Notes
to Consolidated Financial Statements
1.
Nature of Business
RCI
Hospitality Holdings, Inc. (the “Company,” “we,” “us,” or “our”) is a holding
company incorporated in Texas in 1994. Through its subsidiaries, the Company currently owns and operates establishments that offer
live adult entertainment, restaurant, and/or bar operations. These establishments are located in Houston, Austin, San Antonio,
Dallas, Fort Worth, Odessa, Lubbock, Longview, Abilene, Edinburg, El Paso, Harlingen and Beaumont, Texas, as well as Minneapolis,
Minnesota; Pittsburgh, Pennsylvania; Charlotte, North Carolina; New York, New York; Pembroke Park and Miami Gardens, Florida;
Phoenix, Arizona; Sulphur, Louisiana; and Chicago, Washington Park and Kappa, Illinois. The Company also owns and operates media
businesses for adults. The Company’s corporate offices are located in Houston, Texas.
2.
Summary of Significant Accounting Policies
Basis
of Accounting
The
accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is
owned. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal
Year
Our
fiscal year ends on September 30. References to years 2020, 2019, and 2018 are for fiscal years ended September 30, 2020, 2019,
and 2018, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions
are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under
the circumstances. Estimates and assumptions may vary under different circumstances and conditions. We evaluate our estimates
and assumptions on an ongoing basis.
Cash
and Cash Equivalents
The
Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The
Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided
by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to
amounts in excess of FDIC limits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Accounts
and Notes Receivable
Accounts
receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to
cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily comprised of receivables
for advertising sales and Expo registration. Accounts receivable also include employee advances, construction advances, and other
miscellaneous receivables. Long-term notes receivable, which have original maturity of more than one year, include consideration
from the sale of certain investment interest entities and real estate. The Company recognizes interest income on notes receivable
based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income
will be collected. The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected. Allowance for doubtful accounts balance related to accounts
receivable was $261,000 and $101,000 as of September 30, 2020 and 2019, respectively (see Note 6). Allowance for doubtful accounts
balance related to notes receivable was $182,000 and $0 as of September 30, 2020 and 2019, respectively.
Inventories
Inventories
include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at net realizable value.
Property
and Equipment
Property
and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated
useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.
Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to
7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures
for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs
are expensed as incurred. The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off
from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of operations of
the respective period. Interest expense from related debt incurred during site construction is capitalized, which amounted to
$156,000 in 2020, $597,000 in fiscal 2019, and $319,000 in fiscal 2018.
Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for impairment. Definite-lived
intangible assets are amortized on a straight-line basis over their estimated lives.
The
costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets. The costs
of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred. Annual
license renewal fees are expensed over their renewal term.
Goodwill
and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter
and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment
loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
For
our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely
than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors,
including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to
actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting
unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1
quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation
models, including earnings multiples, discounted cash flows, and comparable asset market values. We recognize goodwill impairment
in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount
of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2020,
we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million. See related
discussion in Note 3. For the year ended September 30, 2019, we identified four reporting units that were impaired and recognized
a goodwill impairment loss totaling $1.6 million. For the year ended September 30, 2018, we identified two reporting units that
were impaired and recognized a goodwill impairment loss totaling $834,000. See Note 18.
For
indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings
of the asset. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value
is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds
the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $2.3 million in 2020 related to two
clubs (see Note 3), $178,000 in 2019 related to one club, and $3.1 million in 2018 related to three clubs, which are included
in other charges, net in the consolidated statements of operations. See Note 18.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use
assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant
underperformance relative to historical or projected future operating results, significant changes in the manner of use of the
acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted
cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not
recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group
as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be
identified. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell and are no longer depreciated. For assets held for sale, we measure fair value using an estimation
based on quoted prices for similar items in active or inactive markets (level 2) developed using observable data. The assets and
liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections
of the balance sheet. During fiscal 2020, the Company impaired one club and one Bombshells unit for a total of $302,000;
during fiscal 2019, the Company impaired two clubs for a total of $4.2
million; and during fiscal 2018,
the Company impaired one club and one Bombshells for a total of $1.6
million. The Company also impaired one
club in fiscal of 2020 for operating lease right-of-use assets amounting to $104,000.
See Notes 7 and 18.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Fair
Value of Financial Instruments
The
Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional
information in the notes to consolidated financial statements when the fair value is different than the carrying value of these
financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their
carrying amounts due to the relatively short maturity of these instruments. The carrying value of notes receivable and short and
long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are
held for trading purposes.
Comprehensive
Income (Loss)
Comprehensive income (loss) is the
total of net income or loss and all other changes in net assets arising from non-owner sources, which are referred to as items
of other comprehensive income (loss). An analysis of changes in components of accumulated other comprehensive income is
presented in the consolidated statements of comprehensive income (loss).
Revenue
Recognition
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 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).
Refer
to Notes 5 and 22 for additional disclosures on revenues and leases, respectively.
Advertising
and Marketing
Advertising
and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional
purposes. Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations. See Note 6.
Income
Taxes
The
Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions
where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is
determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
U.S.
GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements. We recognize penalties related to unrecognized
tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized
tax benefits in interest expense.
Investments
Investments
in companies in which the company has a 20%
to 50%
interest are accounted for using the equity
method, which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or
losses. Investments
in companies in which the Company owns less than a 20% interest, or where the Company does not exercise significant influence,
are accounted for at cost and reviewed for any impairment. Cost
and equity method investments are included in other assets in the Company’s consolidated balance sheets. In relation to
the reacquisition of Drink Robust in 2018, which we partially sold in fiscal 2016, we have consolidated the operations
of Drink Robust and eliminated the investment in consolidation. See Note 16.
Paycheck Protection Program
The Company’s policy is to account for the Paycheck Protection
Program (“PPP”) loan as debt (see Note 10). The Company will continue to record the loan as debt until either (1) the
loans are partially or entirely forgiven and the Company has been legally released from the obligation, at which point the amount
forgiven will be recorded as income, or (2) the Company pays off the loans.
Earnings
(Loss) Per Share
Basic earnings (loss) per share includes
no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of securities that could share
in the earnings or losses of the Company. Potential common stock shares consist of shares that may arise from outstanding
dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method)
and from outstanding convertible debentures (the number of which is computed using the if-converted method). Diluted earnings
(loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted
stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s
earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
During the years ended September 30, 2020,
2019, and 2018, the Company did not have any outstanding dilutive securities that are considered adjustment items to reconcile
the numerator and the denominator in the calculation of basic and diluted earnings (loss) per share.
Stock
Options
The
Company recognizes all employee stock-based compensation as a cost in the consolidated financial statements. Equity-classified
awards are measured at the grant date fair value of the award and recognized as expense over their requisite service period. The
Company estimates grant date fair value using the Black-Scholes option-pricing model. The critical estimates are volatility, expected
life and risk-free rate.
At
September 30, 2020 and 2019, the Company has no stock
options outstanding, and as of September 30, 2020, the Company’s 2010 Stock Option Plan contractually
expired.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Legal
and Other Contingencies
The
Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a
material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. The Company
recognizes legal fees and expenses, including those related to legal contingencies, as incurred.
Generally,
the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
The
Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims
for workers’ compensation, general liability, property, auto, and business interruption coverage. The Company carries substantial
insurance to cover such risks with large deductibles and/or self-insured retention. These policies have been structured to limit
our per-occurrence exposure. The Company believes, and the Company’s experience has been, that such insurance policies have
been sufficient to cover such risks.
Fair
Value Accounting
The
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset
or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements,
the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the
following levels.
U.S.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
|
●
|
Level
1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 – Include other inputs that are directly or indirectly observable in the marketplace.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs which are supported by little or no market activity.
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The
Company classifies its marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains
and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income and were
reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018. Realized
gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale
are included in comprehensive income (loss). The Company measures the fair value of its marketable securities based on
quoted prices for identical securities in active markets, or Level 1 inputs. Available-for-sale securities, which are included
in other assets in the consolidated balance sheets, had a balance of $84,000
and $148,000
as of September 30, 2020 and 2019.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
In
accordance with U.S. GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security
below the cost basis is other than temporary. Should the decline be considered other than temporary, the Company writes down the
cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss. No losses or other-than-temporary
impairments in our marketable securities portfolio were recognized during the years ended September 30, 2020, 2019, and 2018.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets
and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill
and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance
sheets. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment.
If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference
is included in other charges, net in the consolidated statements of operations.
Assets
and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):
Schedule of Assets and Liabilities Measured at Fair Value on Nonrecurring Basis
|
|
|
|
|
Fair
Value at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Significant
Other
|
|
|
Unobservable
|
|
|
|
September
30,
|
|
|
Identical
Asset
|
|
|
Observable
Inputs
|
|
|
Inputs
|
|
Description
|
|
2020
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Property and equipment
|
|
$
|
6,042
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,042
|
|
Indefinite-lived intangibles
|
|
|
656
|
|
|
|
-
|
|
|
|
-
|
|
|
|
656
|
|
Goodwill
|
|
|
5,883
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,883
|
|
Operating lease right-of-use assets*
|
|
|
27,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,310
|
|
Operating lease liabilities*
|
|
|
(28,551
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,551
|
)
|
Other assets (equity securities)
|
|
|
84
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
*
|
Measured at October 1, 2019 upon the adoption of
ASC 842.
|
|
|
|
|
|
Fair
Value at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Significant
Other
|
|
|
Unobservable
|
|
|
|
September
30,
|
|
|
Identical
Asset
|
|
|
Observable
Inputs
|
|
|
Inputs
|
|
Description
|
|
2019
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Property and equipment
|
|
$
|
10,926
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,926
|
|
Indefinite-lived intangibles
|
|
|
5,323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,323
|
|
Definite-lived intangibles
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
Goodwill
|
|
|
11,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,627
|
|
Other assets (equity securities)
|
|
|
148
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
|
|
Unrealized
Gain (Loss/Impairments) Recognized
|
|
|
|
Years
Ended September 30,
|
|
Description
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Goodwill
|
|
$
|
(7,944
|
)
|
|
$
|
(1,638
|
)
|
|
$
|
(834
|
)
|
Property and equipment, net
|
|
|
(302
|
)
|
|
|
(4,224
|
)
|
|
|
(1,615
|
)
|
Indefinite-lived intangibles
|
|
|
(2,265
|
)
|
|
|
(178
|
)
|
|
|
(3,121
|
)
|
Operating lease right-of-use assets
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
-
|
|
Other assets (equity securities)
|
|
|
(64
|
)
|
|
|
(612
|
)
|
|
|
305
|
|
Impact
of Recently Issued Accounting Standards
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 22.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
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.
