RCI Hospitality Holdings, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The filing was signed December 14, 2021. RCIHH operates adult entertainment clubs, Bombshells restaurants and bars, and related media and other businesses. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context and results
At fiscal year-end, subsidiaries operated 48 establishments, including two temporarily closed locations. The company reported Nightclubs and Bombshells as its primary segments, with media and other operations reported as Other.
| Metric | FY2021 | FY2020 | FY2019 |
|---|---|---|---|
| Revenue | $195.3 million | $132.3 million | $181.1 million |
| Income (loss) from operations | $38.5 million | $2.7 million | $34.7 million |
| Operating margin | 19.7% | 2.1% | 19.2% |
| Net income (loss) | $30.2 million | $(6.3) million | $20.4 million |
| Net income (loss) attributable to RCIHH common stockholders | $30.3 million | $(6.1) million | $20.3 million |
| Diluted earnings (loss) per share | $3.37 | $(0.66) | $2.10 |
| Net cash provided by operating activities | $42.0 million | $15.6 million | $37.2 million |
| Free cash flow, company-defined non-GAAP | $36.1 million | $13.5 million | $33.3 million |
| Adjusted EBITDA, company-defined non-GAAP | $60.2 million | $22.4 million | $46.2 million |
Financial position, liquidity and debt
- Cash and cash equivalents were $35.7 million at September 30, 2021, up from $15.6 million a year earlier. Working capital was $26.1 million, compared with negative $5.9 million in 2020.
- Gross debt was $126.8 million at year-end, compared with $142.7 million in 2020; the MD&A reports period-end debt of $125.2 million. The balance sheet shows $118.7 million of debt, net of current portion and debt discount/issuance costs, plus $6.4 million current debt.
- On September 30, 2021, RCIHH closed a $99.1 million, 10-year refinancing note at an initial 5.25% rate for five years, then subject to adjustment. It refinanced $85.7 million of existing real-estate debt and provided $12.3 million in cash for repayment of higher-interest unsecured debt.
- The company had no unused credit facilities and stated that additional borrowing might not be available on favorable terms. It reported compliance with debt covenants at September 30, 2021.
- Cash flows were $42.0 million from operations, $(6.8) million from investing, and $(15.1) million from financing. Capital expenditures were $13.5 million, including $5.9 million of maintenance spending.
Material changes versus comparable periods
- Revenue rose 47.6% from FY2020 and was 7.8% above FY2019. Management attributed the rebound principally to reopening and recovery in customer traffic as pandemic-related restrictions eased. FY2020 revenue had fallen 26.9% from FY2019.
- Nightclubs revenue increased 55.4% year over year to $137.3 million; segment operating income was $43.8 million. Same-store sales were down 2.1% excluding pandemic-closure effects, but management’s adjusted measure including those effects showed a 59.2% increase.
- Bombshells revenue increased 31.0% to $56.6 million, with segment operating income of $13.3 million. Same-store sales were up 7.7% excluding pandemic-closure effects and 24.8% on the company’s adjusted basis.
- Operating cash flow and free cash flow more than doubled from FY2020. Results also exceeded FY2019 levels for revenue, net income and free cash flow, according to management.
- Operating margin recovered to 19.7% from 2.1% in FY2020. However, FY2021 included $13.6 million of asset impairment charges, versus $10.6 million in FY2020.
Guidance, outlook, risks and unusual items
- Outlook: The company provided no specific numerical revenue or earnings guidance. Management said it expected adequate operating cash flows for the 12 months following the report, while cautioning that the future duration and effects of COVID-19 were uncertain. Its stated growth plans include club acquisitions, new restaurant development and Bombshells franchising.
- Subsequent acquisitions and financing: On October 18, 2021, the company completed an $88.0 million agreed-price acquisition of 11 clubs, six related real estate properties and intellectual property. Consideration included $36.8 million cash, $21.2 million in seller notes and 500,000 common shares. It separately borrowed $17.0 million at 12% from private investors on October 12, 2021. On November 8, 2021, it acquired a club and real estate for $3.5 million. These post-year-end transactions were not included in FY2021 results.
- Unusual earnings items: FY2021 non-operating gains included approximately $5.3 million of PPP loan forgiveness, principally for 11 loans; a partial forgiveness of the remaining loan was received after year-end. The company also recorded $13.6 million of impairments: $6.3 million goodwill, $5.3 million club licenses and approximately $2.0 million property and equipment. A $1.3 million insurance gain and $1.3 million of lawsuit settlements also affected results.
- FY2021 fourth quarter: Revenue was $54.9 million, operating income $3.6 million, net income attributable to RCIHH stockholders $2.3 million and diluted EPS $0.26. The quarter included $11.9 million of asset impairments and a $1.0 million insurance gain; these items materially affected reported quarterly earnings.
- Internal controls: Management concluded internal control over financial reporting and disclosure controls were not effective at September 30, 2021 because of a material weakness in controls over assumptions used in impairment analyses. The independent auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. The company reported that a prior material weakness concerning income-tax review had been remediated and described a plan to address the current weakness.
- Principal risks: COVID-19 disruptions and restrictions; availability and cost of financing and covenant compliance; local licensing, zoning and alcohol regulations; potential reclassification of entertainers from independent contractors to employees; impairment risk; competition, consumer spending and seasonality; cyber and data-security events; acquisition integration; and franchise execution.
- Contingencies: A consolidated securities class action remained pending; the company said a potential loss could not yet be estimated and intended to defend the case. The Texas Patron Tax ruling was appealed by the state. Other disclosed matters included an image-infringement suit and a dram-shop case awaiting further proceedings. Management stated it did not believe material loss beyond recorded accruals was reasonably possible for asserted legal and other claims, while noting litigation outcomes are uncertain.
- Other capital allocation terms: The September 2021 refinancing permits a quarterly dividend of $0.04 per share unless debt-service coverage falls below 1.4x for three consecutive quarters, in which case dividends must be suspended. The company paid $1.4 million in FY2021 dividends.
Most important facts for investors to verify
- Whether the post-year-end club acquisitions deliver expected operating results and how their cash, seller-note and share consideration affect leverage, interest expense and dilution.
- Whether post-pandemic revenue and margins remain sustainable, especially given seasonality and the company’s warning that restrictions and consumer behavior may change.
- Progress in remediating the material weakness in impairment controls, and whether subsequent filings report effective controls.
- Debt maturities, refinancing terms, covenant headroom and liquidity availability, including the 12% private-investor borrowing and seller-financed acquisition debt.
- Developments in the pending legal matters and regulatory or labor-classification risks, including their potential financial exposure.