During
the nine months ended June 30, 2017, the Company acquired a club location for a total consideration of $26.0 million including
$20.6 million in seller financing, resulting in a cash payment of $5.4 million at closing.
During
the nine months ended June 30, 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 nine months ended June 30, 2017,
the Company sold a property for $1.5 million in exchange for a $1.5 million note payable reduction.
During
the nine months ended June 30, 2017, the Company purchased and retired 89,685 common shares at a cost of $1.1 million.
During
the nine months ended June 30, 2016, the Company converted debt principal and interest valued at $262,500 into 25,610 common shares.
During
the nine months ended June 30, 2016, the Company purchased and retired 606,995 common shares at a cost of $5.8 million.
During
the nine months ended June 30, 2016, a related party creditor converted $750,000 of debt to 75,000 shares of the Company’s
common stock.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1. Basis of Presentation
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 nine months ended June 30,
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 is currently assessing
the impact of the guidance on all of its revenues streams, particularly relating to gift card breakage, but does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements. The Company is still evaluating which
transition method it is going to use upon adoption.
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 had no 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 expect our consolidated
balance sheets to be materially impacted upon adoption due to the recognition of right-of-use assets and lease liabilities related
to currently classified operating leases. We do not expect ASU 2016-02 to have a material impact on our consolidated statements
of income though we expect a shift in the classification of expenses, the materiality of which we are currently evaluating.
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 June 30, 2017, we do not have any stock-based compensation awards outstanding. The Company has early adopted
ASU 2016-09 as of October 1, 2016.
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 in relation to debt prepayment penalty. There were no prior period transactions that need to be adjusted.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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.
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.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
. The amendments of this ASU provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: (1) the
fair value of the modified award is the same as the fair value of the original award immediately before the modification; (2) the
vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification;
and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification
of the original award immediately before the modification. The current disclosure requirements in Topic 718 are not changed. The
amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017, with early adoption permitted. As of June 30, 2017, we do not have any stock-based compensation awards
outstanding. We will adopt ASU 2017-09 when the Company modifies any stock-based compensation awards in the future.
3. Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year financial statement presentation.
4. Acquisitions and Dispositions
Acquisitions
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 following information summarizes the allocation
of fair values assigned to the assets at acquisition date (in thousands):
Land and building
|
|
$
|
3,200
|
|
Furniture and equipment
|
|
|
141
|
|
Noncompete
|
|
|
200
|
|
Other assets
|
|
|
77
|
|
Goodwill
|
|
|
656
|
|
Accrued liability
|
|
|
(75
|
)
|
Net assets acquired
|
|
$
|
4,199
|
|
Management believes that the recorded goodwill
represents the Company’s expansion into the Greater St. Louis area. Goodwill will not be amortized, but will be tested at
least annually for impairment. The goodwill balance of $656,000, which was recognized in the Nightclubs segment, will be deductible
for tax purposes.
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 $26.0 million, payable $5.4 million at closing, $5.0 million after six months through a short-term
5% note, and $15.6 million through a 12-year amortizing 8% note. See Note 7.
The following information summarizes the allocation
of fair values assigned to the assets at acquisition date (in thousands):
Furniture and equipment
|
|
$
|
633
|
|
Leasehold improvement
|
|
|
1,222
|
|
Definite-lived intangibles
|
|
|
500
|
|
SOB license
|
|
|
23,488
|
|
Inventory
|
|
|
109
|
|
Net assets acquired
|
|
$
|
25,952
|
|
For the two preceding acquisitions, the Company
has not finalized its valuation analysis and calculations in sufficient detail necessary to arrive at the fair value of assets
acquired from the previous owners, along with the determination of any goodwill or gain on the transactions. Since the initial
accounting has not been completed for the acquisitions, the Company has not yet allocated any amount to goodwill for the Scarlett’s
acquisition.
The Company’s pro forma results of
operations for the acquisitions have not been presented because the effect of the acquisitions was not material to our consolidated
financial statements. Since the acquisition dates, the two acquisitions generated combined revenues of $2.2 million that are included
in the Company’s consolidated statements of income for the three and nine months ended June 30, 2017.