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.
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 Consolidated Financial Statements
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. 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 were mandated or encouraged by federal, state and local governments. Since
March 2020, we have temporarily closed and reopened several of our clubs and restaurants.
The
temporary 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 are allowed to 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 PPP of the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 10 and 11. 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. The Company believes it
has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be
forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of
the PPP funds and has submitted its forgiveness applications. As of the filing of this report, we have received ten
Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All
of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9
million. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining
two PPP loans in whole or in part.
As
of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses.
Lower sales, as caused by local, state and national 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 certain operating hour restrictions and with limited occupancy.
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 we conducted during the quarters since the pandemic emerged, we
determined that as of September 30, 2020 our assets are impaired in a total amount of approximately $10.6
million comprised of $7.9
million in goodwill, $2.3
million in SOB licenses, $302,000
in property and equipment, and $104,000
in operating lease right-of-use assets.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
4. Revision of Prior Year Immaterial Misstatement
During the fourth quarter ended September
30, 2020, the Company identified an error in the calculation of income taxes in relation to a disposed entity during the fiscal
2019 first quarter ended December 31, 2018. The error related to the recognition of income tax receivable on the disposed entity.
The Company determined the amount of the income tax receivable to be recognized with a consequent credit to income tax expense
as $1.1 million.
The Company assessed the materiality of
the error considering both qualitative and quantitative factors and determined that the error was immaterial for fiscal 2019 but
material if recorded as an out-of-period adjustment in fiscal 2020. Therefore, the Company has decided to correct the error as
a revision to our previously issued financial statements and has adjusted this Form 10-K insofar as fiscal 2019 is concerned.
The tables below present the impact of
the revision in the Company’s consolidated financial statements (in thousands, except per share amounts):
Schedule
of Impact of Revisions in Financial Statements
|
|
Fiscal
2019
|
|
|
|
First
Quarter
|
|
|
Full
Year
|
|
Consolidated Statement of Income/Comprehensive Income:
|
|
|
|
|
|
|
|
|
As previously reported —
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
1,811
|
|
|
$
|
4,863
|
|
Net income
|
|
$
|
6,404
|
|
|
$
|
19,326
|
|
Net income attributable to RCIHH common stockholders
|
|
$
|
6,344
|
|
|
$
|
19,175
|
|
Earnings per share - basic and diluted
|
|
$
|
0.65
|
|
|
$
|
1.99
|
|
Comprehensive income
|
|
$
|
6,404
|
|
|
$
|
19,106
|
|
Comprehensive income attributable to RCIHH common stockholders
|
|
$
|
6,344
|
|
|
$
|
18,955
|
|
|
|
|
|
|
|
|
|
|
Adjustments —
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(1,119
|
)
|
|
$
|
(1,119
|
)
|
Net income
|
|
$
|
1,119
|
|
|
$
|
1,119
|
|
Net income attributable to RCIHH common stockholders
|
|
$
|
1,119
|
|
|
$
|
1,119
|
|
Earnings per share - basic and diluted
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Comprehensive income
|
|
$
|
1,119
|
|
|
$
|
1,119
|
|
Comprehensive income attributable to RCIHH common stockholders
|
|
$
|
1,119
|
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
As revised —
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
692
|
|
|
$
|
3,744
|
|
Net income
|
|
$
|
7,523
|
|
|
$
|
20,445
|
|
Net income attributable to RCIHH common stockholders
|
|
$
|
7,463
|
|
|
$
|
20,294
|
|
Earnings per share - basic and diluted
|
|
$
|
0.77
|
|
|
$
|
2.10
|
|
Comprehensive income
|
|
$
|
7,523
|
|
|
$
|
20,225
|
|
Comprehensive income attributable to RCIHH common stockholders
|
|
$
|
7,463
|
|
|
$
|
20,074
|
|
|
|
December 31,
2018
|
|
|
March
31,
2019
|
|
|
June
30,
2019
|
|
|
September 30,
2019
|
|
|
December 31,
2019
|
|
|
March
31,
2020
|
|
|
June
30,
2020
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
5,583
|
|
|
$
|
5,579
|
|
|
$
|
5,001
|
|
|
$
|
6,289
|
|
|
$
|
3,131
|
|
|
$
|
3,559
|
|
|
$
|
5,529
|
|
Total current assets
|
|
$
|
25,067
|
|
|
$
|
21,859
|
|
|
$
|
22,597
|
|
|
$
|
34,771
|
|
|
$
|
30,899
|
|
|
$
|
26,767
|
|
|
$
|
28,350
|
|
Total assets
|
|
$
|
349,522
|
|
|
$
|
350,873
|
|
|
$
|
350,878
|
|
|
$
|
353,637
|
|
|
$
|
376,173
|
|
|
$
|
361,896
|
|
|
$
|
360,374
|
|
Retained earnings
|
|
$
|
95,179
|
|
|
$
|
101,623
|
|
|
$
|
106,976
|
|
|
$
|
107,049
|
|
|
$
|
112,404
|
|
|
$
|
108,584
|
|
|
$
|
102,837
|
|
Total RCIHH stockholders’ equity
|
|
$
|
159,133
|
|
|
$
|
163,971
|
|
|
$
|
168,921
|
|
|
$
|
168,457
|
|
|
$
|
167,371
|
|
|
$
|
161,504
|
|
|
$
|
155,757
|
|
Total equity
|
|
$
|
159,090
|
|
|
$
|
163,936
|
|
|
$
|
168,906
|
|
|
$
|
168,301
|
|
|
$
|
167,205
|
|
|
$
|
161,276
|
|
|
$
|
155,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RCIHH stockholders’ equity
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As revised —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
6,702
|
|
|
$
|
6,698
|
|
|
$
|
6,120
|
|
|
$
|
7,408
|
|
|
$
|
4,250
|
|
|
$
|
4,678
|
|
|
$
|
6,648
|
|
Total current assets
|
|
$
|
26,186
|
|
|
$
|
22,978
|
|
|
$
|
23,716
|
|
|
$
|
35,890
|
|
|
$
|
32,018
|
|
|
$
|
27,886
|
|
|
$
|
29,469
|
|
Total assets
|
|
$
|
350,641
|
|
|
$
|
351,992
|
|
|
$
|
351,997
|
|
|
$
|
354,756
|
|
|
$
|
377,292
|
|
|
$
|
363,015
|
|
|
$
|
361,493
|
|
Retained earnings
|
|
$
|
96,298
|
|
|
$
|
102,742
|
|
|
$
|
108,095
|
|
|
$
|
108,168
|
|
|
$
|
113,523
|
|
|
$
|
109,703
|
|
|
$
|
103,956
|
|
Total RCIHH stockholders’ equity
|
|
$
|
160,252
|
|
|
$
|
165,090
|
|
|
$
|
170,040
|
|
|
$
|
169,576
|
|
|
$
|
168,490
|
|
|
$
|
162,623
|
|
|
$
|
156,876
|
|
Total equity
|
|
$
|
160,209
|
|
|
$
|
165,055
|
|
|
$
|
170,025
|
|
|
$
|
169,420
|
|
|
$
|
168,324
|
|
|
$
|
162,395
|
|
|
$
|
156,554
|
|
The consolidated statement of cash flows
are not presented because there is no impact on total cash flows from operating, investing, and financing activities. Certain
components of net cash provided by operating activities changed due to the revision but the net change amounted to zero for both
the quarter ended December 31, 2018 and fiscal year ended September 30, 2019.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
5.
Revenues
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 19), are shown below (in thousands).
Schedule of Disaggregation of Segment Revenues
|
|
Fiscal
2020
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
31,950
|
|
|
$
|
27,130
|
|
|
$
|
-
|
|
|
$
|
59,080
|
|
Sales of food and merchandise
|
|
|
8,561
|
|
|
|
15,899
|
|
|
|
-
|
|
|
|
24,460
|
|
Service revenues
|
|
|
41,004
|
|
|
|
158
|
|
|
|
-
|
|
|
|
41,162
|
|
Other revenues
|
|
|
6,858
|
|
|
|
28
|
|
|
|
739
|
|
|
|
7,625
|
|
|
|
$
|
88,373
|
|
|
$
|
43,215
|
|
|
$
|
739
|
|
|
$
|
132,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
87,049
|
|
|
$
|
43,215
|
|
|
$
|
725
|
|
|
$
|
130,989
|
|
Recognized over time
|
|
|
1,324
|
|
|
|
-
|
|
|
|
14
|
|
|
|
1,338
|
|
|
|
$
|
88,373
|
|
|
$
|
43,215
|
|
|
$
|
739
|
|
|
$
|
132,327
|
|
|
|
Fiscal
2019
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
57,277
|
|
|
$
|
17,863
|
|
|
$
|
-
|
|
|
$
|
75,140
|
|
Sales of food and merchandise
|
|
|
13,051
|
|
|
|
12,779
|
|
|
|
-
|
|
|
|
25,830
|
|
Service revenues
|
|
|
67,893
|
|
|
|
162
|
|
|
|
-
|
|
|
|
68,055
|
|
Other revenues
|
|
|
10,385
|
|
|
|
24
|
|
|
|
1,625
|
|
|
|
12,034
|
|
|
|
$
|
148,606
|
|
|
$
|
30,828
|
|
|
$
|
1,625
|
|
|
$
|
181,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
146,938
|
|
|
$
|
30,828
|
|
|
$
|
1,572
|
|
|
$
|
179,338
|
|
Recognized over time
|
|
|
1,668
|
|
|
|
-
|
|
|
|
53
|
|
|
|
1,721
|
|
|
|
$
|
148,606
|
|
|
$
|
30,828
|
|
|
$
|
1,625
|
|
|
$
|
181,059
|
|
|
|
Fiscal
2018
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
54,800
|
|
|
$
|
14,320
|
|
|
$
|
-
|
|
|
$
|
69,120
|
|
Sales of food and merchandise
|
|
|
12,732
|
|
|
|
9,701
|
|
|
|
-
|
|
|
|
22,433
|
|
Service revenues
|
|
|
64,054
|
|
|
|
50
|
|
|
|
-
|
|
|
|
64,104
|
|
Other revenues
|
|
|
8,474
|
|
|
|
23
|
|
|
|
1,594
|
|
|
|
10,091
|
|
|
|
$
|
140,060
|
|
|
$
|
24,094
|
|
|
$
|
1,594
|
|
|
$
|
165,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
138,847
|
|
|
$
|
24,094
|
|
|
$
|
1,516
|
|
|
$
|
164,457
|
|
Recognized over time
|
|
|
1,213
|
|
|
|
-
|
|
|
|
78
|
|
|
|
1,291
|
|
|
|
$
|
140,060
|
|
|
$
|
24,094
|
|
|
$
|
1,594
|
|
|
$
|
165,748
|
|
*
Lease revenue (included in Other Revenues) is covered by ASC 842 in the current year (and ASC 840 in the prior years. All other
revenues are covered by ASC Topic 606.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
5.
