Item
1. Financial Statements.
RCI
HOSPITALITY HOLDINGS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except par value)
|
|
March 31, 2017
|
|
|
September 30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,199
|
|
|
$
|
11,327
|
|
Accounts receivables, net
|
|
|
2,526
|
|
|
|
4,365
|
|
Inventories
|
|
|
2,060
|
|
|
|
2,019
|
|
Prepaid expenses and other current assets
|
|
|
3,195
|
|
|
|
4,005
|
|
Assets held for sale
|
|
|
5,472
|
|
|
|
7,671
|
|
Total current assets
|
|
|
26,452
|
|
|
|
29,387
|
|
Property and equipment, net
|
|
|
144,571
|
|
|
|
142,003
|
|
Notes receivable
|
|
|
4,745
|
|
|
|
4,800
|
|
Goodwill
|
|
|
45,921
|
|
|
|
45,921
|
|
Intangibles, net
|
|
|
52,103
|
|
|
|
52,189
|
|
Other assets
|
|
|
2,267
|
|
|
|
2,188
|
|
Total assets
|
|
$
|
276,059
|
|
|
$
|
276,488
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,194
|
|
|
$
|
1,701
|
|
Accrued liabilities
|
|
|
10,402
|
|
|
|
12,806
|
|
Current portion of long-term debt
|
|
|
12,197
|
|
|
|
9,950
|
|
Total current liabilities
|
|
|
24,793
|
|
|
|
24,457
|
|
Deferred tax liability
|
|
|
25,470
|
|
|
|
25,470
|
|
Long-term debt
|
|
|
90,103
|
|
|
|
95,936
|
|
Other long-term liabilities
|
|
|
593
|
|
|
|
483
|
|
Total liabilities
|
|
|
140,959
|
|
|
|
146,346
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,719 and 9,808 shares issued and outstanding as of March 31, 2017 and September 30, 2016, respectively
|
|
|
97
|
|
|
|
97
|
|
Additional paid-in capital
|
|
|
63,453
|
|
|
|
64,552
|
|
Retained earnings
|
|
|
68,982
|
|
|
|
62,909
|
|
Total RCIHH stockholders’ equity
|
|
|
132,532
|
|
|
|
127,558
|
|
Noncontrolling interests
|
|
|
2,568
|
|
|
|
2,584
|
|
Total stockholders’ equity
|
|
|
135,100
|
|
|
|
130,142
|
|
Total liabilities and stockholders’ equity
|
|
$
|
276,059
|
|
|
$
|
276,488
|
|
See
accompanying notes to condensed consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share data)
(unaudited)
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
14,235
|
|
|
$
|
14,581
|
|
|
$
|
28,610
|
|
|
$
|
29,178
|
|
Sales of food and merchandise
|
|
|
4,353
|
|
|
|
4,609
|
|
|
|
8,560
|
|
|
|
8,943
|
|
Service revenues
|
|
|
14,170
|
|
|
|
13,205
|
|
|
|
27,645
|
|
|
|
25,846
|
|
Other
|
|
|
1,760
|
|
|
|
2,001
|
|
|
|
3,442
|
|
|
|
3,904
|
|
Total revenues
|
|
|
34,518
|
|
|
|
34,396
|
|
|
|
68,257
|
|
|
|
67,871
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,968
|
|
|
|
5,227
|
|
|
|
9,849
|
|
|
|
10,411
|
|
Salaries and wages
|
|
|
9,717
|
|
|
|
9,257
|
|
|
|
19,369
|
|
|
|
18,614
|
|
Selling, general and administrative
|
|
|
10,609
|
|
|
|
10,601
|
|
|
|
21,802
|
|
|
|
21,461
|
|
Depreciation and amortization
|
|
|
1,608
|
|
|
|
1,826
|
|
|
|
3,226
|
|
|
|
3,643
|
|
Other charges, net
|
|
|
129
|
|
|
|
(65
|
)
|
|
|
191
|
|
|
|
475
|
|
Total operating expenses
|
|
|
27,031
|
|
|
|
26,846
|
|
|
|
54,437
|
|
|
|
54,604
|
|
Income from operations
|
|
|
7,487
|
|
|
|
7,550
|
|
|
|
13,820
|
|
|
|
13,267
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,912
|
)
|
|
|
(1,965
|
)
|
|
|
(3,927
|
)
|
|
|
(3,880
|
)
|
Interest income
|
|
|
89
|
|
|
|
1
|
|
|
|
126
|
|
|
|
5
|
|
Income before income taxes
|
|
|
5,664
|
|
|
|
5,586
|
|
|
|
10,019
|
|
|
|
9,392
|
|
Income taxes
|
|
|
1,908
|
|
|
|
293
|
|
|
|
3,358
|
|
|
|
1,660
|
|
Net income
|
|
|
3,756
|
|
|
|
5,293
|
|
|
|
6,661
|
|
|
|
7,732
|
|
Net loss (income) attributable to noncontrolling interests
|
|
|
3
|
|
|
|
212
|
|
|
|
(4
|
)
|
|
|
325
|
|
Net income attributable to RCIHH common shareholders
|
|
$
|
3,759
|
|
|
$
|
5,505
|
|
|
$
|
6,657
|
|
|
$
|
8,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to RCIHH common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.55
|
|
|
$
|
0.68
|
|
|
$
|
0.79
|
|
Diluted
|
|
$
|
0.39
|
|
|
$
|
0.54
|
|
|
$
|
0.68
|
|
|
$
|
0.79
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,719
|
|
|
|
10,013
|
|
|
|
9,744
|
|
|
|
10,154
|
|
Diluted
|
|
|
9,721
|
|
|
|
10,215
|
|
|
|
9,768
|
|
|
|
10,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
See
accompanying notes to condensed consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
(unaudited)
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
3,756
|
|
|
$
|
5,293
|
|
|
$
|
6,661
|
|
|
$
|
7,732
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
(109
|
)
|
Comprehensive income
|
|
|
3,756
|
|
|
|
5,184
|
|
|
|
6,661
|
|
|
|
7,623
|
|
Comprehensive loss (income) attributable to noncontrolling interests
|
|
|
3
|
|
|
|
212
|
|
|
|
(4
|
)
|
|
|
325
|
|
Comprehensive income attributable to RCI Hospitality Holdings, Inc.
|
|
$
|
3,759
|
|
|
$
|
5,396
|
|
|
$
|
6,657
|
|
|
$
|
7,948
|
|
See
accompanying notes to condensed consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,661
|
|
|
$
|
7,732
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,226
|
|
|
|
3,643
|
|
Deferred taxes
|
|
|
-
|
|
|
|
786
|
|
Amortization of debt issuance costs, note discount and beneficial conversion
|
|
|
128
|
|
|
|
15
|
|
Deferred rent
|
|
|
110
|
|
|
|
(446
|
)
|
Gain on sale of marketable securities
|
|
|
-
|
|
|
|
(127
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
240
|
|
Loss on sale of property and other
|
|
|
212
|
|
|
|
-
|
|
Debt prepayment penalty
|
|
|
75
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,839
|
|
|
|
(545
|
)
|
Inventories
|
|
|
(41
|
)
|
|
|
(370
|
)
|
Prepaid expenses and other assets
|
|
|
731
|
|
|
|
1,719
|
|
Accounts payable and accrued liabilities
|
|
|
(1,911
|
)
|
|
|
(1,535
|
)
|
Net cash provided by operating activities
|
|
|
11,030
|
|
|
|
11,112
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of property
|
|
|
2,047
|
|
|
|
-
|
|
Proceeds from sale of marketable securities
|
|
|
-
|
|
|
|
628
|
|
Proceeds from notes receivable
|
|
|
55
|
|
|
|
-
|
|
Additions to property and equipment
|
|
|
(5,680
|
)
|
|
|
(13,561
|
)
|
Net cash used in investing activities
|
|
|
(3,578
|
)
|
|
|
(12,933
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
2,564
|
|
|
|
15,517
|
|
Payments on long-term debt
|
|
|
(6,179
|
)
|
|
|
(7,553
|
)
|
Purchase of treasury stock
|
|
|
(1,099
|
)
|
|
|
(4,704
|
)
|
Payment of dividends
|
|
|
(584
|
)
|
|
|
(296
|
)
|
Payment of loan origination costs
|
|
|
(99
|
)
|
|
|
-
|
|
Debt prepayment penalty
|
|
|
(75
|
)
|
|
|
-
|
|
Distribution to noncontrolling interests
|
|
|
(108
|
)
|
|
|
(108
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(5,580
|
)
|
|
|
2,856
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,872
|
|
|
|
1,035
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
11,327
|
|
|
|
8,020
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
13,199
|
|
|
$
|
9,055
|
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING PERIOD FOR:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,788
|
|
|
$
|
3,896
|
|
Income taxes (net of refund of $1,017 and $0, respectively)
|
|
$
|
73
|
|
|
$
|
97
|
|
See
accompanying notes to condensed consolidated financial statements.
