NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company”
or “RCIHH”) have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP” or “U.S. 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.
The September 30, 2018 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures
required by GAAP. 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, 2018 included in the Company’s Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission on December 31, 2018. 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 statement of the financial statements, consisting
solely of normal recurring adjustments, have been made. Operating results for the three and six months ended March 31, 2019 are
not necessarily indicative of the results that may be expected for the year ending September 30, 2019.
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” and codified as Accounting Standards Codification
No. 606, “ASC 606”), 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 adopted
the new revenue recognition standard as of October 1, 2018 using the cumulative effect method, which did not have a material impact
on its consolidated financial statements. See Note 4 for new disclosures as required by ASC 606.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities, which amends the guidance on the classification and measurement of financial
instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related
to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes
for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair
value of financial instruments. The amendments of the ASU are effective for us for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company adopted ASU 2016-01 as of October 1, 2018. Our adoption required
the Company to reclassify $220,000 from accumulated other comprehensive income to retained earnings as of the beginning of the
quarter ended December 31, 2018. All succeeding unrealized gains or losses related the changes in the market value of our equity
securities are included in non-operating gains/losses in our consolidated statement of income.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 fiscal years, and interim periods within
those fiscal years, 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 are in the process of compiling
an inventory of all lease documents and comparing them to recorded expenses to determine completeness. We have also evaluated
several real estate leases according to the classification criteria of ASC 842. While we anticipate changes in the classification
of expenses in our income statement and the timing of recognition of these expenses, we are still evaluating the materiality of
the implementation of this standard.
In
February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial statement preparers with an
option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in
the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) is recorded. The ASU requires
financial statement preparers to disclose (1) a description of the accounting policy for releasing income tax effects from AOCI;
(2) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (3) information about the other income
tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Topic 220,
Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related
tax effects are presented in other comprehensive income as required by GAAP. The ASU is effective for all organizations for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations
should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which
the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We believe that the adoption
of this ASU will not have a material impact on our consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements of Accounting Standards
Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may
affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to
valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect
the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions
from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate
net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty
in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes
in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements
held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs
used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of
the ASU and delay adoption of the additional disclosures until the effective date. We are still evaluating the impact of this
ASU on the Company’s consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns the guidance
for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of
the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply. However, if there
has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of
fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts both lessees and lessors from having to provide
certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The update is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are still evaluating the impact
of this ASU on the Company’s consolidated financial statements.
3.
Revision of Prior Year Immaterial Misstatement
During
the quarter ended December 31, 2018, the Company identified certain mechanical errors in our goodwill impairment analysis that
was performed for our annual impairment testing for fiscal year ended September 30, 2018. These errors related to the use of an
incorrect income tax rate assumption and the exclusion of certain debt service payments as part of our goodwill impairment testing
for two of our reporting units, which resulted in a goodwill impairment charge of $834,000.
The
Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined that for
both the quarter and fiscal year ended September 30, 2018, the errors were immaterial. The Company has decided to correct these
immaterial errors as revisions to our previously issued financial statements and will adjust the Form 10-K when filed in succeeding
periods of this fiscal year.
The
tables below present the impact of the revision in the Company’s consolidated financial statements (in thousands):
|
|
|
Fiscal
Year Ended September 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Revised
|
|
|
Statement of Income/Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
Other charges, net
|
|
$
|
8,350
|
|
|
$
|
834
|
|
|
$
|
9,184
|
|
|
Total operating expenses
|
|
|
137,352
|
|
|
|
834
|
|
|
|
138,186
|
|
|
Income from operations
|
|
|
28,396
|
|
|
|
(834
|
)
|
|
|
27,562
|
|
|
Income before income taxes
|
|
|
18,676
|
|
|
|
(834
|
)
|
|
|
17,842
|
|
|
Net income
|
|
|
21,794
|
|
|
|
(834
|
)
|
|
|
20,960
|
|
|
Net income attributable to RCIHH common
stockholders
|
|
|
21,713
|
|
|
|
(834
|
)
|
|
|
20,879
|
|
|
Earnings per share - basic
|
|
$
|
2.23
|
|
|
$
|
(0.08
|
)
|
|
$
|
2.15
|
|
|
Earnings per share - diluted
|
|
$
|
2.23
|
|
|
$
|
(0.08
|
)
|
|
$
|
2.15
|
|
|
Comprehensive income
|
|
$
|
22,014
|
|
|
$
|
(834
|
)
|
|
$
|
21,180
|
|
|
Comprehensive income attributable to
RCI Hospitality Holdings, Inc.