Dispositions
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 sheet as of September 30, 2016, 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 June 6, 2017, the Company closed on the
sale of another non-income producing property, included in assets held for sale on the Company’s condensed consolidated
balance sheet as of September 30, 2016, for $1.5 million, recognizing approximately $0.9 million gain on the sale. The buyer owned
one of the Company’s note payable, hence, the Company exchanged the property for a $1.5 million reduction in its note payable.
5. Assets Held for Sale
During the fourth quarter of fiscal 2016, the
Company had decided to offer six real estate properties for sale. The aggregate estimated fair value of the properties less cost
to sell as of September 30, 2016 was approximately $7.7 million, which is primarily comprised of land and buildings, and reclassified
to assets held for sale in the Company’s consolidated balance sheet.
During the quarter ended March 31, 2017, the
Company sold one of the properties held for sale for $2.2 million, recognizing a $116,000 loss. During the quarter ended June
30, 2017, the Company sold another property held for sale for $1.5 million, recognizing a $0.9 million gain. The gain or
loss on the sale of these properties is included in other charges, net in our consolidated statements of income. See
Note 4.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
At the end of the quarter ended June 30, 2017,
Company management decided to close an underperforming club in Dallas. The Company wrote off the balance of goodwill for that location
and recorded an impairment charge amounting to $1.4 million, which is included in other charges, net in our consolidated statements
of income for the three and nine months ended June 30, 2017. The Company also recorded in assets held for sale the carrying value
of the property for sale consisting principally of land and building amounting to $5.2 million, which is lower than appraised value.
The Company expects the property to be sold within 12 months.
The assets held for sale do not have liabilities
associated with them that need to be directly settled from the proceeds in the event of a transaction.
6. Selected Account Information
The components of accrued liabilities are as
follows (in thousands):
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
Payroll and related costs
|
|
$
|
1,655
|
|
|
$
|
1,506
|
|
Lawsuit settlement – legal fees
|
|
|
1,871
|
|
|
|
2,704
|
|
Income taxes
|
|
|
1,036
|
|
|
|
-
|
|
Insurance
|
|
|
447
|
|
|
|
2,303
|
|
Sales and liquor taxes
|
|
|
910
|
|
|
|
889
|
|
Patron tax
|
|
|
808
|
|
|
|
1,559
|
|
Unearned revenues
|
|
|
760
|
|
|
|
256
|
|
Property taxes
|
|
|
784
|
|
|
|
1,017
|
|
Other
|
|
|
2,564
|
|
|
|
2,572
|
|
|
|
$
|
10,835
|
|
|
$
|
12,806
|
|
The components of selling, general and administrative expenses are
as follows (in thousands):
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Taxes and permits
|
|
$
|
1,888
|
|
|
$
|
1,943
|
|
|
$
|
6,017
|
|
|
$
|
6,122
|
|
Advertising and marketing
|
|
|
1,708
|
|
|
|
1,407
|
|
|
|
4,720
|
|
|
|
3,937
|
|
Supplies and services
|
|
|
1,245
|
|
|
|
1,218
|
|
|
|
3,533
|
|
|
|
3,635
|
|
Insurance
|
|
|
991
|
|
|
|
895
|
|
|
|
2,878
|
|
|
|
2,676
|
|
Rent
|
|
|
859
|
|
|
|
725
|
|
|
|
2,299
|
|
|
|
2,532
|
|
Legal
|
|
|
744
|
|
|
|
774
|
|
|
|
2,156
|
|
|
|
2,171
|
|
Utilities
|
|
|
695
|
|
|
|
692
|
|
|
|
2,021
|
|
|
|
2,096
|
|
Charge card fees
|
|
|
840
|
|
|
|
618
|
|
|
|
2,027
|
|
|
|
1,788
|
|
Accounting and professional fees
|
|
|
545
|
|
