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RICK > SEC Filings for RICK > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for RICKS CABARET INTERNATIONAL INC

Form 10-Q for RICKS CABARET INTERNATIONAL INC


12-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto included in this quarterly report.

GENERAL

Rick's Cabaret International, Inc. was incorporated in the State of Texas in 1994. Through our subsidiaries, as of January 31, 2014, we operate a total of forty-three establishments that offer live adult entertainment, and/or restaurant and bar operations. We have one reportable segment, nightclubs.

SCHEDULE OF ESTABLISHMENTS



                                                Date
         Name of Establishment             Acquired/Opened
Club Onyx, Houston, TX                          1995
Rick's Cabaret, Minneapolis, MN                 1998
XTC Cabaret, Austin, TX                         1998
XTC Cabaret, San Antonio, TX                    1998
XTC Cabaret North, Houston, TX                  2004
Rick's Cabaret, New York City, NY               2005
Club Onyx, Charlotte, NC                        2005
Rick's Cabaret, San Antonio, TX                 2006
XTC Cabaret South, South Houston, TX            2006
Rick's Cabaret, Fort Worth, TX                  2007
Tootsie's Cabaret, Miami Gardens, FL            2008
XTC Cabaret, Dallas, TX                         2008
Club Onyx, Dallas, TX                           2008
Club Onyx, Philadelphia, PA                     2008
Rick's Cabaret, North Austin, TX                2009
Cabaret North, Fort Worth, TX                   2009
Cabaret East, Fort Worth, TX                    2010
XTC Cabaret, Fort Worth, TX                     2010
Rick's Cabaret DFW, Fort Worth, TX              2011
Downtown Cabaret, Minneapolis, MN               2011
Rick's Cabaret, Indianapolis, IN                2011
Temptations, Aledo, TX                          2011
Silver City Cabaret, Dallas, TX                 2012
Jaguars Club, Odessa, TX                        2012
Jaguars Club, Phoenix, AZ                       2012
Jaguars Club, Lubbock, TX                       2012
Jaguars Club, Longview, TX                      2012
Jaguars Club, Tye, TX                           2012
Jaguars Club, Edinburg, TX                      2012
Jaguars Club, El Paso, TX                       2012
Jaguars Club, Harlingen, TX                     2012
Rick's Cabaret, Lubbock, TX                     2012
Jaguar's Club, Beaumont, TX                     2012
Rick's Cabaret, Odessa, TX (1)                  2012
Vee Lounge, Fort Worth, TX                      2013
Bombshells, Dallas, TX                          2013
Ricky Bobby Sport Saloon, Fort Worth, TX        2013
Temptations, Sulphur, LA                        2013
Temptations, Beaumont, TX                       2013
Vivid Cabaret, Los Angeles, CA                  2013
The Black Orchid, Dallas, TX                    2013

Vivid Cabaret, New York, NY          2014
Jaguars, Houston, TX                 2013
Bombshells, Austin, TX (1)           2014
Bombshells, Webster, TX              2014
Bombshells, Fuqua (Houston) TX (1)   2014
Tootsies, Harvey, IL (1)             2014
Bombshells, Spring, TX (1)           2014

(1) To be opened in Calendar 2014.

As noted above, we have the following nightclubs and restaurants under construction or contract:

Rick's Cabaret Odessa, Texas - under construction - opening in spring of 2014.

Bombshells, Austin to be opened in spring of 2014.

Bombshells, Fuqua (Houston) to be opened in summer of 2014.

Tootsies, Harvey, Illinois, acquisition under definitive purchase agreement, expected to close in May of 2014

Bombshells, Spring, Texas to be opened in fall of 2014.

Our website address is www.Ricks.com. We also have an investors' website - www.ricksinvestor.com . Upon written request, we make available free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC under the Securities Exchange Act of 1934, as amended. Information contained in the website shall not be construed as part of this Form 10-K.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP"). GAAP consists of a set of standards issued by the FASB and other authoritative bodies in the form of FASB Statements, Interpretations, FASB Staff Positions, Emerging Issues Task Force consensuses and American Institute of Certified Public Accountants Statements of Position, among others. The Company has updated references to GAAP in this Form 10-Q to reflect the guidance in the ASC. The preparation of these 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.

