Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of this report. This overview summarizes the MD&A, which includes the following sections:
•Our Business — a general description of our business and the adult nightclub industry, our objective, our strategic priorities, our core capabilities, and challenges and risks of our business.
•Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.
•Operations Review — an analysis of our Company’s consolidated results of operations for the three years presented in our consolidated financial statements.
•Liquidity and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview of financial position.
Current Operating Environment
Our fiscal 2020 was the period hard hit by the COVID-19 pandemic causing 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 fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased. Stimulus money also flowed to the economy at that time which prompted discretionary spending. In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions. Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S. economy in general, with global inflation and supply chain disruptions impacting our businesses.
Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.
OUR BUSINESS
The following are our operating segments:
| | | | | |
Nightclubs | Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving primarily businessmen and professionals. These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Aledo, Round Rock, El Paso and Odessa, Texas; Denver, Colorado; Charlotte and Raleigh, North Carolina; Minneapolis, Minnesota; New York and Newburgh, New York; Miami Gardens, Pembroke Park and Miami, Florida; Pittsburgh, Pennsylvania; Phoenix, Arizona; Louisville, Kentucky; Portland, Maine; Indianapolis, Indiana; and Washington Park, Kappa, Sauget and Chicago, Illinois. No sexual contact is permitted at any of our locations. We also own and operate a Studio 80 dance club in Fort Worth, Texas. We also own and lease to third parties real properties that are adjacent to (or used to be locations of) our clubs. |
| |
Bombshells | Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball, Katy and Arlington, Texas under the brand name Bombshells Restaurant & Bar. We have one franchised unit in San Antonio, Texas. |
| |
Other | Our wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the multibillion-dollar adult nightclubs industry and the adult retail products industry. We also own an industry trade show, an industry trade publication and more than a dozen industry and social media websites. Included here is Drink Robust, which is licensed to sell Robust Energy Drink in the United States. |
We generate our revenues from the sale of liquor, beer, wine, food, and merchandise; service revenues such as cover charges, membership fees, and facility use fees; and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations. Other revenues include Media Group revenues for the sale of advertising content and revenues from our annual Expo convention, and Drink Robust sales. Our fiscal year-end is September 30.
Same-Store Sales. We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full quarter of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify based on the definitions stated above. Revenues outside of our Nightclubs and Bombshells reportable segments’ core business are excluded from same-store sales calculation.
Our goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our management and employees—to become more competitive and to accelerate growth.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our estimates, and such differences could be material.
A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included in Item 8 – “Financial Statements and Supplementary Data” of this report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial results. These estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.
Impairment of Long-Lived Assets
We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Key estimates in the undiscounted cash flow model include management’s estimate of the projected revenues and operating margins. If fair value is used to determine an impairment loss, an additional key assumption is the selection of a weighted-average cost of capital to discount cash flows. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. During the third quarter of 2022, we impaired two properties for a total of $1.0 million one due to eminent domain by the state of Texas and the other due to underperformance. During the second quarter of 2021, we impaired one property that was reclassified to assets held for sale for $1.4 million, and during the fourth quarter of 2021, we impaired four clubs for $584,000. During the second quarter of 2020, we impaired one club and one Bombshells unit for a total of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use asset for $104,000.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.
Our impairment calculations require management to make assumptions and to apply judgment in order to estimate fair values. If our actual results are not consistent with our estimates and assumptions, we may be exposed to impairments that could be material. We do not believe that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that could cause a material change in our calculated impairment charges.
For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values. Key estimates in the discounted cash flow model include management’s estimate of the projected revenues and operating margins, along with the selection of a weighted-average cost of capital to discount cash flows. We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $566,000. For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $6.3 million. For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.
For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount
exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $293,000 in 2022 related to one club, $5.3 million in 2021 related to three clubs, and $2.3 million in 2020 related to two clubs.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values. The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to acquired entities are included prospectively beginning with the date of acquisition. Acquisition-related costs are expensed as incurred.
Stock-based Compensation
We recognize expense for stock-based compensation awards, which is equal to the fair value of the awards at grant date, ratably in selling, general and administrative expenses in our consolidated statements of operations over their requisite service period. Calculating the grant date fair value of stock-based compensation awards requires the input of subjective assumptions. We determine the fair value of each stock option grant using the Black-Scholes option-pricing model with assumptions based primarily on historical data. Specific inputs to the model include the expected term of the stock options, stock price volatility, dividend yield, and risk-free interest rate.
We used our historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan which may not be reflective of current stock market environment and current mix of grantees. We estimated expected volatility based on historical volatility of the Company's stock price for a period equal to the award's expected term. We estimated expected dividend yield based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged). The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We recognize forfeitures when they occur.
Income Taxes
We estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases. These estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. When necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be realized.
Legal and Other Contingencies
As mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 11 to our consolidated financial statements, we are involved in various suits and claims in the normal course of business. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. 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.
OPERATIONS REVIEW
Highlights of operations from fiscal 2022, 2021, and 2020 are as follows (in thousands, except percentages and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Revenues | | | | | | | | | |
Consolidated | $ | 267,620 | | | 37.1 | % | | $ | 195,258 | | | 47.6 | % | | $ | 132,327 | |
Nightclubs | $ | 206,251 | | | 50.2 | % | | $ | 137,348 | | | 55.4 | % | | $ | 88,373 | |
Bombshells | $ | 59,925 | | | 5.8 | % | | $ | 56,621 | | | 31.0 | % | | $ | 43,215 | |
| | | | | | | | | |
Same-store sales | | | | | | | | | |
Consolidated | | | +5.6 | % | | | | +1.5 | % | | |
Nightclubs | | | +10.1 | % | | | | -2.1 | % | | |
Bombshells | | | -4.6 | % | | | | +7.7 | % | | |
| | | | | | | | | |
Income from operations | | | | | | | | | |
Consolidated | $ | 71,459 | | | 85.4 | % | | $ | 38,548 | | | 1,303.8 | % | | $ | 2,746 | |
Nightclubs | $ | 82,798 | | | 89.0 | % | | $ | 43,815 | | | 235.6 | % | | $ | 13,056 | |
Bombshells | $ | 11,504 | | | (13.3) | % | | $ | 13,264 | | | 43.6 | % | | $ | 9,237 | |
| | | | | | | | | |
Diluted earnings (loss) per share | $ | 4.91 | | | | | $ | 3.37 | | | | | $ | (0.66) | |
| | | | | | | | | |
Net cash provided by operating activities | $ | 64,509 | | | 53.6 | % | | $ | 41,991 | | | 168.6 | % | | $ | 15,632 | |
| | | | | | | | | |
Free cash flow* | $ | 58,911 | | | 63.3 | % | | $ | 36,084 | | | 167.7 | % | | $ | 13,481 | |
*Reconciliation and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial Measures” section of this Item. These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.
The following common size tables present a comparison of our results of operations as a percentage of total revenues for the three most recently completed fiscal years:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenues | | | | | |
Sales of alcoholic beverages | 42.3 | % | | 44.4 | % | | 44.6 | % |
Sales of food and merchandise | 16.6 | % | | 21.1 | % | | 18.5 | % |
Service revenues | 35.1 | % | | 28.4 | % | | 31.1 | % |
Other | 6.0 | % | | 6.1 | % | | 5.8 | % |
Total revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
Operating expenses | | | | | |
Cost of goods sold | | | | | |
Alcoholic beverages sold | 17.8 | % | | 18.3 | % | | 18.8 | % |
Food and merchandise sold | 35.1 | % | | 33.6 | % | | 33.0 | % |
Service and other | 0.3 | % | | 0.6 | % | | 0.5 | % |
Total cost of goods sold (exclusive of items shown separately below) | 13.5 | % | | 15.4 | % | | 14.7 | % |
Salaries and wages | 25.6 | % | | 25.9 | % | | 29.5 | % |
Selling, general and administrative | 29.5 | % | | 28.0 | % | | 39.1 | % |
Depreciation and amortization | 4.6 | % | | 4.2 | % | | 6.7 | % |
Other charges, net | 0.2 | % | | 6.8 | % | | 8.0 | % |
Total operating expenses | 73.3 | % | | 80.3 | % | | 97.9 | % |
Income from operations | 26.7 | % | | 19.7 | % | | 2.1 | % |
Other income (expenses) | | | | | |
Interest expense | (4.5) | % | | (5.1) | % | | (7.4) | % |
Interest income | 0.2 | % | | 0.1 | % | | 0.2 | % |
Non-operating gains (losses), net | 0.1 | % | | 2.7 | % | | 0.0 | % |
Income (loss) before income taxes | 22.5 | % | | 17.5 | % | | (5.1) | % |
Income tax expense (benefit) | 5.3 | % | | 2.0 | % | | (0.4) | % |
Net income (loss) | 17.2 | % | | 15.4 | % | | (4.8) | % |
†Percentages may not foot due to rounding in this and in all of the succeeding tables presenting percentages in this report. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.
Below is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Better (Worse) |
| 2022 vs. 2021 | | 2021 vs. 2020 |
| Amount | | % | | Amount | | % |
Revenues | | | | | | | |
Sales of alcoholic beverages | $ | 26,631 | | | 30.7 | % | | $ | 27,605 | | | 46.7 | % |
Sales of food and merchandise | 3,183 | | | 7.7 | % | | 16,651 | | | 68.1 | % |
Service revenues | 38,427 | | | 69.3 | % | | 14,299 | | | 34.7 | % |
Other | 4,121 | | | 34.3 | % | | 4,376 | | | 57.4 | % |
Total revenues | 72,362 | | | 37.1 | % | | 62,931 | | | 47.6 | % |
Operating expenses | | | | | | | |
Cost of goods sold | | | | | | | |
Alcoholic beverages sold | (4,272) | | | (26.9) | % | | (4,786) | | | (43.1) | % |
Food and merchandise sold | (1,743) | | | (12.6) | % | | (5,723) | | | (70.9) | % |
Service and other | 57 | | | 15.2 | % | | (107) | | | (40.1) | % |
Total cost of goods sold (exclusive of items shown separately below) | (5,958) | | | (19.8) | % | | (10,616) | | | (54.6) | % |
Salaries and wages | (17,820) | | | (35.2) | % | | (11,557) | | | (29.6) | % |
Selling, general and administrative | (24,239) | | | (44.4) | % | | (2,916) | | | (5.6) | % |
Depreciation and amortization | (4,153) | | | (50.4) | % | | 598 | | | 6.8 | % |
Other charges, net | 12,719 | | | 96.5 | % | | (2,638) | | | (25.0) | % |
Total operating expenses | (39,451) | | | (25.2) | % | | (27,129) | | | (20.9) | % |
Income from operations | 32,911 | | | 85.4 | % | | 35,802 | | | 1,303.8 | % |
Other income/expenses | | | | | | | |
Interest expense | (1,958) | | | (19.6) | % | | (181) | | | (1.8) | % |
Interest income | 158 | | | 62.5 | % | | (71) | | | (21.9) | % |
Non-operating gains/losses, net | (5,119) | | | (96.0) | % | | 5,394 | | | * |
Income/loss before income taxes | 25,992 | | | 76.1 | % | | 40,944 | | | 601.7 | % |
Income tax expense/benefit | (10,082) | | | (252.7) | % | | (4,482) | | | * |
Net income/loss | $ | 15,910 | | | 52.8 | % | | $ | 36,462 | | | * |
*Not meaningful.
Revenues
Our consolidated revenues continued their upward trend from 2020 to 2021 (with an increase of 47.6%) rebounding from the heavily COVID-19 affected 2020 to a more stable increase from 2021 to 2022 (with an increase of 37.1%) aided by acquisitions. Consolidated same-store sales increased by 5.6% from 2021 to 2022 and by 1.5% from 2020 to 2021. New units contributed $47.6 million, or 24.4% of total prior-year revenue, to the total revenue increase from 2021 to 2022 (mostly from club acquisitions) and $4.2 million, or 3.1% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021 (all from new Bombshells). Closed units in the comparable prior year contributed $13.9 million, or 7.1% of total prior-year revenue, to the total revenue increase from 2021 to 2022 and $56.8 million, or 42.9% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021.
Segment contribution to total revenues was as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Nightclubs | | | | | | | | | |
Sales of alcoholic beverages | $ | 80,001 | | | 47.3 | % | | $ | 54,305 | | | 70.0 | % | | $ | 31,950 | |
Sales of food and merchandise | 18,289 | | | 6.2 | % | | 17,221 | | | 101.2 | % | | 8,561 | |
Service revenues | 93,481 | | | 69.5 | % | | 55,146 | | | 34.5 | % | | 41,004 | |
Other revenues | 14,480 | | | 35.6 | % | | 10,676 | | | 55.7 | % | | 6,858 | |
| 206,251 | | | 50.2 | % | | 137,348 | | | 55.4 | % | | 88,373 | |
Bombshells | | | | | | | | | |
Sales of alcoholic beverages | 33,315 | | | 2.9 | % | | 32,380 | | | 19.4 | % | | 27,130 | |
Sales of food and merchandise | 26,005 | | | 8.9 | % | | 23,890 | | | 50.3 | % | | 15,899 | |
Service revenues | 407 | | | 29.2 | % | | 315 | | | 99.4 | % | | 158 | |
Other revenues | 198 | | | 450.0 | % | | 36 | | | 28.6 | % | | 28 | |
| 59,925 | | | 5.8 | % | | 56,621 | | | 31.0 | % | | 43,215 | |
Other | | | | | | | | | |
Other revenues | 1,444 | | | 12.0 | % | | 1,289 | | | 74.4 | % | | 739 | |
| $ | 267,620 | | | 37.1 | % | | $ | 195,258 | | | 47.6 | % | | $ | 132,327 | |
Nightclubs segment revenues. Nightclubs revenues increased by 50.2% from 2021 to 2022 and by 55.4% from 2020 to 2021. A breakdown of the changes compared to total change in Nightclubs revenues is as follows:
| | | | | | | | | | | |
| 2022 vs. 2021 | | 2021 vs. 2020 |
Impact of 10.1% increase and 2.1% decrease in same-store sales, respectively, to total revenues | 9.5 | % | | (1.2) | % |
Newly acquired units | 30.5 | % | | — | % |
Closed units | 10.1 | % | | 56.4 | % |
Other | 0.1 | % | | 0.2 | % |
| 50.2 | % | | 55.4 | % |
Nightclubs segment sales mix for the three fiscal years, below:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Sales of alcoholic beverages | 38.8 | % | | 39.5 | % | | 36.2 | % |
Sales of food and merchandise | 8.9 | % | | 12.5 | % | | 9.7 | % |
Service revenues | 45.3 | % | | 40.2 | % | | 46.4 | % |
Other | 7.0 | % | | 7.8 | % | | 7.7 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % |
The 2022 new units include 15 clubs, of which eleven were acquired in October 2021, one acquired in November 2021, one acquired in May 2022, and two acquired in July 2022. See Note 16 to our consolidated financial statements. In total, these newly acquired clubs contributed $41.9 million in revenues during 2022 since their acquisition dates. No new clubs were acquired in 2020 and 2021.
Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.6 million in 2022, $1.5 million in 2021, and $1.3 million in 2020.
Bombshells segment revenues. Bombshells revenues increased by 5.8% from 2021 to 2022 and by 31.0% from 2020 to 2021. A breakdown of the changes compared to total changes in Bombshells revenues is as follows:
| | | | | | | | | | | |
| 2022 vs. 2021 | | 2021 vs. 2020 |
Impact of 4.6% decrease and 7.7% increase in same-store sales, respectively, to total revenues | (4.6) | % | | 5.2 | % |
New units | 10.1 | % | | 9.6 | % |
Closed units | — | % | | 16.2 | % |
Other | 0.3 | % | | — | % |
| 5.8 | % | | 31.0 | % |
Bombshells segment sales mix for the three fiscal years is as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Sales of alcoholic beverages | 55.6 | % | | 57.2 | % | | 62.8 | % |
Sales of food and merchandise | 43.4 | % | | 42.2 | % | | 36.8 | % |
Service and other revenues | 1.0 | % | | 0.6 | % | | 0.4 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % |
Bombshells Katy was opened in the first quarter of 2020, while Bombshells 59 was opened in the second quarter of 2020. No new Bombshells location was opened in 2021. Bombshells Arlington was opened in the first quarter of 2022.
Other segment revenues. Other revenues included revenues from Drink Robust in all three fiscal years presented. Drink Robust sales were $201,000, $249,000, and $150,000 in fiscal 2022, 2021, and 2020, respectively, which excludes intercompany sales to Nightclubs and Bombshells units amounting to $261,000, $141,000, and $70,000 in fiscal 2022, 2021, and 2020, respectively. Media business revenues were $1.2 million, $1.0 million, and $589,000 in fiscal 2022, 2021, and 2020, respectively. Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed to be held in August 2020 (fiscal 2020) was canceled. All unearned sponsorship and advertising revenues related to the event were either further deferred or refunded and no revenue was recognized.
Operating Expenses
Total operating expenses, as a percent of consolidated revenues, were 73.3%, 80.3%, and 97.9% for the fiscal year 2022, 2021, and 2020, respectively. Significant contributors to the change in operating expenses as a percent of revenues are explained below.
Cost of goods sold. Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding, and Drink Robust. As a percentage of consolidated revenues, consolidated cost of goods sold was 13.5%, 15.4%, and 14.7% for fiscal 2022, 2021, and 2020, respectively. See page 29 above for the breakdown of percentages for each line item of consolidated cost of goods sold as it relates to the respective consolidated revenue line. For the Nightclubs segment, cost of goods sold was 10.5%, 11.8%, and 10.7% for fiscal 2022, 2021, and 2020, respectively, which was primarily caused by shifts in sales mix. Bombshells cost of goods sold was 23.5%, 23.8%, and 22.6% for fiscal 2022, 2021, and 2020, respectively, which was mainly driven by menu price increases in 2022 in response to inflation, the shift in sales mix to lower-margin food sales in 2021, and to higher-margin alcoholic beverage sales in 2020.
Salaries and wages. Consolidated salaries and wages increased by $17.8 million, or 35.2%, from 2021 to 2022 and increased by $11.6 million, or 29.6%, from 2020 to 2021. The dollar decrease from 2020 to 2021 was mainly from personnel hiring and rehiring after easing restrictions from COVID-19, and the dollar increase from 2021 to 2022 was mainly from new employees caused by the fifteen new club acquisitions and one Bombshells opening. As a percentage of revenues, consolidated salaries and wages were 25.6%, 25.9%, and 29.5% in 2022, 2021, and 2020, respectively, mainly due to sales trend and the impact of fixed salaries on increasing sales. Corporate salary pay cuts made in 2020 during the height of the pandemic restrictions were paid back in 2021.
By reportable segment, salaries and wages are broken down as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Nightclubs | $ | 40,859 | | | 51.4 | % | | $ | 26,986 | | | 37.8 | % | | $ | 19,590 | |
Bombshells | 14,585 | | | 11.8 | % | | 13,041 | | | 25.1 | % | | 10,427 | |
Other | 601 | | | 3.3 | % | | 582 | | | 18.5 | % | | 491 | |
Corporate | 12,402 | | | 23.8 | % | | 10,018 | | | 17.0 | % | | 8,562 | |
| $ | 68,447 | | | 35.2 | % | | $ | 50,627 | | | 29.6 | % | | $ | 39,070 | |
Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general corporate.
Salaries and wages as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Nightclubs | 19.8 | % | | 19.6 | % | | 22.2 | % |
Bombshells | 24.3 | % | | 23.0 | % | | 24.1 | % |
Other | 41.6 | % | | 45.2 | % | | 66.4 | % |
Corporate | 4.6 | % | | 5.1 | % | | 6.5 | % |
| 25.6 | % | | 25.9 | % | | 29.5 | % |
Selling, general and administrative expenses. The components of consolidated selling, general and administrative expenses are in the tables below (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Amount | | % | | Amount | | % | | Amount | | % |
Taxes and permits | $ | 9,468 | | | 3.5 | % | | $ | 8,701 | | | 4.5 | % | | $ | 8,071 | | | 6.1 | % |
Advertising and marketing | 9,860 | | | 3.7 | % | | 6,676 | | | 3.4 | % | | 5,367 | | | 4.1 | % |
Supplies and services | 8,614 | | | 3.2 | % | | 6,190 | | | 3.2 | % | | 4,711 | | | 3.6 | % |
Insurance | 10,152 | | | 3.8 | % | | 5,676 | | | 2.9 | % | | 5,777 | | | 4.4 | % |
Lease | 6,706 | | | 2.5 | % | | 3,942 | | | 2.0 | % | | 4,060 | | | 3.1 | % |
Legal | 1,995 | | | 0.7 | % | | 3,997 | | | 2.0 | % | | 4,725 | | | 3.6 | % |
Utilities | 4,585 | | | 1.7 | % | | 3,366 | | | 1.7 | % | | 2,945 | | | 2.2 | % |
Charge card fees | 6,292 | | | 2.4 | % | | 3,376 | | | 1.7 | % | | 2,382 | | | 1.8 | % |
Security | 4,404 | | | 1.6 | % | | 3,892 | | | 2.0 | % | | 2,582 | | | 2.0 | % |
Accounting and professional fees | 3,909 | | | 1.5 | % | | 2,031 | | | 1.0 | % | | 3,463 | | | 2.6 | % |
Repairs and maintenance | 3,754 | | | 1.4 | % | | 2,767 | | | 1.4 | % | | 2,289 | | | 1.7 | % |
Stock-based compensation | 2,353 | | | 0.9 | % | | — | | | — | % | | — | | | — | % |
Other | 6,755 | | | 2.5 | % | | 3,994 | | | 2.0 | % | | 5,320 | | | 4.0 | % |
| $ | 78,847 | | | 29.5 | % | | $ | 54,608 | | | 28.0 | % | | $ | 51,692 | | | 39.1 | % |
By reportable segment, selling, general and administrative expenses are broken down as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Nightclubs | $ | 51,285 | | | 56.7 | % | | $ | 32,725 | | | 8.7 | % | | $ | 30,105 | |
Bombshells | 17,295 | | | 16.2 | % | | 14,883 | | | 26.8 | % | | 11,735 | |
Other | 418 | | | 76.4 | % | | 237 | | | (11.6) | % | | 268 | |
Corporate | 9,849 | | | 45.6 | % | | 6,763 | | | (29.4) | % | | 9,584 | |
| $ | 78,847 | | | 44.4 | % | | $ | 54,608 | | | 5.6 | % | | $ | 51,692 | |
Selling, general and administrative expenses as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Nightclubs | 24.9 | % | | 23.8 | % | | 34.1 | % |
Bombshells | 28.9 | % | | 26.3 | % | | 27.2 | % |
Other | 28.9 | % | | 18.4 | % | | 36.3 | % |
Corporate | 3.7 | % | | 3.5 | % | | 7.2 | % |
| 29.5 | % | | 28.0 | % | | 39.1 | % |
The significant variances in selling, general and administrative expenses are as follows:
As a percentage of revenues, relatively fixed expenses were high in rate due to lower sales in fiscal 2020, while more discretionary/controllable expenses such as advertising and marketing were kept to a minimum. Conversely, due to the increase in revenues in 2021 from 2020, almost all selling, general and administrative expenses consequently increased except accounting and professional fees, insurance, leases, and legal. Accounting and legal fees primarily decreased from prior year’s SEC matters; lease expense decreased due to lease credits we received from certain landlords; while insurance decreased due to credits given by insurers for unused coverage due to COVID-19 closures in 2020. Most of the selling, general and administrative expense increases in 2022 came from the Nightclub acquisitions we made. We also incurred stock-based compensation expense from a new 2022 Stock Option Plan.
Depreciation and amortization. Depreciation and amortization increased by $4.2 million, or 50.4%, from 2021 to 2022 and decreased by $598,000, or 6.8%, from 2020 to 2021. The decrease from 2020 to 2021 was mainly from significantly low capital expenditure in 2020 while the increase from 2021 to 2022 was mainly caused by the growth in our depreciable asset base and amortizable intangibles caused by acquired clubs and a new Bombshells unit.
Other charges, net. The components of other charges, net are in the table below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Impairment of assets | $ | 1,888 | | | (86.1) | % | | $ | 13,612 | | | 28.2 | % | | $ | 10,615 | |
Settlement of lawsuits | 1,417 | | | 5.0 | % | | 1,349 | | | 675.3 | % | | 174 | |
Gain on sale of businesses and assets | (2,375) | | | 355.0 | % | | (522) | | | (21.0) | % | | (661) | |
Loss (gain) on insurance | (463) | | | (63.0) | % | | (1,253) | | | (398.3) | % | | 420 | |
| $ | 467 | | | (96.5) | % | | $ | 13,186 | | | 25.0 | % | | $ | 10,548 | |
The significant variances in other charges, net are discussed below:
During 2022, we recorded aggregate impairment charges amounting to $1.9 million related to goodwill of one club ($566,000), SOB license of one club ($293,000), and property and equipment of one club and one Bombshells unit ($1.0 million). During 2021, we recorded aggregate impairment charges amounting to $13.6 million related to goodwill of seven clubs ($6.3 million), SOB licenses of three clubs ($5.3 million), and property and equipment of five clubs, one of which is held for sale ($2.0 million). During 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one
club and one Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000). See Notes 2 and 16 to our consolidated financial statements.
In 2021, we settled a case with one of our Bombshells landlords for $1.0 million. See Note 11 to our consolidated financial statements. In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance.
Refer to dispositions in Note 16 to our consolidated financial statement for details on gains or losses on sale of businesses and assets.
In relation to insurance claims and recoveries, we recognized a $463,000 gain in 2022, $1.3 million gain in 2021, and a $420,000 loss in 2020 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that damaged one of our clubs in Sulphur, Louisiana in August 2020. The rest of the claims for the Sulphur club were received in 2022. Gains related to insurance recoveries are recognized when the contingencies related to the insurance claims have been resolved, which may be in a subsequent reporting period. See Note 15 to our consolidated financial statements.
Income from Operations
During fiscal 2022, 2021, and 2020, our consolidated operating margin was 26.7%, 19.7%, and 2.1%, respectively.
Below is a table which reflects segment contribution to income from operations (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Nightclubs | $ | 82,798 | | | $ | 43,815 | | | $ | 13,056 | |
Bombshells | 11,504 | | | 13,264 | | | 9,237 | |
Other | 57 | | | 35 | | | (614) | |
Corporate | (22,900) | | | (18,566) | | | (18,933) | |
| $ | 71,459 | | | $ | 38,548 | | | $ | 2,746 | |
Nightclubs operating margin was 40.1%, 31.9%, and 14.8% in 2022, 2021, and 2020, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $1.2 million, $13.6 million, and $10.4 million for 2022, 2021, and 2020, respectively. Bombshells operating margin was 19.2%, 23.4%, and 21.4% in 2022, 2021, and 2020, respectively, mainly due to one new unit and same-store sales decrease in 2022, two new units and same-store sales increase in 2021, partially offset by COVID-19 impact in 2020.
Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to discussion of Non-GAAP Financial Measures on page 37.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
Income (loss) from operations | $ | 82,798 | | | $ | 11,504 | | | $ | 57 | | | $ | (22,900) | | | $ | 71,459 | |
Amortization of intangibles | 2,042 | | | 6 | | | 61 | | | 9 | | | 2,118 | |
Settlement of lawsuits | 1,287 | | | 18 | | | — | | | 112 | | | 1,417 | |
Impairment of assets | 1,238 | | | 650 | | | — | | | — | | | 1,888 | |
Loss (gain) on sale of businesses and assets | (2,010) | | | 17 | | | — | | | (382) | | | (2,375) | |
Gain on insurance | (463) | | | — | | | — | | | — | | | (463) | |
Stock-based compensation | — | | | — | | | — | | | 2,353 | | | 2,353 | |
Non-GAAP operating income (loss) | $ | 84,892 | | | $ | 12,195 | | | $ | 118 | | | $ | (20,808) | | | $ | 76,397 | |
| | | | | | | | | |
GAAP operating margin | 40.1 | % | | 19.2 | % | | 3.9 | % | | (8.6) | % | | 26.7 | % |
Non-GAAP operating margin | 41.2 | % | | 20.4 | % | | 8.2 | % | | (7.8) | % | | 28.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
Income (loss) from operations | $ | 43,815 | | | $ | 13,264 | | | $ | 35 | | | $ | (18,566) | | | $ | 38,548 | |
Amortization of intangibles | 187 | | | 14 | | | 57 | | | — | | | 258 | |
Settlement of lawsuits | 275 | | | 59 | | | 5 | | | 1,010 | | | 1,349 | |
Impairment of assets | 13,612 | | | — | | | — | | | — | | | 13,612 | |
Costs and charges related to debt refinancing | 17 | | | — | | | — | | | 40 | | | 57 | |
Loss (gain) on sale of businesses and assets | (580) | | | 72 | | | — | | | (14) | | | (522) | |
Gain on insurance | (1,209) | | | — | | | — | | | (44) | | | (1,253) | |
Non-GAAP operating income (loss) | $ | 56,117 | | | $ | 13,409 | | | $ | 97 | | | $ | (17,574) | | | $ | 52,049 | |
| | | | | | | | | |
GAAP operating margin | 31.9 | % | | 23.4 | % | | 2.7 | % | | (9.5) | % | | 19.7 | % |
Non-GAAP operating margin | 40.9 | % | | 23.7 | % | | 7.5 | % | | (9.0) | % | | 26.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
Income (loss) from operations | $ | 13,056 | | | $ | 9,237 | | | $ | (614) | | | $ | (18,933) | | | $ | 2,746 | |
Amortization of intangibles | 211 | | | 15 | | | 383 | | | — | | | 609 | |
Settlement of lawsuits | 174 | | | — | | | — | | | — | | | 174 | |
Impairment of assets | 10,370 | | | 245 | | | — | | | — | | | 10,615 | |
Loss (gain) on sale of businesses and assets | (639) | | | 16 | | | — | | | (38) | | | (661) | |
Loss (gain) on insurance | 433 | | | — | | | — | | | (13) | | | 420 | |
Non-GAAP operating income (loss) | $ | 23,605 | | | $ | 9,513 | | | $ | (231) | | | $ | (18,984) | | | $ | 13,903 | |
| | | | | | | | | |
GAAP operating margin | 14.8 | % | | 21.4 | % | | (83.1) | % | | (14.3) | % | | 2.1 | % |
Non-GAAP operating margin | 26.7 | % | | 22.0 | % | | (31.3) | % | | (14.3) | % | | 10.5 | % |
Other Income/Expenses
Interest expense increased by $2.0 million from 2021 to 2022 and by $181,000 from 2020 to 2021. The increase in interest expense in 2022 was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions. The net increase in interest expense in 2021 was primarily caused by the expensed loan costs and written off unamortized debt issuance costs related to the September 2021 Refinancing Note (see Note 9 to our consolidated financial statements), partially offset by the impact of a lower average debt balance. During 2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments were deferred, but we continued to accrue interest on these debts. At the end of 2021, we refinanced several of our existing bank and seller-financed real estate debt with the issuance of a $99.1 million 5.25% note with a term of 10 years.
We consider lease plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and restaurants are located. For occupancy cost purposes, we exclude non-real-estate-related interest expense. Total occupancy cost rate (total occupancy cost as a percentage of revenues) was high in 2020 due to lower sales activity caused by the pandemic, as shown below.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Lease | 2.5 | % | | 2.0 | % | | 3.1 | % |
Interest | 4.5 | % | | 4.8 | % | | 7.4 | % |
Total occupancy cost | 7.0 | % | | 6.8 | % | | 10.5 | % |
The 2021 interest expense rate above excludes certain costs and charges related to the September 2021 Refinancing Note amounting to approximately $637,000, or 0.3% of consolidated revenues. The $637,000 interest expense includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed new loan costs.
In fiscal 2021, we received 11 notices of forgiveness for our PPP loans approving the forgiveness of 100% of each of the 11 PPP loans amounting to $5.3 million in principal and interest, which were included in non-operating gains (losses), net. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. See Note 9 to our consolidated financial statements.
Income Taxes
Income taxes were an expense of approximately $14.1 million in 2022, $4.0 million in 2021, and a benefit of $493,000 in 2020. Our effective income tax rate was a 23.4% expense in 2022, 11.7% expense in 2021, and 7.2% benefit in 2020. The components of our annual effective income tax rate are the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal statutory income tax expense/benefit | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal benefit | 3.0 | % | | 2.1 | % | | (3.7) | % |
Permanent differences | 0.2 | % | | (1.3) | % | | (5.8) | % |
Change in state tax rate | 1.5 | % | | (2.4) | % | | — | % |
Change in valuation allowance | 0.6 | % | | (1.9) | % | | (18.7) | % |
Tax credits | (3.0) | % | | (3.5) | % | | 13.9 | % |
Other | 0.2 | % | | (2.4) | % | | 0.6 | % |
Total effective income tax rate | 23.4 | % | | 11.7 | % | | 7.2 | % |
*Positive or negative percentages are in relation to income or loss before income taxes of the respective fiscal year.
The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, and tax credits that are mostly FICA tip credits. The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the pandemic and the changes in the deferred tax asset valuation allowance in all three fiscal years presented.
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:
Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) settlement of lawsuits, (f) costs and charges related to debt refinancing, and (g) stock-based compensation. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets,
(c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) unrealized loss on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) costs and charges related to debt refinancing, (i) stock-based compensation, (j) the income tax effect of the above-described adjustments, and (k) change in deferred tax asset valuation allowance. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.8%, 13.5%, and 26.0% effective tax rate of the pre-tax non-GAAP income before taxes for the 2022, 2021, and 2020, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities.
Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance (f) unrealized gains or losses on equity securities, (g) impairment of assets, (h) settlement of lawsuits, (i) gain on debt extinguishment, and (j) stock-based compensation. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess the unleveraged performance return on our investments. Adjusted EBITDA multiple is also used as a target benchmark for our acquisitions of nightclubs.
We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion.
The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and percentages):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Reconciliation of GAAP net income (loss) to Adjusted EBITDA | | | | | |
Net income (loss) attributable to RCIHH common stockholders | $ | 46,041 | | | $ | 30,336 | | | $ | (6,085) | |
Income tax expense (benefit) | 14,071 | | | 3,989 | | | (493) | |
Interest expense, net | 11,539 | | | 9,739 | | | 9,487 | |
Settlement of lawsuits | 1,417 | | | 1,349 | | | 174 | |
Impairment of assets | 1,888 | | | 13,612 | | | 10,615 | |
Gain on sale of businesses and assets | (2,375) | | | (522) | | | (661) | |
Depreciation and amortization | 12,391 | | | 8,238 | | | 8,836 | |
Unrealized loss on equity securities | — | | | 84 | | | 64 | |
Gain on debt extinguishment | (138) | | | (5,329) | | | — | |
Loss (gain) on insurance | (463) | | | (1,253) | | | 420 | |
Stock-based compensation | 2,353 | | | — | | | — | |
Adjusted EBITDA | $ | 86,724 | | | $ | 60,243 | | | $ | 22,357 | |
| | | | | |
Reconciliation of GAAP net income (loss) to non-GAAP net income | | | | | |
Net income (loss) attributable to RCIHH common stockholders | $ | 46,041 | | | $ | 30,336 | | | $ | (6,085) | |
Amortization of intangibles | 2,118 | | | 258 | | | 609 | |
Settlement of lawsuits | 1,417 | | | 1,349 | | | 174 | |
Impairment of assets | 1,888 | | | 13,612 | | | 10,615 | |
Gain on sale of businesses and assets | (2,375) | | | (522) | | | (661) | |
Costs and charges related to debt refinancing* | — | | | 694 | | | — | |
Unrealized loss on equity securities | — | | | 84 | | | 64 | |
Gain on debt extinguishment | (138) | | | (5,329) | | | — | |
Loss (gain) on insurance | (463) | | | (1,253) | | | 420 | |
Stock-based compensation | 2,353 | | | — | | | — | |
Change in deferred tax asset valuation allowance | 343 | | | (632) | | | 1,273 | |
Net income tax effect | (729) | | | (1,845) | | | (1,700) | |
Non-GAAP net income | $ | 50,455 | | | $ | 36,752 | | | $ | 4,709 | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share | | | | | |
Diluted shares | 9,383,445 | | 9,004,744 | | 9,199,225 |
GAAP diluted earnings (loss) per share | $ | 4.91 | | | $ | 3.37 | | | $ | (0.66) | |
Amortization of intangibles | 0.23 | | | 0.03 | | | 0.07 | |
Settlement of lawsuits | 0.15 | | | 0.15 | | | 0.02 | |
Impairment of assets | 0.20 | | | 1.51 | | | 1.15 | |
Gain on sale of businesses and assets | (0.25) | | | (0.06) | | | (0.07) | |
Costs and charges related to debt refinancing* | — | | | 0.08 | | | — | |
Unrealized loss on equity securities | — | | | 0.01 | | | 0.01 | |
Gain on debt extinguishment | (0.01) | | | (0.59) | | | — | |
Loss (gain) on insurance | (0.05) | | | (0.14) | | | 0.05 | |
Stock-based compensation | 0.25 | | | — | | | — | |
Change in deferred tax asset valuation allowance | 0.04 | | | (0.07) | | | 0.14 | |
Net income tax effect | (0.08) | | | (0.20) | | | (0.18) | |
Non-GAAP diluted earnings per share | $ | 5.38 | | | $ | 4.08 | | | $ | 0.51 | |
| | | | | |
Reconciliation of GAAP operating income to non-GAAP operating income | | | | | |
Income from operations | $ | 71,459 | | | $ | 38,548 | | | $ | 2,746 | |
Amortization of intangibles | 2,118 | | | 258 | | | 609 | |
Settlement of lawsuits | 1,417 | | | 1,349 | | | 174 | |
Impairment of assets | 1,888 | | | 13,612 | | | 10,615 | |
Costs and charges related to debt refinancing* | — | | | 57 | | | — | |
Gain on sale of businesses and assets | (2,375) | | | (522) | | | (661) | |
Loss (gain) on insurance | (463) | | | (1,253) | | | 420 | |
Stock-based compensation | 2,353 | | | — | | | — | |
Non-GAAP operating income | $ | 76,397 | | | $ | 52,049 | | | $ | 13,903 | |
| | | | | |
| 2022 | | 2021 | | 2020 |
Reconciliation of GAAP operating margin to non-GAAP operating margin | | | | | |
GAAP operating margin | 26.7 | % | | 19.7 | % | | 2.1 | % |
Amortization of intangibles | 0.8 | % | | 0.1 | % | | 0.5 | % |
Settlement of lawsuits | 0.5 | % | | 0.7 | % | | 0.1 | % |
Impairment of assets | 0.7 | % | | 7.0 | % | | 8.0 | % |
Costs and charges related to debt refinancing* | — | % | | 0.0 | % | | — | % |
Gain on sale of businesses and assets | (0.9) | % | | (0.3) | % | | (0.5) | % |
Loss (gain) on insurance | (0.2) | % | | (0.6) | % | | 0.3 | % |
Stock-based compensation | 0.9 | % | | — | % | | — | % |
Non-GAAP operating margin | 28.5 | % | | 26.7 | % | | 10.5 | % |
| | | | | |
* | Costs and charges related to debt refinancing in 2021 consist of $637,000 in interest expense and $57,000 in legal and professional fees. The $637,000 interest expense portion above includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed new loan costs. |
The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2022, our cash and cash equivalents were approximately $36.0 million as compared to $35.7 million at September 30, 2021. Because of the large volume of cash we handle, we have very stringent cash controls. As of September 30, 2022, we had working capital of $18.6 million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated liabilities of $0 and $1.1 million, respectively) amounting to $1.0 million and $3.8 million as of September 30, 2022 and 2021, respectively. Since the pandemic hard hit fiscal 2020, we have since recovered and have seen a more normal stream of operations in 2021 and 2022. Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected. 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.
We have not recently raised capital through the issuance of equity securities although we have used equity recently in one of our acquisitions. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.
During 2022, we acquired fifteen clubs at an aggregate acquisition price of $132.6 million, of which $55.3 million was in cash, $49.0 million in debt, and $30.0 million in equity (500,000 shares of our common stock with an acquisition date fair value of $29.9 million, discounted for lack of marketability due to the lock-up period).
We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.
The following table presents a summary of our net cash flows from operating, investing, and financing activities (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating | $ | 64,509 | | | $ | 41,991 | | | $ | 15,632 | |
Investing | (67,797) | | | (6,814) | | | (994) | |
Financing | 3,582 | | | (15,096) | | | (13,130) | |
Net increase in cash and cash equivalents | $ | 294 | | | $ | 20,081 | | | $ | 1,508 | |
We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments in technology. We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital allocation strategy guidelines, and to pay our quarterly dividends.
