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, 2019 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, 2019 included in the Company’s Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on February 13, 2020. 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, 2020 are not necessarily indicative of the results
that may be expected for the year ending September 30, 2020.
2.
Recent Accounting Standards and Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In July 2018, the FASB issued ASU 2018-11 providing for certain practical expedients
in the implementation of ASU 2016-02. The guidance requires the use of a modified retrospective approach. We adopted ASU 2016-02
and related amendments as of October 1, 2019 and elected the package of practical expedients permitted under the transition guidance
within the new standard, which among other things, allows us to retain historical lease classification, as well as relief from
reviewing expired and existing contracts to determine if they contain leases. Our adoption of the new leasing standard resulted
in an increase of $27.3 million in our total assets as of October 1, 2019 due to the recognition of operating lease right-of-use
assets net of the reclassification of deferred rent liability of $1.2 million and an increase in total liabilities due to the
recognition of a $28.6 million operating lease liabilities. Our adoption of ASC 842 did not have an impact on our consolidated
statements of operations and cash flows, except for additional required disclosures. See additional disclosures in Note 14.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking
information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires
credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than
as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses.
The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. We are still evaluating the impact of this ASU, including all related updates, on the Company’s consolidated
financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 accumulated other comprehensive income (“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 adopted ASU 2018-02 as of October 1, 2019. Our adoption of this guidance did not have an 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.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This
ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for
intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments,
and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also
improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially
based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements
of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public
business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption
is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects
early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that
interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. 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)
3.
Liquidity and Impact of COVID-19 Pandemic
In
March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public
health emergency. COVID-19 is the disease caused by a novel strain of a coronavirus that originated from Wuhan, China in November
2019. The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer
behavior as social distancing practices, dining room closures and other restrictions that were mandated or encouraged by federal,
state and local governments, and as of March 18, 2020, we temporarily closed all of our clubs and restaurants.
The closure of our clubs and
restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations in
accordance with local and state guidelines and it is too early to know when and if they will generate positive cash flows for
us. Depending on the timing and number of locations we get open, and their ability to generate positive cash flow, we
may need to borrow funds to meet our obligations or consider selling certain assets. The COVID-19 pandemic is adversely
affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional
liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic
lasts.
To augment an expected decline in operating
cash flows caused by the COVID-19 pandemic, we instituted the following measures:
|
●
|
Arranged
for deferment of principal and interest payment on certain of our debts;
|
|
●
|
Furloughed
employees working at our clubs and restaurants, except for a limited number of managers;
|
|
●
|
Pay
cut for all remaining salaried and hourly employees and deferral of board of director
compensation;
|
|
●
|
Deferred
or modified certain fixed monthly expenses such as insurance, rent, and taxes, among
others;
|
|
●
|
Canceled
certain non-essential expenses such as advertising, cable, pest control, point-of-sale
system support, and investor relations coverage, among others.
|
On May 8, 2020, the Company received approval and funding under
the Paycheck Protection Program (“PPP”) of the CARES Act for its restaurants, shared service entity and lounge. See
Note 9. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million;
our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and
other non-core business subsidiaries received funding under the PPP.
As
of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty
about the spread of the virus. Lower sales, as caused by social distancing guidelines, could lead to adverse financial results.
However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted.
Also
as of the release of this report, we have ten locations in Texas that have partially reopened with 25% occupancy requirement.
Valuation
of Goodwill, Indefinite-Lived Intangibles and Long-Lived tangible Assets
We
consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles
and long-lived tangible assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering
future assumed impact of COVID-19 pandemic on sales. Based on our evaluation, we determined our assets are impaired in a total
amount of approximately $8.2 million comprised of $6.5 million in goodwill, $1.4 million in SOB licenses, and $302,000 in property
and equipment.
4.
Revenues
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 accompanying unaudited condensed consolidated statements of operations. 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 lease revenues are recognized when earned (recognized over time) and are more appropriately covered
by guidance under ASC Topic 842, Leases (ASC 840 in prior year). See Note 14.