Non-cash
and other transactions:
During
the six months ended March 31, 2017, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million, resulting
in net cash proceeds of $1.9 million.
During
the six months ended March 31, 2017, the Company purchased and retired 89,685 common shares at a cost of $1.1 million.
During
the six months ended March 31, 2016, the Company purchased and retired 500,902 common shares at a cost of $4.7 million.
During
the six months ended March 31, 2016, a related party creditor converted $750,000 of debt to 75,000 shares of the Company’s
common stock.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions
to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements.
However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated
financial statements for the year ended September 30, 2016 included in the Company’s Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission on December 13, 2016. The interim unaudited condensed consolidated financial statements
should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management,
all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the three and six months ended March 31, 2017 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2017. The September 30, 2016 consolidated balance sheet data were derived from audited
financial statements, but does not include all disclosures required by GAAP.
2.
|
Recent
Accounting Standards and Pronouncements
|
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes nearly all existing revenue
recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods
or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates
may be required within the revenue recognition process than are required under existing GAAP. The standard’s effective date
has been deferred by the issuance of ASU No. 2015-14, and is effective for annual periods beginning after December 15, 2017, and
interim periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). Early application is permitted but not before December 15, 2016, the ASU’s
original effective date. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
In
February 2015, the FASB issued ASU No. 2015-02, which amends FASB ASU Topic 810,
Consolidations
. This ASU amends the current
consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar
entities. This ASU requires that limited partnerships and similar legal entities provide partners with either substantive kick-out
rights or substantive participating rights over the general partner in order to be considered a voting interest entity. The specialized
consolidation model and guidance for limited partnerships and similar legal entities have been eliminated. There is no longer
a presumption that a general partner should consolidate a limited partnership. For limited partnerships and similar legal entities
that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited
partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive
kick-out rights. The standard is effective for annual periods beginning after December 15, 2015. The Company has adopted this
guidance as of October 1, 2016, and its adoption did not have a material impact on the Company’s consolidated financial
statements.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This ASU does
not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to
all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU eliminates
from GAAP the requirement to measure inventory at the lower of cost or market. Market under the previous requirement could be
replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Entities within scope
of this update will now be required to measure inventory at the lower of cost and net realizable value. Net realizable value is
the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The amendments in
this update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted, and should be applied
prospectively. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial
statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments
. The ASU requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. Acquirers must recognize, in the same reporting
period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change
to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. This ASU is effective
for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company has adopted
this guidance as of October 1, 2016, and its adoption did not have a material impact on the Company’s consolidated financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, on accounting for leases which requires lessees to
recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced
disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases, and will be effective for interim
and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified
retrospective approach. We are evaluating the impact of the guidance on our consolidated financial position, results of operations
and related disclosures.
In
March 2016, the FASB issued amended guidance ASU No. 2016-09,
Compensation–Stock Compensation (Topic 718): Improvement
to Employee Share-Based Payment Accounting
. The guidance requires all income tax effects of awards to be recognized in the
income statement on a prospective basis. The guidance also requires presentation of excess tax benefits as an operating activity
on the statement of cash flows rather than as a financing activity, and can be applied retrospectively or prospectively. The guidance
increases the amount companies can withhold to pay income taxes on awards without triggering liability classification for shares
used to satisfy statutory income tax withholding obligations, and requires application of a modified retrospective transition
method. The amended guidance will be effective for interim and annual periods beginning after December 15, 2016; early adoption
is permitted if all provisions are adopted in the same period. As of March 31, 2017, we do not have any stock-based compensation
awards outstanding. We will adopt ASU 2016-09 when the Company grants stock-based compensation awards in the future.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (a consensus of the Emerging Issues Task Force)
. The ASU intends to reduce diversity in practice on how
the following cash activities are presented in the statement of cash flows: (1) debt prepayment or debt extinguishment costs;
(2) settlement of zero-coupon debt instruments; (3) contingent considerations payments made after a business combination; (4)
proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate and bank-owned life insurance
policies; (6) distributions received from equity method investments; and (7) beneficial interests in securitization transactions.
The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated
should be classified based on the activity that is likely to be the predominant source or use of cash flow. The guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted,
provided that all of the amendments are adopted in the same period, and must be applied using a retrospective transition method.
We early adopted this guidance as of October 1, 2016. Our adoption of this guidance did not have a material impact on our consolidated
financial statements.
In
January 2017, the FASB issued ASU No. 2017-01,
Business Combination (Topic 805): Clarifying the Definition of a Business
.
According to the guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset
(or a group of similar assets), the assets acquired would not represent a business. If met, this initial screen eliminates the
need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process
that together significantly contribute to the ability to create outputs. ASU 2017-01 provides a framework to evaluate when an
input and a substantive process are present. To be a business without outputs, there will now need to be an organized workforce.
The FASB noted that outputs are a key element of a business and included more stringent criteria for aggregated sets of assets
and activities without outputs. Finally, the guidance narrows the definition of the term “outputs” to be consistent
with how it is described in Topic 606,
Revenue from Contracts with Customers
. Under the final definition, an output is
the result of inputs and substantive processes that provide goods and services to customers, other revenue, or investment income,
such as dividends and interest. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption
permitted. The amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial
statements have not been issued. We are evaluating the impact of the guidance on our consolidated financial position, results
of operations and related disclosures.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.
The amount of goodwill impairment will now be the excess of a reporting unit’s carrying value over its fair value, not to
exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue
to have the option to perform a qualitative assessment (Step 0) to determine if a quantitative impairment test is necessary. The
same one-step test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities
will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance
will be applied prospectively, and is effective for calendar year-end SEC filers in 2020; other public business entities will
have an additional year. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company plans
to early adopt this ASU during the fourth quarter of fiscal 2017.
Certain
prior year amounts have been reclassified to conform to the current year financial statement presentation.
4.
|
Selected
Account Information
|
The
components of accrued liabilities are as follows (in thousands):
|
|
March 31, 2017
|
|
|
September 30, 2016
|
|
Payroll and related costs
|
|
$
|
1,872
|
|
|
$
|
1,506
|
|
Lawsuit settlement
|
|
|
1,871
|
|
|
|
2,704
|
|
Insurance
|
|
|
1,310
|
|
|
|
2,303
|
|
Sales and liquor taxes
|
|
|
974
|
|
|
|
889
|
|
Patron tax
|
|
|
810
|
|
|
|
1,559
|
|
Unearned revenues
|
|
|
685
|
|
|
|
256
|
|
Property taxes
|
|
|
602
|
|
|
|
1,017
|
|
Other
|
|
|
2,278
|
|
|
|
2,572
|
|
|
|
$
|
10,402
|
|
|
$
|
12,806
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
components of selling, general and administrative expenses are as follows (in thousands):
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Taxes and permits
|
|
$
|
1,840
|
|
|
$
|
2,054
|
|
|
$
|
4,129
|
|
|
$
|
4,179
|
|
Advertising and marketing
|
|
|
1,355
|
|
|
|
1,225
|
|
|
|
3,012
|
|
|
|
2,530
|
|
Supplies and services
|
|
|
1,142
|
|
|
|
1,155
|
|
|
|
2,288
|
|
|
|
2,417
|
|
Insurance
|
|
|
952
|
|
|
|
907
|
|
|
|
1,887
|
|
|
|
1,781
|
|
Rent
|
|
|
750
|
|
|
|
859
|
|
|
|
1,440
|
|
|
|
1,807
|
|
Legal
|
|
|
709
|
|
|
|
562
|
|
|
|
1,412
|
|
|
|
1,397
|
|
Utilities
|
|
|
656
|
|
|
|
694
|
|
|
|
1,326
|
|
|
|
1,404
|
|
Charge card fees
|
|
|
617
|
|
|
|
557
|
|
|
|
1,187
|
|
|
|
1,170
|
|
Accounting and professional fees
|
|
|
560
|
|
|
|
420
|
|
|
|
1,057
|
|
|
|
690
|
|
Repairs and maintenance
|
|
|
533
|
|
|
|
526
|
|
|
|
999
|
|
|
|
1,023
|
|
Security
|
|
|
512
|
|
|
|
479
|
|
|
|
1,053
|
|
|
|
1,018
|
|
Other
|
|
|
983
|
|
|
|
1,163
|
|
|
|
2,012
|
|
|
|
2,045
|
|
|
|
$
|
10,609
|
|
|
$
|
10,601
|
|
|
$
|
21,802
|
|
|
$
|
21,461
|
|
On
October 5, 2016, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million. The new unsecured debt is payable
$118,817 per month, including interest at 12%, and matures in five years with a balloon payment for the remaining balance at maturity.
