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, Abilene, Edinburg,
El Paso, Harlingen and Beaumont, Texas, as well as Minneapolis, Minnesota; Pittsburgh, Pennsylvania; Charlotte, North Carolina;
New York, New York; Pembroke Park and Miami Gardens, Florida; Phoenix, Arizona; Sulphur, Louisiana; and Chicago, Washington Park
and Kappa, Illinois. The Company also owns and operates media businesses for adults. The Company’s corporate offices are
located in Houston, Texas.
2.
Summary of Significant Accounting Policies
Basis
of Accounting
The
accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is
owned. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal
Year
Our
fiscal year ends on September 30. References to years 2019, 2018, and 2017 are for fiscal years ended September 30, 2019, 2018,
and 2017, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions
are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under
the circumstances. Estimates and assumptions may vary under different circumstances and conditions. We evaluate our estimates
and assumptions on an ongoing basis.
Cash
and Cash Equivalents
The
Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The
Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided
by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to
amounts in excess of FDIC limits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Accounts
and Notes Receivable
Accounts
receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to
cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily comprised of receivables
for advertising sales and Expo registration. Accounts receivable also include employee advances, construction advances, and other
miscellaneous receivables. Long-term notes receivable, which have original maturity of more than one year, include consideration
from the sale of certain investment interest entities and real estate. The Company recognizes interest income on notes receivable
based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income
will be collected. The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected. Allowance for doubtful accounts balance was $101,000 and $0
as of September 30, 2019 and 2018, respectively (see Note 5).
Inventories
Inventories
include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the lower of cost (on a
first-in, first-out (“FIFO”) basis), or net realizable value.
Property
and Equipment
Property
and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated
useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.
Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to
7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures
for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs
are expensed as incurred. The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off
from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of income of the
respective period. Interest expense from related debt incurred during site construction is capitalized, which amounted to $597,000
in fiscal 2019, $319,000 in fiscal 2018, and $43,000 in fiscal 2017.
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, 2019,
we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $1.6 million. For the
year ended September 30, 2018, we identified two reporting units that were impaired and recognized a goodwill impairment loss
totaling $834,000. 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 17.
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 $178,000 in 2019 related to one club,
$3.1 million in 2018 related to three clubs, and $1.4 million in 2017 related to two clubs, which are included in other charges,
net in the consolidated statements of income. See Note 17.
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 2019, the Company impaired two clubs for a total of $4.2 million; during the fourth
quarter 2018, the Company impaired one club and one Bombshells for a total of $1.6 million; and during the fourth quarter of 2017,
the Company impaired one club for $385,000. See Notes 6 and 17.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Fair
Value of Financial Instruments
The
Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional
information in the notes to consolidated financial statements when the fair value is different than the carrying value of these
financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their
carrying amounts due to the relatively short maturity of these instruments. The carrying value of notes receivable and short and
long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are
held for trading purposes.
Comprehensive
Income
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.
Revenue
Recognition
See
“Impact of Recently Issued Accounting Standards” section below regarding ASC 606 and Note 4.
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 5.
Income
Taxes
The
Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions
where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is
determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
U.S.
GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements. We recognize penalties related to unrecognized
tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized
tax benefits in interest expense.
Investments
Investments
in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost
and adjusted for the Company’s proportionate share of their undistributed earnings or losses. Investments in companies in
which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for
at cost and reviewed for any impairment. Cost and equity method investments are included in other assets in the Company’s
consolidated balance sheets. The Company sold 31% of Drink Robust on September 29, 2016, retaining 20%. Because the Company had
no ability to direct the management of the investee company or exert significant influence, the investment was accounted
for at cost beginning on the date of sale. 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 15.
Earnings
Per 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
considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants
and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted
for interest expense, that would no longer be incurred if the debentures were converted).
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Numerator -
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RCIHH shareholders - basic
|
|
$
|
19,175
|
|
|
$
|
20,879
|
|
|
$
|
8,259
|
|
Adjustment to net income from assumed conversion of debentures(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Adjusted net income attributable to RCIHH shareholders - diluted
|
|
$
|
19,175
|
|
|
$
|
20,879
|
|
|
$
|
8,264
|
|
Denominator -
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,657
|
|
|
|
9,719
|
|
|
|
9,731
|
|
Effect of potentially dilutive convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Adjusted weighted average number of common shares outstanding - diluted
|
|
|
9,657
|
|
|
|
9,719
|
|
|
|
9,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.99
|
|
|
$
|
2.15
|
|
|
$
|
0.85
|
|
Diluted earnings per share
|
|
$
|
1.99
|
|
|
$
|
2.15
|
|
|
$
|
0.85
|
|
(1)
Represents interest expense on dilutive convertible securities that would not occur if they were assumed converted.
(2)
There were no outstanding warrants and options to be considered for the EPS computation for all periods presented.
Convertible
debentures amounting to $0, $0, and $0.9 million were dilutive in 2019, 2018, and 2017, respectively.
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, 2019 and 2018, the Company has no stock options outstanding.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
Legal
and Other Contingencies
The
Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a
material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. The Company
recognizes legal fees and expenses, including those related to legal contingencies, as incurred.
Generally,
the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
The
Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims
for workers’ compensation, general liability, property, auto, and business interruption coverage. The Company carries substantial
insurance to cover such risks with large deductibles and/or self-insured retention. These policies have been structured to limit
our per-occurrence exposure. The Company believes, and the Company’s
experience has been, that such insurance policies have been sufficient to cover such risks.
Fair
Value Accounting
The
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset
or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements,
the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the
following levels.
U.S.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
|
●
|
Level
1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 – Include other inputs that are directly or indirectly observable in the marketplace.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs which are supported by little or no market activity.
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The Company classifies
its marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains and losses, net of
the related income tax effect, if any, on available-for-sale securities were excluded from income and were reported
as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018. Realized gains and
losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are
included in comprehensive income. 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 $148,000 and $760,000 as of September 30, 2019 and 2018.
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, 2019, 2018, and 2017.
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
|
|
2019
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Property and equipment, net
|
|
$
|
10,926
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,926
|
|
Indefinite-lived intangibles
|
|
|
5,323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,323
|
|
Definite-lived intangibles
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
Goodwill
|
|
|
11,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,627
|
|
Other assets (equity securities)
|
|
|
148
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
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)
|
|
Goodwill
|
|
$
|
1,999
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,999
|
|
Property and equipment, net
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
Indefinite-lived intangibles
|
|
|
4,618
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,618
|
|
Notes receivable
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Other assets (equity securities)
|
|
|
760
|
|
|
|
760
|
|
|
|
-
|
|
|
|
-
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
|
|
Unrealized
Gain (Loss/Impairments) Recognized
|
|
|
|
Years
Ended September 30,
|
|
Description
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(As Revised)
|
|
|
|
|
Goodwill
|
|
$
|
(1,638
|
)
|
|
$
|
(834
|
)
|
|
$
|
(4,697
|
)
|
Property and equipment, net
|
|
|
(4,224
|
)
|
|
|
(1,615
|
)
|
|
|
(385
|
)
|
Indefinite-lived intangibles
|
|
|
(178
|
)
|
|
|
(3,121
|
)
|
|
|
(1,401
|
)
|
Assets held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other assets (equity securities)
|
|
|
(612
|
)
|
|
|
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” and codified as Accounting Standards Codification
No. 606, “ASC 606”), 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 adopted
the new revenue recognition standard as of October 1, 2018 using the cumulative effect method, which did not have a material impact
on its consolidated financial statements. See Note 4 for new disclosures as required by ASC 606.
In January 2016, the
FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, which amends the guidance on the classification and measurement of financial instruments.
Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification
and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities
measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
The amendments of the ASU are effective for us for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. The Company adopted ASU 2016-01 as of October 1, 2018. Our adoption required the Company to reclassify $220,000
from accumulated other comprehensive income to retained earnings as of the beginning of the quarter ended December 31, 2018. All
succeeding unrealized gains or losses related the changes in the market value of our equity securities are included in other
income/expenses in our consolidated statement of income.