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 12), are shown below (in thousands):
|
|
Three
Months Ended March 31, 2020
|
|
|
Three
Months Ended March 31, 2019
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales
of alcoholic beverages
|
|
$
|
11,860
|
|
|
$
|
5,059
|
|
|
$
|
-
|
|
|
$
|
16,919
|
|
|
$
|
14,148
|
|
|
$
|
4,338
|
|
|
$
|
-
|
|
|
$
|
18,486
|
|
Sales
of food and merchandise
|
|
|
2,799
|
|
|
|
3,680
|
|
|
|
-
|
|
|
|
6,479
|
|
|
|
3,293
|
|
|
|
3,146
|
|
|
|
-
|
|
|
|
6,439
|
|
Service
revenues
|
|
|
14,290
|
|
|
|
58
|
|
|
|
-
|
|
|
|
14,348
|
|
|
|
16,943
|
|
|
|
36
|
|
|
|
-
|
|
|
|
16,979
|
|
Other
revenues
|
|
|
2,418
|
|
|
|
6
|
|
|
|
256
|
|
|
|
2,680
|
|
|
|
2,663
|
|
|
|
7
|
|
|
|
252
|
|
|
|
2,922
|
|
|
|
$
|
31,367
|
|
|
$
|
8,803
|
|
|
$
|
256
|
|
|
$
|
40,426
|
|
|
$
|
37,047
|
|
|
$
|
7,527
|
|
|
$
|
252
|
|
|
$
|
44,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
at a point in time
|
|
$
|
30,977
|
|
|
$
|
8,803
|
|
|
$
|
252
|
|
|
$
|
40,032
|
|
|
$
|
36,582
|
|
|
$
|
7,527
|
|
|
$
|
238
|
|
|
$
|
44,347
|
|
Recognized
over time
|
|
|
390
|
*
|
|
|
-
|
|
|
|
4
|
|
|
|
394
|
|
|
|
465
|
*
|
|
|
-
|
|
|
|
14
|
|
|
|
479
|
|
|
|
$
|
31,367
|
|
|
$
|
8,803
|
|
|
$
|
256
|
|
|
$
|
40,426
|
|
|
$
|
37,047
|
|
|
$
|
7,527
|
|
|
$
|
252
|
|
|
$
|
44,826
|
|
|
|
Six
Months Ended March 31, 2020
|
|
|
Six
Months Ended March 31, 2019
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales
of alcoholic beverages
|
|
$
|
26,544
|
|
|
$
|
11,118
|
|
|
$
|
-
|
|
|
$
|
37,662
|
|
|
$
|
28,950
|
|
|
$
|
7,846
|
|
|
$
|
-
|
|
|
$
|
36,796
|
|
Sales
of food and merchandise
|
|
|
6,063
|
|
|
|
7,863
|
|
|
|
-
|
|
|
|
13,926
|
|
|
|
6,500
|
|
|
|
5,629
|
|
|
|
-
|
|
|
|
12,129
|
|
Service
revenues
|
|
|
31,384
|
|
|
|
157
|
|
|
|
-
|
|
|
|
31,541
|
|
|
|
34,256
|
|
|
|
54
|
|
|
|
-
|
|
|
|
34,310
|
|
Other
revenues
|
|
|
5,235
|
|
|
|
15
|
|
|
|
441
|
|
|
|
5,691
|
|
|
|
5,069
|
|
|
|
11
|
|
|
|
534
|
|
|
|
5,614
|
|
|
|
$
|
69,226
|
|
|
$
|
19,153
|
|
|
$
|
441
|
|
|
$
|
88,820
|
|
|
$
|
74,775
|
|
|
$
|
13,540
|
|
|
$
|
534
|
|
|
$
|
88,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
at a point in time
|
|
$
|
68,411
|
|
|
$
|
19,153
|
|
|
$
|
430
|
|
|
$
|
87,994
|
|
|
$
|
73,974
|
|
|
$
|
13,540
|
|
|
$
|
505
|
|
|
$
|
88,019
|
|
Recognized
over time
|
|
|
815
|
*
|
|
|
-
|
|
|
|
11
|
|
|
|
826
|
|
|
|
801
|
*
|
|
|
-
|
|
|
|
29
|
|
|
|
830
|
|
|
|
$
|
69,226
|
|
|
$
|
19,153
|
|
|
$
|
441
|
|
|
$
|
88,820
|
|
|
$
|
74,775
|
|
|
$
|
13,540
|
|
|
$
|
534
|
|
|
$
|
88,849
|
|
*
Lease revenue (included in Other Revenues) as covered by ASC Topic 842 in the current year (and ASC Topic 840 in the prior year).
