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 September 30, 2023
☐ 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 801A
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 November 3, 2023, there were 64,810,835 shares of Common Stock of Reservoir Media, Inc. issued and outstanding.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
Page
Part I. Financial Information
1
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three and Six Months Ended September 30, 2023 and 2022 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2023 and 2022 (unaudited)
2
Condensed Consolidated Balance Sheets as of September 30, 2023 and March 31, 2023 (unaudited)
3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended September 30, 2023 and 2022 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2023 and 2022 (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
32
Item 4. Controls and Procedures
Part II. Other Information
34
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
35
Part III. Signatures
36
i
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
RESERVOIR MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In U.S. dollars, except share data)
(Unaudited)
Three Months Ended September 30,
Six Months Ended September 30,
2023
2022
Revenues
$
38,397,300
33,265,711
70,233,886
57,544,481
Costs and expenses:
Cost of revenue
14,442,666
13,940,035
27,914,263
23,915,166
Amortization and depreciation
6,214,540
5,384,341
12,270,108
10,745,844
Administration expenses
11,595,004
7,373,880
20,759,504
14,995,490
Total costs and expenses
32,252,210
26,698,256
60,943,875
49,656,500
Operating income
6,145,090
6,567,455
9,290,011
7,887,981
Interest expense
(5,759,506)
(3,504,818)
(10,493,039)
(6,480,878)
(Loss) gain on foreign exchange
(40,156)
173,343
(70,092)
280,686
Gain on fair value of swaps
628,091
2,932,443
2,473,478
4,502,780
Other income (expense), net
474
536
47
Income before income taxes
973,993
6,168,457
1,200,894
6,190,616
Income tax expense
291,638
1,682,369
353,986
1,687,707
Net income
682,355
4,486,088
846,908
4,502,909
Net (income) loss attributable to noncontrolling interests
(146,965)
50,845
(34,185)
110,063
Net income attributable to Reservoir Media, Inc.
535,390
4,536,933
812,723
4,612,972
Earnings per common share (Note 13):
Basic
0.01
0.07
Diluted
Weighted average common shares outstanding (Note 13):
64,783,974
64,349,375
64,684,082
64,286,797
65,085,654
64,789,384
65,031,488
64,786,947
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In U.S. dollars)
Other comprehensive loss:
Translation adjustments
(2,198,433)
(4,924,010)
(1,058,957)
(9,935,573)
Total comprehensive loss
(1,516,078)
(437,922)
(212,049)
(5,432,664)
Comprehensive (income) loss attributable to noncontrolling interests
Total comprehensive loss attributable to Reservoir Media, Inc.
(1,663,043)
(387,077)
(246,234)
(5,322,601)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
March 31,
Assets
Current assets
Cash and cash equivalents
20,555,496
14,902,076
Accounts receivable
29,257,352
31,255,867
Current portion of royalty advances
12,882,031
15,188,656
Inventory and prepaid expenses
6,450,418
5,458,522
Total current assets
69,145,297
66,805,121
Intangible assets, net
635,597,071
617,404,741
Equity method and other investments
2,281,651
2,305,719
Royalty advances, net of current portion
56,442,076
51,737,844
Property, plant and equipment, net
584,184
568,339
Operating lease right of use assets, net
6,866,840
7,356,312
Fair value of swap assets
9,230,362
6,756,884
Other assets
1,322,330
1,147,969
Total assets
781,469,811
754,082,929
Liabilities
Current liabilities
Accounts payable and accrued liabilities
7,022,691
6,680,421
Royalties payable
40,017,207
33,235,235
Accrued payroll
821,049
1,689,310
Deferred revenue
2,549,427
2,151,889
Other current liabilities
9,946,198
10,583,794
Income taxes payable
332,017
204,987
Total current liabilities
60,688,589
54,545,636
Secured line of credit
332,134,211
311,491,581
Deferred income taxes
30,334,187
30,525,523
Operating lease liabilities, net of current portion
6,602,240
7,072,553
Other liabilities
590,519
785,113
Total liabilities
430,349,746
404,420,406
Contingencies and commitments (Note 15)
Shareholders’ Equity
Preferred stock, $0.0001 par value 75,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2023 and March 31, 2023
—
Common stock, $0.0001 par value; 750,000,000 shares authorized, 64,810,835 shares issued and outstanding at September 30, 2023; 64,441,244 shares issued and outstanding at March 31, 2023
6,481
6,444
Additional paid-in capital
340,130,343
338,460,789
Retained earnings
15,565,443
14,752,720
Accumulated other comprehensive loss
(5,914,286)
(4,855,329)
Total Reservoir Media, Inc. shareholders’ equity
349,787,981
348,364,624
Noncontrolling interest
1,332,084
1,297,899
Total shareholders’ equity
351,120,065
349,662,523
Total liabilities and shareholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three and Six Months Ended September 30, 2023
Common Stock
Accumulated
Additional
other
paid-in
Retained
comprehensive
Noncontrolling
Shareholders’
Shares
Amount
capital
earnings
loss
interests
equity
Balance, March 31, 2023
64,441,244
Share-based compensation
713,802
Vesting of restricted stock units, net of shares withheld for employee taxes
207,733
21
(689,176)
(689,155)
Reclassification of liability-classified awards to equity-classified awards
664,167
Net income (loss)
277,333
(112,780)
164,553
Other comprehensive income
1,139,476
Balance, June 30, 2023
64,648,977
6,465
339,149,582
15,030,053
(3,715,853)
1,185,119
351,655,366