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 will adopt ASU 2016-02 and related amendments as of the beginning of our fiscal first quarter ending December 31,
2019. We will be electing the package of practical expedients permitted under the transition guidance within the new standard,
which among other things, allows us to retain historical lease classification, as well as relief from reviewing expired and existing
contracts to determine if they contain leases. We expect our total assets as of October 1, 2019 to have an increase of approximately
$24.5 million due to the recognition of operating lease right-of-use assets, and a corresponding increase in total liabilities
due to the recognition of operating lease liabilities after the reversal of our deferred rent liability balance as of September
30, 2019. We do not expect ASC 842 to have an impact on our consolidated statements of income and cash flows. As a result of the
adoption of ASC 842, we do not expect our future minimum lease payments for the fiscal first quarter ending December 31, 2019
related to leases existing as of September 30, 2019 to be materially different from the amounts disclosed in future minimum lease
commitments in Note 11.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
2.
Summary of Significant Accounting Policies - continued
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking
information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires
credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than
as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses.
The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. We are still evaluating the impact of this ASU, including all related updates, on the Company’s consolidated
financial statements.
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
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.
In
March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns the guidance
for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of
the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply. However, if there
has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of
fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts both lessees and lessors from having to provide
certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The update is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are still evaluating the impact
of this ASU on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes
by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions
to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period
income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’
application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government
that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to
tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities
for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should
reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that
elects early adoption should adopt all the amendments in the same period. We are still evaluating the impact of this ASU on the
Company’s consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
3.
Revision of Prior Year Immaterial Misstatement
During the quarter ended December 31, 2018
(first quarter of fiscal 2019), the Company identified certain mechanical errors in its goodwill impairment analysis that
was performed for its annual impairment testing for fiscal year ended September 30, 2018. These errors related to the use
of an incorrect income tax rate assumption and the exclusion of certain debt service payments as part of our goodwill impairment
testing for two of our reporting units, which resulted in a goodwill impairment charge of $834,000.
The
Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined that for
both the quarter and fiscal year ended September 30, 2018, the errors were immaterial. The Company has decided to correct these
immaterial errors as revisions to our previously issued financial statements and has adjusted this Form 10-K insofar as fiscal
2018 is concerned.
The
tables below present the impact of the revision in the Company’s consolidated financial statements (in thousands):
|
|
Fiscal
Year Ended September 30, 2018
|
|
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Revised
|
|
Statement of Income/Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other charges, net
|
|
$
|
8,350
|
|
|
$
|
834
|
|
|
$
|
9,184
|
|
Total operating expenses
|
|
|
137,352
|
|
|
|
834
|
|
|
|
138,186
|
|
Income from operations
|
|
|
28,396
|
|
|
|
(834
|
)
|
|
|
27,562
|
|
Income before income taxes
|
|
|
18,676
|
|
|
|
(834
|
)
|
|
|
17,842
|
|
Net income
|
|
|
21,794
|
|
|
|
(834
|
)
|
|
|
20,960
|
|
Net income attributable to RCIHH common stockholders
|
|
|
21,713
|
|
|
|
(834
|
)
|
|
|
20,879
|
|
Earnings per share - basic
|
|
$
|
2.23
|
|
|
$
|
(0.08
|
)
|
|
$
|
2.15
|
|
Earnings per share - diluted
|
|
$
|
2.23
|
|
|
$
|
(0.08
|
)
|
|
$
|
2.15
|
|
Comprehensive income
|
|
$
|
22,014
|
|
|
$
|
(834
|
)
|
|
$
|
21,180
|
|
Comprehensive income attributable to RCI Hospitality Holdings, Inc.
|
|
|
21,933
|
|
|
|
(834
|
)
|
|
|
21,099
|
|
|
|
September
30, 2018
|
|
|
|
As
Previously Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Balance Sheet/Statement of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
44,425
|
|
|
$
|
(834
|
)
|
|
$
|
43,591
|
|
Total assets
|
|
|
330,566
|
|
|
|
(834
|
)
|
|
|
329,732
|
|
Retained earnings
|
|
|
89,740
|
|
|
|
(834
|
)
|
|
|
88,906
|
|
Total RCIHH stockholders’ equity
|
|
|
154,269
|
|
|
|
(834
|
)
|
|
|
153,435
|
|
Total equity
|
|
|
154,166
|
|
|
|
(834
|
)
|
|
|
153,332
|
|
Total liabilities and equity
|
|
|
330,566
|
|
|
|
(834
|
)
|
|
|
329,732
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
3.
Revision of Prior Year Immaterial Misstatement - continued
The
table below presents the impact of the revision in the Company’s notes to its consolidated financial statements related
to unaudited quarterly results of operations (in thousands):
|
|
Quarter
Ended September 30, 2018
|
|
|
|
As
Previously Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Income from operations
|
|
$
|
1,533
|
|
|
$
|
(834
|
)
|
|
$
|
699
|
|
Net loss attributable to RCIHH common stockholders
|
|
|
(2,672
|
)
|
|
|
(834
|
)
|
|
|
(3,506
|
)
|
Loss per share - basic
|
|
$
|
(0.27
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.36
|
)
|
Loss per share - diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.36
|
)
|
The
consolidated statements of cash flows are not presented because there is no impact on total cash flows from operating activities,
investing activities and financing activities. Certain components of net cash provided by operating activities changed, as caused
by the revision, but the net change amounted to zero for both quarter and fiscal year ended September 30, 2018.
4.
Revenues
On
October 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (formerly ASU 2014-09). The Company
recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale
upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified
in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities
are presented on a net basis in the accompanying consolidated statements of income. The Company recognizes revenue when it satisfies
a performance obligation (point in time of sale) by transferring control over a product or service to a customer.
Commission
revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of
magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related
to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during
our fiscal fourth quarter. Other rental revenues are recognized when earned (recognized over time) and are more appropriately
covered by guidance under ASC Topic 840, Leases (under ASC 842 commencing on October 1, 2019).
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
4.
Revenues - continued
Revenues,
as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 18), are shown below (in thousands).
|
|
Fiscal
2019
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
57,277
|
|
|
$
|
17,863
|
|
|
$
|
-
|
|
|
$
|
75,140
|
|
Sales of food and merchandise
|
|
|
13,051
|
|
|
|
12,779
|
|
|
|
-
|
|
|
|
25,830
|
|
Service revenues
|
|
|
67,893
|
|
|
|
162
|
|
|
|
-
|
|
|
|
68,055
|
|
Other revenues
|
|
|
10,385
|
|
|
|
24
|
|
|
|
1,625
|
|
|
|
12,034
|
|
|
|
$
|
148,606
|
|
|
$
|
30,828
|
|
|
$
|
1,625
|
|
|
$
|
181,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
146,938
|
|
|
$
|
30,828
|
|
|
$
|
1,572
|
|
|
$
|
179,338
|
|
Recognized over time
|
|
|
1,668
|
|
|
|
-
|
|
|
|
53
|
|
|
|
1,721
|
|
|
|
$
|
148,606
|
|
|
$
|
30,828
|
|
|
$
|
1,625
|
|
|
$
|
181,059
|
|
|
|
Fiscal
2018
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
54,800
|
|
|
$
|
14,320
|
|
|
$
|
-
|
|
|
$
|
69,120
|
|
Sales of food and merchandise
|
|
|
12,732
|
|
|
|
9,701
|
|
|
|
-
|
|
|
|
22,433
|
|
Service revenues
|
|
|
64,054
|
|
|
|
50
|
|
|
|
-
|
|
|
|
64,104
|
|
Other revenues
|
|
|
8,474
|
|
|
|
23
|
|
|
|
1,594
|
|
|
|
10,091
|
|
|
|
$
|
140,060
|
|
|
$
|
24,094
|
|
|
$
|
1,594
|
|
|
$
|
165,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
138,847
|
|
|
$
|
24,094
|
|
|
$
|
1,516
|
|
|
$
|
164,457
|
|
Recognized over time
|
|
|
1,213
|
|
|
|
-
|
|
|
|
78
|
|
|
|
1,291
|
|
|
|
$
|
140,060
|
|
|
$
|
24,094
|
|
|
$
|
1,594
|
|
|
$
|
165,748
|
|
|
|
Fiscal
2017
|
|
|
|
Nightclubs
|
|
|
Bombshells
|
|
|
Other
|
|
|
Total
|
|
Sales of alcoholic beverages
|
|
$
|
48,655
|
|
|
$
|
11,784
|
|
|
$
|
-
|
|
|
$
|
60,439
|
|
Sales of food and merchandise
|
|
|
11,346
|
|
|
|
6,910
|
|
|
|
-
|
|
|
|
18,256
|
|
Service revenues
|
|
|
58,013
|
|
|
|
119
|
|
|
|
-
|
|
|
|
58,132
|
|
Other revenues
|
|
|
6,673
|
|
|
|
17
|
|
|
|
1,379
|
|
|
|
8,069
|
|
|
|
$
|
124,687
|
|
|
$
|
18,830
|
|
|
$
|
1,379
|
|
|
$
|
144,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
123,557
|
|
|
$
|
18,830
|
|
|
$
|
1,273
|
|
|
$
|
143,660
|
|
Recognized over time
|
|
|
1,130
|
|
|
|
-
|
|
|
|
106
|
|
|
|
1,236
|
|
|
|
$
|
124,687
|
|
|
$
|
18,830
|
|
|
$
|
1,379
|
|
|
$
|
144,896
|
|
* Rental revenue (included in Other Revenues)
is covered by ASC Topic 840 until the end of fiscal 2019. Effective October 1, 2019, rental revenue will be reported under
the guidance of ASC 842. All other revenues are covered by ASC Topic 606.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
4.
