Company Quick10K Filing
RCI Hospitality
Price17.53 EPS2
Shares10 P/E10
MCap170 P/FCF5
Net Debt-11 EBIT24
TEV159 TEV/EBIT7
TTM 2019-06-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
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8-K 2020-07-09 Earnings, Exhibits
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8-K 2017-12-29

RICK 10Q Quarterly Report

Part I Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32 ex32.htm

RCI Hospitality Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
3552842131427102012201420172020
Assets, Equity
503928187-22012201420172020
Rev, G Profit, Net Income
1581-6-13-202012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-13992

 

RCI HOSPITALITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Texas   76-0458229

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10737 Cutten Road

Houston, Texas 77066

(Address of principal executive offices) (Zip Code)

 

(281) 397-6730

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, $0.01 par value   RICK   The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ] Smaller reporting company [  ] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of May 8, 2020, 9,125,281 shares of the registrant’s common stock were outstanding.

 

 

 

   
 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack thereof in launching and building the company’s businesses, (iv) cyber security, (v) conditions relevant to real estate transactions, (vi) our ability to maintain compliance with the filing requirements of the SEC and the Nasdaq Stock Market, (vii) the impact of the COVID-19 pandemic, and (viii) numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

As used herein, the “Company,” “we,” “our,” and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

 

 2 
 

 

RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and September 30, 2019 4
     
  Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2020 and 2019 5
     
  Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended March 31, 2020 and 2019 6
     
  Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2020 and 2019 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
     
Item 4. Controls and Procedures 35
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 36
     
Item1A. Risk Factors 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
     
Item 6. Exhibits 38
     
  Signatures 39

 

 3 
 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

   March 31, 2020   September 30, 2019 
    (unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $9,825   $14,097 
Accounts receivable, net   3,559    6,289 
Current portion of notes receivable   675    954 
Inventories   2,735    2,598 
Prepaid insurance   2,805    5,446 
Other current assets   2,343    2,521 
Assets held for sale   4,825    2,866 
Total current assets   26,767    34,771 
Property and equipment, net   182,234    183,956 
Operating lease right-of-use assets   26,485    - 
Notes receivable, net of current portion   4,087    4,211 
Goodwill   47,109    53,630 
Intangibles, net   74,251    75,951 
Other assets   963    1,118 
Total assets  $361,896   $353,637 
           
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable  $2,805   $3,810 
Accrued liabilities   8,671    14,644 
Current portion of long-term debt   14,771    15,754 
Current portion of operating lease liabilities   1,552    - 
Total current liabilities   27,799    34,208 
Deferred tax liability, net   20,503    21,658 
Long-term debt, net of current portion and debt discount and issuance costs   125,669    127,774 
Operating lease liabilities, net of current portion   26,275    - 
Other long-term liabilities   374    1,696 
Total liabilities   200,620    185,336 
           
Commitments and contingencies (Note 10)          
           
Equity          
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding   -    - 
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,125 and 9,591 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively   91    96 
Additional paid-in capital   52,829    61,312 
Retained earnings   108,584    107,049 
Total RCIHH stockholders’ equity   161,504    168,457 
Noncontrolling interests   (228)   (156)
Total equity   161,276    168,301 
Total liabilities and equity  $361,896   $353,637 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 4 
 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
Revenues                    
Sales of alcoholic beverages  $16,919   $18,486   $37,662   $36,796 
Sales of food and merchandise   6,479    6,439    13,926    12,129 
Service revenues   14,348    16,979    31,541    34,310 
Other   2,680    2,922    5,691    5,614 
Total revenues   40,426    44,826    88,820    88,849 
Operating expenses                    
Cost of goods sold                    
Alcoholic beverages sold   3,435    3,790    7,581    7,526 
Food and merchandise sold   2,239    2,308    4,792    4,292 
Service and other   108    94    185    186 
Total cost of goods sold (exclusive of items shown separately below)   5,782    6,192    12,558    12,004 
Salaries and wages   12,222    11,908    25,445    24,004 
Selling, general and administrative   14,450    14,341    30,981    28,368 
Depreciation and amortization   2,257    2,200    4,461    4,253 
Other charges (gains), net   8,190    (981)   8,164    (2,078)
Total operating expenses   42,901    33,660    81,609    66,551 
Income (loss) from operations   (2,475)   11,166    7,211    22,298 
Other income (expenses)                    
Interest expense   (2,459)   (2,645)   (4,944)   (5,166)
Interest income   85    75    183    126 
Unrealized gain (loss) on equity securities   (62)   77    (134)   (370)
Income (loss) before income taxes   (4,911)   8,673    2,316    16,888 
Income tax expense (benefit)   (1,418)   1,930    175    3,741 
Net income (loss)   (3,493)   6,743    2,141    13,147 
Net loss (income) attributable to noncontrolling interests   41    (8)   41    (68)
Net income (loss) attributable to RCIHH common stockholders  $(3,452)  $6,735   $2,182   $13,079 
                     
