NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,”
“we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form
10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September
30, 2021 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by
GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated
financial statements for the year ended September 30, 2021 included in the Company’s Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission on December 14, 2021. The interim unaudited condensed consolidated financial statements should
be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments
considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made.
Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for
the year ending September 30, 2022.
Certain reclassifications of cost of goods sold
components with immaterial amounts have been made to prior period’s financial statements to conform to the current period financial
statement presentation. There is no impact in total cost of goods sold, results of operations, and cash flows in all periods presented.
2.
Recent Accounting Standards and Pronouncements
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
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 adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our 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 are still evaluating the impact of this ASU but we do not expect it to have a material impact
on our consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
Ongoing Impact of COVID-19 Pandemic
Since the U.S. declaration of the COVID-19
pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly
impact our cash flow. The pandemic 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 Note 9.
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 the future
assumed impact of the COVID-19 pandemic on sales. Based on the evaluation we conducted during the interim period ended December
31, 2021, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of December
31, 2021.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
Acquisitions and Dispositions
On
October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $3.0
million for $3.2
million, of which $2.7
million was in the form of a secured promissory
note. This 7%
note receivable has a term of eight years and is collectible in equal monthly installments of $21,544
in principal and interest with the remaining
balance to be paid at maturity.
On
October 8, 2021, the Company sold one of its clubs in South Houston for $300,000.
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, with interest rates
on promissory notes reflective of market yields). The acquisition was structured by entering into nine asset purchase
agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in
that business except certain excluded assets, and two stock purchase agreements, where a newly formed subsidiary purchased 100%
of the capital stock of two club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into
a real estate purchase and sale agreement for six real estate properties and an intellectual property purchase agreement for
substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the
sellers. 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 7), and 500,000 shares
of our common stock. The preliminary fair value of the consideration transferred is as follows (in thousands):
Schedule
of Preliminary Fair Value of Consideration
|
|
|
|
|
Cash
|
|
$
|
36,800
|
|
Notes payable
|
|
|
21,200
|
|
Common stock
|
|
|
30,362
|
|
Total consideration fair value
|
|
$
|
88,362
|
|
We
recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in
our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired
in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets
are
provisional pending receipt of the final valuations for those assets. Based on the allocation of the preliminary fair
value of the acquisition price and subject to any working capital adjustments, the amount of goodwill is estimated to be $13.8 million.
Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable
intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired
entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $9.3 million
of the recognized goodwill will be deductible for tax purposes. The following is our preliminary allocation of the fair value of the
acquisition price (in thousands) as of October 18, 2021:
Schedule of Allocation of Fair Values Assigned to Assets at Acquisition
|
|
|
|
|
Current
assets
|
|
$
|
386
|
|
Property
and equipment
|
|
|
19,534
|
|
Licenses
|
|
|
50,080
|
|
Trademarks
|
|
|
7,460
|
|
Deferred tax liability
|
|
|
(2,903
|
)
|
Total
net assets acquired
|
|
|
74,557
|
|
Goodwill
|
|
|
13,805
|
|
Acquisition
price fair value
|
|
$
|
88,362
|
|
Licenses
and trademarks will not be amortized but will be tested at least annually for impairment.
The Company entered into leases with third parties
for certain clubs where the real estate were not part of the acquisition. See Note 13.
In
connection with the acquisition, we incurred acquisition-related expenses of approximately $417,000 ($173,000 recognized in fiscal
2021 and $244,000 recognized in fiscal 2022), of which $0
was expensed in the first quarter of
2021 and $244,000 was expensed in the first quarter of 2022, and in those periods included in selling, general and
administrative expenses in our consolidated statements of income.
From
the date of acquisition until December 31, 2021, the eleven acquired clubs contributed revenues
of $6.0 million and income from operations of $1.7 million, which are included in our unaudited
condensed consolidated statement of income. 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 amounts and number of shares):
Schedule of Unaudited Pro Forma Combined Results of Operations
|
|
2021
|
|
|
2020
|
|
|
|
For
the Three Months
|
|
|
|
Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Pro forma
revenues
|
|
$
|
63,562
|
|
|
$
|
43,384
|
|
Pro
forma net income attributable to RCIHH common stockholders
|
|
$
|
9,992
|
|
|
$
|
9,892
|
|
Pro
forma earnings per share – basic and diluted
|
|
$
|
1.05
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted
average number of common shares outstanding
|
|
|
9,499,910
|
|
|
|
9,519,088
|
|
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 final valuation
of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary 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 the impact of acquisition-related expenses and
interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were
incurred as of the first day of fiscal 2021. 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.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary 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 $3.5 million
acquisition price is preliminarily allocated $2.0 million
to real estate, $200,000 to
tangible assets, and $1.3 million
to goodwill, which is deductible for tax purposes.
