMENTS
The Company is subject to claims and contingencies in the normal course of business. To the extent the Company cannot predict the outcome of the claims and contingencies or estimate the amount of any loss that may result, no provision for any contingent liabilities has been made in the condensed consolidated financial statements. The Company believes that losses resulting from these matters, if any, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. All such matters which the Company concludes are probable to result in a loss and for which management can reasonably estimate the amount of such loss have been accrued for within these condensed consolidated financial statements.
NOTE 16. SEGMENT REPORTING
The Company’s business is organized in two reportable segments: Music Publishing and Recorded Music. The Company identified its Chief Executive Officer as its Chief Operating Decision Maker (“CODM”). The Company’s CODM evaluates financial performance of its segments based on several factors, of which the primary financial measure is operating income before depreciation and amortization (“OIBDA”). The accounting policies of the Company’s business segments are consistent with the Company’s policies for the condensed consolidated financial statements. The Company does not have sales between segments.
The following tables present total revenue and reconciliation of OIBDA to operating income by segment for the three months ended June 30, 2024 and 2023:
Three Months Ended June 30, 2024
Music
Recorded
Publishing
Consolidated
Reconciliation of OIBDA to operating income:
2,182,422
2,691,278
87,833
4,601,128
1,759,822
23,807
OIBDA
6,783,550
4,451,100
111,640
11,346,290
13
Three Months Ended June 30, 2023
Reconciliation of OIBDA to operating income (loss):
Operating income (loss)
1,396,472
1,763,796
(15,347)
4,302,844
1,729,152
23,572
5,699,316
3,492,948
8,225
9,200,489
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of Reservoir Media, Inc.’s financial condition and results of operations should be read in conjunction with Reservoir Media, Inc.’s condensed consolidated financial statements, including the accompanying notes thereto contained elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). Certain statements contained in the discussion and analysis set forth below include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Reservoir” refer collectively to Reservoir Media, Inc. and its consolidated subsidiaries.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are not historical facts, and are intended to be covered by the safe harbor created thereby. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “predict,” “project,” “target,” “goal,” “intend,” “continue,” “could,” “may,” “might,” “shall,” “should,” “will,” “would,” “plan,” “possible,” “potential,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. In addition, any statements that refer to expectations, projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current expectations, projections and beliefs based on information currently available. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the Company that may cause its actual business, financial condition, results of operations, performance and/or achievements to be materially different from any future business, financial condition, results of operations, performance and/or achievements expressed or implied by these forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in the Company’s Annual Report on Form 10-K (the “Annual Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 30, 2024 and the Company’s other filings with the SEC. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Introduction
We are a holding company that conducts substantially all of our business operations through Reservoir Media Management, Inc. (“RMM”) and RMM’s subsidiaries. Our activities are generally organized into two operating segments: Music Publishing and Recorded Music. Operations of the Music Publishing segment involve the acquisition of interests in music catalogs from which royalties are earned as well as signing songwriters to exclusive agreements, which gives us an interest in the future delivery of songs. Operations of the Recorded Music segment involve the acquisition of sound recording catalogs as well as the discovery and development of recording artists and the marketing, distribution, sale and licensing of the music catalogs.
Business Overview
We are an independent music company operating in music publishing and recorded music. We represent over 150,000 copyrights in our publishing business and over 36,000 master recordings in our recorded music business. Both of our business areas are populated with hit songs dating back to the early 1900s representing an array of artists across genre and geography. Consistent with how we classify and operate our business, our company is organized in two operating and reportable segments: Music Publishing and Recorded Music. A brief description of each segment’s operations is presented below.
Music Publishing Segment
Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter or engaging in those activities for other rightsholders, our Music Publishing business garners a share of the revenues generated from use of the musical compositions.
