Quick10K

RCI Hospitality Holdings

Price	17.53		EPS	2
Shares	10		P/E	10
MCap	170		P/FCF	5
Net Debt	-11		EBIT	24
TEV	159		TEV/EBIT	7
TTM 2019-06-30, in MM, except price, ratios

10-Q	2021-03-31	Filed 2021-05-10 Print
10-Q	2020-12-31	Filed 2021-02-09 Print
10-K	2020-09-30	Filed 2020-12-14 Print
10-Q	2020-06-30	Filed 2020-08-10 Print
10-Q	2020-03-31	Filed 2020-05-11 Print
10-Q	2019-12-31	Filed 2020-02-27 Print
10-K	2019-09-30	Filed 2020-02-13 Print
10-Q	2019-06-30	Filed 2019-09-24 Print
10-Q	2019-03-31	Filed 2019-09-24 Print
10-Q	2018-12-31	Filed 2019-02-11 Print
10-K	2018-09-30	Filed 2018-12-31 Print
10-Q	2018-06-30	Filed 2018-08-09 Print
10-Q	2018-03-31	Filed 2018-05-10 Print
10-Q	2017-12-31	Filed 2018-03-07 Print
10-K	2017-09-30	Filed 2018-02-14 Print
10-Q	2017-06-30	Filed 2017-08-09 Print
10-Q	2017-03-31	Filed 2017-05-09 Print
10-Q	2016-12-31	Filed 2017-02-09 Print
10-K	2016-09-30	Filed 2016-12-13 Print
10-Q	2016-06-30	Filed 2016-08-04 Print
10-Q	2016-03-31	Filed 2016-05-10 Print
10-Q	2015-12-31	Filed 2016-02-09 Print
10-K	2015-09-30	Filed 2015-12-14 Print
10-Q	2015-06-30	Filed 2015-08-10 Print
10-Q	2015-03-31	Filed 2015-05-11 Print
10-Q	2014-12-31	Filed 2015-02-09 Print
10-K	2014-09-30	Filed 2014-12-15 Print
10-Q	2014-06-30	Filed 2014-08-11 Print
10-Q	2014-03-31	Filed 2014-05-12 Print
10-Q	2013-12-31	Filed 2014-02-10 Print
10-K	2013-09-30	Filed 2013-12-16 Print
10-Q	2013-06-30	Filed 2013-08-08 Print
10-Q	2013-03-31	Filed 2013-05-09 Print
10-Q	2012-12-31	Filed 2013-02-11 Print
10-K	2012-09-30	Filed 2012-12-14 Print
10-Q	2012-06-30	Filed 2012-08-09 Print
10-Q	2012-03-31	Filed 2012-05-10 Print
10-Q	2011-12-31	Filed 2012-02-07 Print
10-K	2011-09-30	Filed 2011-12-14 Print
10-Q	2011-06-30	Filed 2011-08-09 Print
10-Q	2011-03-31	Filed 2011-05-10 Print
10-Q	2010-12-31	Filed 2011-02-09 Print
10-K	2010-09-30	Filed 2010-12-14 Print
10-Q	2010-06-30	Filed 2010-08-16 Print
10-Q	2010-03-31	Filed 2010-05-11 Print
10-Q	2009-12-31	Filed 2010-02-16 Print

8-K	2020-11-19
8-K	2020-10-08
8-K	2020-09-14
8-K	2020-09-04
8-K	2020-08-10
8-K	2020-07-09
8-K	2020-04-09
8-K	2020-03-02
8-K	2020-02-27
8-K	2020-02-13
8-K	2020-02-13
8-K	2020-01-09
8-K	2019-12-19
8-K	2019-12-16
8-K	2019-12-10
8-K	2019-10-03
8-K	2019-09-30
8-K	2019-09-24
8-K	2019-08-12
8-K	2019-08-12
8-K	2019-08-08
8-K	2019-07-25
8-K	2019-07-22
8-K	2019-07-12
8-K	2019-07-09
8-K	2019-05-17
8-K	2019-05-10
8-K	2019-02-11
8-K	2019-01-10
8-K	2018-12-31
8-K	2018-12-04
8-K	2018-10-09
8-K	2018-08-29
8-K	2018-08-09
8-K	2018-07-10
8-K	2018-05-15
8-K	2018-05-10
8-K	2018-05-01
8-K	2018-04-10
8-K	2018-03-28
8-K	2018-03-08
8-K	2018-03-07
8-K	2018-03-02
8-K	2018-02-16
8-K	2018-02-14
8-K	2018-01-09
8-K	2018-01-02
8-K	2017-12-29

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Balance Sheet	Income Statement	Cash Flow
CopyHistoryView Assets, Equity	CopyHistoryView Rev, G Profit, Net Income	CopyHistoryView Ops, Inv, Fin

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

☐ 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 ☒ 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 ☒ 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 ☒ 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 ☒

 

As of May 6, 2021, 8,999,910 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) the impact of the COVID-19 pandemic, and (vii) 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.

