RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2019 (the company’s fiscal first quarter of 2020). Comparisons are with the three months ended December 31, 2018. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted.
Business context and results
RCI operated 47 establishments, including adult nightclubs and Bombshells restaurants and bars, as well as related businesses. Nightclubs and Bombshells are its principal reportable segments.
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $48.4 million | $44.0 million | +9.9% |
| Operating income / margin | $9.7 million / 20.0% | $11.1 million / 25.3% | Income down 13.0% |
| Net income | $5.6 million | $6.4 million | Down 12.0% |
| GAAP diluted EPS | $0.60 | $0.65 | Down 7.7% |
| Adjusted EBITDA (non-GAAP) | $11.9 million | $12.0 million | Down 1.4% |
| Operating cash flow | $10.3 million | $11.5 million | Down 10.3% |
| Free cash flow (non-GAAP) | $9.3 million | $11.1 million | Down 16.5% |
Financial position, cash flow and capital allocation
- Cash was $13.2 million at December 31, 2019, versus $14.1 million at September 30, 2019. Cash decreased $0.9 million during the quarter.
- Management reported negative working capital of $7.3 million, excluding assets held for sale, compared with negative $2.3 million at September 30, 2019. Current assets included $4.8 million of assets held for sale.
- Reported debt was approximately $141.8 million, down 7.4% from the prior-year quarter-end. The balance sheet also reported $28.3 million of operating lease liabilities following adoption of the new lease standard.
- Operating cash flow was $10.3 million; investing activities used $2.7 million, including $4.1 million of capital expenditures; financing activities used $8.5 million. Financing included $6.4 million spent to repurchase 332,671 shares and $0.3 million in dividends.
- The company paid a $0.03-per-share dividend. In February 2020, the board authorized another $10 million for repurchases; $13.8 million remained available under the program as of February 25.
Material changes and management commentary
- Revenue growth reflected a 72.1% increase in Bombshells revenue to $10.4 million, while Nightclubs revenue was nearly flat at $37.9 million. Same-store sales rose 19.2% at Bombshells and fell 1.8% at Nightclubs; consolidated same-store sales increased 0.7%.
- Operating expenses rose 17.7% to $38.7 million, faster than revenue. SG&A increased 17.9%, with higher accounting and professional fees partly attributed to an external-auditor re-audit, as well as increased taxes and permits, marketing, utilities and maintenance. The prior-year quarter included $1.1 million of net gains, principally from asset and business sales, versus $26,000 of net gains in the current quarter.
- Management attributed Nightclubs’ same-store decline partly to fewer weeks between Thanksgiving and Christmas. Bombshells benefited from the pro baseball championship series and new units. Seasonal patterns generally make October through March stronger for Nightclubs.
- Management said the near-term outlook remained strong and expected substantial operating cash flow over the next 12 months, but provided no quantified earnings or revenue guidance. It described cash generation as providing flexibility to meet financial commitments.
- A $15 million acquisition of a gentlemen’s club and related real estate in the Northeast Corridor was pending at the report date, subject to conditions. Proposed financing included $4 million of seller financing and an anticipated $11 million bank loan.
- In February 2020, two 12% notes were restructured into 10-year notes with monthly payments, eliminating scheduled balloon payments of $4.0 million in August 2021 and $3.8 million in October 2021. These subsequent events occurred after quarter-end.
- Adoption of ASC 842 on October 1, 2019 added $27.3 million of right-of-use assets and $28.6 million of lease liabilities at adoption; management said adoption did not affect quarterly income or cash flows.
Risks, contingencies and controls
- The company disclosed that its disclosure controls were not effective at December 31, 2019 due to a previously reported material weakness involving financial statement review and close controls, journal-entry review, related-party disclosures and loss-contingency accounting. Remediation was underway but not yet considered complete.
- The filing’s cover-page response indicates the company had not filed all required Exchange Act reports during the preceding 12 months. The company also identified regaining and maintaining SEC and Nasdaq filing compliance as a risk.
- An SEC matter had become a formal investigation. The company said it could not predict its duration, outcome or costs, and that potential penalties or other relief could materially affect the business. A consolidated securities class action and a shareholder derivative action were also pending; potential losses could not yet be estimated.
- Other disclosed matters included a $1.0 million adverse judgment under appeal in a lease dispute, a dram-shop case remanded for a new trial, an image-infringement lawsuit with an unresolved insurance-coverage issue, and ongoing Texas Patron Tax litigation. The filing does not provide a clear estimate of total potential exposure across these matters.
- Management cited risks associated with regulation and operation of adult businesses, competition, entertainer classification, real estate conditions, cybersecurity, key personnel and access to financing. It said it had plans to protect profitability if entertainers were required to become employees.
Important facts for investors to verify
- Whether required SEC filings and Nasdaq compliance issues were resolved, and whether the disclosed material weakness was remediated and controls tested successfully.
- Developments and potential financial exposure from the SEC investigation, securities and derivative actions, and other significant litigation.
- Completion and financing terms of the pending $15 million acquisition, and the effect of the February 2020 debt restructurings on interest costs and liquidity.
- Whether Bombshells’ strong same-store growth can continue and Nightclubs’ performance improves, while monitoring expense growth and operating margins.
- How cash flow, negative working capital, debt service, lease obligations and continued share repurchases affect liquidity and capital allocation.