The note is payable $13,669 per
month, including principal and interest. See Note 7. From the date of acquisition until December 31, 2021, the acquired club
contributed revenues of $289,000 and
income from operations of $4,000,
which are included in our unaudited condensed consolidated statement of income. The
Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the
consolidated operations of the Company.
On
December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased,
for $7.0 million
in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating
lease liability related to the discontinued lease.
5.
Revenues
The
Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale
upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied
contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a
net basis in the accompanying unaudited condensed consolidated statements of income. 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. See Note 13.
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):
Schedule of Disaggregation of Segment Revenues
|
|
Three
Months Ended December 31, 2021
|
|
|
Three
Months Ended December 31, 2020
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales
of alcoholic beverages
|
|
$
|
18,167
|
|
|
$
|
8,264
|
|
|
$
|
-
|
|
|
$
|
26,431
|
|
|
$
|
9,634
|
|
|
$
|
7,726
|
|
|
$
|
-
|
|
|
$
|
17,360
|
|
Sales
of food and merchandise
|
|
|
4,589
|
|
|
|
6,305
|
|
|
|
-
|
|
|
|
10,894
|
|
|
|
3,423
|
|
|
|
5,186
|
|
|
|
-
|
|
|
|
8,609
|
|
Service
revenues
|
|
|
20,684
|
|
|
|
192
|
|
|
|
-
|
|
|
|
20,876
|
|
|
|
9,998
|
|
|
|
62
|
|
|
|
-
|
|
|
|
10,060
|
|
Other
revenues
|
|
|
3,341
|
|
|
|
10
|
|
|
|
284
|
|
|
|
3,635
|
|
|
|
2,142
|
|
|
|
32
|
|
|
|
195
|
|
|
|
2,369
|
|
|
|
$
|
46,781
|
|
|
$
|
14,771
|
|
|
$
|
284
|
|
|
$
|
61,836
|
|
|
$
|
25,197
|
|
|
$
|
13,006
|
|
|
$
|
195
|
|
|
$
|
38,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
at a point in time
|
|
$
|
46,344
|
|
|
$
|
14,770
|
|
|
$
|
283
|
|
|
$
|
61,397
|
|
|
$
|
24,835
|
|
|
$
|
13,006
|
|
|
$
|
193
|
|
|
$
|
38,034
|
|
Recognized
over time
|
|
|
437
|
*
|
|
|
1
|
|
|
|
1
|
|
|
|
439
|
|
|
|
362
|
*
|
|
|
-
|
|
|
|
2
|
|
|
|
364
|
|
|
|
$
|
46,781
|
|
|
$
|
14,771
|
|
|
$
|
284
|
|
|
$
|
61,836
|
|
|
$
|
25,197
|
|
|
$
|
13,006
|
|
|
$
|
195
|
|
|
$
|
38,398
|
|
*
|
Lease
revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606.
|
The
Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services
transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation
of contract liabilities with customers is presented below (in thousands):
Schedule of Reconciliation of Contract Liabilities with Customers
|
|
Balance
at
September
30, 2021
|
|
|
Consideration
Received
|
|
|
Recognized
in
Revenue
|
|
|
Balance
at
December
31,
2021
|
|
Ad
revenue
|
|
$
|
84
|
|
|
$
|
280
|
|
|
$
|
(167
|
)
|
|
$
|
197
|
|
Expo
revenue
|
|
|
151
|
|
|
|
116
|
|
|
|
-
|
|
|
|
267
|
|
Other
(including franchise fees)
|
|
|
119
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
99
|
|
|
|
$
|
354
|
|
|
$
|
396
|
|
|
$
|
(187
|
)
|
|
$
|
563
|
|
Contract
liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets
(see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed
consolidated statements of income.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
|
|
December
31, 2021
|
|
|
September
30, 2021
|
|
Credit
card receivables
|
|
$
|
2,300
|
|
|
$
|
1,447
|
|
Income
tax refundable
|
|
|
1,542
|
|
|
|
4,472
|
|
Insurance
receivable
|
|
|
-
|
|
|
|
185
|
|
ATM
in-transit
|
|
|
684
|
|
|
|
277
|
|
Other
(net of allowance for doubtful accounts of $414 and $382, respectively)
|
|
|
1,486
|
|
|
|
1,189
|
|
Total
accounts receivable, net
|
|
$
|
6,012
|
|
|
$
|
7,570
|
|
Notes
receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets
with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes
amounting to $118,000 and $102,000 as of December 31, 2021 and September 30, 2021, respectively.
