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,
Tomball, Katy, Pearland, Odessa, Lubbock, Longview, Tye, Aledo, Round Rock, 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. In relation to
acquisitions that closed in October and November 2021, we now have club locations in Denver, Colorado; Louisville, Kentucky; Raleigh,
North Carolina; Portland, Maine; Indianapolis, Indiana; Sauget, Illinois; and Newburgh, New York.
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 2021, 2020, and 2019 are for fiscal years ended September 30, 2021, 2020, and 2019,
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 $382,000 and $261,000 as of September
30, 2021 and 2020, respectively (see Note 5). Allowance for doubtful accounts balance related to notes receivable was $102,000 and $182,000
as of September 30, 2021 and 2020, respectively.
Inventories
Inventories
include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the lower of cost (on a first-in,
first-out (“FIFO”) basis), or 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 $0 in fiscal 2021, $156,000 in fiscal 2020, and $597,000 in fiscal 2019.
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 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, 2021, we identified seven reporting units that were impaired
and recognized a goodwill impairment loss totaling $6.3 million. 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
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 $5.3
million in 2021 related to three clubs,
$2.3
million in 2020 related to two clubs (see Note
3), and $178,000
in 2019 related to one club, which are included
in other charges, net in the consolidated statements of operations.
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 2021, the Company impaired five clubs (including
one later reclassified as held for sale) for a total of $2.0
million;
during fiscal 2020, the Company impaired one club and one Bombshells unit for a total of $302,000;
and during fiscal 2019, the Company impaired two clubs for a total of $4.2
million. The Company also impaired one club in
fiscal of 2020 for operating lease right-of-use assets amounting to $104,000.
See Notes 6 and 19.
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 fiscal 2019).
Revenue from initial franchise and area development
fees are recognized as the performance obligations are satisfied over the term of the franchise agreement. Franchise royalties and advertising
contributions, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur.
Refer
to Notes 4 and 19 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 5.
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.
Paycheck
Protection Program
The
Company’s policy is to account for the Paycheck Protection Program (“PPP”) loans as debt (see Note 9). The Company
will continue to record the loans 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).
During
the years ended September 30, 2021, 2020, and 2019, the Company did not have any
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, 2021 and 2020, the Company has no
stock options outstanding, since 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 less than $1,000
and approximately $84,000
respectively
as of September 30, 2021 and 2020.
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, 2021, 2020, and 2019.
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
|
|
|
|
September 30,
|
|
|
Quoted Prices in Active Markets for Identical
Asset
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
Description
|
|
2021
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Property and equipment
|
|
$
|
2,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,044
|
|
Indefinite-lived intangibles
|
|
|
2,008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,008
|
|
Goodwill
|
|
|
2,096
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,096
|
|
Operating lease right-of-use assets*
|
|
|
491
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
Operating lease liabilities*
|
|
|
(491
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(491
|
)
|
Asset held for sale
|
|
|
3,007
|
|
|
|
-
|
|
|
|
3,007
|
|
|
|
-
|
|
*
|
Measured at the lease modification dates.
|
|
|
|
|
|
Fair
Value at Reporting Date Using
|
|
|
|
September 30,
|
|
|
Quoted Prices in Active Markets for Identical
Asset
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable 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.
|
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
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Goodwill
|
|
$
|
(6,307
|
)
|
|
$
|
(7,944
|
)
|
|
$
|
(1,638
|
)
|
Property
and equipment, net (including held for sale)
|
|
|
(2,202
|
)
|
|
|
(302
|
)
|
|
|
(4,224
|
)
|
Indefinite-lived intangibles
|
|
|
(5,296
|
)
|
|
|
(2,265
|
)
|
|
|
(178
|
)
|
Operating lease right-of-use
assets
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
-
|
|
Other assets (equity securities)
|
|
|
(84
|
)
|
|
|
(64
|
)
|
|
|
(612
|
)
|
The significant unobservable inputs used in our
level 3 fair value measurements are as follows:
Schedule of Significant Unobservable Inputs Used
in Level 3 Fair Value Measurement
Assets
|
|
Valuation
Techniques
|
|
Unobservable
Input
|
|
Range
(Weighted Average)
|
|
|
|
|
|
|
|
Property
and equipment
|
|
Discounted
cash flow
|
|
EBITDA
multiple
|
|
8x
(8x)
|
|
|
|
|
Revenue/EBITDA
growth rate
|
|
0%
- 2.5% (1%)
|
|
|
|
|
Weighted
average cost of capital
|
|
13%
- 17% (15%)
|
|
|
|
|
|
|
|
Goodwill
|
|
Discounted
cash flow
|
|
EBITDA
multiple
|
|
8x
(8x)
|
|
|
|
|
Revenue/EBITDA
growth rate
|
|
0%
- 2.5% (1%)
|
|
|
|
|
Weighted
average cost of capital
|
|
13%
- 17% (15%)
|
|
|
|
|
|
|
|
SOB
licenses
|
|
Multiperiod
excess earnings
|
|
EBITDA
multiple
|
|
8x
(8x)
|
|
|
|
|
Revenue/EBITDA
growth rate
|
|
0%
- 2.5% (1%)
|
|
|
|
|
Weighted
average cost of capital
|
|
13%
- 17% (15%)
|
|
|
|
|
Contributory
asset charges rate
|
|
1.4%
- 8.0% (4%)
|
|
|
|
|
|
|
|
Tradename
|
|
Relief-from-royalty
method
|
|
Revenue
growth rate
|
|
0%
- 2.5% (2.5%)
|
|
|
|
|
Terminal
multiple
|
|
8x
(8x)
|
|
|
|
|
Weighted
average cost of capital
|
|
15%
(15%)
|
|
|
|
|
|
|
|
Operating
lease right-of-use assets
|
|
Discounted
cash flow
|
|
EBITDA
growth rate
|
|
0%
- 2.5% (1%)
|
|
|
|
|
Weighted
average cost of capital
|
|
13%
- 17% (15%)
|
Reclassification
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.
Impact
of Recently Issued Accounting Standards
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the
existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate
credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale
debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.
These changes will result in earlier recognition of credit losses. The ASU is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. We 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.
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 2018-03 as of October
1, 2020. Our adoption 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 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.
In October 2021, the FASB issued ASU 2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This
ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in
business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim
periods within those fiscal years. We have not yet determined the timing of adoption but we do not expect the ASU to have a material
impact on our consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
3.
Ongoing Impact of COVID-19 Pandemic
Since
the U.S. declaration of COVID-19 as a pandemic in March 2020, we have had a major disruption in our business operations that threatened
to significantly impact our cash flow. 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. To adapt to the situation, we took significant steps to augment an anticipated decline in operating
cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where
necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.