The refinanced debt was comprised of interest-only notes that were scheduled to mature with full principal payments in October
2017.
On
January 4, 2017, the Company paid off $392,000 of convertible 6% notes, which would have matured on March 4, 2023.
On
March 13, 2017, the Company entered into a promissory note with a bank, which provides for a $1.0 million revolving line of credit
maturing on March 13, 2018. The interest rate under this revolving line of credit is at 6.5% per annum payable every 13th of each
month starting April 13, 2017 for all outstanding borrowings. In an event of a default, as defined in the agreement, the interest
rate shall be increased to 17% per annum. As of March 31, 2017, the Company had available borrowing capacity of $1.0 million under
the revolving line of credit.
During
the six months ended March 31, 2017, the Company purchased and retired 89,685 common shares at a cost of $1.1 million. The Company
also paid a $0.06 per share cash dividend totaling approximately $584,000.
During
the six months ended March 31, 2016, the Company purchased and retired 500,902 common shares at a cost of $4.7 million. The Company
also paid a $0.03 per share cash dividend totaling approximately $296,000.
During
the six months ended March 31, 2016, a related party creditor converted $750,000 of debt to 75,000 shares of the Company’s
common stock.
Basic
earnings per share (“EPS”) includes no dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution
of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that may arise
from outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the “treasury
stock method”) and from outstanding convertible debentures (the number of which is computed using the “if converted
method”). Diluted EPS considers the potential dilution that could occur if the Company’s outstanding common restricted
stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s
earnings (as adjusted for interest expense that would no longer be incurred if the debentures were converted).
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
table below presents the reconciliation of the numerator and the denominator in the calculation of basic and diluted EPS (in thousands,
except per share amounts):
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator -
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH common shareholders - basic
|
|
$
|
3,759
|
|
|
$
|
5,505
|
|
|
$
|
6,657
|
|
|
$
|
8,057
|
|
Adjustment to net income from assumed conversion of debentures(2)
|
|
|
-
|
|
|
|
50
|
|
|
|
5
|
|
|
|
100
|
|
Adjusted net income attributable to RCIHH common shareholders - diluted
|
|
$
|
3,759
|
|
|
$
|
5,555
|
|
|
$
|
6,662
|
|
|
$
|
8,157
|
|
Denominator(1)(3)-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,719
|
|
|
|
10,013
|
|
|
|
9,744
|
|
|
|
10,154
|
|
Effect of potentially dilutive restricted stock, warrants and options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effect of potentially dilutive convertible debentures(2)
|
|
|
2
|
|
|
|
202
|
|
|
|
24
|
|
|
|
202
|
|
Adjusted weighted average number of common shares outstanding - diluted
|
|
|
9,721
|
|
|
|
10,215
|
|
|
|
9,768
|
|
|
|
10,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.39
|
|
|
$
|
0.55
|
|
|
$
|
0.68
|
|
|
$
|
0.79
|
|
Diluted earnings per share
|
|
$
|
0.39
|
|
|
$
|
0.54
|
|
|
$
|
0.68
|
|
|
$
|
0.79
|
|
(1)
All outstanding restricted stock, warrants and options were considered for the EPS computation. Potentially dilutive options and
warrants of 121,180 for the three and six months ended March 31, 2016 have been excluded from earnings per share due to their
being anti-dilutive. No restricted stock or options were outstanding during the three and six months ended March 31, 2017.
(2)
Convertible debentures (principal and accrued interest) outstanding at the beginning of the three and six months ended March 31,
2017 and 2016 totaling $859,000 and $2.3 million, respectively, were convertible into common stock at a price of $10.25 and $12.50
per share in fiscal 2017, and $10.00, $10.25 and $12.50 per share in fiscal 2016.
(3)
As of March 31, 2017, the Company has no outstanding restricted stock, stock options, warrants or convertible debt.
Income
tax expense was $1.9 million and $3.4 million for the three and six months ended March 31, 2017, respectively, compared with a
$293,000 and $1.7 million for the three and six months ended March 31, 2016, respectively. The effective income tax rate for the
six months ended March 31, 2017 was 33.5% compared with 17.7% for the comparable period year-ago. Our effective tax rate is affected
by state taxes, permanent differences, and tax credits, including the FICA tip credit. Beginning in the quarter ended December
31, 2016, the Company began utilizing the effective rate method to calculate income taxes during interim periods instead of the
full deferred calculation method.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company or one of its subsidiaries files income tax returns for U.S. federal, and various state and local jurisdictions. The Company
is no longer subject to federal, state and local income tax examinations by tax authorities for years before 2013. The Company’s
federal income tax returns for the fiscal years ended September 30, 2015, 2014 and 2013 are currently under examination by the
Internal Revenue Service.
The
Company accounts for uncertain tax positions pursuant to ASC Topic 740,
Income Taxes
. As of March 31, 2017 and September
30, 2016, the liability for uncertain tax positions totaled approximately $231,000 and $1.0 million, respectively, which is included
in current liabilities on our condensed consolidated balance sheets. During the three and six months ended March 31, 2017, the
Company settled a city tax audit for approximately $0 and $0.6 million, respectively, the amount previously recorded as an uncertain
tax position. This settlement did not have an impact on the annual effective tax rate. The Company recognizes interest accrued
related to uncertain tax positions in interest expense and penalties in operating expenses.
9.
|
Commitments
and Contingencies
|
Legal
Matters
New
York Settlement
Filed
in 2009, the case claimed Rick’s Cabaret New York misclassified entertainers as independent contractors. Plaintiffs sought
minimum wage for the hours they danced and return of certain fees. RCI Entertainment (New York), Inc. and Peregrine Enterprises,
Inc. maintained the dancers were properly classified, and alternatively, amounts earned were well in excess of the minimum wage
and should satisfy any obligations.
On
April 1, 2015, we and our subsidiaries, RCI Entertainment (New York), Inc. and Peregrine Enterprises, Inc., entered into an agreement
to settle in full a New York based federal wage and hour class and collective action filed in the United States District Court
for the Southern District of New York. On September 22, 2015, the Court granted final approval of the settlement. Under the terms
of the agreement, Peregrine Enterprises, Inc. was to make up to $15.0 million available to class members and their attorneys.
The actual amount paid was determined based on the number of class members responding by the end of a two-month notice period
which ended on December 4, 2015. Unclaimed checks or payments reverted back to Peregrine at that time. Based on the current schedule,
an initial payment for attorneys’ fees of $1,833,333 was made in October 2015, with two subsequent payments of $1,833,333
each being made in equal annual installments. As part of the settlement, RCIHH was required to guarantee the obligations of RCI
Entertainment (New York), Inc. and Peregrine Enterprises, Inc. under the settlement.
The
Company expensed $11.1 million during the year ended September 30, 2015 as the final liability for its obligations under the settlement,
which was included as settlement of lawsuits and other one-time costs in the consolidated statement of income. Of this amount,
$5.6 million was paid to entertainers and $5.5 million has been or will be paid to the lawyers. As of March 31, 2017 and September
30, 2016, the Company has a total amount of $1.9 million and $2.7 million, respectively, recorded in accrued liabilities on the
Company’s consolidated balance sheets for future payments to the lawyers.
Indemnity
Insurance Corporation
As
previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,
RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.
