RCI Hospitality Holdings, Inc. (Rick’s Cabaret International, Inc.) — Q1 FY2013 10-Q
Reporting period: Three months ended December 31, 2012; comparison is with the three months ended December 31, 2011. Financial statement amounts below are in millions, except per-share data. The company reported 34 adult nightclubs at quarter-end.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $27.141 | $22.019 |
| Operating income | $5.934 | $4.367 |
| Income from continuing operations | $2.714 | $2.286 |
| Net income attributable to Rick’s shareholders | $2.647 | $2.185 |
| Diluted EPS | $0.28 | $0.23 |
| Net cash provided by operating activities | $6.224 | $5.215 |
| Adjusted EBITDA (non-GAAP) | $7.309 | $5.527 |
- Revenue increased 23.3%, primarily from clubs acquired in 2011 and 2012, which contributed approximately $4.8 million.
- Operating margin rose to 21.9% from 19.8%. Management reported same-location club operating income, excluding corporate overhead, of $6.1 million, up 12.5% from $5.4 million.
- Interest expense increased to $1.643 million from $0.973 million, mainly reflecting acquisition-related debt. Income tax expense was $1.584 million; the effective rate was 36.9%, versus 34.6%.
- Operating cash flow increased year over year. Investing used $1.938 million, including $2.438 million of property and equipment additions, partly offset by $0.500 million from marketable securities sales. Financing used $2.935 million, including $2.402 million of debt payments and $0.405 million for stock repurchases.
Financial position and material changes
- At December 31, cash and cash equivalents were $6.871 million, versus $5.520 million at September 30, 2012. Total assets were $204.207 million, up from $192.393 million.
- Total debt was $70.451 million, including $6.361 million current and $64.090 million long-term, compared with $63.528 million at September 30. The company incurred $9.3 million of debt in connection with a real estate acquisition.
- Current assets were $15.502 million and current liabilities $25.182 million. Management cited working capital of $1.1 million excluding the $10.7 million Texas patron-tax liability; it was $1.7 million on the same basis at September 30.
- The company acquired real estate associated with its Foster Clubs for a stated purchase price of $10.1 million, financed principally with mortgage notes. It also agreed to acquire the building occupied by its New York club for $23 million; closing was scheduled by June 4, 2013.
- During the quarter, the company repurchased and retired 50,733 shares for approximately $0.405 million.
Outlook, risks, and contingencies
- Management described the near-term outlook as strong and expected substantial operating cash flow in 2013. No quantified earnings or revenue guidance was provided. The company anticipated additional club openings during 2013 and said further acquisitions could require additional debt or equity financing.
- The Texas $5-per-visitor patron tax remained under litigation. The company continued accruing the liability but had not paid the amounts accrued for subsequent quarters; the balance was approximately $10.7 million. A Texas court had upheld the fee as a constitutional occupations tax, and an appeal was pending.
- A Nevada tax audit asserted approximately $2.1 million, including penalties and interest, for Las Vegas entertainment taxes. The company disputed the assessment and had not accrued it.
- Other disclosed matters included a federal wage-and-hour lawsuit in New York and litigation concerning the former Las Vegas club lease. The company disputed liability in these matters; the filing does not quantify a probable loss.
- On January 24, 2013, after quarter-end, the company issued a $3.0 million, 10% convertible debenture due in two years and a warrant for 60,000 shares, receiving $3.0 million before a 6% placement fee. The debenture includes quarterly principal payments after an initial interest-only payment.
- Principal business risks identified include competition, laws governing adult entertainment businesses, availability and cost of financing, dependence on key personnel, and the ability to manage expansion. Management stated disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Progress and potential financial consequences of the Texas patron-tax appeal, including the accrued balance and any exposure for previously paid taxes.
- Status and funding of the planned $23 million New York real estate purchase, and the terms and repayment burden of the company’s debt.
- Outcome of the Nevada tax assessment and wage-and-hour and lease litigation, particularly because the Nevada claim was not accrued.
- How much of revenue and profit growth came from acquired locations versus same-location performance, and whether expected 2013 cash flow supports expansion and debt obligations.