Notes
to Consolidated Financial Statements
1.
Nature of Business
RCI
Hospitality Holdings, Inc. (the “Company”) is a holding company incorporated in Texas in 1994. Through its subsidiaries,
the Company currently owns and operates establishments that offer live adult entertainment, restaurant, and/or bar operations.
These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Odessa, Lubbock, Longview, Tye, Edinburg,
El Paso, Harlingen, Lubbock and Beaumont, Texas, as well as Minneapolis, Minnesota; Philadelphia, Pennsylvania; Charlotte, North
Carolina; New York, New York; Pembroke Park and Miami Gardens, Florida; Phoenix, Arizona; Sulphur, Louisiana; and Washington Park
and Kappa, Illinois. The Company also owns and operates media businesses for adults. The Company’s corporate offices are
located in Houston, Texas.
2.
Summary of Significant Accounting Policies
Basis
of Accounting
The
accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is
owned. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal
Year
Our
fiscal year ends on September 30. References to years 2018, 2017, and 2016 are for fiscal years ended September 30, 2018, 2017,
and 2016, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions
are based on historical experience, forecasted future events and various other assumptions that we believe to be reasonable under
the circumstances. Estimates and assumptions may vary under different circumstances and conditions. We evaluate our estimates
and assumptions on an ongoing basis. We believe the accounting policies below are critical in the portrayal of our financial condition
and results of operations.
Cash
and Cash Equivalents
The
Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The
Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided
by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to
amounts in excess of FDIC limits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Accounts
and Notes Receivable
Accounts
receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to
cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily comprised of receivables
for advertising sales and Expo registration. Accounts receivable also include employee advances, construction advances, and other
miscellaneous receivables. Long-term notes receivable, which have original maturity of more than one year, include consideration
from the sale of certain investment interest entities and real estate. The Company recognizes interest income on notes receivable
based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income
will be collected. The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected.
Inventories
Inventories
include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the lower of cost (on a
first-in, first-out (“FIFO”) basis), or market.
Property
and Equipment
Property
and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated
useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.
Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to
7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures
for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs
are expensed as incurred. The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off
from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of income of the
respective period. Interest expense during site construction from related debt is capitalized, which amounted to $319,000 in fiscal
2018, $43,000 in fiscal 2017, and $59,000 in fiscal 2016.
Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for impairment. Definite-lived
intangible assets are amortized on a straight-line basis over their estimated lives.
The
costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets. The costs
of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred. Annual
license renewal fees are expensed over their renewal term.
Goodwill
and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter
and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment
loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
For
our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely
than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors,
including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to
actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting
unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1
quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation
models, including earnings multiples, discounted cash flows, and comparable asset market values. We recognize goodwill impairment
in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount
of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2017,
we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $4.7 million. See Note
15. No goodwill impairment was recorded in fiscal 2018 and 2016.
For
indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings
of the asset. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value
is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds
the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $3.1 million in 2018 related to three
clubs, $1.4 million in 2017 related to two clubs, and $2.1 million in 2016 related to one club, which are included in other charges,
net in the consolidated statements of income. See Notes 3 and 15.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, such as property, plant, and equipment, and intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be
recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to
historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy
for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated
remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment
loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or
restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Assets to be
disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less
costs to sell and are no longer depreciated. For assets held for sale, we measure fair value using an estimation based on quoted
prices for similar items in active or inactive markets (level 2) developed using observable data. The assets and liabilities of
a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance
sheet. During the fourth quarter of fiscal 2018, the Company impaired one club and one Bombshells for a total of $1.6 million;
during the fourth quarter of 2017, the Company impaired one club for $385,000; and during the fourth quarter of fiscal 2016, the
Company recognized a loss on disposal on one property held for sale in Fort Worth, Texas for $1.4 million, which are included
in other charges, net in the consolidated statements of income. See Notes 3 and 15.
Fair
Value of Financial Instruments
The
Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional
information in the notes to consolidated financial statements when the fair value is different than the carrying value of these
financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their
carrying amounts due to the relatively short maturity of these instruments. The carrying value of notes receivable and short and
long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are
held for trading purposes.
Comprehensive
Income
Comprehensive
income is the total of net income or loss and all other changes in net assets arising from non-owner sources, which are referred
to as items of other comprehensive income. An analysis of changes in components of accumulated other comprehensive income is presented
in the consolidated statements of comprehensive income.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Revenue
Recognition
The
Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale
upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances. Sales and liquor taxes collected
from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements
of income.
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. Other rental
revenues are recognized when earned.
Advertising
and Marketing
Advertising
and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional
purposes. Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative
expenses in the accompanying consolidated statements of income. See Note 3.
Income
Taxes
The
Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions
where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is
determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
U.S.
GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements. We recognize penalties related to unrecognized
tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized
tax benefits in interest expense.
Investments
Investments
in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost
and adjusted for the Company’s proportionate share of their undistributed earnings or losses. Investments in companies in
which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for
at cost and reviewed for any impairment. Cost and equity method investments are included in other assets in the Company’s
consolidated balance sheets. The Company sold 31% of Drink Robust on September 29, 2016, retaining 20%. Because the Company has
no ability to direct the management of the investee company or exert significant influence, the investment is being accounted
for at cost beginning on the date of sale. The carrying value of the cost-method investment in Robust was $1.2 million as of September
30, 2016. During the fourth quarter of fiscal 2017, we determined our investment in Drink Robust was impaired and recognized an
other-than-temporary impairment totaling $1.2 million which brought our carrying value of this investment to zero. In relation
to the reacquisition of Drink Robust in 2018, we have consolidated the operations of Drink Robust and eliminated the investment
in consolidation. See Note 13.
Earnings
Per Common Share
Basic
earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings 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
earnings per share (“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 or losses (as adjusted for interest expense, that would no longer occur if the debentures were converted).
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Net
earnings applicable to common stock and the weighted average number of shares used for basic and diluted earnings (loss) per share
computations are summarized in the table that follows (in thousands, except per share data):
|
|
For the Year Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator -
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH shareholders - basic
|
|
$
|
21,713
|
|
|
$
|
8,259
|
|
|
$
|
11,218
|
|
Adjustment to net income from assumed conversion of debentures
|
|
|
-
|
|
|
|
5
|
|
|
|
153
|
|
Adjusted net income attributable to RCIHH shareholders - diluted
|
|
$
|
21,713
|
|
|
$
|
8,264
|
|
|
$
|
11,371
|
|
Denominator -
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,719
|
|
|
|
9,731
|
|
|
|
9,941
|
|
Effect of potentially dilutive restricted stock, warrants and options
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Effect of potentially dilutive convertible debentures
|
|
|
-
|
|
|
|
12
|
|
|
|
228
|
|
Adjusted weighted average number of common shares outstanding - diluted
|
|
|
9,719
|
|
|
|
9,743
|
|
|
|
10,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.23
|
|
|
$
|
0.85
|
|
|
$
|
1.13
|
|
Diluted earnings per share
|
|
$
|
2.23
|
|
|
$
|
0.85
|
|
|
$
|
1.11
|
|
(1)
Represents interest expense on dilutive convertible securities that would not occur if they were assumed converted.
(2)
All outstanding warrants and options were considered for the EPS computation.
Additional
shares for options, warrants and debentures amounting to zero and 72,400 for the year ended September 30, 2017 and, 2016 were
not considered since they would be antidilutive.
Convertible
debentures (principal and accrued interest) outstanding at September 30, 2018, 2017, and 2016 totaling $0, $0, and $0.5 million,
respectively, were convertible into common stock at prices ranging from $10.00 to $12.50 in fiscal year 2016. Convertible debentures
amounting to $0, $0.9 million, and $0.5 million were dilutive in 2018, 2017, and 2016, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Stock
Options
The
Company recognizes all employee stock-based compensation as a cost in the consolidated financial statements. Equity-classified
awards are measured at the grant date fair value of the award and recognized as expense over their requisite service period. The
Company estimates grant date fair value using the Black-Scholes option-pricing model. The critical estimates are volatility, expected
life and risk-free rate.
At
September 30, 2018 and 2017, the Company has no stock options outstanding.
Legal
and Other Contingencies
The
Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a
material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. The Company
recognizes legal fees and expenses, including those related to legal contingencies, as incurred.
Generally,
the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
Fair
Value Accounting
The
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset
or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements,
the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the
following levels.
U.S.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
|
●
|
Level
1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 – Include other inputs that are directly or indirectly observable in the marketplace.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs which are supported by little or no market activity.