The
temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is
to open locations and operate in accordance with local and state guidelines. We believe that we can borrow capital if needed but
currently we do not have unused credit facilities so 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.
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 9 and 10.
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. Closures and
operating restrictions, 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.
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, where applicable.
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 interim and annual periods since the pandemic emerged,
we determined that during the year ended 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, with an additional $13.6
million of impairment recognized during the
year ended September 30, 2021 comprised of $ 6.3 million in goodwill, $5.3 million in SOB licenses, and $ 2.0 million in
property and equipment, which included one property later reclassified as held for sale.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
4.
Revenues
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 17), are shown below (in thousands).
Schedule of Disaggregation of Segment Revenues
|
|
Fiscal
2021
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
54,305
|
|
|
$
|
32,380
|
|
|
$
|
-
|
|
|
$
|
86,685
|
|
Sales of food and merchandise
|
|
|
17,221
|
|
|
|
23,890
|
|
|
|
-
|
|
|
|
41,111
|
|
Service revenues
|
|
|
55,146
|
|
|
|
315
|
|
|
|
-
|
|
|
|
55,461
|
|
Other revenues
|
|
|
10,676
|
|
|
|
36
|
|
|
|
1,289
|
|
|
|
12,001
|
|
|
|
$
|
137,348
|
|
|
$
|
56,621
|
|
|
$
|
1,289
|
|
|
$
|
195,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
135,799
|
|
|
$
|
56,617
|
|
|
$
|
1,284
|
|
|
$
|
193,700
|
|
Recognized over time
|
|
|
1,549
|
|
|
|
4
|
|
|
|
5
|
|
|
|
1,558
|
|
|
|
$
|
137,348
|
|
|
$
|
56,621
|
|
|
$
|
1,289
|
|
|
$
|
195,258
|
|
|
|
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
|
|
*
|
Lease revenue (included in Other Revenues) is covered by ASC 842 in fiscal 2021 and 2020, and ASC 840
in fiscal 2019. All other revenues are covered by ASC Topic 606.
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
4.
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 (in thousands):
Schedule of Reconciliation of Contract Liabilities with Customers
|
|
Balance
at September 30, 2019
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at September 30, 2020
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at September 30, 2021
|
|
Ad revenue
|
|
$
|
76
|
|
|
$
|
538
|
|
|
$
|
(522
|
)
|
|
$
|
92
|
|
|
$
|
593
|
|
|
$
|
(601
|
)
|
|
$
|
84
|
|
Expo revenue
|
|
|
-
|
|
|
|
211
|
|
|
|
-
|
|
|
|
211
|
|
|
|
393
|
|
|
|
(453
|
)
|
|
|
151
|
|
Other (including franchise fees, see below)
|
|
|
7
|
|
|
|
40
|
|
|
|
(14
|
)
|
|
|
33
|
|
|
|
94
|
|
|
|
(8
|
)
|
|
|
119
|
|
|
|
$
|
83
|
|
|
$
|
789
|
|
|
$
|
(536
|
)
|
|
$
|
336
|
|
|
$
|
1,080
|
|
|
$
|
(1,062
|
)
|
|
$
|
354
|
|
Contract
liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note
5), while the revenues associated with these contract liabilities are included in other revenues in our 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.
5.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
|
|
2021
|
|
|
2020
|
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
1,447
|
|
|
$
|
880
|
|
Income tax refundable
|
|
|
4,472
|
|
|
|
4,325
|
|
Insurance receivable
|
|
|
185
|
|
|
|
191
|
|
ATM-in-transit
|
|
|
277
|
|
|
|
160
|
|
Other (net of allowance for doubtful accounts of $382 and $261, respectively)
|
|
|
1,189
|
|
|
|
1,211
|
|
Total accounts receivable, net
|
|
$
|
7,570
|
|
|
$
|
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 original terms ranging from 1
to 20
years.
The
components of prepaid expenses and other current assets are as follows (in thousands):
Schedule of Components of Prepaid Expenses and Other Current Assets
|
|
2021
|
|
|
2020
|
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Prepaid insurance
|
|
$
|
277
|
|
|
$
|
4,884
|
|
Prepaid legal
|
|
|
112
|
|
|
|
735
|
|
Prepaid taxes and licenses
|
|
|
380
|
|
|
|
428
|
|
Prepaid rent
|
|
|
309
|
|
|
|
37
|
|
Other
|
|
|
850
|
|
|
|
404
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,928
|
|
|
$
|
6,488
|
|
The
components of accrued liabilities are as follows (in thousands):
Schedule
of Accrued Liabilities
|
|
2021
|
|
|
2020
|
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Insurance
|
|
$
|
54
|
|
|
$
|
4,405
|
|
Payroll and related costs
|
|
|
3,220
|
|
|
|
2,419
|
|
Property taxes
|
|
|
2,178
|
|
|
|
2,003
|
|
Sales and liquor taxes
|
|
|
2,261
|
|
|
|
2,613
|
|
Interest
|
|
|
145
|
|
|
|
1,390
|
|
Patron tax
|
|
|
452
|
|
|
|
309
|
|
Lawsuit settlement
|
|
|
378
|
|
|
|
100
|
|
Unearned revenues
|
|
|
354
|
|
|
|
336
|
|
Other
|
|
|
1,361
|
|
|
|
998
|
|
Accrued liabilities
|
|
$
|
10,403
|
|
|
$
|
14,573
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
5.