|
|
|
21,933
|
|
|
|
(834
|
)
|
|
|
21,099
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
September
30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
|
Balance Sheet/Statement of Changes
in Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
44,425
|
|
|
$
|
(834
|
)
|
|
$
|
43,591
|
|
|
Total assets
|
|
|
330,566
|
|
|
|
(834
|
)
|
|
|
329,732
|
|
|
Retained earnings
|
|
|
89,740
|
|
|
|
(834
|
)
|
|
|
88,906
|
|
|
Total RCIHH stockholders’ equity
|
|
|
154,269
|
|
|
|
(834
|
)
|
|
|
153,435
|
|
|
Total stockholders’ equity
|
|
|
154,166
|
|
|
|
(834
|
)
|
|
|
153,332
|
|
|
Total liabilities and stockholders’
equity
|
|
|
330,566
|
|
|
|
(834
|
)
|
|
|
329,732
|
|
The
table below presents the impact of the revision in the Company’s notes to its consolidated financial statements related
to unaudited quarterly results of operations (in thousands):
|
|
|
Quarter
Ended September 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
|
Income from operations
|
|
$
|
1,533
|
|
|
$
|
(834
|
)
|
|
$
|
699
|
|
|
Net loss attributable to RCIHH common
stockholders
|
|
|
(2,672
|
)
|
|
|
(834
|
)
|
|
|
(3,506
|
)
|
|
Loss per share - basic
|
|
$
|
(0.27
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.36
|
)
|
|
Loss per share - diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.36
|
)
|
The
consolidated statements of cash flows are not presented because there is no impact on total cash flows from operating activities,
investing activities and financing activities. Certain components of net cash provided by operating activities changed, as caused
by the revision, but the net change amounted to zero for both quarter and fiscal year ended September 30, 2018.
4.
Revenues
On
October 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (formerly ASU 2014-09). The Company
recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale
upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified
in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities
are presented on a net basis in the unaudited condensed accompanying consolidated statements of income. The Company recognizes
revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to
a customer.
Commission
revenues, such as ATM commission, are recognized when the basis for such commission has transpired. 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, which normally occurs during
our fiscal fourth quarter. Other rental revenues are recognized when earned (recognized over time) and are more appropriately
covered by guidance under ASC Topic 840, Leases.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below.
|
|
|
Three
Months Ended March 31, 2019
|
|
|
Three
Months Ended March 31, 2018
|
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Sales of alcoholic beverages
|
|
$
|
14,148
|
|
|
$
|
4,338
|
|
|
$
|
-
|
|
|
$
|
18,486
|
|
|
$
|
13,992
|
|
|
$
|
3,380
|
|
|
$
|
-
|
|
|
$
|
17,372
|
|
|
Sales of food and merchandise
|
|
|
3,293
|
|
|
|
3,146
|
|
|
|
-
|
|
|
|
6,439
|
|
|
|
3,208
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
5,424
|
|
|
Service revenues
|
|
|
16,943
|
|
|
|
36
|
|
|
|
-
|
|
|
|
16,979
|
|
|
|
16,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,133
|
|
|
Other revenues
|
|
|
2,663
|
|
|
|
7
|
|
|
|
252
|
|
|
|
2,922
|
|
|
|
2,110
|
|
|
|
6
|
|
|
|
181
|
|
|
|
2,297
|
|
|
|
|
$
|
37,047
|
|
|
$
|
7,527
|
|
|
$
|
252
|
|
|
$
|
44,826
|
|
|
$
|
35,443
|
|
|
$
|
5,602
|
|
|
$
|
181
|
|
|
$
|
41,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
36,582
|
|
|
$
|
7,527
|
|
|
$
|
238
|
|
|
$
|
44,347
|
|
|
$
|
35,152
|
|
|
$
|
5,602
|
|
|
$
|
163
|
|
|
$
|
40,917
|
|
|
Recognized over
time
|
|
|
465
|
*
|
|
|
-
|
|
|
|
14
|
|
|
|
479
|
|
|
|
291
|
*
|
|
|
-
|
|
|
|
18
|
|
|
|
309
|
|
|
|
|
$
|
37,047
|
|
|
$
|
7,527
|
|
|
$
|
252
|
|
|
$
|
44,826
|
|
|
$
|
35,443
|
|
|
$
|
5,602
|
|
|
$
|
181
|
|
|
$
|
41,226
|
|
|
|
|
Six
