RCI HOSPITALITY HOLDINGS, INC. [RICK] Filings

10-Q 1 rick-20220331.htm 10-Q rick-20220331

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, 2022

o 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 o

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 o

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 o Accelerated filer x Non-accelerated filer o Smaller reporting company o Emerging growth company o

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. o

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

As of May 6, 2022, 9,416,567 shares of the registrant’s common stock were outstanding.

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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.

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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, 2022 (unaudited) and September 30, 2021	4

	Condensed Consolidated Statements of Income (unaudited) for the three and s ix months ended March 31, 2022 and 2021	5

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended March 31, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 6.	Exhibits	44

	Signatures	45

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and number of shares)


	March 31, 2022		September 30, 2021
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	38,067	$	35,686
Accounts receivable, net	6,262		7,570
Current portion of notes receivable	292		220
Inventories	3,361		2,659
Prepaid expenses and other current assets	6,880		1,928
Assets held for sale	6,126		4,887
Total current assets	60,988		52,950
Property and equipment, net	203,434		175,952
Operating lease right-of-use assets, net	36,180		24,308
Notes receivable, net of current portion	5,411		2,839
Goodwill	54,484		39,379
Intangibles, net	125,284		67,824
Other assets	1,771		1,367
Total assets	$	487,552	$	364,619

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	6,255	$	4,408
Accrued liabilities	15,576		10,403
Current portion of debt obligations, net	11,177		6,434
Current portion of operating lease liabilities	2,306		1,780
Total current liabilities	35,314		23,025
Deferred tax liability, net	22,040		19,137
Debt, net of current portion and debt discount and issuance costs	166,903		118,734
Operating lease liabilities, net of current portion	35,517		24,150
Other long-term liabilities	355		350
Total liabilities	260,129		185,396

Commitments and contingencies (Note 10)

Equity
Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,454,267 and 8,999,910 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively	94		90
Additional paid-in capital	77,553		50,040
Retained earnings	150,366		129,693
Total RCIHH stockholders’ equity	228,013		179,823
Noncontrolling interests	(590)		(600)
Total equity	227,423		179,223
Total liabilities and equity	$	487,552	$	364,619

See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share and number of share data)

(unaudited)


	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2022		2021		2022		2021
Revenues
Sales of alcoholic beverages	$	27,335	$	20,273	$	53,766	$	37,633
Sales of food and merchandise	11,160		9,538		22,054		18,147
Service revenues	21,501		11,502		42,377		21,562
Other	3,696		2,746		7,331		5,115
Total revenues	63,692		44,059		125,528		82,457
Operating expenses
Cost of goods sold
Alcoholic beverages sold	4,896		3,730		9,730		6,992
Food and merchandise sold	3,840		3,029		7,797		5,918
Service and other	24		43		124		96
Total cost of goods sold (exclusive of items shown separately below)	8,760		6,802		17,651		13,006
Salaries and wages	16,530		11,200		33,035		22,686
Selling, general and administrative	18,437		12,618		36,923		24,770
Depreciation and amortization	2,877		2,117		5,071		4,140
Other charges (gains), net	7		1,481		(144)		1,431
Total operating expenses	46,611		34,218		92,536		66,033
Income from operations	17,081		9,841		32,992		16,424
Other income (expenses)
Interest expense	(2,864)		(2,364)		(5,468)		(4,798)
Interest income	112		62		218		122
Non-operating gains, net	—		431		84		5,347
Income before income taxes	14,329		7,970		27,826		17,095
Income tax expense	3,356		1,938		6,289		1,554
Net income	10,973		6,032		21,537		15,541
Net loss (income) attributable to noncontrolling interests	(21)		59		(10)		193
Net income attributable to RCIHH common shareholders	$	10,952	$	6,091	$	21,527	$	15,734

Earnings per share
Basic and diluted	$	1.15	$	0.68	$	2.28	$	1.75

Weighted average number of common shares outstanding
Basic and diluted	9,489,085		8,999,910		9,447,854		9,009,604

Dividends per share	$	0.05	$	0.04	$	0.09	$	0.08

See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands, except number of shares)

(unaudited)