Selected Account Information - continued
The
components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
Years
Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Taxes and permits
|
|
$
|
8,701
|
|
|
$
|
8,071
|
|
|
$
|
10,779
|
|
Advertising and marketing
|
|
|
6,676
|
|
|
|
5,367
|
|
|
|
8,392
|
|
Supplies and services
|
|
|
6,190
|
|
|
|
4,711
|
|
|
|
5,911
|
|
Insurance
|
|
|
5,676
|
|
|
|
5,777
|
|
|
|
5,429
|
|
Lease
|
|
|
3,942
|
|
|
|
4,060
|
|
|
|
3,896
|
|
Legal
|
|
|
3,997
|
|
|
|
4,725
|
|
|
|
5,180
|
|
Utilities
|
|
|
3,366
|
|
|
|
2,945
|
|
|
|
3,165
|
|
Charge cards fees
|
|
|
3,376
|
|
|
|
2,382
|
|
|
|
3,803
|
|
Security
|
|
|
3,892
|
|
|
|
2,582
|
|
|
|
2,973
|
|
Accounting and professional fees
|
|
|
2,031
|
|
|
|
3,463
|
|
|
|
2,815
|
|
Repairs and maintenance
|
|
|
2,767
|
|
|
|
2,289
|
|
|
|
2,980
|
|
Other
|
|
|
3,994
|
|
|
|
5,320
|
|
|
|
4,573
|
|
Selling, general and administrative expenses
|
|
$
|
54,608
|
|
|
$
|
51,692
|
|
|
$
|
59,896
|
|
The
components of other charges, net are as follows (in thousands):
Schedule of Components of Other Charges, Net
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
Years
Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Impairment of assets
|
|
$
|
13,612
|
|
|
$
|
10,615
|
|
|
$
|
6,040
|
|
Settlement of lawsuits
|
|
|
1,349
|
|
|
|
174
|
|
|
|
225
|
|
Gain on sale of businesses and assets
|
|
|
(522
|
)
|
|
|
(661
|
)
|
|
|
(2,877
|
)
|
Loss (gain) on insurance
|
|
|
(1,253
|
)
|
|
|
420
|
|
|
|
(768
|
)
|
Other charges
|
|
$
|
13,186
|
|
|
$
|
10,548
|
|
|
$
|
2,620
|
|
6.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
Schedule of Property, Plant and Equipment
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Buildings and land
|
|
$
|
162,217
|
|
|
$
|
163,938
|
|
Equipment
|
|
|
38,046
|
|
|
|
37,000
|
|
Leasehold improvements
|
|
|
28,681
|
|
|
|
29,776
|
|
Furniture
|
|
|
10,207
|
|
|
|
9,614
|
|
Total property and equipment
|
|
|
239,151
|
|
|
|
240,328
|
|
Less accumulated depreciation
|
|
|
(63,199
|
)
|
|
|
(58,945
|
)
|
Property and equipment, net
|
|
$
|
175,952
|
|
|
$
|
181,383
|
|
Included
in buildings and leasehold improvements above are construction-in-progress amounting to $3.4
million and $20,000
as of September 30, 2021 and 2020, respectively,
which are mostly related to Bombshells projects.
Depreciation
expense was approximately $8.0 million,
$8.2 million,
and $8.4 million
for fiscal years 2021, 2020, and 2019, respectively. Impairment loss for property and equipment, including those later reclassified to
assets held for sale, was $2.0
million, $302,000,
and $4.2 million
for fiscal 2021, 2020, and 2019, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Assets Held for Sale
As
of September 30, 2020, the Company had no properties classified as held for sale.
During
fiscal 2021, the Company classified as held-for-sale three real estate properties with an aggregate carrying value of $8.6
million, which was later remeasured at lower of carrying value and net realizable value less cost to sell of $7.2
million. In May 2021, the Company sold one property
with a carrying value of $2.3
million for $3.1
million (see Note 15).
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.
As
of September 30, 2021, liabilities associated with held-for-sale assets amounted to $1.1 million. Gains or losses on the sale of properties
held for sale are included in other charges (gains), net within the consolidated statements of operations (see Note 5).
8.
Goodwill and Other Intangible Assets
Goodwill
and other intangible assets consisted of the following (in thousands):
Schedule of Goodwill and Other Intangible Assets
|
|
2021
|
|
|
2020
|
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
39,379
|
|
|
$
|
45,686
|
|
Licenses
|
|
|
65,186
|
|
|
|
70,332
|
|
Tradename and domain name
|
|
|
2,238
|
|
|
|
2,215
|
|
Indefinite Intangible
Assets, Net, Total
|
|
|
106,803
|
|
|
|
118,233
|
|
|
|
Amortization Period
|
|
|
|
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
Discounted leases
|
|
18 & 6 years
|
|
|
86
|
|
|
|
93
|
|
Non-compete agreements
|
|
5 years
|
|
|
182
|
|
|
|
362
|
|
Software
|
|
5 years
|
|
|
132
|
|
|
|
23
|
|
Distribution agreement
|
|
3 years
|
|
|
-
|
|
|
|
52
|
|
|
|
|
|
|
400
|
|
|
|
530
|
|
Total goodwill and other intangible assets
|
|
|
|
$
|
107,203
|
|
|
$
|
118,763
|
|
Schedule of Indefinite-lived, Definite-lived Intangible Assets and Goodwill
|
|
2021
|
|
|
2020
|
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
Beginning balance
|
|
$
|
530
|
|
|
$
|
72,547
|
|
|
$
|
45,686
|
|
|
$
|
1,139
|
|
|
$
|
74,812
|
|
|
$
|
53,630
|
|
Acquisitions
|
|
|
128
|
|
|
|
173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
|
|
(5,296
|
)
|
|
|
(6,307
|
)
|
|
|
-
|
|
|
|
(2,265
|
)
|
|
|
(7,944
|
)
|
Amortization
|
|
|
(258
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(609
|
)
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
400
|
|
|
$
|
67,424
|
|
|
$
|
39,379
|
|
|
$
|
530
|
|
|
$
|
72,547
|
|
|
$
|
45,686
|
|
As
of September 30, 2021 and 2020, the accumulated impairment balance of indefinite-lived intangibles was $13.7
million and $8.4
million, respectively, while the accumulated
impairment balance of goodwill was $20.6
million and $14.3
million, respectively. Future amortization expense
related to definite-lived intangible assets that are subject to amortization at September 30, 2021 is: 2022 - $138,000;
2023 - $60,000;
2024 - $11,000;
2025 - $8,000;
2026 - $7,000;
and thereafter - $176,000.