Months Ended March 31, 2019
|
|
|
Six
Months Ended March 31, 2018
|
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Sales of alcoholic beverages
|
|
$
|
28,950
|
|
|
$
|
7,846
|
|
|
$
|
-
|
|
|
$
|
36,796
|
|
|
$
|
28,117
|
|
|
$
|
7,060
|
|
|
$
|
-
|
|
|
$
|
35,177
|
|
|
Sales of food and merchandise
|
|
|
6,500
|
|
|
|
5,629
|
|
|
|
-
|
|
|
|
12,129
|
|
|
|
6,370
|
|
|
|
4,361
|
|
|
|
-
|
|
|
|
10,731
|
|
|
Service revenues
|
|
|
34,256
|
|
|
|
54
|
|
|
|
-
|
|
|
|
34,310
|
|
|
|
32,022
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,022
|
|
|
Other revenues
|
|
|
5,069
|
|
|
|
11
|
|
|
|
534
|
|
|
|
5,614
|
|
|
|
4,152
|
|
|
|
9
|
|
|
|
347
|
|
|
|
4,508
|
|
|
|
|
$
|
74,775
|
|
|
$
|
13,540
|
|
|
$
|
534
|
|
|
$
|
88,849
|
|
|
$
|
70,661
|
|
|
$
|
11,430
|
|
|
$
|
347
|
|
|
$
|
82,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
73,974
|
|
|
$
|
13,540
|
|
|
$
|
505
|
|
|
$
|
88,019
|
|
|
$
|
70,079
|
|
|
$
|
11,430
|
|
|
$
|
308
|
|
|
$
|
81,817
|
|
|
Recognized over
time
|
|
|
801
|
*
|
|
|
-
|
|
|
|
29
|
|
|
|
830
|
|
|
|
582
|
*
|
|
|
-
|
|
|
|
39
|
|
|
|
621
|
|
|
|
|
$
|
74,775
|
|
|
$
|
13,540
|
|
|
$
|
534
|
|
|
$
|
88,849
|
|
|
$
|
70,661
|
|
|
$
|
11,430
|
|
|
$
|
347
|
|
|
$
|
82,438
|
|
*
Rental revenue (included in Other Revenues) as covered by ASC Topic 840. All other revenues are covered by ASC Topic 606.
The Company does not have contract assets
with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is
included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract
liabilities with customers is presented below:
|
|
|
Balance
at
September 30, 2018
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at
March
31, 2019
|
|
|
Ad revenue
|
|
$
|
126
|
|
|
$
|
374
|
|
|
$
|
(311
|
)
|
|
$
|
189
|
|
|
Expo revenue
|
|
|
-
|
|
|
|
357
|
|
|
|
(2
|
)
|
|
|
355
|
|
|
Other
|
|
|
8
|
|
|
|
33
|
|
|
|
(29
|
)
|
|
|
12
|
|
|
|
|
$
|
134
|
|
|
$
|
764
|
|
|
$
|
(342
|
)
|
|
$
|
556
|
|
Contract liabilities with customers are included
in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5), while
the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated
statements of income.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Selected Account Information
The
components of accrued liabilities are as follows (in thousands):
|
|
|
March
31, 2019
|
|
|
September
30, 2018
|
|
|
Payroll and related costs
|
|
$
|
2,782
|
|
|
$
|
2,293
|
|
|
Sales and liquor taxes
|
|
|
2,009
|
|
|
|
1,883
|
|
|
Insurance
|
|
|
1,344
|
|
|
|
3,807
|
|
|
Property taxes
|
|
|
890
|
|
|
|
1,796
|
|
|
Patron tax
|
|
|
617
|
|
|
|
532
|
|
|
Unearned revenues
|
|
|
556
|
|
|
|
134
|
|
|
Income taxes
|
|
|
363
|
|
|
|
-
|
|
|
Lawsuit settlements
|
|
|
75
|
|
|
|
230
|
|
|
Other
|
|
|
1,275
|
|
|
|
1,298
|
|
|
|
|
$
|
9,911
|
|
|
$
|
11,973
|
|
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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Taxes and permits
|
|
$
|
2,370
|
|
|
$
|
2,005
|
|
|
$
|
4,551
|
|
|
$
|
4,171
|
|
|
Advertising and marketing
|
|
|
2,070
|
|
|
|
1,837
|
|
|
|
4,218
|
|
|
|
3,802
|
|
|
Supplies and services
|
|
|
1,465
|
|
|
|
1,315
|
|
|
|
2,921
|
|
|
|
2,683
|
|
|
Insurance
|
|
|
1,402
|
|
|
|
1,368
|
|
|
|
2,755
|
|
|
|
2,627
|
|
|
Accounting and professional fees
|
|
|
1,278
|
|
|
|
670
|
|
|
|
1,928
|
|
|
|
1,556
|
|
|
Rent
|
|
|
957
|
|
|
|
957
|
|
|
|
1,976
|
|
|
|
1,897
|
|
|
Charge card fees
|
|
|
886
|
|
|
|
784
|
|
|
|
1,819
|
|
|
|
1,671
|
|
|
Legal
|
|
|
773
|
|
|
|
1,009
|
|
|
|
1,831
|
|
|
|
1,386
|
|
|
Utilities
|
|
|
762
|
|
|
|
738
|
|
|
|
1,506
|
|
|
|
1,433
|
|
|
Security
|
|
|
756
|
|
|
|
632
|
|
|
|
1,465
|
|
|
|
1,270
|
|
|
Repairs and maintenance
|
|
|
721
|
|
|
|
521
|
|
|
|
1,308
|
|
|
|
1,091
|
|
|
Other
|
|
|
901
|
|
|
|
1,012
|
|
|
|
2,090
|
|
|
|
2,073
|
|
|
|
|
$
|
14,341
|
|
|
$
|
12,848
|
|
|
$
|
28,368
|
|
|
$
|
25,660
|
|
6.
Long-Term Debt
On November 1, 2018, the Company raised $2.35
