RCI Hospitality (RICK) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section provides RCI Hospitality Holdings, Inc.'s unaudited condensed consolidated financial statements and comprehensive explanatory notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | ASSETS/LIABILITIES AND EQUITY | June 30, 2021 (in thousands) | September 30, 2020 (in thousands) | | :------------------------------ | :--------------------------------------- | :-------------------------------- | | ASSETS | | | | Cash and cash equivalents | $29,068 | $15,605 | | Total current assets | $43,171 | $31,433 | | Total assets | $367,939 | $360,933 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $32,062 | $37,304 | | Total liabilities | $190,644 | $208,626 | | Total equity | $177,295 | $152,307 | - Total assets increased by $7.01 million from September 30, 2020, to June 30, 2021, primarily driven by an increase in cash and cash equivalents[12] - Total liabilities decreased by $17.98 million, while total equity increased by $24.99 million, indicating an improved financial position[12] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Total revenues | $57,860 | $14,721 | $140,317 | $103,541 | | Income (loss) from operations | $18,507 | $(4,657) | $34,931 | $2,554 | | Net income (loss) attributable to RCIHH common stockholders | $12,302 | $(5,474) | $28,036 | $(3,292) | | Basic and diluted EPS | $1.37 | $(0.60) | $3.11 | $(0.36) | | Dividends per share | $0.04 | $0.03 | $0.12 | $0.10 | - Total revenues for the three months ended June 30, 2021, increased by 293.0% year-over-year, and for the nine months, increased by 35.5%, primarily due to recovery from COVID-19 closures[14] - The company reported a significant turnaround from a net loss in the prior year to net income for both the three and nine months ended June 30, 2021, with EPS of $1.37 and $3.11, respectively[14] Condensed Consolidated Statements of Changes in Equity Condensed Consolidated Statements of Changes in Equity (in thousands) | Equity Component (in thousands) | Balance at September 30, 2020 | Balance at June 30, 2021 | | :------------------------------ | :---------------------------- | :----------------------- | | Common Stock | $91 | $90 | | Additional Paid-In Capital | $51,833 | $50,040 | | Retained Earnings | $100,797 | $127,753 | | Total RCIHH Stockholders' Equity | $152,721 | $177,883 | | Noncontrolling Interests | $(414) | $(588) | | Total Equity | $152,307 | $177,295 | - Total RCIHH stockholders' equity increased by $25.16 million from September 30, 2020, to June 30, 2021, primarily driven by retained earnings[16] - The company purchased and retired 74,659 common shares for approximately $1.8 million during the nine months ended June 30, 2021[16][57] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $32,217 | $12,147 | | Net cash used in investing activities | $(7,186) | $(1,024) | | Net cash used in financing activities | $(11,568) | $(10,425) | | Net increase in cash and cash equivalents | $13,463 | $698 | | Cash and cash equivalents at end of period | $29,068 | $14,795 | - Net cash provided by operating activities significantly increased by 165.2% to $32.22 million for the nine months ended June 30, 2021, compared to the prior year[19][171] - Investing activities used more cash, primarily due to increased payments for property and equipment and intangible assets ($10.79 million in 2021 vs. $5.57 million in 2020)[19][173] Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and should be read with the Annual Report on Form 10-K[21] 2. Recent Accounting Standards and Pronouncements - The Company adopted ASU 2016-13 (Credit Losses), ASU 2018-13 (Fair Value Measurement), and ASU 2019-01 (Leases) as of October 1, 2020, with no significant impact on consolidated financial statements[23][26][27] - The Company is still evaluating the impact of ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020[28] 3. Liquidity and Impact of COVID-19 Pandemic - The COVID-19 pandemic caused major disruptions, leading to significant steps to augment cash flow, including debt deferment and cost reductions[31] - The Company received PPP funding under the CARES Act for its restaurants, shared services, and lounge, and recognized approximately $1.7 million in asset impairment due to the pandemic[33][36] 4. Revenues - Revenue is recognized at the point-of-sale for alcoholic beverages, food, merchandise, and services, net of discounts[37] Revenue by Type (in thousands) | Revenue Type (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Sales of alcoholic beverages | $25,092 | $7,623 | $62,725 | $45,285 | | Sales of food and merchandise | $12,058 | $3,452 | $30,205 | $17,378 | | Service revenues | $16,880 | $2,907 | $38,442 | $34,448 | | Other | $3,830 | $739 | $8,945 | $6,430 | | Total revenues | $57,860 | $14,721 | $140,317 | $103,541 | - The Company signed a franchise development agreement in December 2020 to open three Bombshells locations in San Antonio, Texas[42] 5. Selected Account Information Selected Account Information (in thousands) | Account (in thousands) | June 30, 2021 | September 30, 2020 | | :--------------------- | :------------ | :----------------- | | Accounts receivable, net | $2,458 | $6,767 | | Prepaid expenses and other current assets | $4,062 | $6,488 | | Accrued liabilities | $11,738 | $14,573 | | Total selling, general and administrative expenses (3 months) | $14,697 | $8,908 | | Total selling, general and administrative expenses (9 months) | $39,467 | $39,889 | - Accounts receivable, net, decreased significantly from $6.77 million to $2.46 million, primarily due to a decrease in income tax refundable[44] - Accrued liabilities decreased from $14.57 million to $11.74 million, mainly due to lower insurance and interest accruals[45] 6. Assets Held for Sale - As of June 30, 2021, assets held for sale were $4.9 million, up from $0 at September 30, 2020[48] - During Q1 2021, three real estate properties were classified as held-for-sale with an aggregate estimated fair value of $7.4 million, after a $1.4 million impairment charge[49] - One property was sold for $3.1 million on May 7, 2021, with proceeds used to pay down $2.0 million in related debt[50] 7. Debt - The Company negotiated extensions on $1.69 million of notes due November 1, 2020, to November 1, 2021[52] - A new $2.175 million promissory note was borrowed on January 25, 2021, with a 3.99% initial interest rate and a 20-year term, guaranteed by the CEO[53] - PPP loans amounting to $5.3 million in principal and interest were forgiven during the nine months ended June 30, 2021, included as non-operating gains[56] 8. Equity - During the nine months ended June 30, 2021, the Company purchased and retired 74,659 common shares for approximately $1.79 million[57] - Cash dividends of $0.12 per share were paid during the nine months ended June 30, 2021, totaling approximately $1.08 million, an increase from $0.10 per share ($920 thousand) in the prior year[57][58] 9. Income Taxes Income Tax Metrics | Income Tax Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income tax expense (benefit) | $3,986 | $(1,437) | $5,540 | $(1,262) | | Effective income tax rate | 24.4% | 20.5% (benefit) | 16.6% | 26.9% (benefit) | - The effective tax rate for the nine months ended June 30, 2021, was 16.6% expense, influenced by state taxes, permanent differences, tax credits, and the impact of PPP loan forgiveness[60][63] - The Company received forgiveness for 11 out of 12 PPP loans, totaling $5.3 million in principal and interest, which impacted non-operating gains[63] 10. Commitments and Contingencies Legal Matters - The aggregate balance of the Texas Patron Tax settlement liability was $1.2 million as of June 30, 2021, down from $2.2 million at September 30, 2020[66] - A U.S. District Court ruled the Texas Patron Tax unconstitutional as applied, which the State of Texas has appealed[67] - The Company is vigorously defending against a consolidated securities class action lawsuit filed in 2019, with a trial date set for January 9, 2023[72] - A shareholder derivative action filed in 2019 was dismissed without prejudice on June 21, 2021, following the plaintiff's motion to voluntarily dismiss[75] - The Company is involved in an image infringement lawsuit and a landlord dispute, both of which are being vigorously defended and are subject to appeal processes[76][77] - The Company is a plaintiff in lawsuits challenging COVID-19 restrictions on its businesses[82] 11. Segment Information - The Company operates two principal reportable segments: Nightclubs and Bombshells, with an 'Other' category for media and energy drink divisions[86] Segment Revenues and Operating Income (Three Months Ended June 30, in thousands) | Segment (in thousands) | Revenues (3M Q2 2021) | Revenues (3M Q2 2020) | Op. Income (3M Q2 2021) | Op. Income (3M Q2 2020) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :---------------------- | | Nightclubs | $41,031 | $6,013 | $18,350 | $(3,038) | | Bombshells | $16,077 | $8,531 | $4,404 | $1,850 | | Other | $752 | $177 | $321 | $(92) | | General corporate | N/A | N/A | $(4,568) | $(3,377) | | Total | $57,860 | $14,721 | $18,507 | $(4,657) | Segment Revenues and Operating Income (Nine Months Ended June 30, in thousands) | Segment (in thousands) | Revenues (9M Q2 2021) | Revenues (9M Q2 2020) | Op. Income (9M Q2 2021) | Op. Income (9M Q2 