RCI HOSPITALITY HOLDINGS, INC. [RICK] Filings

10-Q 1 rick-20220630.htm 10-Q rick-20220630

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 June 30, 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 August 5, 2022, 9,243,948 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

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		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and September 30, 2021	4

	Condensed Consolidated Statements of Income (unaudited) for the three and nine months ended June 30, 2022 and 2021	6

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and nine months ended June 30, 2022 and 2021	7

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2022 and 2021	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

	Signatures	47

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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)


	June 30, 2022		September 30, 2021
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	37,500	$	35,686
Accounts receivable, net	3,955		7,570
Current portion of notes receivable	226		220
Inventories	3,749		2,659
Prepaid expenses and other current assets	4,475		1,928
Assets held for sale	6,989		4,887
Total current assets	56,894		52,950
Property and equipment, net	208,710		175,952
Operating lease right-of-use assets, net	37,753		24,308
Notes receivable, net of current portion	4,750		2,839
Goodwill	61,399		39,379
Intangibles, net	130,585		67,824
Other assets	2,088		1,367
Total assets	$	502,179	$	364,619

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	5,767	$	4,408
Accrued liabilities	12,888		10,403
Current portion of debt obligations, net	12,295		6,434
Current portion of operating lease liabilities	2,730		1,780
Total current liabilities	33,680		23,025
Deferred tax liability, net	24,074		19,137
Debt, net of current portion and debt discount and issuance costs	175,670		118,734
Operating lease liabilities, net of current portion	36,719		24,150
Other long-term liabilities	351		350
Total liabilities	270,494		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; 9,286,198 and 8,999,910 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	93		90
Additional paid-in capital	68,342		50,040
Retained earnings	163,800		129,693
Total RCIHH stockholders’ equity	232,235		179,823
Noncontrolling interests	(550)		(600)
Total equity	231,685		179,223
Total liabilities and equity	$	502,179	$	364,619

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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 June 30,				For the Nine Months Ended June 30,
	2022		2021		2022		2021
Revenues
Sales of alcoholic beverages	$	29,738	$	25,092	$	83,504	$	62,725
Sales of food and merchandise	11,574		12,058		33,628		30,205
Service revenues	25,444		16,880		67,821		38,442
Other	3,958		3,830		11,289		8,945
Total revenues	70,714		57,860		196,242		140,317
Operating expenses
Cost of goods sold
Alcoholic beverages sold	5,177		4,621		14,907		11,613
Food and merchandise sold	3,959		4,043		11,756		9,961
Service and other	46		208		170		304
Total cost of goods sold (exclusive of items shown separately below)	9,182		8,872		26,833		21,878
Salaries and wages	17,387		13,870		50,422		36,556
Selling, general and administrative	19,572		14,697		56,495		39,467
Depreciation and amortization	2,565		2,057		7,636		6,197
Other charges (gains), net	1,501		(143)		1,357		1,288
Total operating expenses	50,207		39,353		142,743		105,386
Income from operations	20,507		18,507		53,499		34,931
Other income (expenses)
Interest expense	(3,028)		(2,281)		(8,496)		(7,079)
Interest income	103		72		321		194
Non-operating gains, net	127		9		211		5,356
Income before income taxes	17,709		16,307		45,535		33,402
Income tax expense	3,767		3,986		10,056		5,540
Net income	13,942		12,321		35,479		27,862
Net loss (income) attributable to noncontrolling interests	(40)		(19)		(50)		174
Net income attributable to RCIHH common shareholders	$	13,902	$	12,302	$	35,429	$	28,036

Earnings per share
Basic and diluted	$	1.48	$	1.37	$	3.76	$	3.11

Weighted average number of common shares outstanding
Basic and diluted	9,389,675		8,999,910		9,428,461		9,006,373

Dividends per share	$	0.05	$	0.04	$	0.14	$	0.12

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
Purchase of treasury shares	—	—		—		—		(168,069)	(9,212)		—		(9,212)
Canceled treasury shares	(168,069)	(1)		(9,211)		—		168,069	9,212		—		—
Payment of dividends	—	—		—		(468)		—	—		—		(468)
Net income	—	—		—		13,902		—	—		40		13,942
Balance at June 30, 2022	9,286,198	$	93	$	68,342	$	163,800	—	$	—	$	(550)	$	231,685