million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on November 1, 2021. The
notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity. Among the promissory notes
are two notes with a principal of $450,000 and $200,000. The $450,000 note was in exchange for a $300,000 12% note and the $200,000
note was in exchange for a $100,000 note, both of which were included in the May 1, 2017 financing to acquire Scarlett’s
Cabaret in Miami. Also included in the $2.35 million borrowing is a $500,000 note borrowed from a related party (see Note 13)
and two notes totaling $400,000 borrowed from a non-officer employee and a family member of a non-officer employee
in which the terms of the notes are the same as the rest of the lender group.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
December 6, 2018, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition, which
had a remaining balance of $3.0 million as of December 6, 2018, extending the maturity date from May 8, 2019, as previously amended,
to May 8, 2020.
On
December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed the remaining
$2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest.
On
February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%,
with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime plus 0.5% with
a 6.0% floor per annum. The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from
closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next
48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company
paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction
loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized debt issuance costs
of the old bank note to interest expense.
Included in the balance of long-term debt
as of March 31, 2019 and September 30, 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer
employee in which the terms of the note are the same as the rest of the lender group.
Future
maturities of long-term debt are as follows: $10.4 million, $17.9 million, $19.3 million, $8.2 million, $8.9 million and $86.7
million for the twelve months ending March 31, 2020, 2021, 2022, 2023, 2024, and thereafter, respectively. Of the maturity schedule
mentioned above, $0, $9.2 million, $10.6 million, $651,000, $1.3 million and $39.7 million, respectively, relate to scheduled
balloon payments.
7.
Stockholders’ Equity
During
the three and six months ended March 31, 2019, the Company purchased and retired 70,700 and 84,811 common shares, respectively,
at a cost of approximately $1.6 million and $2.0 million, respectively. The Company paid a $0.03 per share cash dividend per quarter
totaling approximately $291,000 and $582,000 for the three and six months ended March 31, 2019, respectively.
During
the three and six months ended March 31, 2018, the Company did not purchase shares of its common stock. The Company also paid
a $0.03 per share cash dividend per quarter totaling approximately $291,000 and $583,000 for the three and six months ended March
31, 2018, respectively.
On
January 2, 2019, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s
common stock. As of March 31, 2019, we have $11.2 million remaining to purchase additional shares under our share repurchase
program.
8.
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 occur if the debentures were converted).
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During
the three and six months ended March 31, 2019 and 2018, the Company did not have any outstanding dilutive securities that are
considered adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted EPS.
9.
Income Taxes
Income
taxes were an expense of $1.9 million and $3.7 million during the three and six months ended March 31, 2019, respectively, compared
to an expense of $1.5 million and a benefit of $6.7 million during the three and six months ended March 31, 2018, respectively.
