NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements 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, 2017 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, 2017 included
in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 14, 2018.
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 presentation
of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three
and nine months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending September
30, 2018.
2.
Recent Accounting Standards and Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes nearly all existing revenue
recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods
or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates
may be required within the revenue recognition process than are required under existing GAAP. The standard’s effective date
has been deferred by the issuance of ASU No. 2015-14, and is effective for annual periods beginning after December 15, 2017, and
interim periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). Early application is permitted but not before December 15, 2016, the ASU’s
original effective date. The Company is still evaluating the impact of the standard, including all its applicable amendments and
technical corrections issued by the FASB, and which transition method it is going to use upon adoption.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This ASU does
not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost. This ASU eliminates
from U.S. GAAP the requirement to measure inventory at the lower of cost or market. Market under the previous requirement could
be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Entities within
scope of this update will now be required to measure inventory at the lower of cost or net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The amendments
in this update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted, and should be
applied prospectively. The Company adopted ASU 2015-11 as of October 1, 2017, which did not have an impact on its consolidated
financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
, on accounting for leases, which requires lessees to recognize most leases on their balance
sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount,
timing, and uncertainty of cash flows arising from leases, and will be effective for interim and annual periods beginning after
December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. We expect
our consolidated balance sheets to be materially impacted upon adoption due to the recognition of right-of-use assets and lease
liabilities related to currently classified operating leases. While we anticipate changes in the classification of expenses
in our income statement and the timing of recognition of these expenses, we are still evaluating the materiality of the implementation
of this standard.
In
January 2017, the FASB issued ASU No. 2017-01,
Business Combination (Topic 805): Clarifying the Definition of a Business
.
According to the guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset
(or a group of similar assets), the assets acquired would not represent a business. If met, this initial screen eliminates the
need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process
that together significantly contribute to the ability to create outputs. ASU 2017-01 provides a framework to evaluate when an
input and a substantive process are present. To be a business without outputs, there will now need to be an organized workforce.
The FASB noted that outputs are a key element of a business and included more stringent criteria for aggregated sets of assets
and activities without outputs. Finally, the guidance narrows the definition of the term “outputs” to be consistent
with how it is described in Topic 606,
Revenue from Contracts with Customers
(or ASU 2014-09). Under the final definition,
an output is the result of inputs and substantive processes that provide goods and services to customers, other revenue, or investment
income, such as dividends and interest. The standard is effective for fiscal years beginning after December 15, 2017, with early
adoption permitted. The amendments can be applied to transactions occurring before the guidance was issued as long as the applicable