 

 

RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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, 2020 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, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 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, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021.

 

Certain reclassifications of cost of goods sold components with immaterial amounts have been made to prior year’s financial statements to conform to the current year financial statement presentation. There is no impact in total cost of goods sold, results of operations, and cash flows in all periods presented.

 

2. Recent Accounting Standards and Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 adopted ASU 2016-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our consolidated financial statements.

 

8

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 adopted ASU 2018-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our 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 adopted ASU 2019-01 as of October 1, 2020. Our adoption of this guidance did not have an impact on our 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.

 

9

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Liquidity and Impact of COVID-19 Pandemic

 

In March 2020, former President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency. 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 were mandated or encouraged by federal, state and local governments. Starting in March 2020, we closed and reopened a number of our clubs and restaurants and implemented curfew and capacity restrictions as required by local authorities. We do not know the effects the pandemic may have on our operations in the future.

 

The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. 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; *
	●	Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *
	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
	●	Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

 

* As of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.

 

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 6 and 8. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining PPP loan in whole or in part.

 

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.

 

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions.

 

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

 

We consider the COVID-19 pandemic a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles, and long-lived assets in our clubs and restaurants that are affected. Based on our evaluation, we determined that there is no impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets, except for assets held for sale, as of March 31, 2021.

 

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. Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021, hence, no Expo-related revenue in fiscal 2020. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.

 

10

 

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 11), are shown below (in thousands):

 

 Schedule of Disaggregation of Segment Revenues

Copy History

		Three Months Ended March 31, 2021																Three Months Ended March 31, 2020
		Nightclubs				Bombshells				Other				Total				Nightclubs				Bombshells				Other				Total
Sales of alcoholic beverages		$	12,634			$	7,639			$	-			$	20,273			$	11,860			$	5,059			$	-			$	16,919
Sales of food and merchandise			4,082				5,456				-				9,538				2,799				3,680				-				6,479
Service revenues			11,446				56				-				11,502				14,290				58				-				14,348
Other revenues			2,625				(16	)			137				2,746				2,418				6				256				2,680
		$	30,787			$	13,135			$	137			$	44,059			$	31,367			$	8,803			$	256			$	40,426
Recognized at a point in time		$	30,382			$	13,134			$	136			$	43,652			$	30,977			$	8,803			$	252			$	40,032
Recognized over time			405	*			1				1				407				390	*			-				4				394
		$	30,787			$	13,135			$	137			$	44,059			$	31,367			$	8,803			$	256			$	40,426

 

Copy History

		Six Months Ended March 31, 2021																Six Months Ended March 31, 2020
		Nightclubs				Bombshells				Other				Total				Nightclubs				Bombshells				Other				Total
Sales of alcoholic beverages		$	22,268			$	15,365			$	-			$	37,633			$	26,544			$	11,118			$	-			$	37,662
Sales of food and merchandise			7,505				10,642				-				18,147				6,063				7,863				-				13,926
Service revenues			21,444				118				-				21,562				31,384				157				-				31,541
Other revenues			4,767				16				332				5,115				5,235				15				441				5,691
		$	55,984			$	26,141			$	332			$	82,457			$	69,226			$	19,153			$	441			$	88,820
Recognized at a point in time		$	55,217			$	26,140			$	329			$	81,686			$	68,411			$	19,153			$	430			$	87,994
Recognized over time			767	*			1				3				771				815	*			-				11				826
		$	55,984			$	26,141			$	332			$	82,457			$	69,226			$	19,153			$	441			$	88,820

 

*	Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606.

 

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

 Schedule of Reconciliation of Contract Liabilities with Customers

Copy History

		Balance at September 30, 2020				Consideration Received				Recognized in Revenue				Balance at March 31, 2021
Ad revenue		$	92			$	356			$	(278	)		$	170
Expo revenue			211				105				-				316
Other			33				108				(4	)			137
		$	336			$	569			$	(282	)		$	623

 

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.

