RCI Hospitality Holdings, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fiscal Q4 (three months ended September 30, 2020). Unless stated otherwise, amounts are U.S. dollars.
Business context
RCI Hospitality operates adult entertainment nightclubs, Bombshells restaurants and sports bars, and smaller media and energy-drink businesses. At year-end, subsidiaries operated 48 establishments. Results were heavily affected by COVID-19: all clubs and restaurants temporarily closed on March 18, 2020, then reopened in stages subject to local restrictions, operating-hour limits and occupancy caps.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $132.3 million | $181.1 million |
| Operating income / margin | $2.7 million / 2.1% | $34.7 million / 19.2% |
| Net income (loss) attributable to RCIHH shareholders | $(6.1) million | $20.3 million |
| Diluted EPS | $(0.66) | $2.10 |
| Adjusted EBITDA (non-GAAP) | $22.4 million | $46.2 million |
| Operating cash flow | $15.6 million | $37.2 million |
| Free cash flow (non-GAAP) | $13.5 million | $33.3 million |
Revenue fell 26.9%, operating income fell 92.1%, and operating cash flow fell 57.9% year over year. The company recorded $10.6 million of asset impairment charges, primarily associated with pandemic-related and projected declines in cash flows. FY2020 GAAP net loss also included a $1.3 million deferred-tax-asset valuation allowance. Non-GAAP measures are company-defined and should be considered alongside, not instead of, GAAP results.
Segments: Nightclubs revenue was $88.4 million, down 40.5%; segment operating income was $13.1 million versus $50.7 million. Bombshells revenue was $43.2 million, up 40.2%, and segment operating income was $9.2 million versus $2.3 million. Bombshells growth reflected two new locations and its ability to operate as a restaurant while bars were restricted. Other-segment revenue was $0.7 million.
Comparable sales: Reported consolidated same-store sales declined 4.4%, excluding the effect of COVID-related closures under the company’s calculation. Including pandemic closures, adjusted same-store sales declined 34.7%. Nightclubs’ adjusted same-store sales fell 41.7%; Bombshells’ rose 6.5%.
Balance sheet and debt: Cash was $15.6 million, total assets $360.9 million, total liabilities $208.6 million, and total equity $152.3 million at September 30, 2020. Debt was $142.7 million before unamortized discounts and issuance costs; reported debt, including current maturities, was $141.4 million. Current liabilities were $37.3 million versus current assets of $31.4 million; management reported negative working capital of $5.9 million, excluding assets held for sale. Real-estate-secured debt was $86.7 million. Contractual debt and lease payments, including estimated debt interest, totaled approximately $233.6 million.
Cash uses and capital returns: Capital expenditures were $5.7 million. The company repurchased 516,102 shares for $9.5 million and paid $1.3 million in dividends. Subsequent to year-end through the filing date, it repurchased another 74,659 shares for $1.8 million.
Material changes and unusual items
- COVID-19 closures and restrictions drove the sharp revenue decline, particularly in Nightclubs. The first fiscal quarter had revenue of $48.4 million; Q4 revenue was $28.8 million. Q4 operating income was $0.2 million, net loss attributable to shareholders was $2.8 million, and diluted loss per share was $0.31.
- Impairments totaled $10.6 million: $7.9 million of goodwill, $2.3 million of sexually oriented business licenses, and approximately $0.4 million of property, equipment and operating-lease assets.
- The company received $5.4 million in PPP loans. As of filing, 10 of 12 loans, totaling $4.9 million, had received 100% forgiveness; forgiveness of the remaining two was not assured.
- Adoption of lease accounting (ASC 842) added $27.3 million of operating lease right-of-use assets and $28.6 million of lease liabilities at adoption; the company said adoption did not affect results of operations or cash flows.
- FY2019 results were revised for an income-tax accounting error: full-year net income attributable to RCIHH increased by $1.1 million to $20.3 million, and EPS increased from $1.99 to $2.10. The company assessed the error as immaterial to FY2019 but material if recorded in FY2020.
- The planned $15.0 million acquisition of a Northeast Corridor nightclub and related real estate was terminated before closing. Two Bombshells locations opened during FY2020.
Outlook, risks and contingencies
Management said the pandemic’s duration and financial impact were unknown and that further restrictions or weak customer demand could harm results and liquidity. It stated that it expected adequate operating cash flow for the next 12 months, while warning that prolonged interruptions could require additional borrowing, asset sales or refinancing. Management was hopeful of returning to profitability relatively soon after most locations reopened, conditional on sustaining early results; this was not formal earnings guidance.
At September 30, 2020, the company said it was compliant with debt covenants or had obtained waivers. Some principal and interest payments had been deferred. It warned that covenant failures without waivers could trigger default and accelerated repayment, and that additional financing might not be available on favorable terms. Tenants, suppliers, staffing, consumer behavior and government restrictions were additional pandemic-related uncertainties.
Key other risks include alcohol and adult-entertainment licensing and regulation, entertainer worker-classification claims, competition, cybersecurity and data security, food safety, insurance limits, impairment risk, and dependence on key personnel. CEO Eric Langan’s and Executive Vice President Travis Reese’s employment agreements expired in January 2020; new agreements were being negotiated. The CEO personally guaranteed the company’s commercial bank debt.
Legal and governance matters: In September 2020, the SEC concluded its investigation and settled with the company, CEO Eric Langan and former CFO Phil Marshall. Without admitting or denying the findings, the company agreed to a cease-and-desist order and a $400,000 civil penalty; Langan and Marshall agreed to penalties of $200,000 and $35,000. The SEC order cited undisclosed executive perquisites totaling $615,000 over fiscal 2014–2019, related-party transaction disclosure failures, and books-and-records and internal-control deficiencies. A consolidated securities class action and a shareholder derivative action remained pending; potential losses could not yet be estimated. The company was also appealing an adverse $1.0 million landlord judgment and reported two unresolved claims tied to its former insurer.
Controls and audit: The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management identified a material weakness in controls over the income-tax provision and concluded disclosure controls were ineffective at year-end. Management said it was implementing remediation measures.
Important facts for investors to verify
- Whether operating restrictions ease, customer traffic recovers, and reopened locations generate sustained positive cash flow.
- Forgiveness status and final accounting for the two outstanding PPP loans.
- Debt covenant compliance, deferred-payment terms, near-term maturities and access to refinancing or other liquidity.
- Progress and independent validation of remediation of the income-tax control weakness.
- Developments and potential financial exposure in the SEC-related litigation, shareholder actions, Texas Patron Tax appeal and other material claims.
- Whether the FY2019 tax revision, impairment assumptions and company-defined non-GAAP adjustments affect comparisons or investors’ assessment of underlying performance.