RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Unaudited results are compared with the same periods in 2019. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Business context and reporting period
RCI operates adult nightclubs, Bombshells restaurants and bars, and smaller other businesses. It reported 48 establishments as of March 31, 2020. All clubs and restaurants were temporarily closed beginning March 18 in response to COVID-19. Before the closures, same-store sales had increased 5.3% over the first ten weeks of the quarter; ten Texas locations had partially reopened at 25% occupancy by the report’s release.
Key financial results
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $40.4m, down 9.8% | $88.8m, essentially flat |
| Operating income (loss) | $(2.5)m; operating margin (6.1%) | $7.2m; operating margin 8.1% |
| Net income (loss) attributable to RCIHH common stockholders | $(3.5)m; diluted loss per share $0.37 | $2.2m; diluted EPS $0.24 |
| Adjusted EBITDA (non-GAAP) | $8.0m | $19.9m, down 18.6% |
| Operating cash flow | $1.7m, per management’s quarterly highlights | $12.0m, down 42.9% |
| Free cash flow (non-GAAP) | $0.6m, per management’s quarterly highlights | $9.9m, down 50.3% |
For the quarter, Nightclubs revenue fell 15.3% to $31.4m while Bombshells revenue rose 17.0% to $8.8m, reflecting new locations. For the six-month period, Nightclubs revenue declined 7.4% to $69.2m and Bombshells revenue increased 41.5% to $19.2m. Six-month same-store sales decreased 7.3% overall: down 8.4% at Nightclubs and up 0.7% at Bombshells.
Quarterly operating results included $8.2m of impairment charges, primarily $6.5m of goodwill, $1.4m of sexually oriented business licenses, and $0.3m of property and equipment. The prior-year quarter included a $1.0m net gain in other charges. Excluding specified items, management reported non-GAAP diluted EPS of $0.47 for the quarter and $1.09 for the six months; these non-GAAP measures are not substitutes for GAAP results.
Balance sheet, liquidity and capital allocation
- Cash was $9.8m at March 31, 2020, versus $14.1m at September 30, 2019. Cash decreased $4.3m during the six months.
- Working capital was negative $4.6m, excluding net assets held for sale. Management cautioned that working capital is not, in its view, a representative indicator for its business.
- Long-term debt was approximately $140.4m, including current maturities; the company also reported $27.8m of operating lease liabilities. Debt maturities include $14.8m due in the twelve months ending March 31, 2021, with $6.1m of scheduled balloon payments in that period.
- Six-month investing cash outflow was $3.9m, including $5.3m of capital expenditures. Financing cash outflow was $12.4m, including $8.5m of share repurchases and $0.6m of dividends.
- The company repurchased 465,390 shares during the six months at an average price of $18.24. The quarterly dividend was $0.04 per share in the second quarter. The repurchase authorization had $11.8m remaining as of May 8, 2020.
Material changes and management commentary
COVID-19 closures reversed sales momentum and materially reduced quarterly revenue and cash generation, while fixed costs continued. Salaries and wages and SG&A rose as a percentage of quarterly revenue; management cited fixed salaries and other fixed expenses, as well as perishable inventory spoilage. For the six months, reported net income fell 83.7% year over year, partly reflecting the impairment charge and the prior-year period’s gains on asset sales.
Management furloughed club and restaurant employees other than a limited number of managers, reduced pay, deferred certain debt payments and fixed expenses, and cut non-essential spending. On May 8, 2020, after quarter-end, eligible restaurant, shared-services and lounge subsidiaries received $5.4m in Paycheck Protection Program funding. Forgiveness was uncertain; adult nightclub and other non-core subsidiaries received no PPP funding. Management said it might need to borrow or sell assets if reopenings and cash generation were insufficient, and noted credit availability could be constrained. No numerical full-year guidance was provided.
In February 2020, two 12% notes were restructured into ten-year notes with monthly payments, eliminating scheduled balloon payments of $4.0m in August 2021 and $3.8m in October 2021. On May 1, 2020, the company also extended most of certain notes that had come due that day to November 1, 2020. A planned $15.0m nightclub acquisition did not close; the agreements were terminated in April 2020.
Risks, contingencies and unusual items
- The company stated COVID-19 had materially adversely affected its business. Reopening timing, occupancy limits, customer demand, staffing, supply availability, and access to financing remained uncertain. Management said it was in compliance with debt covenants at March 31, 2020, but warned that future noncompliance could trigger default and acceleration.
- Disclosure controls and procedures were not effective at March 31, 2020 because of a previously reported material weakness involving financial-statement close and review, journal entries, related-party disclosures, and loss contingencies. Remediation was ongoing and not yet considered complete.
- An SEC matter had become a formal, ongoing investigation; the company could not predict its duration, outcome, or costs. Related securities class and derivative actions were also pending, and potential losses could not yet be estimated.
- Other disclosed matters include an appeal of a $1.0m adverse landlord judgment, an unresolved image-infringement action, and a dram-shop case remanded for a new trial. The company also reported a Texas court ruling that the Patron Tax was unconstitutional as applied and enforced; the State appealed.
- RCI adopted lease accounting standard ASC 842 on October 1, 2019, recording $27.3m of right-of-use assets and $28.6m of lease liabilities at adoption. Management said adoption did not affect operating results or cash flows.
Important facts for investors to verify
- How many locations reopened, under what restrictions, and whether they generated positive cash flow after the filing date.
- Cash burn, liquidity needs, debt covenant compliance, near-term maturities, and whether additional financing or asset sales became necessary.
- PPP loan eligibility, use of proceeds, and forgiveness status.
- The progress and financial consequences of the SEC investigation and pending litigation, including the Texas Patron Tax appeal.
- Whether remediation of the material weakness was completed and controls were tested and found effective.
- Whether impairment assumptions and recoverability assessments changed as pandemic effects and operating forecasts developed.