Property and Equipment

Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets and the shorter of useful lives or terms of the applicable leases for leasehold improvements. Buildings have estimated useful lives ranging from 29 to 40 years. Furniture, equipment and leasehold improvements have estimated useful lives between five and 40 years. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses are charged or credited in the accompanying consolidated statement of income of the respective period.

Goodwill and Intangible Assets

FASB ASC 350, Goodwill and Other Intangibles Assets addresses the accounting for goodwill and other intangible assets. Under FASB ASC 350, goodwill and intangible assets with indefinite lives are no longer amortized, but reviewed on an annual basis for impairment. Definite lived intangible assets are amortized on a straight-line basis over their estimated lives. Fully amortized assets are written-off against accumulated amortization.

Impairment of Long-Lived Assets

In accordance with ASC 205, long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired in accordance with ASC 350. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

For goodwill, the impairment determination is made at the reporting unit level. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

None of our reporting units were at risk of failing step one of the impairment test (i.e. that fair value was not substantially in excess of carrying value) in either year.

Fair Value of Financial Instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of short and long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.

Revenue Recognition

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

The Company recognizes Internet revenue from monthly subscriptions to its online entertainment sites when notification of a new or existing subscription and its related fee are received from the third party hosting company or from the credit card company, usually two to three days after the transaction has occurred. The monthly fee is not refundable. The Company recognizes Internet auction revenue when payment is received from the credit card as revenues are not deemed estimable nor collection deemed probable prior to that point.

Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company's annual Expo convention are recognized upon the completion of the convention in August.

Income Taxes

Deferred income taxes are determined using the liability method in accordance with FASB ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

Put Options

In certain situations, the Company issues restricted common shares as partial consideration for acquisitions of certain businesses or assets. Pursuant to the terms and conditions of the governing acquisition agreements, the holder of such shares has the right, but not the obligation, to put a fixed number of the shares on a monthly basis back to the Company at a fixed price per share. The Company may elect during any given month to either buy the monthly shares or, if management elects not to do so, the holder can sell the monthly shares in the open market, and any deficiency between the amount which the holder receives from the sale of the monthly shares and the value of shares will be paid by the Company. The Company has accounted for these shares in accordance with the guidance established by FASB ASC 480, Distinguishing Liabilities From Equity, as a reclassification of the value of the shares from permanent to temporary equity. As the shares become due, the Company transfers the value of the shares back to permanent equity, less any amount paid to the holder. Also see "Derivative Financial Instruments" above. We finished liquidating these put options during the quarter ended March 31, 2013.

Earnings (Loss) Per Common Share

The Company computes earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. FASB ASC 260 provides for the calculation of basic and diluted earnings per share. Basic earnings per share 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 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 stock options, warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (loss) (as adjusted for interest expense, that would no longer occur if the debentures were converted).

Stock Options

The compensation cost recognized for the three months ended March 31, 2014 and 2013 was $150,605 and $281,745, respectively. There were 100,000 stock options exercised during the quarter ended March 31, 2014, aggregating $843,600. There were no stock options exercises for the three months ended March 31, 2013.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2013

For the three months ended March 31, 2014, we had consolidated total revenues of $32.9 million compared to consolidated total revenues of $28.7 million for the three months ended March 31, 2013, an increase of $4.1 million or 14.4%. The increase in total revenues was primarily attributable to clubs acquired during the last year with a slight decrease in same-store sales. Total revenues for same-location-same-period of club operations decreased to $27.0 million for the three months ended March 31, 2014 from $27.3 million for the same period ended March 31, 2013. This decrease is principally due to severe winter weather in 2014, along with poor performance from our Club Onyx brands. Excluding these units, same store sales would have been up 3.8%.