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The
Company classifies its marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains
and losses, net of the related income tax effect, if any, on available-for-sale securities are excluded from income and are reported
as accumulated other comprehensive income in stockholders’ equity. Realized gains and losses from securities classified
as available for-sale are included in comprehensive income. The Company measures the fair value of its marketable securities based
on quoted prices for identical securities in active markets, or Level 1 inputs. Available-for-sale securities, which are included
in other assets in the consolidated balance sheets, had a balance of $760,000 and $80,000 as of September 30, 2018 and 2017.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
In
accordance with U.S. GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security
below the cost basis is other than temporary. Should the decline be considered other than temporary, the Company writes down the
cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss. No losses or other-than-temporary
impairments in our marketable securities portfolio were recognized during the years ended September 30, 2018, 2017, and 2016.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets
and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill
and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance
sheets. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment.
If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference
is included in other charges, net in the consolidated statements of income.
Assets
and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Asset
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
Description
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Property and equipment, net
|
|
$
|
141
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
141
|
|
Indefinite-lived intangibles
|
|
|
4,618
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,618
|
|
Notes receivable
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Goodwill
|
|
|
495
|
|
|
|
-
|
|
|
|
-
|
|
|
|
495
|
|
Other assets
|
|
|
760
|
|
|
|
760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Asset
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
Description
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Goodwill
|
|
$
|
4,572
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,572
|
|
Property and equipment, net
|
|
|
4,678
|
|
|
|
-
|
|
|
|
4,678
|
|
|
|
-
|
|
Indefinite-lived intangibles
|
|
|
25,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,740
|
|
Definite-lived intangibles
|
|
|
600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
|
|
Unrealized Gain (Impairments) Recognized
|
|
|
|
Years Ended September 30,
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
(4,697
|
)
|
|
$
|
-
|
|
Property and equipment, net
|
|
|
(1,615
|
)
|
|
|
(385
|
)
|
|
|
-
|
|
Indefinite-lived intangibles
|
|
|
(3,121
|
)
|
|
|
(1,401
|
)
|
|
|
(2,092
|
)
|
Assets held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,400
|
)
|
Other assets
|
|
|
305
|
|
|
|
(1,156
|
)
|
|
|
-
|
|
Impact
of Recently Issued Accounting Standards
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 has completed its evaluation of the impact of the standard and has determined the impact
of adopting the new standard to be immaterial. The Company will transition using the cumulative effect method upon adoption.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
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 FIFO 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.
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. In July 2018, the FASB issued ASU 2018-11 providing
for certain practical expedients in the implementation of ASU 2016-02. The guidance requires the use of a modified retrospective
approach. We 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
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
. 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
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. We have early adopted ASU
2017-09 as of October 1, 2017. As of September 30, 2018, we do not have any stock-based compensation awards outstanding.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.
This ASU provides financial statement preparers with an
option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in
the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) is recorded. The ASU requires
financial statement preparers to disclose (1) a description of the accounting policy for releasing income tax effects from AOCI;
(2) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (3) information about the other income
tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Topic 220,
Income Statement—Reporting Comprehensive Income
, and has items of other comprehensive income for which the related
tax effects are presented in other comprehensive income as required by GAAP. The ASU is effective for all organizations for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations
should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which
the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We believe that the adoption
of this ASU will not have a material impact on our consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.
This ASU expands the scope of Topic 718, which currently only includes share-based payments issued to
employees, to include share-based payments issued to nonemployees for goods and services. This ASU is effective for the Company
for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted,
but no earlier than the Company’s adoption of ASU 2014-09. We are still evaluating the impact of this ASU on the Company’s
consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement
. ASU 2018-13 modifies the disclosure requirements of Accounting Standards
Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may
affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to
valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect
the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions
from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate
net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty
in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes
in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements
held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs
used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of
the ASU and delay adoption of the additional disclosures until the effective date. We are still evaluating the impact of this
ASU on the Company’s consolidated financial statements.
3.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Credit card receivables
|
|
$
|
2,273
|
|
|
$
|
1,955
|
|
Income tax refundable
|
|
|
2,137
|
|
|
|
-
|
|
ATM-in-transit
|
|
|
933
|
|
|
|
699
|
|
Other
|
|
|
1,977
|
|
|
|
533
|
|
|
|
$
|
7,320
|
|
|
$
|
3,187
|
|
The
components of accrued liabilities are as follows (in thousands):
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Insurance
|
|
$
|
3,807
|
|
|
$
|
3,160
|
|
Payroll and related costs
|
|
|
2,293
|
|
|
|
1,889
|
|
Property taxes
|
|
|
1,796
|
|
|
|
1,270
|
|
Sales and liquor taxes
|
|
|
1,883
|
|
|
|
990
|
|
Patron tax
|
|
|
532
|
|
|
|
801
|
|
Lawsuit settlement
|
|
|
-
|
|
|
|
295
|
|
Unearned revenues
|
|
|
134
|
|
|
|
196
|
|
Income taxes
|
|
|
-
|
|
|
|
549
|
|
Other
|
|
|
1,528
|
|
|
|
2,374
|
|
|
|
$
|
11,973
|
|
|
$
|
11,524
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
3.
Selected Account Information - continued
The
components of selling, general and administrative expenses are as follows (in thousands):
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Taxes and permits
|
|
$
|
9,545
|
|
|
$
|
8,026
|
|
|
$
|
8,089
|
|
Advertising and marketing
|
|
|
7,536
|
|
|
|
6,704
|
|
|
|
5,374
|
|
Supplies and services
|
|
|
5,344
|
|
|
|
4,873
|
|
|
|
4,815
|
|
Insurance
|
|
|
5,473
|
|
|
|
4,006
|
|
|
|
3,575
|
|
Rent
|
|
|
3,720
|
|
|
|
3,258
|
|
|
|
3,278
|
|
Legal
|
|
|
3,586
|
|
|
|
3,074
|
|
|
|
3,197
|
|
Utilities
|
|
|
2,969
|
|
|
|
2,824
|
|
|
|
2,871
|
|
Charge cards fees
|
|
|
3,244
|
|
|
|
2,783
|
|
|
|
2,252
|
|
Security
|
|
|
2,617
|
|
|
|
2,251
|
|
|
|
2,042
|
|
Accounting and professional fees
|
|
|
2,944
|
|
|
|
2,159
|
|
|
|
1,286
|
|
Repairs and maintenance
|
|
|
2,184
|
|
|
|
2,091
|
|
|
|
2,088
|
|
Other
|
|
|
4,662
|
|
|
|
4,726
|
|
|
|
4,208
|
|
|
|
$
|
53,824
|
|
|
$
|
46,775
|
|
|
$
|
43,075
|
|
The
components of other charges, net are as follows (in thousands):
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Impairment of assets
|
|
$
|
4,736
|
|
|
$
|
7,639
|
|
|
$
|
3,492
|
|
Settlement of lawsuits
|
|
|
1,669
|
|
|
|
317
|
|
|
|
1,881
|
|
Loss (gain) on sale of assets
|
|
|
1,965
|
|
|
|
(542
|
)
|
|
|
388
|
|
Gain on insurance
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on settlement of patron tax
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
$
|
8,350
|
|
|
$
|
7,312
|
|
|
$
|
5,761
|
|
4.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Buildings and land
|
|
$
|
149,683
|
|
|
$
|
122,996
|
|
Equipment
|
|
|
34,572
|
|
|
|
30,107
|
|
Leasehold improvements
|
|
|
30,414
|
|
|
|
31,969
|
|
Furniture
|
|
|
8,739
|
|
|
|
8,612
|
|
Total property and equipment
|
|
|
223,408
|
|
|
|
193,684
|
|
Less accumulated depreciation
|
|
|
(51,005
|
)
|
|
|
(45,274
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
172,403
|
|
|
$
|
148,410
|
|
Included
in buildings and leasehold improvements above are construction-in-progress amounting to $6.4 million and $1.6 million as of September
30, 2018 and 2017, respectively, which are mostly related to Bombshells projects.
Depreciation
expense was approximately $7.5 million, $6.7 million, and $6.6 million for fiscal years 2018, 2017, and 2016, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
5.
Assets Held for Sale
During
the fourth quarter of fiscal 2016, the Company had decided to offer six real estate properties for sale. The aggregate estimated
fair value of the properties less cost to sell as of September 30, 2016 was approximately $7.7 million and reclassified to assets
held for sale in the Company’s consolidated balance sheet.
During
the quarter ended March 31, 2017, the Company sold one of the properties held for sale for $2.2 million, recognizing a $116,000
loss. During the quarter ended June 30, 2017, the Company sold another property held for sale for $1.5 million, recognizing a
$0.9 million gain.