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
Payment of dividends	—	—		—		(360)		—	—		—		(360)
Net income	—	—		—		12,302		—	—		19		12,321
Balance at June 30, 2021	8,999,910	$	90	$	50,040	$	127,753	—	$	—	$	(588)	$	177,295

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 Nine Months Ended June 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	35,479	$	27,862
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,636		6,197
Deferred income tax benefit	(409)		(430)
Gain on sale of businesses and assets	(1,282)		(626)
Impairment of assets	1,722		1,672
Unrealized loss on equity securities	1		58
Amortization of debt discount and issuance costs	199		160
Gain on debt extinguishment	(83)		(5,298)
Noncash lease expense	1,725		1,282
Gain on insurance	(408)		(294)
Doubtful accounts expense (reversal) on notes receivable	753		(22)
Changes in operating assets and liabilities:
Accounts receivable	3,411		4,309
Inventories	(492)		(107)
Prepaid expenses, other current and other assets	(3,271)		2,346
Accounts payable, accrued and other liabilities	1,773		(4,892)
Net cash provided by operating activities	46,754		32,217
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets	4,611		3,213
Proceeds from insurance	515		294
Proceeds from notes receivable	127		95
Payments for property and equipment and intangible assets	(17,173)		(10,788)
Acquisition of businesses, net of cash acquired	(44,302)		—
Net cash used in investing activities	(56,222)		(7,186)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively	35,820		2,176
Payments on debt obligations	(10,714)		(10,845)
Purchase of treasury stock	(12,057)		(1,794)
Payment of dividends	(1,322)		(1,080)
Payment of loan origination costs	(445)		(25)
Net cash provided by (used in) financing activities	11,282		(11,568)
NET INCREASE IN CASH AND CASH EQUIVALENTS	1,814		13,463
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,686		15,605
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	37,500	$	29,068

CASH PAID DURING PERIOD FOR:
Interest	$	7,915	$	7,761
Income taxes	$	8,990	$	4,047

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Noncash investing and financing transactions:
Debt incurred in connection with acquisition of businesses	$	33,200	$	—
Debt incurred in connection with purchase of property and equipment	$	4,820	$	—
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	$	21,247	$	217
Unpaid liabilities on capital expenditures	$	1,325	$	995

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 nine months ended June 30, 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 and Potential Economic Slowdown

Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March 2020. We had a major disruption in our business operations that affected 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. In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic. There have been several variants to the coronavirus since then that threatened our operations throughout the period of recovery. We continue to adhere to state and local government mandates regarding the pandemic.

Since early 2021, there has been a worldwide increase in inflation. In the event this global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 a probable economic slowdown on sales and, to a lesser extent, the future assumed impact of the COVID-19 pandemic. Based on the evaluation we conducted during the interim period ended June 30, 2022, we determined that our assets are impaired in a total amount of $1.7 million comprised of $400,000 in goodwill (for one club), $1.0 million in property and equipment ($379,000 for one club and $650,000 for one Bombshells), and $293,000 in SOB license (for one club). See Note 6.

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 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

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
Tradenames	7,460
Deferred tax liability	(2,903)
Total net assets acquired	74,557
Goodwill	13,805
Acquisition price fair value	$	88,362

Licenses and tradenames 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 this acquisition, we incurred acquisition-related expenses of approximately $403,000 ($162,000 recognized in fiscal 2021 and $241,000 recognized in fiscal 2022), of which $30,000 and $42,000 were expensed during the three and nine months ended June 30, 2021 and $7,000 and $241,000 were expensed during the three and nine months ended June 30, 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 June 30, 2022, the eleven acquired clubs contributed revenues of $10.3 million and $24.7 million and income from operations of $3.6 million and $7.3 million during the three and nine months ended June 30, 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 June 30,				For the Nine Months Ended June 30,
	2022		2021		2022		2021
Pro forma revenues	$	70,714	$	64,407	$	197,968	$	155,184
Pro forma net income attributable to RCIHH common stockholders	$	13,931	$	13,745	$	34,876	$	29,252
Pro forma earnings per share – basic and diluted	$	1.48	$	1.45	$	3.70	$	3.08

Pro forma weighted average number of common shares outstanding	9,389,675		9,499,910		9,428,461		9,506,373

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 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.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The Company incurred approximately $21,000 of acquisition-related costs for this acquisition, of which $11,000 was incurred in fiscal 2021 and $10,000 was incurred in the first quarter of fiscal 2022, both of which were included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $433,000 and $1,146,000 and loss from operations of $5,000 and $29,000 during the three and nine months ended June 30, 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 for $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 for $400,000 to move one of our existing clubs due to eminent domain on the current location.