On
November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation
Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance
Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation
Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those
assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation
Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by
IIC. The Liquidation Order further ordered that all claims against IIC must be filed with the Receiver before the close of business
on January 16, 2015 and that all pending lawsuits involving IIC as the insurer are further stayed or abated until October 7, 2014.
As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. Currently,
there are several civil lawsuits pending against the Company and its subsidiaries. The Company has retained counsel to defend
against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from
the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline;
however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will
have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other
insurers, which have covered and/or will cover any claims arising from actions after that date.
General
The
Company is involved in various suits and claims arising in the normal course of business. The ultimate outcome of these items
is not anticipated to have a material adverse effect on the Company’s consolidated statements of income or financial position.
The
Company has been sued by a landlord in the 33rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),
Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping
center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality
Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook
Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied
liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc.
asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims
and third-party claims against Plaintiff, Plaintiff’s manager, and Plaintiff’s broker asserting that they committed
fraud and that the landlord breached the applicable agreements. It is unknown at this time whether the resolution of this uncertainty
will have a material effect on the Company’s financial condition.
Settlements
of lawsuits for the three and six months ended March 31, 2017 totaled $8,000 and $81,000, respectively, while settlements of lawsuits
for the three and six months ended March 31, 2016 totaled $62,000 and $602,000, respectively. As of March 31, 2017 and September
30, 2016, the Company has accrued $1.9 million and $2.7 million in accrued liabilities, respectively, related to settlement of
lawsuits all of which pertain to the New York Settlement discussed above.
The
Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such reportable segments
based on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions
in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment. The other category below includes
our media division and rental income in both years, and the energy drink division in the prior year, that are not significant
to the consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Below
is the financial information related to the Company’s segments (in thousands):
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
29,967
|
|
|
$
|
29,344
|
|
|
$
|
59,249
|
|
|
$
|
57,514
|
|
Bombshells
|
|
|
4,375
|
|
|
|
4,629
|
|
|
|
8,670
|
|
|
|
9,008
|
|
Other
|
|
|
176
|
|
|
|
423
|
|
|
|
338
|
|
|
|
1,349
|
|
|
|
$
|
34,518
|
|
|
$
|
34,396
|
|
|
$
|
68,257
|
|
|
$
|
67,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
10,498
|
|
|
$
|
9,687
|
|
|
$
|
19,714
|
|
|
$
|
18,195
|
|
Bombshells
|
|
|
801
|
|
|
|
758
|
|
|
|
1,439
|
|
|
|
1,245
|
|
Other
|
|
|
(222
|
)
|
|
|
(856
|
)
|
|
|
(563
|
)
|
|
|
(1,504
|
)
|
General corporate
|
|
|
(3,590
|
)
|
|
|
(2,039
|
)
|
|
|
(6,770
|
)
|
|
|
(4,669
|
)
|
|
|
$
|
7,487
|
|
|
$
|
7,550
|
|
|
$
|
13,820
|
|
|
$
|
13,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,225
|
|
|
$
|
1,420
|
|
|
$
|
2,467
|
|
|
$
|
2,562
|
|
Bombshells
|
|
|
223
|
|
|
|
231
|
|
|
|
441
|
|
|
|
462
|
|
Other
|
|
|
4
|
|
|
|
171
|
|
|
|
9
|
|
|
|
342
|
|
General corporate
|
|
|
156
|
|
|
|
4
|
|
|
|
309
|
|
|
|
277
|
|
|
|
$
|
1,608
|
|
|
$
|
1,826
|
|
|
$
|
3,226
|
|
|
$
|
3,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
545
|
|
|
$
|
12,435
|
|
|
$
|
1,340
|
|
|
$
|
12,826
|
|
Bombshells
|
|
|
1,614
|
|
|
|
104
|
|
|
|
2,718
|
|
|
|
144
|
|
Other
|
|
|
10
|
|
|
|
-
|
|
|
|
11
|
|
|
|
2
|
|
General corporate
|
|
|
503
|
|
|
|
133
|
|
|
|
1,611
|
|
|
|
589
|
|
|
|
$
|
2,672
|
|
|
$
|
12,672
|
|
|
$
|
5,680
|
|
|
$
|
13,561
|
|
|
|
March
31, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
243,180
|
|
|
$
|
244,464
|
|
Bombshells
|
|
|
10,714
|
|
|
|
8,673
|
|
Other
|
|
|
1,117
|
|
|
|
896
|
|
General corporate
|
|
|
21,048
|
|
|
|
22,455
|
|
|
|
$
|
276,059
|
|
|
$
|
276,488
|
|
General
corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and
information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs
such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
January 13, 2017, we closed the sale on one of our non-income producing properties, included in assets held for sale on our condensed
consolidated balance sheets, for $2.2 million in cash, recognizing approximately $116,000 loss on the sale. Proceeds were used
to pay off the remaining $1.5 million of a related 11% balloon note, which was due in 2018. The Company paid a $75,000 prepayment
penalty to pay off the debt.
On
April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St. Louis area, as well
as the club’s building and land, adjacent land, and a nearby building and land that can be used for another gentlemen’s
club. The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at closing. The
Company plans to apply for mortgage financing for the acquired properties.
On May 1, 2017, the Company raised $5.4 million
through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on May 1, 2020. The notes
pay interest-only in equal monthly installments, with a lump sum principal payment at maturity.
On May 8, 2017, a subsidiary of the Company
acquired the company that owns Scarlett’s Cabaret Miami in Pembroke Park, Florida along with certain related intellectual
property for total consideration of $25.952 million, payable $5.4 million at closing, $5.0 million after
six months through a short-term 5% note, and $15.552 million through a 12-year amortizing 8% note.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included
in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on
Form 10-K for the year ended September 30, 2016.
Overview
RCI
Hospitality Holdings, Inc. (“RCIHH”) is a holding company engaged in a number of activities in the hospitality and
related businesses. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services,
Inc.
Through
our subsidiaries, as of March 31, 2017, we operated a total of 41 establishments that offer live adult entertainment, and/or restaurant
and bar operations. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs
industry. We have two principal reportable segments: Nightclubs and Bombshells restaurants and bars. We combine other operating
segments into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,”
“we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. Excepting
executive officers of RCIHH, any employment referenced in this document is not with RCIHH but solely with one of its subsidiaries.
RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.
Critical
Accounting Policies and Estimates
The
preparation of the unaudited consolidated financial statements requires our management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s
historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.
For
a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment
or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial
position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2016 filed with the SEC on December 13, 2016.
During
the three and six months ended March 31, 2017, there were no significant changes in our accounting policies and estimates.
