NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company or “RCIHH”)
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”
or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do
not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2020 consolidated
balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However,
except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial
statements for the year ended September 30, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on December 14, 2020. The interim unaudited condensed consolidated financial statements should
be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all
adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments,
have been made. Operating results for the three and six months ended March 31, 2021 are not necessarily indicative of the results
that may be expected for the year ending September 30, 2021.
Certain reclassifications of cost of goods
sold components with immaterial amounts have been made to prior year’s financial statements to conform to the current year
financial statement presentation. There is no impact in total cost of goods sold, results of operations, and cash flows in all
periods presented.
2.
Recent Accounting Standards and Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the reporting
date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing
incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate
credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to
available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized
cost basis of the securities. These changes will result in earlier recognition of credit losses. The ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for
all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We adopted ASU
2016-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements of Accounting Standards
Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may
affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to
valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect
the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions
from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate
net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty
in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes
in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements
held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs
used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of
the ASU and delay adoption of the additional disclosures until the effective date. We adopted ASU 2018-13 as of October 1, 2020.
Our adoption of this guidance did not have a significant impact on our consolidated financial statements.
In
March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns the guidance
for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of
the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply. However, if there
has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of
fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts both lessees and lessors from having to provide
certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The update is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2019-01 as of October
1, 2020. Our adoption of this guidance did not have an impact on our consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This
ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for
intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments,
and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also
improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially
based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements
of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public
business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption
is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects
early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that
interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. We are
still evaluating the impact of this ASU on the Company’s consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
Liquidity and Impact of COVID-19 Pandemic
In
March 2020, former 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. Starting in March 2020, we closed and reopened a number of our clubs and
restaurants and implemented curfew and capacity restrictions as required by local authorities. We do not know the effects the
pandemic may have on our operations in the future.
The
temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy
was to open locations and operate in accordance with local and state guidelines. The COVID-19 pandemic is adversely affecting
the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be
readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
To
augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:
|
●
|
Arranged
for deferment of principal and interest payment on certain of our debts;
|
|
|
|
|
●
|
Furloughed
employees working at our clubs and restaurants, except for a limited number of managers; *
|
|
|
|
|
●
|
Temporarily
enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *
|
|
|
|
|
●
|
Deferred
or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
|
|
|
|
|
●
|
Temporarily
reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support,
and investor relations coverage, among others.
|
*
As of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.
On
May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity
and lounge. See Notes 6 and 8. 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
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 utilized all of the PPP funds and
submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11
Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP
loans granted. All
of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and
$5.3 million
in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in
non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be
provided that the Company will in fact obtain forgiveness of the remaining PPP loan 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 a number of our locations depending on changing
government mandates, including operating hour and limited occupancy restrictions.
Valuation
of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets
We
consider the COVID-19 pandemic 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. Based on our evaluation, we determined that there is no
impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets, except for
assets held for sale, as of March 31, 2021.
4.
Revenues
The
Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale
upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified
in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities
are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations. The Company recognizes
revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to
a customer.