Indefinite-lived
intangible assets consist of sexually oriented business licenses and tradenames, 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, 2021, the Company recognized a $5.3 million impairment related to SOB licenses of three clubs and
a $6.3 million related to goodwill of seven clubs. 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Debt
Debt
consisted of the following (in thousands):
Schedule
of Long-term Debt
|
|
|
|
September
30,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
$
|
785
|
|
|
$
|
886
|
|
Notes payable at 5.5%, matures January 2023
|
|
(d)(1)
|
|
$
|
785
|
|
|
$
|
886
|
|
Non-interest-bearing debts to State of Texas, mature March 2022 and May 2022, interest imputed at 9.6%
|
|
(d)(2)
|
|
|
813
|
|
|
|
2,177
|
|
Note payable at 5.75%, matures December 2027, as amended
|
|
*(a)(6ii)(7)
|
|
|
-
|
|
|
|
9,715
|
|
Note payable at 5.95%, matures December 2027, as amended
|
|
*(a)(6iii)(7)
|
|
|
-
|
|
|
|
5,787
|
|
Note payable at 12%, matures February 2030, as amended
|
|
(d)(3)(25)
|
|
|
-
|
|
|
|
5,031
|
|
Notes payable at 12%, mature November 2021, as amended
|
|
(d)(4)(26)
|
|
|
-
|
|
|
|
1,940
|
|
Note payable at 8%,
matures October
2027, as amended
|
|
(b)(5)(23)
|
|
|
3,025
|
|
|
|
3,025
|
|
Note payable at 8%, matures May 2029
|
|
(b)(5)
|
|
|
11,549
|
|
|
|
12,599
|
|
Note payable at 5.75%, matures December 2027, as amended
|
|
*(a)(6i)(7)(8)(9)
|
|
|
-
|
|
|
|
49,830
|
|
Note payable at 5.99%, matures September 2033, as amended
|
|
(c) (10)
|
|
|
6,089
|
|
|
|
6,395
|
|
Note payable at 5%, matures August 2029
|
|
*(a)(12)
|
|
|
-
|
|
|
|
2,165
|
|
Note payable at prime plus 0.5% with a 5.5% floor, matures September 2035, as amended
|
|
*(a)(13)
|
|
|
-
|
|
|
|
2,099
|
|
Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030
|
|
*(a)(13)
|
|
|
-
|
|
|
|
2,861
|
|
Note payable at 8%, matures May 2021
|
|
(a)(14)
|
|
|
-
|
|
|
|
582
|
|
Note payable at 5.95%, matures August 2039, as amended
|
|
*(a)(11)
|
|
|
-
|
|
|
|
6,979
|
|
Note payable at 12%, matures February 2030, as amended
|
|
(d)(15)(24)
|
|
|
-
|
|
|
|
3,875
|
|
Note payable at 9%, matures September 2028
|
|
(a)(17)
|
|
|
1,063
|
|
|
|
1,167
|
|
Note payable at 5.95%, matures September 2028, as amended
|
|
*(a)(16)
|
|
|
-
|
|
|
|
1,489
|
|
Note payable at 6%, matures February 2040, as amended
|
|
*(a)(22)
|
|
|
-
|
|
|
|
4,066
|
|
Note payable at 5.49%, matures March 2039, as amended
|
|
(c)(21)
|
|
|
2,075
|
|
|
|
2,125
|
|
Note payable at 7%, matures November 2024
|
|
(b)(19)
|
|
|
-
|
|
|
|
3,319
|
|
Note payable at 7%, matures February 2021, as amended
|
|
(b)(20)
|
|
|
-
|
|
|
|
2,000
|
|
Notes payable at 12%, mature November 2021
|
|
(d)(18)
|
|
|
-
|
|
|
|
2,350
|
|
Note payable at 8%, matures November 2028
|
|
(b)(20)
|
|
|
-
|
|
|
|
4,790
|
|
Note payable at 3.99%, matures January 2041
|
|
*(a)(28)
|
|
|
2,127
|
|
|
|
-
|
|
Note payable at 5.25%, matures September 2031
|
|
*(a)(29)
|
|
|
99,146
|
|
|
|
-
|
|
Paycheck Protection Program loans at 1%, matures May 2022
|
|
(d)(27)
|
|
|
124
|
|
|
|
5,422
|
|
Total debt
|
|
|
|
|
126,796
|
|
|
|
142,674
|
|
Less unamortized debt discount and issuance costs
|
|
|
|
|
(1,628
|
)
|
|
|
(1,239
|
)
|
Less current portion
|
|
|
|
|
(6,434
|
)
|
|
|
(16,304
|
)
|
Total long-term portion of debt, net
|
|
|
|
$
|
118,734
|
|
|
$
|
125,131
|
|
*
|
These
commercial bank debts are guaranteed by the Company’s CEO. See Note 18.
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Debt - continued
Following
is a summary of long-term debt at September 30 (in thousands):
Schedule
of Long-term Debt Instruments
|
|
2021
|
|
|
2020
|
|
(a) Secured by real estate
|
|
$
|
102,336
|
|
|
$
|
86,740
|
|
(b) Secured by stock in subsidiary
|
|
|
14,574
|
|
|
|
25,733
|
|
(c) Secured by other assets
|
|
|
8,164
|
|
|
|
8,520
|
|
(d) Unsecured
|
|
|
1,722
|
|
|
|
21,681
|
|
|
|
$
|
126,796
|
|
|
$
|
142,674
|
|
(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 was 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. This note was paid off entirely
on September 30, 2021.
(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 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. These notes were paid off on September 30, 2021.
(5)
On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 15), 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 has
amended the $5.0
million short-term note payable several times,
which has a remaining balance of $3.0
million, extending the maturity date and increasing
the interest rate. Presently, the maturity date is October
1, 2027 and the interest rate is
8%
for its remaining term. Refer to December 2019 amendment below.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
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
consisted of three promissory notes:
|
i)
|
The
first note amounted 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 amounted 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 amounted 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 was 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 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 were certain financial covenants with which the Company must be in compliance related to this financing. All three notes in the preceding paragraph were
refinanced as part of the September 2021 Refinancing Note (see below).
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
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 bore 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 was payable
interest-only during the first 18 months, after which monthly payments of principal and interest were to 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 an
additional construction loan having a maximum availability of $7.4 million.
The new note had 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 was 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. This note was paid off in relation to the
September 2021 Refinancing Note.
(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 bore
an interest rate of prime plus 0.5%
with a floor of 5.0%
and was to mature on August
20, 2029. During
the first 18 months of the construction loan, the Company made 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 was to be in compliance related to this financing. This note was
paid off in relation to the September 2021 Refinancing Note.
(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 was to mature in 24 months,
by which date the principal was to be 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 had an interest
rate of prime plus 0.5%,
with a 5.5%
floor, and payable in 12
years. The first 24 months were to be
interest-only payments, after which monthly payments of principal and interest were to be made based on a 20-year
amortization. There were certain financial covenants with which the Company was to be in compliance related to this financing.
These notes were paid off in relation to the September 2021 Refinancing Note.
(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 was to mature in three
years and was payable in monthly installments
of $20,276,
including interest, based on a five-year
amortization with the remaining balance to be
paid at maturity. This note was fully paid in May 2021.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
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. This note was paid off on September 30, 2021.
(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 had 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, were 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 were certain financial covenants with which the Company was to be in compliance related to this note.
This note was paid off in relation to the September 2021 Refinancing Note.
(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 were to mature on November
1, 2021. The notes paid interest-only
in equal monthly installments, with a lump sum principal payment at maturity. Among the promissory notes were 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 18) 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. These notes were paid off in relation to the September 2021 Refinancing
Note.