The
components of prepaid expenses and other current assets are as follows (in thousands):
Schedule of Components of Prepaid Expenses and Other Current Assets
|
|
December
31, 2021
|
|
|
September
30, 2021
|
|
Prepaid
insurance
|
|
$
|
6,835
|
|
|
$
|
277
|
|
Prepaid
legal
|
|
|
37
|
|
|
|
112
|
|
Prepaid
taxes and licenses
|
|
|
216
|
|
|
|
380
|
|
Prepaid
rent
|
|
|
251
|
|
|
|
309
|
|
Other
|
|
|
906
|
|
|
|
850
|
|
Total
prepaid expenses and other current assets
|
|
$
|
8,245
|
|
|
$
|
1,928
|
|
A reconciliation of goodwill as of December 31,
2021 and September 30, 2021 is as follows (in thousands):
Schedule
of Reconciliation of Goodwill
|
|
Gross
|
|
|
Accumulated Impairment
|
|
|
Net
|
|
Balance at September 30, 2021
|
|
$
|
59,967
|
|
|
$
|
20,588
|
|
|
$
|
39,379
|
|
Acquisitions
|
|
|
15,105
|
|
|
|
-
|
|
|
|
15,105
|
|
Balance at December 31, 2021
|
|
$
|
75,072
|
|
|
$
|
20,588
|
|
|
$
|
54,484
|
|
The
components of intangible assets, net are as follows (in thousands):
Schedule
of Components of Intangible Assets
|
|
December
31, 2021
|
|
|
September
30, 2021
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
115,266
|
|
|
$
|
65,186
|
|
Trademarks
|
|
|
9,675
|
|
|
|
2,215
|
|
Domain
names
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
Noncompete
agreements
|
|
|
137
|
|
|
|
182
|
|
Discounted
leases
|
|
|
84
|
|
|
|
86
|
|
Software
|
|
|
129
|
|
|
|
132
|
|
Total
intangible assets, net
|
|
$
|
125,314
|
|
|
$
|
67,824
|
|
The
components of accrued liabilities are as follows (in thousands):
Schedule of Accrued Liabilities
|
|
December
31, 2021
|
|
|
September
30, 2021
|
|
Insurance
|
|
$
|
6,785
|
|
|
$
|
54
|
|
Sales
and liquor taxes
|
|
|
2,255
|
|
|
|
2,261
|
|
Payroll
and related costs
|
|
|
3,887
|
|
|
|
3,220
|
|
Property
taxes
|
|
|
2,506
|
|
|
|
2,178
|
|
Interest
|
|
|
366
|
|
|
|
145
|
|
Patron
tax
|
|
|
455
|
|
|
|
452
|
|
Unearned
revenues
|
|
|
563
|
|
|
|
354
|
|
Lawsuit
settlement
|
|
|
245
|
|
|
|
378
|
|
Other
|
|
|
1,351
|
|
|
|
1,361
|
|
Total
accrued liabilities
|
|
$
|
18,413
|
|
|
$
|
10,403
|
|
The
components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
|
|
2021
|
|
|
2020
|
|
|
|
For
the Three Months
|
|
|
|
Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Taxes
and permits
|
|
$
|
2,236
|
|
|
$
|
2,028
|
|
Advertising
and marketing
|
|
|
2,383
|
|
|
|
1,189
|
|
Supplies
and services
|
|
|
1,980
|
|
|
|
1,228
|
|
Insurance
|
|
|
2,395
|
|
|
|
1,457
|
|
Legal
|
|
|
1,060
|
|
|
|
861
|
|
Lease
|
|
|
1,640
|
|
|
|
977
|
|
Charge
card fees
|
|
|
1,331
|
|
|
|
564
|
|
Utilities
|
|
|
935
|
|
|
|
713
|
|
Security
|
|
|
1,087
|
|
|
|
860
|
|
Accounting
and professional fees
|
|
|
1,346
|
|
|
|
715
|
|
Repairs
and maintenance
|
|
|
725
|
|
|
|
573
|
|
Other
|
|
|
1,368
|
|
|
|
987
|
|
Total
selling, general and administrative expenses
|
|
$
|
18,486
|
|
|
$
|
12,152
|
|
The
components of non-operating gains (losses), net are as follows:
Components of Non-Operating Gains (Losses), Net
|
|
2021
|
|
|
2020
|
|
|
|
For
the Three Months
|
|
|
|
Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Gain
on debt extinguishment
|
|
$
|
85
|
|
|
$
|
4,949
|
|
Unrealized
loss on equity securities
|
|
|
(1
|
)
|
|
|
(33
|
)
|
Non-operating
gains, net
|
|
$
|
84
|
|
|
$
|
4,916
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
Debt
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 12) 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.