At
the end of the quarter ended June 30, 2017, Company management decided to close an underperforming club in Dallas. The Company
wrote off the balance of goodwill for that location and recorded an impairment charge amounting to $1.4 million, which is included
in other charges, net in our consolidated statements of income for the three months ended June 30, 2017. The Company also recorded
in assets held for sale the carrying value of the property for sale consisting principally of land and building amounting to $5.2
million, which is lower than fair value less cost to sell.
At
the end of the quarter ended September 30, 2017, two properties classified as held for sale with a carrying value of $4.3 million
were reclassified to property and equipment, net in the consolidated balance sheet. At September 30, 2017, we determined the assets
no longer met the criteria for held for sale as the sale of one property was no longer likely to be completed within one year
and that the other property was no longer available for immediate sale in its present condition due to a lease executed during
the period. The assets were measured at the carrying value as adjusted for depreciation which was lower than the fair value at
the date reclassified.
During
the quarter ended December 31, 2017, the Company sold one of the properties held for sale for $675,000, recognizing a gain of
$481,000. During the quarter ended June 30, 2018, the Company decided to offer for sale a real estate property in Dallas, Texas,
which was a location of a recently closed club, with an estimated fair value of $2.0 million. During the quarter ended September
30, 2018, the Company reclassified two properties held for sale with an aggregate carrying value of $7.2 million into held and
used property and equipment, net in the consolidated balance sheet as of September 30, 2018. Also, during the quarter ended September
30, 2018, the Company decided to offer four real estate properties for sale, with an aggregate fair value less cost to sell of
approximately $2.5 million.
The
Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months
through property listings by our real estate brokers.
The
assets held for sale do not have liabilities associated with them that need to be directly settled from the proceeds in the event
of a transaction. The gain or loss on the sale of these properties held for sale is included in other charges, net in our consolidated
statements of income.
6.
Goodwill and Other Intangible Assets
Goodwill
and other intangible assets consisted of the following (in thousands):
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
44,425
|
|
|
$
|
43,866
|
|
Licenses
|
|
|
67,523
|
|
|
|
70,644
|
|
Tradename
|
|
|
2,215
|
|
|
|
2,215
|
|
|
|
|
114,163
|
|
|
|
116,725
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted leases
|
|
|
18 & 6 years
|
|
|
|
108
|
|
|
|
116
|
|
Non-compete agreements
|
|
|
5 years
|
|
|
|
588
|
|
|
|
681
|
|
Software
|
|
|
5 years
|
|
|
|
834
|
|
|
|
768
|
|
Distribution agreement
|
|
|
3 years
|
|
|
|
264
|
|
|
|
-
|
|
|
|
|
|
|
|
|
1,794
|
|
|
|
1,565
|
|
Total goodwill and other intangible assets
|
|
|
|
|
|
$
|
115,957
|
|
|
$
|
118,290
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
6.
Goodwill and Other Intangible Assets - continued
|
|
2018
|
|
|
2017
|
|
|
|
Definite- Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
|
Definite- Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
Beginning balance
|
|
$
|
1,565
|
|
|
$
|
72,859
|
|
|
$
|
43,866
|
|
|
$
|
917
|
|
|
$
|
51,849
|
|
|
$
|
45,847
|
|
Intangibles acquired
|
|
|
483
|
|
|
|
-
|
|
|
|
559
|
|
|
|
865
|
|
|
|
22,411
|
|
|
|
2,716
|
|
Impairment
|
|
|
-
|
|
|
|
(3,121
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,401
|
)
|
|
|
(4,697
|
)
|
Amortization
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(217
|
)
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
1,794
|
|
|
$
|
69,738
|
|
|
$
|
44,425
|
|
|
$
|
1,565
|
|
|
$
|
72,859
|
|
|
$
|
43,866
|
|
As
of September 30, 2018 and 2017, the accumulated impairment balance of indefinite-lived intangibles was $5.9 million and $6.9 million,
respectively, while the accumulated impairment balance of goodwill was $3.9 million and $5.4 million, respectively.
Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2018
is: 2019 - $466,000; 2020 - $443,000; 2021 - $367,000; 2022 - $261,000; 2023 - $186,000; and thereafter - $71,000.
Indefinite-lived
intangible assets consist of sexually oriented business licenses and tradename, which were obtained as part of acquisitions. These
licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which
are done at minimal costs to the Company. The discounted cash flow method of income approach was used in calculating the value
of these licenses in a business combination, while the relief from royalty method was used in calculating the value of tradenames.
During the fiscal year ended September 30, 2018, the Company recognized a $3.1 million impairment related to three clubs’
SOB licenses. During the year ended September 30, 2017, the Company recognized an impairment loss of $4.7 million related to the
goodwill of four reporting units, including one held for sale, as well as an impairment loss of $1.4 million related to two locations’
SOB licenses. The Company impaired one reporting unit during the year ended September 30, 2016 amounting to $2.1 million for indefinite-lived
intangibles. See Note 15.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt
Long-term
debt consisted of the following (in thousands):
|
|
|
|
September 30,
|
|
|
|
|
|
2018
|
|
|
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
|
|
*
|
|
|
1,071
|
|
|
|
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 collateralized by aircraft, matures January 2019
|
|
|
|
|
-
|
|
|
|
2,740
|
|
Non-interest-bearing debt to State of Texas, matures May 2022, interest imputed at 9.6%
|
|
|
|
|
4,470
|
|
|
|
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 at 5.45%, matures July 2020
|
|
*
|
|
|
10,258
|
|
|
|
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 at 5.95%, matures August 2021
|
|
*
|
|
|
7,544
|
|
|
|
8,267
|
|
Note payable at 12%, matures October 2021
|
|
**
|
|
|
6,219
|
|
|
|
9,671
|
|
Note payable at 4.99%, matures April 2037, collateralized by aircraft
|
|
|
|
|
912
|
|
|
|
941
|
|
Notes payable at 12%, mature May 2020
|
|
**
|
|
|
2,940
|
|
|
|
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
|
|
**
|
|
|
14,464
|
|
|
|
15,291
|
|
Note payable at 5%, matures May 2038
|
|
*
|
|
|
-
|
|
|
|
3,441
|
|
Note payable initially at 5.75%, matures December 2027
|
|
*
|
|
|
58,826
|
|
|
|
-
|
|
Note payable at 5.95%, matures December 2032
|
|
|
|
|
6,877
|
|
|
|
-
|
|
Note payable at 5%, matures August 2029
|
|
*
|
|
|
4,257
|
|
|
|
-
|
|
Note payable at 5%, matures April 2020
|
|
*
|
|
|
3,079
|
|
|
|
-
|
|
Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030
|
|
*
|
|
|
960
|
|
|
|
-
|
|
Note payable at 8%, matures May 2023
|
|
*
|
|
|
945
|
|
|
|
-
|
|
Note payable at 5.95%, matures August 2039
|
|
*
|
|
|
3,168
|
|
|
|
-
|
|
Note payable at 12%, matures August 2021
|
|
**
|
|
|
4,000
|
|
|
|
-
|
|
Note payable at 9%, matures September 2028
|
|
*
|
|
|
1,350
|
|
|
|
-
|
|
Note payable at 6.1%, matures September 2019
|
|
*
|
|
|
1,500
|
|
|
|
-
|
|
Note payable at 5.95%, matures September 2023
|
|
*
|
|
|
1,550
|
|
|
|
-
|
|
Note payable at 7%, matures May 2019
|
|
**
|
|
|
5,000
|
|
|
|
-
|
|
Total debt
|
|
|
|
|
142,415
|
|
|
|
124,949
|
|
Less unamortized debt issuance costs
|
|
|
|
|
(1,788
|
)
|
|
|
(597
|
)
|
Less current portion
|
|
|
|
|
(19,047
|
)
|
|
|
(17,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
$
|
121,580
|
|
|
$
|
106,912
|
|
*
Collateralized by real estate
**
Collateralized by stock in subsidiary
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt - continued
Following
is a summary of long-term debt at September 30 (in thousands):
|
|
2018
|
|
|
2017
|
|
Secured by real estate
|
|
$
|
94,509
|
|
|
$
|
73,312
|
|
Secured by stock in subsidiary
|
|
|
35,648
|
|
|
|
42,343
|
|
Secured by other assets
|
|
|
7,788
|
|
|
|
3,681
|
|
Unsecured
|
|
|
4,470
|
|
|
|
5,613
|
|
|
|
$
|
142,415
|
|
|
$
|
124,949
|
|
In
April 2010, the Company acquired the real estate for the club in Austin, Texas, formerly known as Rick’s Cabaret. In connection
with the purchase, the Company executed a note to the seller amounting to $2.2 million. The note was collateralized by the real
estate and was payable in monthly installments through April 2025 of $19,774, including principal and interest at the prime rate
plus 4.5% with a minimum rate of 7%. The Company refinanced this debt in 2013 with a note of $1.5 million, payable in monthly
installments of $15,090 through July 2018, including principal and interest at 6.25%. This note has been fully paid in relation
to the first note of the New Loan, as discussed below.