financial statements have not been issued. We have early adopted ASU 2017-01 as of October 1, 2017, and will apply its amendments
to future transactions.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
.
The amendments of this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all
of the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately
before the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original
award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability
instrument is the same as the classification of the original award immediately before the modification. The current disclosure
requirements in Topic 718 are not changed. The amendments in this ASU are effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Since March 31, 2017, we
do not have any stock-based compensation awards outstanding. We have early adopted ASU 2017-09 as of October 1, 2017, and will
apply its provisions to future stock compensation awards and transactions.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
Selected Account Information
The
components of accrued liabilities are as follows (in thousands):
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Payroll and related costs
|
|
$
|
1,928
|
|
|
$
|
1,889
|
|
Insurance
|
|
|
760
|
|
|
|
3,160
|
|
Income taxes
|
|
|
2,046
|
|
|
|
549
|
|
Sales and liquor taxes
|
|
|
968
|
|
|
|
990
|
|
Patron tax
|
|
|
514
|
|
|
|
801
|
|
Unearned revenues
|
|
|
770
|
|
|
|
196
|
|
Property taxes
|
|
|
1,037
|
|
|
|
1,270
|
|
Lawsuit settlement
|
|
|
962
|
|
|
|
295
|
|
Other
|
|
|
1,458
|
|
|
|
2,374
|
|
|
|
$
|
10,443
|
|
|
$
|
11,524
|
|
The
components of selling, general and administrative expenses are as follows (in thousands):
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Taxes and permits
|
|
$
|
2,372
|
|
|
$
|
1,888
|
|
|
$
|
6,543
|
|
|
$
|
6,017
|
|
Advertising and marketing
|
|
|
1,861
|
|
|
|
1,708
|
|
|
|
5,663
|
|
|
|
4,720
|
|
Insurance
|
|
|
1,409
|
|
|
|
991
|
|
|
|
4,036
|
|
|
|
2,878
|
|
Supplies and services
|
|
|
1,352
|
|
|
|
1,245
|
|
|
|
4,035
|
|
|
|
3,533
|
|
Legal
|
|
|
858
|
|
|
|
744
|
|
|
|
2,244
|
|
|
|
2,156
|
|
Rent
|
|
|
944
|
|
|
|
859
|
|
|
|
2,841
|
|
|
|
2,299
|
|
Charge card fees
|
|
|
813
|
|
|
|
840
|
|
|
|
2,484
|
|
|
|
2,027
|
|
Utilities
|
|
|
731
|
|
|
|
695
|
|
|
|
2,164
|
|
|
|
2,021
|
|
Accounting and professional fees
|
|
|
718
|
|
|
|
545
|
|
|
|
2,274
|
|
|
|
1,602
|
|
Security
|
|
|
652
|
|
|
|
557
|
|
|
|
1,922
|
|
|
|
1,610
|
|
Repairs and maintenance
|
|
|
574
|
|
|
|
546
|
|
|
|
1,665
|
|
|
|
1,545
|
|
Other
|
|
|
1,192
|
|
|
|
1,149
|
|
|
|
3,265
|
|
|
|
3,161
|
|
|
|
$
|
13,476
|
|
|
$
|
11,767
|
|
|
$
|
39,136
|
|
|
$
|
33,569
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
Long-Term Debt
Long-term
debt consisted of the following (in thousands):
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
Notes payable at 10-11%, mature August 2022 and December 2024
|
|
$
|
-
|
|
|
$
|
2,358
|
|
Note payable at 7%, matures December 2019
|
|
|
-
|
|
|
|
95
|
|
Notes payable at 5.5%, matures January 2023
|
|
|
1,094
|
|
|
|
1,157
|
|
Notes payable at 5.5%, matures January 2023 and January 2022
|
|
|
-
|
|
|
|
4,510
|
|
Note payable refinanced at 6.25%, matures July 2018
|
|
|
-
|
|
|
|
1,120
|
|
Note payable at 9.5%, matures August 2024
|
|
|
-
|
|
|
|
6,941
|
|
Notes payable at 9.5%, mature September 2024
|
|
|
-
|
|
|
|
6,423
|
|
Notes payable at 5-7%, mature from 2018 to 2028
|
|
|
-
|
|
|
|
1,679
|
|
7.45% note payable, matures January 2019
|
|
|
-
|
|
|
|
2,740
|
|
Non-interest-bearing debt to State of Texas, matures May 2022, interest imputed at 9.6%
|
|
|
4,852
|
|
|
|
5,613
|
|
Note payable at 6.5%, matures January 2020
|
|
|
-
|
|
|
|
4,484
|
|
Note payable at 6%, matures January 2019
|
|
|
-
|
|
|
|
504
|
|
Notes payable at 5.5%, matures May 2020
|
|
|
-
|
|
|
|
5,320
|
|
Note payable at 6%, matures May 2020
|
|
|
-
|
|
|
|
1,037
|
|
Note payable at 5.25%, matures December 2024
|
|
|
-
|
|
|
|
1,777
|
|
Note payable initially at 5.45%, matures July 2020 (amended to December 2027 with refinancing)
|
|
|
10,351
|
|
|
|
10,620
|
|
Note payable at the greater of 2% above prime or 5% (6.25% at September 30, 2017), matures October 2025
|
|
|
-
|
|
|
|
4,303
|
|
Note payable at 5%, matures January 2026
|
|
|
-
|
|
|
|
9,672
|
|
Note payable at 5.25%, matures March 2037
|
|
|
-
|
|
|
|
4,651
|
|