The operations of our Music Publishing business are conducted principally through RMM, our global music publishing company headquartered in New York City, with operations in multiple countries through various subsidiaries, affiliates and non-affiliated licensees and sub-publishers. We own or control rights to more than 150,000 musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over many years, our current award-winning active songwriters exceed 100, while the catalog includes over 5,000 clients representing a diverse range of genres, including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative and gospel.
Music Publishing revenues are derived from five main sources:
The principal costs associated with our Music Publishing business are as follows:
Recorded Music Segment
Our Recorded Music business consists of three primary areas of sound recording ownership. First is the active marketing, promotion, distribution, sale and licensing of newly created frontline sound recordings from Current Artists that we own and control. This is a new area of focus for us and does not yet produce significant revenue. The second is the active marketing, promotion, distribution, sale and license of previously recorded and subsequently acquired Catalog recordings. The third is acquisition of full or partial interests in existing record labels, sound recording catalogs or income rights to a royalty stream associated with an established recording artist or producer contract in connection with existing sound recordings. Acquisition of these income participation interests are typically in connection with recordings that are owned, controlled, and marketed by other record labels.
Our Current Artist and Catalog recorded music businesses are both primarily handled by our Chrysalis Records label based in London and our Tommy Boy record label based in New York City. We also manage some select Catalog recorded music under our Philly Groove Records and Reservoir Records labels. We also own income participation interests in recordings by The Isley Brothers, The Commodores, Wisin and Yandel, Alabama and Travis Tritt, and an interest in the Loud Records catalog containing recordings by the Wu-Tang Clan. Our core Catalog includes recordings under the Chrysalis Records label by artists such as Sinéad O’Connor, The Specials, Generation X and The Waterboys, and De La Soul, as well as recordings under the Tommy Boy record label by artists such as House of Pain, Naughty By Nature, and Queen Latifah.
Our Current Artist and Catalog recorded music distribution is handled by a network of distribution partners. Chrysalis Records current frontline releases are distributed through Secretly Distribution, with prior frontline releases distributed via PIAS. Chrysalis Records and Tommy Boy catalogs are distributed via our agreements with MERLIN, AMPED, Proper and other partners.
16
Through our distribution network, our music is being sold in physical retail outlets as well as in physical form to online physical retailers, such as amazon.com, and distributed in digital form to an expanding universe of digital partners, including streaming services such as Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM, and download services. We also license music digitally to fitness platforms such as Apple Fitness+, Equinox, Hydrow and Peloton and social media outlets, such as Facebook, Instagram, TikTok and Snap.
Recorded Music revenues are derived from four main sources:
The principal costs associated with our Recorded Music business are as follows:
Use of Non-GAAP Financial Measures
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.
17
Results of Operations
Income Statement
Our income statement was composed of the following amounts (in thousands):
For the Three Months
Ended June 30,
2024 vs. 2023
$ Change
% Change
34,317
31,837
2,480
13,281
13,472
(190)
(1)
6,385
6,056
329
9,689
9,165
525
29,355
28,692
664
4,962
3,145
1,817
58
(5,059)
(4,734)
(326)
(59)
(30)
99
(490)
1,845
(2,336)
(127)
(100)
NM
(747)
227
(974)
(294)
(356)
(453)
164
(618)
107
113
(6)
(347)
277
(624)
NM – Not meaningful
Our revenues were composed of the following amounts (in thousands):
14,635
11,901
2,734
23
5,134
4,515
620
2,811
3,033
(222)
(7)
669
560
109
20
751
784
(32)
(4)
24,000
20,791
3,209
6,558
5,623
936
1,352
3,575
(2,222)
(62)
1,106
859
247
29
614
328
285
87
9,631
10,385
(754)
686
661
Total Revenue
18
U.S. Music Publishing
13,789
13,001
788
U.S. Recorded Music
5,697
5,525
172
U.S. Other Revenue
Total U.S.
