RCI Hospitality Holdings, Inc. — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020, compared with the three months ended December 31, 2019. Amounts below are in U.S. dollars; financial statement figures are unaudited. RCI operated 48 adult entertainment and restaurant/bar establishments, with Nightclubs and Bombshells as its principal segments.
Financial results and liquidity
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $38.4 million | $48.4 million | Down 20.7% |
| Operating income / margin | $6.6 million / 17.1% | $9.7 million / 20.0% | Down 32.0% in income |
| Net income attributable to RCIHH shareholders | $9.6 million | $5.6 million | Up 71.1% |
| GAAP diluted EPS | $1.07 | $0.60 | |
| Non-GAAP diluted EPS | $0.39 | $0.62 | |
| Adjusted EBITDA | $8.7 million | $11.9 million | Down 26.8% |
| Operating cash flow | $6.3 million | $10.3 million | Down 38.9% |
| Free cash flow | $5.7 million | $9.3 million | Down 38.7% |
Revenue fell primarily because of COVID-19 closures and operating restrictions. Nightclubs revenue declined 33.4% to $25.2 million; Bombshells revenue grew 25.7% to $13.0 million. Same-store sales decreased 1.5% overall, comprising a 6.8% decline at Nightclubs and 12.0% growth at Bombshells. Consolidated operating margin contracted as fixed costs weighed more heavily on lower sales.
Reported earnings included a $4.9 million gain from forgiveness of ten Paycheck Protection Program loans. Accordingly, GAAP EPS increased while non-GAAP EPS and Adjusted EBITDA declined. The company reported an income tax benefit of $384,000, versus a $1.6 million expense a year earlier.
Cash and cash equivalents were $17.0 million at December 31, 2020, up from $15.6 million at September 30, 2020. Working capital was negative $3.8 million, improving from negative $5.9 million. Debt obligations were $134.8 million, excluding operating lease liabilities; debt maturities included $15.9 million in the following 12 months. Total liabilities were $198.9 million. Operating lease liabilities totaled $26.7 million.
Investing cash outflow was $1.0 million, including $1.3 million of capital expenditures. Financing cash outflow was $3.9 million, including $1.7 million of debt payments, $1.8 million of share repurchases and $360,000 of dividends. The company repurchased 74,659 shares at an average $24.03 and reported approximately $9.0 million remaining under its repurchase authorization.
Material changes and unusual items
- COVID-19-related closures and capacity or operating-hour limits drove lower sales; Nightclubs results were particularly affected. Management reported many locations had reopened by the report date, subject to restrictions.
- Ten of twelve PPP loans, totaling $4.9 million, were forgiven during the quarter and recognized as a non-operating gain. A further $378,000 loan was forgiven after quarter-end; forgiveness of the remaining loan was not assured.
- Bombshells signed its first franchise development agreement in December 2020: three planned San Antonio locations over five years, with rights of first refusal for three additional Texas locations.
- On January 25, 2021, after quarter-end, the company borrowed $2.175 million under a 20-year bank note at an initial 3.99% interest rate; the CEO guaranteed the note.
- The company identified no impairment of goodwill, indefinite-lived intangible assets or long-lived assets at quarter-end despite treating the pandemic as a triggering event for review.
Outlook, risks and contingencies
Management said it expects adequate operating cash flows for the 12 months after the report’s issuance. It was hopeful the company could become profitable relatively soon after most locations reopened, provided early results were sustained. This outlook is conditional: management said the duration and effects of the pandemic remained uncertain and that prolonged interruptions or occupancy limits could require additional liquidity, borrowing or asset sales. The company was considering refinancing debt obligations. No specific financial guidance was provided.
COVID-19 risks include further closures, reduced customer traffic, operating restrictions and constrained credit availability. Other disclosed risks include regulation of adult entertainment businesses, competition, cyber security, real estate conditions, franchisee execution and dependence on key personnel. The company’s Texas Patron Tax litigation remained on appeal. It also disclosed securities class and derivative actions and other lawsuits; potential losses in certain matters could not be estimated. The filing reported an adverse $1.0 million judgment in a landlord dispute under appeal and a separate prior dram-shop verdict vacated and remanded for a new trial.
Disclosure controls and procedures were reported ineffective as of December 31, 2020 because of a previously identified material weakness in controls over the income tax provision, specifically management review. Remediation efforts included enhanced review controls and retaining a third-party tax consultant.
Most important facts for investors to verify
- Whether reopening progress and customer demand were sufficient to restore Nightclubs revenue and operating margins, and whether Bombshells growth continued.
- Whether operating cash flow remained adequate amid negative working capital, scheduled debt maturities and pandemic-related uncertainty.
- Completion of forgiveness review for the remaining PPP loan and any effects on earnings, taxes or cash obligations.
- Progress on the income-tax-control remediation and whether management later concluded the material weakness was resolved.
- Developments in the Texas Patron Tax appeal, shareholder litigation and other contingencies, including any changes to reasonably estimable exposure.
- Execution and economics of the first Bombshells franchise agreement, including development timing and franchisee performance.