On
October 18, 2021, in relation to an acquisition (see Note 4), the Company executed four seller-financed promissory notes. The first promissory
note was a 10-year
$11.0
million 6%
secured 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%
secured 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.
On
November 8, 2021, in relation to an acquisition (see Note 4), 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.
Future
maturities of long-term debt as of December 31, 2021 are as follows: $9.2
million, $7.4
million, $22.7
million, $7.1
million, $7.5
million and $109.6
million for the twelve months ending December
31, 2022, 2023, 2024, 2025, 2026, and thereafter, respectively. Of the maturity schedule mentioned above, $0,
$651,000,
$15.6
million, $0,
$0
and $63.1
million, respectively, relate to scheduled
balloon payments. Unamortized debt discount and issuance costs amounted to $1.6
million and $1.6
million as of December 31, 2021 and September
30, 2021, respectively.
On
January 25, 2022, the Company borrowed $18.7 million
from a bank lender for working capital purposes by executing a 10-year
promissory note with an initial interest rate of 5.25%
per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98%
with a floor of 5.25%.
The note is payable in monthly payments of $126,265 in
principal and interest to be adjusted after five years. The promissory note is secured by eleven real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 12).
After the 10-year
term, the remaining balance of principal and interest are payable at maturity date. There
are certain financial covenants with which the Company is to be in compliance related to this loan, among which is to maintain a
debt service coverage of not less than 1.4 times, reviewed annually.
8.
Equity
During
the quarters ended December 31, 2021 and 2020, the Company purchased and retired 0
and 74,659
common shares at a cost of approximately $0
and $1.8
million, respectively. The Company paid a $0.04
and $0.04
per share cash dividend during the quarters
ended December 31, 2021 and 2020 totaling approximately $380,000
and $360,000,
respectively.
On
October 18, 2021, we partially paid for an acquisition using 500,000
shares of our common stock with a fair value
of $30.4 million at issuance. See Note 4.
On February 7, 2022, our board of directors approved
the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan is subject to approval of
shareholders, and in the event that the 2022 Plan is not approved by the shareholders within one year of the date of adoption of the
2022 Plan by the board, or less than the required amount of votes of shareholders are received in favor of approval of the 2022 Plan
at a duly held meeting of shareholders within one year of the board’s adoption of the 2022 Plan, then we will unwind and terminate
the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled. The 2022 Plan provides that the maximum
aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000. The options granted
under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation
committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish
the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less
than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable
under the 2022 Plan.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Income Taxes
Income
taxes were an expense of $2.9
million during the quarter ended December 31, 2021 compared
to a benefit of $384,000 during
the quarter ended December 31, 2020. The effective income tax rate was an expense of 21.7%
and a benefit of 4.2%
for the quarters ended December 31, 2021 and 2020, respectively. Our effective tax rate is affected by state taxes, permanent
differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance
and the impact of the forgiveness of the PPP loans in the prior period, as presented below.
Schedule of Effective Income Tax Rate Reconciliation
|
|
2021
|
|
|
2020
|
|
|
|
For
the Three Months
|
|
|
|
Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Federal
statutory income tax expense/benefit
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
2.9
|
%
|
|
|
3.3
|
%
|
Permanent
differences
|
|
|
0.4
|
%
|
|
|
(8.2
|
)%
|
Change
in valuation allowance
|
|
|
-
|
|
|
|
(14.0
|
)%
|
Tax
credits
|
|
|
(2.0
|
)%
|
|
|
(6.3
|
)%
|
Other
|
|
|
(0.6
|
)%
|
|
|
-
|
|
Total
income tax expense (benefit)
|
|
|
21.7
|
%
|
|
|
(4.2
|
)%
|
The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s
federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service with
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 submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants,
shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate
amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult
nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount
for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses
as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications.