Results
of Operations
Three
Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
The
following table summarizes our results of operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
14,235
|
|
|
|
41.2
|
%
|
|
$
|
14,581
|
|
|
|
42.4
|
%
|
|
$
|
(346
|
)
|
|
|
-2.4
|
%
|
Sales of food and merchandise
|
|
|
4,353
|
|
|
|
12.6
|
%
|
|
|
4,609
|
|
|
|
13.4
|
%
|
|
|
(256
|
)
|
|
|
-5.6
|
%
|
Service revenues
|
|
|
14,170
|
|
|
|
41.1
|
%
|
|
|
13,205
|
|
|
|
38.4
|
%
|
|
|
965
|
|
|
|
7.3
|
%
|
Other
|
|
|
1,760
|
|
|
|
5.1
|
%
|
|
|
2,001
|
|
|
|
5.8
|
%
|
|
|
(241
|
)
|
|
|
-12.0
|
%
|
Total revenues
|
|
|
34,518
|
|
|
|
100.0
|
%
|
|
|
34,396
|
|
|
|
100.0
|
%
|
|
|
122
|
|
|
|
0.4
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,968
|
|
|
|
14.4
|
%
|
|
|
5,227
|
|
|
|
15.2
|
%
|
|
|
(259
|
)
|
|
|
-5.0
|
%
|
Salaries and wages
|
|
|
9,717
|
|
|
|
28.2
|
%
|
|
|
9,257
|
|
|
|
26.9
|
%
|
|
|
460
|
|
|
|
5.0
|
%
|
Selling, general and administrative
|
|
|
10,609
|
|
|
|
30.7
|
%
|
|
|
10,601
|
|
|
|
30.8
|
%
|
|
|
8
|
|
|
|
0.1
|
%
|
Depreciation and amortization
|
|
|
1,608
|
|
|
|
4.7
|
%
|
|
|
1,826
|
|
|
|
5.3
|
%
|
|
|
(218
|
)
|
|
|
-11.9
|
%
|
Other charges, net
|
|
|
129
|
|
|
|
0.4
|
%
|
|
|
(65
|
)
|
|
|
-0.2
|
%
|
|
|
194
|
|
|
|
-298.5
|
%
|
Total operating expenses
|
|
|
27,031
|
|
|
|
78.3
|
%
|
|
|
26,846
|
|
|
|
78.0
|
%
|
|
|
185
|
|
|
|
0.7
|
%
|
Income from operations
|
|
|
7,487
|
|
|
|
21.7
|
%
|
|
|
7,550
|
|
|
|
22.0
|
%
|
|
|
(63
|
)
|
|
|
-0.8
|
%
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,912
|
)
|
|
|
-5.5
|
%
|
|
|
(1,965
|
)
|
|
|
-5.7
|
%
|
|
|
53
|
|
|
|
-2.7
|
%
|
Interest income
|
|
|
89
|
|
|
|
0.3
|
%
|
|
|
1
|
|
|
|
0.0
|
%
|
|
|
88
|
|
|
|
8800.0
|
%
|
Income before income taxes
|
|
|
5,664
|
|
|
|
16.4
|
%
|
|
|
5,586
|
|
|
|
16.2
|
%
|
|
|
78
|
|
|
|
1.4
|
%
|
Income taxes
|
|
|
1,908
|
|
|
|
5.5
|
%
|
|
|
293
|
|
|
|
0.9
|
%
|
|
|
1,615
|
|
|
|
551.2
|
%
|
Net income
|
|
$
|
3,756
|
|
|
|
10.9
|
%
|
|
$
|
5,293
|
|
|
|
15.4
|
%
|
|
$
|
(1,537
|
)
|
|
|
-29.0
|
%
|
Revenues
Consolidated
revenues for the three months ended March 31, 2017 increased by $122,000, or 0.4%, compared to the comparable period last year
due primarily to a 2.7% increase in same-store sales (contributing a 2.5% increase in total revenues), 1.5% increase from new
units, 3.4% decrease in closed units, and 0.3% decrease in other revenues. Nightclub same-store sales increased by 2.7% reflecting
continued strong results from units in Minneapolis, Houston, Miami and New York. Bombshells same-store sales increased by 3.2%
but decreased by 5.5% in total due to the fourth quarter 2016 closing of Webster.
Segment
contribution to total revenues for the quarter was as follows (in thousands):
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Nightclubs
|
|
$
|
29,967
|
|
|
$
|
29,344
|
|
Bombshells
|
|
|
4,375
|
|
|
|
4,629
|
|
Other
|
|
|
176
|
|
|
|
423
|
|
|
|
$
|
34,518
|
|
|
$
|
34,396
|
|
Revenues
for the quarter ended March 31, 2016 included revenues from Drink Robust. During the quarter ended September 30, 2016, we sold
31% of Drink Robust, retaining a 20% investment. Because we have no ability to direct the management of the investee company or
exert significant influence, the investment is being accounted for at cost beginning on the date of the sale.
Operating
Expenses
Total
operating expenses, as a percent of revenues, increased to 78.3% from 78.0% from last year. Contributors to the net increase in
operating expenses are explained below.
Cost
of goods sold decreased by 5.0% primarily due to lower unit count. As a percent of total revenues, cost of goods sold decreased
to 14.4% from 15.2% mainly due to the increase in revenue mix of higher margin service revenue.
Salaries
and wages increased by 5.0% mainly due to additional corporate headcount to support franchising and our return to a growth model,
and a shift to employee status of certain entertainers. As a percent of total revenues, salaries and wages increased to 28.2%
from 26.9% primarily due to additional corporate headcount to prepare for future growth and the shift to employee status of certain
entertainers.
Selling,
general and administrative expenses was flat from quarter to quarter. As a percent of total revenues, selling, general and administrative
expenses was also flat at 30.7% this quarter compared to 30.8% last year.
Depreciation
and amortization decreased by 11.9% due to the decrease in intangible assets subject to amortization caused by the divestiture
of Drink Robust and the lower fixed asset depreciable base from closed units.
Other
charges, net increased by $194,000 due to the current quarter’s loss on asset disposal compared to a gain in the prior year,
offset by a gain on patron tax settlement during the current quarter compared to none in the prior year.
Income
from Operations
For
the three months ended March 31, 2017 and 2016, our operating margin was 21.7% and 22.0%, respectively. The main drivers for the
decrease in operating margin are the increase in salaries due to additional corporate headcount to prepare for future growth and
the loss in asset disposal.
Segment
contribution to income from operations for the quarter is presented in the table below (in thousands):
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Nightclubs
|
|
$
|
10,498
|
|
|
$
|
9,687
|
|
Bombshells
|
|
|
801
|
|
|
|
758
|
|
Other
|
|
|
(222
|
)
|
|
|
(856
|
)
|
General corporate
|
|
|
(3,590
|
)
|
|
|
(2,039
|
)
|
|
|
$
|
7,487
|
|
|
$
|
7,550
|
|
Operating
margin for the Nightclubs segment was 35.0% and 33.0% for the three months ended March 31, 2017 and 2016, respectively, while
operating margin for Bombshells was 18.3% and 16.4%, respectively. The increase in Nightclubs operating margin was mainly due
to the increase in higher margin service revenue and margin improvement caused by two sold and three re-concepted clubs. The increase
in Bombshells operating margin was primarily caused by the closing of the underperforming unit in Webster, Texas. Excluding the
impact of settlement of lawsuits, gain on settlement of patron tax and loss on sale of assets, Nightclubs non-GAAP operating margin
would have been 35.2% and 33.2% for the three months ended March 31, 2017 and 2016, respectively. Excluding the impact of loss
on disposal of assets, Bombshells non-GAAP operating margin would have been 18.8% and 16.4% for the three months ended March 31,
2017 and 2016, respectively.
Non-Operating
Items
Interest
expense decreased to $1.9 million from $2.0 million due to lower average debt balance, while interest income increased by $88,000
due to higher average cash balance and new notes receivable.
Income
Tax Expense
Income
tax expense increased by $1.6 million primarily due to lower FICA tax credit in the current quarter versus last year. The effective
income tax rate for the three months ended March 31, 2017 and 2016 was 33.7% and 5.2%, respectively, which was also caused by
the decrease in FICA tax credit. Beginning in the quarter ended December 31, 2016, the Company began utilizing the effective rate
method to calculate income taxes during interim periods instead of the full deferred calculation method.