Commission
revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of
magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related
to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during
our fiscal fourth quarter. Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021,
hence, no Expo-related revenue in fiscal 2020. Lease revenue (included in other revenues) is recognized when earned (recognized
over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):
Schedule of Disaggregation of Segment Revenues
|
|
Three
Months Ended March 31, 2021
|
|
|
Three
Months Ended March 31, 2020
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
12,634
|
|
|
$
|
7,639
|
|
|
$
|
-
|
|
|
$
|
20,273
|
|
|
$
|
11,860
|
|
|
$
|
5,059
|
|
|
$
|
-
|
|
|
$
|
16,919
|
|
Sales of food and merchandise
|
|
|
4,082
|
|
|
|
5,456
|
|
|
|
-
|
|
|
|
9,538
|
|
|
|
2,799
|
|
|
|
3,680
|
|
|
|
-
|
|
|
|
6,479
|
|
Service revenues
|
|
|
11,446
|
|
|
|
56
|
|
|
|
-
|
|
|
|
11,502
|
|
|
|
14,290
|
|
|
|
58
|
|
|
|
-
|
|
|
|
14,348
|
|
Other revenues
|
|
|
2,625
|
|
|
|
(16
|
)
|
|
|
137
|
|
|
|
2,746
|
|
|
|
2,418
|
|
|
|
6
|
|
|
|
256
|
|
|
|
2,680
|
|
|
|
$
|
30,787
|
|
|
$
|
13,135
|
|
|
$
|
137
|
|
|
$
|
44,059
|
|
|
$
|
31,367
|
|
|
$
|
8,803
|
|
|
$
|
256
|
|
|
$
|
40,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
30,382
|
|
|
$
|
13,134
|
|
|
$
|
136
|
|
|
$
|
43,652
|
|
|
$
|
30,977
|
|
|
$
|
8,803
|
|
|
$
|
252
|
|
|
$
|
40,032
|
|
Recognized over time
|
|
|
405
|
*
|
|
|
1
|
|
|
|
1
|
|
|
|
407
|
|
|
|
390
|
*
|
|
|
-
|
|
|
|
4
|
|
|
|
394
|
|
|
|
$
|
30,787
|
|
|
$
|
13,135
|
|
|
$
|
137
|
|
|
$
|
44,059
|
|
|
$
|
31,367
|
|
|
$
|
8,803
|
|
|
$
|
256
|
|
|
$
|
40,426
|
|
|
|
Six
Months Ended March 31, 2021
|
|
|
Six
Months Ended March 31, 2020
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
22,268
|
|
|
$
|
15,365
|
|
|
$
|
-
|
|
|
$
|
37,633
|
|
|
$
|
26,544
|
|
|
$
|
11,118
|
|
|
$
|
-
|
|
|
$
|
37,662
|
|
Sales of food and merchandise
|
|
|
7,505
|
|
|
|
10,642
|
|
|
|
-
|
|
|
|
18,147
|
|
|
|
6,063
|
|
|
|
7,863
|
|
|
|
-
|
|
|
|
13,926
|
|
Service revenues
|
|
|
21,444
|
|
|
|
118
|
|
|
|
-
|
|
|
|
21,562
|
|
|
|
31,384
|
|
|
|
157
|
|
|
|
-
|
|
|
|
31,541
|
|
Other revenues
|
|
|
4,767
|
|
|
|
16
|
|
|
|
332
|
|
|
|
5,115
|
|
|
|
5,235
|
|
|
|
15
|
|
|
|
441
|
|
|
|
5,691
|
|
|
|
$
|
55,984
|
|
|
$
|
26,141
|
|
|
$
|
332
|
|
|
$
|
82,457
|
|
|
$
|
69,226
|
|
|
$
|
19,153
|
|
|
$
|
441
|
|
|
$
|
88,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
55,217
|
|
|
$
|
26,140
|
|
|
$
|
329
|
|
|
$
|
81,686
|
|
|
$
|
68,411
|
|
|
$
|
19,153
|
|
|
$
|
430
|
|
|
$
|
87,994
|
|
Recognized over time
|
|
|
767
|
*
|
|
|
1
|
|
|
|
3
|
|
|
|
771
|
|
|
|
815
|
*
|
|
|
-
|
|
|
|
11
|
|
|
|
826
|
|
|
|
$
|
55,984
|
|
|
$
|
26,141
|
|
|
$
|
332
|
|
|
$
|
82,457
|
|
|
$
|
69,226
|
|
|
$
|
19,153
|
|
|
$
|
441
|
|
|
$
|
88,820
|
|
*
|
Lease
revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606.
|
The
Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services
transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation
of contract liabilities with customers is presented below (in thousands):
Schedule of Reconciliation of Contract Liabilities with Customers
|
|
Balance
at
September
30, 2020
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at
March
31, 2021
|
|
Ad revenue
|
|
$
|
92
|
|
|
$
|
356
|
|
|
$
|
(278
|
)
|
|
$
|
170
|
|
Expo revenue
|
|
|
211
|
|
|
|
105
|
|
|
|
-
|
|
|
|
316
|
|
Other
|
|
|
33
|
|
|
|
108
|
|
|
|
(4
|
)
|
|
|
137
|
|
|
|
$
|
336
|
|
|
$
|
569
|
|
|
$
|
(282
|
)
|
|
$
|
623
|
|
Contract
liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance
sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our
unaudited condensed consolidated statements of operations.