Earnings (loss) per share                    
Basic and diluted  $(0.37)  $0.70   $0.24   $1.35 
                     
Weighted average number of common shares outstanding                    
Basic and diluted   9,225    9,679    9,274    9,696 
                     
Dividends per share  $0.04   $0.03   $0.07   $0.06 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 5 
 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

 

                   Accumulated                 
   Common Stock   Additional       Other   Treasury Stock         
   Number       Paid-In   Retained   Comprehensive   Number       Noncontrolling   Total 
   of Shares   Amount   Capital   Earnings   Income   of Shares   Amount   Interests   Equity 
Balance at September 30, 2019   9,591   $96   $61,312   $107,049   $      -    -   $-   $(156)  $168,301 
Purchase of treasury shares   -    -    -    -    -    (333)   (6,441)   -    (6,441)
Canceled treasury shares   (333)   (3)   (6,438)   -    -    333    6,441    -    - 
Payment of dividends   -    -    -    (279)   -    -    -    -    (279)
Payment to noncontrolling interest   -    -    -    -    -    -    -    (10)   (10)
Net income   -    -    -    5,634    -    -    -    -    5,634 
Balance at December 31, 2019   9,258   $93    54,874    112,404   $-    -    -    (166)   167,205 
Purchase of treasury shares   -    -    -    -    -    (133)   (2,047)   -    (2,047)
Canceled treasury shares   (133)   (2)   (2,045)   -    -    133    2,047    -    - 
Payment of dividends   -    -    -    (368)   -    -    -    -    (368)
Payment to noncontrolling interest   -    -    -    -    -    -    -    (21)   (21)
Net loss   -    -    -    (3,452)   -    -    -    (41)   (3,493)
Balance at March 31, 2020   9,125   $91   $52,829   $108,584   $-    -   $-   $(228)  $161,276 
                                              
Balance at September 30, 2018   9,719   $97   $64,212   $88,906   $220    -   $-   $(103)  $153,332 
Reclassification upon adoption of ASU 2016-01   -    -    -    220    (220)   -    -    -    - 
Purchase of treasury shares   -    -    -    -    -    (14)   (355)   -    (355)
Canceled treasury shares   (14)   -    (355)   -    -    14    355    -    - 
Payment of dividends   -    -    -    (291)   -    -    -    -    (291)
Net income   -    -    -    6,344    -    -    -    60    6,404 
Balance at December 31, 2018   9,705    97    63,857    95,179    -    -    -    (43)   159,090 
Purchase of treasury shares   -    -    -    -    -    (71)   (1,606)   -    (1,606)
Canceled treasury shares   (71)   (1)   (1,605)   -    -    71    1,606    -    - 
Payment of dividends   -    -    -    (291)   -    -    -    -    (291)
Net income   -    -    -    6,735    -    -    -    8    6,743 
Balance at March 31, 2019   9,634   $96   $62,252   $101,623   $-    -   $-   $(35)  $163,936 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 6 
 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   For the Six Months 
   Ended March 31, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $2,141   $13,147 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   4,461    4,253 
Deferred income tax expense (benefit)   (1,155)   1,131 
Gain on sale of businesses and assets   (36)   (2,197)
Impairment of assets   8,210    - 
Unrealized loss on equity securities   134    370 
Amortization of debt discount and issuance costs   129    202 
Deferred rent   -    189 
Noncash lease expense   825    - 
Gain on insurance   (33)   - 
Changes in operating assets and liabilities:          
Accounts receivable   1,917    1,727 
Inventories   (137)   (182)
Prepaid insurance, other current and other assets   2,840    3,550 
Accounts payable, accrued and other liabilities   (7,315)   (1,219)
Net cash provided by operating activities   11,981    20,971 
CASH FLOWS FROM INVESTING ACTIVITIES          
Proceeds from sale of businesses and assets   105    2,866 
Proceeds from insurance   945    - 
Proceeds from notes receivable   403    68 
Issuance of note receivable   -    (420)
Payments for property and equipment and intangible assets   (5,323)   (13,902)
Acquisition of businesses, net of cash acquired   -    (13,500)
Net cash used in investing activities   (3,870)   (24,888)
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from long-term debt   880    10,296 
Payments on long-term debt   (4,097)   (13,287)
Purchase of treasury stock   (8,488)   (1,961)
Payment of dividends   (647)   (582)
Payment of loan origination costs   -    (20)
Distribution to noncontrolling interests   (31)   - 
Net cash used in financing activities   (12,383)   (5,554)
NET DECREASE IN CASH AND CASH EQUIVALENTS   (4,272)   (9,471)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   14,097    17,726 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $9,825   $8,255 
           
