RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; comparisons are to the three months ended December 31, 2020 unless otherwise noted. Dollar amounts are in U.S. dollars. The interim financial statements are unaudited.
Business context and material changes
RCI operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses. At quarter-end it reported 58 establishments. Results benefited from recovery versus pandemic-affected prior-year operations, same-store growth, and acquisitions.
- Total revenue rose 61.0% to $61.8 million. Consolidated same-store sales increased 21.8%: Nightclubs 30.6% and Bombshells 7.6%.
- Nightclubs revenue increased 85.7% to $46.8 million; Bombshells revenue increased 13.6% to $14.8 million.
- The October 2021 acquisition of 11 clubs, six real estate properties, and related intellectual property was valued at approximately $88.4 million, funded with $36.8 million cash, $21.2 million seller notes, and 500,000 shares valued at $30.4 million. A further club and related real estate were acquired in New York in November. Acquired clubs contributed $6.3 million of revenue during the quarter, according to management.
- The company also acquired real estate for a previously leased South Florida club for $7.0 million. Acquisition valuations remained preliminary.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $61.8 million | $38.4 million |
| Operating income / margin | $15.9 million / 25.7% | $6.6 million / 17.1% |
| Net income | $10.6 million | $9.5 million |
| Net income attributable to RCIHH common shareholders | $10.6 million | $9.6 million |
| Diluted EPS | $1.12 | $1.07 |
| Adjusted EBITDA (non-GAAP) | $18.0 million | $8.7 million |
| Operating cash flow | $16.3 million | $6.3 million |
| Free cash flow (non-GAAP) | $15.3 million | $5.7 million |
- Operating expenses were 74.3% of revenue, down from 82.9%. Management attributed margin improvement mainly to higher sales and fixed-cost leverage; higher-margin service revenue also improved cost-of-goods-sold mix.
- Bombshells operating margin declined to 19.0% from 20.9%, primarily due to pre-opening expenses. Nightclubs operating margin rose to 40.1% from 33.7%.
- Prior-year results included a $4.9 million gain on debt extinguishment, primarily related to PPP loan forgiveness, versus $85,000 in the current quarter. Current-quarter income tax expense was $2.9 million, compared with a $384,000 tax benefit a year earlier. These items make reported net income and EPS comparisons less reflective of underlying operations.
- Cash and cash equivalents were $18.0 million at December 31, 2021, down from $35.7 million at September 30, 2021. Cash used in investing was $48.1 million, including $39.3 million for acquisitions and $9.9 million for property, equipment, and intangible assets. Cash from financing was $14.1 million.
- Management reported working capital of $1.3 million, excluding net assets held for sale, versus $26.1 million at fiscal year-end. The balance sheet reports current assets of $39.1 million and current liabilities of $35.5 million.
- Debt obligations were $161.9 million at quarter-end, compared with $134.8 million at December 31, 2020; balance-sheet debt, net of discounts and issuance costs, was $161.9 million. Long-term operating lease liabilities were $35.2 million, in addition to current lease liabilities.
Outlook, risks, and unusual items
- No quantitative earnings or revenue guidance was provided. Management stated it expects adequate operating cash flow for the 12 months following the report. It also said there were no unused credit facilities and additional borrowing might not be available on favorable terms.
- On January 25, 2022, after quarter-end, the company borrowed $18.7 million for working capital under a 10-year, real-estate-secured loan, initially bearing 5.25% interest. The loan includes a debt-service-coverage covenant of at least 1.4 times and a personal guarantee by the CEO.
- Management described all locations as operating at normal business hours at the time of the report, except two clubs undergoing renovation or remodeling; pandemic restrictions and changing government requirements remained risks. The company reported no impairment of goodwill, indefinite-lived intangibles, or long-lived assets in its quarter-end assessment.
- The company’s capital allocation criteria include a target cash-on-cash return of 25%–33% for acquisitions or development. Management said the first Bombshells franchisee in the San Antonio area was scheduled to open in February 2022.
- Disclosure controls were deemed ineffective at December 31, 2021 because of a previously reported material weakness in controls over impairment estimates, particularly review of assumptions. Management was working on remediation. Controls for the acquired business were being incorporated for a future assessment.
- Legal matters include a shareholder class action for which the parties reached an agreement-in-principle in January 2022, subject to a formal agreement and court approval; a new derivative action filed in January, for which potential loss could not yet be estimated; and an ongoing Texas Patron Tax appeal. The company also disclosed other litigation and contingencies.
- Management highlighted risks from COVID-19, regulation of adult entertainment businesses, competition, cybersecurity, real estate conditions, and dependence on key personnel. It also noted that inflationary cost increases may not always be recoverable through pricing.
Most important facts for investors to verify
- Final purchase-price allocation and acquired-asset valuations for the major club acquisition, including the resulting goodwill and intangible-asset assumptions.
- Whether acquisition-driven growth translates into sustained same-store performance and margins, particularly at Bombshells.
- Cash needs, debt maturities and balloon payments, covenant compliance, and the effect of the post-quarter $18.7 million loan on liquidity and leverage.
- Progress in remediating the impairment-control material weakness and whether disclosure controls are subsequently deemed effective.
- Status, court approval, and financial impact of the shareholder settlement, derivative action, Texas Patron Tax appeal, and other litigation.
- Continuing effects of COVID-19, operating restrictions, labor and inflation costs, and any change to management’s expectation of adequate cash flow for the next 12 months.