20,172
19,186
985
10,211
7,790
2,421
3,934
4,860
(926)
(19)
14,145
12,650
1,495
Three Months Ended June 30, 2024 vs. Three Months Ended June 30, 2023
Total revenues increased by $2,480 thousand, or 8%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven by a 15% increase in Music Publishing revenue, partially offset by a 7% decrease in Recorded Music revenue. Music Publishing revenues represented 70% and 65% of total revenues for the three months ended June 30, 2024 and the three months ended June 30, 2023, respectively. Recorded Music revenues represented 28% and 33% of total revenues for the three months ended June 30, 2024 and the three months ended June 30, 2023, respectively. U.S. and international revenues represented 59% and 41%, respectively, of total revenues for the three months ended June 30, 2024. U.S. and international revenues represented 60% and 40%, respectively, of total revenues for the three months ended June 30, 2023.
Total digital revenues increased by $3,670 thousand, or 21%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to price increases at multiple music streaming services, as well as the impact of catalog acquisitions. Total digital revenues represented 62% and 55% of consolidated revenues for the three months ended June 30, 2024 and the three months ended June 30, 2023, respectively.
Music Publishing revenues increased by $3,209 thousand, or 15%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This increase in Music Publishing revenue was mainly driven by acquisitions of catalogs and revenue from the existing catalog, which benefitted from price increases at multiple music streaming services, and led to increases in digital revenue, performance revenue and mechanical revenue, partially offset by decreases in synchronization revenue and other revenue.
On a geographic basis, U.S. Music Publishing revenues represented 57% of total Music Publishing revenues for the three months ended June 30, 2024 compared to 63% for the three months ended June 30, 2023. International Music Publishing revenues represented 43% of total Music Publishing revenues for the three months ended June 30, 2024 compared to 37% for the three months ended June 30, 2023.
Recorded Music revenues decreased by $754 thousand, or 7%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The decrease in Recorded Music revenue was driven by a $2,222 thousand decrease in physical revenue, primarily due to 2023 De La Soul releases. The decrease in physical revenue was partially offset by continued growth at music streaming services and price increases at multiple music streaming services, as well as increases in neighboring rights revenue and synchronization revenue.
On a geographic basis, U.S. Recorded Music revenues represented 59% of total Recorded Music revenues for the three months ended June 30, 2024 compared to 53% for the three months ended June 30, 2023. International Recorded Music revenues represented 41% of total Recorded Music revenues for the three months ended June 30, 2024 compared to 47% for the three months ended June 30, 2023.
19
Cost of Revenues
Our cost of revenues was composed of the following amounts (in thousands):
Writer royalties and other publishing costs
10,635
9,505
1,130
Artist royalties and other recorded music costs
2,646
3,967
(1,321)
(33)
Total cost of revenue
(191)
Cost of revenues decreased by $191 thousand, or 1%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Cost of revenues as a percentage of revenues decreased to 39% for the three months ended June 30, 2024 from 42% for the three months ended June 30, 2023.
Writer royalties and other publishing costs for the Music Publishing segment increased by $1,130 thousand, or 12%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Writer royalties and other publishing costs as a percentage of Music Publishing revenues decreased to 44% for the three months ended June 30, 2024 from 46% for the three months ended June 30, 2023. The increase in margins was due to the change in the mix of revenue by type and songwriting clients with their specific contractual royalty rates being applied to the revenues.
Artist royalties and other recorded music costs for the Recorded Music segment decreased by $1,321 thousand, or 33%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Artist royalties and other recorded music costs as a percentage of recorded music revenues decreased to 27% for the three months ended June 30, 2024 from 38% for the three months ended June 30, 2023. The decrease in artist royalties and other recorded music costs and increase in margins were due primarily to the decrease in physical sales and change in the mix of sales by type to a lower percentage of physical sales, which carry higher costs than other types of revenue.