During 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.
10.
Commitments and Contingencies
Legal
Matters
Texas
Patron Tax
In
2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers.
To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest,
over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly
basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted the $10.0 million at an imputed
interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an
$8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount
previously accrued for the tax.
In
March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue
of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed
by 60 equal monthly installments of $8,200 without interest.
The
aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets, amounted
to $398,000 and $813,000 as of December 31, 2021 and September 30, 2021, respectively.
A
declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative
rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to
expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule
was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the
administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District
Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied
and enforced by the Comptroller. The State of Texas has filed an appeal. We will continue to vigorously defend the matter through the
appeals process.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indemnity
Insurance Corporation
As
previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,
RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.
On
November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation
Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance
Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation
Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets
as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.
On
April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation
Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The
Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on
January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a
result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained
counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement
from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline
and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time
what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general
liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of December
31, 2021, we have 1 remaining unresolved claim out of the original 71 claims.
Shareholder
Class and Derivative Actions
In May and June 2019, three putative securities
class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District of Texas,
Houston Division. The complaints alleged 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 sought unspecified damages, costs, and attorneys’
fees. These lawsuits were 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 added 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. On December 22, 2021, an amended scheduling order was entered,
extending the trial date to April 7, 2023 and extending all other case deadlines. The Company vigorously defended against this action.
In January 2022, the parties engaged in settlement discussions beginning with a formal mediation on January 13, 2022, which resulted
in an agreement-in-principle to resolve the matter. The parties are in the process of negotiating a long-form settlement agreement, subject
to preliminary and final court approval. On January 24, 2022, a Joint Notice of Settlement was filed, informing the District Court of
the agreement-in-principle and the anticipation of executing a formal stipulation of settlement within 30 calendar days.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 21, 2022, Shiva Stein and Kevin McCarty
filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura
Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx,
and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v.
Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate
information, alleged failure to maintain internal controls, and alleged failure to properly manage company property. This action is in
its preliminary phase, and a potential loss cannot yet be estimated. These allegations are substantively similar to claims asserted in
the class action and a prior derivative action that was dismissed in June of 2021. RCI intends to vigorously defend against the action.
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.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services
(Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured
Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix
was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict
in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share
of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed
a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In
September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November
15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new
trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.
As
set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard is
to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are
deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers.
Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent
contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the
clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant
law and are defended vigorously.
General
In
the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation
and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur
liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles,
as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain
cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information
to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability,
we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.
Settlements
of lawsuits for the quarters ended December 31, 2021 and 2020 amount to approximately $192,000
and $152,000,
respectively. As of December 31, 2021 and September 30, 2021, the Company has accrued $245,000
and $378,000
in accrued liabilities, respectively, related
to settlement of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
Segment Information
The
Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management
responsibility and the nature of the Company’s products, services and costs. There are no major distinctions in geographical areas
served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment
assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions
that are not significant to the consolidated financial statements.
Below
is the financial information related to the Company’s segments (in thousands):
Schedule of Segment Reporting Information
|
|
2021
|
|
|
2020
|
|
|
|
For
the Three Months
|
|
|
|
Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues
(from external customers)
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
46,781
|
|
|
$
|
25,197
|
|
Bombshells
|
|
|
14,771
|
|
|
|
13,006
|
|
Other
|
|
|
284
|
|
|
|
195
|
|
Total
Revenues
|
|
$
|
61,836
|
|
|
$
|
38,398
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
18,736
|
|
|
$
|
8,495
|
|
Bombshells
|
|
|
2,802
|
|
|
|
2,717
|
|
Other
|
|
|
(43
|
)
|
|
|
(75
|
)
|
General
corporate
|
|
|
(5,584
|
)
|
|
|
(4,554
|
)
|
Total
Income (loss) from operations
|
|
$
|
15,911
|
|
|
$
|
6,583
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,547
|
|
|
$
|
1,324
|
|
Bombshells
|
|
|
429
|
|
|
|
457
|
|
Other
|
|
|
6
|
|
|
|
36
|
|
General
corporate
|
|
|
212
|
|
|
|
206
|
|
Total
Depreciation and amortization
|
|
$
|
2,194
|
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
9,228
|
|
|
$
|
1,130
|
|
Bombshells
|
|
|
304
|
|
|
|
151
|
|
Other
|
|
|
189
|
|
|
|
3
|
|
General
corporate
|
|
|
129
|
|
|
|
5
|
|
Total
Capital expenditures
|
|
$
|
9,850
|
|
|
$
|
1,289
|
|
|
|
December
31, 2021
|
|
|
September
30, 2021
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
377,611
|
|
|
$
|
280,561
|
|
Bombshells
|
|
|
52,385
|
|
|
|
52,073
|
|
Other
|
|
|
2,059
|
|
|
|
1,573
|
|
General
corporate
|
|
|
33,623
|
|
|
|
30,412
|
|
Total assets
|
|
$
|
465,678
|
|
|
$
|
364,619
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the quarter ended December
31, 2021 amounting to $3.2 million and $168,000, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting
to $69,000. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the
quarter ended December 31, 2020 amounting to $2.8 million and $110,000, respectively, and intercompany sales of Robust Energy Drink of
Other segment amounting to $26,000. These intercompany revenue amounts are eliminated upon consolidation.