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Noncontrolling Interests		Total Equity
	Number of Shares	Amount						Number of Shares	Amount
Balance at September 30, 2021	8,999,910	$	90	$	50,040	$	129,693	—	$	—	$	(600)	$	179,223
Issuance of common shares	500,000	5		30,357		—		—	—		—		30,362
Payment of dividends	—	—		—		(380)		—	—		—		(380)
Net income (loss)	—	—		—		10,575		—	—		(11)		10,564
Balance at December 31, 2021	9,499,910	95		80,397		139,888		—	—		(611)		219,769
Purchase of treasury shares	—	—		—		—		(45,643)	(2,845)		—		(2,845)
Canceled treasury shares	(45,643)	(1)		(2,844)		—		45,643	2,845		—		—
Payment of dividends	—	—		—		(474)		—	—		—		(474)
Net income	—	—		—		10,952		—	—		21		10,973
Balance at March 31, 2022	9,454,267	$	94	$	77,553	$	150,366	—	$	—	$	(590)	$	227,423

Balance at September 30, 2020	9,074,569	$	91	$	51,833	$	100,797	—	$	—	$	(414)	$	152,307
Purchase of treasury shares	—	—		—		—		(74,659)	(1,794)		—		(1,794)
Canceled treasury shares	(74,659)	(1)		(1,793)		—		74,659	1,794		—		—
Payment of dividends	—	—		—		(360)		—	—		—		(360)
Net income (loss)	—	—		—		9,643		—	—		(134)		9,509
Balance at December 31, 2020	8,999,910	90		50,040		110,080		—	—		(548)		159,662
Payment of dividends	—	—		—		(360)		—	—		—		(360)
Net income (loss)	—	—		—		6,091		—	—		(59)		6,032
Balance at March 31, 2021	8,999,910	$	90	$	50,040	$	115,811	—	$	—	$	(607)	$	165,334

See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except number of shares)

(unaudited)


	For the Six Months Ended March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	21,537	$	15,541
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,071		4,140
Loss (gain) on sale of businesses and assets	(708)		86
Impairment of assets	—		1,401
Unrealized loss on equity securities	1		67
Amortization of debt discount and issuance costs	136		101
Gain on debt extinguishment	(83)		(5,298)
Noncash lease expense	1,238		848
Gain on insurance	(321)		(294)
Doubtful accounts expense (reversal) on notes receivable	53		(58)
Changes in operating assets and liabilities:
Accounts receivable	1,065		3,137
Inventories	(276)		(31)
Prepaid expenses, other current and other assets	(5,360)		1,494
Accounts payable, accrued and other liabilities	5,508		(3,888)
Net cash provided by operating activities	27,861		17,246
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets	2,910		8
Proceeds from insurance	485		294
Proceeds from notes receivable	82		61
Payments for property and equipment and intangible assets	(13,990)		(6,718)
Acquisition of businesses, net of cash acquired	(39,302)		—
Net cash used in investing activities	(49,815)		(6,355)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively	35,742		2,176
Payments on debt obligations	(7,290)		(5,977)
Purchase of treasury stock	(2,845)		(1,794)
Payment of dividends	(854)		(720)
Payment of loan origination costs	(418)		(25)
Net cash provided by (used in) financing activities	24,335		(6,340)
NET INCREASE IN CASH AND CASH EQUIVALENTS	2,381		4,551
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,686		15,605
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,067	$	20,156

CASH PAID DURING PERIOD FOR:
Interest	$	5,064	$	5,512
Income taxes	$	4,008	$	29

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Noncash investing and financing transactions:
Debt incurred in connection with acquisition of businesses	$	22,200	$	—
Debt incurred in connection with purchase of property and equipment	$	2,625	$	—
Note receivable from sale of property	$	2,700	$	—
Issuance of shares of common stock for acquisition of businesses:
Number of shares	500,000		—
Fair value	$	30,362	$	—
Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases	$	19,187	$	—
Unpaid liabilities on capital expenditures	$	1,201	$	98

See accompanying notes to unaudited condensed consolidated financial statements.

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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,” “RCIHH,” “we,” or “us”) 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, 2021 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, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2021. 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, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.

2. Recent Accounting Standards and Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on our consolidated financial statements.

3. Ongoing Impact of COVID-19 Pandemic

Since the U.S. declaration of the COVID-19 pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly impact our cash flow. The pandemic 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. To adapt to the situation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

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. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so 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.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Note 9.

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. Closures and operating restrictions, 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.

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, where applicable. As of the date of this report, all COVID-related restrictions affecting our businesses have been lifted.

Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived 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 assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering the future assumed impact of the COVID-19 pandemic on sales. Based on the evaluation we conducted during the interim period ended March 31, 2022, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of March 31, 2022.

4. Acquisitions and Dispositions

On October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $3.0 million for $3.2 million, of which $2.7 million was in the form of a secured promissory note. This 7% note receivable has a term of eight years and is collectible in equal monthly installments of $21,544 in principal and interest with the remaining balance to be paid at maturity.

On October 8, 2021, the Company sold one of its clubs in South Houston for $300,000.

On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period, with interest rates on promissory notes reflective of market yields). The acquisition was structured by entering into nine asset purchase agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in that business except certain excluded assets, and two stock purchase agreements, where a newly formed subsidiary purchased 100% of the capital stock of two club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into a real estate purchase and sale agreement for six real estate properties and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the sellers. The acquisition gives the Company presence in four additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in four seller-financed notes (see Note 7), and 500,000 shares of our common stock. The preliminary fair value of the consideration transferred is as follows (in thousands):


Cash	$	36,800
Notes payable	21,200
Common stock	30,362
Total consideration fair value	$	88,362

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets are provisional pending receipt of the final valuations for those assets. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

adjustments, the amount of goodwill is estimated to be $13.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $9.3 million of the recognized goodwill will be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 18, 2021:


Current assets	$	386
Property and equipment	19,534
Licenses	50,080
Trademarks	7,460
Deferred tax liability	(2,903)
Total net assets acquired	74,557
Goodwill	13,805
Acquisition price fair value	$	88,362

Licenses and trademarks will not be amortized but will be tested at least annually for impairment.

The Company entered into leases with third parties for certain clubs where the real estate was not part of the acquisition. See Note 13.

In connection with the acquisition, we incurred acquisition-related expenses of approximately $417,000 ($173,000 recognized in fiscal 2021 and $244,000 recognized in fiscal 2022), of which $12,000 and $12,000 were expensed during the three and six months ended March 31, 2021 and $0 and $244,000 were expensed during the three and six months ended March 31, 2022, and in those periods included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until March 31, 2022, the eleven acquired clubs contributed revenues of $8.4 million and $14.4 million and income from operations of $2.0 million and $3.7 million during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statements of income. The following table presents the unaudited pro forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amounts and number of shares):


	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2022		2021		2022		2021
Pro forma revenues	$	63,692	$	47,393	$	127,254	$	90,777
Pro forma net income attributable to RCIHH common stockholders	$	10,953	$	5,615	$	20,945	$	15,507
Pro forma earnings per share – basic and diluted	$	1.15	$	0.59	$	2.22	$	1.63

Pro forma weighted average number of common shares outstanding	9,489,085		9,499,910		9,447,854		9,509,604

The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021. Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition.

On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary purchase price of $3.5 million, by which $2.5 million was paid in cash at closing and $1.0 million through a seller-financed 7-year promissory note with an interest rate of 4.0% per annum. The $3.5 million acquisition price is preliminarily allocated $2.0 million to real estate, $200,000 to tangible assets, and $1.3 million to goodwill, which is deductible for tax purposes. The note is payable $13,669 per month, including principal and interest. See Note 7. From the date of acquisition until March 31, 2022, the acquired club contributed revenues of $424,000 and $713,000 and loss from operations of $28,000 and $24,000 during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statement of income. The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company.

On December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased, for $7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating lease liability related to the discontinued lease.

On March 1, 2022, the Company acquired real estate in Stafford, Texas worth $3.5 million for a future Bombshells location. The Company secured a $2.6 million loan in relation to the purchase (see Note 7).

On March 1, 2022, the Company acquired real estate in Lubbock, Texas worth $400,000 to transfer one of our existing clubs due to eminent domain.

On March 23, 2022, the Company sold a property classified as held-for-sale with a carrying value of $1.9 million for $2.1 million in cash. The Company used $816,000 of the proceeds to pay off a loan related to the property.

5. 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 income. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. 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.