(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 15. This note was paid off in relation to the September 2021 Refinancing Note.
(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 15. On September 30, 2020, the maturity date for the first note was extended
to and fully paid off in February 2021.
The second note was paid off in relation to the September 2021 Refinancing Note.
(21)
On December 11, 2018, the Company purchased an aircraft for $2.8
million with a $554,000
down payment and financed for 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 had 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 had a maximum availability of $4.1
million, was to mature in 252 months from
closing date and was 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 were certain financial covenants with which the Company was to be
in compliance related to this financing. In March 2020, certain principal and interest payments for this note were deferred to its maturity
date. This note was paid off in relation to the September 2021 Refinancing Note.
(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 eliminated 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. This note was paid off in relation to the September 2021
Refinancing Note.
(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 eliminated 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. This note was paid off in relation
to the September 2021 Refinancing Note.
(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 was then $1,940,000.
On October 31, 2020, the Company negotiated extensions
to November 1, 2021 on $1,690,000
of the $1,940,000
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. The remaining balance of these notes were paid off
in relation to the September 2021 Refinancing Note.
(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 September 30, 2021, we have received eleven Notices of PPP Forgiveness Payment from the Small Business
Administration out of the twelve of our PPP loans granted. All of those notices received forgave 100% of each of the eleven
PPP loans totaling the amount of $5.3 million in principal and interest. In November 2021, we received a partial forgiveness
of the remaining $124,000
PPP loan for $85,000
in principal and interest. The remaining
unforgiven portion of approximately $41,000 in principal will be repaid as debt plus accrued interest.
See Notes 3 and 10.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Debt – continued
(28)
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 Company paid approximately $25,000 in debt issuance
costs at closing. See Note 15.
(29)
On September 30, 2021, we entered into a $99.1
million term loan refinancing $85.7
million of existing bank and seller-financed
real estate debt and to provide $12.3
million in cash that will be used to pay off
existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing
for the acquisition of 11 clubs and related real estate (see Note 15). The $99.1
million note has a term of 10
years with an initial interest rate of 5.25%
per annum for the first five
years, then adjusted to a rate equal to the then
weekly average yield of U.S. Treasury Securities plus 350 basis points, with a floor rate of 5.25%.
The note is payable in monthly payments of principal and interest of $668,051,
based on a 20-year
amortization period, with the balance paid at maturity. In connection with the transaction, we wrote off to interest expense approximately
$103,000
of unamortized debt issuance costs related to
the paid-off debts. We also paid approximately $1.0
million in loan costs, approximately $567,000
of which is capitalized and will be amortized
together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using
the effective interest method.
Future
maturities of debt obligations as of September 30, 2021 consist of the following (in thousands):
Schedule
of Maturities of Long-term Debt
|
|
Regular
Amortization
|
|
|
Balloon
Payments
|
|
|
Total
Payments
|
|
2022
|
|
$
|
6,625
|
|
|
$
|
-
|
|
|
$
|
6,625
|
|
2023
|
|
|
4,825
|
|
|
|
3,676
|
|
|
|
8,501
|
|
2024
|
|
|
5,094
|
|
|
|
-
|
|
|
|
5,094
|
|
2025
|
|
|
5,409
|
|
|
|
-
|
|
|
|
5,409
|
|
2026
|
|
|
5,745
|
|
|
|
-
|
|
|
|
5,745
|
|
Thereafter
|
|
|
33,145
|
|
|
|
62,277
|
|
|
|
95,422
|
|
Total
maturities of long-term debt, net of debt discount
|
|
$
|
60,843
|
|
|
$
|
65,953
|
|
|
$
|
126,796
|
|
(30)
On October 12, 2021, we closed a debt financing transaction with 28
investors for unsecured promissory notes with a total principal amount of $17.0
million, all of which bear interest at a rate
of 12%
per annum. Of this amount, $9.5
million are promissory notes, payable interest
only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October
1, 2024. The remaining amount of the financing
is $7.5
million in promissory notes, payable in monthly
payments of principal and interest based on a 10-year
amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in
full on October
12, 2024. Included in the $17.0
million borrowing are two notes for $500,000
and $150,000
borrowed from related parties (see Note
18) and two notes for $500,000
and $300,000
borrowed from two non-officer employees
in which the terms of the notes are the same as the rest of the lender group.
(31)
On October 18, 2021, in relation to an acquisition (see Note 15),
the Company executed four seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% note
payable in 120 equal monthly payments of $122,123 in principal and interest. The second promissory note was a 20-year $8.0 million 6%
note payable in 240 equal monthly payments of $57,314 in principal and interest. The third promissory note was a 10-year
$1.2 million
5.25%
note payable in monthly payments of $8,086 in principal and interest based on a 20-year
amortization period, with the balance payable at maturity date. The fourth note was a 20-year
$1.0
million 6%
note payable in 240 equal monthly payments of $7,215 in principal and interest.
(32) On
November 8, 2021, in relation to an acquisition (see Note 15), the Company executed a $1.0
million 7-year
promissory note with an interest rate of 4.0%
per annum. The note is payable $13,669 per
month, including principal and interest.
10.
Income Taxes
Income
tax expense (benefit) consisted of the following (in thousands):
Schedule of Income Tax Expense (Benefit)
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Years
Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,598
|
|
|
$
|
215
|
|
|
$
|
1,886
|
|
State and local
|
|
|
644
|
|
|
|
560
|
|
|
|
1,037
|
|
Total current income tax expense
|
|
|
5,242
|
|
|
|
775
|
|
|
|
2,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(161
|
)
|
|
|
(1,248
|
)
|
|
|
913
|
|
State and local
|
|
|
(1,092
|
)
|
|
|
(20
|
)
|
|
|
(92
|
)
|
Total deferred income tax expense (benefit)
|
|
|
(1,253
|
)
|
|
|
(1,268
|
)
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
3,989
|
|
|
$
|
(493
|
)
|
|
$
|
3,744
|
|
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
10.