CASH PAID DURING PERIOD FOR:          
Interest (net of amounts capitalized of $155 and $324, respectively)  $4,891   $5,173 
Income taxes  $2,105   $319 
           
Noncash investing and financing transactions:          
Notes receivable received as proceeds from sale of assets  $-   $625 
Operating lease right-of-use assets established upon adoption of ASC 842  $27,310   $- 
Deferred rent liabilities reclassified upon adoption of ASC 842  $1,241   $- 
Operating lease liabilities established upon adoption of ASC 842  $28,551   $- 
Unpaid liabilities on capital expenditures  $21   $- 

 

Non-cash and other transactions:

 

During the six months ended March 31, 2019, in conjunction with the borrowings of $2.35 million from certain investors, the Company exchanged two notes payable with principal balances of $300,000 and $100,000 for two new notes amounting to $450,000 and $200,000, respectively. The Company received cash amounting to $1.95 million on the entire transaction.

 

During the six months ended March 31, 2019, the Company acquired two clubs for a total acquisition price of $25.5 million by paying a total of $13.5 million at closing and executing three seller-financed notes for a total of $12.0 million.

 

During the six months ended March 31, 2019, the Company sold a nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash at closing and a $625,000 note receivable.

 

During the six months ended March 31, 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 note receivable.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 7 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company or “RCIHH”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2019 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, 2019 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 13, 2020. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.

 

2. Recent Accounting Standards and Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted ASU 2016-02 and related amendments as of October 1, 2019 and elected 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. Our adoption of the new leasing standard resulted in an increase of $27.3 million in our total assets as of October 1, 2019 due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities. Our adoption of ASC 842 did not have an impact on our consolidated statements of operations and cash flows, except for additional required disclosures. See additional disclosures in Note 14.

 

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.

 

 8 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 accumulated other comprehensive income (“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 adopted ASU 2018-02 as of October 1, 2019. Our adoption of this guidance did not have an 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.

 

 9 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

 10 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Liquidity and Impact of COVID-19 Pandemic

 

In March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency. COVID-19 is the disease caused by a novel strain of a coronavirus that originated from Wuhan, China in November 2019. The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions that were mandated or encouraged by federal, state and local governments, and as of March 18, 2020, we temporarily closed all of our clubs and restaurants.

 

The closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate positive cash flows for us. Depending on the timing and number of locations we get open, and their ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

 

To augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:

 

Arranged for deferment of principal and interest payment on certain of our debts;
Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

 

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the CARES Act for its restaurants, shared service entity and lounge. See Note 9. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP.

 

As of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty about the spread of the virus. Lower sales, as caused by social distancing guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted.

 

Also as of the release of this report, we have ten locations in Texas that have partially reopened with 25% occupancy requirement.

 

Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived tangible Assets

 

We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles and long-lived tangible assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering future assumed impact of COVID-19 pandemic on sales. Based on our evaluation, we determined our assets are impaired in a total amount of approximately $8.2 million comprised of $6.5 million in goodwill, $1.4 million in SOB licenses, and $302,000 in property and equipment.