Note payable at 6.25%, matures February 2018
|
|
|
-
|
|
|
|
1,894
|
|
Note payable initially at 5.95%, matures August 2021 (amended to December 2027 with refinancing)
|
|
|
7,729
|
|
|
|
8,267
|
|
Note payable at 12%, matures October 2021
|
|
|
6,385
|
|
|
|
9,671
|
|
Note payable at 4.99%, matures April 2037
|
|
|
919
|
|
|
|
941
|
|
Notes payable at 12%, mature May 2020
|
|
|
5,440
|
|
|
|
5,440
|
|
Note payable at 5%, matures May 2018 (amended to 8% interest rate and May 2019 maturity)
|
|
|
3,025
|
|
|
|
5,000
|
|
Note payable at 8%, matures May 2029
|
|
|
14,677
|
|
|
|
15,291
|
|
Note payable at 5%, matures May 2038
|
|
|
-
|
|
|
|
3,441
|
|
Note payable initially at 5.75%, matures December 2027
|
|
|
60,031
|
|
|
|
-
|
|
Note payable at 5.95%, matures December 2032
|
|
|
6,949
|
|
|
|
-
|
|
Note payable at 5%, matures August 2029
|
|
|
3,478
|
|
|
|
-
|
|
Note payable at 5.25%, matures February 2038
|
|
|
3,000
|
|
|
|
-
|
|
Note payable at 5%, matures April 2020
|
|
|
4,039
|
|
|
|
-
|
|
Note payable at 8%, matures May 2023
|
|
|
986
|
|
|
|
-
|
|
Total debt
|
|
|
132,955
|
|
|
|
124,949
|
|
Less unamortized debt issuance costs
|
|
|
(1,700
|
)
|
|
|
(597
|
)
|
Less current portion
|
|
|
(12,285
|
)
|
|
|
(17,440
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
118,970
|
|
|
$
|
106,912
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.95% 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 note is payable in 15 years with monthly payments of $59,869,
which includes interest.
On
December 14, 2017, the Company entered into a loan agreement (“New Loan”) with a bank for $81.2 million. The New Loan
fully refinances 20 of the Company’s notes payable and partially pays 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 New Loan consists of three promissory notes:
|
(i)
|
The
first note amounts to $62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five years, then
repriced one time at the then current U.S. Treasury rate plus 3.5%, with a floor rate of 5.75%, and payable in monthly installments
of $442,058, based upon a 20-year amortization period, with the balance payable at maturity;
|
|
|
|
|
(ii)
|
The
second note amounts to $10.6 million with a term of 10 years at a 5.45% fixed interest rate until July 2020, after which to
be repriced at a fixed interest rate of 5.75% until the fifth anniversary of this note, and then to be repriced again at the
then interest rate of the first note. This note is 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 is adjusted accordingly based
on the repricing, with the balance payable at maturity; and
|
|
|
|
|
(iii)
|
The
third note amounts to $8.1 million with a term of 10 years at a 5.95% fixed interest rate until August 2021, after which to
be repriced at 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest of the first
note. This note is payable $100,062 monthly for principal and interest until August 2021, based upon a 20-year amortization
period, after which the monthly payment for principal and interest is adjusted accordingly based on the repricing, with the
balance payable at maturity.
|
In
addition to the monthly principal and interest payments as provided above, the Company will pay monthly installments of principal
of $250,000, applied to the first note, until such time as the loan-to-value ratio of the Properties, based upon reduced principal
balance of the New Loan and the then current value of the Properties, is not greater than 65%. The New Loan has eliminated balloon
payments of the Repaid Notes worth $2.9 million originally scheduled in fiscal 2018, $19.4 million originally scheduled in fiscal
2020, and $5.3 million originally scheduled in fiscal 2021.
In
connection with the Repaid Notes, the Company 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.
Included
in the $62.5 million note detailed in (i) above, was $4.6 million that was escrowed at closing and 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.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million with the difference
paid by the Company in cash. The bank note bears interest at 5.25% adjusted after 36 months to prime plus 1% with a floor of 5.2%
and matures on February 15, 2038. The bank note is payable interest-only during the first 18 months, after which monthly payments
of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity.