Revenues - continued
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 consolidated balance sheet. A reconciliation of contract
liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below:
Schedule of Reconciliation of Contract Liabilities with Customers
|
|
Balance
at September 30, 2018
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at September 30, 2019
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at September 30, 2020
|
|
Ad revenue
|
|
$
|
126
|
|
|
$
|
602
|
|
|
$
|
(652
|
)
|
|
$
|
76
|
|
|
$
|
538
|
|
|
$
|
(522
|
)
|
|
$
|
92
|
|
Expo revenue
|
|
|
-
|
|
|
|
602
|
|
|
|
(602
|
)
|
|
|
-
|
|
|
|
211
|
|
|
|
-
|
|
|
|
211
|
|
Other
|
|
|
8
|
|
|
|
52
|
|
|
|
(53
|
)
|
|
|
7
|
|
|
|
40
|
|
|
|
(14
|
)
|
|
|
33
|
|
|
|
$
|
134
|
|
|
$
|
1,256
|
|
|
$
|
(1,307
|
)
|
|
$
|
83
|
|
|
$
|
789
|
|
|
$
|
(536
|
)
|
|
$
|
336
|
|
6.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
|
|
2020
|
|
|
2019
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
(As
Revised)
|
|
Credit card receivables
|
|
$
|
880
|
|
|
$
|
1,396
|
|
Income tax refundable
|
|
|
4,325
|
|
|
|
2,900
|
|
Insurance receivable
|
|
|
191
|
|
|
|
1,197
|
|
ATM-in-transit
|
|
|
160
|
|
|
|
780
|
|
Other (net of allowance for doubtful accounts of $261 and $101, respectively)
|
|
|
1,211
|
|
|
|
1,135
|
|
Accounts receivable,
net
|
|
$
|
6,767
|
|
|
$
|
7,408
|
|
Notes
receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and
assets with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years.
The
components of accrued liabilities are as follows (in thousands):
Schedule of Accrued Liabilities
|
|
2020
|
|
|
2019
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Insurance
|
|
$
|
4,405
|
|
|
$
|
4,937
|
|
Payroll and related costs
|
|
|
2,419
|
|
|
|
2,892
|
|
Property taxes
|
|
|
2,003
|
|
|
|
1,675
|
|
Sales and liquor taxes
|
|
|
2,613
|
|
|
|
3,086
|
|
Interest
|
|
|
1,390
|
|
|
|
508
|
|
Patron tax
|
|
|
309
|
|
|
|
595
|
|
Lawsuit settlement
|
|
|
100
|
|
|
|
115
|
|
Unearned revenues
|
|
|
336
|
|
|
|
83
|
|
Other
|
|
|
998
|
|
|
|
753
|
|
Accrued liabilities
|
|
$
|
14,573
|
|
|
$
|
14,644
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
6.
Selected Account Information - continued
The
components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Years
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Taxes and permits
|
|
$
|
8,071
|
|
|
$
|
10,779
|
|
|
$
|
9,545
|
|
Advertising and marketing
|
|
|
5,367
|
|
|
|
8,392
|
|
|
|
7,536
|
|
Supplies and services
|
|
|
4,711
|
|
|
|
5,911
|
|
|
|
5,344
|
|
Insurance
|
|
|
5,777
|
|
|
|
5,429
|
|
|
|
5,473
|
|
Lease
|
|
|
4,060
|
|
|
|
3,896
|
|
|
|
3,720
|
|
Legal
|
|
|
4,725
|
|
|
|
5,180
|
|
|
|
3,586
|
|
Utilities
|
|
|
2,945
|
|
|
|
3,165
|
|
|
|
2,969
|
|
Charge cards fees
|
|
|
2,382
|
|
|
|
3,803
|
|
|
|
3,244
|
|
Security
|
|
|
2,582
|
|
|
|
2,973
|
|
|
|
2,617
|
|
Accounting and professional fees
|
|
|
3,463
|
|
|
|
2,815
|
|
|
|
2,944
|
|
Repairs and maintenance
|
|
|
2,289
|
|
|
|
2,980
|
|
|
|
2,184
|
|
Other
|
|
|
5,320
|
|
|
|
4,573
|
|
|
|
4,662
|
|
Selling, general and administrative
expenses
|
|
$
|
51,692
|
|
|
$
|
59,896
|
|
|
$
|
53,824
|
|
The
components of other charges, net are as follows (in thousands):
Schedule
of Components of Other Charges, Net
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Years
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Impairment of assets
|
|
$
|
10,615
|
|
|
$
|
6,040
|
|
|
$
|
5,570
|
|
Settlement of lawsuits
|
|
|
174
|
|
|
|
225
|
|
|
|
1,669
|
|
Loss (gain) on sale of businesses and assets
|
|
|
(661
|
)
|
|
|
(2,877
|
)
|
|
|
1,965
|
|
Loss (gain) on insurance
|
|
|
420
|
|
|
|
(768
|
)
|
|
|
(20
|
)
|
Other charges
|
|
$
|
10,548
|
|
|
$
|
2,620
|
|
|
$
|
9,184
|
|
7.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
Schedule of Property, Plant and Equipment
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Buildings and land
|
|
$
|
163,938
|
|
|
$
|
159,969
|
|
Equipment
|
|
|
37,000
|
|
|
|
37,031
|
|
Leasehold improvements
|
|
|
29,776
|
|
|
|
32,868
|
|
Furniture
|
|
|
9,614
|
|
|
|
9,393
|
|
Total property and equipment
|
|
|
240,328
|
|
|
|
239,261
|
|
Less accumulated depreciation
|
|
|
(58,945
|
)
|
|
|
(55,305
|
)
|
Property and equipment, net
|
|
$
|
181,383
|
|
|
$
|
183,956
|
|
Included
in buildings and leasehold improvements above are construction-in-progress amounting to $20,000 and $8.9 million as of September
30, 2020 and 2019, respectively, which are mostly related to Bombshells projects.
Depreciation
expense was approximately $8.2 million, $8.4 million, and $7.5 million for fiscal years 2020, 2019, and 2018, respectively. Impairment
loss for property and equipment was $302,000, $4.2 million, and $1.6 million for fiscal 2020, 2019, and 2018, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
8.
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.
During
the three months ended September 30, 2020, the Company reverted the remaining held-for-sale real estate property with a value
of $2.0 million as held and used.
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 September 30, 2019. Gains or losses on the sale of properties held
for sale are included in other charges (gains), net within the consolidated statements of operations.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Goodwill and Other Intangible Assets
Goodwill
and other intangible assets consisted of the following (in thousands):
Schedule of Goodwill and Other Intangible Assets
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
45,686
|
|
|
$
|
53,630
|
|
Licenses
|
|
|
70,332
|
|
|
|
72,597
|
|
Tradename
|
|
|
2,215
|
|
|
|
2,215
|
|
|
|
|
118,233
|
|
|
|
128,442
|
|
|
|
Amortization
Period
|
|
|
|
|
|
|
Definite
useful lives:
|
|
|
|
|
|
|
|
|
|
|
Discounted
leases
|
|
18
& 6 years
|
|
|
93
|
|
|
|
101
|
|
Non-compete
agreements
|
|
5
years
|
|
|
362
|
|
|
|
565
|
|
Software
|
|
5
years
|
|
|
23
|
|
|
|
315
|
|
Distribution
agreement
|
|
3
years
|
|
|
52
|
|
|
|
158
|
|
|
|
|
|
|
530
|
|
|
|
1,139
|
|
Total
goodwill and other intangible assets
|
|
|
|
$
|
118,763
|
|
|
$
|
129,581
|
|
Schedule
of Indefinite-lived, Definite-lived Intangible Assets and Goodwill
|
|
2020
|
|
|
2019
|
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
Beginning balance
|
|
$
|
1,139
|
|
|
$
|
74,812
|
|
|
$
|
53,630
|
|
|
$
|
1,794
|
|
|
$
|
69,738
|
|
|
$
|
43,591
|
|
Acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243
|
|
|
|
5,252
|
|
|
|
11,677
|
|
Impairment
|
|
|
-
|
|
|
|
(2,265
|
)
|
|
|
(7,944
|
)
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
(1,638
|
)
|
Amortization
|
|
|
(609
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(898
|
)
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
530
|
|
|
$
|
72,547
|
|
|
$
|
45,686
|
|
|
$
|
1,139
|
|
|
$
|
74,812
|
|
|
$
|
53,630
|
|
As
of September 30, 2020 and 2019, the accumulated impairment balance of indefinite-lived intangibles was $8.4
million and $6.1
million, respectively, while the accumulated
impairment balance of goodwill was $14.3
million and $6.3
million, respectively. Future amortization
expense related to definite-lived intangible assets that are subject to amortization at September 30, 2020 is: 2021 - $263,000;
2022 - $134,000;
2023 - $59,000;
2024 - $11,000;
2025 - $7,000;
and thereafter - $56,000.
Indefinite-lived
intangible assets consist of sexually oriented business licenses and tradename, which were obtained as part of acquisitions. These
licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which
are done at minimal costs to the Company. The discounted cash flow of the income approach method was used in calculating the value
of these licenses in a business combination, while the relief-from-royalty method was used in calculating the value of tradenames.