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 (in thousands):
|
|
Balance
at
September
30, 2019
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at
March
31, 2020
|
|
Ad
revenue
|
|
$
|
76
|
|
|
$
|
355
|
|
|
$
|
(303
|
)
|
|
$
|
128
|
|
Expo
revenue
|
|
|
-
|
|
|
|
351
|
|
|
|
-
|
|
|
|
351
|
|
Other
|
|
|
7
|
|
|
|
12
|
|
|
|
(17
|
)
|
|
|
2
|
|
|
|
$
|
83
|
|
|
$
|
718
|
|
|
$
|
(320
|
)
|
|
$
|
481
|
|
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 operations.
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, 2020
|
|
|
September
30, 2019
|
|
Insurance
|
|
$
|
1,700
|
|
|
$
|
4,937
|
|
Sales
and liquor taxes
|
|
|
2,460
|
|
|
|
3,086
|
|
Payroll
and related costs
|
|
|
1,372
|
|
|
|
2,892
|
|
Property
taxes
|
|
|
829
|
|
|
|
1,675
|
|
Patron
tax
|
|
|
480
|
|
|
|
595
|
|
Unearned
revenues
|
|
|
481
|
|
|
|
83
|
|
Lawsuit
settlement
|
|
|
75
|
|
|
|
115
|
|
Other
|
|
|
1,274
|
|
|
|
1,261
|
|
|
|
$
|
8,671
|
|
|
$
|
14,644
|
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Taxes
and permits
|
|
$
|
2,240
|
|
|
$
|
2,370
|
|
|
$
|
4,914
|
|
|
$
|
4,551
|
|
Advertising
and marketing
|
|
|
1,907
|
|
|
|
2,070
|
|
|
|
4,317
|
|
|
|
4,218
|
|
Supplies
and services
|
|
|
1,390
|
|
|
|
1,465
|
|
|
|
2,924
|
|
|
|
2,921
|
|
Insurance
|
|
|
1,473
|
|
|
|
1,402
|
|
|
|
2,956
|
|
|
|
2,755
|
|
Accounting
and professional fees
|
|
|
1,311
|
|
|
|
1,278
|
|
|
|
2,509
|
|
|
|
1,928
|
|
Lease
|
|
|
1,023
|
|
|
|
957
|
|
|
|
2,053
|
|
|
|
1,976
|
|
Charge
card fees
|
|
|
845
|
|
|
|
886
|
|
|
|
1,891
|
|
|
|
1,819
|
|
Legal
|
|
|
1,072
|
|
|
|
773
|
|
|
|
2,268
|
|
|
|
1,831
|
|
Utilities
|
|
|
798
|
|
|
|
762
|
|
|
|
1,693
|
|
|
|
1,506
|
|
Security
|
|
|
749
|
|
|
|
756
|
|
|
|
1,597
|
|
|
|
1,465
|
|
Repairs
and maintenance
|
|
|
652
|
|
|
|
721
|
|
|
|
1,449
|
|
|
|
1,308
|
|
Other
|
|
|
990
|
|
|
|
901
|
|
|
|
2,410
|
|
|
|
2,090
|
|
|
|
$
|
14,450
|
|
|
$
|
14,341
|
|
|
$
|
30,981
|
|
|
$
|
28,368
|
|
6.
Assets Held for Sale
As
of September 30, 2019, the Company had two real estate properties for sale. The aggregate estimated fair value of the properties
less cost to sell as of September 30, 2019 was approximately $2.9 million and was reclassified to assets held for sale in the
Company’s consolidated balance sheet. The assets were measured at the carrying value as adjusted for depreciation, which
was lower than the fair value at the date reclassified.
During
the six months ended March 31, 2020, the Company classified as held-for-sale another real estate property. The aggregate estimated
fair value of the property less cost to sell was $1.9 million. As of March 31, 2020, the Company has a total of three real estate
properties held for sale with a total value of $4.8 million.
The
Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months
through property listings by our real estate brokers.