In
connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $ 1.5
million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate
of 5.5%. The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the Company also acquired
the related real estate and executed notes to the seller for $6.5 million. The notes are also payable over eleven years at $53,110
per month including interest and have the same adjustable interest rate of 5.5%. The real estate notes, with original principal
of $6.5 million, has been fully paid in relation to the first note of the New Loan, as discussed below.
As
consideration for the purchase of nine operating adult cabarets and two other licensed location under development at that time
(collectively, the “Foster Clubs”), a subsidiary paid to the sellers at closing $3.5 million cash and $22.0 million
pursuant to a secured promissory note (the “Club Note”). The Club Note bears interest at the rate of 9.5% per annum,
is payable in 144 equal monthly installments of $ 256,602 per month and is secured by the assets purchased from the Companies.
This note has been fully paid in relation to the first note of the New Loan, as discussed below.
In
connection with the acquisition of the Foster Clubs, as explained above, the Company’s wholly owned subsidiary, Jaguars
Holdings, Inc. (“JHI”), entered into a Commercial Contract (the “Real Estate Agreement”), which agreement
provided for JHI to purchase the real estate where the Foster Clubs are located. The transactions contemplated by the Real Estate
Agreement closed on October 16, 2012. The purchase price of the real estate was $10.1 million (discounted to $9.6 million as explained
below) and was paid with $350,000 in cash, $9.1 million in mortgage notes, and an agreement to make a one-time payment of $650,000
in twelve years that bears no interest. The note bears interest at the rate of 9.5%, is payable in 143 equal monthly installments
and is secured by the real estate properties. The Company has recorded a debt discount of $431,252 related to the one-time payment
of $650,000. This note has been fully paid in relation to the first note of the New Loan, as discussed below.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt – continued
The
Club Note from the Jaguars acquisition also provides that in the event any regulatory or administrative authority seeks to enforce
or attempts to collect any tax or obligation or liability that may be due pursuant to the Texas Patron Tax (sometimes referred
to as the “Pole Tax”) or related legislation, then the then outstanding principal amount of the Club Note, as of the
date the tax is enforced, will immediately be reduced by an amount calculated by multiplying 1,200,000 by the dollar amount of
the per-person tax implemented (the “Reduction Amount”). The Reduction Amount cannot exceed $6.0 million. By way of
example, if exactly two years after closing, a $2.00 per person tax is implemented and enforced, the Reduction Amount would be
$2.4 million and the then principal amount of the Club Note would be reduced $2.4 million. The Texas Patron Tax is currently enacted
to be $5 per person which equates to a $6.0 million Reduction Amount. The State of Texas has demanded payment and this provision
was invoked in July 2014 and the Company recorded a gain of $6 million, less related debt discount.
During
the year ended September 30, 2013, the Company acquired four parcels of real estate at a cost aggregating $3,230,000 and incurred
debt aggregating $2.6 million in connection therewith. The notes bear interest at rates ranging from 5 - 7% and are payable $25,660
monthly, including principal and interest. The notes mature from 2018 to 2028. These notes have been fully paid in relation to
the first note of the New Loan, as discussed below.
In
December 2013, the Company borrowed $3.6 million from a lender. The funds were used to purchase an aircraft. The debt bears interest
at 7.45% with monthly principal and interest payments of $40,653 beginning March 2012. The note matures in January 2019. This
note has been fully paid in relation to the December 2017 aircraft note trade-in, as discussed below.
In
December 2014, the Company refinanced certain real estate debt amounting to $2.1 million with new bank debt of $2.0 million. The
new debt is payable $13,270 per month, including interest at 5.25% and matures in ten years. This note has been fully paid in
relation to the first note of the New Loan, as discussed below.
In
December 2014, the Company borrowed $1.0 million from an individual. The note is collateralized by certain real estate, is payable
$13,215 per month, including interest at 10% and matures in ten years. This note has been fully paid in relation to the first
note of the New Loan, as discussed below.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt – continued
On
January 13, 2015 a Company subsidiary purchased Down in Texas Saloon gentlemen’s club in an Austin, Texas suburb. As part
of the transaction, another subsidiary also purchased the club’s real estate. Total consideration of $6.8 million consisted
of $3.5 million for the club business and $3.3 million for its 3.5 acres of real estate. Payment was in the form of $1 million
in cash and $1.4 million in seller financing at 6% annual interest, with the balance provided by commercial bank financing in
the form of a note at a variable interest rate equal to the prime rate plus 2%, but in no event less than 6.5%. Payments on these
notes aggregate $68,829 per month. These notes have been fully paid in relation to the first note of the New Loan, as discussed
below.
On
May 4, 2015 a Company subsidiary purchased The Seville gentlemen’s club in Minneapolis Minnesota. As part of the transaction,
another subsidiary also purchased the club’s real estate. Total consideration of $8.5 million consisted of $4.5 million
for the assets of the club business and $4.0 million for the real estate. Payment was made through bank financing of $5.7 million
at 5.5% interest, seller financing of $1.8 million at 6% and cash of $1.1 million. There are certain financial covenants with
which the Company must be in compliance related to this financing. The Company was in compliance with such covenants as of September
30, 2017. Payments on these notes aggregate to $65,355 per month. These notes have been fully paid in relation to the first note
of the New Loan, as discussed below.
On
July 30, 2015, a subsidiary of the Company acquired the building in which the Company’s Miami Gardens, Florida nightclub
operates. The cost was $15,300,000 and was purchased with an $11,325,000 note, payable in monthly installments of approximately
$78,000, including interest at 5.45% and matures in five years and the balance with cash. The building has several other third-party
tenants in addition to the Company’s nightclub. There are certain financial covenants with which the Company must be in
compliance related to this financing. The Company was in compliance with such covenants as of September 30, 2017. This note has
been fully paid in relation to the second note of the New Loan, as discussed below.
In
2015, the Company reached a settlement with the State of Texas over payment of the state’s Patron Tax on adult club customers.
To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without
interest, over 84 months, beginning in June 2015, for all but two nonsettled locations. Going forward, 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.
In
October 2015, the Company refinanced certain real estate debt amounting to $2.3 million with new bank debt of $4.6 million. After
closing costs, the Company received $2.0 million in cash from the transaction. The new debt is payable $30,244 per month, including
interest at the prime rate plus 2% (6.25% at September 30, 2017) and matures in ten years. There are certain financial covenants
with which the Company must be in compliance related to this financing. The Company was in compliance with such covenants as of
September 30, 2017. This note has been fully paid in relation to the first note of the New Loan, as discussed below.
In
October 2015, the Company entered into a $4.7 million construction loan with a commercial bank for a new corporate headquarters
building. The note, which was fully funded upon the finish of construction of the building in October 2016, is payable over 20
years at $31,988 per month including interest and has an adjustable interest rate of 5.25%. The rate adjusts to prime plus 1%
in the 61st month, with a floor of 5.25%. This note has been fully paid in relation to the first note of the New Loan, as discussed
below.
In
January 2016, a subsidiary of the Company acquired the building in which the Company’s Rick’s Cabaret New York nightclub
operates. The cost was $10.5 million, including closing costs and was purchased with a $10.0 million note, payable in monthly
installments of approximately $59,000, including interest at 5.0% and matures in ten years. There are certain financial covenants
with which the Company must be in compliance related to this financing. The Company was in compliance with such covenants as of
September 30, 2017. This note has been fully paid in relation to the first note of the New Loan, as discussed below.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt – continued
In
August 2016, the Company acquired certain land for future development of a Bombshells in Harris County, Texas for $2.5 million,
financed with a bank note for $1.9 million, payable interest only at 5.0% monthly until its maturity in 18 months. This note has
been fully paid in relation to the February 20, 2018 refinancing, as discussed below.
In
August 2016, the Company refinanced two notes payable with an aggregate carrying value of $6.1 million with a $9.0 million bank
note at an interest rate of 5.95%. The note matures in 10 years with monthly installments of $100,062 and a balloon payment at
maturity for the remaining balance. This note has been fully paid in relation to the third note of the New Loan, as discussed
below.
On
October 5, 2016, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million. The new unsecured debt is payable
$118,817 per month, including interest at 12%, and matures in five years with a balloon payment for the remaining balance at maturity.
This note has been partially paid in relation to the first note of the New Loan, as discussed below.
On
May 1, 2017, the Company raised $5.4 million through the issuance of 12% unsecured promissory notes to certain investors, which
notes mature on May 1, 2020. The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity.
