Business context and reporting period
Rick’s Cabaret International, Inc. (the registrant named in this filing; the request metadata uses RCI Hospitality Holdings, Inc.) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2011. The company operated 24 adult nightclubs, plus Internet and media businesses. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $22.019 | $19.668 |
| Operating income | $4.367 | $4.448 |
| Income from continuing operations | $2.286 | $2.379 |
| Net income attributable to Rick’s shareholders | $2.185 | $2.076 |
| Basic and diluted EPS | $0.23 | $0.21 |
| Adjusted EBITDA, non-GAAP | $5.539 | $5.264 |
| Operating margin | 19.8% | 22.6% |
Revenue increased 12.0%, driven by higher sales at several clubs and approximately $1.1 million from new club sales. Operating income declined despite revenue growth as operating expenses rose 16.0%; cost of goods sold, taxes and permits, legal and professional costs, depreciation, and other expenses increased. Net income improved partly because the discontinued-operations loss narrowed to $0.048 million from $0.250 million. The filing reports continuing-operations income attributable to shareholders of $2.233 million in 2011 versus $2.326 million in 2010 in its EPS reconciliation.
Net cash provided by operating activities was $5.215 million, up from $2.940 million; management attributed the increase mainly to deferred taxes and higher accounts payable. Investing activities used $1.557 million, including $1.177 million of capital expenditures and a $0.380 million acquisition. Financing activities used $2.419 million, including $1.394 million of debt payments, $0.554 million for put options and derivatives, and $0.417 million for share repurchases. Cash rose to $10.937 million from $9.698 million at September 30, 2011.
Financial position and material changes
At December 31, 2011, total assets were $154.222 million and total liabilities were $70.860 million. Current assets of $19.620 million exceeded current liabilities of $17.899 million by $1.721 million. Long-term debt was $28.682 million and current debt was $5.513 million, for reported debt of $34.195 million. Total debt was $35.554 million at September 30, 2011. A $7.542 million Texas patron-tax accrual was included in current liabilities.
During the quarter, the company acquired the New West club and began operating it as Temptations; $0.380 million of the purchase price was allocated to a license. After quarter-end, it completed acquisitions of Silver City Cabaret and related real estate, and purchased additional real estate; the Blue Star/Inwood club and property transactions were pending required licensing and closing conditions. The filing states that purchase-price allocations for the subsequent acquisitions were incomplete.
Outlook, risks and contingencies
No quantitative earnings or revenue guidance was provided. Management described continued club acquisitions and organic growth as its strategy, while noting that expansion may require additional debt or equity financing and that financing on reasonable terms is not assured. Management cited seasonality, with historically stronger club results from October through March, and said the media division remained loss-making; it expected possible improvement as the economy improves and costs are controlled.
- Texas patron fee: The Texas Supreme Court rejected the federal First Amendment challenge and remanded remaining state-law issues; the U.S. Supreme Court declined review in January 2012. The company continued accruing but generally not paying the fee while litigation remained pending. Accrued liability was about $7.5 million; quarterly expense was $0.712 million.
- Nevada tax dispute: State auditors 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 litigation: Matters included a Las Vegas lease dispute, a shareholder claim, and two TCPA text-message class actions. The company denied liability and was defending the claims; its separate coverage action against its insurer was dismissed in January 2012.
- Put obligations: The maximum potential obligation if the stock price fell to zero was $2.4 million. The filing estimated $1.579 million total obligation using the December 31 share price, with most payable in fiscal 2012.
- Management identified regulatory and competitive conditions, financing availability, Internet operations, and dependence on key personnel as risks. It reported disclosure controls as effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Track the Texas patron-fee litigation and the $7.5 million accrued balance, including any new payment or court developments.
- Assess the Nevada tax assessment and the potential exposure from the Las Vegas lease and TCPA cases.
- Verify completion, financing terms, licensing, and final purchase-price allocations for post-quarter acquisitions and property purchases.
- Reconcile revenue growth with the decline in operating income and margin, and monitor whether cost increases persist.
- Review debt repayment capacity, put-option exposure, and funding needs for the company’s acquisition strategy.
- Confirm the issuer identity: this filing is for Rick’s Cabaret International, Inc., notwithstanding the RCI Hospitality Holdings, Inc. metadata.