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 nine months ended June 30, 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. Our evaluation indicates that our consolidated financial statements will not be significantly impacted upon
adoption of this guidance.
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. Our evaluation indicates that fair value disclosures
in our consolidated financial statements will be minimally impacted by the requirements of this ASU.
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. Our evaluation indicates that
our consolidated financial statements will not be significantly impacted upon adoption of this guidance.
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 since March 2020, we have temporarily closed and reopened several 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
and continue to arrange 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 Notes 7 and 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, including
refinancing several of our debt obligations.
We continue to adhere to state and local
government mandates regarding the pandemic and, since March 2020, have closed and reopened several of our locations depending
on changing government mandates. As of the release of this report, we have reopened many of our club and Bombshells
locations with limited occupancy but some of our bigger clubs are still closed.
Valuation
of Goodwill, Indefinite-Lived Intangibles and Long-Lived 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 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 as of June 30, 2020, we determined our assets are impaired in a
total amount of approximately $9.2 million comprised of $6.5 million in goodwill, $2.3 million in SOB licenses, $302,000 in property
and equipment, and $104,000 in right-of-use operating lease assets.
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. Lease revenue (included in other revenues) is recognized when earned
(recognized over time) and is more appropriately covered by guidance under ASC 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):
Schedule of Disaggregation of Segment Revenues
|
|
|
Three
Months Ended June 30, 2020
|
|
|
Three
Months Ended June 30, 2019
|
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Sales of alcoholic beverages
|
|
$
|
1,777
|
|
|
$
|
5,846
|
|
|
$
|
-
|
|
|
$
|
7,623
|
|
|
$
|
14,597
|
|
|
$
|
4,973
|
|
|
$
|
-
|
|
|
$
|
19,570
|
|
|
Sales of food and merchandise
|
|
|
774
|
|
|
|
2,678
|
|
|
|
-
|
|
|
|
3,452
|
|
|
|
3,313
|
|
|
|
3,733
|
|
|
|
-
|
|
|
|
7,046
|
|
|
Service revenues
|
|
|
2,906
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2,907
|
|
|
|
17,257
|
|
|
|
42
|
|
|
|
-
|
|
|
|
17,299
|
|
|
Other revenues
|
|
|
556
|
|
|
|
6
|
|
|
|
177
|
|
|
|
739
|
|
|
|
2,722
|
|
|
|
7
|
|
|
|
383
|
|
|
|
3,112
|
|
|
|
|
$
|
6,013
|
|
|
$
|
8,531
|
|
|
$
|
177
|
|
|
$
|
14,721
|
|
|
$
|
37,889
|
|
|
$
|
8,755
|
|
|
$
|
383
|
|
|
$
|
47,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
5,781
|
|
|
$
|
8,531
|
|
|
$
|
175
|
|
|
$
|
14,487
|
|
|
$
|
37,457
|
|
|
$
|
8,755
|
|
|
$
|
369
|
|
|
$
|
46,581
|
|
|
Recognized over time
|
|
|
232
|
*
|
|
|
-
|
|
|
|
2
|
|
|
|
234
|
|
|
|
432
|
*
|
|
|
-
|
|
|
|
14
|
|
|
|
446
|