 

On December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells locations in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in Corpus Christi, New Braunfels, and San Marcos, all in Texas. Upon execution of the agreement, the Company collected $75,000 in development fees representing 100% of the initial franchise fee of the first restaurant and 50% of the initial franchise fee of the second restaurant. Revenue from initial franchise fees is recognized as the performance obligations are satisfied over the term of the franchise agreement.

 

11

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Selected Account Information

 

The components of accounts receivable, net are as follows (in thousands):

 Schedule of Accounts Receivable

Copy History

		March 31, 2021				September 30, 2020
Credit card receivables		$	1,354			$	880
Income tax refundable			599				4,325
ATM in-transit			273				160
Insurance receivable			-				191
Other (net of allowance for doubtful accounts of $483 and $261, respectively)			1,404				1,211
Total accounts receivable, net		$	3,630			$	6,767

 

Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to $124,000 and $182,000 as of March 31, 2021 and September 30, 2020, respectively.

 

The components of prepaid expenses and other current assets are as follows (in thousands):

 Schedule of Prepaid Expenses and Other Current Assets

Copy History

		March 31, 2021				September 30, 2020
Prepaid insurance		$	2,549			$	4,884
Prepaid legal			715				735
Prepaid taxes and licenses			398				428
Prepaid rent			373				37
Other			985				404
Total prepaid expenses and other current assets		$	5,020			$	6,488

 

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

 Schedule of Accrued Liabilities

Copy History

		March 31, 2021				September 30, 2020
Payroll and related costs		$	3,633			$	2,419
Sales and liquor taxes			2,580				2,613
Insurance			2,399				4,405
Property taxes			1,055				2,003
Unearned revenues			623				336
Interest			544				1,390
Patron tax			386				309
Lawsuit settlement			228				100
Other			873				998
Total accrued liabilities		$	12,321			$	14,573

 

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

 Schedule of Selling, General and Administrative Expenses

Copy History

		2021				2020				2021				2020
		For the Three Months								For the Six Months
		Ended March 31,								Ended March 31,
		2021				2020				2021				2020
Taxes and permits		$	2,084			$	2,240			$	4,112			$	4,914
Supplies and services			1,488				1,390				2,716				2,924
Insurance			1,427				1,473				2,884				2,956
Advertising and marketing			1,384				1,907				2,573				4,317
Lease			972				1,023				1,949				2,053
Utilities			858				798				1,571				1,693
Security			830				749				1,690				1,597
Legal			812				1,072				1,673				2,268
Charge card fees			695				845				1,259				1,891
Repairs and maintenance			677				652				1,250				1,449
Accounting and professional fees			297				1,311				1,012				2,509
Other			1,094				990				2,081				2,410
Total selling, general and administrative expenses		$	12,618			$	14,450			$	24,770			$	30,981

 

The components of other charges, net are as follows (in thousands):

 Schedule of Components of Other Charges (Gains), Net

Copy History

		2021				2020				2021				2020
		For the Three Months								For the Six Months
		Ended March 31,								Ended March 31,
		2021				2020				2021				2020
Impairment of assets		$	1,401			$	8,210			$	1,401			$	8,210
Settlement of lawsuits			1				-				153				24
Loss (gain) on disposal of assets			91				(7	)			86				(37	)
Gain on insurance			(12	)			(13	)			(209	)			(33	)
Total other charges, net		$	1,481			$	8,190			$	1,431			$	8,164

 

The components of non-operating gains (losses), net are as follows (in thousands):

 Components of Non-Operating Gains (Losses), Net

Copy History

		2021				2020				2021				2020
		For the Three Months								For the Six Months
		Ended March 31,								Ended March 31,
		2021				2020				2021				2020
Gain on debt extinguishment		$	380			$	-			$	5,329			$	-
Unrealized loss on equity securities			(34	)			(62	)			(67	)			(134	)
Other			85				-				85				-
Total non-operating gains (losses), net		$	431			$	(62	)		$	5,347			$	(134	)

 

12

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Assets Held for Sale

 

As of March 31, 2021 and September 30, 2020, the Company had net carrying value of assets held for sale at $7.4 million and $0, respectively.

 

During the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate estimated fair value less cost to sell of $7.4 million after recognizing a Nightclub segment impairment charge of $1.4 million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property. The Company expects the properties, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers. Liabilities that are expected to be paid with the sale of held-for-sale assets were $3.2 million as of March 31, 2021, which is included in current portion of debt obligations in our unaudited condensed consolidated balance sheet. See Note 14.