On
February 20, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over prime with a
5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million. The construction loan agreement
bears an interest rate of prime plus 0.5% with a floor of 5.0% and matures on August 20, 2029. During the first 18 months of the
construction loan, the Company will make monthly interest-only payments, and after such, monthly payments of principal and interest
will be made based on a 20-year amortization with the remaining balance to be paid at maturity. The note had a balance of $3.5
million as of June 30, 2018.
On
April 24, 2018, the Company acquired certain land for future development of a Bombshells in Houston, Texas for $5.5 million, financed
with a bank note for $4.0 million, payable interest only at prime plus 0.5% with a floor of 5% per annum. The note matures in
24 months, by which date the principal is payable in full.
On
May 8, 2018, the Company amended its short-term note payable, with an original principal amount of $5.0 million, related to the
Scarlett’s acquisition. The amendment extended the maturity date of the note, with a remaining balance of $3.0 million as
of the amendment date, from May 8, 2018 to May 8, 2019, and increased its interest rate from 5.0% to 8.0% for the remaining
term of the note.
On
May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest
at 8%. The note matures in three years and is payable in monthly installments of $20,276, including interest, based on a five-year
amortization with the remaining balance to be paid at maturity. See Note 12.
As
of June 30, 2018, the Company is in compliance with all its debt covenants.
5.
Stockholders’ Equity
The
Company paid a $0.03 per share quarterly cash dividend totaling approximately $293,000 and $876,000 for the three and nine months
ended June 30, 2018, respectively.
The
Company paid a $0.03 per share quarterly cash dividend totaling approximately $293,000 and $877,000 for the three and nine months
ended June 30, 2017, respectively. During the three and nine months ended June 30, 2017, the Company purchased and retired 0 and
89,685 common shares at a cost of $0 and $1.1 million, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
Earnings Per Share
Basic
earnings per share (“EPS”) 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 per share reflect the potential dilution
of securities that could share in the earnings 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 EPS 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 (as adjusted for interest expense that would no longer occur if the debentures were converted).
The
table below presents the reconciliation of the numerator and the denominator in the calculation of basic and diluted EPS (in thousands,
except per share amounts):
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH common shareholders - basic
|
|
$
|
5,389
|
|
|
$
|
3,841
|
|
|
$
|
24,385
|
|
|
$
|
10,498
|
|
Adjustment to net income from assumed conversion of debentures(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Adjusted net income attributable to RCIHH common shareholders - diluted
|
|
$
|
5,389
|
|
|
$
|
3,841
|
|
|
$
|
24,385
|
|
|
$
|
10,503
|
|
Denominator(1)(3)-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,735
|
|
Effect of potentially dilutive convertible debentures(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
Adjusted weighted average number of common shares outstanding - diluted
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.55
|
|
|
$
|
0.40
|
|
|
$
|
2.51
|
|
|
$
|
1.08
|
|
Diluted earnings per share
|
|
$
|
0.55
|
|
|
$
|
0.40
|
|
|
$
|
2.51
|
|
|
$
|
1.08
|
|
(1)
|
There
were no outstanding restricted stock, warrants and options during the three and nine months ended June 30, 2018 and 2017.
|
|
|
(2)
|
Convertible
debentures (principal and accrued interest) outstanding at the beginning of the nine months ended June 30, 2017 totaling $859,000
were convertible into common stock at a price of $10.25 and $12.50 per share until January 4, 2017, when the last conversion
option expired in relation to the payment of the last convertible note.
|
|
|
(3)
|
Since
January 4, 2017 to date, the Company has no outstanding convertible debt.
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
Income Taxes
Income
taxes were an expense of $1.8 million and a benefit of $4.9 million for the three and nine months ended June 30, 2018, respectively,
compared to income tax expense of $1.9 million and $5.2 million for the three and nine months ended June 30, 2017, respectively.