On
December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells
locations in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in
Corpus Christi, New Braunfels, and San Marcos, all in Texas. Upon execution of the agreement, the Company collected $75,000
in development fees representing 100%
of the initial franchise fee of the first restaurant and 50%
of the initial franchise fee of the second restaurant. Revenue from initial franchise fees is recognized as the performance
obligations are satisfied over the term of the franchise agreement.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
|
|
March
31, 2021
|
|
|
September
30, 2020
|
|
Credit card receivables
|
|
$
|
1,354
|
|
|
$
|
880
|
|
Income tax refundable
|
|
|
599
|
|
|
|
4,325
|
|
ATM in-transit
|
|
|
273
|
|
|
|
160
|
|
Insurance receivable
|
|
|
-
|
|
|
|
191
|
|
Other (net of allowance for doubtful accounts of $483 and $261, respectively)
|
|
|
1,404
|
|
|
|
1,211
|
|
Total accounts receivable, net
|
|
$
|
3,630
|
|
|
$
|
6,767
|
|
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, net of allowance for doubtful
notes amounting to $124,000 and $182,000 as of March 31, 2021 and September 30, 2020, respectively.
The
components of prepaid expenses and other current assets are as follows (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
|
|
March
31, 2021
|
|
|
September
30, 2020
|
|
Prepaid insurance
|
|
$
|
2,549
|
|
|
$
|
4,884
|
|
Prepaid legal
|
|
|
715
|
|
|
|
735
|
|
Prepaid taxes and licenses
|
|
|
398
|
|
|
|
428
|
|
Prepaid rent
|
|
|
373
|
|
|
|
37
|
|
Other
|
|
|
985
|
|
|
|
404
|
|
Total prepaid expenses and other current assets
|
|
$
|
5,020
|
|
|
$
|
6,488
|
|
The
components of accrued liabilities are as follows (in thousands):
Schedule of Accrued Liabilities
|
|
March
31, 2021
|
|
|
September
30, 2020
|
|
Payroll and related costs
|
|
$
|
3,633
|
|
|
$
|
2,419
|
|
Sales and liquor taxes
|
|
|
2,580
|
|
|
|
2,613
|
|
Insurance
|
|
|
2,399
|
|
|
|
4,405
|
|
Property taxes
|
|
|
1,055
|
|
|
|
2,003
|
|
Unearned revenues
|
|
|
623
|
|
|
|
336
|
|
Interest
|
|
|
544
|
|
|
|
1,390
|
|
Patron tax
|
|
|
386
|
|
|
|
309
|
|
Lawsuit settlement
|
|
|
228
|
|
|
|
100
|
|
Other
|
|
|
873
|
|
|
|
998
|
|
Total accrued liabilities
|
|
$
|
12,321
|
|
|
$
|
14,573
|
|
The
components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Taxes and permits
|
|
$
|
2,084
|
|
|
$
|
2,240
|
|
|
$
|
4,112
|
|
|
$
|
4,914
|
|
Supplies and services
|
|
|
1,488
|
|
|
|
1,390
|
|
|
|
2,716
|
|
|
|
2,924
|
|
Insurance
|
|
|
1,427
|
|
|
|
1,473
|
|
|
|
2,884
|
|
|
|
2,956
|
|
Advertising and marketing
|
|
|
1,384
|
|
|
|
1,907
|
|
|
|
2,573
|
|
|
|
4,317
|
|
Lease
|
|
|
972
|
|
|
|
1,023
|
|
|
|
1,949
|
|
|
|
2,053
|
|
Utilities
|
|
|
858
|
|
|
|
798
|
|
|
|
1,571
|
|
|
|
1,693
|
|
Security
|
|
|
830
|
|
|
|
749
|
|
|
|
1,690
|
|
|
|
1,597
|
|
Legal
|
|
|
812
|
|
|
|
1,072
|
|
|
|
1,673
|
|
|
|
2,268
|
|
Charge card fees
|
|
|
695
|
|
|
|
845
|
|
|
|
1,259
|
|
|
|
1,891
|
|
Repairs and maintenance
|
|
|
677
|
|
|
|
652
|
|
|
|
1,250
|
|
|
|
1,449
|
|
Accounting and professional fees
|
|
|
297
|
|
|
|
1,311
|
|
|
|
1,012
|
|
|
|
2,509
|
|
Other
|
|
|
1,094
|
|
|
|
990
|
|
|
|
2,081
|
|
|
|
2,410
|
|
Total selling, general and administrative expenses
|
|
$
|
12,618
|
|
|
$
|
14,450
|
|
|
$
|
24,770
|
|
|
$
|
30,981
|
|
The
components of other charges, net are as follows (in thousands):
Schedule
of Components of Other Charges (Gains), Net
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Impairment of assets
|
|
$
|
1,401
|
|
|
$
|
8,210
|
|
|
$
|
1,401
|
|
|
$
|
8,210
|
|
Settlement of lawsuits
|
|
|
1
|
|
|
|
-
|
|
|
|
153
|
|
|
|
24
|
|
Loss (gain) on disposal of assets
|
|
|
91
|
|
|
|
(7
|
)
|
|
|
86
|
|
|
|
(37
|
)
|
Gain on insurance
|
|
|
(12
|
)
|
|
|
(13
|
)
|
|
|
(209
|
)
|
|
|
(33
|
)
|
Total other charges, net
|
|
$
|
1,481
|
|
|
$
|
8,190
|
|
|
$
|
1,431