|
|
238
|
|
|
|
1,602
|
|
|
|
928
|
|
Repairs and maintenance
|
|
|
546
|
|
|
|
523
|
|
|
|
1,545
|
|
|
|
1,546
|
|
Security
|
|
|
557
|
|
|
|
535
|
|
|
|
1,610
|
|
|
|
1,553
|
|
Other
|
|
|
1,149
|
|
|
|
1,021
|
|
|
|
3,161
|
|
|
|
3,066
|
|
|
|
$
|
11,767
|
|
|
$
|
10,589
|
|
|
$
|
33,569
|
|
|
$
|
32,050
|
|
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
7. Long-Term Debt
Long-term
debt consisted of the following (in thousands):
|
|
June
30, 2017
|
|
|
September
30, 2016
|
|
Notes payable at 10%-11%,
mature August 2022 and December 2024
|
|
$
|
2,437
|
|
|
$
|
2,662
|
|
Note payable at 7%, matures December 2019
|
|
|
105
|
|
|
|
133
|
|
Notes payable at 5.5%, mature January 2023
|
|
|
1,178
|
|
|
|
1,238
|
|
Notes payable at 5.5%, mature January 2023 and
January 2022
|
|
|
4,601
|
|
|
|
4,864
|
|
Note payable refinanced at 6.25%, matures July
2018
|
|
|
1,147
|
|
|
|
1,227
|
|
Note payable at 6.3%, matures June 2030, collateralized
by aircraft
|
|
|
-
|
|
|
|
422
|
|
Note payable at 9.5%, matures August 2024
|
|
|
9,017
|
|
|
|
10,642
|
|
Notes payable at 9.5%, mature September 2024
|
|
|
5,083
|
|
|
|
7,040
|
|
6% convertible debentures, mature March 2023
|
|
|
-
|
|
|
|
406
|
|
Notes payable at 13%, mature October 2016 and
2017
|
|
|
-
|
|
|
|
4,000
|
|
Notes payable at 5%-7%, mature from 2018 to
2028
|
|
|
1,727
|
|
|
|
1,867
|
|
Note payable at 11%, matures June 2018
|
|
|
-
|
|
|
|
1,500
|
|
9% convertible debentures, mature October 2016
|
|
|
-
|
|
|
|
452
|
|
7.45% note payable collateralized by aircraft,
matures 2019
|
|
|
2,810
|
|
|
|
3,013
|
|
Notes payable at 12%, mature December 2017 and
September 2018
|
|
|
-
|
|
|
|
4,000
|
|
Non-interest-bearing debt to State of Texas,
matures May 2022, interest imputed at 9.6%
|
|
|
5,488
|
|
|
|
6,201
|
|
Note payable at 6.5%, matures January 2020
|
|
|
4,519
|
|
|
|
4,621
|
|
Note payable at 6%, matures January 2019
|
|
|
595
|
|
|
|
857
|
|
Notes payable at 5.5%, mature May 2020
|
|
|
5,364
|
|
|
|
5,493
|
|
Note payable at 6%, matures May 2020
|
|
|
1,126
|
|
|
|
1,386
|
|
Note payable at 5.3%, matures December 2024
|
|
|
1,792
|
|
|
|
1,842
|
|
Note payable at 5.45%, matures July 2020
|
|
|
10,702
|
|
|
|
10,962
|
|
Note payable at the greater of 2% above prime
or 5% (5.5% at September 30, 2016), matures October 2025
|
|
|
4,334
|
|
|
|
4,430
|
|
Note payable at 5%, matures January 2026
|
|
|
9,724
|
|
|
|
9,882
|
|
Note payable at 5.25%, matures March 2037
|
|
|
4,684
|
|
|
|
4,442
|
|
Note payable at 5%, matures July 2017
|
|
|
-
|
|
|
|
2,157
|
|
Note payable at 5%, matures February 2018
|
|
|
1,894
|
|
|
|
1,894
|
|
Note payable at 5.95%, matures August 2021
|
|
|
8,438
|
|
|
|
8,945
|
|
Note payable at 12%, matures October 2021
|
|
|
9,736
|
|
|
|
-
|
|
Note payable at 9.58%, matures March 2022
|
|
|
366
|
|
|
|
-
|
|
Note payable at 4.99%, matures April 2037, collateralized
by aircraft
|
|
|
948
|
|
|
|
-
|
|
Notes payable at 12%, mature June 2020
|
|
|
5,440
|
|
|
|
-
|
|
Note payable at 5%, matures November 2017
|
|
|
5,000
|
|
|
|
-
|
|
Note payable at 8%, matures May 2029
|
|
|
15,487
|
|
|
|
-
|
|
Note payable at 5%, matures May 2037
|
|
|
2,163
|
|
|
|
-
|
|
Total debt
|
|
|
125,905
|
|
|
|
106,578
|
|
Less unamortized debt issuance costs
|
|
|
(637
|
)
|
|
|
(692
|
)
|
Less current portion
|
|
|
(16,237
|
)
|
|
|
(9,950
|
)
|
Total long-term debt, net
|
|
$
|
109,031
|
|
|
$
|
95,936
|
|
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 June 30, 2017, the Company had available borrowing capacity of $1.0 million under the revolving line of credit.
