RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2014; interim financial statements are unaudited. The company operated 43 establishments in its nightclub segment. Stockholders approved the company’s name change from Rick’s Cabaret International, Inc. on August 6, 2014, after quarter-end.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | 2014: $33.343; 2013: $28.308 (+17.8%) | 2014: $95.636; 2013: $84.177 (+13.6%) |
| Operating income / margin | 2014: $2.892 / 8.7%; 2013: $5.460 / 19.3% | 2014: $15.965 / 16.7%; 2013: $17.545 / 20.8% |
| Income attributable to RCIH shareholders | 2014: $0.691 ($0.07 diluted EPS); 2013: $2.195 ($0.23) | 2014: $6.816 ($0.69 diluted EPS); 2013: $7.587 ($0.79) |
| Company-defined Adjusted EBITDA | 2014: $7.741; 2013: $6.936 | 2014: $24.200; 2013: $21.652 |
| Operating cash flow | Nine months: $13.798, versus $14.145 in 2013 | |
| Cash and cash equivalents | $11.102 at June 30, 2014, versus $10.638 at September 30, 2013 | |
| Total debt | $82.383 at June 30, 2014, versus $78.592 at September 30, 2013 |
Quarterly revenue growth reflected recent acquisitions and 5.1% same-store sales growth; management said same-store sales would have risen 6.9% excluding Club Onyx units. For the nine-month period, operating cash flow was slightly lower year over year despite higher revenue. Investing used $17.424 million, chiefly for property and equipment and New York building development rights; financing provided $4.090 million. Cash increased $0.464 million over the nine months.
Liquidity, debt, and material changes
- Current assets were $27.124 million and current liabilities were $37.327 million. Management reported working capital of $5.2 million excluding the $15.4 million Texas patron-tax liability, compared with $4.8 million at September 30, 2013.
- Current debt was $13.079 million and long-term debt was $69.304 million. The company reported $7.025 million of debt proceeds and $5.899 million of debt payments during the nine months. It also disclosed $4.9 million of seller-financed debt incurred for real estate and an aircraft.
- Quarterly operating margin fell to 8.7% from 19.3%; nine-month margin declined to 16.7% from 20.8%. Management attributed the pressure primarily to litigation and other one-time costs and pre-opening expenses. Quarterly same-location club operating income, excluding corporate overhead, was $6.8 million in both periods.
- Quarterly litigation and other one-time costs were approximately $3.233 million, compared with $0.160 million a year earlier. These included a $2 million settlement not paid by the former liability insurer and a $775,000 settlement of Nevada tax claims. The insurer’s estate may provide recovery, but none is assured.
- Property and equipment additions were $11.822 million, compared with $5.497 million in the prior-year nine-month period. Two assets—a Beaumont property and an aircraft—were classified as held for sale and under contract at June 30.
- During the nine months, the company issued 211,443 shares in conversion of $2.1 million of debt principal and interest, and received $3.126 million from option exercises. Options exercisable at June 30 expired July 2, 2014. Dilution from convertible debt, warrants, and options remains relevant.
Outlook, risks, and contingencies
Management described the near-term outlook as strong and expected substantial operating cash flow in 2014, but provided no specific numerical guidance. Planned openings included Rick’s Cabaret in Odessa and Bombshells locations in Houston and Spring, Texas; the filing described expected summer and fall 2014 openings. Management identified club acquisitions, new concepts, and real-estate control as growth strategies, while noting that expansion may require additional debt or equity financing.
- Texas patron tax: The company had accrued approximately $15.4 million and was not making payments while litigation continued. A Texas appellate ruling in May 2014 was adverse to the industry association; the association sought review by the Texas Supreme Court. Management said a final adverse ruling would affect the balance sheet, and that a favorable outcome could result in a one-time gain. The company’s own additional claims had not yet been addressed by the courts.
- Other legal exposure: A New York wage-and-hour case had a summary judgment ruling for plaintiffs on minimum-wage claims; further issues and trial proceedings remained. The company disputed liability and intended to appeal. A Nevada tax claim of approximately $2.1 million was settled for $775,000 in July 2014.
- Insurance: The former liability insurer was placed into liquidation, and its policies were terminated. The company reported multiple pending or threatened claims arising from events before the coverage change and intended to file claims with the insurer’s receiver; recovery is uncertain. Coverage from a replacement insurer applies to claims arising after October 25, 2013.
- Business and financing risks: The filing highlights competition, regulation of adult entertainment businesses, dependence on key personnel, execution of expansion plans, and availability of acceptable financing. Management also noted seasonal revenue softness historically from April through September.
Most important facts for investors to verify
- Progress and potential financial outcomes of the Texas patron-tax litigation, including the $15.4 million accrual and any unpaid or recoverable amounts.
- Potential liability in the New York wage-and-hour litigation and the likelihood and timing of recovery from the former insurer’s estate for settlements and other claims.
- Whether planned openings and asset sales occurred as expected, and the resulting effects on revenue, expenses, and cash flow.
- Debt terms, upcoming maturities, interest burden, and possible share dilution from convertible instruments, warrants, or other equity issuance.
- Underlying operating trends apart from one-time items: compare GAAP results with management’s adjusted measures and assess the recurring nature of exclusions.