Rick’s Cabaret – a Gentlemen’s Establishment with a private jet
This blog does not usually comment on small caps – but following Jeff Matthews I couldn’t resist. Ricks Cabaret is a listed consolidator of strip joints. Yeah – you read that right. The business consists of renting crappily constructed barns on the edge of towns (Houston, Vegas etc) and getting gals to jiggle their silicon around. They do own a fine-dining strip joint in NYC.
Despite having compiled an index of the price of hookers in various Eastern European locations I don’t usually hang around these businesses. I had never heard of Rick’s before Jeff’s post.
The stated premise for Rick’s Cabaret is that being a listed company gives Ricks (RICK:NASDAQ) access to capital and hence provides an exit for the thousands of strip club operators throughout the land. This of course ignores the other exits that Jeff Matthews points out (busted for prostitution, non payment of taxes etc).
But let’s take them at their word and look at the accounts as given. Here is the balance sheet:
CURRENT ASSETS:
Cash and cash equivalents
13,191,087
Accounts receivable
Trade
1,339,413
Other, net
722,868
Marketable securities
2,225
Inventories
1,706,544
Prepaid expenses and other current assets
975,067
Total current assets
17,937,204
PROPERTY AND EQUIPMENT:
Buildings, land and leasehold improvements
44,031,599
Furniture and equipment
11,463,950
55,495,549
Accumulated depreciation
-7,288,117
Total property and equipment, net
48,207,432
OTHER ASSETS:
Goodwill and indefinite lived intangibles
60,272,095
Definite lived intangibles, net
1,322,111
Other
761,753
Total other assets
62,355,959
Total assets
128,500,595
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable – trade
912,190
Accrued liabilities
4,390,849
Current portion of long-term debt
1,561,244
Total current liabilities
6,864,283
Deferred tax liability
16,278,165
Other long-term liabilities
508,579
Long-term debt, less current portion
28,877,816
Long-term debt-related parties
1,260,000
Total liabilities
53,788,843
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS
3,359,595
TEMPORARY EQUITY – Common stock, subject to put rights (461,740 and 215,000 shares, respectively)
10,935,020
PERMANENT STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par, 1,000,000 shares authorized; none issued and outstanding
--
Common stock, $.01 par, 15,000,000 shares authorized; 9,272,237 and 6,903,354 shares issued, respectively
92,722
Additional paid-in capital
52,807,479
Accumulated other comprehensive income (loss)
-11,123
Retained earnings
8,821,839
Less 908,530 shares of common stock held in treasury, at cost
-1,293,780
Total permanent stockholders’ equity
60,417,137
Total liabilities and stockholders’ equity
128,500,595
Now I am a dopey sort of guy – more used to bank balance sheets than strip joints. But there are a few things that are odd about this one.
The first is that there is over 60 million in goodwill on the balance sheet. That is 60 million paid to owners in excess of the value of couches and other fittings. That is a lot of goodwill for strip joints and leads you to the conclusion that if you want to be a multi-millionaire forget hedge funds – start a strip joint and sell it to RICK.
Indeed despite selling considerable common stock in unregistered sales to institutional investors the company manages to have almost no net tangible net worth. [The cash flow statement shows 27 million raised from sale of equity in the quarter – but I can find only one SEC 8K for about half that amount.]
The second thing that jumped out at me was the large deferred tax liability. The deferred tax liability of 16.2 million.
My first reaction was whoa – a deferred tax liability happens usually because profit for GAAP purposes is substantially higher than profit for tax purposes. This could be accelerated depreciation or some other tax incentive (though why the IRS/congress might give tax incentives for strip joints is beyond me) or it might just be that the company is declaring income for accounting purposes but not for tax purposes. There is of course a problem with faking your income up – which is that you tend to have to pay tax on the phoney income – unless you tell something different to the IRS.
In the quarter the prima facie tax was over a million but the payments were just over half a million. There is no large current tax liability to note – so there is prima-facie suggestion of overstating GAAP vis taxable income. Indeed the cash flow statement benefits from 632 thousand being added to the deferred taxes during the quarter… This does not surprise me – but it is not the main reason that that there is a large deferred tax liability. This company peculiarly tax effects the goodwill purchased – a treatment I have not seen elsewhere – but then I am used to looking at financials. [Anyone known why you would do this?] To quote:
Included in the Company’s deferred tax liabilities at June 30, 2008 is approximately $14,400,000 representing the tax effect of indefinite lived intangible assets from club acquisitions which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s balance sheet until the related clubs are sold or impaired.