Revenues - continued
The
Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services
transferred to the customer is included in accounts receivable, net in our consolidated balance sheet. A reconciliation of contract
liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below:
|
|
Balance
at September 30, 2018
|
|
|
Consideration
Received
|
|
|
Recognized
in Revenue
|
|
|
Balance
at September 30, 2019
|
|
Ad revenue
|
|
$
|
126
|
|
|
$
|
602
|
|
|
$
|
(652
|
)
|
|
$
|
76
|
|
Expo revenue
|
|
|
-
|
|
|
|
602
|
|
|
|
(602
|
)
|
|
|
-
|
|
Other
|
|
|
8
|
|
|
|
52
|
|
|
|
(53
|
)
|
|
|
7
|
|
|
|
$
|
134
|
|
|
$
|
1,256
|
|
|
$
|
(1,307
|
)
|
|
$
|
83
|
|
5.
Selected Account Information
The
components of accounts receivable, net are as follows (in thousands):
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Credit card receivables
|
|
$
|
1,396
|
|
|
$
|
2,273
|
|
Income tax refundable
|
|
|
1,781
|
|
|
|
2,137
|
|
Insurance receivable
|
|
|
1,197
|
|
|
|
-
|
|
ATM-in-transit
|
|
|
780
|
|
|
|
933
|
|
Other (net of allowance for doubtful accounts of $101 and $0, respectively)
|
|
|
1,135
|
|
|
|
1,977
|
|
|
|
$
|
6,289
|
|
|
$
|
7,320
|
|
Notes
receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses
and assets with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years.
The
components of accrued liabilities are as follows (in thousands):
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Insurance
|
|
$
|
4,937
|
|
|
$
|
3,807
|
|
Payroll and related costs
|
|
|
2,892
|
|
|
|
2,293
|
|
Property taxes
|
|
|
1,675
|
|
|
|
1,796
|
|
Sales and liquor taxes
|
|
|
3,086
|
|
|
|
1,883
|
|
Patron tax
|
|
|
595
|
|
|
|
532
|
|
Lawsuit settlement
|
|
|
115
|
|
|
|
230
|
|
Unearned revenues
|
|
|
83
|
|
|
|
134
|
|
Other
|
|
|
1,261
|
|
|
|
1,298
|
|
|
|
$
|
14,644
|
|
|
$
|
11,973
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
5.
Selected Account Information - continued
The
components of selling, general and administrative expenses are as follows (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Taxes and permits
|
|
$
|
10,779
|
|
|
$
|
9,545
|
|
|
$
|
8,026
|
|
Advertising and marketing
|
|
|
8,392
|
|
|
|
7,536
|
|
|
|
6,704
|
|
Supplies and services
|
|
|
5,911
|
|
|
|
5,344
|
|
|
|
4,873
|
|
Insurance
|
|
|
5,429
|
|
|
|
5,473
|
|
|
|
4,006
|
|
Rent
|
|
|
3,896
|
|
|
|
3,720
|
|
|
|
3,258
|
|
Legal
|
|
|
5,180
|
|
|
|
3,586
|
|
|
|
3,074
|
|
Utilities
|
|
|
3,165
|
|
|
|
2,969
|
|
|
|
2,824
|
|
Charge cards fees
|
|
|
3,803
|
|
|
|
3,244
|
|
|
|
2,783
|
|
Security
|
|
|
2,973
|
|
|
|
2,617
|
|
|
|
2,251
|
|
Accounting and professional fees
|
|
|
2,815
|
|
|
|
2,944
|
|
|
|
2,159
|
|
Repairs and maintenance
|
|
|
2,980
|
|
|
|
2,184
|
|
|
|
2,091
|
|
Other
|
|
|
4,573
|
|
|
|
4,662
|
|
|
|
4,726
|
|
|
|
$
|
59,896
|
|
|
$
|
53,824
|
|
|
$
|
46,775
|
|
The
components of other charges, net are as follows (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(As
Revised)
|
|
|
|
|
Impairment of assets
|
|
$
|
6,040
|
|
|
$
|
5,570
|
|
|
$
|
7,639
|
|
Settlement of lawsuits
|
|
|
225
|
|
|
|
1,669
|
|
|
|
317
|
|
Loss (gain) on sale of businesses and assets
|
|
|
(2,877
|
)
|
|
|
1,965
|
|
|
|
(542
|
)
|
Gain on insurance
|
|
|
(768
|
)
|
|
|
(20
|
)
|
|
|
-
|
|
Gain on settlement of patron tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
$
|
2,620
|
|
|
$
|
9,184
|
|
|
$
|
7,312
|
|
6.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Buildings and land
|
|
$
|
159,969
|
|
|
$
|
149,683
|
|
Equipment
|
|
|
37,031
|
|
|
|
34,572
|
|
Leasehold improvements
|
|
|
32,868
|
|
|
|
30,414
|
|
Furniture
|
|
|
9,393
|
|
|
|
8,739
|
|
Total property and equipment
|
|
|
239,261
|
|
|
|
223,408
|
|
Less accumulated depreciation
|
|
|
(55,305
|
)
|
|
|
(51,005
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
183,956
|
|
|
$
|
172,403
|
|
Included
in buildings and leasehold improvements above are construction-in-progress amounting to $8.9 million and $6.4 million as of September
30, 2019 and 2018, respectively, which are mostly related to Bombshells projects.
Depreciation
expense was approximately $8.4 million, $7.5 million, and $6.7 million for fiscal years 2019, 2018, and 2017, respectively. Impairment
loss for property and equipment was $4.2 million, $1.6 million, and $385,000 for fiscal 2019, 2018, and 2017, respectively.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
7.
Assets Held for Sale
As of September 30, 2018, the Company
had five real estate properties for sale. The aggregate estimated fair value of the properties less cost to sell as of
September 30, 2018 was approximately $2.9 million and reclassified to assets held for sale in the Company’s
consolidated balance sheet. The assets were measured at the carrying value as adjusted for depreciation which was lower than the
fair value at the date reclassified.
During fiscal 2019, we sold all the properties
held for sale as of September 30, 2018. See Note 15.
In
September 2019, the Company classified as held-for-sale two separate parcels of land subdivided from previously constructed Bombshells
pad sites located in Houston, Texas. The aggregate estimated fair value of the properties less cost to sell as of September 30,
2019 was approximately $2.9 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
8.