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net income (loss) | $ | 46,060 | | | $ | 30,150 | | | $ | (6,312) | |
Depreciation and amortization | 12,391 | | | 8,238 | | | 8,836 | |
Deferred tax expense (benefit) | 3,080 | | | (1,253) | | | (1,268) | |
Stock-based compensation expense | 2,353 | | | — | | | — | |
Impairment of assets | 1,888 | | | 13,612 | | | 10,615 | |
Gain on debt extinguishment | (83) | | | (5,298) | | | — | |
Net change in operating assets and liabilities | (1,421) | | | (3,451) | | | 1,380 | |
Other | 241 | | | (7) | | | 2,381 | |
Net cash provided by operating activities | $ | 64,509 | | | $ | 41,991 | | | $ | 15,632 | |
Net cash flows from operating activities increased from 2021 to 2022 mainly due to the operating results of the fifteen acquired clubs and one Bombshells opened. Net cash flows from operating activities increased from 2020 to 2021 mainly due to significantly higher income from operations partially offset by higher interest payments, which included deferred debt interest payments from 2020, and higher income taxes paid.
Cash Flows from Investing Activities
Following are our summarized cash flows from investing activities (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Proceeds from sale of businesses and assets | $ | 10,669 | | | $ | 5,415 | | | $ | 2,221 | |
Proceeds from notes receivable | 182 | | | 130 | | | 1,576 | |
Proceeds from insurance | 648 | | | 1,152 | | | 945 | |
Payments for property and equipment and intangible assets | (24,003) | | | (13,511) | | | (5,736) | |
Acquisition of businesses, net of cash acquired | (55,293) | | | — | | | — | |
Net cash used in investing activities | $ | (67,797) | | | $ | (6,814) | | | $ | (994) | |
In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity. We also purchased an aircraft and six real estate properties, of which, four are for future Bombshells locations, one for a club that we were leasing, and another to replace a club location which was taken by eminent domain. Also in 2022, we received payment for four real estate properties. We did not receive payment for the eminent domain property mentioned above until November 2022. In 2021, we acquired four real estate properties either for future club or restaurant locations or for corporate use. On one of the real properties purchased, we opened a Bombshells restaurant on December 6, 2021 in Arlington, Texas. There were no new Bombshells units opened in 2021. We also sold two real estate properties in 2021. We opened two new Bombshells units in 2020 (one in Katy, Texas and another on U.S. Highway 59 in Houston, Texas) and sold three real estate properties. As of September 30, 2022, 2021, and 2020, we had $1.5 million, $3.4 million, and $20,000 in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year. See Note 16 to our consolidated financial statements.
Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
New capital expenditures in new clubs and Bombshells units and equipment* | $ | 18,405 | | | $ | 7,604 | | | $ | 3,585 | |
Maintenance capital expenditures | 5,598 | | | 5,907 | | | 2,151 | |
Total capital expenditures, excluding business acquisitions | $ | 24,003 | | | $ | 13,511 | | | $ | 5,736 | |
*Includes real estate except those acquired through business acquisitions.
See discussion of acquisitions and dispositions subsequent to September 30, 2022 in Note 16 to our consolidated financial statements.
Cash Flows from Financing Activities
Following are our summarized cash flows from financing activities (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Proceeds from debt obligations | $ | 35,820 | | | $ | 38,490 | | | $ | 6,503 | |
Payments on debt obligations | (14,894) | | | (49,178) | | | (8,832) | |
Purchase of treasury stock | (15,097) | | | (1,794) | | | (9,484) | |
Payment of dividends | (1,784) | | | (1,440) | | | (1,286) | |
Payment of loan origination costs | (463) | | | (1,174) | | | — | |
Distribution to noncontrolling interests | — | | | — | | | (31) | |
Net cash provided by (used in) financing activities | $ | 3,582 | | | $ | (15,096) | | | $ | (13,130) | |
See Note 9 to our consolidated financial statements for a detailed discussion of our debt obligations.
We purchased shares of our common stock representing 268,185 shares, 74,659 shares, and 516,102 shares in 2022, 2021, and 2020, respectively. We paid quarterly dividends of $0.03 per share in fiscal 2020, except in the second and fourth quarter of 2020 where we paid $0.04 per share. We paid quarterly dividends of $0.04 per share in fiscal 2021 through the first quarter of 2022. Then starting in the second quarter of 2022, we increased our quarterly dividends to $0.05 per share.
Non-GAAP Cash Flow Measure
Management also uses certain non-GAAP cash flow measures such as free cash flow. We define free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy. See table below (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net cash provided by operating activities | $ | 64,509 | | | $ | 41,991 | | | $ | 15,632 | |
Less: Maintenance capital expenditures | 5,598 | | | 5,907 | | | 2,151 | |
Free cash flow | $ | 58,911 | | | $ | 36,084 | | | $ | 13,481 | |
We do not include total capital expenditures as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow.
Debt Financing
See Note 9 to our consolidated financial statements for more details regarding our debt activity.
Contractual Obligations and Commitments
We have long-term contractual obligations primarily in the form of debt obligations and operating leases. The following table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments. Future interest payments related to debt were estimated using the interest rate in effect as of September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
Debt obligations - regular(a) | $ | 106,102 | | | $ | 10,216 | | | $ | 9,663 | | | $ | 9,527 | | | $ | 9,825 | | | $ | 10,424 | | | $ | 56,447 | |
Debt obligations - balloon(a) | 99,738 | | | 2,226 | | | 2,195 | | | 20,457 | | | — | | | — | | | 74,860 | |
Interest payments on debt | 78,616 | | | 12,792 | | | 11,987 | | | 9,468 | | | 8,418 | | | 7,820 | | | 28,131 | |
Operating leases(b) | 52,789 | | | 4,895 | | | 4,944 | | | 5,024 | | | 5,089 | | | 4,895 | | | 27,942 | |
(a)See Note 9 to our consolidated financial statements.
(b)See Note 20 to our consolidated financial statements.
Other than the ongoing impact of the COVID-19 pandemic, the current geopolitical and macroeconomic events happening globally, and the notes payable financing described above, we are not aware of any event or trend that would adversely impact our liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.
The following table presents a summary of such indicators (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Inc (Dec) | | 2021 | | Inc (Dec) | | 2020 |
Sales of alcoholic beverages | $ | 113,316 | | | 30.7 | % | | $ | 86,685 | | | 46.7 | % | | $ | 59,080 | |
Sales of food and merchandise | 44,294 | | | 7.7 | % | | 41,111 | | | 68.1 | % | | 24,460 | |
Service revenues | 93,888 | | | 69.3 | % | | 55,461 | | | 34.7 | % | | 41,162 | |
Other revenues | 16,122 | | | 34.3 | % | | 12,001 | | | 57.4 | % | | 7,625 | |
Total revenues | $ | 267,620 | | | 37.1 | % | | $ | 195,258 | | | 47.6 | % | | $ | 132,327 | |
Net income (loss) attributable to RCIHH common stockholders | $ | 46,041 | | | 51.8 | % | | $ | 30,336 | | | (598.5) | % | | $ | (6,085) | |
Net cash provided by operating activities | $ | 64,509 | | | 53.6 | % | | $ | 41,991 | | | 168.6 | % | | $ | 15,632 | |
Adjusted EBITDA* | $ | 86,724 | | | 44.0 | % | | $ | 60,243 | | | 169.5 | % | | $ | 22,357 | |
Free cash flow* | $ | 58,911 | | | 63.3 | % | | $ | 36,084 | | | 167.7 | % | | $ | 13,481 | |
Debt (end of period) | $ | 202,463 | | | 61.8 | % | | $ | 125,168 | | | (11.5) | % | | $ | 141,435 | |
*See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and Capital Resources above.
We have not established financing other than the notes payable discussed in Note 9 to the consolidated financial statements. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise.
Share Repurchase
As part of our capital allocation strategy, we buy back shares in the open market or through negotiated purchases, as authorized by our Board of Directors. During fiscal years 2022, 2021, and 2020, we paid for treasury stock amounting to $15.1 million, $1.8 million, and $9.5 million representing 268,185 shares, 74,659 shares, and 516,102 shares, respectively. On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. We have approximately $18.9 million remaining to purchase additional shares as of September 30, 2022.
For additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
IMPACT OF INFLATION
To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future.
SEASONALITY
Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.
GROWTH STRATEGY
We believe that we can continue to grow organically and through careful entry into markets with high growth potential. Our growth strategy includes acquiring existing units, opening new units after market analysis, developing new club concepts that are consistent with our management and marketing skills, franchising our Bombshells brand, and developing and opening our Bombshells concept as our capital and manpower allow.
All eleven of the existing Bombshells as of September 30, 2022 are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.
We opened two new Bombshells units in fiscal 2020.
In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity. See Note 16 to our consolidated financial statements. We also opened a new Bombshells location in Arlington, Texas in December 2021 and our first franchised location in San Antonio, Texas opened in June 2022.
On October 26, 2022, subsequent to the current reporting date, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $9.0 million. The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note payable in 180 equal monthly payments of $42,193 in principal and interest.
We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item begins on page 47.
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
RCI Hospitality Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of RCI Hospitality Holdings, Inc. (the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended September 30, 2022, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 14, 2022 expressed an adverse opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Goodwill, Indefinite-lived Intangible Assets, and Long-lived Assets
As discussed in Note 2 to the consolidated financial statements, the Company reviews goodwill and indefinite-lived intangible assets on an annual basis for impairment, or when events and circumstances indicate that the asset might be impaired. Additionally, the Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value, and impairment of indefinite-lived intangible assets is recognized in the amount by which the carrying value of the assets exceed their fair value. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If these assets are determined to be
impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined using forecasted cash flows discounted using an estimated weighted average cost of capital. As of September 30, 2022, the Company had goodwill of approximately $67.8 million, and indefinite-lived intangible assets of approximately $117.1 million. Long-lived assets consisted of property and equipment, right of use assets, and intangible assets subject to amortization totaling approximately $288.6 million. During the year ended September 30, 2022 the Company recorded an impairment of these assets of approximately $1.9 million.
We identified the evaluation of the impairment analysis of goodwill, indefinite-lived intangible assets, and long-lived assets as a critical audit matter. There was a high degree of subjective auditor judgment in evaluating the estimated undiscounted future cash flows used to test operating locations for recoverability and the determination of fair value of the relevant assets when required. Specifically, a high degree of subjective auditor judgment was required to evaluate future revenues, operating cash flows and the discount rate.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill, indefinite-lived intangible asset, and long-lived asset impairment process, including controls over the identification of relevant assets at risk of impairment, the determination of estimated undiscounted future cash flows and the fair value of individual reporting unit or asset, as necessary, and controls over the key assumptions as noted above. These procedures also included, among others, (1) testing management’s process for developing the fair value estimates of the reporting units or assets; (2) evaluating the appropriateness of the underlying discounted and undiscounted cash flow models; (3) testing the completeness and accuracy of underlying data used in the models; and (4) evaluating the reasonableness of the significant assumptions used by management, including the future cash flows, growth rates and discount rates. Evaluating management’s significant assumptions related to future cash flows, growth rates and the discount rates involved, with the assistance of valuation specialists employed by us, evaluating whether the assumptions used by management were reasonable considering (1) the historical performance of the reporting units or operating location; (2) the consistency with external market data; and (3) sensitivities over significant inputs and assumptions, including the development of a point estimate.
Fair Value Measurement of consideration and, tangible and intangible assets acquired in business acquisitions
As described in Note 16 to the consolidated financial statements, the Company completed five business acquisitions with an aggregate acquisition price totaling approximately $132.6 million during the year ended September 30, 2022.
The Company accounts for business combinations using the acquisition method, which requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. The fair value of the tangible assets acquired were measured using adjusted market prices or costs to construct. The fair values of intangible assets acquired are typically estimated using an income approach, which is based on the present value of future discounted cash flows. Management applied significant judgment in estimating the fair value of the consideration and, tangible and intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors. In addition, the discount for lack of marketability applied to the consideration is estimated using a market approach, which is based on a Black-Scholes option pricing model.
The principal considerations for our determination that performing procedures relating to the fair value measurement of the consideration and assets acquired related to the acquisitions is a critical audit matter are (1) the significant judgment by management, including the use of specialists, when estimating the fair values of assets acquired; (2) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of assets acquired; (3) the significant audit effort in evaluating the reasonableness of the significant assumptions relating to the rate of future revenue growth and profitability of the acquired business and the discount rate; and (4) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included identifying and evaluating the design of controls relating to the acquisition accounting, including controls over management’s valuation of the assets acquired and consideration, and controls over the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and the costs to construct an asset. These procedures also included, among others, (1) reading the purchase agreement; and (2) testing management’s process for estimating the fair values of the assets acquired. Testing management’s process included evaluating the appropriateness of the valuation method, testing the completeness and accuracy of data provided by
management, and evaluating the reasonableness of significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and costs to construct an asset. Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired business involved considering the historical performance of the acquired businesses and market comparable information, as well as economic and industry forecasts. The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. (3) Developing an independent point estimate for the consideration. (4) Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow models, the reasonableness of the discount rate, and evaluating the market and cost assumptions for the fair value of the assets; and in developing a model and independent assumptions for the consideration.
| | | | | |
/s/ Friedman LLP |
| |
We have served as the Company’s auditor since 2019.