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.

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $5.0 million under a 10% ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity. The Company acquired 100% of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement. Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.

The preliminary fair value of the consideration transferred is as follows (in thousands) as of May 2, 2022:


Cash	$	5,000
Notes payable	11,000
Total consideration fair value	$	16,000

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, including the fair value of the contingent debt consideration. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital adjustments, the amount of goodwill is estimated to be $7.3 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

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

annually for impairment. The recognized goodwill will not be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022:


Current assets	$	172
Property and equipment	5,336
Licenses	4,510
Tradenames	1,110
Deferred tax liability	(2,443)
Total net assets acquired	8,685
Goodwill	7,315
Acquisition price fair value	$	16,000

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

In connection with this acquisition, we incurred acquisition-related expenses of approximately $8,000 and $8,000 expensed during the three and nine months ended June 30, 2022, respectively, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $1.1 million and $1.1 million and income from operations of $497,000 and $497,000 during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statements of income.

The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.

On May 17, 2022, the Company sold a property classified as held-for sale with a carrying value of $1.1 million for $1.7 million in cash. The Company used $1.6 million of the proceeds to pay off a loan related to the property.

On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $3.3 million for a future Bombshells location. The Company secured a $2.2 million loan in relation to the purchase (see Note 7).

On July 12, 2022, the Company received $6.0 million from the Philadelphia Regional Port Authority for one of the Company's rental properties, with a carrying value of $4.9 million, due to eminent domain. The Company paid the current lessee a lease termination fee of $250,000, which will be included in other charges (gains), net in our consolidated statement of income for the year ending September 30, 2022. The Company used $2.1 million of the proceeds to pay down a loan related to the property.

On July 21, 2022, the Company acquired a club in Odessa, Texas for a total of $1.8 million, of which $1.0 million was for the real estate and $800,000 for the adult entertainment business. The Company paid $1.0 million at closing for the real estate and executed an $800,000 6% seller-financed promissory note for the business. The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest. See Note 7. Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired and the debt consideration, along with the determination of any goodwill or gain on the transaction. 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 July 27, 2022, the Company completed an acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $25.0 million. The acquisition price includes (1) $20.0 million for the adult entertainment business covered in a stock purchase agreement payable $10.0 million in cash at closing and $10.0 million under a 6% ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million for the real estate property covered in an asset purchase agreement payable under a 6% ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest. In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired and the debt consideration, along with the determination of any goodwill or gain on the transaction.

The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.

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 June 30, 2022									Three Months Ended June 30, 2021
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	21,061		$	8,677	$	—	$	29,738	$	16,130		$	8,962	$	—	$	25,092
Sales of food and merchandise	4,639			6,935		—		11,574		5,062			6,996		—		12,058
Service revenues	25,287			157		—		25,444		16,772			108		—		16,880
Other revenues	3,697			20		241		3,958		3,067			11		752		3,830
	$	54,684		$	15,789	$	241	$	70,714	$	41,031		$	16,077	$	752	$	57,860

Recognized at a point in time	$	54,320		$	15,777	$	241	$	70,338	$	40,599		$	16,075	$	751	$	57,425
Recognized over time	364		*	12		—		376		432		*	2		1		435
	$	54,684		$	15,789	$	241	$	70,714	$	41,031		$	16,077	$	752	$	57,860

	Nine Months Ended June 30, 2022									Nine Months Ended June 30, 2021
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	57,901		$	25,603	$	—	$	83,504	$	38,398		$	24,327	$	—	$	62,725
Sales of food and merchandise	13,726			19,902		—		33,628		12,567			17,638		—

RCI HOSPITALITY HOLDINGS, INC. [RICK] Filings
10-Q	[2022-08-09]
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]