Amortization and Depreciation
Our amortization and depreciation expenses are composed of the following amounts (in thousands):
Music Publishing amortization and depreciation
4,601
4,303
298
Recorded Music amortization and depreciation
1,760
1,729
Other amortization and depreciation
24
Total amortization and depreciation
Amortization and depreciation expense increased by $329 thousand, or 5%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven primarily by an increase in the Music Publishing segment. Music Publishing amortization and depreciation expense increased by $298 thousand, or 7%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to the acquisition of additional music catalogs.
Administration Expenses
Our administration expenses are composed of the following amounts (in thousands):
Music Publishing administration expenses
6,581
5,587
994
Recorded Music administration expenses
2,534
2,925
(391)
(13)
Other administration expenses
574
653
(79)
(12)
Total administration expenses
524
Total administration expenses increased by $524 thousand, or 6%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven by an increase in the Music Publishing segment, partially offset by a decrease in the Recorded Music segment. Expressed as a percentage of revenues, administration expenses decreased to 28% for the three months ended June 30, 2024 from 29% for the three months ended June 30, 2023.
Music Publishing administration expenses increased by $994 thousand, or 18%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Expressed as a percentage of revenues, Music Publishing administration expenses were 27% for the three months ended June 30, 2024 and the three months ended June 30, 2023.
Recorded Music administration expenses decreased by $391 thousand, or 13%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Expressed as a percentage of revenue, Recorded Music administration expenses decreased to 26% for the three months ended June 30, 2024 from 28% for the three months ended June 30, 2023, primarily due to the non-recurrence of legal fees related to a matter incurred during the three months ended June 30, 2023.
Interest Expense
Interest expense increased by $326 thousand, or 7%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven primarily by increased debt balances due to use of funds in acquisitions of music catalogs and writer signings, as well as an increase in SOFR. The Company expects its interest expense will increase on the portions of its borrowings that are hedged beginning in October 2024, as existing swaps mature, and new swap contracts become effective.
Loss on Foreign Exchange
Loss on foreign exchange increased by $30 thousand for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This change was due to fluctuations in the two foreign currencies we are directly exposed to, namely British pound sterling and euro.
(Loss) Gain on Fair Value of Swaps
Loss on fair value of swaps was $490 thousand for the three months ended June 30, 2024. Gain on the fair value of swaps for the three months ended June 30, 2023 was $1,845 thousand. This change was due to marking to market our interest rate swap hedges.
Income Tax (Benefit) Expense
Income tax benefit was $294 thousand during the three months ended June 30, 2024 compared to income tax expense of $62 thousand during the three months ended June 30, 2023. The effective income tax rate during the three months ended June 30, 2024 was 39.3% compared to 27.5% during the three months ended June 30, 2023. During the three months ended June 30, 2024, the Company recorded an incremental tax benefit of approximately $103,000 to its deferred tax liabilities related to certain international intangible assets. Additionally, the change in the effective income tax rate reflect changes in the mix of income from multiple tax jurisdictions.
Net (Loss) Income
Net loss was $453 thousand during the three months ended June 30, 2024 compared to the net income of $164 thousand during the three months ended June 30, 2023. The decrease in net income was driven primarily by the loss on fair value of swaps during the three months ended June 30, 2024 compared to gain on fair value of swaps during the three months ended June 30, 2023 and an increase in interest expense. These factors were partially offset by an increase in operating income, which reflects revenue growth and improved margins, and an income tax benefit in the three months ended June 30, 2024 compared to income tax expense in the three months ended June 30, 2023.