2020) | | :--------------------- | :-------------------- | :-------------------- | :---------------------- | :---------------------- | | Nightclubs | $97,015 | $75,239 | $37,313 | $13,002 | | Bombshells | $42,218 | $27,684 | $10,263 | $4,109 | | Other | $1,084 | $618 | $107 | $(423) | | General corporate | N/A | N/A | $(12,752) | $(14,134) | | Total | $140,317 | $103,541 | $34,931 | $2,554 | 12. Related Party Transactions - CEO Eric Langan personally guarantees all commercial bank indebtedness of the Company, totaling $81.6 million as of June 30, 2021[92] - Related parties, including an employee (brother of a director) and a brother of the CFO, hold notes totaling $600 thousand as part of a larger private lender group[93] - The Company utilized Nottingham Creations (owned by Eric Langan's brother) for furniture fabrication and TW Mechanical LLC (partially owned by Eric Langan's son-in-law) for plumbing and HVAC services, with billings of $118.09 thousand and $388.18 thousand respectively for the nine months ended June 30, 2021[94][95] 13. Leases Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Operating lease expense – fixed payments | $828 | $839 | $2,485 | $2,519 | | Variable lease expense | $47 | $158 | $155 | $288 | | Short-term equipment and other lease expense | $296 | $97 | $843 | $856 | | Sublease income | $(2) | $(2) | $(5) | $(8) | | Total lease expense, net | $1,169 | $1,092 | $3,478 | $3,655 | - The weighted average remaining lease term is 12 years, with a weighted average discount rate of 6.0% as of June 30, 2021[98] 14. Subsequent Events - On July 23, 2021, the Company entered into definitive agreements to acquire eleven gentlemen's clubs, six related real estate properties, and associated intellectual property for a total of $88.0 million[99] - The acquisition is subject to permit transfers, bank financing, and other customary closing conditions[99] - The Company is negotiating with its bank lender to refinance existing real estate debt and partially finance the real estate purchases related to the acquisition[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, COVID-19 recovery, liquidity, and strategic growth Overview - RCI Hospitality Holdings, Inc. operates 48 establishments (adult entertainment and restaurants/bars) and a business communications company for the adult nightclubs industry[105] - The Company has two principal reportable segments: Nightclubs and Bombshells, with other operating segments combined into 'Other'[105] Impact of COVID-19 Pandemic - COVID-19 heavily impacted businesses through temporary closures and restrictions, leading to a 293.0% increase in total revenues for the three months ended June 30, 2021, compared to the prior year's pandemic-affected period[106] - The Company implemented debt deferments, payroll cost reductions, and expense modifications to mitigate anticipated declines in operating cash flows[107] Critical Accounting Policies and Estimates - Management's estimates and assumptions are crucial for financial statements, based on historical experience and reasonable forecasts, with actual results potentially differing[110] - No significant changes in accounting policies or estimates occurred during the three and nine months ended June 30, 2021, other than newly adopted accounting standards disclosed in Note 2[112] Results of Operations Highlights of the Company's operating results Operating Results Highlights | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 9 Months Ended June 30, 2021 | 9 Months Ended June 30, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Revenues | $57.9 million (↑293.0%) | $14.7 million | $140.3 million (↑35.5%) | $103.5 million | | Nightclubs Revenue | $41.0 million (↑582.4%) | $6.0 million | $97.0 million (↑28.9%) | $75.2 million | | Bombshells Revenue | $16.1 million (↑88.5%) | $8.5 million | $42.2 million (↑52.5%) | $27.7 million | | Basic & Diluted EPS | $1.37 | $(0.60) | $3.11 | $(0.36) | | Net Cash from Operations | $15.0 million (↑8,918.7%) | $166,000 | $32.2 million (↑165.2%) | $12.1 million | - Compared to pre-pandemic fiscal 2019, total revenues increased by 23.0% for the quarter and 3.3% year-to-date, driven by strong Bombshells growth[114][116] Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Three Months Ended June 30, 2021 vs 2020 (in thousands) | Metric (in thousands) | Q3 2021 Amount | Q3 2021 % of Revenues | Q3 2020 Amount | Q3 2020 % of Revenues | Change Amount | Change % | | :-------------------- | :------------- | :-------------------- | :------------- | :-------------------- | :------------ | :------- | | Total Revenues | $57,860 | 100.0% | $14,721 | 100.0% | $43,139 | 293.0% | | Total Operating Expenses | $39,353 | 68.0% | $19,378 | 131.6% | $(19,975) | (103.1)% |\ | Income (Loss) from Operations | $18,507 | 32.0% | $(4,657) | (31.6)% | $23,164 | 497.4% | | Net Income (Loss) | $12,321 | 21.3% | $(5,568) | (37.8)% | $17,889 | 321.3% | - Nightclubs revenues increased by 582.4% due to prior year closures, and 8.3% compared to pre-pandemic Q3 2019, driven by alcoholic beverages and food/merchandise sales[118] - Bombshells revenues increased by 88.5% year-over-year and 83.6% compared to Q3 2019, primarily due to two new locations[119] - Operating expenses as a percentage of revenues decreased significantly from 131.6% to 68.0%, mainly due to higher sales and a shift to higher-margin service revenues[120][121] Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020 Nine Months Ended June 30, 2021 vs 2020 (in thousands) | Metric (in thousands) | 9M 2021 Amount | 9M 2021 % of Revenues | 9M 2020 Amount | 9M 2020 % of Revenues | Change Amount | Change % | | :-------------------- | :------------- | :-------------------- | :------------- | :-------------------- | :------------ | :------- | | Total Revenues | $140,317 | 100.0% | $103,541 | 100.0% | $36,776 | 35.5% | | Total Operating Expenses | $105,386 | 75.1% | $100,987 | 97.5% | $(4,399) | (4.4)% |\ | Income from Operations | $34,931 | 24.9% | $2,554 | 2.5% | $32,377 | 1,267.7% |\ | Net Income (Loss) | $27,862 | 19.9% | $(3,427) | (3.3)% | $31,289 | 913.0% | - Nightclubs revenues increased by 28.9% year-over-year but decreased by 13.9% compared to pre-pandemic 9M 2019, due to early fiscal 2021 restrictions[136] - Bombshells revenues increased by 52.5% year-over-year and 89.4% compared to 9M 2019, driven by new locations[137] - Operating expenses as a percentage of revenues decreased from 97.5% to 75.1%, primarily due to higher sales and lower impairment charges in the current period[139][144] Non-GAAP Financial Measures - Management uses non-GAAP measures like Non-GAAP Operating Income, Non-GAAP Net Income, Non-GAAP Net Income per Diluted Share, and Adjusted EBITDA to provide a clearer understanding of ongoing business operations[153][154][155] Non-GAAP Financial Metrics (in thousands, except per share) | Non-GAAP Metric (in thousands, except per share) | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 9 Months Ended June 30, 2021 | 9 Months Ended June 30, 2020 | | :----------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Adjusted EBITDA | $20,402 | $(1,904) | $42,675 | $17,973 | | Non-GAAP Net Income (Loss) | $12,240 | $(6,772) | $22,560 | $3,362 | | Non-GAAP Diluted EPS | $1.36 | $(0.74) | $2.50 | $0.36 | | Non-GAAP Operating Income (Loss) | $18,415 | $(4,084) | $36,428 | $11,604 | - Adjusted EBITDA increased significantly to $42.68 million for the nine months ended June 30, 2021, from $17.97 million in the prior year, reflecting improved operating performance[158] Liquidity and Capital Resources Cash Flows from Operating Activities Operating Cash Flow (in thousands) | Operating Cash Flow (in thousands) | 9 Months Ended June 30, 2021 | 9 Months Ended June 30, 2020 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $27,862 | $(3,427) | | Depreciation and amortization | $6,197 | $6,696 | | Gain on debt extinguishment | $(5,298) | $- | | Impairment of assets | $1,672 | $9,192 | | Net cash provided by operating activities | $32,217 | $12,147 | - Net cash provided by operating activities increased by 165.2% to $32.22 million, driven by higher income from operations and lower income taxes paid[171] Cash Flows from Investing Activities Investing Cash Flow (in thousands) | Investing Cash Flow (in thousands) | 9 Months Ended June 30, 2021 | 9 Months Ended June 30, 2020 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Payments for property and equipment and intangible assets | $(10,788) | $(5,565) | | Proceeds from sale of businesses and assets | $3,213 | $2,041 | | Net cash used in investing activities | $(7,186) | $(1,024) | - Capital expenditures for new facilities increased to $6.18 million (from $3.45 million), primarily for a new Bombshells location, a renovated club, and a liquor license[173] - Maintenance capital expenditures also increased to $4.61 million (from $2.11 million)[173] Cash Flows from Financing Activities Financing Cash Flow (in thousands) | Financing Cash Flow (in thousands) | 9 Months Ended June 30, 2021 | 9 Months Ended June 30, 2020 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Proceeds from debt obligations | $2,176 | $6,503 | | Payments on debt obligations | $(10,845) | $(7,489) | | Purchase of treasury stock | $(1,794) | $(8,488) | | Payment of dividends | $(1,080) | $(920) | | Net cash used in financing activities | $(11,568) | $(10,425) | - The Company purchased fewer treasury shares ($1.79 million vs. $8.49 million) and paid