Following is a comparison of the Company's income statement for the quarters ended March 31, 2014 and 2013 with percentages compared to total revenue:

           (in thousands)                     2014               %             2013            %

Sales of alcoholic beverages            $         12,985           39.5 %   $   11,044           38.4 %
Sales of food and merchandise                      3,979           12.1 %        2,878           10.0 %
Service Revenues                                  14,347           43.6 %       13,052           45.4 %
Other                                              1,559            4.7 %        1,754            6.1 %
  Total Revenues                                  32,870          100.0 %       28,728          100.0 %

Cost of Goods Sold                                 4,041           12.3 %        3,495           12.2 %
Salaries & Wages                                   6,854           20.9 %        6,149           21.4 %
Stock-based Compensation                             151            0.5 %          281            1.0 %
Taxes and permits                                  5,142           15.6 %        4,573           15.9 %
Charge card fees                                     449            1.4 %          342            1.2 %
Rent                                               1,156            3.5 %          783            2.7 %
Legal & professional                                 426            1.3 %          980            3.4 %
Advertising and marketing                          1,406            4.3 %        1,162            4.0 %
Insurance                                            972            3.0 %          570            2.0 %
Utilities                                            646            2.0 %          552            1.9 %
Depreciation and amortization                      1,513            4.6 %        1,318            4.6 %
Gain on sale of property                             (86 )         -0.3 %            -            0.0 %
Settlement of lawsuit                                150            0.5 %            -            0.0 %
Other                                              2,591            7.9 %        2,353            8.2 %

Total operating expenses                          25,411           77.3 %       22,558           78.5 %
  Operating income                                 7,459           22.7 %        6,170           21.5 %

Interest income                                       35            0.1 %            1            0.0 %
Interest expense                                  (1,924 )         -5.9 %       (1,762 )         -6.1 %
Gain (loss) on change in fair value
of derivative instruments                              -            0.0 %            1            0.0 %
Income from continuing operations
before income taxes                     $          5,570           16.9 %   $    4,410           15.4 %

Following is an explanation of significant variances in the above amounts.

Service revenues include cover charges, fees paid by entertainers, room rentals, memberships and fees charged for credit card processing. Other revenues include ATM commissions earned, video games and other vending and certain promotion fees charged to our entertainers. We recognize revenue from other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding and media postage. The cost of goods sold for the club operations was 12.2% for each of the three months ended March 31, 2014 and 2013. The cost of goods sold for same-location-same-period of club operations for the three months ended March 31, 2014 was 11.4%, compared to 11.7% for the same period ended March 31, 2013.

Payroll for same-location-same-period of club operations was $4.4 million for the three months ended March 31, 2014 and $4.8 million for the same period in 2013. The decrease is due to adjustments and reduction of payroll in certain locations. Management currently believes that its labor and management staff levels are appropriate.

The increase in the percentage of rent expense to revenues is due to increased rents in both of our New York clubs, our Los Angeles club and our restaurants opening in leased locations.

The decrease in legal and professional expense is principally due to a continuing labor lawsuit in New York which was more active in 2012.

The increase in insurance expense is due to an increase from acquisitions and an increase in premium rates, especially in the general liability area. Also see Note 11 of Notes to Consolidated Financial Statements for more information regarding our former general liability insurer.

Income taxes, as a percentage of income before taxes was 34.5% and 36.6% for the quarters ended March 31, 2014 and 2013, respectively. The decrease in 2014 is principally due to the permanent difference - stock option disqualifying dispositions in 2014.

Operating income (exclusive of corporate overhead) for same-location-same-period of club operations was $7.6 and $7.5 million for the quarters ended March 31, 2014 and 2013, respectively.

Our "operating margin", the percentage of operating income to total revenues, was 22.7% and 21.5% for the quarters ended March 31, 2014 and 2013, respectively.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2014 AS COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2013

For the six months ended March 31, 2014, we had consolidated total revenues of $62.3 million compared to consolidated total revenues of $55.9 million for the six months ended March 31, 2013, an increase of $6.4 million or 11.5%. The increase in total revenues was primarily attributable to new club acquisitions, net of a decrease in total revenues for same-location-same-period of $130,000, to $53.2 million for the six months ended March 31, 2014. This small decrease is despite the severe winter weather in 2014 and the poor performance from our Club Onyx brands.