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. See Note 14.
On May 4, 2017, the Company entered into a
construction loan agreement with a bank for the construction of the Company’s Bombshells Pearland location. The maximum availability
of the 5% promissory note is $4.8 million with advances based on the progress of construction. On June 4, 2017, an initial advance
of $2.2 million was used to pay off a previous interest-only note for the same construction project. The new loan is payable interest-only
until after one year from the date of the initial advance when the construction loan, including all advances as its principal,
converts to an amortizing 20-year note with scheduled monthly payments to be determined on the date of conversion. The Company
paid loan costs amounting to $24,000, which will be amortized for the term of the note.
On May 8, 2017, in relation to the Scarlett’s
acquisition (see Note 4), the Company executed two promissory notes with the sellers: (i) a 5% short-term note for $5.0 million
payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million. The 12-year note
is payable $168,343 per month, including interest.
As of June 30, 2017, the Company is in compliance
with all its debt covenants.
Future maturities of long-term debt consist
of the following (in thousands) as of June 30, 2017:
|
|
Regular
|
|
|
Balloon
|
|
|
Total
|
|
12-Month Period Ending
|
|
Amortization
|
|
|
Payments
|
|
|
Payments
|
|
June 30, 2018
|
|
$
|
14,343
|
|
|
$
|
1,894
|
|
|
$
|
16,237
|
|
June 30, 2019
|
|
|
7,817
|
|
|
|
3,404
|
|
|
|
11,221
|
|
June 30, 2020
|
|
|
8,729
|
|
|
|
15,238
|
|
|
|
23,967
|
|
June 30, 2021
|
|
|
8,626
|
|
|
|
9,572
|
|
|
|
18,198
|
|
June 30, 2022
|
|
|
5,298
|
|
|
|
22,226
|
|
|
|
27,524
|
|
Thereafter
|
|
|
21,759
|
|
|
|
6,999
|
|
|
|
28,758
|
|
|
|
$
|
66,572
|
|
|
$
|
59,333
|
|
|
$
|
125,905
|
|
8. Stockholders’ Equity
During the nine months ended June 30, 2017,
the Company purchased and retired 89,685 common shares at a cost of $1.1 million. The Company also paid a $0.09 per share cash
dividend totaling approximately $877,000.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
During the nine months ended June 30, 2016,
the Company purchased and retired 606,995 common shares at a cost of $5.8 million. The Company also paid a $0.06 per share cash
dividend totaling approximately $591,000.
During the nine months ended June 30, 2016,
the Company converted debt principal and interest valued at $262,500 into 25,610 common shares.
During the nine months ended June 30, 2016,
a related party creditor converted $750,000 of debt to 75,000 shares of the Company’s common stock.
9. Earnings Per Share
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).