Six
Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016
The
following table summarizes our results of operations for the six months ended March 31, 2017 and 2016 (dollars in thousands):
|
|
For the Six Months Ended
|
|
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
28,610
|
|
|
|
41.9
|
%
|
|
$
|
29,178
|
|
|
|
43.0
|
%
|
|
$
|
(568
|
)
|
|
|
-1.9
|
%
|
Sales of food and merchandise
|
|
|
8,560
|
|
|
|
12.5
|
%
|
|
|
8,943
|
|
|
|
13.2
|
%
|
|
|
(383
|
)
|
|
|
-4.3
|
%
|
Service revenues
|
|
|
27,645
|
|
|
|
40.5
|
%
|
|
|
25,846
|
|
|
|
38.1
|
%
|
|
|
1,799
|
|
|
|
7.0
|
%
|
Other
|
|
|
3,442
|
|
|
|
5.0
|
%
|
|
|
3,904
|
|
|
|
5.8
|
%
|
|
|
(462
|
)
|
|
|
-11.8
|
%
|
Total revenues
|
|
|
68,257
|
|
|
|
100.0
|
%
|
|
|
67,871
|
|
|
|
100.0
|
%
|
|
|
386
|
|
|
|
0.6
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
9,849
|
|
|
|
14.4
|
%
|
|
|
10,411
|
|
|
|
15.3
|
%
|
|
|
(562
|
)
|
|
|
-5.4
|
%
|
Salaries and wages
|
|
|
19,369
|
|
|
|
28.4
|
%
|
|
|
18,614
|
|
|
|
27.4
|
%
|
|
|
755
|
|
|
|
4.1
|
%
|
Selling, general and administrative
|
|
|
21,802
|
|
|
|
31.9
|
%
|
|
|
21,461
|
|
|
|
31.6
|
%
|
|
|
341
|
|
|
|
1.6
|
%
|
Depreciation and amortization
|
|
|
3,226
|
|
|
|
4.7
|
%
|
|
|
3,643
|
|
|
|
5.4
|
%
|
|
|
(417
|
)
|
|
|
-11.4
|
%
|
Other charges, net
|
|
|
191
|
|
|
|
0.3
|
%
|
|
|
475
|
|
|
|
0.7
|
%
|
|
|
(284
|
)
|
|
|
-59.8
|
%
|
Total operating expenses
|
|
|
54,437
|
|
|
|
79.8
|
%
|
|
|
54,604
|
|
|
|
80.5
|
%
|
|
|
(167
|
)
|
|
|
-0.3
|
%
|
Income from operations
|
|
|
13,820
|
|
|
|
20.2
|
%
|
|
|
13,267
|
|
|
|
19.5
|
%
|
|
|
553
|
|
|
|
4.2
|
%
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,927
|
)
|
|
|
-5.8
|
%
|
|
|
(3,880
|
)
|
|
|
-5.7
|
%
|
|
|
(47
|
)
|
|
|
1.2
|
%
|
Interest income
|
|
|
126
|
|
|
|
0.2
|
%
|
|
|
5
|
|
|
|
0.0
|
%
|
|
|
121
|
|
|
|
2420.0
|
%
|
Income before income taxes
|
|
|
10,019
|
|
|
|
14.7
|
%
|
|
|
9,392
|
|
|
|
13.8
|
%
|
|
|
627
|
|
|
|
6.7
|
%
|
Income taxes
|
|
|
3,358
|
|
|
|
4.9
|
%
|
|
|
1,660
|
|
|
|
2.4
|
%
|
|
|
1,698
|
|
|
|
102.3
|
%
|
Net income
|
|
$
|
6,661
|
|
|
|
9.8
|
%
|
|
$
|
7,732
|
|
|
|
11.4
|
%
|
|
$
|
(1,071
|
)
|
|
|
-13.9
|
%
|
Revenues
Consolidated
revenues for the six months ended March 31, 2017 increased by $386,000, or 0.6%, compared to the comparable period last year due
primarily to a 3.2% increase in same-store sales (contributing a 2.9% increase in total revenues), 1.7% increase from new units,
3.3% decrease in closed units, and 0.8% decrease in other revenues. Nightclub same-store sales increased by 2.7% due to strong
performances from units in Minneapolis with the return of the Vikings to their new downtown stadium, and from clubs in New York
City and parts of Texas. Units that were reformatted or moved also did well. Bombshells same-store sales increased by 6.2% from
the four remaining Bombshells locations.
Segment
contribution to total revenues for the six-month period was as follows (in thousands):
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Nightclubs
|
|
$
|
59,249
|
|
|
$
|
57,514
|
|
Bombshells
|
|
|
8,670
|
|
|
|
9,008
|
|
Other
|
|
|
338
|
|
|
|
1,349
|
|
|
|
$
|
68,257
|
|
|
$
|
67,871
|
|
Revenues
for the six months ended March 31, 2016 included revenues from Drink Robust. During the quarter ended September 30, 2016, we sold
31% of Drink Robust, retaining a 20% investment. Because we have no ability to direct the management of the investee company or
exert significant influence, the investment is being accounted for at cost beginning on the date of the sale.
Operating
Expenses
Total
operating expenses, as a percent of revenues, decreased to 79.8% from 80.5% from year-ago. Contributors to the net decrease in
operating expenses are explained below.
Cost
of goods sold decreased by 5.4% primarily due to lower unit count. As a percent of total revenues, cost of goods sold decreased
to 14.4% from 15.3% mainly due to the increase in revenue mix of higher margin service revenue.
Salaries
and wages increased by 4.1% mainly due to additional corporate headcount to support franchising and our return to a growth model,
and a shift to employee status of certain entertainers, offset partially by a decrease in stock-based compensation. As a percent
of total revenues, salaries and wages increased to 28.4% from 27.4% primarily due to additional corporate headcount to prepare
for future growth and the shift to employee status of certain entertainers.
Selling,
general and administrative expenses increased by 1.6% primarily due to increases in advertising and marketing, and professional
fees, partially offset by decreases in rent, supplies and utilities expenses. As a percent of total revenues, selling, general
and administrative expenses increased to 31.9% from 31.6% mainly due to increases in advertising and marketing and professional
fees, partially offset by a decrease in rent.
Depreciation
and amortization decreased by 11.4% due to the decrease in intangible assets subject to amortization caused by the divestiture
of Drink Robust and the lower fixed asset depreciable base from closed units.
Other
charges, net decreased by $284,000 due to lower lawsuit settlement costs and the gain in patron tax settlement in the current
year, offset partially by a higher loss in asset disposal in the current year.
Income
from Operations
For
the six months ended March 31, 2017 and 2016, our operating margin was 20.2% and 19.5%, respectively. The main drivers for the
increase in operating margin are increase in higher margin service revenue and sales leverage from fixed costs, partially offset
by increase in salaries due to additional corporate headcount in the current year to prepare for future growth.
Segment
contribution to income from operations for the six-month period is presented in the table below (in thousands):
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Nightclubs
|
|
$
|
19,714
|
|
|
$
|
18,195
|
|
Bombshells
|
|
|
1,439
|
|
|
|
1,245
|
|
Other
|
|
|
(563
|
)
|
|
|
(1,504
|
)
|
General corporate
|
|
|
(6,770
|
)
|
|
|
(4,669
|
)
|
|
|
$
|
13,820
|
|
|
$
|
13,267
|
|
Operating
margin for the Nightclubs segment was 33.3% and 31.6% for the six months ended March 31, 2017 and 2016, respectively, while operating
margin for Bombshells was 16.6% and 13.8%, respectively. The increase in Nightclubs operating margin was mainly due to the increase
in higher margin service revenue and margin improvement caused by two sold and three re-concepted clubs. The increase in Bombshells
operating margin was primarily caused by the closing of the underperforming unit in Webster, Texas. Excluding the impact of settlement
of lawsuits, gain on settlement of patron tax and loss on sale of assets, Nightclubs non-GAAP operating margin would have been
33.4% and 32.7% for the six months ended March 31, 2017 and 2016, respectively. Excluding the impact of loss on disposal of assets,
Bombshells non-GAAP operating margin would have been 16.8% and 13.8% for the six months ended March 31, 2017 and 2016, respectively.
Non-Operating
Items
Interest
expense increased by $47,000 due mainly from debt prepayment penalty, offset partially by lower regular interest due to lower
average debt balance. Interest income increased by $121,000 due to higher average cash balance and new notes receivable.
Income
Tax Expense
Income
tax expense increased by $1.7 million primarily due to lower FICA tax credit in the current year versus last year. The effective
income tax rate for the six months ended March 31, 2017 and 2016 was 33.5% and 17.7%, respectively, which was also mainly caused
by the decrease in FICA tax credit. Beginning in the quarter ended December 31, 2016, the Company began utilizing the effective
rate method to calculate income taxes during interim periods instead of the full deferred calculation method.
Non-GAAP
Financial Measures
In
addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures,
within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future.
Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position
or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated
and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of
the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) items that management
believes are not representative of the ongoing business operations of the Company, but are included (or excluded) in the most
directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures,
we further set forth our rationale as follows:
Non-GAAP
Operating Income and Non-GAAP Operating Margin.
We exclude from non-GAAP operating income and non-GAAP operating margin amortization
of intangibles, gains or losses on sale of assets, stock-based compensation, gain on patron tax settlement, and settlement of
lawsuits and other one-time costs. We believe that excluding these items assists investors in evaluating period-over-period changes
in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and
operations.
Non-GAAP
Net Income and Non-GAAP Net Income per Diluted Share
. We exclude from non-GAAP net income and non-GAAP net income per diluted
share amortization of intangibles, income tax expense, gains or losses on sale of assets, stock-based compensation, gain on patron
tax settlement, and settlement of lawsuits and other one-time costs, and include the non-GAAP provision for current and deferred
income taxes, calculated as the tax effect at 33% and 35% year-to-date effective tax rate of the pre-tax non-GAAP income before
taxes for the three and six months ended March 31, 2017 and 2016, respectively, because we believe that excluding and including
such items help management and investors better understand our operating activities.