Liabilities associated with held-for-sale
assets amounting to $1.2 million and $0 as of March 31, 2020 and September 30, 2019, respectively, are included in current portion
of long-term debt in our unaudited consolidated balance sheets. The gain or loss on the sale of properties held for sale is
included in other charges/gains, net in the unaudited condensed consolidated statements of operations.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
Long-term Debt
In
December 2019, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May
2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2022. The amendment
did not have an impact in the Company’s results of operations and cash flows.
In
February 2020, in relation to a $4.0 million 12% note payable earlier refinanced on August 15, 2018, the Company restructured
the note with a private lender by executing a 12% 10-year note payable $57,388 monthly, including interest, starting March 2020.
The restructured note eliminates a scheduled balloon principal payment of $4.0 million in August 2021. The refinancing did not
have an impact in the Company’s results of operations and cash flows.
In
February 2020, in relation to a $9.9 million 12% note payable that was partially paid during the December 2017 Refinancing Loan,
the Company restructured the note, which had a balance of $5.2 million as of the amendment date, by executing a 12% 10-year note
payable $74,515 monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal
payment of $3.8 million in October 2021. As a result of the refinancing, the Company wrote off approximately $25,400 in unamortized
debt issuance cost as interest expense in the unaudited condensed consolidated statement of operations for the quarter ended March
31, 2020.
Included
in the balance of long-term debt as of March 31, 2020 and September 30, 2019 is a $500,000 note borrowed from a related party
(see Note 13) and three notes totaling $600,000 borrowed from two non-officer employees 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 groups.
Future
maturities of long-term debt as of March 31, 2020 are as follows: $14.8 million, $11.7 million, $11.6 million, $8.1 million, $8.4
million and $87.2 million for the twelve months ending March 31, 2021, 2022, 2023, 2024, 2025, and thereafter, respectively. Of
the maturity schedule mentioned above, $6.1 million, $2.8 million, $3.8 million, $0, $0 and $56.0 million, respectively, relate
to scheduled balloon payments.
On
May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000 of $2,040,000 of notes to individuals that were
due on May 1, 2020. The Company paid $300,000 to certain lenders and received $200,000 in new debt from existing lenders and their
affiliates. The aggregate amount of debt due on these notes on November 1, 2020 is now $1,940,000.
8.
Equity
During
the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares, respectively,
at a cost of approximately $2.0 and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividends during
the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.
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.
On
February 6, 2020, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s
common stock. As of May 8, 2020, the Company has $11.8 million remaining to purchase additional shares under its share repurchase
program.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Income Taxes
Income
taxes were $1.4 million benefit and $175,000 expense during the three and six months ended March 31, 2020, respectively, compared
to income tax expense of $1.9 million and $3.7 million during the three and six months ended March 31, 2019, respectively. The
effective income tax rate was a 28.9% benefit and a 7.6% expense during the three and six months ended March 31, 2020, respectively,
compared to expense rates of 22.3% and 22.2% during the three and six months ended March 31, 2019, respectively. Our effective
tax rate for both years is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit.
The
Company or one of its subsidiaries file 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. Tax years 2014 through
2017 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.
The
Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of March 31, 2020 and September
30, 2019, the liability for uncertain tax positions was $0 and $0, respectively. 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 operations.
On March 27, 2020, President Trump signed
the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") into law. As a result of this, additional
avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses
through programs administered by the Small Business Administration. The CARES Act includes, among other items, provisions
relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical
corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of
the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain
small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds
are used for payroll and other qualified expenses. The Company has submitted its application for a PPP loan and on May 8, 2020
has received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries
received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received
$1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received
funding under the PPP. There is no certainty that the loan will qualify for forgiveness.
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 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
aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets,
amounted to $2.8 million and $3.4 million as of March 31, 2020 and September 30, 2019, respectively.
A
declaratory judgment action was brought by five operating subsidiaries of the Company 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. On March 6, 2020,
the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional
as it has been applied and enforced by the Comptroller. The State of Texas has filed a Notice of Appeal. We will continue to vigorously
defend the matter through the appeals process.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 have been filed with the Receiver before the close
of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were 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, 2020, 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 moved to consolidate the purported
class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated
case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated
case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint
also adds director Nour-Dean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual
defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. The plaintiff’s
response to the motion is currently due June 23, 2020. The Company and the individual defendants will have the opportunity to
file a reply in support of their motion by July 23, 2020. The Company intends to continue to vigorously defend against this action.