612,235
Stock option exercises
56,466
288,537
288,542
Vesting of restricted stock units
105,392
11
(11)
80,000
146,965
Other comprehensive loss
Balance, September 30, 2023
64,810,835
For the Three and Six Months Ended September 30, 2022
Balance, March 31, 2022
64,150,186
6,415
335,372,981
12,213,519
(1,198,058)
1,057,467
347,452,324
359,461
140,138
14
(475,872)
(475,858)
961,429
76,039
(59,218)
16,821
(5,011,563)
Balance, June 30, 2022
64,290,324
6,429
336,217,999
12,289,558
(6,209,621)
998,249
343,302,614
596,184
83,580
8
(8)
145,000
(50,845)
Balance, September 30, 2022
64,373,904
6,437
336,959,175
16,826,491
(11,133,631)
947,404
343,605,876
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets
12,152,021
10,656,334
Depreciation of property, plant and equipment
118,087
89,510
1,727,286
1,617,490
Non-cash interest charges
668,544
1,158,685
(2,473,478)
(4,502,780)
Share of earnings of equity affiliates, net of tax
(34,133)
Dividend from equity affiliates
62,306
Changes in operating assets and liabilities:
1,998,515
(1,181,423)
(991,896)
(1,910,295)
Royalty advances
(2,397,607)
(5,456,865)
Other assets and liabilities
187,764
(120,854)
Accounts payable and accrued expenses
6,893,749
5,050,386
127,030
1,694,732
Net cash provided by operating activities
18,856,923
11,626,002
Cash flows from investing activities:
Purchases of music catalogs
(32,382,393)
(15,793,674)
Purchase of property, plant and equipment
(133,932)
(161,338)
Net cash used for investing activities
(32,516,325)
(15,955,012)
Cash flows from financing activities:
Proceeds from secured line of credit
20,000,000
7,000,000
Proceeds from stock option exercises
Taxes paid related to net share settlement of restricted stock units
Deferred financing costs paid
(25,914)
(6,975)
Net cash provided by financing activities
19,573,473
6,517,167
Foreign exchange impact on cash
(260,651)
(1,181,185)
Increase in cash and cash equivalents
5,653,420
1,006,972
Cash and cash equivalents beginning of period
17,814,292
Cash and cash equivalents end of period
18,821,264
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
NOTE 1. DESCRIPTION OF BUSINESS
Reservoir Media, Inc. (formerly known as Roth CH Acquisition II Co. (“ROCC”)), 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 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’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 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. The Recorded Music operations are primarily conducted through the Chrysalis Records platform and Tommy Boy Music and include the ownership of over 36,000 sound recordings.
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, 2023 and 2022.
The condensed consolidated balance sheet of the Company as of March 31, 2023, 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 and six months ended September 30, 2023 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending March 31, 2024 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 Recently Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. Subsequent to ASU 2016-13, the FASB has issued several related ASUs amending the original ASU 2016-13. The updates are intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For the Company, ASU 2016-13 was effective beginning April 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.
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 $3,571,968 and $3,377,420 from performance obligations satisfied in previous periods for the six months ended September 30, 2023 and 2022, respectively. Revenue recognized from performance obligations satisfied in previous periods for the six months ended September 30, 2022 was impacted by an update to estimated Music Publishing royalties based on the Company’s estimate of effects arising from the July 2022 ruling by the U.S. Copyright Royalty Board (the “CRB”) to affirm increases to the statutory royalty rate structure for mechanical royalties in the U.S. for the period 2018 to 2022. For much of the period between 2018 and 2022, most digital service providers accounted and submitted payment to the Company using the applicable 2017 rate while the remand process took place.
7
Disaggregation of Revenue
The Company’s revenue consisted of the following categories during the three and six months ended September 30, 2023 and 2022:
Revenue by Type
Digital
12,755,372
13,246,981
24,655,889
21,710,851
Performance
6,493,505
4,411,443
11,008,409
7,947,867
Synchronization
4,467,826
4,413,154
7,500,525
7,712,500
Mechanical
1,251,662
1,000,513
1,811,309
1,514,981
Other
939,697
991,290
1,723,245
1,623,889
Total Music Publishing
25,908,062
24,063,381
46,699,377
40,510,088
7,264,540
6,312,160
12,887,189
10,875,702
Physical
1,892,387
851,355
5,466,938
2,148,533
Neighboring rights
802,398
740,932
1,661,545
1,426,281
868,154
989,232
1,196,444
2,013,874
Total Recorded Music
10,827,479
8,893,679
21,212,116
16,464,390
Other revenue
1,661,759
308,651
2,322,393
570,003
Total revenue
Revenue by Geographical Location
United States Music Publishing
14,371,352
14,916,155
27,372,346
24,759,449
United States Recorded Music
5,882,700
4,967,177
11,407,463
8,770,013
United States other revenue
Total United States
21,915,811
20,191,983
41,102,202
34,099,465
International Music Publishing
11,536,710
9,147,226
19,327,031
15,750,639
International Recorded Music
4,944,779
3,926,502
9,804,653
7,694,377
Total International
16,481,489
13,073,728
29,131,684
23,445,016
Only the United States represented 10% or more of the Company’s total revenues in the three and six months ended September 30, 2023 and 2022.