Following is a comparison of the Company's income statement for the six months ended March 31, 2014 and 2013 with percentages compared to total revenue:

           (in thousands)                  2014            %             2013            %

Sales of alcoholic beverages            $   24,674           39.6 %   $   21,449           38.4 %
Sales of food and merchandise                7,402           11.9 %        5,456            9.8 %
Service Revenues                            27,077           43.5 %       25,707           46.0 %
Other                                        3,140            5.0 %        3,257            5.8 %
  Total Revenues                            62,293          100.0 %       55,869          100.0 %

Cost of Goods Sold                           7,788           12.5 %        6,881           12.3 %
Salaries & Wages                            13,431           21.6 %       12,187           21.8 %
Stock-based Compensation                       154            0.2 %          563            1.0 %
Taxes and permits                            9,557           15.3 %        8,772           15.7 %
Charge card fees                               877            1.4 %          716            1.3 %
Rent                                         2,384            3.8 %        1,353            2.4 %
Legal & professional                         1,214            1.9 %        1,656            3.0 %
Advertising and marketing                    2,691            4.3 %        2,271            4.1 %
Insurance                                    1,771            2.8 %        1,069            1.9 %
Utilities                                    1,241            2.0 %        1,041            1.9 %
Depreciation and amortization                2,906            4.7 %        2,646            4.7 %
Gain on sale of property                       (86 )         -0.1 %            -            0.0 %
Settlement of lawsuit                          270            0.4 %            -            0.0 %
Other                                        5,022            8.1 %        4,631            8.3 %

Total operating expenses                    49,220           79.0 %       43,786           78.4 %
  Operating income                          13,073           21.0 %       12,083           21.6 %

Interest income                                112            0.2 %            8            0.0 %
Interest expense                            (3,936 )         -6.3 %       (3,405 )         -6.1 %
Gain (loss) on change in fair value
of derivative instruments                        -            0.0 %            1            0.0 %
Income from continuing operations
before income taxes                     $    9,249           14.8 %   $    8,687           15.5 %

Following is an explanation of significant variances in the above amounts.

Service revenues include cover charges, fees paid by entertainers, room rentals, memberships and fees charged for credit card processing. Other revenues include ATM commissions earned, video games and other vending and certain promotion fees charged to our entertainers. We recognize revenue from other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding, media postage and internet traffic purchases and webmaster payouts. The cost of goods sold for the club operations for the six months ended March 31, 2014 was 12.5% compared to 12.3% for the six months ended March 31, 2013. The cost of goods sold for same-location-same-period of club operations for the six months ended March 31, 2014 was 11.6%, compared to 12.0% for the same period ended March 31, 2013.

Payroll for same-location-same-period of club operations was $9.0 million for the six months ended March 31, 2014 and $9.7 million for the same period in 2013. The decrease is due to adjustments and reduction of payroll in certain locations. Management currently believes that its labor and management staff levels are appropriate.

The decrease in stock-based compensation is due to the stock options to employees and Board members in 2012 completely vesting in 2013.

The increase in the percentage of rent expense to revenues is due to increased rents in both of our New York clubs, our Los Angeles club and our opening restaurants in leased locations.

The decrease in legal and professional expense is principally due to a continuing labor lawsuit in New York which was more active in 2012.

The increase in insurance expense is due to an increase from acquisitions and an increase in premium rates, especially in the general liability area. Also see Note 11 of Notes to Consolidated Financial Statements for more information regarding our former general liability insurer.

The increase in depreciation is principally due to the new clubs acquired.

Income taxes, as a percentage of income before taxes was 35.1% and 36.7% for the six months ended March 31, 2014 and 2013, respectively. The higher rate in 2013 is principally due to the increased stock-based compensation, which is not deductible for tax purposes, in addition to the stock option disqualifying disposition in 2014.

Operating income (exclusive of corporate overhead) for same-location-same-period of club operations decreased to $14.5 million for the six months ended March 31, 2014 from to $14.7 million for same period ended March 31, 2013, or by 1.2%. The 2014 period was affected by losses in the period amounting to over $416,000 as a result of pre-opening costs for the Company's unopened Bombshells and Vivid New York compared to only 90,000 in pre-opening costs for the previous year.

Our "operating margin", the percentage of operating income to total revenues, was 21.0% and 21.6% for the six months ended March 31, 2014 and 2013, respectively.

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 some recurring charges that are included 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 . . .

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