During the fiscal year ended September 30, 2020, the Company recognized a $2.3 million impairment related to two clubs’
SOB licenses and a $7.9 million impairment related to the goodwill of seven reporting units (see Note 3). During the fiscal year
ended September 30, 2019, the Company recognized a $178,000 impairment related to one club’s SOB license and a $1.6 million
impairment related to the goodwill of four reporting units. During the fiscal year ended September 30, 2018, the Company recognized
a $3.1 million impairment related to three clubs’ SOB licenses and an $834,000 impairment related to the goodwill of two
reporting units. See Note 18.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt
Long-term
debt consisted of the following (in thousands):
Schedule of Long-term Debt
|
|
|
|
September
30,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Notes
payable at 5.5%, matures January 2023
|
|
(d)(1)
|
|
$
|
886
|
|
|
$
|
981
|
|
Non-interest-bearing
debts to State of Texas, mature March 2022 and May 2022, interest imputed at 9.6%
|
|
(d)(2)
|
|
|
2,177
|
|
|
|
3,379
|
|
Note
payable at 5.75%,
matures December
2027, as amended
|
|
*(a)(6ii)(7)
|
|
|
9,715
|
|
|
|
9,877
|
|
Note
payable at 5.95%,
matures December
2027, as amended
|
|
*(a)(6iii)(7)
|
|
|
5,787
|
|
|
|
6,776
|
|
Note
payable at 12%, matures February 2030, as amended
|
|
(d)(3)(25)
|
|
|
5,031
|
|
|
|
5,518
|
|
Notes
payable at 12%,
mature November
2021,
as amended
|
|
(d)(4)(26)
|
|
|
1,940
|
|
|
|
2,040
|
|
Note
payable at 8%,
matures October
2022, as amended
|
|
(b)(5)(23)
|
|
|
3,025
|
|
|
|
3,025
|
|
Note
payable at 8%, matures May 2029
|
|
(b)(5)
|
|
|
12,599
|
|
|
|
13,569
|
|
Note
payable at 5.75%,
matures December
2027, as amended
|
|
*(a)(6i)(7)(8)(9)
|
|
|
49,830
|
|
|
|
51,167
|
|
Note
payable at 5.99%,
matures September
2033, as amended
|
|
(c)(10)
|
|
|
6,395
|
|
|
|
6,555
|
|
Note
payable at 5%, matures August 2029
|
|
*(a)(12)
|
|
|
2,165
|
|
|
|
3,709
|
|
Note
payable at prime
plus 0.5% with a 5.5% floor, matures September
2035, as amended
|
|
*(a)(13)
|
|
|
2,099
|
|
|
|
2,099
|
|
Note
payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030
|
|
*(a)(13)
|
|
|
2,861
|
|
|
|
2,619
|
|
Note
payable at 8%, matures May 2021
|
|
(a)(14)
|
|
|
582
|
|
|
|
771
|
|
Note
payable at 5.95%,
matures August
2039, as amended
|
|
*(a)(11)
|
|
|
6,979
|
|
|
|
6,858
|
|
Note
payable at 12%, matures February 2030, as amended
|
|
(d)(15)(24)
|
|
|
3,875
|
|
|
|
4,000
|
|
Note
payable at 9%, matures September 2028
|
|
(a)(17)
|
|
|
1,167
|
|
|
|
1,263
|
|
Note
payable at 5.95%,
matures September
2028, as amended
|
|
*(a)(16)
|
|
|
1,489
|
|
|
|
1,511
|
|
Note
payable at 6%,
matures February
2040, as amended
|
|
*(a)(22)
|
|
|
4,066
|
|
|
|
3,608
|
|
Note
payable at 5.49%, matures March 2039, as amended
|
|
(c)(21)
|
|
|
2,125
|
|
|
|
2,156
|
|
Note
payable at 7%, matures November 2024
|
|
(b)(19)
|
|
|
3,319
|
|
|
|
3,982
|
|
Note
payable at 7%, matures February 2021, as amended
|
|
(b)(20)
|
|
|
2,000
|
|
|
|
2,000
|
|
Notes
payable at 12%, mature November 2021
|
|
(d)(18)
|
|
|
2,350
|
|
|
|
2,350
|
|
Note
payable at 8%, matures November 2028
|
|
(b)(20)
|
|
|
4,790
|
|
|
|
5,190
|
|
Paycheck
Protection Program loans at 1%, matures May 2022
|
|
(d)(27)
|
|
|
5,422
|
|
|
|
-
|
|
Total
debt
|
|
|
|
|
142,674
|
|
|
|
145,003
|
|
Less
unamortized debt discount and issuance costs
|
|
|
|
|
(1,239
|
)
|
|
|
(1,475
|
)
|
Less
current portion
|
|
|
|
|
(16,304
|
)
|
|
|
(15,754
|
)
|
Total
long-term portion of debt, net
|
|
|
|
$
|
125,131
|
|
|
$
|
127,774
|
|
*
|
These
commercial bank debts are guaranteed by the Company’s CEO. See Note 21.
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt - continued
Following
is a summary of long-term debt at September 30 (in thousands):
Schedule of Long-term Debt Instruments
|
|
2020
|
|
|
2019
|
|
(a) Secured by real estate
|
|
$
|
86,740
|
|
|
$
|
90,258
|
|
(b) Secured by stock in subsidiary
|
|
|
25,733
|
|
|
|
27,766
|
|
(c) Secured by other assets
|
|
|
8,520
|
|
|
|
8,711
|
|
(d) Unsecured
|
|
|
21,681
|
|
|
|
18,269
|
|
|
|
$
|
142,674
|
|
|
$
|
145,003
|
|
(1)
In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $1.5
million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate of 5.5%. The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $6.5
million, which have been paid
off in relation to the December 2017 Refinancing Loan, as discussed below.
The notes are also payable over eleven
years at $53,110
per month including interest and have
the same adjustable interest rate of 5.5%.
(2)
In 2015, the Company reached a settlement with the State of Texas over 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 nonsettled locations. 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. In March 2017, the Company settled
with the State of Texas for one of the two remaining unsettled Patron Tax locations. 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. In March 2017, the
present value of the second note was approximately $390,000 after discounting using an imputed interest rate of 9.6%. Going
forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5
per customer.
(3)
On October 5, 2016, the Company refinanced $8.0
million of long-term debt by borrowing
$9.9 million.
The new unsecured debt is payable $118,817
per month, including interest at 12%,
and matures in five years with
a balloon payment for the remaining balance at maturity. This note has been partially paid in relation to the first note of the
December 2017 Refinancing Loan, as discussed below. Also refer to the February 20, 2020 loan restructuring below.
(4) On May 1, 2017, the Company raised
$5.4
million through the issuance of 12%
unsecured promissory notes to certain investors, which notes mature
on May
1, 2020. The notes pay interest-only in equal monthly installments,
with a lump sum principal payment at maturity. On August 15, 2018 and September 26, 2018, the Company refinanced $2.0
million and $500,000
of the notes, respectively. The $2.0 million note was exchanged
for a $4.0
million 12%
note maturing in three
years with interest-only payments until maturity, where
the full principal is to be paid. The $500,000 note was exchanged for a $1.35
million 9%
note maturing in 10
years with monthly payments of $17,101,
including interest. On November 1, 2018, the Company refinanced two notes with a total principal of $400,000
with certain investors. See succeeding paragraph related
to November 1, 2018 financing below. Included in the balance of long-term debt as of September 30, 2020 and 2019 is a $200,000
note, that is a part of the May 1, 2017 financing, borrowed
from a non-officer employee in which the terms of the note are the same as the rest of the lender group. Refer to May 1, 2020
extension below.
(5)
On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 16), the Company executed two promissory notes with
the sellers: (i) a 5%
short-term note for $5.0
million payable in lump sum after six
months from closing date and (ii) a 12-year
amortizing 8%
note for $15.6
million. The 12-year note is payable $168,343
per month, including interest. The Company
amended the $5.0
million short-term note payable, which
had a remaining balance of $3.0
million as of amendment date, several
times extending the maturity date to October
1, 2022 and increasing the interest rate
to 8%
for its remaining term. Refer to December
2019 amendment below.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt - continued
(6)
On December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank for
$81.2
million. The December 2017 Refinancing
Loan fully refinanced 20 of the Company’s notes payable and partially paid down 1 note payable (collectively, “Repaid
Notes”) with interest rates ranging from 5% to 12% covering 43 parcels of real properties the Company previously acquired
(“Properties”). The December 2017 Refinancing Loan consists of three promissory notes:
|
i)
|
The
first note amounts to $62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five years, then
repriced one time at the then current U.S. Treasury rate plus 3.5%, with a floor rate of 5.75%, and payable in monthly installments
of $442,058, based upon a 20-year amortization period, with the balance payable at maturity;
|
|
|
|
|
ii)
|
The
second note amounts to $10.6
million with a term of 10
years at a 5.45%
fixed interest rate until
July 2020, after which to be repriced
at a fixed interest rate of 5.75%
until the fifth anniversary of this
note, and then to be repriced again at the then interest rate of the first note. This note was payable $78,098
monthly for principal and interest
until July 2020, based upon a 20-year
amortization period, after which the monthly payment for principal and interest was adjusted accordingly based on the
repricing, with the balance payable at maturity; and
|
|
|
|
|
iii)
|
The
third note amounts to $8.1 million with a term of 10 years at a 5.95% fixed interest rate until August 2021, after which to
be repriced at 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest of the first
note. This note is payable $100,062 monthly for principal and interest until August 2021, based upon a 20-year amortization
period, after which the monthly payment for principal and interest is adjusted accordingly based on the repricing, with the
balance payable at maturity.
|
(7)
In addition to the monthly principal and interest payments as provided above, the Company paid monthly installments of principal of $250,000, applied to the first note, until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017 Refinancing Loan and the then current value of the Properties, is not greater than 65%. The loan-to-value ratio of the Properties
fell below 65% in October 2019, hence, we stopped paying the additional $250,000 monthly. The December 2017 Refinancing Loan has eliminated balloon payments of the Repaid Notes worth $2.9
million originally scheduled in fiscal
2018, $19.4
million originally scheduled in fiscal
2020 and $5.3
million originally scheduled in fiscal
2021. There are certain financial covenants with which the Company must be in compliance related to this financing. We obtained
waivers of compliance from the bank lender for financial covenants as of September 30, 2020.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt - continued
(8)
In connection with the Repaid Notes, we wrote off $279,000
of unamortized debt issuance costs to
interest expense. Prior to September 30, 2017, the Company paid a portion of debt issuance costs amounting to $612,500,
which was included in other assets until the closing of the transaction. At closing, the Company paid an additional $764,000
in debt issuance costs, which together
with the $612,500 prepayment will be amortized for the term of the loan using the effective interest rate method. We also paid
prepayment penalties amounting to $543,000
on the Repaid Notes, which was included
in interest expense in our consolidated statement of operations for the year ended September 30, 2018.