Deferred Revenue
The following table reflects the change in deferred revenue during the six months ended September 30, 2023 and 2022:
Balance at beginning of period
1,103,664
Cash received during period
2,719,181
4,451,194
Revenue recognized during period
(2,321,643)
(1,930,247)
Balance at end of period
3,624,611
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 six months ended September 30, 2023 and 2022, the Company completed such acquisitions totaling $31,303,370 and $6,946,630, 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 September 30, 2023 and March 31, 2023:
September 30, 2023
March 31, 2023
Intangible assets subject to amortization:
Publishing and recorded music catalogs
752,086,373
721,904,892
Artist management contracts
881,377
893,283
Gross intangible assets
752,967,750
722,798,175
Accumulated amortization
(117,370,679)
(105,393,434)
Straight-line amortization expense totaled $6,154,509 and $5,341,069 in the three months ended September 30, 2023 and 2022, respectively. Straight-line amortization expense totaled $12,152,021 and $10,656,334 in the six months ended September 30, 2023 and 2022, respectively.
NOTE 7. ROYALTY ADVANCES
The Company made royalty advances totaling $8,969,170 and $12,313,011 during the six months ended September 30, 2023 and 2022, 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.
Six Months Ended
66,926,500
57,012,754
Additions
8,969,170
12,313,011
Recoupments
(6,571,563)
(6,856,146)
69,324,107
62,469,619
NOTE 8. SECURED LINE OF CREDIT
Long-term debt consists of the following:
337,828,410
317,828,409
Debt issuance costs, net
(5,694,199)
(6,336,828)
Credit Facilities
On December 16, 2022, Reservoir Media Management, Inc. (“RMM”), a subsidiary of RHI, entered into an amendment (the “Second Amendment”) to the credit agreement (the “RMM Credit Agreement”) governing RMM’s secured revolving credit facility
9
(the “Senior Credit Facility”). The Second Amendment amended the RMM Credit Agreement to (i) increase RMM’s senior secured revolving credit facility from $350,000,000 to $450,000,000, (ii) increase the incremental borrowing available under the facility’s accordion feature (discussed below) from $50,000,000 to $150,000,000, (iii) extend the maturity date of the loans advanced under the RMM Credit Agreement from October 16, 2024 to December 16, 2027, (iv) modify the interest rate to be equal to either the sum of a base rate plus a margin of 1.00% or 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, (v) remove the existing total leverage ratio financial covenant of no greater than 7.50:1.00 (net of up to $20,000,000 of certain cash balances) as of the end of each fiscal quarter, (vi) reduce the minimum required fixed charge coverage ratio financial covenant to 1.10:1.00 and (vii) modify the consolidated senior debt to library value ratio financial covenant to 0.450, subject to certain adjustments. In connection with the Second Amendment, RMM recorded a loss on early extinguishment of debt of approximately $914,000 that reflects the write-off of a portion of unamortized previous debt issuance costs and capitalized approximately $3,500,000 in new debt issuance costs.
RMM is 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.
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. As of September 30, 2023, the Senior Credit Facility had a borrowing capacity of $450,000,000, with remaining borrowing availability of $112,171,590.
Interest Rate Swaps
At September 30, 2023, 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
Amount at
Pay Fixed
Effective Date
Rate
Maturity
March 10, 2022
8,000,000
1.5330
%
September 2024
87,680,787
1.4220
December 31, 2021
54,319,213
0.9720
September 30, 2024
100,000,000
2.9460
December 2027
NOTE 9. INCOME TAXES
Income tax expense for the three months ended September 30, 2023 and 2022 was $291,638 (29.9% effective tax rate) and $1,682,369 (27.3% effective tax rate), respectively. Income tax expense for the six months ended September 30, 2023 and 2022 was $353,986 (29.5% effective tax rate) and $1,687,707 (27.3% effective tax rate), respectively. 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 six months ended September 30, 2023 and 2022 were comprised of the following:
Interest paid
9,136,713
5,319,954
Income taxes paid
187,940
30,000
Non-cash investing and financing activities for the six months ended September 30, 2023 and 2022 were comprised of the following:
Acquired intangible assets included in other liabilities
1,823,691
1,051,692
744,167
1,106,429
NOTE 11. WARRANTS
As of September 30, 2023, 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 $812,860 ($626,014, net of taxes) and $851,987 ($656,692, net of taxes) during the three months ended September 30, 2023 and 2022, respectively. Share-based compensation expense totaled $1,727,286 ($1,330,249, net of taxes) and $1,617,490 ($1,246,724, net of taxes) during the six months ended September 30, 2023 and 2022, respectively. Share-based compensation expense is classified as “Administration expenses” in the accompanying condensed consolidated statements of income.
During the three and six months ended September 30, 2023 and 2022, 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 $744,167 and $1,106,429 were reclassified from accounts payable and accrued liabilities to additional paid-in capital during the six months ended September 30, 2023 and 2022, respectively.
NOTE 13. EARNINGS PER SHARE
The following table summarizes the basic and diluted earnings per common share calculation for the three and six months ended September 30, 2023 and 2022:
Three Months Ended
Basic earnings per common share
Weighted average common shares outstanding - basic
Earnings per common share - basic
Diluted earnings per common share
Weighted average effect of potentially dilutive securities:
Effect of dilutive stock options and RSUs
301,680
440,009
347,406
500,150
Weighted average common shares outstanding - diluted
Earnings per common share - diluted
Because of their anti-dilutive effect, 5,960,637 shares of Common Stock equivalents, comprised of 73,137 RSUs and 5,887,500 warrants have been excluded from the diluted earnings per share calculation for the three and six months ended September 30, 2023. Because of their anti-dilutive effect, 5,957,444 shares of Common Stock equivalents, comprised of 69,944 RSUs and 5,887,500 warrants have been excluded from the diluted earnings per share calculation for the three months ended September 30, 2022. Because of their anti-dilutive effect, 5,952,683 shares of Common Stock equivalents, comprised of 65,183 RSUs and 5,887,500 warrants have been excluded from the diluted earnings per share calculation for the six months ended September 30, 2022.