Goodwill and Other Intangible Assets
Goodwill
and other intangible assets consisted of the following (in thousands):
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
(As
Revised)
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
53,630
|
|
|
$
|
43,591
|
|
Licenses
|
|
|
72,597
|
|
|
|
67,523
|
|
Tradename
|
|
|
2,215
|
|
|
|
2,215
|
|
|
|
|
128,442
|
|
|
|
113,329
|
|
|
|
Amortization
Period
|
|
|
|
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
Discounted leases
|
|
18 & 6 years
|
|
|
101
|
|
|
|
108
|
|
Non-compete agreements
|
|
5 years
|
|
|
565
|
|
|
|
588
|
|
Software
|
|
5 years
|
|
|
315
|
|
|
|
834
|
|
Distribution agreement
|
|
3 years
|
|
|
158
|
|
|
|
264
|
|
|
|
|
|
|
1,139
|
|
|
|
1,794
|
|
Total goodwill and other intangible assets
|
|
|
|
$
|
129,581
|
|
|
$
|
115,123
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
|
Definite-
Lived Intangibles
|
|
|
Indefinite-
Lived Intangibles
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As
Revised)
|
|
Beginning balance
|
|
$
|
1,794
|
|
|
$
|
69,738
|
|
|
$
|
43,591
|
|
|
$
|
1,565
|
|
|
$
|
72,859
|
|
|
$
|
43,866
|
|
Acquisitions
|
|
|
243
|
|
|
|
5,252
|
|
|
|
11,677
|
|
|
|
483
|
|
|
|
-
|
|
|
|
559
|
|
Impairment
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
(1,638
|
)
|
|
|
-
|
|
|
|
(3,121
|
)
|
|
|
(834
|
)
|
Amortization
|
|
|
(898
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
1,139
|
|
|
$
|
74,812
|
|
|
$
|
53,630
|
|
|
$
|
1,794
|
|
|
$
|
69,738
|
|
|
$
|
43,591
|
|
As
of September 30, 2019 and 2018, the accumulated impairment balance of indefinite-lived intangibles was $6.1 million and $5.9 million,
respectively, while the accumulated impairment balance of goodwill was $6.3 million and $4.7 million, respectively.
Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2019
is: 2020 - $519,000; 2021 - $353,000; 2022 - $134,000; 2023 - $59,000; 2024 - $11,000; and thereafter - $63,000.
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 of the income approach method was used in calculating the value
of these licenses in a business combination, while the relief from royalty method was used in calculating the value of tradenames.
During the fiscal year ended September 30, 2019, the Company recognized a $178,000 impairment related to one club’s SOB
license and a $1.6 million impairment related to the goodwill of four reporting units. During the fiscal year ended September
30, 2018, the Company recognized a $3.1 million impairment related to three clubs’ SOB licenses and an $834,000 impairment
related to the goodwill of two reporting units. 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. See Note 17.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt
Long-term
debt consisted of the following (in thousands):
|
|
|
|
September
30,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Notes payable at 5.5%, matures January 2023
|
|
*
|
|
$
|
981
|
|
|
$
|
1,071
|
|
Non-interest-bearing debts to State of Texas, mature March 2022 and May 2022, interest
imputed at 9.6%
|
|
|
|
|
3,379
|
|
|
|
4,470
|
|
Note payable at 5.45%, matures December 2027
|
|
*(a)
|
|
|
9,877
|
|
|
|
10,258
|
|
Note payable at 5.95%, matures December 2027
|
|
*(a)
|
|
|
6,776
|
|
|
|
7,544
|
|
Note payable at 12%, matures October 2021
|
|
|
|
|
5,518
|
|
|
|
6,219
|
|
Note payable at 4.99%, collateralized by aircraft, paid June 2019
|
|
(a)
|
|
|
-
|
|
|
|
912
|
|
Notes payable at 12%, mature May 2020
|
|
|
|
|
2,040
|
|
|
|
2,940
|
|
Note payable at 8%, matures May 2020, as amended, subsequently extended
|
|
**
|
|
|
3,025
|
|
|
|
3,025
|
|
Note payable at 8%, matures May 2029
|
|
**
|
|
|
13,569
|
|
|
|
14,464
|
|
Note payable at 5.75%, matures December 2027
|
|
*(a)
|
|
|
51,167
|
|
|
|
58,826
|
|
Note payable at 5.99%, matures December 2032
|
|
|
|
|
6,555
|
|
|
|
6,877
|
|
Note payable at 5%, matures August 2029
|
|
*(a)
|
|
|
3,709
|
|
|
|
4,257
|
|
Note payable at 5%, matures April 2020
|
|
*(a)
|
|
|
2,099
|
|
|
|
3,079
|
|
Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030
|
|
*(a)
|
|
|
2,619
|
|
|
|
960
|
|
Note payable at 8%, matures May 2021
|
|
*
|
|
|
771
|
|
|
|
945
|
|
Note payable at 5.95%, matures August 2039
|
|
*(a)
|
|
|
6,858
|
|
|
|
3,168
|
|
Note payable at 12%, matures August 2021
|
|
|
|
|
4,000
|
|
|
|
4,000
|
|
Note payable at 9%, matures September 2028
|
|
*
|
|
|
1,263
|
|
|
|
1,350
|
|
Note payable at 6.1%, paid February 2019
|
|
*(a)
|
|
|
-
|
|
|
|
1,500
|
|
Note payable at 5.95%, matures September 2028
|
|
*(a)
|
|
|
1,511
|
|
|
|
1,550
|
|
Note payable at 7%, paid April 2019
|
|
|
|
|
-
|
|
|
|
5,000
|
|
Note payable at 6%, matures February 2040
|
|
*(a)
|
|
|
3,608
|
|
|
|
-
|
|
Note payable at 5.49%, matures December 2038
|
|
|
|
|
2,156
|
|
|
|
-
|
|
Note payable at 7%, matures November 2024
|
|
**
|
|
|
3,982
|
|
|
|
-
|
|
Note payable at 7%, matures November 2020
|
|
**
|
|
|
2,000
|
|
|
|
-
|
|
Notes payable at 12%, mature November 2021
|
|
|
|
|
2,350
|
|
|
|
-
|
|
Note payable at 8%, matures November 2028
|
|
**
|
|
|
5,190
|
|
|
|
-
|
|
Total debt
|
|
|
|
|
145,003
|
|
|
|
142,415
|
|
Less unamortized debt discount and issuance costs
|
|
|
|
|
(1,475
|
)
|
|
|
(1,788
|
)
|
Less current portion
|
|
|
|
|
(15,754
|
)
|
|
|
(19,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term portion of debt
|
|
|
|
$
|
127,774
|
|
|
$
|
121,580
|
|
*
|
Collateralized
by real estate
|
**
|
Collateralized
by stock in subsidiary
|
(a)
|
These
commercial bank debts are guaranteed by the Company’s CEO. See Note 20.
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt - continued
Following
is a summary of long-term debt at September 30 (in thousands):
|
|
2019
|
|
|
2018
|
|
Secured by real estate
|
|
$
|
90,257
|
|
|
$
|
93,437
|
|
Secured by stock in subsidiary
|
|
|
27,766
|
|
|
|
17,489
|
|
Secured by other assets
|
|
|
8,711
|
|
|
|
7,789
|
|
Unsecured
|
|
|
18,269
|
|
|
|
23,700
|
|
|
|
$
|
145,003
|
|
|
$
|
142,415
|
|
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 December 2017 Refinancing 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. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate
of 9.6%, establishing a net present value for the settlement of $7.2 million. In March 2017, the Company settled with the State
of Texas for one of the two remaining unsettled Patron Tax locations. The Company agreed to pay a total of $687,815 with $195,815
paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest. Going
forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5 per customer.
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. This
note has been fully refinanced in relation to the second note of the December 2017 Refinancing Loan, 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 refinanced in relation to the third note of the December 2017 Refinancing 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 December 2017 Refinancing Loan, as discussed below.
In June 2010, the Company borrowed $518,192
from a lender. The funds were used to purchase an aircraft. The debt bore interest at 6.30% with monthly principal and interest
payments of $3,803 beginning in July 2010, maturing June 2030. This note was refinanced with a bank in April 2017 with the borrowing
of $952,690 at 4.99% for 20 years, together with a purchase of a new aircraft. Monthly payments for the new note was at $6,286,
including interest, beginning in May 2017. This note has been paid off in 2019.