|
|
|
$
|
8,164
|
|
The
components of non-operating gains (losses), net are as follows (in thousands):
Components of Non-Operating Gains (Losses), Net
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Gain on debt extinguishment
|
|
$
|
380
|
|
|
$
|
-
|
|
|
$
|
5,329
|
|
|
$
|
-
|
|
Unrealized loss on equity securities
|
|
|
(34
|
)
|
|
|
(62
|
)
|
|
|
(67
|
)
|
|
|
(134
|
)
|
Other
|
|
|
85
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
Total non-operating gains (losses), net
|
|
$
|
431
|
|
|
$
|
(62
|
)
|
|
$
|
5,347
|
|
|
$
|
(134
|
)
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
Assets Held for Sale
As
of March 31, 2021 and September 30, 2020, the Company had net carrying value of assets held for sale at $7.4 million and $0, respectively.
During
the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate
estimated fair value less cost to sell of $7.4 million after
recognizing a Nightclub segment impairment charge of $1.4
million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property. The
Company expects the properties, which are primarily comprised of land and buildings, to be sold within 12 months through property
listings by our real estate brokers. Liabilities that are expected to be paid with the sale of held-for-sale assets were
$3.2
million as of March 31, 2021, which is included in current portion of debt obligations in our unaudited condensed
consolidated balance sheet. See Note 14.
7.
Debt
On
October 31, 2020, the Company negotiated extensions to November 1, 2021 on $1,690,000 of $1,940,000 of notes to individuals that
were due on November 1, 2020. The Company paid $250,000 to a certain lender who only extended a portion of his original note.
On
January 25, 2021, the Company borrowed $2.175 million from a bank lender by executing a 20-year promissory note with an initial
interest rate of 3.99% per annum. The note is payable $13,232 per month for the first five years after which the interest rate
will be repriced at the then-current prime rate plus 1.0% per annum, with a floor rate of 3.99%. The note is guaranteed by the
Company’s CEO, Eric Langan. See Note 12. The Company paid approximately $25,000 in debt issuance costs at closing.
Included
in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are two notes borrowed from related parties (see
Note 12)—one note for $500,000
(from an employee of the Company who is
also the brother of our director, Nourdean Anakar) and another note for $100,000
(from a brother of Company CFO, Bradley
Chhay)—and two notes totaling $500,000
borrowed from two non-officer employees.
All four notes are part of a larger group of private lenders, with the terms of the notes being the same
as the rest of the lender group.
Future
maturities of debt obligations as of March 31, 2021 are as follows: $16.6
million, $11.7
million, $8.1
million, $8.4
million, $8.4
million, and $80.4
million for the twelve months ending
March 31, 2022, 2023, 2024, 2025, 2026, and thereafter, respectively. Of the maturity schedule mentioned above, $4.5
million, $3.7
million, $0,
$0,
$0,
and $42.3
million, respectively, relate to scheduled
balloon payments. Unamortized debt discount and issuance costs amounted to $1.2
million and $1.2
million as of March 31, 2021 and September
30, 2020, respectively.
Included
in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $124,000
and $5.4
million, respectively. During the three
and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving the forgiveness of 100%
of each of the 11 PPP loans amounting to $380,000
and $5.3
million, respectively,
in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated
statement of operations. As of the date of the filing of this report, we have not received a forgiveness notice for only one PPP
loan that, if not forgiven, under the terms of the loans as provided by the CARES Act, bears an interest rate of 1% per annum.