Marlton, New Jersey |
|
December 14, 2022 | |
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 35,980 | | | $ | 35,686 | |
Accounts receivable, net | 8,510 | | | 7,570 | |
Current portion of notes receivable | 230 | | | 220 | |
Inventories | 3,893 | | | 2,659 | |
Prepaid expenses and other current assets | 1,499 | | | 1,928 | |
Assets held for sale | 1,049 | | | 4,887 | |
Total current assets | 51,161 | | | 52,950 | |
Property and equipment, net | 224,615 | | | 175,952 | |
Operating lease right-of-use assets, net | 37,048 | | | 24,308 | |
Notes receivable, net of current portion | 4,691 | | | 2,839 | |
Goodwill | 67,767 | | | 39,379 | |
Intangibles, net | 144,049 | | | 67,824 | |
Other assets | 1,407 | | | 1,367 | |
Total assets | $ | 530,738 | | | $ | 364,619 | |
| | | |
LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 5,482 | | | $ | 4,408 | |
Accrued liabilities | 11,328 | | | 10,403 | |
Current portion of long-term debt | 11,896 | | | 6,434 | |
Current portion of operating lease liabilities | 2,795 | | | 1,780 | |
Total current liabilities | 31,501 | | | 23,025 | |
Deferred tax liability, net | 30,562 | | | 19,137 | |
Debt, net of current portion and debt discount and issuance costs | 190,567 | | | 118,734 | |
Operating lease liabilities, net of current portion | 36,001 | | | 24,150 | |
Other long-term liabilities | 349 | | | 350 | |
Total liabilities | 288,980 | | | 185,396 | |
| | | |
Commitments and contingencies (Note 11) | | | |
| | | |
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; 9,231,725 shares and 8,999,910 shares issued and outstanding as of September 30, 2022 and 2021, respectively | 92 | | | 90 | |
Additional paid-in capital | 67,227 | | | 50,040 | |
Retained earnings | 173,950 | | | 129,693 | |
Total RCIHH stockholders’ equity | 241,269 | | | 179,823 | |
Noncontrolling interests | 489 | | | (600) | |
Total equity | 241,758 | | | 179,223 | |
Total liabilities and equity | $ | 530,738 | | | $ | 364,619 | |
See accompanying notes to consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and number of shares data)
| | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Revenues | | | | | |
Sales of alcoholic beverages | $ | 113,316 | | | $ | 86,685 | | | $ | 59,080 | |
Sales of food and merchandise | 44,294 | | | 41,111 | | | 24,460 | |
Service revenues | 93,888 | | | 55,461 | | | 41,162 | |
Other | 16,122 | | | 12,001 | | | 7,625 | |
Total revenues | 267,620 | | | 195,258 | | | 132,327 | |
Operating expenses | | | | | |
Cost of goods sold | | | | | |
Alcoholic beverages sold | 20,155 | | | 15,883 | | | 11,097 | |
Food and merchandise sold | 15,537 | | | 13,794 | | | 8,071 | |
Service and other | 317 | | | 374 | | | 267 | |
Total cost of goods sold (exclusive of items shown separately below) | 36,009 | | | 30,051 | | | 19,435 | |
Salaries and wages | 68,447 | | | 50,627 | | | 39,070 | |
Selling, general and administrative | 78,847 | | | 54,608 | | | 51,692 | |
Depreciation and amortization | 12,391 | | | 8,238 | | | 8,836 | |
Other charges, net | 467 | | | 13,186 | | | 10,548 | |
Total operating expenses | 196,161 | | | 156,710 | | | 129,581 | |
Income from operations | 71,459 | | | 38,548 | | | 2,746 | |
Other income (expenses) | | | | | |
Interest expense | (11,950) | | | (9,992) | | | (9,811) | |
Interest income | 411 | | | 253 | | | 324 | |
Non-operating gain (loss), net | 211 | | | 5,330 | | | (64) | |
Income (loss) before income taxes | 60,131 | | | 34,139 | | | (6,805) | |
Income tax expense (benefit) | 14,071 | | | 3,989 | | | (493) | |
Net income (loss) | 46,060 | | | 30,150 | | | (6,312) | |
Net loss (income) attributable to noncontrolling interests | (19) | | | 186 | | | 227 | |
Net income (loss) attributable to RCIHH common stockholders | $ | 46,041 | | | $ | 30,336 | | | $ | (6,085) | |
| | | | | |
Earnings (loss) per share | | | | | |
Basic and diluted | $ | 4.91 | | | $ | 3.37 | | | $ | (0.66) | |
| | | | | |
Weighted average number of common shares outstanding | | | | | |
Basic and diluted | 9,383,445 | | 9,004,744 | | 9,199,225 |
| | | | | |
Dividends per share | $ | 0.19 | | | $ | 0.16 | | | $ | 0.14 | |
See accompanying notes to consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 2022, 2021, and 2020
(in thousands, except number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2019 | 9,590,671 | | $ | 96 | | | $ | 61,312 | | | $ | 108,168 | | | — | | $ | — | | | $ | (156) | | | $ | 169,420 | |
Purchase of treasury shares | — | | — | | | — | | | — | | | (516,102) | | (9,484) | | | — | | | (9,484) | |
Canceled treasury shares | (516,102) | | (5) | | | (9,479) | | | — | | | 516,102 | | 9,484 | | | — | | | — | |
Payment of dividends | — | | — | | | — | | | (1,286) | | | — | | — | | | — | | | (1,286) | |
Payments to noncontrolling interests | — | | — | | | — | | | — | | | — | | — | | | (31) | | | (31) | |
Net loss | — | | — | | | — | | | (6,085) | | | — | | — | | | (227) | | | (6,312) | |
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 | — | | — | | | — | | | (1,440) | | | — | | — | | | — | | | (1,440) | |
Net income (loss) | — | | — | | | — | | | 30,336 | | | — | | — | | | (186) | | | 30,150 | |
Balance at September 30, 2021 | 8,999,910 | | 90 | | | 50,040 | | | 129,693 | | | — | | — | | | (600) | | | 179,223 | |
Issuance of common shares for business combination | 500,000 | | 5 | | | 29,928 | | | — | | | — | | — | | | — | | | 29,933 | |
Purchase of treasury shares | — | | — | | | — | | | — | | | (268,185) | | (15,097) | | | — | | | (15,097) | |
Canceled treasury shares | (268,185) | | (3) | | | (15,094) | | | — | | | 268,185 | | 15,097 | | | — | | | — | |
Payment of dividends | — | | — | | | — | | | (1,784) | | | — | | — | | | — | | | (1,784) | |
Stock-based compensation expense | — | | — | | | 2,353 | | | — | | | — | | — | | | — | | | 2,353 | |
Investment from noncontrolling partner | — | | — | | | — | | | — | | | — | | — | | | 1,070 | | | 1,070 | |
Net income | — | | — | | | — | | | 46,041 | | | — | | — | | | 19 | | | 46,060 | |
Balance at September 30, 2022 | 9,231,725 | | $ | 92 | | | $ | 67,227 | | | $ | 173,950 | | | — | | $ | — | | | $ | 489 | | | $ | 241,758 | |
See accompanying notes to consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income (loss) | $ | 46,060 | | | $ | 30,150 | | | $ | (6,312) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 12,391 | | | 8,238 | | | 8,836 | |
Deferred tax expense (benefit) | 3,080 | | | (1,253) | | | (1,268) | |
Gain on sale of businesses and assets | (2,970) | | | (714) | | | (777) | |
Impairment of assets | 1,888 | | | 13,612 | | | 10,615 | |
Amortization and writeoff of debt discount and issuance costs | 314 | | | 311 | | | 236 | |
Doubtful accounts expense (reversal) on notes receivable | 753 | | | (80) | | | 602 | |
Unrealized loss on equity securities | — | | | 84 | | | 64 | |
Loss (gain) on insurance | (463) | | | (1,337) | | | 596 | |
Noncash lease expense | 2,607 | | | 1,729 | | | 1,660 | |
Stock-based compensation expense | 2,353 | | | — | | | — | |
Gain on debt extinguishment | (83) | | | (5,298) | | | — | |
Changes in operating assets and liabilities, net of business acquisitions: | | | | | |
Accounts receivable | (175) | | | (769) | | | (294) | |
Inventories | (554) | | | (287) | | | 226 | |
Prepaid expenses, other current assets and other assets | 387 | | | 4,120 | | | 1,633 | |
Accounts payable and accrued liabilities | (1,079) | | | (6,515) | | | (185) | |
Net cash provided by operating activities | 64,509 | | | 41,991 | | | 15,632 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Proceeds from sale of businesses and assets | 10,669 | | | 5,415 | | | 2,221 | |
Proceeds from notes receivable | 182 | | | 130 | | | 1,576 | |
Proceeds from insurance | 648 | | | 1,152 | | | 945 | |
Payments for property and equipment and intangible assets | (24,003) | | | (13,511) | | | (5,736) | |
Acquisition of businesses, net of cash acquired | (55,293) | | | — | | | — | |
Net cash used in investing activities | (67,797) | | | (6,814) | | | (994) | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Proceeds from debt obligations, including related party proceeds of $650, $0, and $0, respectively | 35,820 | | | 38,490 | | | 6,503 | |
Payments on debt obligations | (14,894) | | | (49,178) | | | (8,832) | |
Purchase of treasury stock | (15,097) | | | (1,794) | | | (9,484) | |
Payment of dividends | (1,784) | | | (1,440) | | | (1,286) | |
Payment of loan origination costs | (463) | | | (1,174) | | | — | |
Distribution to noncontrolling interests | — | | | — | | | (31) | |
Net cash provided by (used in) financing activities | 3,582 | | | (15,096) | | | (13,130) | |
| | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 294 | | | 20,081 | | | 1,508 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 35,686 | | | 15,605 | | | 14,097 | |
| | | | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 35,980 | | | $ | 35,686 | | | $ | 15,605 | |
| | | | | |
CASH PAID DURING YEAR FOR: | | | | | |
Interest paid, net of amounts capitalized | $ | 11,227 | | | $ | 10,362 | | | $ | 8,695 | |
Income taxes paid (net of refunds of $2,256, $2,201, and $153, in 2022, 2021, and 2020, respectively) | $ | 9,500 | | | $ | 5,389 | | | $ | 2,200 | |
| |
Non-cash investing and financing transactions: | |
| Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Debt incurred with seller in connection with acquisition of businesses | $ | 49,000 | | | $ | — | | | $ | — | |
Debt incurred in connection with purchase of property and equipment | $ | 9,201 | | | $ | — | | | $ | — | |
Notes receivable received as proceeds from sale of assets | $ | 2,700 | | | $ | — | | | $ | — | |
Investment from noncontrolling partner in connection with purchase of property | $ | 1,070 | | | $ | — | | | $ | — | |
Issuance of shares of common stock for acquisition of business: | | | | | |
Number of shares | 500,000 | | — | | — |
Fair value | $ | 29,933 | | | $ | — | | | $ | — | |
Accounts receivable converted to notes receivable | $ | — | | | $ | — | | | $ | 122 | |
Refinanced long-term debt | $ | — | | | $ | 62,832 | | | $ | 11,292 | |
Operating lease right-of-use assets established upon adoption of ASC 842 | $ | — | | | $ | — | | | $ | 27,310 | |
Deferred rent liabilities reclassified upon adoption of ASC 842 | $ | — | | | $ | — | | | $ | 1,241 | |
Operating lease liabilities established upon adoption of ASC 842 | $ | — | | | $ | — | | | $ | 28,551 | |
Adjustment to operating lease right-of-use assets and operating lease liabilities related to new and renewed leases | $ | 21,424 | | | $ | 491 | | | $ | — | |
Unpaid liabilities on capital expenditures | $ | 1,503 | | | $ | 830 | | | $ | 29 | |
Receivable on eminent domain disposition | $ | 1,047 | | | $ | — | | | $ | — | |
See accompanying notes to consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
1. Nature of Business
RCI Hospitality Holdings, Inc. (the “Company,” “we,” “us,” or “our”) is a holding company incorporated in Texas in 1994. Through its subsidiaries, the Company currently owns and operates establishments that offer live adult entertainment, restaurant, and/or bar operations. These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Tomball, Katy, Pearland, Odessa, Lubbock, Longview, Tye, Aledo, Round Rock, Edinburg, El Paso, Harlingen, Arlington, and Beaumont, Texas, as well as Denver, Colorado; Minneapolis, Minnesota; Pittsburgh, Pennsylvania; Charlotte and Raleigh, North Carolina; New York and Newburgh, New York; Miami, Pembroke Park and Miami Gardens, Florida; Phoenix, Arizona; Sulphur, Louisiana; Portland, Maine; Louisville, Kentucky; Indianapolis, Indiana; and Chicago, Washington Park, Sauget, and Kappa, Illinois. The Company also owns and operates media businesses for the adult industry. The Company’s corporate offices are located in Houston, Texas.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is owned. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on September 30. References to years 2022, 2021, and 2020 are for fiscal years ended September 30, 2022, 2021, and 2020, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and assumptions may vary under different circumstances and conditions. We evaluate our estimates and assumptions on an ongoing basis.
Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.
Accounts and Notes Receivable
Accounts receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily comprised of receivables for advertising sales and Expo registration. Accounts receivable also include employee advances, construction advances, and other miscellaneous receivables. Long-term notes receivable, which have original maturity of more than one year, include consideration from the sale of certain investment interest entities and real estate. The Company
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
recognizes interest income on notes receivable based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income will be collected. The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances indicate that accounts or notes receivable will not be collected. Allowance for doubtful accounts balance related to accounts receivable was $30,000 and $382,000 as of September 30, 2022 and 2021, respectively (see Note 5). Allowance for doubtful accounts balance related to notes receivable was $0 and $102,000 as of September 30, 2022 and 2021, respectively.
Inventories
Inventories include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements. Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to 7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of operations of the respective period. Interest expense from related debt incurred during site construction is capitalized, which amounted to $0 in fiscal 2022, $0 in fiscal 2021, and $156,000 in fiscal 2020.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for impairment. Definite-lived intangible assets are amortized on a straight-line basis over their estimated lives.
The costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets. The costs of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred. Annual license renewal fees are expensed over their renewal term.
Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values. We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $566,000. For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $6.3 million. For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.
For indefinite-lived intangibles, specifically sexually-oriented business ("SOB") licenses, we determine fair value by estimating the multiperiod excess earnings of the asset. For indefinite-lived tradename, we determine fair value by using
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
the relief from royalty method. The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $293,000 in 2022 related to one club, $5.3 million in 2021 related to three clubs, $2.3 million in 2020 related to two clubs, which are included in other charges, net in the consolidated statements of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. For assets held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or inactive markets (level 2) developed using observable data. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. During fiscal 2022, the Company impaired one club and one Bombshells for a total of $1.0 million; during fiscal 2021, the Company impaired five clubs (including one later reclassified as held for sale) for a total of $2.0 million; and during fiscal 2020, the Company impaired one club and one Bombshells unit for a total of $302,000. The Company also impaired one club in fiscal of 2020 for operating lease right-of-use assets amounting to $104,000. See Notes 6 and 20.
Fair Value of Financial Instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of notes receivable and short and long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.
Revenue Recognition
The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of 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. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases.
Revenue from initial franchise and area development fees are recognized as the performance obligations are satisfied over the term of the franchise agreement. Franchise royalties and advertising contributions, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Refer to Notes 4 and 20 for additional disclosures on revenues and leases, respectively.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional purposes. Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. See Note 5.
Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
U.S. GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense.
Investments
Investments in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses. Investments in companies in which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for at cost and reviewed for any impairment. Cost and equity method investments are included in other assets in the Company’s consolidated balance sheets.
Paycheck Protection Program
The Company’s policy is to account for the Paycheck Protection Program (“PPP”) loans as debt (see Note 9). The Company will continue to record the loans as debt until either (1) the loans are partially or entirely forgiven and the Company has been legally released from the obligation, at which point the amount forgiven will be recorded as income, or (2) the Company pays off the loans.
Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of securities that could share in the earnings or losses of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method) and from outstanding convertible debentures (the number of which is computed using the if-converted method). Diluted earnings (loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).
During the years ended September 30, 2022, 2021, and 2020, the Company did not have any adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted earnings (loss) per share. For fiscal 2022, we
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
excluded 300,000 stock options from the calculation of diluted earnings per share because the effect was anti-dilutive. There were no other potentially dilutive securities outstanding during fiscal 2021 and 2020.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values. The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to acquired entities are included prospectively beginning with the date of acquisition. Acquisition-related costs are expensed as incurred.
Share Repurchases
The Company accounts for treasury stock transactions using the cost method. When treasury shares are retired, we charge the excess of the repurchase price over the par value of the repurchased shares to additional paid-in capital.
Stock-based Compensation
The Company recognizes all employee stock-based compensation in selling, general and administrative expenses in our consolidated statements of operations. Equity-classified awards are measured at the grant date fair value of the award and recognized as expense over their requisite service period. The Company estimates grant date fair value of stock options using the Black-Scholes option-pricing model.
The following table provides the significant assumptions used in determining the estimated grant date fair value of the stock options granted in fiscal 2022. No grants were awarded in fiscal 2021 and 2020.
| | | | | |
Expected term (in years) | 4.45 |
Expected volatility | 64.42 | % |
Expected dividend yield | 0.20 | % |
Risk-free rate | 3.23 | % |
The expected term was estimated using the historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan. The expected volatility was based on historical volatility of the Company's stock price for a period equal to the award's expected term. The expected dividend yield is based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged). The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We recognize forfeitures when they occur.
Legal and Other Contingencies
The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. The Company recognizes legal fees and expenses, including those related to legal contingencies, as incurred.
Generally, the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
The Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims for workers’ compensation, general liability, property, auto, and business interruption coverage. The Company carries substantial insurance to cover such risks with large deductibles and/or self-insured retention. These policies have
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
been structured to limit our per-occurrence exposure. The Company believes, and the Company’s experience has been, that such insurance policies have been sufficient to cover such risks.
Fair Value Measurement
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels.
U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
•Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.
•Level 3 – Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company classifies its marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income and were reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018. Realized gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are included in comprehensive income (loss). The Company measures the fair value of its marketable securities based on quoted prices for identical securities in active markets, or Level 1 inputs.
In accordance with U.S. GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, the Company writes down the cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss. No losses or other-than-temporary impairments in our marketable securities portfolio were recognized during the years ended September 30, 2022, 2021, and 2020.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance sheets. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment. If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in other charges, net in the consolidated statements of operations.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Assets and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at Reporting Date Using |
Description | | September 30, 2022 | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Property and equipment* | | $ | 32,904 | | | $ | — | | | $ | — | | | $ | 32,904 | |
Property and equipment** | | 3,432 | | | — | | | — | | | 3,432 | |
Indefinite-lived intangibles* | | 50,454 | | | — | | | — | | | 50,454 | |
Definite-lived intangibles* | | 27,986 | | | — | | | — | | | 27,986 | |
Goodwill* | | 20,608 | | | — | | | — | | | 20,608 | |
Goodwill** | | 663 | | | — | | | — | | | 663 | |
Current assets* | | 681 | | | — | | | — | | | 681 | |
*Certain assets and liabilities measured at the acquisition dates.
** Measured at year-end impairment testing.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at Reporting Date Using |
Description | | September 30, 2021 | | Quoted Prices in Active Markets for Identical Asset (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Property and equipment | | $ | 2,044 | | | $ | — | | | $ | — | | | $ | 2,044 | |
Indefinite-lived intangibles | | 2,008 | | | — | | | — | | | 2,008 | |
Goodwill | | 2,096 | | | — | | | — | | | 2,096 | |
Asset held for sale | | 3,007 | | | — | | | 3,007 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | Unrealized Gain (Loss/Impairments) Recognized |
| | Years Ended September 30, |
Description | | 2022 | | 2021 | | 2020 |
Goodwill | | $ | (566) | | | $ | (6,307) | | | $ | (7,944) | |
Property and equipment, net (including held for sale) | | (1,029) | | | (2,202) | | | (302) | |
Indefinite-lived intangibles | | (293) | | | (5,296) | | | (2,265) | |
Operating lease right-of-use assets | | — | | | — | | | (104) | |
Other assets (equity securities) | | — | | | (84) | | | (64) | |
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
The significant unobservable inputs used in our level 3 fair value measurements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Range (Weighted Average) |
Areas | | Valuation Techniques | | Unobservable Input | | 2022 | | 2021 |
| | | | | | | | |
Property and equipment | | Discounted cash flow | | EBITDA multiple | | 9x - 10x (10x) | | 8x (8x) |
| | Revenue/EBITDA growth rate | | 0% - 2.5% (1.5%) | | 0% - 2.5% (1%) |
| | Weighted average cost of capital | | 12.5% (12.5%) | | 13% - 17% (15%) |
| | | | | | | | |
Goodwill | | Discounted cash flow | | EBITDA multiple | | 8x - 10x (9x) | | 8x (8x) |
| | Revenue/EBITDA growth rate | | 0% - 2.5% (1.5%) | | 0% - 2.5% (1%) |
| | Weighted average cost of capital | | 12.5% (12.5%) | | 13% - 17% (15%) |
| | | | | | | | |
SOB licenses | | Multiperiod excess earnings | | EBITDA multiple | | 9x - 10x (10x) | | 8x (8x) |
| | Revenue/EBITDA growth rate | | 0% - 2.5% (1.5%) | | 0% - 2.5% (1%) |
| | Weighted average cost of capital | | 12.5% (12.5%) | | 13% - 17% (15%) |
| | Contributory asset charges rate | | 0.5% - 7.4% (2.3%) | | 1.4% - 8.0% (4%) |
| | | | | | | | |
Tradename | | Relief-from-royalty method | | Revenue growth rate | | 0% - 2.5% (1.5%) | | 0% - 2.5% (2.5%) |
| | Terminal multiple | | 9x - 10x (9x) | | 8x (8x) |
| | Royalty rate | | 3.5% - 4.5% (4%) | | None |
| | Weighted average cost of capital | | 12.5% (12.5%) | | 15% (15%) |
| | | | | | | | |
Operating lease right-of-use assets | | Discounted cash flow | | EBITDA growth rate | | 0% - 2.5% (1.5%) | | 0% - 2.5% (1%) |
| | Weighted average cost of capital | | 12.5% (12.5%) | | 13% - 17% (15%) |
| | | | | | | | |
Business combinations | | Various* | | Growth rate | | 2.5% - 10% (4.8%) | | None |
| | Weighted average cost of capital | | 15% - 19.5% (18.1%) | | None |
| | Internal rate of return | | 15% - 21.5% (19.4%) | | None |
| | Contributory asset charges rate | | 8.5% - 10.2% (9.3%) | | None |
* Includes all of the valuation techniques for each of the fair valued assets above.
Impact of Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
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 Accounting Standards Codification ("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.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction. The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. We have not yet evaluated the impact of this ASU on our consolidated financial statements.
3. Ongoing Impact of COVID-19 Pandemic
Our fiscal 2020 was the period hard hit by the COVID-19 pandemic caused by 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 fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased. Stimulus money also flowed to the economy at that time which prompted discretionary spending. In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions. Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S. economy in general, with global inflation and supply chain disruption impacting our businesses the most.
Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.
Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets
We considered 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 future assumed impact of COVID-19 pandemic on sales. Going forward, because of the illness' anticipated permanence, we will no longer consider it as a triggering event for impairment purposes. Based on the evaluation we conducted during the interim and annual periods since the pandemic emerged, we determined that during the year ended September 30, 2020 our assets were impaired in a total amount of approximately $10.6 million comprised of $7.9 million in goodwill, $2.3 million in SOB licenses, $302,000 in property and equipment, and $104,000 in operating lease right-of-use assets. We recognized an additional $13.6 million of impairment during the year ended September 30, 2021 comprised of $6.3 million in goodwill, $5.3 million in SOB licenses, and $2.0 million in property and equipment, which included one property later reclassified as held for sale. During the year ended September 30, 2022, we recorded total impairment charges of $1.9 million comprised of $566,000 in goodwill, $293,000 in SOB license, and $1.0 million in property and equipment.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
4. Revenues
Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 18), are shown below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2022 |
| Nightclubs | | Bombshells | | Other | | Total |
Sales of alcoholic beverages | $ | 80,001 | | | $ | 33,315 | | | $ | — | | | $ | 113,316 | |
Sales of food and merchandise | 18,289 | | | 26,005 | | | — | | | 44,294 | |
Service revenues | 93,481 | | | 407 | | | — | | | 93,888 | |
Other revenues | 14,480 | | | 198 | | | 1,444 | | | 16,122 | |
| $ | 206,251 | | | $ | 59,925 | | | $ | 1,444 | | | $ | 267,620 | |
| | | | | | | |
Recognized at a point in time | $ | 204,644 | | | $ | 59,918 | | | $ | 1,443 | | | $ | 266,005 | |
Recognized over time | 1,607 | | | 7 | | | 1 | | | 1,615 | |
| $ | 206,251 | | | $ | 59,925 | | | $ | 1,444 | | | $ | 267,620 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 |
| Nightclubs | | Bombshells | | Other | | Total |
Sales of alcoholic beverages | $ | 54,305 | | | $ | 32,380 | | | $ | — | | | $ | 86,685 | |
Sales of food and merchandise | 17,221 | | | 23,890 | | | — | | | 41,111 | |
Service revenues | 55,146 | | | 315 | | | — | | | 55,461 | |
Other revenues | 10,676 | | | 36 | | | 1,289 | | | 12,001 | |
| $ | 137,348 | | | $ | 56,621 | | | $ | 1,289 | | | $ | 195,258 | |
| | | | | | | |
Recognized at a point in time | $ | 135,799 | | | $ | 56,617 | | | $ | 1,284 | | | $ | 193,700 | |
Recognized over time | 1,549 | | | 4 | | | 5 | | | 1,558 | |
| $ | 137,348 | | | $ | 56,621 | | | $ | 1,289 | | | $ | 195,258 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2020 |
| Nightclubs | | Bombshells | | Other | | Total |
Sales of alcoholic beverages | $ | 31,950 | | | $ | 27,130 | | | $ | — | | | $ | 59,080 | |
Sales of food and merchandise | 8,561 | | | 15,899 | | | — | | | 24,460 | |
Service revenues | 41,004 | | | 158 | | | — | | | 41,162 | |
Other revenues | 6,858 | | | 28 | | | 739 | | | 7,625 | |
| $ | 88,373 | | | $ | 43,215 | | | $ | 739 | | | $ | 132,327 | |
| | | | | | | |
Recognized at a point in time | $ | 87,049 | | | $ | 43,215 | | | $ | 725 | | | $ | 130,989 | |
Recognized over time | 1,324 | | | — | | | 14 | | | 1,338 | |
| $ | 88,373 | | | $ | 43,215 | | | $ | 739 | | | $ | 132,327 | |
The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our consolidated balance sheet. A
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
4. Revenues - continued
reconciliation of contract liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2020 | | Consideration Received | | Recognized in Revenue | | Balance at September 30, 2021 | | Consideration Received | | Recognized in Revenue | | Balance at September 30, 2022 |
Ad revenue | $ | 92 | | | $ | 593 | | | $ | (601) | | | $ | 84 | | | $ | 611 | | | $ | (613) | | | $ | 82 | |
Expo revenue | 211 | | | 393 | | | (453) | | | 151 | | | 426 | | | (569) | | | 8 | |
Other (including franchise fees, see below) | 33 | | | 94 | | | (8) | | | 119 | | | 33 | | | (8) | | | 144 | |
| $ | 336 | | | $ | 1,080 | | | $ | (1,062) | | | $ | 354 | | | $ | 1,070 | | | $ | (1,190) | | | $ | 234 | |
Contract liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our 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. The first Bombshells franchised location opened in June 2022. On May 2, 2022, the Company signed a franchise development agreement with a private investor to open three Bombshells locations in the state of Alabama over a period of five years. Upon execution of the agreement, the Company received $50,000 in development fees representing 100% of the initial franchise fee of the first restaurant.