|
|
|
|
$
|
6,013
|
|
|
$
|
8,531
|
|
|
$
|
177
|
|
|
$
|
14,721
|
|
|
$
|
37,889
|
|
|
$
|
8,755
|
|
|
$
|
383
|
|
|
$
|
47,027
|
|
|
|
|
Nine
Months Ended June 30, 2020
|
|
|
Nine
Months Ended June 30, 2019
|
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Sales of alcoholic beverages
|
|
$
|
28,321
|
|
|
$
|
16,964
|
|
|
$
|
-
|
|
|
$
|
45,285
|
|
|
$
|
43,547
|
|
|
$
|
12,819
|
|
|
$
|
-
|
|
|
$
|
56,366
|
|
|
Sales of food and merchandise
|
|
|
6,837
|
|
|
|
10,541
|
|
|
|
-
|
|
|
|
17,378
|
|
|
|
9,813
|
|
|
|
9,362
|
|
|
|
-
|
|
|
|
19,175
|
|
|
Service revenues
|
|
|
34,290
|
|
|
|
158
|
|
|
|
-
|
|
|
|
34,448
|
|
|
|
51,513
|
|
|
|
96
|
|
|
|
-
|
|
|
|
51,609
|
|
|
Other revenues
|
|
|
5,791
|
|
|
|
21
|
|
|
|
618
|
|
|
|
6,430
|
|
|
|
7,791
|
|
|
|
18
|
|
|
|
917
|
|
|
|
8,726
|
|
|
|
|
$
|
75,239
|
|
|
$
|
27,684
|
|
|
$
|
618
|
|
|
$
|
103,541
|
|
|
$
|
112,664
|
|
|
$
|
22,295
|
|
|
$
|
917
|
|
|
$
|
135,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
74,192
|
|
|
$
|
27,684
|
|
|
$
|
605
|
|
|
$
|
102,481
|
|
|
$
|
111,431
|
|
|
$
|
22,295
|
|
|
$
|
874
|
|
|
$
|
134,600
|
|
|
Recognized over time
|
|
|
1,047
|
*
|
|
|
-
|
|
|
|
13
|
|
|
|
1,060
|
|
|
|
1,233
|
*
|
|
|
-
|
|
|
|
43
|
|
|
|
1,276
|
|
|
|
|
$
|
75,239
|
|
|
$
|
27,684
|
|
|
$
|
618
|
|
|
$
|
103,541
|
|
|
$
|
112,664
|
|
|
$
|
22,295
|
|
|
$
|
917
|
|
|
$
|
135,876
|
|
|
*
|
Lease revenue (included in Other Revenues) as covered by ASC 842 in the current year (and ASC 840 in the prior year). All other
revenues are covered by ASC 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):
Schedule of Reconciliation of Contract Liabilities with Customers
|
|
|
Balance
at
September
30, 2019
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at
June
30, 2020
|
|
|
Ad revenue
|
|
$
|
76
|
|
|
$
|
403
|
|
|
$
|
(412
|
)
|
|
$
|
67
|
|
|
Expo revenue
|
|
|
-
|
|
|
|
262
|
|
|
|
-
|
|
|
|
262
|
|
|
Other
|
|
|
7
|
|
|
|
18
|
|
|
|
(23
|
)
|
|
|
2
|
|
|
|
|
$
|
83
|
|
|
$
|
683
|
|
|
$
|
(435
|
)
|
|
$
|
331
|
|
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):
Schedule of Accrued Liabilities
|
|
|
June
30, 2020
|
|
|
September
30, 2019
|
|
|
Insurance
|
|
$
|
425
|
|
|
$
|
4,937
|
|
|
Sales and liquor taxes
|
|
|
2,844
|
|
|
|
3,086
|
|
|
Payroll and related costs
|
|
|
1,972
|
|
|
|
2,892
|
|
|
Property taxes
|
|
|
1,355
|
|
|
|
1,675
|
|
|
Interest
|
|
|
1,565
|
|
|
|
508
|
|
|
Patron tax
|
|
|
679
|
|
|
|
595
|
|
|
Unearned revenues
|
|
|
331
|
|
|
|
83
|
|
|
Lawsuit settlement
|
|
|
75
|
|
|
|
115
|
|
|
Other
|
|
|
1,040
|
|
|
|
753
|
|
|
Accrued liabilities
|
|
$
|
10,286
|
|
|
$
|
14,644
|
|
The
components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Taxes and permits
|
|
$
|
1,187
|
|
|
$
|
2,258
|
|
|
$
|
6,101
|
|
|
$
|
6,809
|
|
|
Advertising and marketing
|
|
|
428
|
|
|
|
2,083
|
|
|
|
4,745
|
|
|
|
6,301
|
|
|
Supplies and services
|
|
|
681
|
|
|
|
1,493
|
|
|
|
3,605
|
|
|
|
4,414
|
|
|
Insurance
|
|
|
1,481
|
|
|
|
1,367
|
|
|
|
4,437
|
|
|
|
4,122
|
|
|
Accounting and professional fees
|
|
|
407
|
|
|
|
631
|
|
|
|
2,916
|
|
|
|
2,559
|
|
|
Lease
|
|
|
1,010
|
|
|
|
965
|
|
|
|
3,063
|
|
|
|
2,941
|
|
|
Charge card fees
|
|
|
146
|
|
|
|
1,011
|
|
|
|
2,037
|
|
|
|
2,830
|
|
|
Legal