Non-GAAP Reconciliations
We use certain financial information, such as OIBDA, OIBDA Margin, EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin, which are non-GAAP financial measures, which means they have not been prepared in accordance with U.S. GAAP. Reservoir’s management uses these non-GAAP financial measures to evaluate our operations, measure its performance and make strategic decisions. We believe that the use of these non-GAAP financial measures provides useful information to investors and others in understanding our results of operations and trends in the same manner as our management and in evaluating our financial measures as compared to the financial measures of other similar companies, many of which present similar non-GAAP financial measures. However, these non-GAAP financial measures are subject to inherent limitations as they reflect the exercise of judgments by our management about which items are excluded or included in determining these non-GAAP financial measures and, therefore, should not be considered as a substitute for net income, operating income or any other operating performance measures calculated in accordance with GAAP. Using such non-GAAP financial measures in isolation to analyze our business would have material limitations because the calculations are based on the subjective determination of our management regarding the nature and classification of events and circumstances. In addition, although other companies in our industry may report measures titled OIBDA, OIBDA margin, Adjusted EBITDA, and Adjusted EBITDA Margin, or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate such non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, such non-GAAP financial measures should be considered alongside other financial performance measures and other financial results presented in accordance with GAAP. Reconciliations of OIBDA to operating income and EBITDA and Adjusted EBITDA to net income are provided below.
We consider operating income before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”) to be an important indicator of the operational strengths and performance of our businesses and believe this non-GAAP financial measure provides useful information to investors because it removes the significant impact of amortization from our results of operations and represents our measure of segment income. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses and other non-operating income (loss). Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income attributable to us and other measures of financial performance reported in accordance with GAAP. In addition, our definition of OIBDA may differ from similarly titled measures used by other companies. OIBDA Margin is defined as OIBDA as a percentage of revenue.
22
EBITDA is defined as earnings (net income or loss) before net interest expense, income tax expense, non-cash depreciation of tangible assets and non-cash amortization of intangible assets and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA further adjusted to exclude items or expenses such as, among others, (1) any non-cash charges (including any impairment charges), (2) any net gain or loss on foreign exchange, (3) any net gain or loss resulting from interest rate swaps, (4) equity-based compensation expense and (5) certain unusual or non-recurring items. Adjusted EBITDA is a key measure used by our management to understand and evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. However, certain limitations on the use of Adjusted EBITDA include, among others, (1) it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue for our business, (2) it does not reflect the significant interest expense or cash requirements necessary to service interest or principal payments on our indebtedness and (3) it does not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments. In particular, Adjusted EBITDA measure adds back certain non-cash, unusual or non-recurring charges that are deducted in calculating net income; however, these are expenses that may recur, vary greatly and are difficult to predict. In addition, Adjusted EBITDA is not the same as net income or cash flow provided by operating activities as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Adjusted EBITDA Margin is defined as Adjusted EBITDA as a percentage of revenue.
Reconciliation of Operating Income to OIBDA
We use OIBDA as our primary measure of financial performance. The following tables reconcile operating income to OIBDA (in thousands):
4,961
1,816
Amortization and depreciation expenses
11,346
9,201
2,145
OIBDA Margin
33
Music Publishing
2,183
1,396
787
56
6,784
5,699
1,085
27
Recorded Music
2,691
1,764
927
53
4,451
3,493
958
46
34
Consolidated OIBDA increased by $2,145 thousand, or 23%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven by a $1,085 thousand increase in Music Publishing OIBDA and a $958 thousand increase in Recorded Music OIBDA. Expressed as a percentage of revenue, OIBDA Margin increased to 33% for the three months ended June 30, 2024 from 29% for the three months ended June 30, 2023.
Music Publishing OIBDA increased by $1,085 thousand, or 19%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Expressed as a percentage of revenue, Music Publishing OIBDA Margin increased to 28% in the three months ended June 30, 2024 from 27% in the three months ended June 30, 2023. The increases in Music Publishing OIBDA and OIBDA Margin reflect revenue growth and improved margins.
Recorded Music OIBDA increased by $958 thousand, or 27% during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Expressed as a percentage of revenue, Recorded Music OIBDA Margin increased to 46% during the three months ended June 30, 2024 from 34% in the three months ended June 30, 2023, driven primarily by the change in the mix of revenue by type to a lower percentage of physical sales.
Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA
The following table reconciles net income to Adjusted EBITDA (in thousands):
(617)
5,059
4,734
325
EBITDA
10,697
11,016
(319)
(3)
Loss on foreign exchange(a)
59
Loss (gain) on fair value of swaps(b)
490
(1,845)
2,335
Non-cash share-based compensation(c)
1,274
914
360
39
Other expense (income), net(d)
100
Adjusted EBITDA
12,620
10,115
2,505
NM - Not meaningful
Adjusted EBITDA increased by $2,505 thousand, or 25%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily as a result of revenue growth and improved margins. Adjusted EBITDA Margin increased to 37% during the three months ended June 30, 2024 compared to 32% during the three months ended June 30, 2023, primarily due to revenue growth, improved gross margins driven by a lower percentage of physical revenue, and effective cost management.
Liquidity and Capital Resources
Capital Resources
As of June 30, 2024, we had $324,127 thousand of debt (net of $4,701 thousand of deferred financing costs) and $16,359 thousand of cash and cash equivalents.
Cash Flows
The following table summarizes our historical cash flows (in thousands).
For the Three Months Ended
2024 vs.2023
Cash provided by (used for):
Operating activities
8,556
(861)
9,417
Investing activities
(1,899)
(15,227)
13,328
(88)
Financing activities
(8,415)
13,294
(21,709)
(163)
Operating Activities
Cash provided by operating activities was $8,556 thousand for the three months ended June 30, 2024 compared to cash used for operating activities of $861 thousand for the three months ended June 30, 2023. The primary driver of the $9,417 thousand increase in cash provided by operating activities during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was an increase in royalty advance recoupments and the timing of collection of accounts receivable, partially offset by the timing of payments for royalties payable and accounts payable and accrued expenses.
Investing Activities
Cash used for investing activities was $1,899 thousand for the three months ended June 30. 2024 compared to $15,227 thousand for the three months ended June 30, 2023. The decrease in cash used in investing activities was primarily due to a decrease in acquisitions of music catalogs.
Financing Activities
Cash (used for) provided by financing activities was $(8,415) thousand for the three months ended June 30, 2024 compared to $13,294 thousand for the three months ended June 30, 2023. The change in cash (used for) provided by financing activities in the three months ended June 30, 2024 primarily reflects an $11,000 thousand decrease in borrowings used for investing activities and a $10,000 thousand repayment towards the secured line of credit.
Liquidity
Our primary sources of liquidity are the cash flows generated from our subsidiaries’ operations, available cash and cash equivalents and funds available for drawing under our Senior Credit Facility (as described below). These sources of liquidity are needed to fund our debt service requirements, working capital requirements, strategic acquisitions and investments, capital expenditures and other investing and financing activities we may elect to make in the future.
We believe that our primary sources of liquidity will be sufficient to support our existing operations over the next twelve months.
Existing Debt as of June 30, 2024
As of June 30, 2024, our outstanding debt consisted of $328,828 thousand borrowed under the Senior Credit Facility. As of June 30. 2024, remaining borrowing availability under the Senior Credit Facility was $121,172 thousand.
We use cash generated from operations to service outstanding debt, consisting primarily of interest payments through maturity, and we expect to continue to refinance and extend maturity on the Senior Credit Facility for the foreseeable future.
Debt Capital Structure
RMM is party to a credit agreement (as amended or supplemented from time to time, the “RMM Credit Agreement”) governing RMM’s $450,000 thousand senior secured revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility also includes an “accordion feature” that permits RMM to seek additional commitments in an amount not to exceed $150,000 thousand. The maturity date of the loans advanced under the Senior Credit Facility is December 16, 2027.
The interest rate on borrowings under the Senior Credit Facility is equal to, at our option, either (i) the sum of a base rate plus a margin of 1.00% or (ii) the sum of a SOFR rate plus a margin of 2.00%, in each case subject to a 0.25% increase based on a consolidated net senior debt to library value ratio. RMM is also required to pay an unused fee in respect of unused commitments under the Senior Credit Facility, if any, at a rate of 0.25% per annum.