On May 1, 2017, the Company raised $5.4
million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on May 1, 2020. The notes
pay interest-only in equal monthly installments, with a lump sum principal payment at maturity. On August 15, 2018 and September
26, 2018, the Company refinanced $2.0 million and $500,000 of the notes, respectively. The $2.0 million note was exchanged for
a $4.0 million 12% note maturing in three years with interest-only payments until maturity, where the full principal is to be
paid. The $500,000 note was exchanged for a $1.35 million 9% note maturing in 10 years with monthly payments of $17,101, including
interest. On November 1, 2018, the Company refinanced two notes with a total principal of $400,000 with certain investors. See
succeeding paragraph related to November 1, 2018 financing below. Included in the balance of long-term debt as of September 30,
2019 and 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer employee in which the
terms of the note are the same as the rest of the lender group.
On May 8, 2017, in relation to the Scarlett’s
acquisition (see Note 15), the Company executed two promissory notes with the sellers: (i) a 5% short-term note for $5.0 million
payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million. The 12-year note
is payable $168,343 per month, including interest. The Company amended the $5.0 million short-term note payable, which had a remaining
balance of $3.0 million as of amendment date, several times extending the maturity date to October 1, 2022 and increasing the
interest rate to 8% for its remaining term.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt - continued
On
December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank for $81.2
million. The December 2017 Refinancing Loan fully refinanced 20 of the Company’s notes payable and partially paid down 1
note payable (collectively, “Repaid Notes”) with interest rates ranging from 5% to 12% covering 43 parcels of real
properties the Company previously acquired (“Properties”). The December 2017 Refinancing Loan 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 paid monthly installments of principal of $250,000, applied to the first note,
until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017 Refinancing Loan and
the then current value of the Properties, is not greater than 65%. The loan-to-value ratio of the Properties fell below 65%
in October 2019, hence, we stopped paying the additional $250,000 monthly. The December 2017 Refinancing Loan 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. There are certain financial covenants with which the Company
must be in compliance related to this financing.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt - continued
In connection with the Repaid Notes, we wrote
off $279,000 of unamortized debt issuance costs to interest expense. Prior to September 30, 2017, the Company paid a portion of
debt issuance costs amounting to $612,500, which was included in other assets until the closing of the transaction. At closing,
the Company paid an additional $764,000 in debt issuance costs, which together with the $612,500 prepayment will be amortized
for the term of the loan using the effective interest rate method. We also paid prepayment penalties amounting to $543,000 on
the Repaid Notes, which was included in interest expense in our consolidated statement of income for the year ended September
30, 2018.
Included
in the $62.5 million first note of the December 2017 Refinancing Loan was $4.6 million that was escrowed at closing due to the
bank lender of one of the Repaid Notes. The amount was released from escrow in June 2018 when the construction, for which the
original note was borrowed, was completed.
On
December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The transaction was
partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the
old aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with monthly payments of
$59,869, which includes interest.
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.
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. There
are certain financial covenants with which the Company must be in compliance related to this financing.
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. There are certain financial covenants with
which the Company must be in compliance related to this financing.
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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt - continued
On August 15, 2018, the Company refinanced
a $2.0 million note payable for $4.0 million from a private lender by executing a 12% 3-year note payable $40,000 monthly starting
September 15, 2018, with the remaining principal and interest balance payable at maturity.
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. The loan was payable
$200,000 weekly, which included interest, until maturity. This loan was fully paid in April 2019.
On
September 26, 2018, the Company refinanced a $500,000 12% note payable for $1.35 million from a private lender by executing a
9% 10-year note payable $17,101 monthly, including interest, until maturity.
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 to acquire Scarlett’s Cabaret in Miami. Also included in the $2.35 million borrowing is a $500,000 note borrowed
from a related party (see Note 20) and two notes totaling $400,000 borrowed from a non-officer employee and a family member of
a non-officer employee in which the terms of the notes are the same as the rest of the lender group.
On
November 1, 2018, we acquired a club in Chicago that was partially financed by a $4.5 million 6-year 7% seller note. See additional
details in Note 15.
On
November 5, 2018, we acquired a club in Pittsburgh that was partially financed by two seller notes payable. See additional details
in Note 15.
On
December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed the remaining
$2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest.
On
February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%,
with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime plus 0.5% with
a 6.0% floor per annum. The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from
closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next
48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company
paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction
loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized debt issuance costs
of the old bank note to interest expense. There are certain financial covenants with which the Company must be in compliance
related to this financing.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
9.
Long-term Debt – continued
Future
maturities of long-term debt consist of the following (in thousands):
|
|
Regular
Amortization
|
|
|
Balloon
Payments
|
|
|
Total
Payments
|
|
2020
|
|
$
|
8,822
|
|
|
$
|
7,163
|
|
|
$
|
15,985
|
|
2021
|
|
|
9,499
|
|
|
|
6,466
|
|
|
|
15,965
|
|
2022
|
|
|
7,756
|
|
|
|
6,273
|
|
|
|
14,029
|
|
2023
|
|
|
7,279
|
|
|
|
1,970
|
|
|
|
9,249
|
|
2024
|
|
|
7,685
|
|
|
-
|
|
|
|
7,685
|
|
Thereafter
|
|
|
39,401
|
|
|
|
42,689
|
|
|
|
82,090
|
|
|
|
$
|
80,442
|
|
|
$
|
64,561
|
|
|
$
|
145,003
|
|
10.
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 was 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 $8.8 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. We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin
No. 118.
Income
tax expense (benefit) consisted of the following (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,005
|
|
|
$
|
2,438
|
|
|
$
|
2,989
|
|
State and local
|
|
|
1,037
|
|
|
|
1,219
|
|
|
|
1,097
|
|
Total current income tax expense
|
|
|
4,042
|
|
|
|
3,657
|
|
|
|
4,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
913
|
|
|
|
(8,096
|
)
|
|
|
1,545
|
|
State and local
|
|
|
(92
|
)
|
|
|
1,321
|
|
|
|
728
|
|
Total deferred income tax expense (benefit)
|
|
|
821
|
|
|
|
(6,775
|
)
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
4,863
|
|
|
$
|
(3,118
|
)
|
|
$
|
6,359
|
|
The
Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Income Taxes - continued
Income
tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory
rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Computed expected income tax expense
|
|
$
|
5,080
|
|
|
$
|
4,371
|
|
|
$
|
4,979
|
|
State income taxes, net of federal benefit
|
|
|
672
|
|
|
|
804
|
|
|
|
291
|
|
Deferred taxes on subsidiaries acquired/sold
|
|
|
-
|
|
|
|
709
|
|
|
|
-
|
|
Permanent differences
|
|
|
45
|
|
|
|
85
|
|
|
|
108
|
|
Change in deferred tax liability rate
|
|
|
-
|
|
|
|
(8,832
|
)
|
|
|
1,329
|
|
Reserve for uncertain tax position
|
|
|
-
|
|
|
|
-
|
|
|
|
406
|
|
Tax credits
|
|
|
(900
|
)
|
|
|
(808
|
)
|
|
|
(564
|
)
|
Other
|
|
|
(34
|
)
|
|
|
553
|
|
|
|
(190
|
)
|
Total income tax expense (benefit)
|
|
$
|
4,863
|
|
|
$
|
(3,118
|
)
|
|
$
|
6,359
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Patron tax
|
|
$
|
621
|
|
|
$
|
948
|
|
Capital loss carryforwards
|
|
|
420
|
|
|
|
763
|
|
|
|
|
1,041
|
|
|
|
1,711
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(14,491
|
)
|
|
|
(13,110
|
)
|
Property and equipment
|
|
|
(8,024
|
)
|
|
|
(7,206
|
)
|
Other
|
|
|
(184
|
)
|
|
|
(947
|
)
|
|
|
|
(22,699
|
)
|
|
|
(21,263
|
)
|
Net deferred tax liability
|
|
$
|
(21,658
|
)
|
|
$
|
(19,552
|
)
|
Included in the Company’s deferred tax
liabilities at September 30, 2019 and 2018 is approximately $19.3 million and $17.3 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 or impaired.