|
|
|
841
|
|
|
|
1,479
|
|
|
|
3,109
|
|
|
|
3,310
|
|
|
Utilities
|
|
|
512
|
|
|
|
756
|
|
|
|
2,205
|
|
|
|
2,262
|
|
|
Security
|
|
|
272
|
|
|
|
757
|
|
|
|
1,869
|
|
|
|
2,222
|
|
|
Repairs and maintenance
|
|
|
353
|
|
|
|
787
|
|
|
|
1,802
|
|
|
|
2,095
|
|
|
Other
|
|
|
1,590
|
|
|
|
1,308
|
|
|
|
4,000
|
|
|
|
3,398
|
|
|
Selling, general and administrative expenses
|
|
$
|
8,908
|
|
|
$
|
14,895
|
|
|
$
|
39,889
|
|
|
$
|
43,263
|
|
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 three months ended December 31, 2019, the Company classified as held-for-sale another real estate property with an aggregate
estimated fair value of the property less cost to sell of $1.9
million. This property was later reclassified
out of held-for-sale assets and back to property and equipment during the three months ended June 30, 2020 due to a change in
management’s plan with the property.
During
the three months ended June 30, 2020, the Company sold one held-for-sale
property valued at $853,000
for $1.5
million.
As
of June 30, 2020, the Company has a total of one real estate property held for sale with a total value of $2.0 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.
No
liabilities were associated with held-for-sale
assets as of June 30, 2020 and September 30, 2019. Gains or losses on the sale of properties held for sale are included in other
charges (gains), net within the unaudited condensed consolidated statements of operations.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
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 on 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 debt obligations as of June 30, 2020 and September 30, 2019 is a $500,000 note borrowed from a related party
(see Note 13) and three notes totaling $600,000 (of which $200,000 was included in the $1,740,000 extension in the
succeeding paragraph) 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.
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.
Future
maturities of long-term debt as of June 30, 2020 are as follows: $17.5
million, $14.6
million, $11.6
million, $8.4
million, $8.5
million and $83.5
million for the twelve months ending June
30, 2021, 2022, 2023, 2024, 2025, and thereafter, respectively. Of the maturity schedule mentioned above, $6.5
million, $2.4
million, $3.7
million, $0,
$0
and $41.7
million, respectively, relate to scheduled
balloon payments. Unamortized debt discount and issuance costs amounted to $1.3 million and $1.5 million as of June 30, 2020
and September 30, 2019, respectively.
Included
in the balance of debt obligations as of June 30, 2020 are PPP loans amounting to $5.4
million. If not forgiven, under the terms
of the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1%
per annum and will be payable in 18 equal monthly installments of $305,138
starting December 6, 2020. See Notes
3 and 9.
8.
Equity
During
the three and nine months ended June 30, 2020, the Company purchased and retired 0 and 465,390 common shares, respectively, at
a cost of approximately $0 and $8.5 million, respectively. The Company paid $0.03 and $0.10 per share cash dividends during the
three and nine months ended June 30, 2020 totaling approximately $273,000 and $920,000, respectively.