On August 15, 2018 and September 26, 2018, the Company refinanced $2.0 million and $500,000 of the notes, respectively. The $2.0
million note was exchanged for a $4.0 million 12% note maturing in three years with interest-only payments until maturity, where
the full principal is to be paid. The $500,000 note was exchanged for a $1.35 million 9% note maturing in 10 years with monthly
payments of $17,101, including interest. On November 1, 2018, the Company refinanced two notes with a total principal of $400,000
with certain investors. See Note 19.
On
May 4, 2017, the Company entered into a construction loan agreement with a bank for the construction of the Company’s Bombshells
Pearland location. The maximum availability of the 5% promissory note is $4.8 million with advances based on the progress of construction.
On June 4, 2017, an initial advance of $2.2 million was used to pay off a previous interest-only note for the same construction
project. The new loan is payable interest-only until after one year from the date of the initial advance when the construction
loan, including all advances as its principal, converts to an amortizing 20-year note with scheduled monthly payments to be determined
on the date of conversion. The Company paid loan costs amounting to $24,000, which will be amortized for the term of the note.
This note has been fully paid in relation to the first note of the New Loan, as discussed below.
On
May 8, 2017, in relation to the Scarlett’s acquisition (see Note 13), the Company executed two promissory notes with the
sellers: (i) a 5% short-term note for $5.0 million payable in lump sum after six months from closing date and (ii) a 12-year amortizing
8% note for $15.6 million. The 12-year note is payable $168,343 per month, including interest. On May 8, 2018, the Company amended
the $5.0 million short-term note payable, which had a remaining balance of $3.0 million as of amendment date, extending the maturity
date to May 8, 2019 and increasing the interest rate to 8% for its remaining term. See Note 19 for related disclosures.
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 aircraft 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, we wrote off $279,000 of unamortized debt issuance costs to interest expense. Prior to September
30, 2017, the Company paid a portion of debt issuance costs amounting to $612,500, which was included in other assets until the
closing of the transaction. At closing, the Company paid an additional $764,000 in debt issuance costs, which together with the
$612,500 prepayment will be amortized for the term of the loan using the effective interest rate method. We also paid prepayment
penalties amounting to $543,000 on the Repaid Notes.
Included
in the $62.5 million first note of the New Loan was $4.6 million that was escrowed at closing due to the bank lender of one of
the Repaid Notes. The amount was released from escrow in June 2018 when the construction, for which the original note was borrowed,
was completed.
On
February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million with the difference
paid by the Company in cash. The bank note bears interest at 5.25% adjusted after 36 months to prime plus 1% with a floor of 5.2%
and matures on February 15, 2038. The bank note is payable interest-only during the first 18 months, after which monthly payments
of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity. On August
28, 2018, this note was refinanced for additional construction loan having a maximum availability of $7.4 million. The new note
has an initial interest rate of 5.95%, subject to a repricing after 72 months to prime plus 1% with a 5.9% floor. The note is
payable $53,084 per month, including interest, for 72 months , then adjusted based on repriced interest rate until its August
2039 maturity. As of September 30, 2018, the Company had $4.3 million in available borrowing capacity under this construction
loan.
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. As of September 30, 2018, the
Company had $403,000 in available borrowing capacity under this construction loan.
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 September 17, 2018, the Company and the bank lender agreed to carve
out a portion of the loan that relates to the land where the Bombshells location is to be built amounting to $960,000, and added
a construction loan with a maximum availability of $2.9 million. The new $2.9 million construction loan has an interest rate of
prime plus 0.5%, with a 5.5% floor, and payable in 12 years. The first 24 months will be interest-only payments, after which monthly
payments of principal and interest will be made based on a 20-year amortization.
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.
On
September 6, 2018, the Company borrowed $1.55 million from a bank lender to finance the acquisition of the remaining not-owned
interest in a joint venture. The 10-year note payable has an initial interest rate of 5.95% until after five years when the interest
rate is adjusted to the U.S. Treasury rate plus 3.5%, with a 5.95% floor. Monthly payments of $11,138, including interest, is
due for five years until an adjustment in monthly payments based on the interest rate repricing. The Company paid approximately
$40,000 in debt issuance costs at closing.
On
September 14, 2018, the Company acquired land worth $2.75 million for a future Bombshells location by executing a note with a
bank lender for 1.5 million and paying the remainder in cash. The 6.1% one-year note has monthly interest-only payments of $7,625
with the full principal payable at maturity. The Company paid approximately $22,000 in debt issuance costs at closing.
On
September 25, 2018, the Company borrowed $5.0 million through a credit facility with a bank lender. The loan has a 7% fixed interest
rate and matures in May 2019. The loan is payable $200,000 weekly, which includes interest, until maturity.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Long-term Debt – continued
Future
maturities of long-term debt consist of the following, net of debt discount (in thousands):
|
|
Regular
|
|
|
Balloon
|
|
|
Total
|
|
|
|
Amortization
|
|
|
Payments
|
|
|
Payments
|
|
2019
|
|
$
|
14,522
|
|
|
$
|
4,525
|
|
|
$
|
19,047
|
|
2020
|
|
|
7,543
|
|
|
|
6,019
|
|
|
|
13,562
|
|
2021
|
|
|
4,142
|
|
|
|
7,779
|
|
|
|
11,921
|
|
2022
|
|
|
10,818
|
|
|
|
-
|
|
|
|
10,818
|
|
2023
|
|
|
6,948
|
|
|
|
1,314
|
|
|
|
8,262
|
|
Thereafter
|
|
|
32,257
|
|
|
|
46,548
|
|
|
|
78,805
|
|
|
|
$
|
76,230
|
|
|
$
|
66,185
|
|
|
$
|
142,415
|
|
8.
Income Taxes
The
Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal
corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate for fiscal 2018 was
24.5% percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our federal corporate income
tax rate will be 21%.
Additionally,
for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to
reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement
resulted in a $8.7 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet
as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal
year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 which allows companies to record provisional
amounts during a measurement period that is similar to the measurement period used when accounting for business combinations.
While we are able to make a reasonable estimate of the impacts of the Tax Act, adjustments may occur and may be affected by other
factors, including, but not limited to, further refinement of our calculations, changes in interpretations and assumptions and
regulatory changes from the Internal Revenue Service (IRS), the SEC, the FASB, and various tax jurisdictions. We do not expect
any future impact to be material.
Income
tax expense (benefit) consisted of the following (in thousands):
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,438
|
|
|
$
|
2,989
|
|
|
$
|
260
|
|
State and local
|
|
|
1,219
|
|
|
|
1,097
|
|
|
|
970
|
|
Total current income tax expense
|
|
|
3,657
|
|
|
|
4,086
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(8,096
|
)
|
|
|
1,545
|
|
|
|
1,110
|
|
State and local
|
|
|
1,321
|
|
|
|
728
|
|
|
|
33
|
|
Total deferred income tax expense (benefit)
|
|
|
(6,775
|
)
|
|
|
2,273
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(3,118
|
)
|
|
$
|
6,359
|
|
|
$
|
2,373
|
|
The
Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
Income
tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory
rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Computed expected income tax expense
|
|
$
|
4,576
|
|
|
$
|
4,979
|
|
|
$
|
4,366
|
|
State income taxes, net of federal benefit
|
|
|
804
|
|
|
|
291
|
|
|
|
730
|
|
Deferred taxes on subsidiaries acquired/sold
|
|
|
709
|
|
|
|
-
|
|
|
|
(841
|
)
|
Permanent differences
|
|
|
85
|
|
|
|
108
|
|
|
|
(109
|
)
|
Change in deferred tax liability rate
|
|
|
(8,832
|
)
|
|
|
1,329
|
|
|
|
-
|
|
Reserve for uncertain tax position
|
|
|
-
|
|
|
|
406
|
|
|
|
240
|
|
Tax credits
|
|
|
(808
|
)
|
|
|
(564
|
)
|
|
|
(2,013
|
)
|
Other
|
|
|
348
|
|
|
|
(190
|
)
|
|
|
-
|
|
Total income tax expense (benefit)
|
|
$
|
(3,118
|
)
|
|
$
|
6,359
|
|
|
$
|
2,373
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
8.