higher dividends ($1.08 million vs. $920 thousand) compared to the prior year[177][178] - Free cash flow, calculated as net cash from operating activities less maintenance capital expenditures, increased by 175.1% to $27.6 million[179][180] Share Repurchase - The Company repurchased 74,659 shares of common stock at an average price of $24.03 during the nine months ended June 30, 2021[184] - Approximately $9.0 million remains authorized for additional share repurchases as of June 30, 2021[184] Impact of Inflation - The Company has not experienced a material overall impact from inflation in recent years and has managed to recover increased costs through price increases[185] Seasonality - Nightclub operations are seasonal, with reduced revenues from April through September (fiscal Q3 and Q4) and strongest results from October through March (fiscal Q1 and Q2)[186] - Bombshells revenues are also affected by sporting events, causing unusual sales changes[186] Capital Allocation Strategy Growth Strategy - The growth strategy includes acquiring existing units, opening new units, franchising the Bombshells brand, forming joint ventures, developing new club concepts, and controlling real estate[188] - The Company aims for a minimum cash-on-cash return of 25%-33% on new club or restaurant developments/acquisitions[192] Nightclubs - Nightclub operations are expected to grow organically and through acquisitions in high-growth potential markets[189][190] Bombshells - Bombshells aims for organic growth and expansion into new markets, with all ten existing locations in Texas as of June 30, 2021[191] - The Company is increasing efforts in Bombshells franchising, having signed its first franchisee in San Antonio, Texas, in December 2020[192] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes to market risk disclosures were reported compared to the prior fiscal year's Annual Report on Form 10-K - No material changes to market risk disclosures were reported as of June 30, 2021, compared to the prior fiscal year's 10-K[193] Item 4. Controls and Procedures This section addresses disclosure controls, internal control over financial reporting, income tax material weakness, and remediation Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to a previously identified material weakness in internal control over financial reporting[195] Previously Reported Material Weakness in Internal Control Over Financial Reporting - A material weakness was identified in internal control over financial reporting as of September 30, 2020, specifically concerning the design and implementation of controls over the income tax provision[196] Remediation Efforts to Address Material Weakness - Remediation efforts include enhancing the risk assessment process for income tax provision controls, implementing enhanced review controls by senior accounting management, and retaining a new third-party income tax consultant[197][198] Changes in Internal Control Over Financial Reporting - No other material changes in internal control over financial reporting occurred during the quarter ended June 30, 2021, beyond the described remediation efforts[199] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, exhibits, and report signatures Item 1. Legal Proceedings This section incorporates by reference detailed legal matters from Note 10 of the financial statements - Legal proceedings information is incorporated by reference from Note 10 of the financial statements[201] Item 1A. Risk Factors No material changes to risk factors were reported, except for additional legal disclosures and franchising risks - No material changes to risk factors were disclosed, except for those arising from additional legal matters (Note 10) and risks associated with franchising operations[202] - Risks associated with franchising include potential negative impacts on brand values if franchisees do not operate consistently with company standards[203] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock during the quarter, with remaining authorization for future repurchases - No common stock shares were repurchased during the three months ended June 30, 2021[204] - As of August 4, 2021, approximately $9.0 million remains authorized for additional share repurchases[204] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL documents - Exhibits include CEO and CFO certifications (Rule 13a-14(1) or 15d-14(a), Section 906 of Sarbanes-Oxley Act) and various XBRL taxonomy documents[206] Signatures This section contains the signatures of the CEO and CFO, certifying the filing of the report - The report is signed by Eric S. Langan, CEO and President, and Bradley Chhay, CFO and Principal Accounting Officer, on August 5, 2021[209]