The effective income tax rate for the three and six months ended March 31, 2019 was an expense of 22.3% and 22.2%, respectively,
compared to an expense of 24.2% and a benefit of 54.6% for the three and six months ended March 31, 2018, respectively. Our effective
tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years while
the first quarter of 2018 was significantly impacted by a $9.7 million reduction of our deferred tax liability caused by then-enacted
tax laws (see below).
The
Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in
the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate for fiscal
2018 was 24.5% percent and represents a blended income tax rate for our fiscal year ended September 30, 2018. For fiscal 2019,
our federal corporate income tax rate is 21%.
Additionally,
for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to
reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement
resulted in a $8.7 million full year adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet
as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of income for
the fiscal year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118, which allows companies to record
provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations.
There were no additional measurement adjustments since September 30, 2018 until the end of the measurement period on December
22, 2018.
Under
generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under
this method, 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. At September 30, 2017, the Company’s deferred tax assets and liabilities
were determined based on the then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income
tax rate under the Tax Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets
and liabilities expected to be realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining
deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21%.
The Company or one of its subsidiaries files
income tax returns for U.S. federal jurisdiction and various states. Fiscal years ended September 30, 2016 and thereafter
remain open to tax examination. The Company’s federal income tax returns for the years ended September 30, 2015, 2014
and 2013 have been examined by the Internal Revenue Service with no changes. These years are now under examination for payroll
taxes. The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve
months.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of March 31, 2019 and September
30, 2018, the liability for uncertain tax positions totaled approximately $165,000 as of each date, which is included in current
liabilities on our condensed consolidated balance sheets. The Company recognizes interest accrued related to uncertain tax positions
in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of income.
10.
Commitments and Contingencies
Legal
Matters
Texas
Patron Tax
In
2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club
customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000,
without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the
Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted
the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As
a consequence, the Company has recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the
difference between the $7.2 million and the amount previously accrued for the tax.
In March 2017, the Company settled with the
State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed
to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments
of $8,200 without interest. The Company believes that it does not have any further liability related to the other location.
The
aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets,
amounted to $3.9 million and $4.5 million as of March 31, 2019 and September 30, 2018, respectively.
A Declaratory judgment action was brought by
five operating subsidiaries of the Company in state court, to challenge a Texas Comptroller administrative rule related to the
$5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee
to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged
on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative
rule is invalid based on it exceeding the scope of the Comptroller’s authority. Other challenges remain and will be resolved
at trial. In addition to the foregoing state court lawsuit, the Texas Entertainment Association filed a federal lawsuit against
the Comptroller challenging the constitutionality of the administrative rule. On February 27, 2019, the Court ruled on summary
judgment motions filed by the parties. The Court ruled that the amended rule was an unconstitutional restriction on expressive
conduct under the First Amendment of the U.S. Constitution, unconstitutionally retroactive under the Due Process Clause and violated
the provisions of 42 U.S.C. §1983. There are remaining claims and defenses pending with the Court.
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.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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 and has provided updates as requested; 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. As of March 31, 2019, we have 2 unresolved claims out of the original 71 claims.
Shareholder
Class and Derivative Actions
In
May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc. and certain
of its officers in the Southern District of Texas, Houston Division. The complaints allege violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements
made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management.
The complaints seek unspecified damages, costs, and attorneys’ fees. These lawsuits are Hoffman v. RCI Hospitality Holdings,
Inc., et al. (filed May 21, 2019, naming the Company and Eric Langan); Gu v. RCI Hospitality Holdings, Inc., et al.
(filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall); and Grossman v. RCI Hospitality Holdings, Inc., et
al. (filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases have moved
to consolidate the purported class actions. The Company anticipates a consolidated class action complaint will be filed in the
next few months. The Company intends to vigorously defend against these actions. These actions are in their preliminary phases,
and a potential loss cannot yet be estimated.
On
August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against officers
and directors, Eric S. Langan, Phillip Marshall, Nour-Dean Anakar, Yura Barabash, Steven Jenkins, Luke Lirot, Travis Reese and
RCI Hospitality Holdings, Inc., as nominal defendant. The action alleges that the individual officers and directors made
or caused the Company to make a series of materially false and/or misleading statements and omissions regarding the Company’s
business, operations, prospects, and legal compliance and engaged in or caused the Company to engage in, inter alia, related party
transactions, questionable uses of corporate assets, and failure to maintain internal controls. The action asserts claims for
breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations
of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks injunctive relief, damages,
restitution, costs, and attorneys’ fees. The case, Cecere v. Langan, et al., is in its early stage, and a potential
loss cannot yet be estimated.