The
Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized
tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component
of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest
expense. During the year ended September 30, 2019 and 2018, the Company has accrued $0 and $165,000, respectively, (all related
to previous years’ taxes) in uncertain state tax positions. In fiscal 2018, the Company released $700,000 of uncertain tax
positions due to a settlement with New York state. In fiscal 2019, the Company released the remaining amount accrued when the
examination was closed.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
10.
Income Taxes - continued
The
following table shows the changes in the Company’s uncertain tax positions (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
165
|
|
|
$
|
865
|
|
|
$
|
240
|
|
Additions for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
|
|
625
|
|
Decrease related to settlements with taxing authorities
|
|
|
-
|
|
|
|
(700
|
)
|
|
|
-
|
|
Reduction due to lapse from closed examination
|
|
|
(165
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
165
|
|
|
$
|
865
|
|
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 and subsequent
years remain 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 outcome of which may occur within the next twelve months.
11.
Commitments and Contingencies
Leases
The Company leases certain equipment and facilities
under operating leases, of which rent expense was approximately $3.9 million, $3.8 million, and $3.3 million for the years ended
September 30, 2019, 2018, and 2017, respectively. These leases include a house that the Company’s CEO rented to the Company
for corporate housing for its out-of-town Bombshells management and trainers, of which rent expense totaled $78,000, $55,250, and $0
for the years ended September 30, 2019, 2018, and 2017, respectively (this lease terminated on December 31, 2019). 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 accumulated and included in other long-term liabilities in the consolidated balance sheets.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
11.
Commitments and Contingencies - continued
Undiscounted
future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):
2020
|
|
$
|
3,237
|
|
2021
|
|
|
3,154
|
|
2022
|
|
|
3,057
|
|
2023
|
|
|
2,889
|
|
2024
|
|
|
2,850
|
|
Thereafter
|
|
|
21,038
|
|
Total future minimum lease obligations
|
|
$
|
36,225
|
|
Included
in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as advertising and marketing
expenses, and included in selling, general and administrative expenses in our consolidated statements of income, in the amount
of $255,000, $254,000, and $106,000 for the fiscal year ended September 30, 2019, 2018, and 2017, respectively.
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 $3.4 million and $4.5 million as of September 30, 2019 and 2018, 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. 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, 2019,
we have 2 unresolved claims out of the original 71 claims.
Shareholder
Class and Derivative Actions
In May and June 2019, three putative securities
class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District
of Texas, Houston Division. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings
and disclosures as they relate to various alleged transactions by the Company and management. The complaints seek unspecified
damages, costs, and attorneys’ fees. These lawsuits are Hoffman v. RCI Hospitality Holdings, Inc., et al. (filed
May 21, 2019, naming the Company and Eric Langan); Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming
the Company, Eric Langan, and Phil Marshall); and Grossman v. RCI Hospitality Holdings, Inc., et al. (filed June 28, 2019,
naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases moved to consolidate the purported class
actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated
case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. The Company intends to vigorously defend against
this action. This action is in its preliminary phase, and a potential loss cannot yet be estimated.
On August 16, 2019, a shareholder derivative
action was filed in the Southern District of Texas, Houston Division against officers and directors, Eric S. Langan, Phillip Marshall,
Nour-Dean Anakar, Yura Barabash, Luke Lirot, Travis Reese, former director Steven Jenkins, and RCI Hospitality
Holdings, Inc., as nominal defendant. The action alleges that the individual officers and directors made or caused the Company
to make a series of materially false and/or misleading statements and omissions regarding the Company’s business, operations,
prospects, and legal compliance and engaged in or caused the Company to engage in, inter alia, related party transactions, questionable
uses of corporate assets, and failure to maintain internal controls. The action asserts claims for breach of fiduciary duty, unjust
enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of Sections 14(a), 10(b) and 20(a)
of the Securities Exchange Act of 1934. The complaint seeks injunctive relief, damages, restitution, costs, and attorneys’
fees. The case, Cecere v. Langan, et al., is in its early stage, and a potential loss cannot yet be estimated.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
SEC
Matter and Internal Review
In
mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated with the short-selling
community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of
the Company’s audit committee engaged independent outside counsel to conduct an internal review. Management of the Company
fully cooperated with the internal review conducted by the special committee and its outside counsel. The board of directors has
implemented the recommendations resulting from the internal review. As of the date hereof, the internal review has been completed
subject to any ongoing cooperation with regulatory authorities.
Since
the initiation of the informal inquiry by the SEC in early 2019, the Company and its management have fully cooperated and continue
to fully cooperate with the SEC matter, which has now converted to a formal investigation and is ongoing. At this time, the Company
is unable to predict the duration, scope, result or related costs associated with the investigation. The Company is also unable
to predict what, if any, action may be taken as a result of the investigation. Any determination by the SEC that the Company’s
activities were not in compliance with federal securities laws or regulations, however, could result in the imposition of fines,
penalties, disgorgement, or equitable relief, which could have a material adverse effect on the Company.
Other
On
March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against the Company
and several of its subsidiaries. Plaintiffs allege that their images were misappropriated, intentionally altered and published
without their consent by clubs affiliated with the Company. The causes of action asserted in Plaintiffs’ Complaint include
alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The
Company contends that there is insurance coverage under an applicable insurance policy. The insurer has raised several issues
regarding coverage under the policy. At this time, this disagreement remains unresolved. The Company has denied all allegations,
continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.
The
Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which
was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),
Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping
center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality
Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook
Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied
liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc.
asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims
and third-party claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord
breached the applicable agreements. The case was tried to a jury in late September 2018 and an adverse judgment was entered in
January 2019 in the amount totaling $1.0 million, which includes damages, attorney fees and interest. The matter is being appealed.
The appeal process required that a check be deposited in the registry of the court in the amount of $690,000, which was deposited
in April 2019 and included in other current assets in our consolidated balance sheet as of September 30, 2019. Management believes
that the case has no merit and is vigorously defending itself in the appeal.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Legal
Matters – continued
On
June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services
(Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno
injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged
that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial
proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which
JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million.
In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court
denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard
by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case
to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously
defend itself.
As
set forth in the risk factors included elsewhere in this Annual Report on Form 10-K, the adult entertainment industry standard
is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers
are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers.
Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the
independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s
work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise
in the relevant law and are defended vigorously.
General
In
the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party
litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability
that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally
accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company
or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them,
we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there
is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with
these claims in excess of our insurance coverage.
Settlement
of lawsuits for the years ended September 30, 2019, 2018, and 2017 total $225,000, $1.7 million, and $317,000, respectively.
As of September 30, 2019 and 2018, the Company has accrued $115,000 and $230,000 in accrued liabilities, respectively, related
to settlement of lawsuits.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
12.
Common Stock
During
the year ended September 30, 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.
During
the year ended September 30, 2019, the following common stock transactions occurred:
|
●
|
The
Company acquired 128,040 shares of its own common stock at a cost of $2.9 million. These shares were subsequently retired.
|
|
|
|
|
●
|
The
Company paid quarterly dividends of $0.03 per share, except for the fourth quarter when $0.04 per share was paid, for an aggregate
amount of $1.3 million.
|
Subsequent
to September 30, 2019 through the filing date of this report, we purchased 332,671 shares of the Company’s common stock
for a total of $6.4 million. On February 6, 2020, the Board of Directors increased the repurchase authorization by an
additional $10.0 million.
13.
Employee Retirement Plan
The Company sponsors a Simple IRA plan (the
“Plan”), which covers all of the Company’s corporate employees. The Plan allows corporate employees to contribute
up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3% of the employee’s salary.
Expenses related to matching contributions to the Plan approximated $164,000, $160,000, and $131,000 for the years
ended September 30, 2019, 2018, and 2017, respectively.
14.
Insurance Recoveries
One
of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club
in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2018. We wrote off the net carrying value of the
assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid
us or where contingencies relating to the insurance claims have been resolved.