 

4. Revenues

 

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

 

Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Other lease revenues are recognized when earned (recognized over time) and are more appropriately covered by guidance under ASC Topic 842, Leases (ASC 840 in prior year). See Note 14.

 

 11 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 12), are shown below (in thousands):

 

    Three Months Ended March 31, 2020     Three Months Ended March 31, 2019  
    Nightclubs     Bombshells     Other     Total     Nightclubs     Bombshells     Other     Total  
Sales of alcoholic beverages   $ 11,860     $ 5,059     $ -     $ 16,919     $ 14,148     $ 4,338     $ -     $ 18,486  
Sales of food and merchandise     2,799       3,680       -       6,479       3,293       3,146       -       6,439  
Service revenues     14,290       58       -       14,348       16,943       36       -       16,979  
Other revenues     2,418       6       256       2,680       2,663       7       252       2,922  
    $ 31,367     $ 8,803     $ 256     $ 40,426     $ 37,047     $ 7,527     $ 252     $ 44,826  
                                                                 
Recognized at a point in time   $ 30,977     $ 8,803     $ 252     $ 40,032     $ 36,582     $ 7,527     $ 238     $ 44,347  
Recognized over time     390 *     -       4       394       465 *     -       14       479  
    $ 31,367     $ 8,803     $ 256     $ 40,426     $ 37,047     $ 7,527     $ 252     $ 44,826  

 

    Six Months Ended March 31, 2020     Six Months Ended March 31, 2019  
    Nightclubs     Bombshells     Other     Total     Nightclubs     Bombshells     Other     Total  
Sales of alcoholic beverages   $ 26,544     $ 11,118     $ -     $ 37,662     $ 28,950     $ 7,846     $ -     $ 36,796  
Sales of food and merchandise     6,063       7,863       -       13,926       6,500       5,629       -       12,129  
Service revenues     31,384       157       -       31,541       34,256       54       -       34,310  
Other revenues     5,235       15       441       5,691       5,069       11       534       5,614  
    $ 69,226     $ 19,153     $ 441     $ 88,820     $ 74,775     $ 13,540     $ 534     $ 88,849  
                                                                 
Recognized at a point in time   $ 68,411     $ 19,153     $ 430     $ 87,994     $ 73,974     $ 13,540     $ 505     $ 88,019  
Recognized over time     815 *     -       11       826       801 *     -       29       830  
    $ 69,226     $ 19,153     $ 441     $ 88,820     $ 74,775     $ 13,540     $ 534     $ 88,849  

 

* Lease revenue (included in Other Revenues) as covered by ASC Topic 842 in the current year (and ASC Topic 840 in the prior year). All other revenues are covered by ASC Topic 606.

 

The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented below (in thousands):

 

   

Balance at

September 30, 2019

    Consideration Received     Recognized in Revenue    

Balance at

March 31, 2020

 
Ad revenue   $ 76     $ 355     $ (303 )   $ 128  
Expo revenue     -       351       -       351  
Other     7       12       (17 )     2  
    $ 83     $ 718     $ (320 )   $ 481  

 

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of operations.

 

 12 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Selected Account Information

 

The components of accrued liabilities are as follows (in thousands):

 

   March 31, 2020   September 30, 2019 
Insurance  $1,700   $4,937 
Sales and liquor taxes   2,460    3,086 
Payroll and related costs   1,372    2,892 
Property taxes   829    1,675 
Patron tax   480    595 
Unearned revenues   481    83 
Lawsuit settlement   75    115 
Other   1,274    1,261 
   $8,671   $14,644 

 

The components of selling, general and administrative expenses are as follows (in thousands):

 

   For the Three Months   For the Six Months  
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
Taxes and permits  $2,240   $2,370   $4,914   $4,551 
Advertising and marketing   1,907    2,070    4,317    4,218 
Supplies and services   1,390    1,465    2,924    2,921 
Insurance   1,473    1,402    2,956    2,755 
Accounting and professional fees   1,311    1,278    2,509    1,928 
Lease   1,023    957    2,053    1,976 
Charge card fees   845    886    1,891    1,819 
Legal   1,072    773    2,268    1,831 
Utilities   798    762    1,693    1,506 
Security   749    756    1,597    1,465 
Repairs and maintenance   652    721    1,449    1,308 
Other   990    901    2,410    2,090 
   $14,450   $14,341   $30,981   $28,368 