The effective income tax rate for the three and nine months ended June 30, 2018 was an expense of 25.3% and a benefit of 25.0%,
respectively, compared with an expense of 32.9% and 33.3% for the three and nine months ended June 30, 2017, respectively. Our
effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both
years while the first quarter of 2018 was significantly impacted by a $9.7 million reduction of our deferred tax liability caused
by the newly enacted Tax Cuts and Jobs Act (the “Tax Act”).
On
December 22, 2017, the Tax Act was enacted into law. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify
policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate
from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company
has a fiscal year end of September 30, the reduced corporate tax rate will result in the application of a blended federal statutory
tax rate for its fiscal year 2018 and then a flat 21% thereafter.
The
Company uses the asset and liability method of accounting for income taxes. Under this 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. At September 30, 2017, the Company’s deferred tax assets and liabilities were determined based on the then-current
enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate under the Tax Act, the Company
initially revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities expected
to be realized in fiscal year 2018 were remeasured using the aforementioned blended rate. All remaining deferred tax assets and
liabilities were re-measured using the new statutory federal rate of 21%. These remeasurements collectively resulted in a discrete
tax benefit of $9.7 million that was recognized during the nine months ended June 30, 2018. The Company’s revaluation of
its deferred tax assets and liabilities is subject to further clarification of the Act and refinements of its estimates. As a
result, the actual impact on the deferred tax assets and liabilities and income tax expense due to the Tax Act may vary from the
amounts estimated.
The
Company or one of its subsidiaries files income tax returns for U.S. federal jurisdiction and various states. The Company is no
longer subject to federal, state and local income tax examinations by tax authorities for years before 2013. The Company’s
federal income tax returns for the fiscal years ended September 30, 2015, 2014 and 2013 were recently examined by the Internal
Revenue Service with no changes.
The
Company accounts for uncertain tax positions pursuant to ASC Topic 740,
Income Taxes
. As of June 30, 2018 and September
30, 2017, the liability for uncertain tax positions totaled approximately $865,000 as of each date, which is included in current
liabilities on our condensed consolidated balance sheets. The Company recognizes interest accrued related to uncertain tax positions
in interest expense and penalties in operating expenses.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
December 22, 2017, the SEC issued Staff Accounting Bulletin No. 18 (“SAB 118”), which provides guidance on accounting
for the tax effects of the Tax Act. In accordance with SAB 118, the Company has made reasonable estimates related to the following
areas impacted by the Tax Act: existing timing differences, reversal of existing timing differences, and accelerated depreciation.
As such, the Company has left the measurement period open as of June 30, 2018.
8.
Commitments and Contingencies
Legal
Matters
New
York Settlement
Filed
in 2009, the case claimed Rick’s Cabaret New York misclassified entertainers as independent contractors. Plaintiffs sought
minimum wage for the hours they danced and return of certain fees. RCI Entertainment (New York), Inc. and Peregrine Enterprises,
Inc. maintained the dancers were properly classified, and alternatively, amounts earned were well in excess of the minimum wage
and should satisfy any obligations.
On
April 1, 2015, we and our subsidiaries, RCI Entertainment (New York), Inc. and Peregrine Enterprises, Inc., entered into an agreement
to settle in full a New York based federal wage and hour class and collective action filed in the United States District Court
for the Southern District of New York. On September 22, 2015, the Court granted final approval of the settlement. Under the terms
of the agreement, Peregrine Enterprises, Inc. was to make up to $15.0 million available to class members and their attorneys.
The actual amount paid was determined based on the number of class members responding by the end of a two-month notice period
which ended on December 4, 2015. Unclaimed checks or payments reverted back to Peregrine at that time. Based on the current schedule,
an initial payment for attorneys’ fees of $1,833,333 was made in October 2015, with two subsequent payments of $1,833,333
each being made in equal annual installments. As part of the settlement, RCIHH was required to guarantee the obligations of RCI
Entertainment (New York), Inc. and Peregrine Enterprises, Inc. under the settlement. As of June 30, 2018, this matter has been
fully settled.