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 was a $9,230,362 asset as of September 30, 2023 and a $6,756,884 asset as of March 31, 2023. 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 and six months ended September 30, 2023 of $628,091 and $2,473,478, respectively, was recorded as a Gain on fair value of swaps. The change in the unrealized fair value of the swaps during
12
the three and six months ended September 30, 2022 of $2,932,443 and $4,502,780, respectively, was recorded as a Gain on fair value of swaps.
(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 September 30, 2023 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.
The Company has been involved in a royalty dispute, which commenced in 2017 (the “Royalty Dispute”). Under the terms of the Company’s royalty contract, the Company is indemnified for legal expenses and attorneys’ fees incurred by the Company in connection with the Royalty Dispute, including, without limitation, the right to withhold royalties or offset all such legal expenses and attorneys’ fees against royalties otherwise owed under the contract. The Company recorded legal expenses and attorneys’ fees incurred as recoupable advances against the royalty account under such contract beginning in 2017. In September 2023, the Company engaged in mediation sessions in an effort to reach a settlement of the Royalty Dispute. Following such mediation and associated settlement negotiations, the Company agreed to pay previously accrued but unpaid royalties plus interest and forego its right to recoup its historical legal expenses and attorneys’ fees in order to resolve the Royalty Dispute. Consequently, during the three and six months ended September 30, 2023, the Company recorded approximately $2,700,000 of Administration expenses to write-off recoupable legal expenses and attorneys’ fees and recorded $620,000 of interest expense based on amounts it paid in October 2023, pursuant to a final settlement agreement reached on October 3, 2023 to resolve the Royalty Dispute.
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.
13
The following tables present total revenue and reconciliation of OIBDA to operating income by segment for the three and six months ended September 30, 2023 and 2022:
Three Months Ended September 30, 2023
Music
Recorded
Publishing
Consolidated
Reconciliation of OIBDA to operating income:
1,410,522
4,129,816
604,752
4,791,759
1,398,966
23,815
OIBDA
6,202,281
5,528,782
628,567
12,359,630
Three Months Ended September 30, 2022
3,074,439
3,476,367
16,649
4,010,123
1,352,977
21,241
7,084,562
4,829,344
37,890
11,951,796
Six Months Ended September 30, 2023
2,806,994
5,893,612
589,405
9,094,603
3,128,118
47,387
11,901,597
9,021,730
636,792
21,560,119
Six Months Ended September 30, 2022
2,813,131
5,057,677
17,173
7,964,493
2,737,458
43,894
10,777,624
7,795,135
61,067
18,633,825
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 31, 2023 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. In the United States, 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, 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 through 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, Tidal 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
For the Six Months
Ended September 30,
2023 vs. 2022
$ Change
% Change
38,397
33,266
5,132
70,234
57,544
12,689
22
14,443
13,940
503
27,914
23,915
3,999
6,215
5,384
830
12,270
10,746
1,524
11,595
7,374
4,221
57
20,760
14,995
5,764
38
32,252
26,698
5,554
60,944
49,657
11,287
23
6,145
6,567
(422)
(6)
9,290
7,888
1,402
18
(5,760)
(3,505)
(2,255)
64
(10,493)
(6,481)
(4,012)
62
(40)
173
(213)
(123)
(70)
281
(351)
(125)
628
2,932
(2,304)
(79)
2,473
4,503
(2,029)
(45)
0
NM
974
6,168
(5,194)
(84)
1,201
6,191
(4,990)
(81)
292
1,682
(1,391)
(83)
354
1,688
(1,334)
682
4,486
(3,804)
(85)
847
(3,656)
(147)
51
(198)
(34)
110
(144)
(131)
535
4,537
(4,002)
(88)
813
4,613
(3,800)
(82)
NM – Not meaningful
Our revenues were composed of the following amounts (in thousands):
12,755
13,247
(492)
(4)
24,656
21,711
2,945
6,494
4,411
2,082
11,008
7,948
3,061
39
4,468
4,413
55
7,501
7,713
(212)
(3)
1,252
1,001
251
25
1,811
1,515
296
20
940
991
(52)
(5)
1,723
1,624
99
25,908
24,063
1,845
46,699
40,510
6,189
7,265
6,312
952
12,887
10,876
2,011
1,892
851
1,041
122
5,467
2,149
3,318
154
802
741
61
1,662
1,426
235
868
989
(121)
(12)
1,196
2,014
(817)
(41)
10,827
8,894
1,934
21,212
16,464
4,748
29
309
1,353
2,322
570
1,752
Total Revenue
U.S. Music Publishing
14,371
14,916
(545)
27,372
24,759
2,613
U.S. Recorded Music
5,883
4,967
916
11,407
8,770
2,637
30
U.S. Other Revenue
Total U.S.
21,916
20,192
1,724
41,102
34,099
7,003
11,537
9,147
2,389
26
19,327
15,751
3,576
4,945
3,927
1,018
9,805
7,694
2,110
27
16,481
13,074
3,408
29,132
23,445
5,687
24
Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022
Total revenues increased by $5,132 thousand, or 15%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, driven by a 22% increase in Recorded Music revenue and an 8% increase in Music Publishing revenue. Music Publishing revenues represented 67% and 72% of total revenues for the three months ended September 30, 2023 and the three months ended September 30, 2022, respectively. Recorded Music revenues represented 28% and 27% of total revenues for the three months ended September 30, 2023 and the three months ended September 30, 2022, respectively. U.S. and international revenues represented 57% and 43%, respectively of total revenues for the three months ended September 30, 2023. U.S. and international revenues represented 61% and 39%, respectively of total revenues for the three months ended September 30, 2022. The shift in mix between Music Publishing and Recorded Music was driven primarily by the significant physical sales in the Recorded Music segment for the quarter. The shift in geographic mix is primarily attributable to the nonrecurrence of $2.1 million recognized during the three months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling.