In
relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):
|
|
|
|
For
the Year Ended September 30,
|
|
|
|
Included
in
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Consolidated
balance sheets (period end)
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable
|
|
Account
receivable, net
|
|
$
|
1,197
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
statements of income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
interruption
|
|
Other
charges, net
|
|
$
|
(484
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Net
property insurance claims
|
|
Other
charges, net
|
|
$
|
(284
|
)
|
|
$
|
(20
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
interruption
|
|
Operating
activity
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Proceeds
from property insurance claims
|
|
Investing
activity
|
|
$
|
100
|
|
|
$
|
20
|
|
|
$
|
-
|
|
The net property insurance claims amount in fiscal 2019 is net of
assets written off and expenses amounting to $629,000.
The $1.2 million balance of insurance receivable
as of September 30, 2019 was collected in October and November 2019.
15.
Acquisitions and Dispositions
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 is not
amortized but is tested at least annually for impairment. The goodwill amount 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
15.
Acquisitions and Dispositions - continued
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 9.
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 is 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 2017 acquisitions have not been presented because it is impracticable
for management to provide assumptions and estimates in pre-acquisition prior periods without undue cost and effort, notwithstanding
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 and combined income from operations of $2.2 million that are included
in the Company’s consolidated statements of income for the year ended September 30, 2017. We estimate their combined revenues
to be $14.6 million and combined income from operations to be $6.5 million for the year ended September 30, 2017
if the acquisitions occurred at the beginning of the fiscal year.
2017
Dispositions
On
January 13, 2017, we closed the sale on one of our non-income-producing properties, included in assets held for sale in our 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, which was included in assets held for sale
on the Company’s 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.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Acquisitions and Dispositions - continued
2018
Acquisitions
At September 30, 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 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 estimated of the fair value of the shares of the manufacturing company and the interest acquired in Drink Robust.
The estimated fair value 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 quarter 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. The Company then acquired the remaining 1.5% interest
in Drink Robust from an individual investor to complete its 100% 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, which is deductible for tax purposes. 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 $759,000 (net of tax), was recognized in additional paid-in capital.
2018 Disposition
On December 11, 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.
2019
Acquisitions
On
November 1, 2018, the Company acquired the stock of a club in Chicago for $10.5 million with $6.0 million
cash paid at closing and the $4.5 million in a 6-year seller-financed note with interest at 7%. The Company paid approximately
$37,000 in acquisition-related costs for this transaction, which is included in selling, general and administrative expenses in
our consolidated statement of income. The club generated revenue of approximately $5.0 million since acquisition date.
In relation to this acquisition, on September 25, 2018, the Company borrowed $5.0 million through a credit facility with a bank
lender. The loan has a 7% fixed interest rate with a maturity date in May 2019. The loan was fully paid as of June 30, 2019. Goodwill
and SOB license for the Chicago acquisition are not amortized but are tested at least annually for impairment. Goodwill recognized
for this transaction is not deductible for tax purposes. Noncompete is amortized on a straight-line basis over five years from
acquisition date.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Acquisitions and Dispositions - continued
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Land and building
|
|
$
|
4,325
|
|
Inventory
|
|
|
57
|
|
Furniture and equipment
|
|
|
50
|
|
Noncompete
|
|
|
100
|
|
SOB license
|
|
|
5,252
|
|
Goodwill
|
|
|
2,003
|
|
Deferred tax liability
|
|
|
(1,287
|
)
|
Net assets
|
|
$
|
10,500
|
|
On
November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $15.0 million, with $7.5
million cash paid at closing and two seller notes payable. The first note is a 2-year 7% note for $2.0 million, and the second
is a 10-year 8% note for $5.5 million. The Company paid acquisition-related costs for this transaction of approximately $134,000,
which is included in selling, general and administrative expenses in our consolidated statement of income. The club generated
revenue of approximately $4.6 million since acquisition date. Goodwill for the Pittsburgh acquisition is not amortized
but is tested at least annually for impairment. Goodwill recognized for this transaction is deductible for tax purposes. Noncompete
is amortized on a straight-line basis over five years from acquisition date.
The
following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):
Land
and building
|
|
$
|
5,000
|
|
Inventory
|
|
|
23
|
|
Furniture
and equipment
|
|
|
200
|
|
Noncompete
|
|
|
100
|
|
Goodwill
|
|
|
9,677
|
|
Net
assets
|
|
$
|
15,000
|
|
2019
Dispositions
In
October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash
at closing and a $625,000 9% note payable to us over a 10-year period. The note is payable interest-only for twelve months
at the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is
payable in 108 equal installments of $5,078 per month until October 2028. The buyer will lease the property from the Company’s
real estate subsidiary under the following terms: $36,000 per month lease payments for ten years; renewal option for a succeeding
ten years at a minimum of $48,000 per month; lessee has option to purchase the property for $6.0 million during a term beginning
November 2023 and expiring in October 2028. The Company recorded a gain on the sale transaction of approximately $879,000, which
is included in other charges (gains), net in our consolidated statement of income during the quarter ended December 31, 2018.
In July 2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from
April to September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest
payments for a total principal balance of $879,085. The note, as modified, still bears interest at 9% and is payable in 108 equal
monthly installments of $11,905, including principal and interest, until July 2028.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
15.
Acquisitions and Dispositions - continued
In November 2018, the Company sold two
assets held for sale in Houston and San Antonio, Texas for a combined sales price of $868,000. Net gain on the two transactions
amounted to $273,000 after closing costs. The Company used the proceeds to pay down $945,000 in loans related to the properties.
On January 24, 2019, the Company sold a
held-for-sale property in Dallas, Texas for a total sales price of $1.4 million, payable $163,000 in cash at closing, net of closing
costs and property taxes of $87,000, and a $1.15 million 8% note payable over a three-year period. The note is payable $9,619
per month, principal and interest, for the first 35 months with the remaining balance payable at maturity. The buyer has the option
to extend the maturity date by one year at least 60 days prior to maturity, as long as the buyer is not in default. The Company
recorded a gain on the sale transaction of approximately $383,000.
On March 21, 2019, the Company sold a held-for-sale
property adjacent to our Bombshells 249 location for a total sales price of $1.4 million in cash. Net gain on the transaction
amounted to approximately $628,000 after closing costs. The Company used $980,000 of the proceeds to pay off a loan related to
the property.
In April 2019, the Company sold another
held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of $1.1 million in cash. Net gain on the
transaction amounted to approximately $331,000 after closing costs. The Company used $942,000 of the proceeds to pay off a loan
related to the property.
In June 2019, the Company sold a property
located in Lubbock, Texas for $350,000 in cash. Net loss on the transaction amounted to $376,000 after closing costs. The Company
used $331,000 of the proceeds from the sale to pay down debt.
In June 2019, the Company sold an aircraft
for $690,000 in cash. Net loss on the transaction amounted to $9,000 after closing costs. The Company used $666,000 of the proceeds
from the sale to pay down related debt.
On July 23, 2019, the Company sold an aircraft
for a total sales price of $382,000 for net gain of $16,000. Proceeds were used to pay off the remaining note payable balance of
approximately $217,000.
On September 30, 2019, the Company sold its
Bombshells Webster location for a total sales price of $85,000 in cash. Net loss on the transaction amounted to approximately $156,000.
2020 Acquisition
On
November 5, 2019, the Company announced that its subsidiaries have signed definitive agreements to acquire the assets and
related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0 million. As
of the filing of this report, closing of this transaction is still pending subject to certain conditions. Under the terms of
the agreements, Company subsidiaries will pay $7.2 million for the club and $7.8 million for the real estate using $4.0
million in seller financing at 6.0% for the club with the balance of cash from an anticipated $11.0 million bank loan at a
blended rate of 6.25%.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
16.