Income Taxes - continued
During
the fiscal year ended September 30, 2016 the Company deconsolidated three subsidiaries. Two of these subsidiaries were 100 percent
owned subsidiaries, 100 percent of the stock of both of these subsidiaries were sold to third parties. The third subsidiary was
a 51 percent owned subsidiary that was accounted for under the consolidated method; 31 percent of the 51 percent ownership of
the stock was sold during the year to a third party, and the investment is now accounted for under the cost method. In accordance
with U.S. GAAP, the company has elected to account for the deferred taxes on the inside basis differences of all three deconsolidated
subsidiaries as a component of the gain or loss on the sale of the shares. All outside basis differences in the investment in
subsidiaries stock are accounted for as a component of the tax provision.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax
assets and liabilities were as follows (in thousands):
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Patron tax
|
|
$
|
948
|
|
|
$
|
1,954
|
|
Capital loss carryforwards
|
|
|
763
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
231
|
|
|
|
|
1,711
|
|
|
|
2,185
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(13,110
|
)
|
|
|
(18,549
|
)
|
Property and equipment
|
|
|
(7,206
|
)
|
|
|
(9,177
|
)
|
Other
|
|
|
(947
|
)
|
|
|
-
|
|
|
|
|
(21,263
|
)
|
|
|
(27,726
|
)
|
Net deferred tax liability
|
|
$
|
(19,552
|
)
|
|
$
|
(25,541
|
)
|
For
the year ended September 30, 2016, income tax expense includes a tax benefit in the amount of $2.0 million representing the net
amount to be realized from fiscal year 2016 and from amending certain prior year federal tax returns to take the available FICA
tip tax credits which were not taken in prior years. The Company will continue to utilize FICA tip credits in future tax filings.
Included
in the Company’s deferred tax liabilities at September 30, 2018 and 2017 is approximately $16.3 million and $16.3 million,
respectively, representing the tax effect of indefinite-lived intangible assets from club acquisitions which are not deductible
for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related
clubs are sold.
The
Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized
tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component
of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest
expense. During the year ended September 30, 2018 and 2017, the Company has accrued $165,000 and $865,000, respectively, (all
related to previous years’ taxes) in uncertain state tax positions. In fiscal 2017, the Company also accrued $223,000 and
$266,000 in penalties and interest, respectively, related to uncertain tax positions. In fiscal 2018, the Company released $700,000
of uncertain tax positions due to a settlement with New York state.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
8.
Income Taxes - continued
The
following table shows the changes in the Company’s uncertain tax positions (in thousands):
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
865
|
|
|
$
|
240
|
|
|
$
|
-
|
|
Additions for tax positions of prior years
|
|
|
-
|
|
|
|
625
|
|
|
|
240
|
|
Released in current year
|
|
|
(700
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
165
|
|
|
$
|
865
|
|
|
$
|
240
|
|
The
full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any
federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within
the next twelve months.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year
ended September 30, 2016 remains open to tax examination. The Company’s federal income tax returns for the years ended September
30, 2015, 2014 and 2013 have been examined by the Internal Revenue Service with no changes. These years are now under examination
for payroll taxes. The Company is also being examined for state income taxes, the settlement of which may occur within the next
twelve months.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Stock-Based Compensation
In
2010, the Company’s Board of Directors approved the 2010 Stock Option Plan (the “2010 Plan”). The 2010 Plan
was approved by the shareholders of the Company at the 2011 Annual Meeting of Stockholders. At the 2012 Annual Meeting of Stockholders,
shareholders approved amending the 2010 Plan to increase the maximum aggregate number of shares of common stock that may be optioned
and sold from 500,000 to 800,000. The options granted under the Plans may be either incentive stock options or non-qualified options.
The 2010 Plan is administered by the Board of Directors or by a compensation committee of the Board of Directors. The Board of
Directors 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 2010 Plan.
There were no options outstanding as of September 30, 2018 or 2017.
In
July 2014, the Company granted to an executive officer and an officer of a subsidiary a total of 96,325 shares of restricted stock.
The total grant date fair value of all of these awards was $963,000, or $10.00 per share, and vested in two years. Restricted
stock awards are awards of common stock that are subject the restrictions on transfer and to a risk of forfeiture if the awardee
terminates employment with the Company prior to the lapse of the restrictions. The fair value of such stock was determined using
the closing price on the grant date and compensation expense is recorded over the applicable requisite service periods. Forfeitures
are recognized as a reversal of expense of any unvested amounts in the period incurred. These restricted stock awards vested in
July 2016 at an aggregate intrinsic value of $969,000. There was no restricted stock outstanding as of September 30, 2018 and
2017.
Stock-based
compensation expense recognized during the fiscal years ended September 30, 2018, 2017, and 2016 amounted to $0, $0, and $360,000,
respectively.
10.
Commitments and Contingencies
Leases
The
Company leases certain equipment and facilities under operating leases, of which rent expense was approximately $3.8 million,
$3.3 million, and $3.3 million for the years ended September 30, 2018, 2017, and 2016, respectively. Rent expense for the Company’s
operating leases, which generally have escalating rentals over the term of the lease, is recorded using the straight-line method
over the initial lease term whereby an equal amount of rent expense is attributed to each period during the term of the lease,
regardless of when actual payments are made. Generally, this results in rent expense in excess of cash payments during the early
years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and
actual rental payments is included in other long-term liabilities in the consolidated balance sheets.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Commitments and Contingencies - continued
Undiscounted
future minimum annual lease obligations as of September 30, 2018 are as follows (in thousands):
2019
|
|
$
|
2,796
|
|
2020
|
|
|
2,878
|
|
2021
|
|
|
2,792
|
|
2022
|
|
|
2,744
|
|
2023
|
|
|
2,576
|
|
Thereafter
|
|
|
21,922
|
|
Total future minimum lease obligations
|
|
$
|
35,708
|
|
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 has recorded an $8.2 million pre-tax gain for the third quarter ending 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 $4.5 million and $5.6 million as of September 30, 2018 and 2017, 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. Constitutional challenges
remain and will be resolved at trial.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
Indemnity
Insurance Corporation
As
previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,
RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.
On
November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation
Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance
Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation
Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those
assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.
On
April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation
Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by
IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close
of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until
October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with
IIC. 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 September 30, 2018, we have 2 unresolved claims out of the original 71 claims.
General
The
Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),
Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping
center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality
Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook
Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied
liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc.
asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims
and third-party claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord
breached the applicable agreements. While the case was tried to a jury in late September 2018, a final judgment has not yet been
issued because substantial disputes remain related to the legal impact of the jury’s verdict, and the parties are currently
engaged in motion practice to resolve their disputes. It is unknown at this time whether the resolution of this uncertainty will
have a material effect on the Company’s financial condition.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
On
June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services
(Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno
injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged
that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial
proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which
JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million.
In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court
denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard
by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case
to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously
defend itself.
Settlement
of lawsuits for the years ended September 30, 2018, 2017, and 2016 total $1.7 million, $317,000, and $1.9 million, respectively.
As of September 30, 2018 and 2017, the Company has accrued $0 and $295,000 in accrued liabilities, respectively, related to settlement
of lawsuits.
11.
Common Stock
During
the year ended September 30, 2016, the following common stock transactions occurred:
|
●
|
The Company acquired
747,081 shares of its own common stock at a cost of $7.3 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The Company issued
125,610 common shares for the conversion of debt and interest in the aggregate amount of $1.3 million.
|
|
|
|
|
●
|
Warrants exercised
during the year amounted to 48,780 shares amounting to $500,000.
|
|
|
|
|
●
|
The Company paid
quarterly dividends of $0.03 per share starting the second quarter for an aggregate amount of $862,000.
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
11.
Common Stock - continued
During
the year ended September 30, 2017, the following common stock transactions occurred:
|
●
|
The Company acquired
89,685 shares of its own common stock at a cost of $1.1 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The Company paid
quarterly dividends of $0.03 per share for an aggregate amount of $1.2 million.
|
During
the year ended September 30, 2018, the Company paid quarterly dividends of $0.03 per share for an aggregate amount of $1.2 million.
12.
Employee Retirement Plan
The
Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The
Plan allows the corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching
contribution of up to 3% of the employee’s salary. Expenses related to matching contributions to the Plan approximated $159,000,
$130,000, and $108,000 for the years ended September 30, 2018, 2017, and 2016, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
13.
Acquisitions and Dispositions
2016
Dispositions
In
September 2016, we sold a 31% interest in Robust for a $2.0 million note back to its former owner, retaining a 20% interest in
the business. The sale of the 31% interest resulted in a loss in control of Robust and we recognized a loss of $184,000 at the
date of deconsolidation. The loss was measured as the excess of the carrying amount of the assets and liabilities over the aggregate
of 1) the fair value of the $2 million note received, 2) the fair value of retained non-controlling interest measured at $1.2
million, and 3) the carrying amount of the noncontrolling interest. At the date of deconsolidation, we no longer held a significant
influence in Robust and have accounted for our 20% remaining interest as a cost method investment. See Note 15 for further discussion
of the other-than-temporary impairment recognized in 2017.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
In
September 2016, the Company sold two adult clubs and closed a Bombshells location. Following are the aggregate details of the
sales:
|
●
|
Sales price —
$6.3 million
|
|
|
|
|
●
|
Cash received —
$3.5 million
|
|
|
|
|
●
|
Notes receivable
— $2.8 million
|
|
|
|
|
●
|
Gain on sale —
$1.1 million of adult club
|
|
|
|
|
●
|
Loss on closure
of Bombshells — $550,000
|
|
|
|
|
●
|
Deferred gain on
sale of adult club (gain recognized as note collected) — $399,000
|
The
notes receivable are payable as follows:
|
●
|
$1.8 million payable
at 6% over 240 months.
|
|
|
|
|
●
|
$1.0 million payable
at 9% over 120 months.
|
The
gain/loss on sale transactions above includes a tax benefit of the deferred tax liabilities amounting to $2.5 million, which were
released upon the sale of the entities.