5. Selected Account Information
The components of accounts receivable, net are as follows (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Credit card receivables | $ | 2,687 | | | $ | 1,447 | |
Income tax refundable | 2,979 | | | 4,472 | |
Insurance receivable | — | | | 185 | |
ATM-in-transit | 819 | | | 277 | |
Other (net of allowance for doubtful accounts of $30 and $382, respectively) | 2,025 | | | 1,189 | |
Total accounts receivable, net | $ | 8,510 | | | $ | 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 original terms ranging from 1 to 20 years.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
5. Selected Account Information - continued
The components of prepaid expenses and other current assets are as follows (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Prepaid insurance | $ | 191 | | | $ | 277 | |
Prepaid legal | 61 | | | 112 | |
Prepaid taxes and licenses | 391 | | | 380 | |
Prepaid rent | 296 | | | 309 | |
Other | 560 | | | 850 | |
Total prepaid expenses and other current assets | $ | 1,499 | | | $ | 1,928 | |
The components of accrued liabilities are as follows (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Payroll and related costs | $ | 3,186 | | | $ | 3,220 | |
Property taxes | 2,618 | | | 2,178 | |
Sales and liquor taxes | 2,227 | | | 2,261 | |
Insurance | 30 | | | 54 | |
Interest | 499 | | | 145 | |
Patron tax | 467 | | | 452 | |
Lawsuit settlement | 246 | | | 378 | |
Unearned revenues | 234 | | | 354 | |
Other | 1,821 | | | 1,361 | |
Total accrued liabilities | $ | 11,328 | | | $ | 10,403 | |
The components of selling, general and administrative expenses are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Taxes and permits | $ | 9,468 | | | $ | 8,701 | | | $ | 8,071 | |
Advertising and marketing | 9,860 | | | 6,676 | | | 5,367 | |
Supplies and services | 8,614 | | | 6,190 | | | 4,711 | |
Insurance | 10,152 | | | 5,676 | | | 5,777 | |
Lease | 6,706 | | | 3,942 | | | 4,060 | |
Legal | 1,995 | | | 3,997 | | | 4,725 | |
Utilities | 4,585 | | | 3,366 | | | 2,945 | |
Charge cards fees | 6,292 | | | 3,376 | | | 2,382 | |
Security | 4,404 | | | 3,892 | | | 2,582 | |
Accounting and professional fees | 3,909 | | | 2,031 | | | 3,463 | |
Repairs and maintenance | 3,754 | | | 2,767 | | | 2,289 | |
Stock-based compensation | 2,353 | | | — | | | — | |
Other | 6,755 | | | 3,994 | | | 5,320 | |
Total selling, general and administrative expenses | $ | 78,847 | | | $ | 54,608 | | | $ | 51,692 | |
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
5. Selected Account Information - continued
The components of other charges, net are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Impairment of assets | $ | 1,888 | | | $ | 13,612 | | | $ | 10,615 | |
Settlement of lawsuits | 1,417 | | | 1,349 | | | 174 | |
Gain on sale of businesses and assets | (2,375) | | | (522) | | | (661) | |
Loss (gain) on insurance | (463) | | | (1,253) | | | 420 | |
Total other charges, net | $ | 467 | | | $ | 13,186 | | | $ | 10,548 | |
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Buildings and land | $ | 206,424 | | | $ | 162,217 | |
Equipment | 45,648 | | | 38,046 | |
Leasehold improvements | 30,729 | | | 28,681 | |
Furniture | 12,391 | | | 10,207 | |
Total property and equipment | 295,192 | | | 239,151 | |
Less accumulated depreciation | (70,577) | | | (63,199) | |
Property and equipment, net | $ | 224,615 | | | $ | 175,952 | |
Included in buildings and leasehold improvements above are construction-in-progress amounting to $1.5 million and $3.4 million as of September 30, 2022 and 2021, respectively, which are mostly related to Bombshells development projects.
Depreciation expense was approximately $10.3 million, $8.0 million, and $8.2 million for fiscal years 2022, 2021, and 2020, respectively. Impairment loss for property and equipment, including those later reclassified to assets held for sale, was $1.0 million, $2.0 million, and $0.3 million for fiscal 2022, 2021, and 2020, respectively.
7. Assets Held for Sale
As of September 30, 2021, the Company had two properties classified as held for sale with an aggregate net realizable value less cost to sell of $4.9 million with associated liabilities amounting to $1.1 million.
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. The 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 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 17, 2022, the Company sold a property classified as held-for-sale during the first quarter of fiscal 2022 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.
The Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
7. Assets Held for Sale - continued
As of September 30, 2022, there were no liabilities associated with held-for-sale assets amounting to $1.0 million. Gains or losses on the sale of properties held for sale are included in other charges, net within the consolidated statements of operations (see Note 5).
8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Indefinite useful lives: | | | |
Goodwill | $ | 67,767 | | | $ | 39,379 | |
Licenses | 103,972 | | | 65,186 | |
Tradename and domain name | 13,142 | | | 2,238 | |
| 184,881 | | | 106,803 | |
| | | | | | | | | | | | | | | | | |
| Amortization Period | | | | |
Definite useful lives: | | | | | |
Discounted leases | 18 & 6 years | | 78 | | | 86 | |
Non-compete agreements | 5 years | | 55 | | | 182 | |
Software | 5 years | | 723 | | | 132 | |
Licenses | Lease term | | 25,962 | | | — | |
Leases acquired in-place | Lease term | | 117 | | | — | |
| | | 26,935 | | | 400 | |
Total goodwill and other intangible assets | | | $ | 211,816 | | | $ | 107,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Definite- Lived Intangibles | | Indefinite- Lived Intangibles | | Goodwill | | Definite- Lived Intangibles | | Indefinite- Lived Intangibles | | Goodwill |
Beginning balance | $ | 400 | | | $ | 67,424 | | | $ | 39,379 | | | $ | 530 | | | $ | 72,547 | | | $ | 45,686 | |
Acquisitions | 28,653 | | | 50,453 | | | 28,954 | | | 128 | | | 173 | | | — | |
Impairment | — | | | (293) | | | (566) | | | — | | | (5,296) | | | (6,307) | |
Dispositions | — | | | (470) | | | — | | | — | | | — | | | — | |
Amortization | (2,118) | | | — | | | — | | | (258) | | | — | | | — | |
Ending balance | $ | 26,935 | | | $ | 117,114 | | | $ | 67,767 | | | $ | 400 | | | $ | 67,424 | | | $ | 39,379 | |
Definite-lived intangible assets consist of the following (in thousands):
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
8. Goodwill and Other Intangible Assets - continued
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Licenses | $ | 27,725 | | | $ | — | |
Software | 1,671 | | | 1,004 | |
Leases acquired in-place | 261 | | | — | |
Discounted leases | 297 | | | 297 | |
Non-compete agreements | 1,100 | | | 1,100 | |
Distribution agreements | 317 | | | 317 | |
Total definite-lived intangibles | 31,371 | | | 2,718 | |
Less accumulated amortization | (4,436) | | | (2,318) | |
Definite-lived intangibles, net | $ | 26,935 | | | $ | 400 | |
As of September 30, 2022 and 2021, the accumulated impairment balance of indefinite-lived intangibles was $11.4 million and $13.7 million, respectively, while the accumulated impairment balance of goodwill was $21.2 million and $20.6 million, respectively. Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2022 is: 2023 - $2.8 million; 2024 - $2.7 million; 2025 - $2.6 million; 2026 - $2.4 million; 2027 - $2.3 million; and thereafter - $14.2 million.
Indefinite-lived intangible assets consist of SOB licenses and tradenames, which were obtained as part of acquisitions. These licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which are done at minimal costs to the Company. We considered certain licenses that are associated with leased locations as definite-lived. The discounted cash flow of the income approach method was used in calculating the value of these licenses in a business combination, while the relief-from-royalty method was used in calculating the value of tradenames. During the fiscal year ended September 30, 2022, the Company recognized a $293,000 impairment related to the SOB license of one club and a $566,000 impairment related to goodwill of one reporting unit. During the fiscal year ended September 30, 2021, the Company recognized a $5.3 million impairment related to three clubs’ SOB licenses and a $6.3 million impairment related to the goodwill of seven reporting units (see Note 3). During the fiscal year ended September 30, 2020, the Company recognized a $2.3 million impairment related to two clubs’ SOB licenses and a $7.9 million impairment related to the goodwill of seven reporting units.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Debt
Debt consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | September 30, |
| | | 2022 | | 2021 |
Notes payable at 5.5%, matures January 2023 | (d)(1) | | $ | 678 | | | $ | 785 | |
Non-interest-bearing debts to State of Texas, paid in April 2022, interest imputed at 9.6% | (d)(2) | | — | | | 813 | |
Note payable at 8%, matures October 2027, as amended | (b)(3)(10) | | 3,025 | | | 3,025 | |
Note payable at 8%, matures May 2029 | (b)(3) | | 10,412 | | | 11,549 | |
Note payable at 5.99%, matures September 2033, as amended | (c) (4) | | 5,731 | | | 6,089 | |
Note payable at 9%, paid in March 2022 | (a)(5) | | — | | | 1,063 | |
Note payable at 5.49%, matures March 2039, as amended | (c)(6) | | 2,008 | | | 2,075 | |
Paycheck Protection Program loans at 1%, paid in May 2022 | (d)(7) | | — | | | 124 | |
Note payable at 3.99%, paid in January 2022 | *(a)(8) | | — | | | 2,127 | |
Note payable at 5.25%, matures September 2031 | *(a)(9) | | 92,062 | | | 99,146 | |
Notes payable at 12%, matures October 2024 | (d)(11) | | 9,500 | | | — | |
Notes payable at 12%, matures October 2024 | (d)(11) | | 3,561 | | | — | |
Notes payable at 12%, matures October 2024 | (d)(11) | | 3,561 | | | — | |
Note payable at 5.25% matures October 2031 | (a)(12) | | 1,172 | | | — | |
Note payable at 6% matures October 2031 | (b)(12) | | 10,321 | | | — | |
Note payable at 6% matures October 2041 | (b)(12) | | 7,828 | | | — | |
Note payable at 6% matures October 2041 | (b)(12) | | 978 | | | — | |
Note payable at 4% matures November 2028 | (b)(13) | | 895 | | | — | |
Note payable at 5.25% matures January 2032 | *(a)(14) | | 18,391 | | | — | |
Note payable at 4.25% matures February 2043 | *(a)(15) | | 2,625 | | | — | |
Note payable at 10% matures May 2025 | (b)(16) | | 5,881 | | | — | |
Note payable at 10% matures May 2032 | (b)(16) | | 5,000 | | | — | |
Note payable at 5% matures November 2023 | *(a)(17) | | 2,195 | | | — | |
Note payable at 6% matures July 2029 | (b)(18) | | 785 | | | — | |
Note payable at 6% matures July 2032 | (b)(19) | | 9,880 | | | — | |
Note payable at 6% matures August 2032
| (a)(19) | | 4,970 | | | — | |
Note payable at 5.25% matures August 2023 | *(a)(20) | | 1,575 | | | — | |
Note payable at 4.79% matures October 2042
| (c)(21) | | 2,806 | | | — | |
Total debt | | | 205,840 | | | 126,796 | |
Less unamortized debt discount and issuance costs | | | (3,377) | | | (1,628) | |
Less current portion | | | (11,896) | | | (6,434) | |
Total long-term portion of debt, net | | | $ | 190,567 | | | $ | 118,734 | |
*These commercial bank debts are guaranteed by the Company’s CEO. See Note 19.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Debt - continued
Following is a summary of long-term debt at September 30 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
(a) Secured by real estate | $ | 122,990 | | | $ | 102,336 | |
(b) Secured by stock in subsidiary | 55,004 | | | 14,574 | |
(c) Secured by other assets | 10,545 | | | 8,164 | |
(d) Unsecured | 17,301 | | | 1,722 | |
| $ | 205,840 | | | $ | 126,796 | |
(1)In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $1.5 million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate of 5.5%. The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $6.5 million, which have been paid off in relation to the December 2017 Refinancing Loan, as discussed below. The notes were also payable over eleven years at $53,110 per month including interest and have the same adjustable interest rate of 5.5%.
(2)In 2015, the Company reached a settlement with the State of Texas over payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two nonsettled locations. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. The Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest. In March 2017, the present value of the second note was approximately $390,000 after discounting using an imputed interest rate of 9.6%. On April 20, 2022, the Company finally settled all of its remaining Patron Tax debt. Going forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5 per customer.
(3)On May 8, 2017, in relation to the Scarlett’s acquisition, the Company executed two promissory notes with the sellers: (i) a 5% short-term note for $5.0 million payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million. The 12-year note is payable $168,343 per month, including interest. The Company has amended the $5.0 million short-term note payable several times, which has a remaining balance of $3.0 million, extending the maturity date and increasing the interest rate. Presently, the maturity date is October 1, 2027 and the interest rate is 8% for its remaining term. Refer to December 2019 amendment below.
(4)On December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the old aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with monthly payments of $59,869, which includes interest. In March 2020, this loan was extended to September 2033.