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.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 be filed with the Receiver before the close of business
on January 16, 2015 and that all pending lawsuits involving IIC as the insurer are 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. Currently,
there are several civil lawsuits pending against the Company and its subsidiaries. The Company has retained counsel to defend
against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from
the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline
and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this
time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained
general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that
date. As of June 30, 2018, we have 3 remaining unresolved claims out of the original 71 claims.
General
The
Company has been sued by a landlord in the 33rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),
Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping
center, and by failing to provide the plaintiff with proposed plans before beginning construction. The plaintiff also asserts
RCI Hospitality Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in
the Willowbrook Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook),
Inc. have denied liability and assert that the plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services
(Willowbrook), Inc. asserts that the plaintiff affirmatively represented that the patio could be constructed under the lease and
has filed counter claims and third-party claims against the plaintiff, the plaintiff’s manager, and the plaintiff’s
broker asserting that they committed fraud and that the landlord breached the applicable agreements. It is unknown at this time
whether the resolution of this uncertainty will have a material effect on the Company’s financial condition.
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 alleges that Mr. Panameno injured Mr. Dupray in a traffic accident
after being served alcohol at an establishment operated by JAI Phoenix. The suit alleges JAI Phoenix is 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. The hearing on the appeal was held in June 2018, and JAI Phoenix is now
waiting on the decision. JAI Phoenix believes the lower Court’s assessments of liability and damages are unsupportable
by the facts of the case and the law, and JAI Phoenix will continue to vigorously defend itself. RCI Hospitality Holdings, Inc.
is not a party to the lawsuit. The Company estimates a possible loss in the range of $0 to $5.0 million in this matter.
The
Company is currently undergoing sales tax audits for several states. At this stage of the sales tax audits, the Company cannot
estimate the possible loss, if any, that may result from these examinations.
Settlements
of lawsuits for the three and nine months ended June 30, 2018 total $474,000 and $1.3 million, respectively, and for the three
and nine months ended June 30, 2017 total $222,000 and $303,000, respectively. As of June 30, 2018 and September 30, 2017, the
Company has accrued $937,000 and $295,000 in accrued liabilities, respectively, related to settlement of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Segment Information
The
Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such reportable segments
based on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions
in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes
our media divisions and rental income that are not significant to the consolidated financial statements.
Below
is the financial information related to the Company’s segments (in thousands):
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
35,253
|
|
|
$
|
32,575
|
|
|
$
|
105,914
|
|
|
$
|
91,824
|
|
Bombshells
|
|
|
7,120
|
|
|
|
4,611
|
|
|
|
18,550
|
|
|
|
13,281
|
|
Other
|
|
|
261
|
|
|
|
243
|
|
|
|
608
|
|
|
|
581
|
|
|
|
$
|
42,634
|
|
|
$
|
37,429
|
|
|
$
|
125,072
|
|
|
$
|
105,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
12,584
|
|
|
$
|
10,579
|
|
|
$
|
37,835
|
|
|
$
|
30,293
|
|
Bombshells
|
|
|
1,391
|
|
|
|
692
|
|
|
|
3,247
|
|
|
|
2,131
|
|
Other
|
|
|
(328
|
)
|
|
|
(130
|
)
|
|
|
(547
|
)
|
|
|
(693
|
)
|
General corporate
|
|
|
(4,155
|
)
|
|
|
(3,258
|
)
|
|
|
(13,672
|
)
|
|
|
(10,028
|
)
|
|
|
$
|
9,492
|
|
|
$
|
7,883
|
|
|
$
|
26,863
|
|
|
$
|
21,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
1,381
|
|
|
$
|
1,344
|
|
|
$
|
4,050
|
|
|
$
|
3,811
|
|
Bombshells
|
|
|
322
|
|
|
|
202
|
|
|
|
999
|
|
|
|
643
|
|
Other
|
|
|
103
|
|
|
|
5
|
|
|
|
76
|
|
|
|
14
|
|
General corporate
|
|
|
192
|
|
|
|
159
|
|
|
|
681
|
|
|
|
468
|
|
|
|
$
|
1,998
|
|
|
$
|
1,710
|
|
|
$
|
5,806
|
|
|
$
|
4,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
253
|
|
|
$
|
1,199
|
|
|
$
|
1,550
|
|
|
$
|
2,539
|
|
Bombshells
|
|
|
9,125
|
|
|
|
1,164
|
|
|
|
16,625
|
|
|
|
3,882
|
|
Other
|
|
|
29
|
|
|
|
-
|
|
|
|
33
|
|
|
|
11
|
|
General corporate
|
|
|
409
|
|
|
|
1,005
|
|
|
|
619
|
|
|
|
2,616
|
|
|
|
$
|
9,816
|
|
|
$
|
3,368
|
|
|
$
|
18,827
|
|
|
$
|
9,048
|
|
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Total assets
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
258,885
|
|
|
$
|
254,432
|
|
Bombshells
|
|
|
32,893
|
|
|
|
18,870
|
|
Other
|
|
|
2,316
|
|
|
|
780
|
|
General corporate
|
|
|
26,169
|
|
|
|
25,802
|
|
|
|
$
|
320,263
|
|
|
$
|
299,884
|
|
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.