This action is in its preliminary phase, and a potential loss cannot yet be estimated.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, Luke Lirot, Travis Reese, former director Steven
Jenkins, 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 has
implemented 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 and included in other current assets in both consolidated balance sheets as of March 31, 2020 and September 30,
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. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix 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, 2019, 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, 2020 total approximately $0 and $24,000, respectively, while for the
three and six months ended March 31, 2019 total $84,000 and $144,000, respectively. As of March 31, 2020 and September 30, 2019,
the Company has accrued $75,000 and $115,000 in accrued liabilities, respectively, related to settlement of lawsuits.
11.
Acquisition
On
November 5, 2019, we announced that our subsidiaries had signed definitive agreements to acquire the assets and related real estate
of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0 million. The agreements terminated
prior to closing. We provided the sellers notice of the termination in April 2020.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and energy drink divisions that are not significant to the consolidated financial statements.
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
31,367
|
|
|
$
|
37,047
|
|
|
$
|
69,226
|
|
|
$
|
74,775
|
|
Bombshells
|
|
|
8,803
|
|
|
|
7,527
|
|
|
|
19,153
|
|
|
|
13,540
|
|
Other
|
|
|
256
|
|
|
|
252
|
|
|
|
441
|
|
|
|
534
|
|
|
|
$
|
40,426
|
|
|
$
|
44,826
|
|
|
$
|
88,820
|
|
|
$
|
88,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
2,314
|
|
|
$
|
15,078
|
|
|
$
|
16,090
|
|
|
$
|
30,465
|
|
Bombshells
|
|
|
690
|
|
|
|
738
|
|
|
|
2,263
|
|
|
|
857
|
|
Other
|
|
|
(178
|
)
|
|
|
(176
|
)
|
|
|
(385
|
)
|
|
|
(295
|
)
|
General
corporate
|
|
|
(5,301
|
)
|
|
|
(4,474
|
)
|
|
|
(10,757
|
)
|
|
|
(8,729
|
)
|
|
|
$
|
(2,475
|
)
|
|
$
|
11,166
|
|
|
$
|
7,211
|
|
|
$
|
22,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,486
|
|
|
$
|
1,467
|
|
|
$
|
2,956
|
|
|
$
|
2,974
|
|
Bombshells
|
|
|
456
|
|
|
|
339
|
|
|
|
873
|
|
|
|
631
|
|
Other
|
|
|
104
|
|
|
|
106
|
|
|
|
208
|
|
|
|
210
|
|
General
corporate
|
|
|
211
|
|
|
|
288
|
|
|
|
424
|
|
|
|
438
|
|
|
|
$
|
2,257
|
|
|
$
|
2,200
|
|
|
$
|
4,461
|
|
|
$
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
526
|
|
|
$
|
647
|
|
|
$
|
2,858
|
|
|
$
|
1,094
|
|
Bombshells
|
|
|
612
|
|
|
|
5,788
|
|
|
|
2,337
|
|
|
|
9,797
|
|
Other
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
18
|
|
General
corporate
|
|
|
127
|
|
|
|
163
|
|
|
|
128
|
|
|
|
2,993
|
|
|
|
$
|
1,265
|
|
|
$
|
6,607
|
|
|
$
|
5,323
|
|
|
$
|
13,902
|
|
|
|
March
31, 2020
|
|
|
September
30, 2019
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
281,080
|
|
|
$
|
274,071
|
|
Bombshells
|
|
|
48,271
|
|
|
|
44,144
|
|
Other
|
|
|
1,723
|
|
|
|
1,773
|
|
General
corporate
|
|
|
30,822
|
|
|
|
33,649
|
|
|
|
$
|
361,896
|
|
|
$
|
353,637
|
|
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.
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, 2020 and September 30, 2019 is $86.0 million and $86.8 million, respectively.