During
the three and nine months ended June 30, 2019, the Company purchased and retired 17,302 and 102,113 common shares, respectively,
at a cost of approximately $403,000 and $2.4 million, respectively. The Company paid a $0.03 per share cash dividend per quarter
totaling approximately $285,000 and $867,000 for the three and nine months ended June 30, 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 August 7, 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
tax benefit was $1.4
million and $1.3
million during the three and nine months
ended June 30, 2020, respectively, compared to income tax expense of $1.8
million and $5.5
million during the three and nine months
ended June 30, 2019, respectively. The effective income tax rate was a benefit of 20.5%
and 26.9%
during the three and nine months ended
June 30, 2020, respectively, compared to expense rates of 24.1%
and 22.8%
during the three and nine months ended
June 30, 2019, respectively. Our effective tax rate for both years is affected by the estimate of pre-tax accounting income
(loss) for the year, 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, 2017 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. In July 2020,
we have resolved payroll tax audits with the IRS for tax years 2014 through 2017 and have accrued approximately $149,000 in
payroll taxes and penalties, which are included in accrued liabilities in our unaudited condensed consolidated balance sheet as
of June 30, 2020.
The
Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of June 30, 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. See Note 3.
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 unaudited condensed consolidated
balance sheets, amounted to $2.5
million and $3.4
million as of June 30, 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 an 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 June 30, 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. As of
July 23, 2020, briefing on the motion to dismiss is complete, and we are currently waiting for the court to rule on the
motion. 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 June 30, 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.
Due
to several COVID-19 regulations and restrictions imposed on some of our businesses by local municipalities and/or States, certain
of our subsidiaries are plaintiffs to lawsuits that have been filed on behalf of the affected entities to have the
restrictions eased or removed entirely. The lawsuits may increase or decrease based on the spread of the disease and new or additional
restrictions placed on our businesses.
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 nine months ended June 30, 2020 total approximately $50,000 and $74,000, respectively, while for
the three and nine months ended June 30, 2019 total $0 and $144,000, respectively. As of June 30, 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.
Schedule of Segment Reporting Information
Below
is the financial information related to the Company’s segments (in thousands):
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
6,013
|
|
|
$
|
37,889
|
|
|
$
|
75,239
|
|
|
$
|
112,664
|
|
|
Bombshells
|
|
|
8,531
|
|
|
|
8,755
|
|
|
|
27,684
|
|
|
|
22,295
|
|
|
Other
|
|
|
177
|
|
|
|
383
|
|
|
|
618
|
|
|
|
917
|
|
|
General corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
14,721
|
|
|
$
|
47,027
|
|
|
$
|
103,541
|
|
|
$
|
135,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
(3,088
|
)
|
|
$
|
14,034
|
|
|
$
|
13,002
|
|
|
$
|
44,499
|
|
|
Bombshells
|
|
|
1,903
|
|
|
|
686
|
|
|
|
4,166
|
|
|
|
1,543
|
|
|
Other
|
|
|
(95
|
)
|
|
|
(111
|
)
|
|
|
(480
|
)
|
|
|
(406
|
)
|
|
General corporate
|
|
|
(3,377
|
)
|
|
|
(4,635
|
)
|
|
|
(14,134
|
)
|
|
|
(13,364
|
)
|
|
|
|
$
|
(4,657
|
)
|
|
$
|
9,974
|
|
|
$
|
2,554
|
|
|
$
|
32,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,470
|
|
|
$
|
1,737
|
|
|
$
|
4,426
|
|
|
$
|
4,711
|
|
|
Bombshells
|
|
|
455
|
|
|
|
370
|
|
|
|
1,328
|
|
|
|
1,001
|
|
|
Other
|
|
|
103
|
|
|
|
102
|
|
|
|