2017
Acquisitions
On
April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St. Louis area, as well
as the club’s building and land, adjacent land, and a nearby building and land that can be used for another gentlemen’s
club. The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at closing.
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Land and building
|
|
$
|
2,320
|
|
Furniture and equipment
|
|
|
141
|
|
Noncompete
|
|
|
200
|
|
Other assets
|
|
|
74
|
|
Goodwill
|
|
|
1,539
|
|
Accrued liability
|
|
|
(75
|
)
|
Net assets
|
|
$
|
4,199
|
|
Management
believes that the recorded goodwill represents the Company’s expansion into the Greater St. Louis area. Goodwill will not
be amortized but will be tested at least annually for impairment. The goodwill balance of $1.5 million, which was recognized in
the Nightclubs segment, is deductible for tax purposes.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
On
May 8, 2017, a subsidiary of the Company acquired the company that owns Scarlett’s Cabaret Miami in Pembroke Park, Florida
along with certain related intellectual property for a total consideration of $26.0 million, payable $5.4 million at closing,
$5.0 million after six months through a short-term 5% note, and $15.6 million through a 12-year amortizing 8% note. See Note 7.
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Inventory
|
|
$
|
109
|
|
Leasehold improvements
|
|
|
1,222
|
|
Furniture and equipment
|
|
|
633
|
|
Noncompete
|
|
|
400
|
|
SOB license
|
|
|
20,196
|
|
Tradename
|
|
|
2,215
|
|
Goodwill
|
|
|
1,177
|
|
Net assets
|
|
$
|
25,952
|
|
Management
believes that the recorded goodwill represents the Company’s strong market positioning in the South Florida area and with
its different clientele from Tootsie’s Cabaret, which is five miles away, the two are complementary to each other including
management synergies. Goodwill for this acquisition is not amortized but will be tested at least annually for impairment. The
goodwill amount of $1.2 million, which was recognized in the Nightclubs segment, is deductible for tax purposes.
In
conjunction with the acquisition, the Company made an election under IRS Code 338(h)10 to treat the acquisition as an asset purchase
for tax purposes. As a result, no deferred taxes were recorded upon acquisition.
The
Company’s pro forma results of operations for the acquisitions have not been presented because the effect of the acquisitions
was not material to our consolidated financial statements. Since the acquisition dates, the two acquisitions generated combined
revenues of $5.6 million that are included in the Company’s consolidated statements of income for the year ended September
30, 2017.
2017
Dispositions
On
January 13, 2017, we closed the sale on one of our non-income-producing properties, included in assets held for sale on our condensed
consolidated balance sheet as of September 30, 2016, for $2.2 million in cash, recognizing approximately $116,000 loss on the
sale. Proceeds were used to pay off the remaining $1.5 million of a related 11% balloon note, which was due in 2018. The Company
paid a $75,000 prepayment penalty to pay off the debt.
On
June 6, 2017, the Company closed on the sale of another non-income-producing property, included in assets held for sale on the
Company’s condensed consolidated balance sheet as of September 30, 2016, for $1.5 million, recognizing approximately $0.9
million gain on the sale. The buyer owned one of the Company’s notes payable, hence, the Company exchanged the property
for a $1.5 million reduction in its note payable.
2018
Acquisitions
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 has finalized its estimate of the fair value of the shares acquired in the transaction, as well as its accounting
for such ownership.
On
May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest
at 8%. The transaction provides for the purchase of the real estate for $825,000 and other non-real estate business assets for
$180,000, with goodwill amounting to $495,000. Since the acquisition date, the acquired club generated revenues of approximately
$442,000 that are included in the Company’s consolidated statements of income for the year ended September 30, 2018.
On
September 6, 2018, a subsidiary acquired the remaining 49% of TEZ Real Estate that it did not own for $1,550,000 in cash. The
acquisition was principally funded by a loan on the property from a commercial bank. The Company accounted for the transaction
as an equity transaction in accordance with ASC 505. The difference between the fair value of the consideration paid and the amount
by which the noncontrolling interest was adjusted, in the amount of approximately $934,000, was recognized in additional paid-in
capital.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
14.
Quarterly Results of Operations (Unaudited)
The
following tables summarize unaudited quarterly data for fiscal 2018, 2017, and 2016 (in thousands, except per share data):
|
|
For the Three Months Ended
|
|
|
|
December 31, 2017
|
|
|
March 31, 2018
|
|
|
June 30, 2018
|
|
|
September 30, 2018
|
|
Revenues
|
|
$
|
41,212
|
|
|
$
|
41,226
|
|
|
$
|
42,634
|
|
|
$
|
40,676
|
|
Income from operations(1)
|
|
$
|
9,140
|
|
|
$
|
8,231
|
|
|
$
|
9,492
|
|
|
$
|
1,533
|
|
Net income (loss) attributable to RCIHH shareholders(1)
|
|
$
|
14,311
|
|
|
$
|
4,685
|
|
|
$
|
5,389
|
|
|
$
|
(2,672
|
)
|
Earnings (loss) per share (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.47
|
|
|
$
|
0.48
|
|
|
$
|
0.55
|
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
1.47
|
|
|
$
|
0.48
|
|
|
$
|
0.55
|
|
|
$
|
(0.27
|
)
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
Diluted
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
For the Three Months Ended
|
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
June 30, 2017
|
|
|
September 30, 2017
|
|
Revenues
|
|
$
|
33,739
|
|
|
$
|
34,518
|
|
|
$
|
37,429
|
|
|
$
|
39,210
|
|
Income from operations(2)
|
|
$
|
6,333
|
|
|
$
|
7,487
|
|
|
$
|
7,883
|
|
|
$
|
1,436
|
|
Net income (loss) attributable to RCIHH shareholders(2)
|
|
$
|
2,898
|
|
|
$
|
3,759
|
|
|
$
|
3,841
|
|
|
$
|
(2,239
|
)
|
Earnings (loss) per share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
(0.23
|
)
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,768
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
9,719
|
|
Diluted
|
|
|
9,814
|
|
|
|
9,721
|
|
|
|
9,719
|
|
|
|
9,719
|
|
|
|
For the Three Months Ended
|
|
|
|
December 31, 2015
|
|
|
March 31, 2016
|
|
|
June 30, 2016
|
|
|
September 30, 2016
|
|
Revenues
|
|
$
|
33,475
|
|
|
$
|
34,396
|
|
|
$
|
33,952
|
|
|
$
|
33,037
|
|
Income from operations(3)
|
|
$
|
5,717
|
|
|
$
|
7,550
|
|
|
$
|
6,657
|
|
|
$
|
769
|
|
Net income attributable to RCIHH shareholders(3)
|
|
$
|
2,552
|
|
|
$
|
5,505
|
|
|
$
|
2,653
|
|
|
$
|
508
|
|
Earnings per share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.55
|
|
|
$
|
0.27
|
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.54
|
|
|
$
|
0.27
|
|
|
$
|
0.05
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,296
|
|
|
|
10,013
|
|
|
|
9,906
|
|
|
|
9,839
|
|
Diluted
|
|
|
10,635
|
|
|
|
10,215
|
|
|
|
10,047
|
|
|
|
9,840
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
|
(1)
|
Fiscal year 2018
income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact of a $1.6
million loss on disposition in the second quarter, a $4.7 million in asset impairments ($1.6 million in the second quarter
and $3.2 million in the fourth quarter), and a $9.7 million deferred income tax benefit related to the revaluation of deferred
tax assets and liabilities in the first quarter. Quarterly effective income tax expense (benefit) rate was (134.3%), 24.2%,
25.3%, and 202.2% from first to fourth quarter, respectively.
|
|
|
|
|
(2)
|
Fiscal year 2017
income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact of $7.6
million in asset impairment ($1.4 million in the third quarter and $6.2 in the fourth quarter) and $1.3 million additional
income tax expense due to change in deferred tax liability rate in the fourth quarter. Quarterly effective income tax expense
rate was 33.3%, 33.7%, 32.9%, and 99.6% from first to fourth quarter, respectively.
|
|
|
|
|
(3)
|
Fiscal year 2016
income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact of $3.5
million in asset impairment in the fourth quarter; and $1.9 million in settlement of lawsuits (significant of which were $540,000
in the first quarter and $1.1 million in the fourth quarter). Quarterly effective income tax expense (benefit) rate was 35.9%,
5.2%, 43.0%, and (109.0%) from first to fourth quarter, respectively.
|
Our
nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September
(our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal
first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in
sales from year to year.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Impairment of Assets
During
the year ended September 30, 2016, we recorded an impairment of $3.5 million, of which $2.1 million was for indefinite-lived intangible
assets of one club, while $1.4 million was for one property held for sale.