SEC
Matter and Internal Review
In
mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated with the short-selling
community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of
the Company’s audit committee engaged independent outside counsel to conduct an internal review. Management of the Company
fully cooperated with the internal review conducted by the special committee and its outside counsel. The board of directors is
implementing the recommendations resulting from the internal review. As of the date hereof, the internal review has been
completed subject to any ongoing cooperation with regulatory authorities.
Since
the initiation of the informal inquiry by the SEC in early 2019, the Company and its management have fully cooperated and continue
to fully cooperate with the SEC matter, which has now converted to a formal investigation and is ongoing. At this time, the Company
is unable to predict the duration, scope, result or related costs associated with the investigation. The Company is also unable
to predict what, if any, action may be taken as a result of the investigation. Any determination by the SEC that the Company’s
activities were not in compliance with federal securities laws or regulations, however, could result in the imposition of fines,
penalties, disgorgement, or equitable relief, which could have a material adverse effect on the Company.
Other
On
March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against the Company and
several of its subsidiaries. Plaintiffs allege that their images were misappropriated, intentionally altered and published without
their consent by clubs affiliated with the Company. The causes of action asserted in Plaintiffs’ Complaint include alleged violations
of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The Company contends that there
is insurance coverage under an applicable insurance policy. The insurer has raised several issues regarding coverage under the
policy. At this time, this disagreement remains unresolved. The Company has denied all allegations, continues to vigorously defend against
the lawsuit and continues to believe the matter is covered by insurance.
The Company has been sued by a landlord in
the 333rd 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
and Plaintiff’s manager asserting that they committed fraud and that the landlord breached the applicable agreements. The
case was tried to a jury in late September 2018 and an adverse judgment was entered in January 2019 in the amount totaling
$1.0 million, which includes damages, attorney fees and interest. The matter is being appealed. The appeal process required
that a check be deposited in the registry of the court in the amount of $690,000, which was deposited in April 2019. Management
believes that the case has no merit and is vigorously defending itself in the appeal.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services
(Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno
injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged
that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial
proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which
JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million.
In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court
denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard
by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case
to the trial court. The Plaintiffs have filed a petition for review with the Arizona Supreme Court. JAI Phoenix has filed a response
and will continue to vigorously defend itself.
As
set forth in the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2018, the adult entertainment industry standard is to classify adult entertainers as independent contractors,
not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to
time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both
federal and where applicable, state law. Based on the industry standard, the manner in which the independent
contractor entertainers are treated at the clubs, and the entertainer license agreements governing the
entertainer's work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are
handled by attorneys with an expertise in the relevant law and are defended vigorously.
General
In the regular course of business affairs
and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local
environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection
with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified
in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases
that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information
to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any
liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.
Settlements
of lawsuits for the three and six months ended March 31, 2019 total $84,000 and $144,000, respectively, while for the three and
six months ended March 31, 2018 total $773,000 and $800,000, respectively. As of March 31, 2019 or September 30, 2018, the Company
has accrued $75,000 and $230,000 in accrued liabilities, respectively, related to settlement of lawsuits.
11.