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 Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH common shareholders - basic
|
|
$
|
3,841
|
|
|
$
|
2,653
|
|
|
$
|
10,498
|
|
|
$
|
10,710
|
|
Adjustment to net income from assumed conversion of debentures(2)
|
|
|
-
|
|
|
|
33
|
|
|
|
5
|
|
|
|
100
|
|
Adjusted net income attributable to RCIHH common shareholders - diluted
|
|
$
|
3,841
|
|
|
$
|
2,686
|
|
|
$
|
10,503
|
|
|
$
|
10,810
|
|
Denominator(1)(3) -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,719
|
|
|
|
9,906
|
|
|
|
9,735
|
|
|
|
10,071
|
|
Effect of potentially dilutive restricted stock, warrants and options
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Effect of potentially dilutive convertible debentures(2)
|
|
|
-
|
|
|
|
140
|
|
|
|
16
|
|
|
|
140
|
|
Adjusted weighted average number of common shares outstanding - diluted
|
|
|
9,719
|
|
|
|
10,047
|
|
|
|
9,751
|
|
|
|
10,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
1.08
|
|
|
$
|
1.06
|
|
Diluted earnings per share
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
1.08
|
|
|
$
|
1.06
|
|
(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 nine
months ended June 30, 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 nine months ended June 30, 2017.
(2) Convertible debentures (principal and accrued
interest) outstanding at the beginning of the three months ended June 30, 2017 and 2016 totaling $0 and $1.6 million, respectively,
and at the beginning of the nine months ended June 30, 2017 and 2016 totaling $859,000 and $3.8 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.
The last of the Company’s convertible notes had been fully paid in March 2017.
(3) As of June 30, 2017, the Company has no
outstanding restricted stock, stock options, warrants or convertible debt.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
10. Income Taxes
Income tax expense was $1.9 million and $5.2
million for the three and nine months ended June 30, 2017, respectively, compared with $2.0 million and $3.6 million for the three
and nine months ended June 30, 2016, respectively. The effective income tax rate for the nine months ended June 30, 2017 was 33.3%
compared with 26.0% for the comparable period in the prior year. Our effective tax rate is affected by state taxes, permanent differences,
and tax credits, including the FICA tax credit.
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 June 30, 2017 and September
30, 2016, the liability for uncertain tax positions totaled approximately $437,000 and $1.0 million, respectively, which is included
in current liabilities on our condensed consolidated balance sheets, and is open to further evaluation. During the three
and nine months ended June 30, 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.
11. Commitments and Contingencies
Leases
The Company leases certain equipment and facilities
under operating leases, of which rent expense was approximately $859,000 and $725,000 for the three months ended June 30, 2017
and 2016, respectively, and approximately $2.3 million and $2.5 million for the nine months ended June 30, 2017 and 2016, respectively.
Rent expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded
using the straight-line method over the initial lease term whereby an equal amount of rent expense is attributed to each period
during the term of the lease, regardless of when actual payments are made. Generally, this results in rent expense in excess of
cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between
rent expense recognized and actual rental payments is recorded as other long-term liabilities in the consolidated balance sheets.
In relation to the acquisition of Scarlett’s
in Pembroke Park, Florida (see Note 4), a subsidiary of the Company assumed the lease for the club building, and entered into a
new lease for certain office space, a billboard and parking lot from an affiliate of the former owners. The remaining term of both
leases expires in October 2035. Aggregate monthly rent of the leases amounts to $78,000, subject to lease escalation.
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.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 June 30, 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.
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.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
General
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 nine
months ended June 30, 2017 totaled $222,000 and $303,000, respectively, while settlements of lawsuits for the three and nine months
ended June 30, 2016 totaled $139,000 and $741,000, respectively. As of June 30, 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.
From time to time, we are involved in or
subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course
of business, including direct claims brought by or against us with contracts, employment and other matters. We accrue for a liability
when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant
judgement is required in both the determination of probability and the determination as to whether a loss is reasonably estimable.