General
corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information
technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile
and travel costs. Management considers these to be non-allocable costs for segment purposes.
Certain
real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment
projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.
12.
Related Party Transactions
Presently,
our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives
no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of
debt discount and issuance costs, as of December 31, 2021 and September 30, 2021, was $98.5 million and $99.7 million, respectively.
Included
in the $17.0 million borrowing on October 12, 2021 (see Note 7) are 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 $150,000 (from a brother
of Company CFO, Bradley Chhay) 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 $24,037 and $0 during the three months ended December 31, 2021 and 2020, respectively. As of December 31, 2021
and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $0 and $12,205, 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 2022 and 2021. 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 $0
and $0
for the three months ended December 31, 2021
and 2020, respectively. Amounts billed directly to the Company were $80,996
and $7,130
for the three months ended December 31, 2021
and 2020, respectively. As of December 31, 2021 and September 30, 2021, the Company owed TW Mechanical $752
and $7,500,
respectively, in unpaid direct billings.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13.
Leases
The
Company leases certain facilities and equipment under operating leases. In relation to an acquisition that was completed on October
18, 2021 (see Note 4), the Company entered into leases with third parties for certain clubs where the real estate locations were not
part of the acquisition.
Total
lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income
for the three months ended December 31, 2021 and 2020 is as follows (in thousands):
Schedule of Lease Expense
|
|
Three
Months Ended
December
31, 2021
|
|
|
Three
Months Ended
December
31, 2020
|
|
Operating lease expense – fixed payments
|
|
$
|
1,131
|
|
|
$
|
-
|
|
Variable
lease expense
|
|
|
334
|
|
|
|
64
|
|
Short-term
equipment and other lease expense (includes $72
and $57
recorded in advertising and marketing, and $83
and $88
recorded in repairs and maintenance for the three months ended
December 31, 2021 and 2020, respectively; see Note 6)
|
|
|
330
|
|
|
|
229
|
|
Sublease
income
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Total
lease expense, net
|
|
$
|
1,793
|
|
|
$
|
1,120
|
|
|
|
|
|
|
|
|
|
|
Other
information:
|
|
|
|
|
|
|
|
|
Operating
cash outflows from operating leases
|
|
$
|
1,749
|
|
|
$
|
1,091
|
|
Weighted average
remaining lease term – operating leases
|
|
|
12.4
years
|
|
|
|
12
years
|
|
Weighted average
discount rate – operating leases
|
|
|
5.7
|
%
|
|
|
6.1
|
%
|
Future
maturities of operating lease liabilities as of December 31, 2021 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
|
|
Principal
Payments
|
|
|
Interest
Payments
|
|
|
Total
Payments
|
|
January - December 2022
|
|
$
|
2,288
|
|
|
$
|
2,058
|
|
|
$
|
4,346
|
|
January - December 2023
|
|
|
2,291
|
|
|
|
1,927
|
|
|
|
4,218
|
|
January - December 2024
|
|
|
2,475
|
|
|
|
1,790
|
|
|
|
4,265
|
|
January - December 2025
|
|
|
2,702
|
|
|
|
1,641
|
|
|
|
4,343
|
|
January - December 2026
|
|
|
2,915
|
|
|
|
1,480
|
|
|
|
4,395
|
|
Thereafter
|
|
|
24,771
|
|
|
|
6,247
|
|
|
|
31,018
|
|
Future maturities of lease liabilities
|
|
$
|
37,442
|
|
|
$
|
15,143
|
|
|
$
|
52,585
|
|