See Note 3.
8.
Equity
During
the three and six months ended March 31, 2021, the Company purchased and retired 0 and 74,659
common shares, respectively, at a cost
of approximately $0
and $1.8
million, respectively. The Company paid
$0.04 and
$0.08 per
share cash dividend during the three and six months ended March 31, 2021 totaling approximately $360,000
and $720,000,
respectively.
During
the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares, respectively,
at a cost of approximately $2.0 million and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividend
during the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Income Taxes
Income
taxes were an expense of $1.9
million and $1.6
million during the three and six months ended
March 31, 2021, respectively, compared to a benefit of $1.4
million and an expense of $175,000
during the three and six months ended March 31,
2020, respectively. The effective income tax rate was an expense of 24.3%
and 9.1%
for the three and six months ended March 31, 2021, respectively, compared
to a benefit of 28.9%
and an expense of 7.6%
for the three and six months ended March 31, 2020, respectively. Our effective tax rate is affected by the statutory federal income
tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the
deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current period.
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 accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of March 31, 2021 and September
30, 2020, there was no liability for uncertain tax positions. The Company recognizes interest accrued related to uncertain tax
positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of
operations.
On
March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were made
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 included, 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 the Paycheck Protection Program, whereby certain small businesses are eligible for loans
to fund payroll expenses, rent, and related costs. The loans may be forgiven if the funds are used for payroll and other qualified
expenses. The Company submitted its application for a PPP loan and on May 8, 2020 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. During the three and six months ended March 31, 2021, we received 1 and 11
Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans
granted. All of the notices received forgave
100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the
three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net
in our unaudited condensed consolidated statement of operations. No
assurance can be provided that the Company will obtain forgiveness of the one remaining PPP loan in whole or in part. See Note
3.
10.
Commitments and Contingencies
Legal
Matters
Texas
Patron Tax
In
2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club
customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000,
without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the
Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company 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 $1.5 million and $2.2 million as of March 31, 2021 and September 30, 2020, respectively.
A
declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative
rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted
to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative
rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect
of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020,
the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional
as it has been applied and enforced by the Comptroller. The State of Texas has filed an appeal. We will continue to vigorously
defend the matter through the appeals process.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indemnity
Insurance Corporation
As
previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,
RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.
On
November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation
Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance
Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation
Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those
assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.
On
April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation
Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by
IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close
of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until
October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with
IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs
of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with
the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any
recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated,
since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will
cover any claims arising from actions after that date. As of March 31, 2021, 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 (who is no longer an officer of the Company));
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. On March 31, 2021, the
court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative
defenses, denying liability as to all claims. The Company intends to continue to vigorously defend against this action. This
action is in its preliminary phase, and a potential loss cannot yet be estimated.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against officers
and directors Eric S. Langan, Phillip Marshall, 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.
Other
On
March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against the Company
and several of its subsidiaries. Plaintiffs allege that their images were misappropriated, intentionally altered and published
without their consent by clubs affiliated with the Company. The causes of action asserted in Plaintiffs’ Complaint include
alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The
Company contends that there is insurance coverage under an applicable insurance policy. The insurer has raised several issues
regarding coverage under the policy. At this time, this disagreement remains unresolved. The Company has denied all allegations,
continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.
The
Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),
Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping
center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality
Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook
Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied
liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc.
asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims
and third-party claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord
breached the applicable agreements. The case was tried to a jury in late September 2018 and an adverse judgment was entered in
January 2019 in the amount totaling $1.0 million, which includes damages, attorney fees and interest. The matter is being appealed.
The appeal process required that a check be deposited in the registry of the court in the amount of $690,000, which was deposited
in April 2019 and included in other current assets in both consolidated balance sheets as of March 31, 2021 and September 30,
2020. Management believes that the case has no merit and is vigorously defending itself in the appeal.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services
(Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno
injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged
that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial
proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which
JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million.
In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court
denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard
by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case
to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously
defend itself.
As
set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard
is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers
are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers.
Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the
independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s
work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise
in the relevant law and are defended vigorously.