19
Total digital revenues increased by $461 thousand, or 2%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the higher royalty rates in effect for 2023 as well as price increases at multiple music streaming services, partially offset by the nonrecurrence of $2.1 million recognized during the three months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling. Total digital revenues represented 52% and 59% of consolidated revenues for the three months ended September 30, 2023 and the three months ended September 30, 2022, respectively.
Music Publishing revenues increased by $1,845 thousand, or 8%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase in Music Publishing revenue was mainly driven by acquisitions of catalogs and revenue from the existing catalog, which led to increases in performance revenue and mechanical revenue, partially offset by a decrease in digital revenue. The decrease in digital revenue was due primarily to the nonrecurrence of $2.1 million recognized during the three months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling, partially offset by higher royalty rates in effect for 2023 as well as price increases at multiple music streaming services.
On a geographic basis, U.S. Music Publishing revenues represented 55% of total Music Publishing revenues for the three months ended September 30, 2023 compared to 62% for the three months ended September 30, 2022. International Music Publishing revenues represented 45% of total Music Publishing revenues for the three months ended September 30, 2023 compared to 38% for the three months ended September 30, 2022. The decrease in the U.S. percentage for the three months ended September 30, 2023 was driven primarily by the nonrecurrence of $2.1 million recognized during the three months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling.
Recorded Music revenues increased by $1,934 thousand, or 22%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in Recorded Music revenue was driven by an increase in physical revenue and the continued growth at music streaming services. The $1,041 thousand increase in physical revenue was primarily due to De La Soul releases for Tommy Boy and the timing of Chrysalis’ release schedule. The $121 thousand decrease in synchronization revenue was primarily due to timing of synchronization licenses, as well as the writers’ and actors’ strikes in Hollywood.
On a geographic basis, U.S. Recorded Music revenues represented 54% of total Recorded Music revenues for the three months ended September 30, 2023 compared to 56% for the three months ended September 30, 2022. International Recorded Music revenues represented 46% of total Recorded Music revenues for the three months ended September 30, 2023 compared to 44% for the three months ended September 30, 2022, primarily as a result of De La Soul releases that performed particularly well in the U.S.
Six Months Ended September 30, 2023 vs. Six Months Ended September 30, 2022
Total revenues increased by $12,689 thousand, or 22%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, driven by a 29% increase in Recorded Music revenue and a 15% increase in Music Publishing revenue. Music Publishing revenues represented 66% and 70% of total revenues for the six months ended September 30, 2023 and the six months ended September 30, 2022, respectively. Recorded Music revenues represented 30% and 29% of total revenues for the six months ended September 30, 2023 and the six months ended September 30, 2022, respectively. U.S. and international revenues represented 59% and 41%, respectively of total revenues for the six months ended September 30, 2023 and September 30, 2022. The shift in mix between Music Publishing and Recorded Music was driven primarily by the significant physical sales in the Recorded Music segment for the six months ended September 30, 2023.
Total digital revenues increased by $4,957 thousand, or 15%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily due to the higher royalty rates in effect for 2023 as well as price increases at multiple music streaming services, partially offset by the nonrecurrence of $2.1 million recognized during the six months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling. Total digital revenues represented 53% and 57% of consolidated revenues for the six months ended September 30, 2023 and the six months ended September 30, 2022, respectively.
Music Publishing revenues increased by $6,189 thousand, or 15%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. This increase in Music Publishing revenue was mainly driven by acquisitions of catalogs and revenue from the existing catalog, which led to increases in digital revenue and performance revenue. The increase in digital revenue reflects higher royalty rates in effect for 2023 as well as price increases at multiple music streaming services, which were partially offset by the nonrecurrence of $2.1 million recognized during the six months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling. Synchronization revenue decreased due to timing of synchronization licenses, as well as the writers’ and actors’ strikes in Hollywood.
On a geographic basis, U.S. Music Publishing revenues represented 59% of total Music Publishing revenues for the six months ended September 30, 2023 compared to 61% for the six months ended September 30, 2022. International Music Publishing revenues represented 41% of total Music Publishing revenues for the six months ended September 30, 2023 compared to 39% for the six months ended September 30, 2022. The decrease in the U.S. percentage for the six months ended September 30, 2023 was driven primarily by the nonrecurrence of $2.1 million recognized during the six months ended September 30, 2022 for estimated retroactive U.S. royalties related to the 2022 CRB ruling.
Recorded Music revenues increased by $4,748 thousand, or 29%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. The increase in Recorded Music revenue was driven by an increase in physical revenue and the continued growth at music streaming services. The $3,318 thousand increase in physical revenue was primarily due to De La Soul releases for Tommy Boy and the timing of the Chrysalis’ release schedule. The $817 thousand decrease in synchronization revenue was primarily due to timing of synchronization licenses, as well as the writers’ and actors’ strikes in Hollywood.
On a geographic basis, U.S. Recorded Music revenues represented 54% of total Recorded Music revenues for the six months ended September 30, 2023 compared to 53% for the six months ended September 30, 2022. International Recorded Music revenues represented 46% of total Recorded Music revenues for the six months ended September 30, 2023 compared to 47% for the six months ended September 30, 2022.