 

7. Debt

 

On October 31, 2020, the Company negotiated extensions to November 1, 2021 on $1,690,000 of $1,940,000 of notes to individuals that were due on November 1, 2020. The Company paid $250,000 to a certain lender who only extended a portion of his original note.

 

On January 25, 2021, the Company borrowed $2.175 million from a bank lender by executing a 20-year promissory note with an initial interest rate of 3.99% per annum. The note is payable $13,232 per month for the first five years after which the interest rate will be repriced at the then-current prime rate plus 1.0% per annum, with a floor rate of 3.99%. The note is guaranteed by the Company’s CEO, Eric Langan. See Note 12. The Company paid approximately $25,000 in debt issuance costs at closing.

 

Included in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are two notes borrowed from related parties (see Note 12)—one note for $500,000 (from an employee of the Company who is also the brother of our director, Nourdean Anakar) and another note for $100,000 (from a brother of Company CFO, Bradley Chhay)—and two notes totaling $500,000 borrowed from two non-officer employees. All four notes are part of a larger group of private lenders, with the terms of the notes being the same as the rest of the lender group.

 

Future maturities of debt obligations as of March 31, 2021 are as follows: $16.6 million, $11.7 million, $8.1 million, $8.4 million, $8.4 million, and $80.4 million for the twelve months ending March 31, 2022, 2023, 2024, 2025, 2026, and thereafter, respectively. Of the maturity schedule mentioned above, $4.5 million, $3.7 million, $0, $0, $0, and $42.3 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $1.2 million and $1.2 million as of March 31, 2021 and September 30, 2020, respectively.

 

Included in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $124,000 and $5.4 million, respectively. During the three and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving the forgiveness of 100% of each of the 11 PPP loans amounting to $380,000 and $5.3 million, respectively, in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. As of the date of the filing of this report, we have not received a forgiveness notice for only one PPP loan that, if not forgiven, under the terms of the loans as provided by the CARES Act, bears an interest rate of 1% per annum. See Note 3.

 

8. Equity

 

During the three and six months ended March 31, 2021, the Company purchased and retired 0 and 74,659 common shares, respectively, at a cost of approximately $0 and $1.8 million, respectively. The Company paid $0.04 and $0.08 per share cash dividend during the three and six months ended March 31, 2021 totaling approximately $360,000 and $720,000, respectively.

 

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 million and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividend during the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.

 

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Income Taxes

 

Income taxes were an expense of $1.9 million and $1.6 million during the three and six months ended March 31, 2021, respectively, compared to a benefit of $1.4 million and an expense of $175,000 during the three and six months ended March 31, 2020, respectively. The effective income tax rate was an expense of 24.3% and 9.1% for the three and six months ended March 31, 2021, respectively, compared to a benefit of 28.9% and an expense of 7.6% for the three and six months ended March 31, 2020, respectively. Our effective tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current period.

 

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service with only immaterial changes. Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax examination. 

 

The Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of March 31, 2021 and September 30, 2020, there was no liability for uncertain tax positions. 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, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were made 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 included, 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 the Paycheck Protection Program, whereby certain small businesses are eligible for loans to fund payroll expenses, rent, and related costs. The loans may be forgiven if the funds are used for payroll and other qualified expenses. The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will obtain forgiveness of the one remaining PPP loan in whole or in part. See Note 3.

 

10. Commitments and Contingencies

 

Legal Matters

 

Texas Patron Tax

 

In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company 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 $1.5 million and $2.2 million as of March 31, 2021 and September 30, 2020, respectively.

 

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

 

14

 

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, 2021, 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 (who is no longer an officer of the Company)); and Grossman v. RCI Hospitality Holdings, Inc., et al. (filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director Nourdean 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. On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims. 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.

 

15

 

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, Nourdean 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.

 

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, 2021 and September 30, 2020. Management believes that the case has no merit and is vigorously defending itself in the appeal.

 

16

 

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

Due to several COVID-19 regulations and restrictions imposed on some of our businesses by local municipalities and/or States, certain of our subsidiaries are plaintiffs to lawsuits that have been filed on behalf of the affected entities to have the restrictions eased or removed entirely. The lawsuits may increase or decrease based on the spread of the disease and new or additional restrictions placed on our businesses.

 

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, 2021 amount to approximately $1,000 and $153,000, respectively, while for the three and six months ended March 31, 2020 amount to approximately $0