Due
to several COVID-19 regulations and restrictions imposed on some of our businesses by local municipalities and/or States, certain
of our subsidiaries are plaintiffs to lawsuits that have been filed on behalf of the affected entities to have the restrictions
eased or removed entirely. The lawsuits may increase or decrease based on the spread of the disease and new or additional restrictions
placed on our businesses.
General
In
the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party
litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability
that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally
accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company
or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them,
we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there
is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with
these claims in excess of our insurance coverage.
Settlements
of lawsuits for the three and six months ended March 31, 2021 amount to approximately $1,000 and $153,000, respectively, while
for the three and six months ended March 31, 2020 amount to approximately $0 and $24,000, respectively. As of March 31, 2021 and
September 30, 2020, the Company has accrued $228,000 and $100,000 in accrued liabilities, respectively, related to settlement
of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
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.
Below
is the financial information related to the Company’s segments (in thousands):
Schedule
of Segment Reporting Information
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues (from external customers)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
30,787
|
|
|
$
|
31,367
|
|
|
$
|
55,984
|
|
|
$
|
69,226
|
|
Bombshells
|
|
|
13,135
|
|
|
|
8,803
|
|
|
|
26,141
|
|
|
|
19,153
|
|
Other
|
|
|
137
|
|
|
|
256
|
|
|
|
332
|
|
|
|
441
|
|
|
|
$
|
44,059
|
|
|
$
|
40,426
|
|
|
$
|
82,457
|
|
|
$
|
88,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
10,468
|
|
|
$
|
2,284
|
|
|
$
|
18,963
|
|
|
$
|
16,040
|
|
Bombshells
|
|
|
3,142
|
|
|
|
688
|
|
|
|
5,859
|
|
|
|
2,259
|
|
Other
|
|
|
(139
|
)
|
|
|
(146
|
)
|
|
|
(214
|
)
|
|
|
(331
|
)
|
General corporate
|
|
|
(3,630
|
)
|
|
|
(5,301
|
)
|
|
|
(8,184
|
)
|
|
|
(10,757
|
)
|
|
|
$
|
9,841
|
|
|
$
|
(2,475
|
)
|
|
$
|
16,424
|
|
|
$
|
7,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,413
|
|
|
$
|
1,486
|
|
|
$
|
2,737
|
|
|
$
|
2,956
|
|
Bombshells
|
|
|
461
|
|
|
|
456
|
|
|
|
918
|
|
|
|
873
|
|
Other
|
|
|
36
|
|
|
|
104
|
|
|
|
72
|
|
|
|
208
|
|
General corporate
|
|
|
207
|
|
|
|
211
|
|
|
|
413
|
|
|
|
424
|
|
|
|
$
|
2,117
|
|
|
$
|
2,257
|
|
|
$
|
4,140
|
|
|
$
|
4,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
2,201
|
|
|
$
|
526
|
|
|
$
|
3,331
|
|
|
$
|
2,858
|
|
Bombshells
|
|
|
3,104
|
|
|
|
612
|
|
|
|
3,255
|
|
|
|
2,337
|
|
Other
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
General corporate
|
|
|
126
|
|
|
|
127
|
|
|
|
131
|
|
|
|
128
|
|
|
|
$
|
5,429
|
|
|
$
|
1,265
|
|
|
$
|
6,718
|
|
|
$
|
5,323
|
|
|
|
March
31, 2021
|
|
|
September
30, 2020
|
|
Total assets
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
280,060
|
|
|
$
|
277,960
|
|
Bombshells
|
|
|
50,832
|
|
|
|
48,991
|
|
Other
|
|
|
1,303
|
|
|
|
1,269
|
|
General corporate
|
|
|
28,915
|
|
|
|
32,713
|
|
|
|
$
|
361,110
|
|
|
$
|
360,933
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months
ended March 31, 2021 amounting to $2.8
million and $31,000,
respectively, and for the six months ended March 31, 2021 amounting to $5.6
million and $141,000,
respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2021
amounting to $49,000
and $75,000,
respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and corporate segments
for the three months ended March 31, 2020 amounting to $2.8
million and $32,000,
respectively, and for the six months ended March 31, 2020 amounting to $5.4
million and $63,000,
respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2020
amounting to $32,000
and $54,000,
respectively. 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.
12.