Cost of Revenues
Our cost of revenues was composed of the following amounts (in thousands):
Writer royalties and other publishing costs
11,268
11,853
(585)
20,773
19,605
1,168
Artist royalties and other recorded music costs
3,174
2,087
1,087
52
7,141
4,310
2,831
66
Total cost of revenue
14,442
502
Cost of revenues increased by $502 thousand, or 4%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Cost of revenues as a percentage of revenues decreased to 38% for the three months ended September 30, 2023 from 42% for the three months ended September 30, 2022.
Writer royalties and other publishing costs for the Music Publishing segment decreased by $585 thousand, or 5%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Writer royalties and other publishing costs as a percentage of Music Publishing revenues decreased to 43% for the three months ended September 30, 2023 from 49% for the three months ended September 30, 2022. 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 increased by $1,087 thousand, or 52%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase was due primarily to an increase in revenue as well as a shift to a larger portion of revenue coming from physical product which carries a much higher cost. Artist royalties and other recorded music costs as a percentage of recorded music revenues increased to 29% for the three months ended September 30, 2023 from 23% for the three months ended September 30, 2022. The increase in artist royalties and other recorded music costs and decrease in margins were due primarily to the change in the mix of sales by type to a higher percentage of physical sales, which carry higher costs than other types of revenue.
Cost of revenues increased by $3,999 thousand, or 17%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Cost of revenues as a percentage of revenues decreased to 40% for the six months ended September 30, 2023 from 42% for the six months ended September 30, 2022.
Writer royalties and other publishing costs for the Music Publishing segment increased by $1,168 thousand, or 6%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Writer royalties and other publishing costs as a percentage of Music Publishing revenues decreased to 44% for the six months ended September 30, 2023 from 48% for the six months ended September 30, 2022. 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 increased by $2,831 thousand, or 66%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. This increase was due primarily to an increase in revenue as well as a shift to a larger portion of revenue coming from physical product which carries a much higher cost. Artist royalties and other recorded music costs as a percentage of recorded music revenues increased to 34% for the six months ended September 30, 2023 from 26% for the six months ended September 30, 2022. The increase in artist royalties and other recorded music costs and decrease in margins were due primarily to the change in the mix of sales by type to a higher 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
4,791
4,010
781
9,095
7,964
1,130
Recorded Music amortization and depreciation
1,399
46
3,128
2,737
391
Other amortization and depreciation
44
Total amortization and depreciation
Amortization and depreciation expense increased by $830 thousand, or 15%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, driven by increases in both the Music Publishing and Recorded Music segments. Music Publishing amortization and depreciation expense increased by $781 thousand, or 19%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the acquisition of additional music catalogs. Recorded Music amortization and depreciation increased by $46 thousand, or 3%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the acquisition of additional music catalogs.
Amortization and depreciation expense increased by $1,524 thousand, or 14%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, driven by increases in both the Music Publishing and Recorded Music segments. Music Publishing amortization and depreciation expense increased by $1,130 thousand, or 14%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily due to the acquisition of additional music catalogs. Recorded Music amortization and depreciation increased by $391 thousand, or 14%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, 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
8,438
5,126
3,312
65
14,025
10,128
3,897
Recorded Music administration expenses
2,124
1,978
146
5,049
4,359
690
Other administration expenses
1,033
270
763
283
1,686
508
1,178
232
Total administration expenses
5,765
Total administration expenses increased by $4,221 thousand, or 57%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, reflecting increases in both the Music Publishing and Recorded Music segments, as well as an increase in Other administration expenses. Approximately $2,700 thousand of the increase relates to the write-off of recoupable legal expenses and attorneys’ fees incurred in connection with the Royalty Dispute described in Note 15 to the accompanying condensed consolidated financial statements (the “Recoupable legal fee write-off”). Expressed as a percentage of revenues, administration expenses increased to 30% for the three months ended September 30, 2023 from 22% for the three months ended September 30, 2022, primarily due to the Recoupable legal fee write-off.
Music Publishing administration expenses increased by $3,312 thousand, or 65%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Expressed as a percentage of revenues, Music Publishing administration expenses increased to 33% for the three months ended September 30, 2023 from 21% for the three months ended September 30, 2022, primarily as a result of the Recoupable legal fee write-off.
Recorded Music administration expenses increased by $146 thousand, or 7%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Expressed as a percentage of revenue, Recorded Music administration expenses decreased to 20% for the three months ended September 30, 2023 from 22% for the three months ended September 30, 2022, primarily due to taking advantage of operating leverage on the Recorded Music platform.
Other administration expenses increased by $763 thousand, or 283%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to selling expenses associated with our artist management business, consisting mostly of manager compensation.
Total administration expenses increased by $5,765 thousand, or 38%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, reflecting increases in both the Music Publishing and Recorded Music segments, as well as an increase in Other administration expenses. Approximately $2,700 thousand of the increase relates to the Recoupable legal fee write-off. Expressed as a percentage of revenues, administration expenses increased to 30% for the six months ended September 30, 2023 from 26% for the six months ended September 30, 2022, primarily as a result of the Recoupable legal fee write-off.
Music Publishing administration expenses increased by $3,897 thousand, or 38%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Expressed as a percentage of revenues, Music Publishing administration expenses increased to 30% for the six months ended September 30, 2023 from 25% for the six months ended September 30, 2022, primarily as a result of the Recoupable legal fee write-off.
Recorded Music administration expenses increased by $690 thousand, or 16%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Expressed as a percentage of revenue, Recorded Music administration expenses decreased to 24% for the six months ended September 30, 2023 from 26% for the six months ended September 30, 2022, primarily due to taking advantage of operating leverage on the Recorded Music platform.