Quarterly Results of Operations (Unaudited)
The
following tables summarize unaudited quarterly data for fiscal 2019, 2018, and 2017 (in thousands, except per share data):
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2018
|
|
|
March
31, 2019
|
|
|
June
30, 2019
|
|
|
September
30, 2019
|
|
Revenues
|
|
$
|
44,023
|
|
|
$
|
44,826
|
|
|
$
|
47,027
|
|
|
$
|
45,183
|
|
Income from operations(1)
|
|
$
|
11,132
|
|
|
$
|
11,166
|
|
|
$
|
9,974
|
|
|
$
|
2,429
|
|
Net income attributable to RCIHH shareholders(1)
|
|
$
|
6,344
|
|
|
$
|
6,735
|
|
|
$
|
5,638
|
|
|
$
|
458
|
|
Earnings per share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.65
|
|
|
$
|
0.70
|
|
|
$
|
0.59
|
|
|
$
|
0.05
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,713
|
|
|
|
9,679
|
|
|
|
9,620
|
|
|
|
9,616
|
|
|
|
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(2)
|
|
$
|
9,140
|
|
|
$
|
8,231
|
|
|
$
|
9,492
|
|
|
$
|
699
|
|
Net income (loss) attributable to RCIHH shareholders(2)
|
|
$
|
14,311
|
|
|
$
|
4,685
|
|
|
$
|
5,389
|
|
|
$
|
(3,506
|
)
|
Earnings (loss) per share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.47
|
|
|
$
|
0.48
|
|
|
$
|
0.55
|
|
|
$
|
(0.36
|
)
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and 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(3)
|
|
$
|
6,333
|
|
|
$
|
7,487
|
|
|
$
|
7,883
|
|
|
$
|
1,436
|
|
Net income (loss) attributable to RCIHH shareholders(3)
|
|
$
|
2,898
|
|
|
$
|
3,759
|
|
|
$
|
3,841
|
|
|
$
|
(2,239
|
)
|
Earnings (loss) per share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
|
(1)
|
Fiscal
year 2019 income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact
of a $6.0 million in asset impairments in the fourth quarter, a $2.9 million net gain on sale of businesses and assets ($1.2
million in the first quarter, $1.1 million in the second quarter, $0.3 million in the third quarter and $0.4 million in the
fourth quarter), and a $0.8 million net gain on insurance ($0.1 million net loss in the third quarter and $0.9 million net
gain in the fourth quarter). Quarterly effective income tax expense (benefit) rate was 22.0%, 22.3%, 24.1%, and (371.7%) from
first to fourth quarter, respectively.
|
|
|
|
|
(2)
|
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 $5.6 million in asset impairments ($1.6 million in the second quarter and
$4.0 million in the fourth quarter), and a $8.8 million deferred income tax benefit
related to the revaluation of deferred tax assets and liabilities ($9.7 million credit
in the first quarter, $38,000 expense in the second quarter, and $827,000 expense
in the fourth quarter). Quarterly effective income tax expense (benefit) rate was
(134.3%), 24.2%, 25.3%, and 103.8% from first to fourth quarter, respectively. See
Note 3 related to revision of prior year immaterial misstatement.
|
|
|
|
|
(3)
|
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.
|
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
17.
Impairment of Assets
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 $5.6 million comprised of $1.6 million for long-lived
assets of one club and one Bombshells, $834,000 for goodwill impairment of two clubs, and $3.1 million for SOB licenses of three
clubs.
During
the year ended September 30, 2019, we recorded aggregate impairment charges of $6.0 million comprised of $1.6 million for the
goodwill of four club locations, $4.2 million for property and equipment of two clubs, and $178,000 for SOB license of one club.
18.
Segment Information
The
Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based
on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions
in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes
our media and energy drink divisions that are not significant to the consolidated financial statements.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
18.
Segment Information - continued
Below
is the financial information related to the Company’s reportable segments (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenues (from external customers)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
148,606
|
|
|
$
|
140,060
|
|
|
$
|
124,687
|
|
Bombshells
|
|
|
30,828
|
|
|
|
24,094
|
|
|
|
18,830
|
|
Other
|
|
|
1,625
|
|
|
|
1,594
|
|
|
|
1,379
|
|
|
|
$
|
181,059
|
|
|
$
|
165,748
|
|
|
$
|
144,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
50,724
|
|
|
$
|
43,624
|
|
|
$
|
35,138
|
|
Bombshells
|
|
|
2,307
|
|
|
|
2,040
|
|
|
|
3,084
|
|
Other
|
|
|
(309
|
)
|
|
|
(252
|
)
|
|
|
(522
|
)
|
General corporate
|
|
|
(18,021
|
)
|
|
|
(17,850
|
)
|
|
|
(14,561
|
)
|
|
|
$
|
34,701
|
|
|
$
|
27,562
|
|
|
$
|
23,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
6,645
|
|
|
$
|
2,052
|
|
|
$
|
5,142
|
|
Bombshells
|
|
|
10,933
|
|
|
|
22,522
|
|
|
|
4,489
|
|
Other
|
|
|
27
|
|
|
|
33
|
|
|
|
14
|
|
General corporate
|
|
|
3,579
|
|
|
|
656
|
|
|
|
1,604
|
|
|
|
$
|
21,184
|
|
|
$
|
25,263
|
|
|
$
|
11,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
6,401
|
|
|
$
|
5,404
|
|
|
$
|
5,186
|
|
Bombshells
|
|
|
1,374
|
|
|
|
1,265
|
|
|
|
1,025
|
|
Other
|
|
|
416
|
|
|
|
179
|
|
|
|
50
|
|
General corporate
|
|
|
881
|
|
|
|
874
|
|
|
|
659
|
|
|
|
$
|
9,072
|
|
|
$
|
7,722
|
|
|
$
|
6,920
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
Total assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nightclubs
|
|
$
|
274,071
|
|
|
$
|
252,335
|
|
|
$
|
254,432
|
|
Bombshells
|
|
|
44,144
|
|
|
|
39,560
|
|
|
|
18,870
|
|
Other
|
|
|
1,773
|
|
|
|
1,978
|
|
|
|
780
|
|
General corporate
|
|
|
33,649
|
|
|
|
35,859
|
|
|
|
25,802
|
|
|
|
$
|
353,637
|
|
|
$
|
329,732
|
|
|
$
|
299,884
|
|
(1)
See Note 3 for a discussion of revision of prior year immaterial misstatement.
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $10.0 million, $9.0
million, and $8.8 million for 2019, 2018, and 2017, respectively, and intercompany sales of Robust Energy Drink of Other segment
amounting to $140,000, $26,000, and $0, for the same respective years. These revenue items are eliminated upon consolidation.
General
corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and
information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs
such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.
RCI
HOSPITALITY HOLDINGS, INC.
Notes
to Consolidated Financial Statements
19.
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. 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 included noncontrolling interests related 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.
Our
consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51%
of an entity which owns one of the Company’s nightclubs in New York City.
20.
Related Party Transactions
Presently,
our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan
receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness,
net of debt discount and issuance costs, as of September 30, 2019 and 2018 is $86.8 million and $90.4 million, respectively.
Included
in the $2.35 million borrowing on November 1, 2018 (see Note 9) was a $500,000 note borrowed from a related party (Ed Anakar,
an employee of the Company and brother of our director Nourdean Anakar). The terms of this related party note are the same as
the rest of the lender group in the November 1, 2018 transaction.
We
used the services of Sherwood Forest Creations, LLC (“Sherwood Forest”) and its predecessor, Creative Steel Designs
(“Creative Steel”), furniture fabrication companies that manufacture tables, chairs and other furnishings for our
Bombshells locations, as well as providing ongoing maintenance. Sherwood Forest is owned by a brother of Eric Langan, and Creative
Steel was owned by his father. Amounts billed to us for goods and services provided by Sherwood Forest were approximately $134,000
in fiscal 2019, $321,000 in fiscal 2018, and an aggregate of $135,000 by Sherwood Forest and Creative Steel in fiscal 2017. As of September 30, 2019 and 2018, we owed Sherwood Forest $6,588 and $73,377, respectively, in unpaid billings.
TW Mechanical LLC (“TW Mechanical”)
provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as
well as directly to the Company during fiscal 2018 and 2019. TW Mechanical is 20% owned by the son-in-law of Eric Langan. Amounts
billed by TW Mechanical to the third-party general contractor were $452,000, $120,000, and $0 for the fiscal years ended
2019, 2018 and 2017 respectively. Amounts billed directly to the Company were $47,000, $7,000 and $0 for the fiscal years ended
2019, 2018, and 2017 respectively. As of September 30, 2019 and 2018, we owed TW Mechanical $0 and $0, respectively, in unpaid
direct billings.