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)
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Years
Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Federal statutory income tax expense (benefit)
|
|
$
|
7,169
|
|
|
$
|
(1,429
|
)
|
|
$
|
5,080
|
|
State income taxes, net of federal benefit
|
|
|
716
|
|
|
|
253
|
|
|
|
672
|
|
Permanent differences
|
|
|
(434
|
)
|
|
|
395
|
|
|
|
45
|
|
Change in state tax rate
|
|
|
(804
|
)
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(632
|
)
|
|
|
1,273
|
|
|
|
-
|
|
Tax credits
|
|
|
(1,207
|
)
|
|
|
(945
|
)
|
|
|
(900
|
)
|
Other
|
|
|
(819
|
)
|
|
|
(40
|
)
|
|
|
(1,153
|
)
|
Total income tax expense (benefit)
|
|
$
|
3,989
|
|
|
$
|
(493
|
)
|
|
$
|
3,744
|
|
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
|
|
|
2021
|
|
|
|
2020
|
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Patron tax
|
|
$
|
-
|
|
|
$
|
349
|
|
Capital loss carryforwards
|
|
|
899
|
|
|
|
1,263
|
|
Net operating loss carryforwards
|
|
|
664
|
|
|
|
-
|
|
Other
|
|
|
247
|
|
|
|
2,046
|
|
Valuation allowance
|
|
|
(641
|
)
|
|
|
(1,273
|
)
|
Net
deferred tax assets
|
|
|
1,169
|
|
|
|
2,385
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(12,174
|
)
|
|
|
(14,106
|
)
|
Property and equipment
|
|
|
(8,132
|
)
|
|
|
(8,669
|
)
|
Deferred
tax liabilities
|
|
|
(20,306
|
)
|
|
|
(22,775
|
)
|
Net
deferred tax liability
|
|
$
|
(19,137
|
)
|
|
$
|
(20,390
|
)
|
Included
in the Company’s deferred tax liabilities at September 30, 2021 and 2020 is the tax effect of indefinite-lived intangible assets
from club acquisitions amounting to approximately $17.1
million and $14.9
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 2019,
the Company released the remaining amount accrued when the examination was closed.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Income Taxes - continued
The
following table shows the changes in the Company’s uncertain tax positions (in thousands):
Schedule of Uncertain Tax Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
165
|
|
Additions for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Decrease related to settlements with taxing authorities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reduction due to lapse from closed examination
|
|
|
-
|
|
|
|
-
|
|
|
|
(165
|
)
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 (“IRS”) with
no changes. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters.
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,
former 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 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. During fiscal 2021, we received 11 Notices
of PPP Forgiveness Payment 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 $5.3 million in principal and
interest and were included in non-operating gains (losses), net in our consolidated statement of operations for the fiscal year
ended September 30, 2021. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP
loan for $85,000 in
principal and interest. The remaining unforgiven portion of approximately $41,000 in principal will be repaid as debt plus accrued
interest. See Note 3.
11.
Commitments and Contingencies
Leases
See
Note 19.
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 approximately $813,000 and $2.2 million as of September 30, 2021 and 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 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, 2021, we had 2 remaining unresolved claims out of
the original 71 claims. One of the two remaining claims was settled in November 2021.
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 former directors Nourdean Anakar and 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. On June 14, 2021, a scheduling
order was entered in the case, setting January 9, 2023 as the trial date. 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 (who is no longer a director), Yura Barabash, Luke Lirot, Travis Reese, former
director Steven Jenkins, and RCI Hospitality Holdings, Inc., as nominal defendant. The action, styled Cecere v. Langan, et al.,
4:19-cv-03080, alleged 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 asserted 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 sought
injunctive relief, damages, restitution, costs, and attorneys’ fees. On June 1, 2021, the Company and the individual defendants
moved to dismiss the lawsuit based on the plaintiff’s failure to make a pre-suit demand prior to filing of the derivative action,
as is required under Texas law. In response, the plaintiff filed a motion to voluntarily dismiss his claims. On June 21, 2021, the court
granted that motion and entered an order dismissing this lawsuit in its entirety, without prejudice.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
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 was sued by a commercial landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The Plaintiff alleged 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 failed to provide Plaintiff with proposed plans before beginning construction. Plaintiff asserted RCI Hospitality Holdings, Inc.
was also liable as the 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. denied liability and asserted that
Plaintiff failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc. asserted that Plaintiff affirmatively
represented that construction of the patio was permitted under the lease and accordingly, pursued counter claims against Plaintiff and
Plaintiff’s manager for breach of the parties’ agreement. The case was tried to a jury in late September 2018 and an adverse
judgment was entered in January 2019 in an amount totaling more than $1.15
million, including damages, costs, attorney fees,
and interest. The matter was appealed to the Court of Appeals for the First District of Texas. The appeal process required that funds
be deposited in the registry of the court in the amount of $690,000,
which was deposited in April 2019 and is included in other current assets in the consolidated balance sheet as of September 30, 2020.
On June 3, 2021, the Court of Appeals affirmed the lower court’s judgment in the case. A motion to reconsider this decision was
denied. This matter was subsequently settled for $1.0
million in exchange for a full and complete release
of all claims. The settlement funds are comprised of the funds on deposit in the court registry, which total $705,876
with interest, and a wire transfer of the remaining
$294,124.
This settlement will fully resolve this matter.
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.
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, 2021, 2020, and 2019 total $1.3 million, $174,000, and $225,000, respectively. As of September
30, 2021 and 2020, the Company has accrued $378,000 and $100,000 in accrued liabilities, respectively, related to settlement of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
12.
Common Stock
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.
|
During
the year ended September 30, 2021, the following common stock transactions occurred:
|
●
|
The
Company acquired 74,659 shares of its own common stock at a cost of $1.8 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The
Company paid quarterly dividends of $0.04 per share for an aggregate amount of $1.4 million.
|
On October 18, 2021, we partially paid for an
acquisition using 500,000 shares of our common stock. See Note 15.
13.
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 $209,000, $171,000, and $164,000
for the years ended September 30, 2021, 2020, and 2019, respectively.
14.
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
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Consolidated balance sheets (period end)
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivable
|
|
Account receivable, net
|
|
$
|
186
|
|
|
$
|
191
|
|
|
$
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of operations – loss (gain)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption
|
|
Other charges, net
|
|
$
|
-
|
|
|
$
|
(176
|
)
|
|
$
|
(484
|
)
|
Property
|
|
Other charges, net
|
|
$
|
(1,337
|
)
|
|
$
|
596
|
|
|
$
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from business interruption insurance claims
|
|
Operating activity
|
|
$
|
106
|
|
|
$
|
384
|
|
|
$
|
100
|
|
Proceeds from property insurance claims
|
|
Investing activity
|
|
$
|
1,152
|
|
|
$
|
945
|
|
|
$
|
100
|
|
The
net property insurance gain/loss amount in fiscal 2021, 2020, and 2019 was net of assets written off and expenses amounting to $88,000,
$728,000, and $629,000, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Acquisitions and Dispositions
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.
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
15.
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
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.