(9)
Included in the $62.5 million first note of the December 2017 Refinancing Loan was $4.6
million that was escrowed at closing due
to the bank lender of one of the Repaid Notes. The amount was released from escrow in June 2018 when the construction, for which
the original note was borrowed, was completed. In March and August 2020, certain principal and interest payments for the three
notes of the December 2017 Refinancing Loan were deferred to their maturity dates.
(10)
On December 7, 2017, the Company borrowed $7.1
million from a lender to purchase an aircraft
at 5.99%
interest. The transaction was partly funded
by trading in an aircraft that the Company owned with a carrying value of $3.4
million, with an assumption of the old
aircraft’s note payable liability of $2.0
million. The aircraft note is payable
in 15
years with monthly payments of $59,869,
which includes interest. In March 2020, this loan was extended to September 2033.
(11) On
February 15, 2018, the Company borrowed $3.0
million from a bank for the purchase of land at a cost
of $4.0 million
with the difference paid by the Company in cash. The bank note bears interest at 5.25% adjusted after 36 months to prime plus
1% with a floor of 5.2% and matures on February 15, 2038. The bank note is payable interest-only during the first 18 months, after
which monthly payments of principal and interest will be made based on a 20-year amortization with the remaining balance to be
paid at maturity. On August 28, 2018, this note was refinanced for additional construction loan having a maximum availability
of $7.4
million. The new note has an initial interest rate of 5.95%,subject to a repricing after 72 months to prime plus 1% with a 5.9% floor. The note is payable $53,084 per month, including interest, for 72 months, then adjusted based on repriced interest rate until its August 2039 maturity. In May 2020, certain principal and interest payments for this note were deferred to its maturity date.
(12)
On February 20, 2018, the Company refinanced a bank note with a balance of $1.9
million, bearing interest of 2%
over prime with a 5.5%
floor, with the same bank for a construction
loan with maximum availability of $4.7
million. The construction loan agreement
bears an interest rate of prime plus 0.5%
with a floor of 5.0%
and matures on August
20, 2029. During the first 18 months of the construction loan, the Company will make monthly interest-only payments, and after such, monthly payments
of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity. There are certain financial covenants with which the Company must be in compliance related to this financing. We are in compliance with these financial covenants as of September 30, 2020.
(13) On April 24, 2018, the Company acquired
certain land for future development of a Bombshells in Houston, Texas for $5.5
million, financed with a bank note for $4.0
million, payable interest only at prime plus 0.5%
with a floor of 5%
per annum. The note matures in 24 months,
by which date the principal is payable in full. In March and July 2020, in view of the pandemic, the bank lender and the Company
agreed to defer the maturity of this note to October 2020. In September 2020, they further negotiated to refinance the note
with a deferral of maturity to September 2035 with monthly amortization payments of $16,396,
including interest. On September 17, 2018, the Company and the bank lender agreed to carve out a portion of the loan that
relates to the land where the Bombshells location is to be built amounting to $960,000,
and added a construction loan with a maximum availability of $2.9
million. The new $2.9 million construction loan has an interest rate of prime plus 0.5%,
with a 5.5%
floor, and payable in 12
years. The first 24 months will be interest-only payments, after
which monthly payments of principal and interest will be made based on a 20-year
amortization. There are certain financial covenants with which the Company must be in compliance related to this financing. We
are in compliance with these financial covenants as of September 30, 2020.
(14) On May 25, 2018, the Company acquired
a club in Kappa, Illinois for $1.5
million, financed by a $1.0
million seller note with interest at 8%.
The note matures in three
years and is payable in monthly installments of $20,276,
including interest, based on a five-year
amortization with the remaining balance to be paid at maturity.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt - continued
(15)
On August 15, 2018, the Company refinanced a $2.0
million note payable for $4.0
million from a private lender by executing
a 12%
3-year
note payable $40,000
monthly starting September 15, 2018, with
the remaining principal and interest balance payable at maturity. See February 20, 2020 extension below.
(16)
On September 6, 2018, the Company borrowed $1.55
million from a bank lender to finance
the acquisition of the remaining not-owned interest in a joint venture. The 10-year note payable has an initial interest rate
of 5.95% until after five years when the interest rate is adjusted to the U.S. Treasury rate plus 3.5%, with a 5.95% floor. Monthly
payments of $11,138,
including interest, is due for five years until an adjustment in monthly payments based on the interest rate repricing. The Company
paid approximately $40,000
in debt issuance costs at closing. In
March and August 2020, certain principal and interest payments for this note were deferred to its maturity date. There are certain financial covenants with which the Company must be in compliance related to this note. We
obtained a waiver of compliance from the bank lender for financial covenants as of September 30, 2020.
(17) On September
26, 2018, the Company refinanced a $500,000
12%
note payable for $1.35
million from a private lender by executing a 9%
10-year
note payable $17,101
monthly, including interest, until maturity.
(18) On November 1, 2018, the Company
raised $2.35
million through the issuance of 12%
unsecured promissory notes to certain investors, which notes mature on November
1, 2021. The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity. Among
the promissory notes are two notes with a principal of $450,000
and $200,000.
The $450,000 note was in exchange for a $300,000
12% note and the $200,000 note was in exchange for a $100,000
note, both of which were included in the May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami. Also included
in the $2.35
million borrowing are two notes for $500,000
and $100,000 borrowed from related parties (see Note 21) and one note for $300,000
borrowed from a non-officer employee in which the terms of the notes
are the same as the rest of the lender group.
(19)
On November 1, 2018, we acquired a club in Chicago that was
partially financed by a $4.5
million 6-year
7%
seller note. See additional details related
to the acquisition in Note 16.
(20)
On November 5, 2018, we acquired a club in Pittsburgh that was
partially financed by two seller notes payable. The first note is a 2-year 7% note for $2.0 million and the second is a 10-year
8% note for $5.5 million. See additional details related to the acquisition in Note 16. On September 30, 2020, the
maturity date for the first note was extended to February 2021.
(21)
On December 11, 2018, the Company purchased an aircraft for
$2.8 million
with a $554,000 down
payment and financed the remaining $2.2
million with a 5.49%
promissory
note payable in 20 years with monthly payments of
$15,118,
including interest. Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity
date.
(22)
On February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5
million, bearing an interest rate of 6.1%,
with a construction loan with another
bank, which has an interest rate of 6.0%
adjusted after five years to prime plus
0.5%
with a 6.0%
floor per annum. The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571
monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company paid approximately $69,000
in loan costs of which approximately $19,600
was capitalized as debt issuance costs
on the new construction loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized
debt issuance costs of the old bank note to interest expense. There are certain financial covenants with which the Company must
be in compliance related to this financing. In March 2020, certain principal and interest payments for this note were deferred
to its maturity date. We are in compliance with these financial covenants as of September 30, 2020.
(23) 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.
(24) On February 20, 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.
(25) On February 20, 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 our consolidated statement of operations for the year ended September
30, 2020.
(26) 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 is now $1,940,000.
In October 2020, $1,690,000 of these notes were again extended
to November 2021.
(27) On May 8, 2020, the Company received
approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge 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. As of the filing of this report, we have received ten
Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All
of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9
million. See Notes 3 and 11.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Debt – continued
Future
maturities of debt obligations as of September 30, 2020 consist of the following (in thousands):
Schedule of Maturities of Long-term Debt
|
|
Regular
Amortization
|
|
|
Balloon
Payments
|
|
|
Total
Payments
|
|
2021
|
|
$
|
12,098
|
|
|
$
|
4,405
|
|
|
$
|
16,503
|
|
2022
|
|
|
11,032
|
|
|
|
2,350
|
|
|
|
13,382
|
|
2023
|
|
|
8,090
|
|
|
|
3,676
|
|
|
|
11,766
|
|
2024
|
|
|
8,642
|
|
|
|
-
|
|
|
|
8,642
|
|
2025
|
|
|
8,479
|
|
|
-
|
|
|
|
8,479
|
|
Thereafter
|
|
|
41,911
|
|
|
|
41,991
|
|
|
|
83,902
|
|
|
|
$
|
90,252
|
|
|
$
|
52,422
|
|
|
$
|
142,674
|
|
11.
Income Taxes
The
Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in
the federal corporate income tax rate from 35% to 21%
effective
January 1, 2018. Our federal corporate income
tax rate for fiscal 2018 was 24.5%
and represents a blended income tax rate
for that fiscal year. For fiscal 2020 and 2019, our federal corporate income tax rate was 21%.
Additionally,
for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to
reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement
resulted in a $8.8 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet
as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of operations for the
fiscal year ended September 30, 2018. We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin No. 118.
Income
tax expense (benefit) consisted of the following (in thousands):
Schedule of Income Tax Expense (Benefit)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Years
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
(As
Revised)
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
215
|
|
|
$
|
1,886
|
|
|
$
|
2,438
|
|
State and local
|
|
|
560
|
|
|
|
1,037
|
|
|
|
1,219
|
|
Total current income tax expense (benefit)
|
|
|
775
|
|
|
|
2,923
|
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,248
|
)
|
|
|
913
|
|
|
|
(8,096
|
)
|
State and local
|
|
|
(20
|
)
|
|
|
(92
|
)
|
|
|
1,321
|
|
Total deferred income tax expense (benefit)
|
|
|
(1,268
|
)
|
|
|
821
|
|
|
|
(6,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(493
|
)
|
|
$
|
3,744
|
|
|
$
|
(3,118
|
)
|
The
Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
11.