Adjusted
EBITDA
. We exclude from adjusted EBITDA depreciation expense, amortization of intangibles, income tax expense, interest expense,
interest income, gains or losses on sale of assets, gain on patron tax settlement, and settlement of lawsuits and other one-time
costs because we believe that adjusting for such items helps management and investors better understand operating activities.
Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal,
state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration
of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return
on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.
We
also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section
for further discussion.
The
following tables present our non-GAAP performance measures for the three and six months ended March 31, 2017 and 2016 (in thousands,
except per share amounts and percentages):
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of GAAP net income to Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH common shareholders
|
|
$
|
3,759
|
|
|
$
|
5,505
|
|
|
$
|
6,657
|
|
|
$
|
8,057
|
|
Income tax expense
|
|
|
1,908
|
|
|
|
293
|
|
|
|
3,358
|
|
|
|
1,660
|
|
Interest expense and income
|
|
|
1,823
|
|
|
|
1,964
|
|
|
|
3,801
|
|
|
|
3,875
|
|
Settlement of lawsuits and other one-time costs
|
|
|
8
|
|
|
|
62
|
|
|
|
81
|
|
|
|
602
|
|
Gain on settlement of patron tax
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
-
|
|
Loss (gain) on sale of assets
|
|
|
223
|
|
|
|
(127
|
)
|
|
|
212
|
|
|
|
(127
|
)
|
Depreciation and amortization
|
|
|
1,608
|
|
|
|
1,826
|
|
|
|
3,226
|
|
|
|
3,643
|
|
Adjusted EBITDA
|
|
$
|
9,227
|
|
|
$
|
9,523
|
|
|
$
|
17,233
|
|
|
$
|
17,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP net income to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-GAAP net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH common shareholders
|
|
$
|
3,759
|
|
|
$
|
5,505
|
|
|
$
|
6,657
|
|
|
$
|
8,057
|
|
Amortization of intangibles
|
|
|
40
|
|
|
|
197
|
|
|
|
86
|
|
|
|
399
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
120
|
|
|
|
-
|
|
|
|
240
|
|
Settlement of lawsuits and other one-time costs
|
|
|
8
|
|
|
|
62
|
|
|
|
81
|
|
|
|
602
|
|
Gain on settlement of patron tax
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
-
|
|
Income tax expense
|
|
|
1,908
|
|
|
|
293
|
|
|
|
3,358
|
|
|
|
1,660
|
|
Loss (gain) on sale of assets
|
|
|
223
|
|
|
|
(127
|
)
|
|
|
212
|
|
|
|
(127
|
)
|
Non-GAAP provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,946
|
)
|
|
|
(1,129
|
)
|
|
|
(3,401
|
)
|
|
|
(2,011
|
)
|
Deferred
|
|
|
20
|
|
|
|
(991
|
)
|
|
|
5
|
|
|
|
(1,740
|
)
|
Non-GAAP net income
|
|
$
|
3,910
|
|
|
$
|
3,930
|
|
|
$
|
6,896
|
|
|
$
|
7,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted shares
|
|
|
9,721
|
|
|
|
10,215
|
|
|
|
9,768
|
|
|
|
10,356
|
|
Diluted EPS attributable to RCIHH common shareholders
|
|
$
|
0.39
|
|
|
$
|
0.54
|
|
|
$
|
0.68
|
|
|
$
|
0.79
|
|
Amortization of intangibles
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.04
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.02
|
|
Settlement of lawsuits and other one-time costs
|
|
|
0.00
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.06
|
|
Gain on settlement of patron tax
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
Income tax expense
|
|
|
0.20
|
|
|
|
0.03
|
|
|
|
0.34
|
|
|
|
0.16
|
|
Loss (gain) on sale of assets
|
|
|
0.02
|
|
|
|
(0.01
|
)
|
|
|
0.02
|
|
|
|
(0.01
|
)
|
Non-GAAP provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(0.20
|
)
|
|
|
(0.11
|
)
|
|
|
(0.35
|
)
|
|
|
(0.19
|
)
|
Deferred
|
|
|
0.00
|
|
|
|
(0.10
|
)
|
|
|
0.00
|
|
|
|
(0.17
|
)
|
Non-GAAP diluted EPS
|
|
$
|
0.41
|
|
|
$
|
0.39
|
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP operating income to non-GAAP operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
7,487
|
|
|
$
|
7,550
|
|
|
$
|
13,820
|
|
|
$
|
13,267
|
|
Amortization of intangibles
|
|
|
40
|
|
|
|
197
|
|
|
|
86
|
|
|
|
399
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
120
|
|
|
|
-
|
|
|
|
240
|
|
Settlement of lawsuits and other one-time costs
|
|
|
8
|
|
|
|
62
|
|
|
|
81
|
|
|
|
602
|
|
Gain on settlement of patron tax
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
-
|
|
Loss (gain) on sale of assets
|
|
|
223
|
|
|
|
(127
|
)
|
|
|
212
|
|
|
|
(127
|
)
|
Non-GAAP operating income
|
|
$
|
7,656
|
|
|
$
|
7,802
|
|
|
$
|
14,097
|
|
|
$
|
14,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP operating margin to non-GAAP operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
|
21.7
|
%
|
|
|
22.0
|
%
|
|
|
20.2
|
%
|
|
|
19.5
|
%
|
Amortization of intangibles
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
Stock-based compensation
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
0.0
|
%
|
|
|
0.4
|
%
|
Settlement of lawsuits and other one-time costs
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.9
|
%
|
Gain on settlement of patron tax
|
|
|
-0.3
|
%
|
|
|
0.0
|
%
|
|
|
-0.1
|
%
|
|
|
0.0
|
%
|
Loss (gain) on sale of assets
|
|
|
0.6
|
%
|
|
|
-0.4
|
%
|
|
|
0.3
|
%
|
|
|
-0.2
|
%
|
Non-GAAP operating margin
|
|
|
22.2
|
%
|
|
|
22.7
|
%
|
|
|
20.7
|
%
|
|
|
21.2
|
%
|
*
Per share amounts and percentages may not foot due to rounding.
The
adjustments to reconcile net income attributable to RCIHH common shareholders to non-GAAP net income exclude the impact of adjustments
related to noncontrolling interests, which is immaterial. In the calculation of non-GAAP diluted net income per share, we take
into consideration the adjustment to net income from the assumed conversion of debentures (see Note 7 to the condensed consolidated
financial statements).
Liquidity
and Capital Resources
At
March 31, 2017, our cash and cash equivalents were $13.2 million compared to $11.3 million at September 30, 2016. Because of the
large volume of cash we handle, we have very stringent cash controls. As of March 31, 2017, we had negative working capital of
$3.8 million compared to negative working capital of $2.7 million as of September 30, 2016, excluding assets held for sale amounting
to $5.5 million and $7.7 million, respectively. We believe our ability to generate cash from operating activities is one of our
fundamental financial strengths. Our net cash provided by operating activities was $11.0 million during the six months ended March
31, 2017 compared to $11.1 million during the six months ended March 31, 2016. The near-term outlook for our business remains
strong, and we expect to generate substantial cash flows from operations for the remainder of fiscal 2017. As a result of our
expected cash flows from operations, we have significant flexibility to meet our financial commitments.
We
prefer not to raise capital through the issuance of common stock. Instead, we use debt financing, which may include convertible
debt, to lower our overall cost of capital and increase our return on shareholders' equity. We have a history of borrowing funds
in private transactions and from sellers in acquisition transactions and continue to have the ability to borrow funds at reasonable
interest rates in that manner. We also have historically utilized cash flows from operations to invest in property and equipment
and adult nightclubs.