Related Party Transactions
Presently,
our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan
receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness,
net of debt discount and issuance costs, as of March 31, 2021 and September 30, 2020, was $84.6 million and $83.8 million, respectively.
Included
in the $2.35 million borrowing on November 1, 2018 (included in debt obligations as of March 31, 2021 and September 30, 2020)
were notes borrowed from related parties—one note for $500,000 (from an employee of the Company who is also the brother
of our director Nourdean Anakar) and another note for $100,000 (from a brother of Company CFO, Bradley Chhay) as part of a larger
group of private lenders. The terms of these related party notes 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 $114,910 and $114,910 during the three and six months ended March 31, 2021, respectively, and
$53,556 and $72,809 during the three and six months ended March 31, 2020, respectively. As of March 31, 2021 and September 30,
2020, we owed Nottingham Creations and Sherwood Forest $64,910 and $0, 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 2021 and 2020. A son-in-law of Eric Langan
owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0
and $0 for the three and six months ended March 31, 2021, respectively, and $18,758 and $30,585 for the three and six months ended
March 31, 2020, respectively. Amounts billed directly to the Company were $55,621 and $62,751 for the three and six months ended
March 31, 2021, respectively, and $24,416 and $26,241 for the three and six months ended March 31, 2020, respectively. As of March
31, 2021 and September 30, 2020, the Company owed TW Mechanical $1,545 and $5,700, respectively, in unpaid direct billings.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13.
Leases
The
Company leases certain facilities and equipment under operating leases. Total lease expense, under ASC 842, was included in selling,
general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income
which was included in other revenue, for the three and six months ended March 31, 2021 and 2020 as follows (in thousands):
Schedule of Lease Expense
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating lease expense – fixed payments
|
|
$
|
828
|
|
|
$
|
838
|
|
|
$
|
1,657
|
|
|
$
|
1,680
|
|
Variable lease expense
|
|
|
44
|
|
|
|
65
|
|
|
|
108
|
|
|
|
130
|
|
Short-term equipment and other lease expense (includes $102 and $145 recorded in advertising and marketing for the three months ended March 31, 2021 and 2020, respectively, and $159 and $291 for the six months ended March 31, 2021 and 2020, respectively; and $116 and $100 recorded in repairs and maintenance for the three months ended March 31, 2021 and 2020, respectively, and $204 and $225 for the six months ended March 31, 2021 and 2020, respectively; see Note 5)
|
|
|
318
|
|
|
|
365
|
|
|
|
547
|
|
|
|
759
|
|
Sublease income
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Total lease expense, net
|
|
$
|
1,189
|
|
|
$
|
1,264
|
|
|
$
|
2,309
|
|
|
$
|
2,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
1,162
|
|
|
$
|
1,207
|
|
|
$
|
2,253
|
|
|
$
|
2,462
|
|
Weighted average remaining lease term
|
|
|
|
|
|
|
|
|
|
|
12 years
|
|
|
|
13 years
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
|
6.1
|
%
|
|
|
6.1
|
%
|
Future
maturities of ASC 842 lease liabilities as of March 31, 2021 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
April 2021 – March 2022
|
|
$
|
1,692
|
|
|
$
|
1,543
|
|
|
$
|
3,235
|
|
April 2022 – March 2023
|
|
|
1,728
|
|
|
|
1,438
|
|
|
|
3,166
|
|
April 2023 – March 2024
|
|
|
1,706
|
|
|
|
1,336
|
|
|
|
3,042
|
|
April 2024 – March 2025
|
|
|
1,860
|
|
|
|
1,229
|
|
|
|
3,089
|
|
April 2025 – March 2026
|
|
|
2,054
|
|
|
|
1,111
|
|
|
|
3,165
|
|
Thereafter
|
|
|
17,235
|
|
|
|
4,881
|
|
|
|
22,116
|
|
|
|
$
|
26,275
|
|
|
$
|
11,538
|
|
|
$
|
37,813
|
|
14. Subsequent Events
On April 7, 2021, the Company acquired
land near the southern boundary of Houston, Texas for $1.3 million.
On May 7, 2021, the Company sold one
of the properties held for sale as of March 31, 2021 for $3.1 million. The property had a carrying value of $2.3 million as of
March 31, 2021. See Note 6. The Company paid related debt amounting to $2.0 million from the proceeds of the sale.