Sapan Gai, CCO at Sovereign Metals, discusses their superior graphite test results. Watch the video here.
Italian, though the detail on this is in the Real Network 10k and 9m figures it is not specifically referred to in the MVR acquisition RNS. However there is reference in that RNS to Napster requesting funds to pay rights holder obligations and $3m going into escrow to secure indemnity obligations which may cover these off. In finalising any agreement it is usually the warranties and indemnities that hold it up getting across the line so your observations are timely today.
Some posters on this site have indicated they may not understand what 302 is about. This is section 302 of the Sarbanas Oxley Act 2002 in the US which was brought in on the back of Enron. This requires both management and the auditors to provide assurance on the internal accounting controls of the business. Real have avoided reporting on this for Napster due to the timing of their acquisition of it, and in theory the compliance risk falls away with it becoming a subsidiary of a UK company where section 302 does not apply – yet. The Kingman/Brydon reviews on the back of Carillion have recommended similar legislation apply in the UK and proposals on this are imminent. Also if there is an aspiration to a US listing the US law would re-apply. But compliance apart it is in the interest of MVR and its reputation for the artists to be comfortable that MVR can manage the back office – in particular the $44m royalty liability - accurately and promptly. Sorting this addresses a number of the Real risks so I would expect some action on this area to be noted in the Admission Document.
The risks disclosed in Real Networks’ 10-Q run to 11 pages and cover 11,000 words. In analysing them I recognised that these applied to the whole of RN’s business and not just Napster, and wondered if some could be excluded. On reflection all have some relevance. These are all IMO.
1 Covid 19 effect
2 Cash constraints on development – including risk of repaying government loan in Napster $1.7m under US Covid relief. Risk of management time sorting it out.
3 Failure of deal with MVR
4 Monetising of products and services
5 Competition
6 Contracts to provide technology – claims if technology fails
7 Volatility in share price and $1 Nasdaq listing price limit
8 Goodwill impairment.
9 Continued loss of revenue from subscription income – lack of innovation
10 Going concern
11 Government regulation – cannot provide assurance that changes compliant – and complaint management
12 Global exposure – country laws such as GDPR in Europe
13 Key personnel – attraction and retention. Repeated restructuring has affected retention
14 Acquisition/disposal transaction costs
15 Protection of proprietary rights to retain superiority
16 Operation and security of information systems
17 International Tax
18 Changes in accounting standards
19 Chairman (Glaser) retaining 38% of the RN shares
20 Napster’s changing revenue model – from subscription to rent a platform
21 Napster’s dependence on third party licences
22 Napster’s royalty record keeping challenges and lack of 302 assurance
These effectively repeat MVR’s own but go into considerably more depth. The ones that take my focus and which I think the AD needs to have some address to are 10,11,12,13,16,17 and 22. The lynchpin being 13 and having the right people. Risks 9 and 20 are interesting because they both point to a reducing revenue from the subscription revenue stream. However part of the mitigation is developing new products/services and the MVR merger provide this opportunity for them. Personal conclusions to follow in third post
As we wait avidly for “soon” to expire on the Admission Document it is worth mulling over the sort of things we would hope to see in it, apart from the puff associated with the selling opportunities. Let me say at the outset that I am in favour of the deal as it appears to stand, and can see that 1+1 does = 4 or even more. But this can only be best leveraged provided that the underlying risks associated with the transaction are properly mitigated allowing AM and his team to continue doing what they do best.
There are many traditional risks associated with any business and we take these on board as investors knowingly or at least with a nod to them. But there are many interesting risks associated both with MVR and Napster that need special attention. These are set out in MVR’s annual accounts at December 2019 and in the Real Network’s (RN) 10-Q filing at September 2020. In this and my second post I attempt in my own amateurish fashion to summarise these in short bullets.
MVR’s risks can be summarised as follows;
1 New emerging products
2 Monetising
3 Licensing arrangements
4 Key personnel – attraction and retention
5 Covid 19
6 Treasury management
7 Going concern
8 Foreign exchange exposure
I am intrigued by the “treasury management” one as it wraps up a lot of hidden risks and leads to other questions being asked. The RN risk register lays these out in the open and allows a closer inspection. These run to 11,000 words spread over 11 pages which are difficult to digest, and which I try to summarise in 22 bullets in my next post.
I don’t think you need to be that pessimistic MrH. The 10-Q notes on the royalties indicate that some of the dues may not need to be paid for more than one year. As the systems aren’t good enough to separate this out they’ve all been shoved in current liabilities. This may be prudent from an audit perspective but probably is a pessimistic reflection. The other factor is that cash from existing sales is funding the day to day payment though the amount represents a long period of time measured against reported cost of sales. I tend ro agree an extra bit of cash to help manage these down might not go amiss and that might be covered by another placing proposal in the Admission document if the due diligence revealed such concerns.
With the purchase of Columbus Nova’s 42% by Real in February 2019 Napster became an 84% owned subsidiary. So the details of assets purchased were detailed in Real’s 10K filing at December 2019 whilst the proposed disposal is detailed in the 10-Q filing at September 2020. The information in these two filings are quite telling on the areas of risk for Napster especially with royalty payments. The 10-Q sets out the key items in the balance sheet relating to discontinued operations (Napster) with further information on the royalty creditor which accounts for the bulk of the $44m creditors reported as part of the consideration. The 10-Q balance sheet notes are sufficiently woffly to indicate this is a creditor that could be materially misstated either way owing to so many variables. What is more telling is the ring-fencing for section 302 reporting in the 10K by Real which enabled them and KPMG to avoid actually reporting if the controls in place for Napster were adequate for 302. The fact these risks associated with the internal control of the royalties are still around at 30 September per the 10-Q risk report suggest that this has been a nut Real have been unable to crack, so this is something we would expect MVR to step up to the plate for and have a plan to deal with on purchase. It’s all very well offering 4 times Spotify royalties to artists but if they were not to end up getting paid on time that attraction would be eroded.
The announcements in August on the acquisition were interesting as they referred to $26m in some press releases and $70m in others. On closer inspection MVR’s announcements were based on $26m whereas the Real Networks (Real) showed $70m by adding in $44m of creditors. You would not normally include creditors if you are buying shares, and the MVR announcement makes clear Napster would be a wholly owned subsidiary on closure of the deal, whereas Real’s announcement is rather more ambivalent. Perhaps they are keeping the options open as to whether a share deal or an assets and undertaking deal are on the table. There may be tax issues involved and legacy purchase arrangements of the 42% shares previously owned by Columbus Nova affecting the approach. An assets deal could be messy because of the need to novate contractual arrangements with artists so I suspect the shares purchase route is the most likely. The Admission Document should clear this up.
Joining in the discussion on the chatroom as a LTH who has watched but not previously posted. I have done some research on the deal to see what we should be looking for in the Admission Document (AD) quite apart from the expected puffs on audience reach and hit rates, which I will set out in later posts. I note there have been some queries on when the shares are due to be relisted; under AIM Rule 40 the suspension was required pending uncertainty, but, as the Bookbuild RNS states, the suspension was made pending issue of the AD. Somewhat confusingly it says “on or around 31 October” in paragraph 12 and “anticipated to take place by the end of November 2020” in paragraph 4. In practice I could see this following an AM “soon” and perhaps for commercial reasons and timing with the LG concert, could end up appearing week commencing 7 December. They don’t appear to have much time though because the first tranche of consideration is payable by 31 December.