Subject to market conditions, we expect to continue to take opportunistic steps to extend our maturity dates and reduce related interest expense. From time to time, we may incur additional indebtedness for, among other things, working capital, repurchasing, redeeming or tendering for existing indebtedness and acquisitions or other strategic transactions.
Certain terms of the Senior Credit Facility are described below.
Guarantees and Security
The obligations under the Senior Credit Facility are guaranteed by us, RHI and subsidiaries of RMM. Substantially all of our, RHI’s, RMM’s and other subsidiary guarantors’ tangible and intangible assets are pledged as collateral to secure the obligations of RMM under the Senior Credit Facility, including accounts receivable, cash and cash equivalents, deposit accounts, securities accounts, commodities accounts, inventory and certain intercompany debt owing to us or our subsidiaries.
Covenants, Representations and Warranties
The Senior Credit Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants contained in the Senior Credit Facility limit the ability our, RHI’s, RMM’s and certain of its subsidiaries ability to, among other things, incur debt or liens, merge or consolidate with others, make investments, make cash dividends, redeem or repurchase capital stock, dispose of assets, enter into transactions with affiliates or enter into certain restrictive agreements.
Events of Default
The Senior Credit Facility includes customary events of default, including nonpayment of principal when due, nonpayment of interest or other amounts, inaccuracy of representations or warranties in any material respect, violation of covenants, certain bankruptcy or insolvency events, certain ERISA events and certain material judgments, in each case, subject to customary thresholds, notice and grace period provisions.
Covenant Compliance
The Senior Credit Facility contains financial covenants that requires us, on a consolidated basis with our subsidiaries, to maintain, (i) a fixed charge coverage ratio of not less than 1.10:1.00 for each four fiscal quarter period, and (ii) a consolidated senior debt to library value ratio of no greater than 0.45:1.00, subject to certain adjustments.
Non-compliance with the fixed charge coverage ratio and consolidated senior debt to library value ratio could result in the lenders, subject to customary cure rights, requiring the immediate payment of all amounts outstanding under the Senior Credit Facility, which could have a material adverse effect on our business, cash flows, financial condition and results of operations. As of June 30, 2024, we were in compliance with both of the financial covenants under the Senior Credit Facility.
26
At June 30, 2024, RMM had the following interest rate swaps outstanding, under which it pays a fixed rate and receives a floating interest payment from the counterparty based on SOFR with reference to notional amounts adjusted to match the amended scheduled principal repayments pursuant to the Senior Credit Facility (in thousands):
Pay Fixed
7,625
87,502
54,873
50,000
Dividends
Our ability to pay dividends is restricted by covenants in the Senior Credit Facility. We did not pay any dividends to stockholders during the three months ended June 30, 2024.
Summary
Management believes that funds generated from our operations, borrowings under the Senior Credit Facility and available cash and equivalents will be sufficient to fund our debt service requirements, working capital requirements and capital expenditure requirements for the foreseeable future. However, our ability to continue to fund these items and to reduce debt may be affected by general economic, financial, competitive, legislative and regulatory factors, as well as other industry-specific factors such as the ability to control music piracy and the continued transition from physical to digital formats in the recorded music and music publishing industries. It could also be affected by the severity and duration of natural or human-made disasters, including pandemics. We and our affiliates continue to evaluate opportunities to, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to pay dividends or prepay outstanding debt or repurchase or retire our outstanding debt. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings or equity raises. In addition, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity, and other factors, we may seek to refinance the Senior Credit Facility with existing cash and/or with funds provided from additional borrowings.
Contractual and Other Obligations
As of June 30, 2024, there have been no material changes, outside the ordinary course of business, in our contractual obligations since March 31, 2024. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual and Other Obligations” in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on May 30, 2024 for information regarding our contractual obligations.