Other administration expenses increased by $1,178 thousand, or 232%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily due to selling expenses associated with our artist management business, consisting mostly of manager compensation.
Interest Expense
Interest expense increased by $2,255 thousand, or 64%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Approximately $620 thousand of this increase was incurred in connection with settlement of the Royalty Dispute described in Note 15 to the accompanying condensed consolidated financial statements. The remaining increase was primarily driven by increased debt balances due to use of funds in acquisitions of music catalogs and writer signings, as well as increases in SOFR.
Interest expense increased by $4,012 thousand, or 62%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Approximately $620 thousand of this increase was incurred in connection with settlement of the Royalty Dispute described in Note 15 to the accompanying condensed consolidated financial statements. The remaining increase was primarily driven by increased debt balances due to use of funds in acquisitions of music catalogs and writer signings, as well as increases in SOFR.
(Loss) Gain on Foreign Exchange
Loss on foreign exchange was $40 thousand for the three months ended September 30, 2023 compared to a gain on foreign exchange of $173 thousand for the three months ended September 30, 2022. This change was due to fluctuations in the two foreign currencies we are directly exposed to, namely British pound sterling and euro.
Loss on foreign exchange was $70 thousand for the six months ended September 30, 2023 compared to a gain on foreign exchange of $281 thousand for the six months ended September 30, 2022. This change was due to fluctuations in the two foreign currencies we are directly exposed to, namely British pound sterling and euro.
Gain on Fair Value of Swaps
Gain on fair value of swaps decreased by $2,304 thousand during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This change was due to marking to market our interest rate swap hedges.
Gain on fair value of swaps decreased by $2,029 thousand during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. This change was due to marking to market our interest rate swap hedges.
Income Tax Expense
Income tax expense was $292 thousand during the three months ended September 30, 2023 compared to $1,682 thousand during the three months ended September 30, 2022. The effective income tax rate during the three months ended September 30, 2023 was
29.9% compared to 27.3% during the three months ended September 30, 2022. The increase in the effective income tax rate was driven primarily by changes in the mix of income from multiple tax jurisdictions.
Income tax expense was $354 thousand during the six months ended September 30, 2023 compared to $1,688 thousand during the six months ended September 30, 2022. The effective income tax rate during the six months ended September 30, 2023 was 29.5% compared to 27.3% during the six months ended September 30, 2022. The increase in the effective income tax rate was driven primarily by changes in the mix of income from multiple tax jurisdictions.
Net Income
Net income was $682 thousand during the three months ended September 30, 2023 compared to $4,486 thousand during the three months ended September 30, 2022. The decrease in net income was driven primarily by a $2,304 thousand decrease in Gain on fair value of swaps, a $2,255 thousand increase in interest expense and a $422 thousand decrease in operating income. These factors were partially offset by a $1,391 thousand decrease in income tax expense.
Net income was $847 thousand during the six months ended September 30, 2023 compared to $4,503 thousand during the six months ended September 30, 2022. The decrease in net income was driven primarily by a $4,012 thousand increase in interest expense and a $2,029 thousand decrease in Gain on fair value of swaps. These factors were partially offset by a $1,402 thousand increase in operating income and a $1,334 thousand decrease in income tax expense.
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.
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):
Amortization and depreciation expenses
831
12,360
11,951
409
21,560
18,634
2,926
OIBDA Margin
31
Music Publishing
1,411
3,074
(1,663)
(54)
2,807
2,813
1,131
6,202
7,084
(882)
11,902
10,777
1,125
Recorded Music
For the Six Months Ended
4,130
3,476
654
5,894
5,058
836
5,529
4,829
700
9,022
7,795
1,227
54
43
Consolidated OIBDA increased by $409 thousand, or 3%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, driven by a $700 thousand increase in Recorded Music OIBDA and a $591 thousand increase in Other OIBDA, partially offset by an $882 thousand decrease in Music Publishing OIBDA, including the impact of the Recoupable legal fee write-off. Expressed as a percentage of revenue, OIBDA Margin decreased to 32% for the three months ended September 30, 2023 from 36% for the three months ended September 30, 2022.
Music Publishing OIBDA decreased by $882 thousand, or 12%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Expressed as a percentage of revenue, Music Publishing OIBDA Margin decreased to 24% in the three months ended September 30, 2023 from 29% in the three months ended September 30, 2022. The decreases in Music Publishing OIBDA and OIBDA Margin reflect the impact of the Recoupable legal fee write-off, partially offset by revenue growth and improved margins.
Recorded Music OIBDA increased by $700 thousand, or 14% during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Expressed as a percentage of revenue, Recorded Music OIBDA Margin decreased to 51% during the three months ended September 30, 2023 from 54% in the three months ended September 30, 2022. This decrease is primarily driven by a decrease in margins due to the change in the mix of sales by type to a higher percentage of physical sales, partially offset by improved operating leverage on the Recorded Music platform.
Consolidated OIBDA increased by $2,926 thousand, or 16%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, driven by a $1,227 thousand increase in Recorded Music OIBDA and $1,125 thousand increase in Music Publishing OIBDA. Expressed as a percentage of revenue, OIBDA Margin decreased to 31% for the six months ended September 30, 2023 from 32% for the six months ended September 30, 2022.
Music Publishing OIBDA increased by $1,125 thousand, or 10%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Expressed as a percentage of revenue, Music Publishing OIBDA Margin decreased to 25% in the six months ended September 30, 2023 from 27% in the six months ended September 30, 2022. The increase in Music Publishing OIBDA reflects revenue growth and the decrease in OIBDA Margin reflects the Recoupable legal fee write-off, partially offset by improved margins.