10.
Noncontrolling Interests
Noncontrolling
interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Noncontrolling
interests are reported in the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue,
expenses and net income attributable to both the Company and the noncontrolling interests are reported in the consolidated statements
of income.
Our
consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51%
of an entity which owns the real estate for the Company’s nightclub in Philadelphia.
11.
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.
12.
Acquisitions and Dispositions
At
September 30, 2017 and December 31, 2017, the Company held a $2.0 million note receivable related to the Drink Robust, Inc. (“Drink
Robust”) disposition that occurred in September 2016. The note required interest-only monthly payments at a per annum rate
of 4% beginning January of 2017 and principal and interest payments due monthly commencing in January 2018 and ending December
2032. Interest payments from January 2017 through December 2017 were made in the form of shares of the common stock of a manufacturing
company. Cash was received for the January 2018 principal and interest payment; however, in April of 2018, the Company was
informed that the note holder did not intend to make any future principal or interest payments due on the note. The Company
had recourse to the personal assets of the note holder in the amount of $500,000 and entered into negotiations for settlement
of the note in April of 2018. On April 26, 2018, the Company forgave the $500,000 guaranteed portion of the note for 750,000 shares
of common stock of the manufacturing company. Additionally, as part of the settlement, the Company acquired 78.5% of the remaining
80% ownership interest in Drink Robust, bringing its ownership interest to 98.5% with the payment of an outstanding liability
to the Drink Robust distributor of $250,000. As a result of the payment, Drink Robust also obtained a three-year exclusive right
of distribution for the Robust Energy Drinks in the United States. The Company has made a preliminary estimate of the fair value
of the shares of the manufacturing company and the interest acquired in Drink Robust. The preliminary estimate totals $450,000,
which is net of the consideration of $250,000 owed to the Drink Robust distributor. As a result of the transaction, the Company
impaired $1.55 million of the note receivable during the three months ended March 31, 2018, with a remaining balance of $450,000
recorded within long-term assets at June 30, 2018. The Company accounted for the acquisition in the third quarter of 2018, when
the transaction was executed and expects to finalize its estimate of the fair value of the shares acquired in the transaction,
as well as its accounting for such ownership, no later than the fourth quarter of 2018.
RCI
HOSPITALITY HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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%. See Note 4. The transaction provides for the purchase of the real estate for $1.32 million and other non-real estate business
assets for $180,000.
13.
Asset Held for Sale
During
the quarter ended June 30, 2018, the Company decided to offer for sale a real estate property in Dallas, Texas. A recently closed
club owned by a subsidiary of the Company used to operate on the property. The estimated fair value of the property less cost
to sell was approximately $2.0 million, which is comprised of land and building reported as Nightclubs segment assets, and reclassified
to assets held for sale in the Company’s consolidated balance sheet as of June 30, 2018. The Company determined fair value
based on an estimation of net realizable value and/or recent transactions or quoted prices in similar markets. The Company expects
the property to be sold within 12 months by a real estate broker which the Company contracted.