Critical Accounting Policies
As of June 30, 2024, there have been no material changes to our critical accounting policies since March 31, 2024. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on May 30, 2024 for information regarding our critical accounting policies. We believe that our accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. The preparation of our condensed consolidated financial statements in conformity with US GAAP requires us to make estimates and judgments that affect the amounts reported in those condensed consolidated financial statements and the accompanying notes thereto. We believe we have used reasonable estimates and assumptions in preparing the condensed consolidated financial statements. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Off-Balance Sheet Arrangements
As of June 30, 2024, we had no off-balance sheet arrangements.
New Accounting Pronouncements
See Note 3, “Recent Accounting Pronouncements” to the accompanying unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2024, as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act.
As a result of the material weaknesses in our internal controls over financial reporting, as previously disclosed under Part II “Item 9A, Controls and Procedures” in our Annual Report on Form 10-K for the year ended March 31, 2024 (the “Annual Report”), our principal executive officer and principal financial and accounting officer concluded that during the period covered by this Quarterly Report our disclosure controls and procedures were not effective as of June 30, 2024. Notwithstanding these material weaknesses, management has concluded that the condensed consolidated financial statements included in this Quarterly Report are fairly stated in all material respects in accordance with U.S. GAAP.
Remediation Plan and Status of Material Weaknesses
We continue to take steps to remediate the material weaknesses described in our Annual Report by continuing to hire qualified accounting personnel and further evolving our accounting processes. We retained third party experts on complex technical accounting issues and taxes, as well as hired additional accounting personnel with the requisite experience to improve the process around financial reporting. We are actively improving our risk assessment activities, implementing corrective actions to support our remediation of the material weaknesses noted above. This includes, but is not limited to, providing training to process and control owners, enhancing relevant policies, procedures, guidelines and documentation templates, implementing new controls and improving documentation supporting existing controls, and enhancing segregation of duties by reducing access to our Enterprise Resource Planning (ERP) system. The evaluation over whether these improved control activities have been designed effectively, is ongoing.
In future periods, we will ensure that the improved processes and controls have been designed and implemented effectively, and we will also evaluate the operating effectiveness of the new and redesigned controls.
We will not be able to fully remediate these material weaknesses until the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively. Our management will continue to monitor the effectiveness of our remediation plans in future periods and will make changes we determine to be appropriate.
Changes in Internal Control over Financial Reporting
Except as disclosed above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls and Procedures
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all cases of error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We may, from time to time, become involved in various legal and administrative proceedings, claims, lawsuits and/or other actions incidental to the conduct of our business. Some of these legal and administrative proceedings, claims, lawsuits and/or other actions may be material and involve highly complex issues that are subject to substantial uncertainties and could result in damages, fines, penalties, non-monetary sanctions or relief. We recognize provisions for claims or pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherently uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. As of the date of this Quarterly Report, we are not involved in any legal proceedings that we believe could have a material adverse effect on our business, financial condition and/or results of operations.
Item 1A. Risk Factors.
There have been no material changes in the Company’s risk factors from those disclosed in Part I, Item 1A to the Company’s Annual Report for the year ended March 31, 2024. The risk factors disclosed in the Annual Report, in addition to the other information set forth in this report, could materially affect our business, financial condition or results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There have been no other unregistered sales of equity securities during the three months ended June 30, 2024 which have not been previously disclosed on a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
None of our directors or officers (as defined in Rule 16a-1 (f) under the Exchange Act) adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K) during the quarterly period covered by this Quarterly Report on Form 10-Q.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report.
No.
Description of Exhibit
31.1*
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
†
Certain of the schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules or exhibits upon request by the SEC.
*
Filed herewith.
**
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 31, 2024
By:
/s/ Golnar Khosrowshahi
Name: Golnar Khosrowshahi
Title: Chief Executive Officer (Principal Executive Officer)
/s/ Jim Heindlmeyer
Name: Jim Heindlmeyer
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)