RCI Hospitality (RICK) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The company's financial statements for Q1 FY2022 show significant growth in assets, revenues, and net income, primarily driven by strategic acquisitions and pandemic recovery Condensed Consolidated Balance Sheets Total assets increased to $465.7 million, driven by acquisitions, while liabilities and equity also grew significantly Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Total Assets | $465,678 | $364,619 | | Cash and cash equivalents | $17,954 | $35,686 | | Goodwill | $54,484 | $39,379 | | Intangibles, net | $125,314 | $67,824 | | Total Liabilities | $245,909 | $185,396 | | Debt, net of current portion | $152,847 | $118,734 | | Total Equity | $219,769 | $179,223 | Condensed Consolidated Statements of Income Total revenues increased 61.0% to $61.8 million, leading to a 141.7% rise in operating income and $10.6 million net income Quarterly Income Statement Highlights (in thousands, except per share data) | Metric | Q1 FY2022 (ended Dec 31, 2021) | Q1 FY2021 (ended Dec 31, 2020) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $61,836 | $38,398 | 61.0% | | Income from Operations | $15,911 | $6,583 | 141.7% | | Net Income Attributable to RCIHH | $10,575 | $9,643 | 9.7% | | Diluted EPS | $1.12 | $1.07 | 4.7% | | Dividends per share | $0.04 | $0.04 | 0.0% | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased to $16.3 million, but cash decreased by $17.7 million due to substantial investing activities for acquisitions Summary of Cash Flows (in thousands) | Activity | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,264 | $6,274 | | Net cash used in investing activities | ($48,130) | ($1,013) | | Net cash provided by (used in) financing activities | $14,134 | ($3,899) | | Net (Decrease) Increase in Cash | ($17,732) | $1,362 | - A significant non-cash transaction was the issuance of 500,000 shares of common stock valued at $30.4 million as partial payment for the acquisition of businesses[20] Notes to Condensed Consolidated Financial Statements Notes detail the $88.4 million acquisition of eleven clubs, new debt financing, and a pending shareholder lawsuit settlement - On October 18, 2021, the company acquired eleven gentlemen's clubs and six real estate properties for a total preliminary fair value of $88.4 million, paid with $36.8 million in cash, $21.2 million in seller-financed notes, and 500,000 shares of common stock valued at $30.4 million[38][63] - The company closed a $17.0 million debt financing transaction with 28 investors for unsecured promissory notes bearing 12% interest[57] - In January 2022, the parties in a shareholder class action lawsuit reached an agreement-in-principle to resolve the matter, which is now pending court approval[78] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q1 revenue growth of 61.0% to $61.8 million, improved operating margin, and the strategic $88.4 million acquisition Results of Operations Q1 2022 revenues increased 61.0% to $61.8 million, driven by strong Nightclubs and Bombshells segment growth and improved operating margin Segment Revenue Performance (in thousands) | Segment | Q1 FY2022 Revenue | Q1 FY2021 Revenue | Change (%) | | :--- | :--- | :--- | :--- | | Nightclubs | $46,781 | $25,197 | 85.7% | | Bombshells | $14,771 | $13,006 | 13.6% | | Total | $61,836 | $38,398 | 61.0% | - Consolidated same-store sales increased by 21.8%, with Nightclubs up 30.6% and Bombshells up 7.6%[114] Non-GAAP Performance Measures (in thousands, except per share data) | Metric | Q1 FY2022 | Q1 FY2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $17,965 | $8,690 | | Non-GAAP Net Income | $10,352 | $3,537 | | Non-GAAP Diluted EPS | $1.10 | $0.39 | Liquidity and Capital Resources Cash decreased to $18.0 million due to acquisitions, despite strong free cash flow of $15.3 million, with new debt secured post-quarter - The company paid for an $88.4 million acquisition with $36.8 million in cash, $21.2 million in seller-financed notes, and 500,000 shares of common stock[148] Free Cash Flow (in thousands) | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,264 | $6,274 | | Less: Maintenance capital expenditures | $998 | $605 | | Free cash flow | $15,266 | $5,669 | - In January 2022, the company borrowed $18.7 million from a bank lender for working capital purposes, secured by eleven real estate properties[149] Capital Allocation Strategy The capital allocation strategy prioritizes acquisitions with 25%-33% cash-on-cash returns, debt reduction, and potential share buybacks - The company targets acquisitions or developments that are expected to provide a minimum cash-on-cash return of 25%-33%[171] - The company considers buying back its own stock if the after-tax yield on free cash flow is above 10%[171] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures were reported as of December 31, 2021, compared to the prior annual report - There were no material changes to the information regarding market risk from the company's most recent Annual Report on Form 10-K[172] Controls and Procedures Disclosure controls and procedures were deemed ineffective due to a material weakness in impairment testing, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[174] - The ineffectiveness is due to a material weakness related to the design and implementation of controls over estimates for the impairment of goodwill, indefinite-lived intangibles, and long-lived assets[175] - Remediation efforts are underway, including adding controls to increase the precision of the review of assumptions used in the impairment valuation model[176] PART II OTHER INFORMATION Legal Proceedings Legal proceedings include an ongoing Patron Tax dispute and a pending settlement for a shareholder class action lawsuit - This section incorporates by reference the 'Legal Matters' section from Note 10 of the financial statements[180] Risk Factors No material changes to risk factors were reported, except for potential risks from legal matters disclosed in Note 10 - There were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021[181] Unregistered Sales of Equity Securities and Use of Proceeds No common stock was repurchased during the quarter, with approximately $9.0 million remaining for future share purchases - The company did not repurchase any shares of its common stock during the quarter[182] - As of February 7, 2022, approximately $9.0 million remained authorized for future share purchases[182] Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications and XBRL data files - Lists required certifications from the CEO and CFO, as well as XBRL data files, filed as exhibits to the report[183]