Recorded Music OIBDA increased by $1,227 thousand, or 16% during the six months ended September 30, 2023 compared to the six months ended September 30, 2022. Expressed as a percentage of revenue, Recorded Music OIBDA Margin decreased to 43% during the six months ended September 30, 2023 from 47% in the six months ended September 30, 2022. This decrease is primarily driven by a decrease in margins due to the change in the mix of sales by type to a higher percentage of physical sales, partially offset by improved operating leverage on the Recorded Music platform.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
The following table reconciles net income to Adjusted EBITDA (in thousands):
(1,390)
5,760
3,505
2,255
10,493
4,012
EBITDA
12,949
15,057
(2,108)
(14)
23,964
23,418
546
Loss (gain) on foreign exchange(a)
40
(173)
213
70
(281)
351
Gain on fair value of swaps(b)
(628)
(2,932)
2,304
(2,473)
(4,503)
2,030
Non-cash share-based compensation(c)
(38)
1,727
1,617
Recoupable legal fee write-off(d)
2,695
Other (income) expense, net
(1)
Adjusted EBITDA
15,869
12,803
3,066
25,982
20,251
5,731
28
NM - Not meaningful
Consolidated Adjusted EBITDA increased by $3,066 thousand, or 24%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily as a result of revenue growth. Adjusted EBITDA Margin increased to 41% during the three months ended September 30, 2023 compared to 38% during the three months ended September 30, 2022, primarily due to improved operating leverage.
Consolidated Adjusted EBITDA increased by $5,731 thousand, or 28%, during the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily as a result of revenue growth. Adjusted EBITDA Margin increased to 37% during the six months ended September 30, 2023 compared to 35% during the six months ended September 30, 2022, primarily due to improved operating leverage.
Liquidity and Capital Resources
Capital Resources
As of September 30, 2023, we had $332,134 thousand of debt (net of $5,694 thousand of deferred financing costs) and $20,555 thousand of cash and cash equivalents.
Cash Flows
The following table summarizes our historical cash flows (in thousands).
2023 vs.2022
Cash provided by (used in):
Operating activities
18,857
11,626
7,231
Investing activities
(32,516)
(15,955)
(16,561)
104
Financing activities
19,573
6,517
13,056
200
Operating Activities
Cash provided by operating activities was $18,857 thousand for the six months ended September 30, 2023 compared to $11,626 thousand for the six months ended September 30, 2022. The primary driver of the $7,231 thousand increase in cash provided by operating activities during the six months ended September 30, 2023 as compared to the six months ended September 30, 2022 was the timing of accounts receivable collections and payments of accounts payable and accrued liabilities.
Investing Activities
Cash used in investing activities was $32,516 thousand for the six months ended September 30, 2023 compared to $15,955 thousand for the six months ended September 30, 2022. The increase in cash used in investing activities was primarily due to increased acquisitions of music catalogs.
Financing Activities
Cash provided by financing activities was $19,573 thousand for the six months ended September 30, 2023 compared to $6,517 thousand for the six months ended September 30, 2022. The increase in cash provided by financing activities in the six months ended September 30, 2023 reflects an increase in net borrowings used for investing activities.
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 September 30, 2023
As of September 30, 2023, our outstanding debt consisted of $337,828 thousand borrowed under the Senior Credit Facility. As of September 30, 2023, remaining borrowing availability under the Senior Credit Facility was $112,172 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
On December 16, 2022, RMM entered into an amendment (the “Second Amendment”) to the RMM Credit Agreement. The Second Amendment amended the RMM Credit Agreement governing RMM’s secured revolving credit facility (the “Senior Credit Facility”). The Second Amendment amended the RMM Credit Agreement to (i) increase RMM’s senior secured revolving credit facility from $350,000 thousand to $450,000 thousand, (ii) increase the incremental borrowing available under the facility’s accordion feature from $50,000 thousand to $150,000 thousand , (iii) extend the maturity date of the loans advanced under the RMM Credit Agreement from October 16, 2024 to December 16, 2027, (iv) modify the interest rate to be equal to either the sum of a base rate plus a margin of 1.00% or 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, (v) remove the existing total leverage ratio financial covenant of no greater than 7.50:1.00 (net of up to $20,000 thousand of certain cash balances) as of the end of each fiscal quarter, (vi) reduce the minimum required fixed charge coverage ratio financial covenant to 1.10:1.00 and (vii) modify the consolidated senior debt to library value ratio financial covenant to 0.450, subject to certain adjustments. 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 September 30, 2023, we were in compliance with both of the financial covenants under the Senior Credit Facility.
At September 30, 2023, 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 Rate
8,000
1.533
87,681
1.422
54,319
0.972
100,000
2.946
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 and six months ended September 30, 2023.
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 such as the COVID-19 pandemic. 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 September 30, 2023, there have been no material changes, outside the ordinary course of business, in our contractual obligations since March 31, 2023. 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 31, 2023 for information regarding our contractual obligations.
Critical Accounting Policies
As of September 30, 2023, there have been no material changes to our critical accounting policies since March 31, 2023. 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 31, 2023 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 September 30, 2023, 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 September 30, 2023, 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, 2023 (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 September 30, 2023. 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 hiring additional qualified accounting personnel and further evolving our accounting processes. Specifically, since the material weakness related to the lack of qualified personnel was identified, 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 September 30, 2023 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.
33
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, 2023. 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 September 30, 2023, 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.
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.
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: November 7, 2023
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)