Income Taxes - continued
Income
tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory
rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):
Schedule of Components of Income Tax Expense (Benefit)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Years
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Computed expected income tax expense (benefit)
|
|
$
|
(1,429
|
)
|
|
$
|
5,080
|
|
|
$
|
4,371
|
|
State income taxes, net of federal benefit
|
|
|
253
|
|
|
|
672
|
|
|
|
804
|
|
Deferred taxes on subsidiaries acquired/sold
|
|
|
-
|
|
|
|
-
|
|
|
|
709
|
|
Permanent differences
|
|
|
395
|
|
|
|
45
|
|
|
|
85
|
|
Change in deferred tax liability rate
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,832
|
)
|
Change in valuation allowance
|
|
|
1,273
|
|
|
|
-
|
|
|
|
-
|
|
Tax credits
|
|
|
(945
|
)
|
|
|
(900
|
)
|
|
|
(808
|
)
|
Other
|
|
|
(40
|
)
|
|
|
(1,153
|
)
|
|
|
553
|
|
Total income tax expense (benefit)
|
|
$
|
(493
|
)
|
|
$
|
3,744
|
|
|
$
|
(3,118
|
)
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax
assets and liabilities were as follows (in thousands):
Schedule of Deferred Tax Assets and Liabilities
|
|
2020
|
|
|
2019
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Patron tax
|
|
$
|
349
|
|
|
$
|
621
|
|
Capital loss carryforwards
|
|
|
1,263
|
|
|
|
420
|
|
Other
|
|
|
2,046
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(1,273
|
)
|
|
|
-
|
|
Net deferred tax assets
|
|
|
2,385
|
|
|
|
1,041
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(14,106
|
)
|
|
|
(14,491
|
)
|
Property and equipment
|
|
|
(8,669
|
)
|
|
|
(8,024
|
)
|
Other
|
|
|
-
|
|
|
|
(184
|
)
|
Deferred tax liabilities
|
|
|
(22,775
|
)
|
|
|
(22,699
|
)
|
Net deferred tax liability
|
|
$
|
(20,390
|
)
|
|
$
|
(21,658
|
)
|
Included
in the Company’s deferred tax liabilities at September 30, 2020 and 2019 is the tax effect of indefinite-lived intangible
assets from club acquisitions amounting to approximately $14.9
million and $19.3
million, respectively, which are not deductible for tax purposes. These deferred
tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.
The
Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized
tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component
of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest
expense. In fiscal 2018, the Company released $700,000
of uncertain tax positions due to a settlement
with New York state. In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
11.
Income Taxes - continued
The
following table shows the changes in the Company’s uncertain tax positions (in thousands):
Schedule of Uncertain Tax Positions
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Years
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Balance
at beginning of year
|
|
$
|
-
|
|
|
$
|
165
|
|
|
$
|
865
|
|
Additions
for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Decrease
related to settlements with taxing authorities
|
|
|
-
|
|
|
|
-
|
|
|
|
(700
|
)
|
Reduction
due to lapse from closed examination
|
|
|
-
|
|
|
|
(165
|
)
|
|
|
-
|
|
Balance
at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
165
|
|
The
full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any
federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within
the next twelve months.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s
federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue
Service with only immaterial changes. Fiscal year ended September 30, 2018 and subsequent years remain open to federal
tax examination. The Company is also being examined for state income taxes, the outcome of which may occur within the next
twelve months.
On
March 27, 2020, President Trump signed 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, 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. The Company believes it has used the entire loan amount for qualifying expenses. Under the
terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the
CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. As of
the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small Business Administration out
of the twelve of our PPP loans granted. All
of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9
million. No assurance can be provided
that the Company will in fact obtain forgiveness of the remaining two PPP loans in whole or in part. See Note
3.
12.
Commitments and Contingencies
Leases
See
Note 22.
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 $2.2 million and $3.4 million as of September 30, 2020 and 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 Consolidated Financial Statements
Legal
Matters – continued
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 September 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 Nourdean 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 December 12, 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.
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, Nourdean 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
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.
Since the initiation of the informal inquiry
in early 2019 and the investigation conducted by the SEC thereafter, the Company and its management have fully cooperated
with the SEC.
On
September 21, 2020, the SEC concluded its investigation and reached a settlement with the Company, Eric Langan, and Phil Marshall.
Separately, the SEC also reached a settlement with a former director. As part of the settlement, the Company, Eric Langan, and
Phil Marshall agreed, without admitting or denying the allegations, to an order instituting cease-and-desist proceedings regarding
certain sections of the Securities Exchange Act of 1934 and certain rules promulgated thereunder.
The SEC’s order as to the Company,
Eric Langan, and Phil Marshall found that, from fiscal 2014 through 2019, the Company failed to disclose a total of $615,000 in
executive compensation in the form of perquisites. According to the order, these undisclosed perquisites included the cost of
the personal use of the Company’s aircraft and Company-provided vehicles, reimbursements for personal airline flights, charitable
corporate contributions to the school two of Mr. Langan’s children attended, and housing costs and meal allowance for Mr.
Marshall. In addition, the order found that the Company failed to disclose related party transactions involving Mr. Langan’s
father and brother and a director’s brother. The order further found that the Company failed to keep books and records that
allowed it to report, and lacked sufficient internal controls concerning, these executive perquisites and related party transactions.
The SEC’s order as to the Company,
Mr. Langan, and Mr. Marshall found that the Company and Mr. Langan violated, and Mr. Langan and Mr. Marshall caused the Company
to violate, the proxy solicitation provisions of Section 14(a) of the Securities Exchange Act of 1934 and Rules 14a-3 and 14a-9
thereunder. The order further found that the Company violated, and Mr. Langan and Mr. Marshall caused the Company to violate,
the reporting provisions of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder, the books and records provisions
of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and the disclosure controls provision of Rule 13a-15(a) under the
Exchange Act. The Company, Mr. Langan, and Mr. Marshall have agreed, without admitting or denying the SEC’s findings, to
a cease-and-desist order and to pay civil penalties in the amounts of $400,000, $200,000, and $35,000, respectively.
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 September 30, 2020 and 2019. Management
believes that the case has no merit and is vigorously defending itself in the appeal.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
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 this report, 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.
Settlement
of lawsuits for the years ended September 30, 2020, 2019, and 2018 total $174,000, $225,000, and $1.7 million, respectively. As
of September 30, 2020 and 2019, the Company has accrued $100,000 and $115,000 in accrued liabilities, respectively, related to
settlement of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
13.
Common Stock
During
the year ended September 30, 2018, the Company paid quarterly dividends of $0.03 per share for an aggregate amount of $1.2 million.
During
the year ended September 30, 2019, the following common stock transactions occurred:
|
●
|
The
Company acquired 128,040 shares of its own common stock at a cost of $2.9 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The
Company paid quarterly dividends of $0.03 per share, except for the fourth quarter when $0.04 per share was paid, for an aggregate
amount of $1.3 million.
|
During
the year ended September 30, 2020, the following common stock transactions occurred:
|
●
|
The
Company acquired 516,102 shares of its own common stock at a cost of $9.5 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The
Company paid quarterly dividends of $0.03 per share, except for the second and fourth quarters when $0.04 per share was paid,
for an aggregate amount of $1.3 million.
|
Subsequent
to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common
stock for a total of $1.8 million.
14.
Employee Retirement Plan
The
Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The
Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution
of up to 3% of the employee’s salary. Expenses related to matching contributions to the Plan approximated $171,000, $164,000,
and $160,000 for the years ended September 30, 2020, 2019, and 2018, respectively.
15.
Insurance Recoveries
One
of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club
in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2018. During the fourth quarter of 2020, one
club in Sulphur, Louisiana incurred damage from a hurricane. We wrote off the net carrying value of the assets destroyed in
the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies
relating to the insurance claims have been resolved.
In
relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):
Schedule of Business Insurance Recoveries
|
|
|
|
For
the Year Ended September 30,
|
|
|
|
Included
in
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Consolidated balance sheets (period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivable
|
|
Account receivable, net
|
|
$
|
191
|
|
|
$
|
1,197
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of operations – loss (gain)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption
|
|
Other charges, net
|
|
$
|
(176
|
)
|
|
$
|
(484
|
)
|
|
$
|
-
|
|
Property
|
|
Other charges, net
|
|
$
|
596
|
|
|
$
|
(284
|
)
|
|
$
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from business interruption insurance claims
|
|
Operating activity
|
|
$
|
384
|
|
|
$
|
100
|
|
|
$
|
-
|
|
Proceeds from property insurance claims
|
|
Investing activity
|
|
$
|
945
|
|
|
$
|
100
|
|
|
$
|
20
|
|
The
net property insurance gain/loss amount in fiscal 2020, 2019, and 2018 was net of assets written off and expenses
amounting to $728,000,
$629,000,
and $0,
respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Acquisitions and Dispositions
2018
Acquisitions
At
September 30, 2017, the Company held a $2.0
million note receivable related to the
Drink Robust, Inc. (“Drink Robust”) disposition that occurred in September 2016. The note required interest-only monthly
payments at a per annum rate of 4% beginning January of 2017 and principal and interest payments due monthly commencing in January
2018 and ending December 2032. Interest payments from January 2017 through December 2017 were made in the form of shares of the
common stock of a manufacturing company. Cash was received for the January 2018 principal and interest payment; however, in April
of 2018, the Company was informed that the note holder did not intend to make any future principal or interest payments due on
the note. The Company had recourse to the personal assets of the note holder in the amount of $500,000
and entered into negotiations for settlement
of the note in April 2018. On April 26, 2018, the Company forgave the $500,000
guaranteed portion of the note for 750,000
shares of common stock of the manufacturing
company. Additionally, as part of the settlement,
the Company acquired 78.5% of the remaining 80% ownership interest in Drink Robust, bringing its ownership interest to 98.5% with
the payment of an outstanding liability to the Drink Robust distributor of $250,000.
As a result of the payment, Drink Robust also obtained a three-year exclusive right of distribution for the Robust Energy Drinks
in the United States. The Company estimated the fair value of the shares of the manufacturing company and the interest acquired
in Drink Robust. The estimated fair value totals $450,000,
which is net of the consideration of $250,000
owed to the Drink Robust distributor.