In addition, in the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop
what we believe to be a reasonable range of possible loss, then we will include disclosure related to such a matter as appropriate
and in compliance with ASC 450. The accruals or estimates, if any, are reviewed at least quarterly and adjusted to reflect the
impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular
matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, as
applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of
loss, indicate that the estimate is immaterial to our financial statements as a whole, or, if the amount of such adjustment cannot
be reasonably estimated, disclose that an estimate cannot be made.
12. Segment Information
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 Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
32,575
|
|
|
$
|
28,336
|
|
|
$
|
91,824
|
|
|
$
|
86,272
|
|
Bombshells
|
|
|
4,611
|
|
|
|
5,005
|
|
|
|
13,281
|
|
|
|
14,013
|
|
Other
|
|
|
243
|
|
|
|
611
|
|
|
|
581
|
|
|
|
1,538
|
|
|
|
$
|
37,429
|
|
|
$
|
33,952
|
|
|
$
|
105,686
|
|
|
$
|
101,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
10,579
|
|
|
$
|
9,172
|
|
|
$
|
30,293
|
|
|
$
|
27,844
|
|
Bombshells
|
|
|
692
|
|
|
|
905
|
|
|
|
2,131
|
|
|
|
2,150
|
|
Other
|
|
|
(130
|
)
|
|
|
(650
|
)
|
|
|
(693
|
)
|
|
|
(2,154
|
)
|
General corporate
|
|
|
(3,258
|
)
|
|
|
(2,770
|
)
|
|
|
(10,028
|
)
|
|
|
(7,916
|
)
|
|
|
$
|
7,883
|
|
|
$
|
6,657
|
|
|
$
|
21,703
|
|
|
$
|
19,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,344
|
|
|
$
|
1,274
|
|
|
$
|
3,811
|
|
|
$
|
3,836
|
|
Bombshells
|
|
|
202
|
|
|
|
237
|
|
|
|
643
|
|
|
|
700
|
|
Other
|
|
|
5
|
|
|
|
171
|
|
|
|
14
|
|
|
|
513
|
|
General corporate
|
|
|
159
|
|
|
|
143
|
|
|
|
468
|
|
|
|
419
|
|
|
|
$
|
1,710
|
|
|
$
|
1,825
|
|
|
$
|
4,936
|
|
|
$
|
5,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,199
|
|
|
$
|
110
|
|
|
$
|
3,618
|
|
|
$
|
12,616
|
|
Bombshells
|
|
|
1,164
|
|
|
|
119
|
|
|
|
3,882
|
|
|
|
263
|
|
Other
|
|
|
-
|
|
|
|
4
|
|
|
|
11
|
|
|
|
6
|
|
General corporate
|
|
|
1,005
|
|
|
|
3,782
|
|
|
|
1,537
|
|
|
|
4,691
|
|
|
|
$
|
3,368
|
|
|
$
|
4,015
|
|
|
$
|
9,048
|
|
|
$
|
17,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
275,252
|
|
|
$
|
244,464
|
|
|
|
|
|
|
|
|
|
Bombshells
|
|
|
10,940
|
|
|
|
8,673
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,113
|
|
|
|
896
|
|
|
|
|
|
|
|
|
|
General corporate
|
|
|
15,361
|
|
|
|
22,455
|
|
|
|
|
|
|
|
|
|
|
|
$
|
302,666
|
|
|
$
|
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)
13. Noncontrolling Interests
Noncontrolling interests represent the portion
of equity in a consolidated entity held by owners other than the consolidating parent. Noncontrolling interests are reported in
the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income attributable
to both the Company and the noncontrolling interests are reported in the consolidated statements of income.
Our consolidated financial statements include
noncontrolling interests related principally to the Company’s ownership of 51% of an entity which owns the real estate for
the Company’s nightclub in Philadelphia.
14. Related Party Transaction
On May 1, 2017, the Company raised $5.4 million
through the issuance of 12% unsecured promissory notes to certain investors (“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. See Note 7.
The notes were issued to several creditors, which include a Company employee with a share of $200,000. The terms of the employee
note are uniform with all the other Investors’ terms.
Presently, our Chairman and President,
Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation
or other direct financial benefit for any of the guarantees.