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 and energy drink divisions 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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
37,047
|
|
|
$
|
35,443
|
|
|
$
|
74,775
|
|
|
$
|
70,661
|
|
|
Bombshells
|
|
|
7,527
|
|
|
|
5,602
|
|
|
|
13,540
|
|
|
|
11,430
|
|
|
Other
|
|
|
252
|
|
|
|
181
|
|
|
|
534
|
|
|
|
347
|
|
|
|
|
$
|
44,826
|
|
|
$
|
41,226
|
|
|
$
|
88,849
|
|
|
$
|
82,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
15,078
|
|
|
$
|
11,880
|
|
|
$
|
30,465
|
|
|
$
|
25,251
|
|
|
Bombshells
|
|
|
738
|
|
|
|
965
|
|
|
|
857
|
|
|
|
1,856
|
|
|
Other
|
|
|
(176
|
)
|
|
|
(82
|
)
|
|
|
(295
|
)
|
|
|
(219
|
)
|
|
General
corporate
|
|
|
(4,474
|
)
|
|
|
(4,532
|
)
|
|
|
(8,729
|
)
|
|
|
(9,517
|
)
|
|
|
|
$
|
11,166
|
|
|
$
|
8,231
|
|
|
$
|
22,298
|
|
|
$
|
17,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,467
|
|
|
$
|
1,334
|
|
|
$
|
2,974
|
|
|
$
|
2,669
|
|
|
Bombshells
|
|
|
339
|
|
|
|
341
|
|
|
|
631
|
|
|
|
677
|
|
|
Other
|
|
|
106
|
|
|
|
(29
|
)
|
|
|
210
|
|
|
|
(27
|
)
|
|
General
corporate
|
|
|
288
|
|
|
|
253
|
|
|
|
438
|
|
|
|
489
|
|
|
|
|
$
|
2,200
|
|
|
$
|
1,899
|
|
|
$
|
4,253
|
|
|
$
|
3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
647
|
|
|
$
|
847
|
|
|
$
|
1,094
|
|
|
$
|
1,297
|
|
|
Bombshells
|
|
|
5,788
|
|
|
|
5,272
|
|
|
|
9,797
|
|
|
|
7,500
|
|
|
Other
|
|
|
9
|
|
|
|
4
|
|
|
|
18
|
|
|
|
4
|
|
|
General
corporate
|
|
|
163
|
|
|
|
119
|
|
|
|
2,993
|
|
|
|
210
|
|
|
|
|
$
|
6,607
|
|
|
$
|
6,242
|
|
|
$
|
13,902
|
|
|
$
|
9,011
|
|
|
|
|
March
31, 2019
|
|
|
September
30, 2018
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
277,209
|
|
|
$
|
252,335
|
|
|
Bombshells
|
|
|
39,455
|
|
|
|
39,560
|
|
|
Other
|
|
|
2,178
|
|
|
|
1,978
|
|
|
General
corporate
|
|
|
32,031
|
|
|
|
35,859
|
|
|
|
|
$
|
350,873
|
|
|
$
|
329,732
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Certain
real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or
investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.
12.
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 one of the Company’s nightclubs in New York City.
13.
Related Party Transactions
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. The balance of our commercial bank indebtedness, net of debt discount and
issuance costs, as of March 31, 2019 and September 30, 2018 is $90.8 million and $88.9 million, respectively.
Included in the $2.35 million borrowing on
November 1, 2018 (see Note 6) was a $500,000 note borrowed from a related party (Ed Anakar, an employee of the Company and brother
of our director Nourdean Anakar). The terms of this related party note are the same as the rest of the lender group in the November
1, 2018 transaction.
We used the services of Sherwood Forest Creations,
LLC, a furniture fabrication company that manufactures tables, chairs and other furnishings for our Bombshells locations, as well
as providing ongoing maintenance. Sherwood Forest is owned by a brother of Eric Langan. Amounts billed to us for goods and services
provided by Sherwood Forest were $98,072 and $107,815 during the three and six months ended March 31, 2019, respectively, and $17,233
and $114,561 during the three and six months ended March 31, 2018, respectively. As of March 31, 2019 and September 30, 2018, we
owed Sherwood Forest $49,258 and $73,377, respectively, in unpaid billings.
TW Mechanical LLC (“TW Mechanical”)
provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as
well as directly to the Company during fiscal 2018 and 2019. TW Mechanical is 20% owned by the son-in-law of Eric Langan. Amounts
billed by TW Mechanical to the third-party general contractor were $359,500 and $435,800 for the three and six months ended
March 31, 2019, respectively, and $0 and $0 for the three and six months ended March 31, 2018, respectively. Amounts billed directly
to the Company were $206 and $206 for the three and six months ended March 31, 2019, respectively, and $0 and $0 for the three
and six months ended March 31, 2018, respectively. As of March 31, 2019 and September 30, 2018, we owed TW Mechanical $0 and $0,
respectively, in unpaid direct billings.
14.
Acquisitions and Disposition
In
October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash
at closing and a $625,000 9% note receivable over a 10-year period. The note is payable interest-only for twelve months
at the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is
payable in 108 equal installments of $5,078 per month until October 2028. The buyer will lease the property from the Company’s
real estate subsidiary under the following terms: $36,000 per month lease payments for ten years; renewal option for a succeeding
ten years at a minimum of $48,000 per month; lessee has option to purchase the property for $6.0 million during a term beginning
November 2023 and expiring in October 2028. The Company recorded a gain on the sale transaction of approximately $879,000, which
is included in other charges (gains), net in our consolidated statement of income during the quarter ended December 31, 2018.