As a result of the transaction, the Company impaired $1.55
million of the note receivable during
the quarter ended March 31, 2018, with a remaining balance of $450,000
recorded within long-term assets at June
30, 2018. The Company accounted for the acquisition in the third quarter of 2018, when the transaction was executed and has finalized
its estimate of the fair value of the shares acquired in the transaction, as well as its accounting for such ownership. The Company
then acquired the remaining 1.5%
interest in Drink Robust from an individual investor to complete its 100%
ownership.
On
May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest
at 8%. The transaction provides for the purchase of the real estate for $825,000 and other non-real estate business assets for
$180,000, with goodwill amounting to $495,000, which is deductible for tax purposes. Since the acquisition date, the acquired
club generated revenues of approximately $442,000 that are included in the Company’s consolidated statements of operations
for the year ended September 30, 2018.
On
September 6, 2018, a subsidiary acquired the remaining 49% of TEZ Real Estate that it did not own for $1,550,000 in cash. The
acquisition was principally funded by a loan on the property from a commercial bank. The Company accounted for the transaction
as an equity transaction in accordance with ASC 505. The difference between the fair value of the consideration paid and the amount
by which the noncontrolling interest was adjusted, in the amount of approximately $759,000 (net of tax), was recognized in additional
paid-in capital.
2018
Disposition
On
December 11, 2017, the Company sold one of the properties held for sale for $675,000, recognizing a gain of $481,000. During the
quarter ended June 30, 2018, the Company decided to offer for sale a real estate property in Dallas, Texas, which was a location
of a recently closed club, with an estimated fair value of $2.0 million. During the quarter ended September 30, 2018, the Company
reclassified two properties held for sale with an aggregate carrying value of $7.2 million into held and used property and equipment,
net in the consolidated balance sheet as of September 30, 2018. Also, during the quarter ended September 30, 2018, the Company
decided to offer four real estate properties for sale, with an aggregate fair value less cost to sell of approximately $2.5 million.
2019
Acquisitions
On
November 1, 2018, the Company acquired the stock of a club in Chicago for $10.5
million with $6.0
million cash paid at closing and the $4.5
million in a 6-year seller-financed note
with interest at 7%.
The Company paid approximately $37,000
in acquisition-related costs for this
transaction, which is included in selling, general and administrative expenses in our consolidated statement of operations. In
fiscal 2019, the club generated revenue of approximately $5.0
million since acquisition date. In relation
to this acquisition, on September 25, 2018, the Company borrowed $5.0
million through a credit facility with
a bank lender. The loan has a 7%
fixed interest rate with a maturity date in May
2019. The loan was fully paid as of June
30, 2019. Goodwill and SOB license for the Chicago acquisition are not amortized but are tested at least annually for impairment.
Goodwill recognized for this transaction is not deductible for tax purposes. Noncompete
is amortized on a straight-line basis over five years from acquisition date.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Acquisitions and Dispositions - continued
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Schedule of Allocation of Fair Values Assigned to Assets at Acquisition
Land and building
|
|
$
|
4,325
|
|
Inventory
|
|
|
57
|
|
Furniture and equipment
|
|
|
50
|
|
Noncompete
|
|
|
100
|
|
SOB license
|
|
|
5,252
|
|
Goodwill
|
|
|
2,003
|
|
Deferred tax liability
|
|
|
(1,287
|
)
|
Net assets
|
|
$
|
10,500
|
|
On
November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $15.0 million, with $7.5 million cash paid at closing
and two seller notes payable. The first note is a 2-year 7% note for $2.0 million, and the second is a 10-year 8% note for $5.5
million. The Company paid acquisition-related costs for this transaction of approximately $134,000, which is included in selling,
general and administrative expenses in our consolidated statement of operations. The club generated revenue of approximately $4.6
million since acquisition date. Goodwill for the Pittsburgh acquisition is not amortized but is tested at least annually for impairment.
Goodwill recognized for this transaction is deductible for tax purposes. Noncompete is amortized on a straight-line basis over
five years from acquisition date.
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Schedule of Allocation of Fair Values Assigned to Assets at Acquisition
Land and building
|
|
$
|
5,000
|
|
Inventory
|
|
|
23
|
|
Furniture and equipment
|
|
|
200
|
|
Noncompete
|
|
|
100
|
|
Goodwill
|
|
|
9,677
|
|
Net assets
|
|
$
|
15,000
|
|
2019
Dispositions
In
October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash
at closing and a $625,000 9% note payable to us over a 10-year period. The note is payable interest-only for twelve months at
the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is payable
in 108 equal installments of $5,078 per month until October 2028. The buyer will lease the property from the Company’s real
estate subsidiary under the following terms: $36,000 per month lease payments for ten years; renewal option for a succeeding ten
years at a minimum of $48,000 per month; lessee has option to purchase the property for $6.0 million during a term beginning November
2023 and expiring in October 2028. The Company recorded a gain on the sale transaction of approximately $879,000, which is included
in other charges (gains), net in our consolidated statement of operations during the quarter ended December 31, 2018. In July
2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from April to
September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest payments
for a total principal balance of $879,085. The note, as modified, still bears interest at 9% and is payable in 108 equal monthly
installments of $11,905, including principal and interest, until July 2028.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Acquisitions and Dispositions - continued
In
November 2018, the Company sold two assets held for sale in Houston and San Antonio, Texas for a combined sales price of $868,000.
Net gain on the two transactions amounted to $273,000 after closing costs. The Company used the proceeds to pay down $945,000
in loans related to the properties.
On
January 24, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4 million, payable
$163,000 in cash at closing, net of closing costs and property taxes of $87,000, and a $1.15 million 8% note payable over a three-year
period. The note is payable $9,619 per month, principal and interest, for the first 35 months with the remaining balance payable
at maturity. The buyer has the option to extend the maturity date by one year at least 60 days prior to maturity, as long as the
buyer is not in default. The Company recorded a gain on the sale transaction of approximately $383,000.
On
March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales price of $1.4
million in cash. Net gain on the transaction amounted to approximately $628,000 after closing costs. The Company used $980,000
of the proceeds to pay off a loan related to the property.
In
April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of
$1.1 million in cash. Net gain on the transaction amounted to approximately $331,000 after closing costs. The Company used $942,000
of the proceeds to pay off a loan related to the property.
In
June 2019, the Company sold a property located in Lubbock, Texas for $350,000 in cash. Net loss on the transaction amounted to
$376,000 after closing costs. The Company used $331,000 of the proceeds from the sale to pay down debt.
In
June 2019, the Company sold an aircraft for $690,000 in cash. Net loss on the transaction amounted to $9,000 after closing costs.
The Company used $666,000 of the proceeds from the sale to pay down related debt.
On
July 23, 2019, the Company sold an aircraft for a total sales price of $382,000 for net gain of $16,000. Proceeds were used to
pay off the remaining note payable balance of approximately $217,000.
On
September 30, 2019, the Company sold its Bombshells Webster location for a total sales price of $85,000 in cash. Net loss on the
transaction amounted to approximately $156,000.
2020
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.
2020
Dispositions
On
April 1, 2020, the Company sold a corporate housing property to an employee for $375,000
in cash with an approximate gain of $20,000.
On
May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $1.5 million in cash. Net gain
on the transaction was $583,000 after closing costs. The net proceeds of $1.4 million were used to pay down related debt.
On
August 6, 2020, the Company sold another corporate housing property for $176,000
in cash with an approximate gain of $26,000.
The net proceeds of $160,500 were used
to pay down related debt.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
17.
Quarterly Results of Operations (Unaudited)
The
following tables summarize unaudited quarterly data for fiscal 2020, 2019, and 2018 (in thousands, except per share data):
Schedule of Quarterly Financial Information
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2019
|
|
|
March
31, 2020
|
|
|
June
30, 2020
|
|
|
September
30, 2020
|
|
Revenues(1)
|
|
$
|
48,394
|
|
|
$
|
40,426
|
|
|
$
|
14,721
|
|
|
$
|
28,786
|
|
Income (loss) from operations(1)
|
|
$
|
9,686
|
|
|
$
|
(2,475
|
)
|
|
$
|
(4,657
|
)
|
|
$
|
192
|
|
Net income (loss) attributable to RCIHH stockholders(1)
|
|
$
|
5,634
|
|
|
$
|
(3,452
|
)
|
|
$
|
(5,474
|
)
|
|
$
|
(2,793
|
)
|
Earnings (loss) per share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.60
|
|
|
$
|
(0.37
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.31
|
)
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,322
|
|
|
|
9,225
|
|
|
|
9,125
|
|
|
|
9,124
|
|
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2018
|
|
|
March
31, 2019
|
|
|
June
30, 2019
|
|
|
September
30, 2019
|
|
Revenues
|
|
$
|
44,023
|
|
|
$
|
44,826
|
|
|
$
|
47,027
|
|
|
$
|
45,183
|
|
Income from operations(2)
|
|
$
|
11,132
|
|
|
$
|
11,166
|
|
|
$
|
9,974
|
|
|
$
|
2,429
|
|
Net income attributable to RCIHH stockholders(2)
|
|
$
|
7,463
|
|
|
$
|
6,735
|
|
|
$
|
5,638
|
|
|
$
|
458
|
|
Earnings per share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.77
|
|
|
$
|
0.70
|
|
|
$
|
0.59
|
|
|
$
|
0.05
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,713
|
|
|
|
9,679
|
|
|
|
9,620
|
|
|
|
9,616
|
|
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2017
|
|
|
March
31, 2018
|
|
|
June
30, 2018
|
|
|
September
30, 2018
|
|
Revenues
|
|
$
|
41,212
|
|
|
$
|
41,226
|
|
|
$
|
42,634
|
|
|
$
|
40,676
|
|
Income from operations(3)
|
|
$
|
9,140
|
|
|
$
|
8,231
|
|
|
$
|
9,492
|
|
|
$
|
699
|
|
Net income (loss) attributable to RCIHH stockholders(3)
|
|
$
|
14,311
|
|
|
$
|
4,685
|
|
|
$
|
5,389
|
|
|
$
|
(3,506
|
)
|
Earnings (loss) per share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.47
|
|
|
$
|
0.48
|
|
|
$
|
0.55
|
|
|
$
|
(0.36
|
)
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
|
(1)
|
Fiscal
year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic. Income
(loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included
the impact of a $10.6
million in asset impairments ($8.2
million in the second quarter, $982,000
in the third quarter, and $1.4
million in the fourth quarter). Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter
was also affected by the $1.3
million valuation allowance on our deferred tax assets. Quarterly effective income tax expense (benefit) rate was 22.0%,
(28.9)%,
(20.5)%, and 36.3%
from first to fourth quarter, respectively.