This led me to think that the company might be doing something very strange like buying the clubs and not the corporate structures that the clubs reside in. That indeed would be sensible because it would absolve the acquirer from unpaid taxes and penalties (criminal and otherwise) that might live with the old owners. That might give a peculiar GAAP treatment of goodwill. And indeed they are – as this 8K shows . If there is any accounting expert here – can you explain this.
But this still gives us a residual of 1.8 million of deferred tax liability that comes from another purpose. This implies GAAP income of about 5 million more than cumulative taxable income over the history of the firm. I will make the point that this is roughly the half cumulative profit of RICKS. When in doubt (and where I can’t see a good explanation for deferred tax liabilities) I tend to prefer the income people report to the IRS than their stated income. (Maybe that is something I just learnt in the mortgage market!)
Now the premise for listing this thing is – I presume – access to capital. But you got to wonder the extent to which a bank or for that matter typical financial market type might lend money to a strip joint whose tax accounts don’t match their GAAP accounts. Well for the most part they don’t lend that way. Indeed almost every strip club they consolidate they do with high interest vendor finance. This is typical:
On November 30, 2007, in connection with the acquisition of Miami Gardens Square One, Inc., (see Note 9), the Company entered into two secured promissory notes in the amount of $5,000,000 each to the sellers (the "Notes"). The Notes bear interest at the rate of 14% per annum with the principal payable in one lump sum payment on November 30, 2010. Interest on the Notes is payable monthly, in arrears, with the first payment due thirty (30) days after the closing of the transaction, which occurred on November 30, 2007. The Company cannot pre-pay the Notes during the first twelve (12) months; thereafter, the Company may prepay the Notes, in whole or in part, provided that (i) any prepayment by the Company from December 1, 2008 through November 30, 2009, shall be paid at a rate of 110% of the original principal amount and (ii) any prepayment by the Company after November 30, 2009, may be prepaid without penalty at a rate of 100% of the original principal amount.
Most the long term debt is pretty short term – 30 November 2010 won’t get them to a time when bank lending standards drop enough. So they better have the cash when they get there. And that is not the only "long term debt" on the books.
Indeed access to capital looks questionable when the CEO has to personally guarantee corporate debt:
In connection with the acquisition of the real estate in Dallas related to the acquisition of Hotel Development Ltd., on April 11, 2008 (Note 9), the Company issued a $3,640,000 five-year promissory note (the "Promissory Note"). The Promissory Note bears interest at a varying rate at the greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%), and is guaranteed by the Company and Eric Langan, the Company’s Chief Executive Officer, individually.
Come to think of it – this company also purchased its private jet on hock:
In February 2008, the Company borrowed $1,561,500 from a lender. The funds were used to purchase an aircraft. The debt bears interest at 6.15% with monthly principal and interest payments of $11,323 beginning March 12, 2008. The note matures on February 12, 2028.
Hey – the interest rate on a private jet (presumably secured by the jet) is almost 8 percentage points better than the interest rate on a strip joint secured by the strip joint. Impressive.
Summary
So what have we got?
A company in a seedy business usually infiltrated with the sort of people who you would not want to have marry your daughter.
A company whose tax returns do not match their GAAP accounts
A company with no obvious access to capital and with a lot of debts that mature quite shortly and pay high interest rates,
A company who has no reason to be listed but manages to buy a private jet
People own this stock? Search me as to why…
That this is listed and retains a market cap over $100 million tells me that this market has a long way to fall. I shorted a token number last night.
A positive: the company has a code of ethics
I can’t be all negative.
Rick’s must be the only strip joint with a public stated code of ethics. You can find it here. However at Rick’s ethics tend only to apply to financial matters. The code is also only applicable to the following persons:
1. The Company's principal executive officers; 2. The Company's principal financial officers; 3. The Company's principal accounting officer or controller; and 4. Persons performing similar functions.
I will leave it to your imagination what other unethical behaviours might happen at a strip joint and who might perform them.
I wonder if you can think of any ethical violations that might involve the private jet.
I thought you could.
John