RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. Unaudited results cover the three- and nine-month periods; balance-sheet comparisons are June 30, 2021 versus September 30, 2020. The company operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses.
Financial performance
| Metric | Three months ended June 30, 2021 | Nine months ended June 30, 2021 |
|---|---|---|
| Revenue | $57.9 million, up 293.0% year over year | $140.3 million, up 35.5% |
| Operating income and margin | $18.5 million; 32.0% | $34.9 million; 24.9% |
| Net income attributable to RCIHH common stockholders | $12.3 million; diluted EPS $1.37 | $28.0 million; diluted EPS $3.11 |
| Operating cash flow | $15.0 million, per MD&A | $32.2 million |
| Adjusted EBITDA | $20.4 million | $42.7 million |
| Free cash flow | Not clearly stated for the quarter | $27.6 million |
Quarterly revenue comprised $41.0 million from Nightclubs and $16.1 million from Bombshells. For the nine months, Nightclubs contributed $97.0 million and Bombshells $42.2 million. GAAP results improved substantially from the prior-year losses, when pandemic-related closures sharply constrained business. The filing says revenue was also up 23.0% for the quarter and 3.3% year to date versus comparable fiscal 2019 periods; no locations qualified for same-store comparisons because of prior-year closures.
Quarterly operating margin was 32.0%, versus negative 31.6% a year earlier. Year-to-date margin was 24.9%, versus 2.5%. The nine-month figures include a $5.3 million gain from forgiveness of 11 PPP loans; one $124,000 PPP loan remained without a forgiveness notice. Adjusted measures exclude specified items and should be considered alongside GAAP results.
Liquidity, debt and capital
- Cash and cash equivalents were $29.1 million, up from $15.6 million at September 30, 2020. Working capital was positive $7.3 million, excluding assets held for sale and associated liabilities; it was negative $5.9 million at the prior year-end.
- Debt, net of discounts and issuance costs, was approximately $127.6 million, down from $141.4 million at September 30, 2020. Debt maturities include $13.9 million in the 12 months ending June 30, 2022; balloon payments include $4.0 million in that period. Operating lease liabilities totaled $26.1 million.
- Nine-month investing cash use was $7.2 million, including $10.8 million of capital expenditures. Financing cash use was $11.6 million, including $10.8 million of debt repayments, $1.8 million of share repurchases and $1.1 million of dividends.
- Management expects adequate operating cash flows for the next 12 months, but the company has no unused credit facilities and gives no assurance that additional borrowing would be available on favorable terms.
Material developments, outlook and risks
- Management attributed the strong year-over-year rebound chiefly to reopening after COVID-19 closures. It reported all locations open except two clubs undergoing renovation or remodeling, while noting that future restrictions could adversely affect results.
- On July 23, 2021, after quarter-end, the company agreed to acquire 11 clubs, six related properties and associated intellectual property for $88.0 million. Closing depends on permits, bank financing and other conditions. The company was negotiating to refinance much of its existing real-estate debt and partially finance the property purchases; purchase accounting and pro forma information were not yet available.
- Three properties were classified as held for sale; the remaining carrying value was $4.9 million at June 30. One property sold for $3.1 million in May, with $2.0 million of proceeds used to repay related debt.
- Material litigation includes a securities class action that survived a motion to dismiss and is scheduled for trial in January 2023; the company says potential loss cannot yet be estimated. The Texas Patron Tax ruling is under state appeal. Other disclosed matters include an affirmed $1.0 million landlord judgment subject to a further rehearing request, an unresolved image-infringement case, and a dram-shop case remanded for a new trial. One shareholder derivative action was dismissed without prejudice.
- Disclosure controls were deemed ineffective at June 30, 2021 because of a previously reported material weakness in review controls over the income tax provision. Management described remediation efforts, including enhanced reviews and a retained tax consultant.
- Management cited risks from COVID-19, regulation and litigation affecting adult businesses, local business conditions, cybersecurity, competition, key-person dependence, real-estate transactions, and new franchising operations. Nightclub revenues are historically seasonal, with stronger results generally in October–March.
Investor verification priorities
- Confirm the $15.0 million quarterly operating-cash-flow figure in MD&A and reconcile it to the cash-flow statement, which presents nine-month cash flows only.
- Track financing, permits and closing conditions for the $88.0 million acquisition, including the resulting debt and purchase accounting.
- Monitor debt maturities, refinancing negotiations, available liquidity, and the status of the remaining PPP loan forgiveness.
- Assess whether revenue and margins remain strong after pandemic-related comparisons normalize, particularly Nightclubs’ year-to-date revenue, which remained below fiscal 2019.
- Follow litigation developments and remediation of the income-tax control weakness; assess potential exposure where the filing says losses cannot yet be estimated.