In July 2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from
April to September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest
payments for a total principal balance of $879,085. The note, as modified, still bears interest at 9% and is payable in 108 equal
monthly installments of $11,905, including principal and interest, until July 2028.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On November 1, 2018, a club in Chicago was
acquired for $10.5 million with $6.0 million cash paid at closing and the $4.5 million in a 6-year seller financed note with interest
at 7%. The Company paid approximately $37,000 in acquisition-related costs for this transaction, which is included in selling,
general and administrative expenses in our unaudited condensed consolidated statement of income. The club generated revenue
of approximately $1.8 million since acquisition date. In relation to this acquisition, on September 25, 2018, the Company borrowed
$5.0 million through a credit facility with a bank lender. The loan has a 7% fixed interest rate and matures in May 2019. The
loan was payable $200,000 weekly, which included interest, until maturity. The loan was fully paid as of June
30, 2019. Goodwill and SOB license for the Chicago acquisition will not be amortized but will be tested at least annually
for impairment. Goodwill recognized for this transaction is not deductible for tax purposes. Noncompete will be amortized on a
straight-line basis over five years from acquisition date.
The
following information summarizes the preliminary allocation of fair values assigned to the assets at acquisition date (in thousands):
|
Land and building
|
|
$
|
4,325
|
|
|
Inventory
|
|
|
57
|
|
|
Furniture and equipment
|
|
|
50
|
|
|
Noncompete
|
|
|
100
|
|
|
SOB license
|
|
|
5,252
|
|
|
Goodwill
|
|
|
2,003
|
|
|
Deferred tax
liability
|
|
|
(1,287
|
)
|
|
Net assets
|
|
$
|
10,500
|
|
On November 5, 2018, a Pittsburgh club was
acquired for $15.0 million, with $7.5 million cash paid at closing and two seller notes payable. The first note is 2-year 7% note
for $2.0 million, and the second is a 10-year 8% note for $5.5 million. The Company paid acquisition-related costs for this transaction
of approximately $134,000, which is included in selling, general and administrative expenses in our unaudited condensed
consolidated statement of income. The club generated revenue of approximately $2.1 million since acquisition date. Goodwill
for the Pittsburgh acquisition will not be amortized but will be tested at least annually for impairment. Goodwill recognized
for this transaction is deductible for tax purposes. Noncompete will be amortized on a straight-line basis over five years from
acquisition date.
The
following information summarizes the preliminary allocation of fair values assigned to the assets at acquisition date (in thousands):
|
Land and building
|
|
$
|
5,000
|
|
|
Inventory
|
|
|
23
|
|
|
Furniture and equipment
|
|
|
200
|
|
|
Noncompete
|
|
|
100
|
|
|
Goodwill
|
|
|
9,677
|
|
|
Net assets
|
|
$
|
15,000
|
|
It
is management’s expectation that the purchase price of these acquisitions will be allocated to assets, including land, buildings,
inventory, noncompetes, SOB license, and goodwill; however, the final purchase price allocation of the two clubs remains subject
to post-closing adjustments until the Company has completed final valuation and accounting for the transactions.
In November 2018, the Company sold two
assets held for sale in Houston and San Antonio, Texas for a combined sales price of $868,000. Net gain on the two transactions
amounted to $273,000 after closing costs. The Company used $945,500 of the proceeds to pay down loans related to the properties.
On
January 24, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4 million, payable
$163,000 in cash at closing, net of closing costs and property taxes of $87,000, and a $1.15 million 8% note receivable
over a three-year period. The note is payable $9,619 per month, principal and interest, for the first 35 months with the remaining
balance payable at maturity. The buyer has the option to extend the maturity date by one year at least 60 days prior to maturity,
as long as the buyer is not in default. The Company recorded a gain on the sale transaction of approximately $383,000.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales price of $1.4
million in cash. Net gain on the transaction amounted to approximately $628,000 after closing costs. The Company used $980,000
of the proceeds to pay off a loan related to the property.
In
April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of
$1.1 million in cash. Net gain on the transaction amounted to approximately $331,000 after closing costs. The Company used $942,000
of the proceeds to pay off a loan related to the property.
In
June 2019, the Company sold a property located in Lubbock, Texas for $350,000 in cash. Net loss on the transaction amounted to
$376,000 after closing costs. The Company used $331,000 of the proceeds from the sale to pay down debt.
In
June 2019, the Company sold an aircraft for $690,000 in cash. Net loss on the transaction amounted to $9,000 after closing costs.
The Company used $666,000 of the proceeds from the sale to pay down related debt.