2021
Acquisitions
On
December 28, 2020, the Company acquired the real estate and other business assets of a club in Centerville, Illinois for $500,000 in
cash. The Company is leasing out this property to a club operator for $48,000 annually.
On
January 26, 2021, the Company acquired land for a future Bombshells location in Arlington, Texas for $2.9 million. The Company paid approximately
$754,000 in cash including closing costs and financed $2.175 million with a bank lender for a 20-year promissory note with an initial
interest rate of 3.99% per annum. See Note 9.
On
March 10, 2021, the Company acquired approximately 57,000-square
foot of land across the street from our corporate office for $475,000
in cash. The Company plans to build
a warehouse on that land in the coming months.
On
March 22, 2021, the Company acquired land adjacent to a Bombshells location in Houston, Texas for $1.04 million in cash.
On
April 7, 2021, the Company acquired land near our Bombshells location in Pearland, Texas for $1.275 million in cash.
2021
Dispositions
On
May 7, 2021, the Company sold one of the properties held for sale for $3.1 million. The property had a carrying value of $2.3 million.
We recorded a net gain of approximately $657,000 after closing costs and we paid related debt amounting to $2.0 million from the proceeds
of the sale. See Note 7.
On
September 21, 2021, the Company sold land where a club used to be operated for $2.25 million with a net gain of approximately $54,000
after closing costs. We paid $1.2 million of related debt with the proceeds of the sale.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Acquisitions and Dispositions - continued
2022
Acquisitions
On
October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real
estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with
a total consideration preliminary fair value of $88.4
million based on the Company’s stock price at acquisition date and discounted due to the lock-up period). The acquisition
gives the Company presence in six additional states. We paid for the acquisition with $36.8 million
in cash, $21.2 million
in four seller-financed notes (see Note 9), and 500,000 shares
of our common stock.
We have not completed
our valuation of the assets acquired, therefore, we do not have an allocation of the acquisition price at this time.
In
connection with the acquisition, we incurred acquisition-related expenses of approximately $347,000, of which $174,000 was expensed
in fiscal 2021 and $173,000 will be expensed in fiscal 2022, and in both periods included in selling, general and administrative
expenses in our consolidated statement of operations.
The following table presents the unaudited pro
forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred
at the beginning of fiscal 2021 (in thousands, except per share amount):
Schedule of Unaudited Pro Forma Combined Results of Operations
|
|
For the Fiscal
Year
Ended
September 30, 2021
|
|
Pro forma revenues
|
|
$
|
217,996
|
|
Pro forma net income attributable to RCIHH common stockholders
|
|
$
|
25,290
|
|
Pro forma earnings per share - basic and diluted
|
|
$
|
2.66
|
|
|
|
|
|
|
Pro forma weighted average number of common shares outstanding - basic and diluted
|
|
|
9,500
|
|
The above unaudited pro forma financial information
is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved
if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material,
nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related
tax effects. Since we do not have a valuation of the assets that we acquired yet, the unaudited pro forma financial information does
not have adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and
amortization and related tax effects. Pro forma net income and pro forma earnings per share include acquisition-related expenses that
will be recorded in fiscal 2022 amounting to $173,000 and interest expense of $3.3 million related to the 28 private lender group notes
and 4 seller-financed notes in the acquisition. Pro forma weighted average number of common shares outstanding includes the impact of
500,000 shares of our common stock issued as partial consideration for the acquisition.
On
November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total purchase price of $3.5
million, by which $2.5
million was paid in cash at closing and $1.0
million through a seller-financed 7-year
promissory note with an interest rate of 4.0%
per annum. The note is payable $13,669
per month, including principal and interest.
See Note 9. Since this acquisition is not material, we are not providing supplemental pro forma disclosures.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Quarterly Results of Operations (Unaudited)
The
following tables summarize unaudited quarterly data for fiscal 2021, 2020, and 2019 (in thousands, except per
share data):
Schedule of Quarterly Financial Information
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2020
|
|
|
March
31,
2021
|
|
|
June
30,
2021
|
|
|
September
30, 2021
|
|
Revenues(1)
|
|
$
|
38,398
|
|
|
$
|
44,059
|
|
|
$
|
57,860
|
|
|
$
|
54,941
|
|
Income from operations(1)
|
|
$
|
6,583
|
|
|
$
|
9,841
|
|
|
$
|
18,507
|
|
|
$
|
3,617
|
|
Net income attributable to RCIHH stockholders(1)
|
|
$
|
9,643
|
|
|
$
|
6,091
|
|
|
$
|
12,302
|
|
|
$
|
2,300
|
|
Earnings per share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.07
|
|
|
$
|
0.68
|
|
|
$
|
1.37
|
|
|
$
|
0.26
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,019
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2019
|
|
|
March
31,
2020
|
|
|
June
30,
2020
|
|
|
September
30, 2020
|
|
Revenues(2)
|
|
$
|
48,394
|
|
|
$
|
40,426
|
|
|
$
|
14,721
|
|
|
$
|
28,786
|
|
Income (loss) from operations(2)
|
|
$
|
9,686
|
|
|
$
|
(2,475
|
)
|
|
$
|
(4,657
|
)
|
|
$
|
192
|
|
Net income (loss) attributable to RCIHH stockholders(2)
|
|
$
|
5,634
|
|
|
$
|
(3,452
|
)
|
|
$
|
(5,474
|
)
|
|
$
|
(2,793
|
)
|
Earnings (loss) per share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(3)
|
|
$
|
11,132
|
|
|
$
|
11,166
|
|
|
$
|
9,974
|
|
|
$
|
2,429
|
|
Net income attributable to RCIHH stockholders(3)
|
|
$
|
7,463
|
|
|
$
|
6,735
|
|
|
$
|
5,638
|
|
|
$
|
458
|
|
Earnings per share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(1)
|
Fiscal
year 2021 revenues were significantly higher compared to prior year, except for the first quarter, which was still affected by the
lockdowns and social restrictions of the COVID-19 pandemic. Net income attributable to RCIHH stockholders and earnings per share
were heavily impacted by the gain on debt extinguishment ($4.9
million in the first
quarter and $380,000
in the second quarter),
asset impairments totaling $13.6
million ($1.4
million in the second
quarter, $271,000
in the third quarter,
and $11.9
million in the
fourth quarter), and gain on insurance totaling $1.3
million ($197,000
in the first quarter, $12,000 in the second quarter,
and $1.0
million in the
fourth quarter). Quarterly effective income tax
expense (benefit) rate was (4.2)%,
24.3%,
24.4%,
and (210.4)%
from first to fourth
quarter, respectively, including the impact of the release of a $462,000 deferred tax asset valuation allowance in the fourth
quarter.
|
|
|
(2)
|
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.
|
|
|
(3)
|
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.
|
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
17.