The
following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands):
|
|
For the Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
$
|
11,030
|
|
|
$
|
11,112
|
|
Investing activities
|
|
|
(3,578
|
)
|
|
|
(12,933
|
)
|
Financing activities
|
|
|
(5,580
|
)
|
|
|
2,856
|
|
Net increase in cash and cash equivalents
|
|
$
|
1,872
|
|
|
$
|
1,035
|
|
Cash
Flows from Operating Activities
Following
are our summarized cash flows from operating activities (in thousands):
|
|
For the Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
6,661
|
|
|
$
|
7,732
|
|
Depreciation and amortization
|
|
|
3,226
|
|
|
|
3,643
|
|
Deferred taxes
|
|
|
-
|
|
|
|
786
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
240
|
|
Change in operating assets and liabilities
|
|
|
618
|
|
|
|
(731
|
)
|
Other
|
|
|
525
|
|
|
|
(558
|
)
|
Net cash provided by operating activities
|
|
$
|
11,030
|
|
|
$
|
11,112
|
|
Cash
Flows from Investing Activities
Following
are our cash flows from investing activities (in thousands):
|
|
For the Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Additions to property and equipment
|
|
$
|
(5,680
|
)
|
|
$
|
(13,561
|
)
|
Proceeds from sale of property
|
|
|
2,047
|
|
|
|
-
|
|
Proceeds from sale of marketable securities
|
|
|
-
|
|
|
|
628
|
|
Proceeds from notes receivable
|
|
|
55
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
$
|
(3,578
|
)
|
|
$
|
(12,933
|
)
|
Following
is a breakdown of our additions to property and equipment for the six months ended March 31, 2017 and 2016 (in thousands):
|
|
For the Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Acquisition of real estate
|
|
$
|
-
|
|
|
$
|
12,505
|
|
New facilities capital expenditures
|
|
|
4,629
|
|
|
|
220
|
|
Maintenance capital expenditures
|
|
|
1,051
|
|
|
|
836
|
|
Total capital expenditures
|
|
$
|
5,680
|
|
|
$
|
13,561
|
|
The
capital expenditures during the six months ended March 31, 2017 are composed primarily of construction and development costs for
three new locations and our new corporate office, while the capital expenditures during the six months ended March 31, 2016 are
composed primarily of development costs of one new location and our new corporate office.
Cash
Flows from Financing Activities
Following
are our cash flows from financing activities (in thousands):
|
|
For the Six Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Proceeds from long-term debt
|
|
$
|
2,564
|
|
|
$
|
15,517
|
|
Payments on long-term debt
|
|
|
(6,179
|
)
|
|
|
(7,553
|
)
|
Purchase of treasury stock
|
|
|
(1,099
|
)
|
|
|
(4,704
|
)
|
Payment of loan origination costs
|
|
|
(99
|
)
|
|
|
-
|
|
Payment of dividends
|
|
|
(584
|
)
|
|
|
(296
|
)
|
Debt prepayment penalty
|
|
|
(75
|
)
|
|
|
-
|
|
Distribution to noncontrolling interests
|
|
|
(108
|
)
|
|
|
(108
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
(5,580
|
)
|
|
$
|
2,856
|
|
During
the six months ended March 31, 2017, we purchased and retired 89,685 shares of the Company’s common stock at an average
price of $12.25 per share, while during the six months ended March 31, 2016, we purchased and retired 500,902 shares of the Company’s
common stock at an average price of $9.39 per share. We started paying $0.03 per share quarterly dividend during the second quarter
of fiscal 2016.
On May 1, 2017, the Company raised $5.4
million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on May 1,
2020. The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity.
Management
also uses non-GAAP cash flow measures such as free cash flow. Free cash flow is derived from net cash provided by operating activities
less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation
strategy.
|
|
For the Six Months
|
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
11,030
|
|
|
$
|
11,112
|
|
Less: Maintenance capital expenditures
|
|
|
1,051
|
|
|
|
836
|
|
Free cash flow
|
|
$
|
9,979
|
|
|
$
|
10,276
|
|
We
are not aware of any event or trend that would potentially affect our liquidity. In the event such a trend develops, we believe
our working capital and capital expenditure requirements will be adequately met by cash flows from operations. In our opinion,
working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities
in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal
receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often
remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business down
turns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues,
overall cash flow, profitability from operations, and the level of long-term debt.
The
following table presents a summary of such indicators for the six months ended March 31:
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2017
|
|
|
(Decrease)
|
|
|
2016
|
|
|
(Decrease)
|
|
|
2015
|
|
Sales of alcoholic beverages
|
|
$
|
28,610
|
|
|
|
-1.9
|
%
|
|
$
|
29,178
|
|
|
|
3.0
|
%
|
|
$
|
28,315
|
|
Sales of food and merchandise
|
|
|
8,560
|
|
|
|
-4.3
|
%
|
|
|
8,943
|
|
|
|
-7.5
|
%
|
|
|
9,671
|
|
Service revenues
|
|
|
27,645
|
|
|
|
7.0
|
%
|
|
|
25,846
|
|
|
|
-5.6
|
%
|
|
|
27,375
|
|
Other
|
|
|
3,442
|
|
|
|
-11.8
|
%
|
|
|
3,904
|
|
|
|
1.9
|
%
|
|
|
3,832
|
|
Total revenues
|
|
|
68,257
|
|
|
|
0.6
|
%
|
|
|
67,871
|
|
|
|
-1.9
|
%
|
|
|
69,193
|
|
Net cash provided by operating activities
|
|
$
|
11,030
|
|
|
|
-0.7
|
%
|
|
$
|
11,112
|
|
|
|
-15.3
|
%
|
|
$
|
13,119
|
|
Adjusted EBITDA
|
|
$
|
17,233
|
|
|
|
-2.7
|
%
|
|
$
|
17,710
|
|
|
|
-8.3
|
%
|
|
$
|
19,307
|
|
Long-term debt (at period end)
|
|
$
|
102,300
|
|
|
|
0.6
|
%
|
|
$
|
101,713
|
|
|
|
42.6
|
%
|
|
$
|
71,347
|
|
*
See definition of Adjusted EBITDA above under Results of Operations.
Share
Repurchase
During
the six months ended March 31, 2017, we bought back 89,685 shares in the open market or through privately negotiated transactions
at prices ranging from $11.24 to $13.87. During the six months ended March 31, 2016, we bought back 500,902 shares in the open
market or through privately negotiated transactions at prices ranging from $8.00 to $9.85. As of March 31, 2017, we have $3.1
million authorized to purchase additional shares.
Other
Liquidity and Capital Resources
There
can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the
need arise.
We
believe that the adult entertainment industry standard of treating entertainers as independent contractors provides us with safe
harbor protection to preclude payroll tax assessment for prior years. We have prepared plans that we believe will protect our
profitability in the event that sexually oriented business industry is required in all states to convert dancers who are now independent
contractors into employees.
The
sexually oriented business industry is highly competitive with respect to price, service and location, as well as the professionalism
of the entertainment. Although management believes that we are well-positioned to compete successfully in the future, there can
be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.
Impact
of Inflation
We
have not experienced a material overall impact from inflation in our operations during the past several years. To the extent permitted
by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can
be no assurance that we will be able to do so in the future.
Seasonality
Our
nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September
with the strongest operating results occurring during October through March.
Growth
Strategy
We
believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic
segments with high growth potential. Our growth strategy involves the following: (a) to franchise our Bombshells brand, (b) to
open new clubs after market analysis, (c) to acquire existing clubs in locations that are consistent with our growth and income
targets and which appear receptive to the upscale club formula we have developed, (d) to form joint ventures or partnerships to
reduce start-up and operating costs, with us contributing equity in the form of our brand name and management expertise, (e) to
develop new club concepts that are consistent with our management and marketing skills, (f) to develop and open our restaurant
concepts as our capital and manpower allow, and/or (g) to control the real estate in connection with club operations, although
some clubs may be in leased premises.
We
currently have three Bombshells restaurants in development with two expected to open in the second half of fiscal 2017 and the
third in January 2018. In the third quarter of fiscal 2017, we opened a second Studio 80 in Houston, Texas and a re-concepted
club in Dallas.
Subsequent to the end of the second quarter
2017, on April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St. Louis area,
as well as the club’s building and land, adjacent land, and a nearby building and land that can be used for another gentlemen’s
club. The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at closing. The
Company plans to apply for mortgage financing for the acquired properties. Also, on May 8, 2017, a subsidiary of the Company
acquired the company that owns Scarlett’s Cabaret Miami in Pembroke Park, Florida along with certain related intellectual
property for total consideration of $25.952 million, payable $5.4 million at closing, $5.0 million after
six months through a short-term 5% note, and $15.552 million through a 12-year amortizing 8% note.
We
continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model
as we have done in the past. The acquisition of additional clubs may require us to obtain additional debt or issuance of our common
stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future,
if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth
strategy.