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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):


	Three Months Ended March 31, 2022									Three Months Ended March 31, 2021
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	18,673		$	8,662	$	—	$	27,335	$	12,634		$	7,639	$	—	$	20,273
Sales of food and merchandise	4,498			6,662		—		11,160		4,082			5,456		—		9,538
Service revenues	21,501			—		—		21,501		11,446			56		—		11,502
Other revenues	3,502			9		185		3,696		2,625			(16)		137		2,746
	$	48,174		$	15,333	$	185	$	63,692	$	30,787		$	13,135	$	137	$	44,059

Recognized at a point in time	$	47,722		$	15,332	$	185	$	63,239	$	30,382		$	13,134	$	136	$	43,652
Recognized over time	452		*	1		—		453		405		*	1		1		407
	$	48,174		$	15,333	$	185	$	63,692	$	30,787		$	13,135	$	137	$	44,059

	Six Months Ended March 31, 2022									Six Months Ended March 31, 2021
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	36,840		$	16,926	$	—	$	53,766	$	22,268		$	15,365	$	—	$	37,633
Sales of food and merchandise	9,087			12,967		—		22,054		7,505			10,642		—		18,147
Service revenues	42,185			192		—		42,377		21,444			118		—		21,562
Other revenues	6,843			19		469		7,331		4,767			16		332		5,115
	$	94,955		$	30,104	$	469	$	125,528	$	55,984		$	26,141	$	332	$	82,457

Recognized at a point in time	$	94,066		$	30,102	$	468	$	124,636	$	55,217		$	26,140	$	329	$	81,686
Recognized over time	889		*	2		1		892		767		*	1		3		771
	$	94,955		$	30,104	$	469	$	125,528	$	55,984		$	26,141	$	332	$	82,457

* 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):


	Balance at September 30, 2021		Consideration Received		Recognized in Revenue		Balance at March 31, 2022
Ad revenue	$	84	$	450	$	(330)	$	204
Expo revenue	151		178		—		329
Other (including franchise fees)	119		9		(20)		108
	$	354	$	637	$	(350)	$	641

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Selected Account Information

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


	March 31, 2022		September 30, 2021
Credit card receivables	$	2,152	$	1,447
Income tax refundable	2,148		4,472
Insurance receivable	21		185
ATM in-transit	443		277
Other (net of allowance for doubtful accounts of $517 and $382, respectively)	1,498		1,189
Total accounts receivable, net	$	6,262	$	7,570

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 $154,000 and $102,000 as of March 31, 2022 and September 30, 2021, respectively.

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


	March 31, 2022		September 30, 2021
Prepaid insurance	$	4,712	$	277
Prepaid legal	25		112
Prepaid taxes and licenses	565		380
Prepaid rent	471		309
Other	1,107		850
Total prepaid expenses and other current assets	$	6,880	$	1,928

A reconciliation of goodwill as of March 31, 2022 and September 30, 2021 is as follows (in thousands):


	Gross		Accumulated Impairment		Net
Balance at September 30, 2021	$	59,967	$	20,588	$	39,379
Acquisitions (see Note 4)	15,105		—		15,105
Balance at March 31, 2022	$	75,072	$	20,588	$	54,484

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of intangible assets, net are as follows (in thousands):


	March 31, 2022	September 30, 2021
Indefinite-lived:

RCI HOSPITALITY HOLDINGS, INC. [RICK] Filings
10-Q	[2022-05-09]
10-Q	[2022-02-09]
10-K	[2021-12-14]
10-Q	[2021-08-05]
10-Q	[2021-05-10]
10-Q	[2021-02-09]
10-K	[2020-12-14]
10-Q	[2020-08-10]
10-Q	[2020-05-11]
10-Q	[2020-02-27]
10-K	[2020-02-13]
10-Q	[2019-09-24]
10-Q	[2019-09-24]
10-Q	[2019-02-11]
10-K	[2018-12-31]
10-Q	[2018-08-09]
10-Q	[2018-05-10]
10-Q	[2018-03-07]
10-K	[2018-02-14]
10-Q	[2017-08-09]
10-Q	[2017-05-09]
10-Q	[2017-02-09]
10-K	[2016-12-13]
10-Q	[2016-08-04]
10-Q	[2016-05-10]
10-Q	[2016-02-09]
10-K	[2015-12-14]
10-Q	[2015-08-10]
10-Q	[2015-05-11]
10-Q	[2015-02-09]
10-K	[2014-12-15]
10-Q	[2014-08-11]
10-Q	[2014-05-12]
10-Q	[2014-02-10]
10-K	[2013-12-16]
10-Q	[2013-08-08]
10-Q	[2013-05-09]
10-Q	[2013-02-11]
10-K	[2012-12-14]