During
the year ended September 30, 2017, we recorded aggregate impairment charges of $7.6 million comprised of $4.7 million for the
goodwill of four club locations, including one that we have put up for sale during the fiscal year, $385,000 for property and
equipment of one club, $1.4 million for SOB license of two club locations, and $1.2 million of investment impairment.
During
the year ended September 30, 2018, we recorded aggregate impairment charges of $4.7 million comprised of $1.6 million for long-lived
assets of one club and one Bombshells, and $3.1 million for SOB licenses of three clubs.
16.
Segment Information
The
Company is engaged in the operations of 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. Total assets are those assets controlled by each reportable segment. The other category below
includes our media and energy drink divisions that are not significant to the consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Segment Information - continued
Below
is the financial information related to the Company’s reportable segments (in thousands):
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
140,060
|
|
|
$
|
124,687
|
|
|
$
|
113,941
|
|
Bombshells
|
|
|
24,094
|
|
|
|
18,830
|
|
|
|
18,690
|
|
Other
|
|
|
1,594
|
|
|
|
1,379
|
|
|
|
2,229
|
|
|
|
$
|
165,748
|
|
|
$
|
144,896
|
|
|
$
|
134,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
44,458
|
|
|
$
|
35,138
|
|
|
$
|
33,211
|
|
Bombshells
|
|
|
2,040
|
|
|
|
3,084
|
|
|
|
1,152
|
|
Other
|
|
|
(252
|
)
|
|
|
(522
|
)
|
|
|
(2,650
|
)
|
General corporate
|
|
|
(17,850
|
)
|
|
|
(14,561
|
)
|
|
|
(11,020
|
)
|
|
|
$
|
28,396
|
|
|
$
|
23,139
|
|
|
$
|
20,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
2,052
|
|
|
$
|
5,142
|
|
|
$
|
22,136
|
|
Bombshells
|
|
|
22,522
|
|
|
|
4,489
|
|
|
|
609
|
|
Other
|
|
|
33
|
|
|
|
14
|
|
|
|
10
|
|
General corporate
|
|
|
656
|
|
|
|
1,604
|
|
|
|
5,393
|
|
|
|
$
|
25,263
|
|
|
$
|
11,249
|
|
|
$
|
28,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
5,404
|
|
|
$
|
5,186
|
|
|
$
|
5,008
|
|
Bombshells
|
|
|
1,265
|
|
|
|
1,025
|
|
|
|
1,072
|
|
Other
|
|
|
179
|
|
|
|
50
|
|
|
|
684
|
|
General corporate
|
|
|
874
|
|
|
|
659
|
|
|
|
564
|
|
|
|
$
|
7,722
|
|
|
$
|
6,920
|
|
|
$
|
7,328
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
253,169
|
|
|
$
|
254,432
|
|
|
$
|
244,332
|
|
Bombshells
|
|
|
39,560
|
|
|
|
18,870
|
|
|
|
8,378
|
|
Other
|
|
|
1,978
|
|
|
|
780
|
|
|
|
896
|
|
General corporate
|
|
|
35,859
|
|
|
|
25,802
|
|
|
|
22,455
|
|
|
|
$
|
330,566
|
|
|
$
|
299,884
|
|
|
$
|
276,061
|
|
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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Segment Information - continued
A
further disaggregation by revenue line item of segment revenues is as follows:
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
Fiscal 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
54,800
|
|
|
$
|
14,320
|
|
|
$
|
-
|
|
Sales of food and merchandise
|
|
|
12,732
|
|
|
|
9,701
|
|
|
|
-
|
|
Service revenues
|
|
|
64,054
|
|
|
|
50
|
|
|
|
-
|
|
Other revenues
|
|
|
8,474
|
|
|
|
23
|
|
|
|
1,594
|
|
|
|
$
|
140,060
|
|
|
$
|
24,094
|
|
|
$
|
1,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
48,655
|
|
|
$
|
11,784
|
|
|
$
|
-
|
|
Sales of food and merchandise
|
|
|
11,346
|
|
|
|
6,910
|
|
|
|
-
|
|
Service revenues
|
|
|
58,013
|
|
|
|
119
|
|
|
|
-
|
|
Other revenues
|
|
|
6,673
|
|
|
|
17
|
|
|
|
1,379
|
|
|
|
$
|
124,687
|
|
|
$
|
18,830
|
|
|
$
|
1,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of alcoholic beverages
|
|
$
|
45,677
|
|
|
$
|
11,539
|
|
|
$
|
-
|
|
Sales of food and merchandise
|
|
|
10,767
|
|
|
|
7,133
|
|
|
|
-
|
|
Service revenues
|
|
|
51,276
|
|
|
|
-
|
|
|
|
-
|
|
Other revenues
|
|
|
6,221
|
|
|
|
18
|
|
|
|
2,229
|
|
|
|
$
|
113,941
|
|
|
$
|
18,690
|
|
|
$
|
2,229
|
|
17.
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.
Until
September 2018, 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. The Company acquired
the remaining not-owned portion of the entity in September 2018.
18.
Related Party Transactions
Presently,
our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan
receives no compensation or other direct financial benefit for any of the guarantees.
In
August 2011, the Company borrowed $750,000 from a related party. The note bore interest at the rate of 10% per annum and matured
on August 1, 2014. The note was payable with one initial payment of interest only due January 1, 2012, and, thereafter in ten
interest-only quarterly payments. The principal was payable on August 1, 2014. The note was extended in 2014 under the same terms
until maturity in October 2017. At the option of the holder, the principal amount of the note and the accrued but unpaid interest
thereon could have been converted into shares of the Company’s common stock at $10.00 per share. The note was redeemable
by the Company after six months at any time if the closing price of its common stock for 20 consecutive trading days is at least
$13.00 per share. The note was converted into shares during 2016.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
19.
Subsequent Events
2019
Acquisitions
In
November 2018, subsequent to our fiscal year ended September 30, 2018, we closed on the acquisition of one club in Chicago, Illinois
and another club in Pittsburgh, Pennsylvania.
The
club in Chicago was acquired for a total consideration of $10.5 million with $6.0 million cash paid at closing and the $4.5 million
in a 6-year seller financed note with interest at 7%. The Company paid approximately $37,000 in acquisition-related costs for
this transaction.
The
Pittsburgh club was acquired for a total consideration of $15.1 million, with $7.6 million cash paid at closing and two seller
notes payable. The first note is 2-year 7% note for $2.0 million, and the second is a 10-year 8% note for $5.5 million. The Company
paid approximately $134,000 in acquisition-related costs for this transaction.
It is management’s expectation that
the purchase price of these acquisitions will be allocated to assets, including land, buildings, inventory, noncompetes, SOB license,
and goodwill; however, the final purchase price allocation of the two clubs remains subject to post-closing adjustments until
the Company has completed final valuation and accounting for the transactions.
2019
Disposition
In
October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash
at closing and a 9% note payable over a 10-year period. The note is payable interest-only for twelve months at the conclusion
of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is payable in 108 equal
installments of $5,078 per month until October 2028. The buyer will lease the property from the Company’s real estate subsidiary
under the following terms: $36,000 per month lease payments for ten years; renewal option for a succeeding ten years at a minimum
of $48,000 per month; lessee has option to purchase the property for $6.0 million during a term beginning November 2023 and expiring
in October 2028.
The
Company recorded a gain on the sale transaction of approximately $890,000.
2019
Financing
On
November 1, 2018, the Company raised $2.35 million through the issuance of 12% unsecured promissory notes to certain investors,
which notes mature on November 1, 2021. The notes pay interest-only in equal monthly installments, with a lump sum principal payment
at maturity. Among the promissory notes are two notes with a principal of $450,000 and $200,000. The $450,000 note was in exchange
for a $300,000 12% note and the $200,000 note was in exchange for a $100,000 note, both of which were included in the May 1, 2017
financing discussed in Note 7, above. Also included in the $2.35 million borrowing is a $500,000 note borrowed from a related
party.
On
December 6, 2018, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition, which
had a remaining balance of $3.0 million as of December 6, 2018, extending the maturity date from May 8, 2019, as previously amended,
to May 8, 2020.