 

6. Assets Held for Sale

 

As of September 30, 2019, the Company had two real estate properties for sale. The aggregate estimated fair value of the properties less cost to sell as of September 30, 2019 was approximately $2.9 million and was 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 the six months ended March 31, 2020, the Company classified as held-for-sale another real estate property. The aggregate estimated fair value of the property less cost to sell was $1.9 million. As of March 31, 2020, the Company has a total of three real estate properties held for sale with a total value of $4.8 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.

 

Liabilities associated with held-for-sale assets amounting to $1.2 million and $0 as of March 31, 2020 and September 30, 2019, respectively, are included in current portion of long-term debt in our unaudited consolidated balance sheets. The gain or loss on the sale of properties held for sale is included in other charges/gains, net in the unaudited condensed consolidated statements of operations.

 

 13 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Long-term Debt

 

In December 2019, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2022. The amendment did not have an impact in the Company’s results of operations and cash flows.

 

In February 2020, in relation to a $4.0 million 12% note payable earlier refinanced on August 15, 2018, the Company restructured the note with a private lender by executing a 12% 10-year note payable $57,388 monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal payment of $4.0 million in August 2021. The refinancing did not have an impact in the Company’s results of operations and cash flows.

 

In February 2020, in relation to a $9.9 million 12% note payable that was partially paid during the December 2017 Refinancing Loan, the Company restructured the note, which had a balance of $5.2 million as of the amendment date, by executing a 12% 10-year note payable $74,515 monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal payment of $3.8 million in October 2021. As a result of the refinancing, the Company wrote off approximately $25,400 in unamortized debt issuance cost as interest expense in the unaudited condensed consolidated statement of operations for the quarter ended March 31, 2020.

 

Included in the balance of long-term debt as of March 31, 2020 and September 30, 2019 is a $500,000 note borrowed from a related party (see Note 13) and three notes totaling $600,000 borrowed from two non-officer employees 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 groups.

 

Future maturities of long-term debt as of March 31, 2020 are as follows: $14.8 million, $11.7 million, $11.6 million, $8.1 million, $8.4 million and $87.2 million for the twelve months ending March 31, 2021, 2022, 2023, 2024, 2025, and thereafter, respectively. Of the maturity schedule mentioned above, $6.1 million, $2.8 million, $3.8 million, $0, $0 and $56.0 million, respectively, relate to scheduled balloon payments.

 

On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000 of $2,040,000 of notes to individuals that were due on May 1, 2020. The Company paid $300,000 to certain lenders and received $200,000 in new debt from existing lenders and their affiliates. The aggregate amount of debt due on these notes on November 1, 2020 is now $1,940,000.

 

8. Equity

 

During the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares, respectively, at a cost of approximately $2.0 and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividends during the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.

 

During the three and six months ended March 31, 2019, the Company purchased and retired 70,700 and 84,811 common shares, respectively, at a cost of approximately $1.6 million and $2.0 million, respectively. The Company paid a $0.03 per share cash dividend per quarter totaling approximately $291,000 and $582,000 for the three and six months ended March 31, 2019, respectively.

 

On February 6, 2020, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock. As of May 8, 2020, the Company has $11.8 million remaining to purchase additional shares under its share repurchase program.

 

 14 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Income Taxes

 

Income taxes were $1.4 million benefit and $175,000 expense during the three and six months ended March 31, 2020, respectively, compared to income tax expense of $1.9 million and $3.7 million during the three and six months ended March 31, 2019, respectively. The effective income tax rate was a 28.9% benefit and a 7.6% expense during the three and six months ended March 31, 2020, respectively, compared to expense rates of 22.3% and 22.2% during the three and six months ended March 31, 2019, respectively. Our effective tax rate for both years is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit.

 

The Company or one of its subsidiaries file income tax returns for U.S. federal jurisdiction and various states. Fiscal years ended September 30, 2016 and thereafter 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. Tax years 2014 through 2017 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.