311
|
|
|
|
312
|
|
|
General corporate
|
|
|
207
|
|
|
|
256
|
|
|
|
631
|
|
|
|
694
|
|
|
|
|
$
|
2,235
|
|
|
$
|
2,465
|
|
|
$
|
6,696
|
|
|
$
|
6,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
106
|
|
|
$
|
1,935
|
|
|
$
|
2,964
|
|
|
$
|
3,029
|
|
|
Bombshells
|
|
|
136
|
|
|
|
900
|
|
|
|
2,473
|
|
|
|
10,697
|
|
|
Other
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
20
|
|
|
General corporate
|
|
|
-
|
|
|
|
162
|
|
|
|
128
|
|
|
|
3,155
|
|
|
|
|
$
|
242
|
|
|
$
|
2,999
|
|
|
$
|
5,565
|
|
|
$
|
16,901
|
|
|
|
|
June
30, 2020
|
|
|
September
30, 2019
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
277,707
|
|
|
$
|
274,071
|
|
|
Bombshells
|
|
|
51,907
|
|
|
|
44,144
|
|
|
Other
|
|
|
1,516
|
|
|
|
1,773
|
|
|
General corporate
|
|
|
29,244
|
|
|
|
33,649
|
|
|
|
|
$
|
360,374
|
|
|
$
|
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 June 30, 2020 and September 30, 2019 is $84.0 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 is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and
services provided by Nottingham Creations and Sherwood Forest were $0 and
$72,809 during
the three and nine months ended June 30, 2020, respectively, and $12,990 and
$120,805 during
the three and nine months ended June 30, 2019, respectively. As of June 30, 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 $0
and $18,758
for the three and nine months ended
June 30, 2020, respectively, and $0
and $435,800
for the three and nine months ended June
30, 2019, respectively. Amounts billed directly to the Company were $11,363
and $37,605
for the three and nine months ended June
30, 2020, respectively, and $0
and $206
for the three and nine months ended June
30, 2019, respectively. As of June 30, 2020 and September 30, 2019, the Company owed TW Mechanical $4,439
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 nine months ended June 30, 2020, respectively, and $19,500 and
$58,500 for the three and nine months ended June 30, 2019, respectively. This lease terminated on December 31, 2019.
Schedule of Future Minimum Rental Payments for Operating Leases
Undiscounted
future minimum annual lease obligations as of September 30, 2019 under ASC 840 are as follows (in thousands):
|
|
|
|
September 30, 2019
|
|
|
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 $965,000 and $2.9 million during the three and nine months ended June 30,
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.
Schedule of Future Maturities of Lease Liabilities
Future
maturities of ASC 842 lease liabilities as of June 30, 2020 are as follows (in thousands):
|
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
|
July
2020 - June 2021
|
|
$
|
1,586
|
|
|
$
|
1,617
|
|
|
$
|
3,203
|
|
|
July
2021 - June 2022
|
|
|
1,719
|
|
|
|
1,517
|
|
|
|
3,236
|
|
|
July
2022 - June 2023
|
|
|
1,703
|
|
|
|
1,412
|
|
|
|
3,115
|
|
|
July
2023 - June 2024
|
|
|
1,738
|
|
|
|
1,310
|
|
|
|
3,048
|
|
|
July
2024 - June 2025
|
|
|
1,906
|
|
|
|
1,200
|
|
|
|
3,106
|
|
|
Thereafter
|
|
|
18,797
|
|
|
|
5,703
|
|
|
|
24,500
|
|
|
|
|
$
|
27,449
|
|
|
$
|
12,759
|
|
|
$
|
40,208
|
|
Schedule of Lease Expense
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 nine months ended June
30, 2020 as follows (in thousands):
|
|
|
Three
Months Ended
June
30, 2020
|
|
|
Nine
Months Ended
June
30, 2020
|
|
|
Operating lease expense – fixed payments
|
|
$
|
839
|
|
|
$
|
2,519
|
|
|
Variable lease expense
|
|
|
158
|
|
|
|
288
|
|
|
Short-term equipment and other lease expense (includes $12 and $303 recorded in advertising and marketing, and $72 and $297 recorded in repairs and maintenance for the three and nine months ended June 30, 2020, respectively; see Note 5)
|
|
|
97
|
|
|
|
856
|
|
|
Sublease income
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
Total lease expense, net
|
|
$
|
1,092
|
|
|
$
|
3,655
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
1,051
|
|
|
$
|
3,513
|
|
|
Weighted average remaining lease term
|
|
|
|
|
|
|
13 years
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
6.1
|
%
|