Included
in the $2.35 million borrowing on November 1, 2018 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 Nottingham Creations (formerly 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. Nottingham Creations
(as was Sherwood Forest) is owned by a brother of Eric Langan. Amounts billed to us for goods and services provided by Nottingham
Creations and Sherwood Forest were $53,556 and $72,809 during the three and six months ended March 31, 2020, respectively, and
$98,072 and $107,815 during the three and six months ended March 31, 2019, respectively. As of March 31, 2020 and September 30,
2019, we owed Nottingham Creations and Sherwood Forest $13,705 and $6,588, 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 2020 and 2019. A son-in-law of Eric Langan
owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $18,758
and $30,585 for the three and six months ended March 31, 2020, respectively, and $359,500 and $435,800 for the three and six months
ended March 31, 2019, respectively. Amounts billed directly to the Company were $24,416 and $26,241 for the three and six months
ended March 31, 2020, respectively, and $206 and $206 for the three and six months ended March 31, 2019, respectively. As of March
31, 2020 and September 30, 2019, the Company owed TW Mechanical $20,401 and $0, respectively, in unpaid direct billings.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
Leases
The
Company leases certain facilities and equipment under operating leases. Under ASC 840, lease 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 lease expense is attributed to each period during the term of the lease, regardless
of when actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of
a lease and lease expense less than cash payments in the later years. The difference between lease expense recognized and actual
lease payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.
Included
in lease expense in our unaudited condensed consolidated statements of operations (see Note 5) were lease payments for a house
that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers,
of which lease expense totaled $0 and $19,500 for the three and six months ended March 31, 2020, respectively, and $19,500 and
$39,000 for the three and six months ended March 31, 2019. This lease terminated on December 31, 2019.
Undiscounted
future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):
2020
|
|
$
|
3,237
|
|
2021
|
|
|
3,154
|
|
2022
|
|
|
3,057
|
|
2023
|
|
|
2,889
|
|
2024
|
|
|
2,850
|
|
Thereafter
|
|
|
21,038
|
|
Total
future minimum lease obligations
|
|
$
|
36,225
|
|
Included
in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as advertising and marketing
expenses, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of operations.
Under ASC 840, we recorded lease expense amounting to $957,000 and $2.0 million during the three and six months ended March 31,
2019.
The
Company adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options
for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain
economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.
Some
leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for
insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities.
Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments
is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our unaudited condensed
consolidated statement of operations.
We
have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases.
That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line
basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value
guarantees are generally not included within our operating leases.
Our
adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 4.
Future
maturities of lease liabilities as of March 31, 2020 are as follows (in thousands):
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
April
2020 – March 2021
|
|
$
|
1,552
|
|
|
$
|
1,641
|
|
|
$
|
3,193
|
|
April
2021 – March 2022
|
|
|
1,692
|
|
|
|
1,543
|
|
|
|
3,235
|
|
April
2022 – March 2023
|
|
|
1,728
|
|
|
|
1,438
|
|
|
|
3,166
|
|
April
2023 – March 2024
|
|
|
1,706
|
|
|
|
1,336
|
|
|
|
3,042
|
|
April
2024 – March 2025
|
|
|
1,860
|
|
|
|
1,229
|
|
|
|
3,089
|
|
Thereafter
|
|
|
19,289
|
|
|
|
5,992
|
|
|
|
25,281
|
|
|
|
$
|
27,827
|
|
|
$
|
13,179
|
|
|
$
|
41,006
|
|
Total
lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated
statement of operations, except for sublease income which was included in other revenue, for the three and six months ended March
31, 2020 as follows (in thousands):
|
|
Three
Months Ended
March
31, 2020
|
|
|
Six
Months Ended
March
31, 2020
|
|
Operating
lease expense – fixed payments
|
|
$
|
838
|
|
|
$
|
1,680
|
|
Variable
lease expense
|
|
|
65
|
|
|
|
130
|
|
Short-term
equipment and other lease expense (includes $145 and $291 recorded in advertising and marketing, and $100 and $225 recorded
in repairs and maintenance for the three and six months ended March 31, 2020, respectively; see Note 5)
|
|
|
365
|
|
|
|
759
|
|
Sublease
income
|
|
|
(4
|
)
|
|
|
(6
|
)
|
Total
lease expense, net
|
|
$
|
1,264
|
|
|
$
|
2,563
|
|
|
|
|
|
|
|
|
|
|
Other
information:
|
|
|
|
|
|
|
|
|
Operating
cash outflows from operating leases
|
|
$
|
1,207
|
|
|
$
|
2,462
|
|
Weighted
average remaining lease term
|
|
|
|
|
|
|
13
years
|
|
Weighted
average discount rate
|
|
|
|
|
|
|
6.1
|
%
|