 

The Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of March 31, 2020 and September 30, 2019, the liability for uncertain tax positions was $0 and $0, respectively. The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of operations.

 

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") into law. As a result of this, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act includes, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company has submitted its application for a PPP loan and on May 8, 2020 has received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. There is no certainty that the loan will qualify for forgiveness.

 

10. Commitments and Contingencies

 

Legal Matters

 

Texas Patron Tax

 

In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.

 

In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest.

 

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets, amounted to $2.8 million and $3.4 million as of March 31, 2020 and September 30, 2019, respectively.

 

A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas has filed a Notice of Appeal. We will continue to vigorously defend the matter through the appeals process.

 

 15 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Indemnity Insurance Corporation

 

As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.

 

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

 

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of March 31, 2020, 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. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director Nour-Dean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. The plaintiff’s response to the motion is currently due June 23, 2020. The Company and the individual defendants will have the opportunity to file a reply in support of their motion by July 23, 2020. The Company intends to continue to vigorously defend against this action. This action is in its preliminary phase, and a potential loss cannot yet be estimated.

 

 16 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 both consolidated balance sheets as of March 31, 2020 and September 30, 2019. Management believes that the case has no merit and is vigorously defending itself in the appeal.

 

 17 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.

 

As set forth in the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

 

General

 

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

 

Settlements of lawsuits for the three and six months ended March 31, 2020 total approximately $0 and $24,000, respectively, while for the three and six months ended March 31, 2019 total $84,000 and $144,000, respectively. As of March 31, 2020 and September 30, 2019, the Company has accrued $75,000 and $115,000 in accrued liabilities, respectively, related to settlement of lawsuits.

 

11. Acquisition

 

On November 5, 2019, we announced that our subsidiaries had 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. The agreements terminated prior to closing. We provided the sellers notice of the termination in April 2020.

 

 18 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Segment Information

 

The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such reportable segments based on management responsibility and the nature of the Company’s products, services, and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements.

 

Below is the financial information related to the Company’s segments (in thousands):

 

    For the Three Months     For the Six Months  
    Ended March 31,     Ended March 31,  
    2020     2019     2020     2019  
Revenues                                
Nightclubs   $ 31,367     $ 37,047     $ 69,226     $ 74,775  
Bombshells     8,803       7,527       19,153       13,540  
Other     256       252       441       534  
    $ 40,426     $ 44,826     $ 88,820     $ 88,849  
                                 
Income (loss) from operations                                
Nightclubs   $ 2,314     $ 15,078     $ 16,090     $ 30,465  
Bombshells     690       738       2,263       857  
Other     (178 )     (176 )     (385 )     (295 )
General corporate     (5,301 )     (4,474 )     (10,757 )     (8,729 )
    $ (2,475   $ 11,166     $ 7,211     $ 22,298  
                                 
Depreciation and amortization                                
Nightclubs   $ 1,486     $ 1,467     $ 2,956     $ 2,974  
Bombshells     456       339       873       631  
Other     104       106       208       210  
General corporate     211       288       424       438  
    $ 2,257     $ 2,200     $ 4,461     $ 4,253  
                                 
Capital expenditures                                
Nightclubs   $ 526     $ 647     $ 2,858     $ 1,094  
Bombshells     612       5,788       2,337       9,797  
Other     -       9       -       18  
General corporate     127       163       128       2,993  
    $ 1,265     $ 6,607     $ 5,323     $ 13,902  

 

    March 31, 2020     September 30, 2019  
Total assets                
Nightclubs   $ 281,080     $ 274,071  
Bombshells     48,271       44,144  
Other     1,723       1,773  
General corporate     30,822       33,649  
    $ 361,896     $ 353,637  

 

 19 
 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.

 

Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.

 

13. 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 March 31, 2020 and September 30, 2019 is $86.0 million and $86.8 million, respectively.

 

Included in the $2.35 million borrowing on November 1, 2018 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 Nottingham Creations (formerly Sherwood Forest Creations, LLC), a furniture fabrication company that manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations (as was Sherwood Forest) is owned by a brother of Eric Langan. Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $53,556 and $72,809 during the three and six months ended March 31, 2020, respectively, and $98,072 and $107,815 during t