RCI Hospitality (RICK) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Q2 and H1 2024 and 2023, including balance sheets, income, and cash flows Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Total Assets | $609,893 | $610,884 | | Cash and cash equivalents | $19,973 | $21,023 | | Total current assets | $42,032 | $37,473 | | Goodwill | $67,862 | $70,772 | | Total Liabilities | $324,394 | $329,560 | | Current portion of debt obligations | $25,072 | $22,843 | | Debt, net of current portion | $206,853 | $216,908 | | Total Equity | $285,499 | $281,324 | Condensed Consolidated Statements of Income Highlights (in thousands, except EPS) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $72,283 | $71,517 | $146,190 | $141,485 | | Income from Operations | $4,657 | $13,427 | $17,822 | $30,325 | | Net Income Attributable to RCIHH | $774 | $7,732 | $8,000 | $17,970 | | Basic and Diluted EPS | $0.08 | $0.83 | $0.85 | $1.94 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended Mar 31, 2024 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,469 | $31,684 | | Net cash used in investing activities | $(12,686) | $(48,076) | | Net cash provided by (used in) financing activities | $(12,833) | $3,196 | | Net Decrease in Cash | $(1,050) | $(13,196) | - During the quarter ended March 31, 2024, the company recorded asset impairments totaling $8.0 million, including $4.4 million in SOB license impairment, $2.9 million in goodwill impairment, and $0.7 million in tradename impairment[47] - Subsequent to the quarter end, on April 30, 2024, the company entered into a new $20.0 million term loan for additional working capital with a 10-year term and an initial interest rate of 8.25%[84] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 fiscal 2024 financial results, highlighting revenue changes, increased operating expenses, and liquidity status Results of Operations Q2 2024 revenues increased 1.1% YoY to $72.3 million, driven by acquisitions but offset by same-store sales declines, impacting profitability Q2 FY2024 Performance Highlights vs. Q2 FY2023 | Metric | Q2 2024 | Q2 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $72.3M | $71.5M | +1.1% | | Nightclubs Revenue | $59.4M | $57.0M | +4.1% | | Bombshells Revenue | $12.8M | $14.3M | -10.8% | | Consolidated Same-Store Sales | -8.6% | N/A | N/A | | Basic and Diluted EPS | $0.08 | $0.83 | -90.4% | | Non-GAAP Diluted EPS | $0.90 | $1.30 | -30.8% | - For the six months ended March 31, 2024, consolidated revenues increased 3.3% YoY, driven by a $19.6 million increase from new clubs and openings, but partially offset by a $12.3 million negative impact from declining same-store sales[96] - Total operating expenses as a percentage of revenue increased to 93.6% in Q2 2024 from 81.2% in Q2 2023, primarily due to higher costs, wage inflation, and significant asset impairment charges of $8.0 million[103][47] Segment Operating Income (in thousands) | Segment | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Nightclubs | $11,021 | $17,995 | $31,390 | $40,735 | | Bombshells | $699 | $1,775 | $785 | $3,622 | | Total Income from Operations | $4,657 | $13,427 | $17,822 | $30,325 | Non-GAAP Financial Measures The company utilizes non-GAAP metrics such as Adjusted EBITDA and Non-GAAP Net Income to provide a clearer view of core operational performance Reconciliation of GAAP Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to RCIHH | $774 | $7,732 | $8,000 | $17,970 | | Adjustments (Taxes, Interest, D&A, etc.) | $16,458 | $13,958 | $26,699 | $24,179 | | Adjusted EBITDA | $17,232 | $21,690 | $34,699 | $42,149 | Reconciliation of GAAP to Non-GAAP Diluted EPS | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | GAAP diluted EPS | $0.08 | $0.83 | $0.85 | $1.94 | | Adjustments (per share) | $0.82 | $0.47 | $0.91 | $0.56 | | Non-GAAP diluted EPS | $0.90 | $1.30 | $1.76 | $2.50 | Liquidity and Capital Resources As of March 31, 2024, the company held $20.0 million in cash and had negative working capital, with net cash from operations decreasing - Cash and cash equivalents stood at $20.0 million as of March 31, 2024, compared to $21.0 million at September 30, 2023, with the company having negative working capital of $14.4 million[127] Free Cash Flow Reconciliation (in thousands) | Metric | Six Months Ended Mar 31, 2024 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,469 | $31,684 | | Less: Maintenance capital expenditures | $2,994 | $3,885 | | Free cash flow | $21,475 | $27,799 | - During the six months ended March 31, 2024, the company repurchased 65,219 shares of its common stock for $3.6 million at an average price of $55.23 per share[132] Capital Allocation Strategy The company's capital allocation strategy uses free cash flow to guide investment decisions, prioritizing acquisitions, stock repurchases, and debt reduction - The company's capital allocation strategy prioritizes investments based on specific return thresholds and market conditions: acquire/develop clubs/restaurants with a 25%-33% minimum cash-on-cash return, buy back stock if the after-tax free cash flow yield is above 10%, dispose of underperforming units, and pay down expensive debt when strategically advantageous[144] - The growth strategy includes acquiring existing nightclubs and developing the Bombshells restaurant concept to diversify operations, as these units do not require difficult-to-obtain SOB licenses[142][143] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to the market risk disclosures from its Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - There were no material changes to the information regarding market risk from the company's last Annual Report on Form 10-K[145] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of March 31, 2024, due to material weaknesses in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2024[147] - The ineffectiveness is due to previously reported material weaknesses in internal controls related to: (1) accounting for business combinations, (2) impairment of goodwill and other assets, and (3) ineffective IT general controls (ITGCs)[148] - Remediation efforts are underway, including enhancing management review precision, engaging third-party consultants for valuation, and strengthening IT controls, with completion expected by the end of fiscal 2024[149][150][151][153] PART II OTHER INFORMATION Legal Proceedings This section incorporates by reference the 'Legal Matters' discussion from Note 9 of the financial statements, detailing ongoing litigation - The company is involved in several legal matters, detailed in Note 9 of the financial statements, including a challenge to the Texas Patron Tax, issues from the 2014 liquidation of its former insurer IIC, and a shareholder derivative action that has an agreement in principle to settle[156][64][67][69] Risk Factors The company reports no material changes to the risk factors disclosed in its most recent Annual Report on Form 10-K, other than potential risks from legal proceedings - 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, 2023[157] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity for the three months ended March 31, 2024, with 27,265 shares repurchased Share Repurchase Activity (Q2 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2024 | — | — | | February 2024 | 13,712 | $56.65 | | March 2024 | 13,553 | $55.59 | | Total | 27,265 | $56.12 | Exhibits This section lists the exhibits filed with the Form 10-Q, primarily including CEO and CFO certifications and financial statements in Inline XBRL - Filed exhibits include CEO and CFO certifications (Rule 13a-14(1) and Section 906 of Sarbanes-Oxley) and financial data in Inline XBRL format[160]