|
|
|
|
|
(2)
|
Fiscal
year 2019 income from operations, net income attributable to RCIHH stockholders, and earnings per share included the impact
of a $6.0 million in asset impairments in the fourth quarter, a $2.9 million net gain on sale of businesses and assets ($1.2
million in the first quarter, $1.1 million in the second quarter, $0.3 million in the third quarter, and $0.4 million in the
fourth quarter), and a $0.8 million net gain on insurance ($0.1 million net loss in the third quarter and $0.9 million net
gain in the fourth quarter). Quarterly effective income tax expense (benefit) rate was 8.4%, 22.3%, 24.1%, and (371.7)% from
first to fourth quarter, respectively. See Note 4 related to revision of prior year immaterial misstatement.
|
|
|
|
|
(3)
|
Fiscal
year 2018 income from operations, net income attributable to RCIHH stockholders, and earnings per share included the impact
of a $1.6 million loss on disposition in the second quarter, a $5.6 million in asset impairments ($1.6 million in the second
quarter and $4.0 million in the fourth quarter), and a $8.8 million deferred income tax benefit related to the revaluation
of deferred tax assets and liabilities ($9.7 million credit in the first quarter, $38,000 expense in the second quarter, and
$827,000 expense in the fourth quarter). Quarterly effective income tax expense (benefit) rate was (134.3)%, 24.2%, 25.3%,
and 103.8% from first to fourth quarter, respectively.
|
Our
nightclub operations are normally affected by seasonal factors. Historically, we have experienced reduced revenues from April
through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through
March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through
the fourth quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause
unusual changes in sales from year to year.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
18.
Impairment of Assets
During
the year ended September 30, 2018, we recorded aggregate impairment charges of $5.6 million comprised of $1.6 million for property
and equipment of one club and one Bombshells, $834,000 for goodwill impairment of two club reporting units, and $3.1 million for
SOB licenses of three clubs.
During
the year ended September 30, 2019, we recorded aggregate impairment charges of $6.0 million comprised of $1.6 million for the
goodwill of four club reporting units, $4.2 million for property and equipment of two clubs, and $178,000 for SOB license of one
club.
During
the year ended September 30, 2020, we recorded aggregate impairment charges of $10.6
million comprised of $7.9
million for goodwill of seven club reporting
units, $2.3
million for SOB licenses of two clubs,
$406,000
for long-lived assets of one club and
one Bombshells unit ($302,000
for property and equipment and $104,000
for operating lease right-of-use assets).
The impairment charges for fiscal 2020 were mainly due to lower cash flow projections and uncertainty risk caused by the pandemic.
19.
Segment Information
The
Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based
on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions
in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes
our media and energy drink divisions that are not significant to the consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
19.
Segment Information - continued
Below
is the financial information related to the Company’s reportable segments (in thousands):
Schedule of Segment Reporting Information
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenues (from external customers)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
88,373
|
|
|
$
|
148,606
|
|
|
$
|
140,060
|
|
Bombshells
|
|
|
43,215
|
|
|
|
30,828
|
|
|
|
24,094
|
|
Other
|
|
|
739
|
|
|
|
1,625
|
|
|
|
1,594
|
|
|
|
$
|
132,327
|
|
|
$
|
181,059
|
|
|
$
|
165,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
13,118
|
|
|
$
|
50,724
|
|
|
$
|
43,624
|
|
Bombshells
|
|
|
9,245
|
|
|
|
2,307
|
|
|
|
2,040
|
|
Other
|
|
|
(684
|
)
|
|
|
(309
|
)
|
|
|
(252
|
)
|
General corporate
|
|
|
(18,933
|
)
|
|
|
(18,021
|
)
|
|
|
(17,850
|
)
|
|
|
$
|
2,746
|
|
|
$
|
34,701
|
|
|
$
|
27,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
3,477
|
|
|
$
|
6,645
|
|
|
$
|
2,052
|
|
Bombshells
|
|
|
2,114
|
|
|
|
10,457
|
|
|
|
22,522
|
|
Other
|
|
|
-
|
|
|
|
27
|
|
|
|
33
|
|
General corporate
|
|
|
145
|
|
|
|
3,579
|
|
|
|
656
|
|
|
|
$
|
5,736
|
|
|
$
|
20,708
|
|
|
$
|
25,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
5,799
|
|
|
$
|
6,401
|
|
|
$
|
5,404
|
|
Bombshells
|
|
|
1,785
|
|
|
|
1,374
|
|
|
|
1,265
|
|
Other
|
|
|
415
|
|
|
|
416
|
|
|
|
179
|
|
General corporate
|
|
|
837
|
|
|
|
881
|
|
|
|
874
|
|
|
|
$
|
8,836
|
|
|
$
|
9,072
|
|
|
$
|
7,722
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
Total assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
(1)
|
$
|
277,960
|
|
|
$
|
274,071
|
|
|
$
|
252,335
|
|
Bombshells
|
(1)
|
|
48,991
|
|
|
|
44,144
|
|
|
|
39,560
|
|
Other
|
(1)
|
|
1,269
|
|
|
|
1,773
|
|
|
|
1,978
|
|
General corporate
|
(1)
|
|
32,713
|
|
|
|
34,768
|
|
|
|
35,859
|
|
|
(1)
|
$
|
360,933
|
|
|
$
|
354,756
|
|
|
$
|
329,732
|
|
(1)
|
See Note 4 for a discussion of revision of prior
year immaterial misstatement.
|
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $11.1 million, $10.0
million, and $9.0 million for 2020, 2019, and 2018, respectively, and intercompany sales of Robust Energy Drink of Other segment
amounting to $70,000, $140,000, and $26,000 for the same respective years. These intercompany revenue amounts are eliminated upon
consolidation.
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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
20.
Noncontrolling Interests
Noncontrolling
interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Noncontrolling
interests are reported in the consolidated balance sheets within equity. Revenue, expenses and net income attributable to both
the Company and the noncontrolling interests are reported in the consolidated statements of operations.
Until
September 2018, our consolidated financial statements included noncontrolling interests related to the Company’s ownership
of 51% of an entity which owns the real estate for the Company’s nightclub in Philadelphia. The Company acquired the remaining
not-owned portion of the entity in September 2018.
Our
consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51%
of an entity which owns one of the Company’s nightclubs in New York City.
21.
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 September 30, 2020 and 2019 was $83.8 million and $86.8 million, respectively.
Included
in the $2.35 million
borrowing on November 1, 2018 (see Note 10) were notes borrowed from related parties—one note for
$500,000 (Ed Anakar, an employee of the Company and brother of our director Nourdean Anakar) and another note for $100,000
(Allen Chhay, brother of Company CFO, Bradley Chhay) as part of a larger group of private lenders. 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 approximately $59,000 in fiscal 2020, $134,000 in fiscal 2019, and $321,000 in fiscal 2018.
As of September 30, 2020 and 2019, we owed Nottingham Creations and Sherwood Forest $0 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 approximately
$19,000, $452,000, and $120,000 for the fiscal years 2020, 2019, and 2018, respectively. Amounts billed directly to the Company
were approximately $62,000, $47,000, and $7,000 for the fiscal years 2020, 2019, and 2018, respectively. As of September 30, 2020
and 2019, the Company owed TW Mechanical approximately $5,700 and $0, respectively, in unpaid direct billings.
22.
Leases
ASC
840 (Related to Fiscal 2019 and 2018)
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.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated
Financial Statements
Included
in lease expense in our consolidated statements of operations (see Note 6) 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 $19,500, $78,000, and $55,250 for the years ended September 30, 2020, 2019, and 2018, respectively. This lease terminated
on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.
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 consolidated statements of operations. Under ASC
840, we recorded lease expense amounting to $3.9 million and $3.8 million for the years ended September 30, 2019 and 2018, respectively.
ASC
842 (Related to Fiscal 2020)
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 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 5.
Future
maturities of ASC 842 lease liabilities as of September 30, 2020 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
October
2020 - September 2021
|
|
$
|
1,628
|
|
|
$
|
1,593
|
|
|
$
|
3,221
|
|
October
2021 - September 2022
|
|
|
1,742
|
|
|
|
1,491
|
|
|
|
3,233
|
|
October
2022 - September 2023
|
|
|
1,678
|
|
|
|
1,387
|
|
|
|
3,065
|
|
October
2023 - September 2024
|
|
|
1,775
|
|
|
|
1,283
|
|
|
|
3,058
|
|
October
2024 - September 2025
|
|
|
1,953
|
|
|
|
1,171
|
|
|
|
3,124
|
|
Thereafter
|
|
|
18,291
|
|
|
|
5,421
|
|
|
|
23,712
|
|
|
|
$
|
27,067
|
|
|
$
|
12,346
|
|
|
$
|
39,413
|
|
Total
lease expense, under ASC 842, was included in selling, general and administrative expenses in our consolidated statement of operations,
except for sublease income which was included in other revenue, for the year ended September 30, 2020 as follows (in thousands):
Schedule of Lease Expense
|
|
Year
Ended
September
30, 2020
|
|
Operating lease expense – fixed payments
|
|
$
|
3,244
|
|
Variable lease expense
|
|
|
381
|
|
Short-term equipment and other lease expense (includes $315 recorded in advertising and marketing, and $372 recorded in repairs and maintenance; see Note 6)
|
|
|
1,122
|
|
Sublease income
|
|
|
(9
|
)
|
Total lease expense, net
|
|
$
|
4,738
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
4,562
|
|
Weighted average remaining lease term
|
|
|
13 years
|
|
Weighted average discount rate
|
|
|
6.1
|
%
|
In relation to certain rent concessions
that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral
of payments as if the lease is unchanged. Any reduction in total lease expense during the period caused by either an extension
of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.
RCI
HOSPITALITY HOLDINGS, INC.
Schedule
of Valuation and Qualifying Accounts
(Amounts
in Thousands)