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 reportable segments (in thousands):
Schedule of Segment Reporting Information
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenues (from external customers)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
137,348
|
|
|
$
|
88,373
|
|
|
$
|
148,606
|
|
Bombshells
|
|
|
56,621
|
|
|
|
43,215
|
|
|
|
30,828
|
|
Other
|
|
|
1,289
|
|
|
|
739
|
|
|
|
1,625
|
|
|
|
$
|
195,258
|
|
|
$
|
132,327
|
|
|
$
|
181,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
43,815
|
|
|
$
|
13,056
|
|
|
$
|
50,724
|
|
Bombshells
|
|
|
13,264
|
|
|
|
9,237
|
|
|
|
2,307
|
|
Other
|
|
|
35
|
|
|
|
(614
|
)
|
|
|
(309
|
)
|
General corporate
|
|
|
(18,566
|
)
|
|
|
(18,933
|
)
|
|
|
(18,021
|
)
|
|
|
$
|
38,548
|
|
|
$
|
2,746
|
|
|
$
|
34,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
6,890
|
|
|
$
|
3,477
|
|
|
$
|
6,645
|
|
Bombshells
|
|
|
5,895
|
|
|
|
2,114
|
|
|
|
10,457
|
|
Other
|
|
|
157
|
|
|
|
-
|
|
|
|
27
|
|
General corporate
|
|
|
569
|
|
|
|
145
|
|
|
|
3,579
|
|
|
|
$
|
13,511
|
|
|
$
|
5,736
|
|
|
$
|
20,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
5,494
|
|
|
$
|
5,799
|
|
|
$
|
6,401
|
|
Bombshells
|
|
|
1,824
|
|
|
|
1,785
|
|
|
|
1,374
|
|
Other
|
|
|
87
|
|
|
|
415
|
|
|
|
416
|
|
General corporate
|
|
|
833
|
|
|
|
837
|
|
|
|
881
|
|
|
|
$
|
8,238
|
|
|
$
|
8,836
|
|
|
$
|
9,072
|
|
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
280,561
|
|
|
$
|
277,960
|
|
|
$
|
274,071
|
|
Bombshells
|
|
|
52,073
|
|
|
|
48,991
|
|
|
|
44,144
|
|
Other
|
|
|
1,573
|
|
|
|
1,269
|
|
|
|
1,773
|
|
General corporate
|
|
|
30,412
|
|
|
|
32,713
|
|
|
|
34,768
|
|
|
|
$
|
364,619
|
|
|
$
|
360,933
|
|
|
$
|
354,756
|
|
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $11.5 million, $11.1 million,
and $10.0 million for 2021, 2020, and 2019, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to
$141,000, $70,000, and $140,000 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
18.
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, 2021 and 2020 was $99.7 million and $83.8 million, respectively.
Included
in the $2.35 million
borrowing on November 1, 2018 (see Note 9) were notes borrowed from related parties—one note for $500,000
(Ed Anakar, an employee of the Company and brother
of our former 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 this related party note are the same as the rest of the lender group in the
November 1, 2018 transaction. These notes were paid off in relation to the September 2021 Refinancing Note (see Note 9). Included
in the $17.0 million borrowing on October 12, 2021 (see Note 9) are notes borrowed from related parties—one note for $500,000 (Ed
Anakar, see above) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the
notes are the same as the rest of the lender group.
We
used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture
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 $118,000 in fiscal 2021, $59,000 in fiscal 2020, and $134,000 in fiscal 2019. As of September
30, 2021 and 2020, we owed Nottingham Creations and Sherwood Forest $12,205 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, 2020, and 2019. A son-in-law of Eric Langan owns a 50%
interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were approximately $0,
$19,000,
and $452,000
for the fiscal years 2021, 2020, and 2019, respectively.
Amounts billed directly to the Company were approximately $425,000,
$62,000,
and $47,000
for the fiscal years 2021, 2020, and 2019, respectively.
As of September 30, 2021 and 2020, the Company owed TW Mechanical approximately $7,500
and $5,700,
respectively, in unpaid direct billings.
19.
Leases
ASC
840 (Related to Fiscal 2019)
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 5) were lease payments for a house that the Company’s CEO
rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $19,500
and $78,000 for the years ended September 30, 2020 and 2019, 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 for the year ended September 30, 2019.
ASC
842 (Related to Fiscal 2021 and 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.
Future
maturities of ASC 842 lease liabilities as of September 30, 2021 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
October 2021 - September 2022
|
|
$
|
1,780
|
|
|
$
|
1,516
|
|
|
$
|
3,296
|
|
October 2022 - September 2023
|
|
|
1,764
|
|
|
|
1,409
|
|
|
|
3,173
|
|
October 2023 - September 2024
|
|
|
1,877
|
|
|
|
1,300
|
|
|
|
3,177
|
|
October 2024 - September 2025
|
|
|
2,062
|
|
|
|
1,183
|
|
|
|
3,245
|
|
October 2025 - September 2026
|
|
|
2,251
|
|
|
|
1,053
|
|
|
|
3,304
|
|
Thereafter
|
|
|
16,196
|
|
|
|
4,375
|
|
|
|
20,571
|
|
|
|
$
|
25,930
|
|
|
$
|
10,836
|
|
|
$
|
36,766
|
|
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, 2021 and 2020 as follows (in thousands):
Schedule of Lease Expense
|
|
Year
Ended
September
30, 2021
|
|
|
Year
Ended
September
30, 2020
|
|
Operating lease expense – fixed payments
|
|
$
|
3,325
|
|
|
$
|
3,244
|
|
Variable lease expense
|
|
|
349
|
|
|
|
381
|
|
Short-term equipment and other lease expense (includes $298 and $315 recorded in advertising and marketing for fiscal 2021 and 2020, respectively, and $397 and $372 recorded in repairs and maintenance, respectively; see Note 5)
|
|
|
955
|
|
|
|
1,122
|
|
Sublease income
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Total lease expense, net
|
|
$
|
4,623
|
|
|
$
|
4,738
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
4,522
|
|
|
$
|
4,562
|
|
Weighted average remaining lease term
|
|
|
12 years
|
|
|
|
13 years
|
|
Weighted average discount rate
|
|
|
6.0
|
%
|
|
|
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.
We
recorded impairment charges of operating lease right-of-use assets amounting to $0, $104,000, and $0 during fiscal years 2021, 2020,
and 2019, respectively.