(5)On September 26, 2018, the Company refinanced a $500,000 12% note payable for $1.35 million from a private lender by executing a 9% 10-year note payable $17,101 monthly, including interest, until maturity. In relation to a sale of a held-for-sale property (see Note 7), this note was fully paid in March 2022.
(6)On December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed for the remaining $2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest. Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity date.
(7)On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge amounting to $5.4 million. Under the terms of the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1% per annum. As of September 30, 2022, we have received eleven
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Debt - continued
Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of those notices received forgave 100% of each of the eleven PPP loans totaling the amount of $5.3 million in principal and interest. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal was fully paid in May 2022 as debt plus accrued interest. See Note 10.
(8)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 Company paid approximately $25,000 in debt issuance costs at closing. This note was fully paid with proceeds from the January 25, 2022 borrowing.
(9)On September 30, 2021, we entered into a $99.1 million term loan refinancing $85.7 million of existing bank and seller-financed real estate debt and to provide $12.3 million in cash that will be used to pay off existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing for the acquisition of 11 clubs and related real estate (see Note 16). The $99.1 million note has a term of 10 years with an initial interest rate of 5.25% per annum for the first five years, then adjusted to a rate equal to the then weekly average yield of U.S. Treasury Securities plus 350 basis points, with a floor rate of 5.25%. The note is payable in monthly payments of principal and interest of $668,051, based on a 20-year amortization period, with the balance paid at maturity. In connection with the transaction, we wrote off to interest expense approximately $103,000 of unamortized debt issuance costs related to the paid-off debts. We also paid approximately $1.0 million in loan costs, approximately $567,000 of which is capitalized and will be amortized together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using the effective interest method. There are certain financial covenants with which the Company is to be in compliance related to this loan.
(10)On October 12, 2021, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2027. The amendment did not have an impact in the Company’s results of operations and cash flows.
(11)On October 12, 2021, we closed on a debt financing transaction with 28 investors for unsecured promissory notes with a total principal amount of $17.0 million, all of which bear interest at a rate of 12% per annum. Of this amount, $9.5 million are promissory notes, payable interest only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2024. The remaining amount of the financing is $7.5 million in promissory notes, payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on October 12, 2024. Included in the $17.0 million borrowing are two notes for $500,000 and $150,000 borrowed from related parties (see Note 19) and two notes for $500,000 and $300,000 borrowed from two non-officer employees in which the terms of the notes are the same as the rest of the lender group.
(12)On October 18, 2021, in relation to an acquisition (see Note 16), the Company executed four seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% note payable in 120 equal monthly payments of $122,123 in principal and interest. The second promissory note was a 20-year $8.0 million 6% note payable in 240 equal monthly payments of $57,314 in principal and interest. The third promissory note was a 10-year $1.2 million 5.25% note payable in monthly payments of $8,086 in principal and interest based on a 20-year amortization period, with the balance payable at maturity date. The fourth note was a 20-year $1.0 million 6% note payable in 240 equal monthly payments of $7,215 in principal and interest.
(13)On November 8, 2021, in relation to an acquisition (see Note 16), the Company executed a $1.0 million 7-year promissory note with an interest rate of 4.0% per annum. The note is payable $13,669 per month, including principal and interest.
(14)On January 25, 2022, the Company borrowed $18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Debt - continued
payable in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured by eleven real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 19). After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan.
(15)On March 1, 2022, the Company borrowed $2.6 million from a bank lender in relation to a purchase of real estate (see Note 16). The 21-year promissory note has an initial interest rate of 4.25% per annum, repriced after five years and then again annually to prime plus 1% with a floor rate of 4.25%. The note is payable interest only during the first 12 months; then the next 48 months with $16,338 equal monthly payments of principal and interest; then the next 191 months at an equal monthly payment based on a 20-year amortization; with the balance of principal and interest payable at the 252nd month.
(16)On May 2, 2022, in relation to a club acquisition (see Note 16), the Company executed two seller-financed notes totaling $11.0 million, comprised of (1) $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 (2) $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.
(17)On May 23, 2022, the Company borrowed $2.2 million from a bank lender in relation to a purchase of real estate (see Note 16). The 18-month promissory note has an initial interest rate of 4.5% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1% with a floor of 4.5%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid loan costs amounting to $25,000 for this note.
(18)On July 21, 2022, the Company executed an $800,000 6% seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 16). The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest.
(19)On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 16), the Company executed two seller-financed promissory notes: (1) $10.0 million 6% ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million 6% ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest.
(20)On August 18, 2022, in relation to a purchase of real estate for a future Bombshells location amounting to $2.1 million (see Note 16), the Company borrowed $1.6 million from a bank lender. The 5.25% mortgage note is payable interest-only for eleven months and on its August 18, 2023 maturity date payable with the entire principal balance plus accrued interest.
(21) On September 23, 2022, in connection with the purchase of an aircraft worth $3.5 million (see Note 16), the Company entered into a financing transaction for $2.8 million. The financing agreement bears an interest of 4.79% per annum and payable in 240 monthly installments of principal and interest amounting to $18,298.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Debt - continued
Future maturities of debt obligations as of September 30, 2022 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Regular Amortization | | Balloon Payments | | Total Payments |
2023 | $ | 10,216 | | | $ | 2,226 | | | $ | 12,442 | |
2024 | 9,663 | | | 2,195 | | | 11,858 | |
2025 | 9,527 | | | 20,457 | | | 29,984 | |
2026 | 9,825 | | | — | | | 9,825 | |
2027 | 10,424 | | | — | | | 10,424 | |
Thereafter | 56,447 | | | 74,860 | | | 131,307 | |
| $ | 106,102 | | | $ | 99,738 | | | $ | 205,840 | |
(22)On October 10, 2022, in relation to a real estate purchase (see Note 16), the Company borrowed $2.3 million from a bank lender. The 18-month promissory note bears an initial interest rate of 6% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5% with a floor of 6%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid approximately $26,000 in debt issuance cost at closing. This promissory note is secured by the purchased real estate property.
(23)On October 26, 2022, in relation to a club acquisition, the Company executed a promissory note for $5.0 million with the seller. The 6% 15-year promissory note is payable in 180 equal monthly payments of $42,193 in principal and interest. This promissory note is secured by the purchased real estate property. See Note 16.
(23)On November 18, 2022, in relation to a real estate purchase on September 12, 2022, the Company borrowed $1.5 million from a bank lender. The 18-month promissory note bears an initial interest rate of 6% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5% with a floor of 6%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. This promissory note is secured by the purchased real estate property.
10. Income Taxes
Income tax expense (benefit) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | 8,335 | | | $ | 4,598 | | | $ | 215 | |
State and local | 2,656 | | | 644 | | | 560 | |
Total current income tax expense | 10,991 | | | 5,242 | | | 775 | |
| | | | | |
Deferred | | | | | |
Federal | 2,080 | | | (161) | | | (1,248) | |
State and local | 1,000 | | | (1,092) | | | (20) | |
Total deferred income tax expense (benefit) | 3,080 | | | (1,253) | | | (1,268) | |
| | | | | |
Total income tax expense (benefit) | $ | 14,071 | | | $ | 3,989 | | | $ | (493) | |
The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Income Taxes - continued
Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal statutory income tax expense (benefit) | $ | 12,628 | | | $ | 7,169 | | | $ | (1,429) | |
State income taxes, net of federal benefit | 1,801 | | | 716 | | | 253 | |
Permanent differences | 96 | | | (434) | | | 395 | |
Change in state tax rate | 896 | | | (804) | | | — | |
Change in valuation allowance | 343 | | | (632) | | | 1,273 | |
Tax credits | (1,796) | | | (1,207) | | | (945) | |
Other | 103 | | | (819) | | | (40) | |
Total income tax expense (benefit) | $ | 14,071 | | | $ | 3,989 | | | $ | (493) | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 1,022 | | | $ | 664 | |
Capital loss carryforwards | 234 | | | 899 | |
Right-of-use assets | 626 | | | 335 | |
Accrued expenses | 240 | | | 148 | |
Stock-based compensation | 569 | | | — | |
Other | — | | | 6 | |
Valuation allowance | (984) | | | (641) | |
| 1,707 | | | 1,411 | |
Deferred tax liabilities: | | | |
Intangibles | (21,927) | | | (12,174) | |
Property and equipment | (10,119) | | | (8,132) | |
Prepaid expenses | (205) | | | (242) | |
Other | (18) | | | — | |
| (32,269) | | | (20,548) | |
| $ | (30,562) | | | $ | (19,137) | |
Included in the Company’s deferred tax liabilities at September 30, 2022 and 2021 is the tax effect of indefinite-lived intangible assets from club acquisitions amounting to approximately $32.9 million and $17.1 million, respectively, which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.
The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Income Taxes - continued
related to unrecognized tax benefits in interest expense. In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.
The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service (“IRS”) with no changes. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. Fiscal year ended September 30, 2019 and subsequent years remain open to federal tax examination. The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.
On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were 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 CARES Act also established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company 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 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 fiscal 2021, we received 11 Notices of PPP Forgiveness Payment 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 $5.3 million in principal and interest and were included in non-operating gains (losses), net in our consolidated statement of operations for the fiscal year ended September 30, 2021. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal was fully paid as debt plus accrued interest in fiscal 2022.
11. Commitments and Contingencies
Leases
See Note 20.
Legal Matters
Texas Patron Tax
In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
11. Commitments and Contingencies - continued
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. On April 20, 2022, the Company finally settled all of its remaining Patron Tax debt.
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 appealed to the Fifth Circuit Court of Appeals, who affirmed that the Texas Patron Fee is unconstitutional as applied. The State of Texas next sought review from the Supreme Court, but the high court declined to take the case. That lawsuit is now back before the trial court for post-trial proceedings but is final for purposes of determining the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.
Indemnity Insurance Corporation
As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.
On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.
On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of September 30, 2022, we had 1 remaining unresolved claim 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 and directors in the Southern District of Texas, Houston Division. The complaints alleged 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 cases were consolidated as In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. In January 2022, the parties engaged in settlement discussions beginning with a formal mediation on January 13, 2022, which resulted in an agreement-in-principle to resolve the matter. On January 24, 2022, a Joint Notice of Settlement was filed. On April 28, 2022, the Court preliminarily approved the settlement and form of class
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
11. Commitments and Contingencies - continued
notice. On August 12, 2022, the Court issued an order finally approving the settlement, which was funded by insurance carrier. No appeal was filed and hence the litigation has concluded.
On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information, alleged failure to maintain internal controls, and alleged failure to properly manage company property. This action is in its preliminary phase, and a potential loss cannot yet be estimated. These allegations are substantively similar to claims asserted in the class action and a prior derivative action that was dismissed in June of 2021. RCI intends to vigorously defend against the action. On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed their Motions to Dismiss and the derivative plaintiffs have responded. The Motions now have been fully briefed for the Court's consideration.
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 included alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The Company contended that there was insurance coverage under an applicable insurance policy. The insurer raised several issues regarding coverage under the policy. This matter was settled at mediation in August 2022.
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 this report, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.
General
In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
11. Commitments and Contingencies - continued
Settlement of lawsuits for the years ended September 30, 2022, 2021, and 2020 total $1.4 million, $1.3 million, and $174,000, respectively. As of September 30, 2022 and 2021, the Company has accrued $246,000 and $378,000 in accrued liabilities, respectively, related to settlement of lawsuits
12. Common Stock
During the year ended September 30, 2020, the following common stock transactions occurred:
•The Company acquired 516,102 shares of its own common stock at a cost of $9.5 million. These shares were subsequently retired.
•The Company paid quarterly dividends of $0.03 per share, except for the second and fourth quarters when $0.04 per share was paid, for an aggregate amount of $1.3 million.
During the year ended September 30, 2021, the following common stock transactions occurred:
•The Company acquired 74,659 shares of its own common stock at a cost of $1.8 million. These shares were subsequently retired.
•The Company paid quarterly dividends of $0.04 per share for an aggregate amount of $1.4 million.
During the year ended September 30, 2022, the following common stock transactions occurred:
•The Company acquired 268,185 shares of its own common stock at a cost of $15.1 million. These shares were subsequently retired.
•The Company paid quarterly dividends of $0.05 per share, except for the first quarter when $0.04 per share was paid, for an aggregate amount of $1.8 million.
•On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock. See Note 16.
13. Stock-based Compensation
On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan was approved by the shareholders during the annual stockholders' meeting on August 23, 2022. The 2022 Plan provides that the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000. The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to six members of management subject to the approval of the 2022 Plan.
Stock-based compensation expense for fiscal 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $2.4 million with related tax benefit amounting to $569,000. No stock-based compensation was recognized during fiscal 2021 and 2020. As of September 30, 2022, we had unrecognized compensation cost amounting to $7.1 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 4.4 years.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
13. Stock-based Compensation - continued
The February 9, 2022 stock options vest over four years with the first 20% having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20% vesting on February 9 of each year thereafter, provided however that the options will be subject to earlier vesting under certain events set forth in the Plan, including without limitation a change in control. All of the options will expire, if not vested, at the end of five years. The weighted average grant-date fair value of the stock options was $31.37. No stock options were exercised in fiscal 2022.
The following table summarizes information about stock option activity under the 2022 Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at September 30, 2021 | — | | | | | | | |
Granted | 300,000 | | | $ | 100.00 | | | | | |
Outstanding at September 30, 2022 | 300,000 | | | $ | 100.00 | | | 4.4 | | $ | — | |
| | | | | | | |
Exercisable at September 30, 2022 | 60,000 | | | $ | 100.00 | | | 4.4 | | $ | — | |
14. Employee Retirement Plan
The Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3% of the employee’s salary. Expenses related to matching contributions to the Plan approximated $258,000, $209,000, and $171,000 for the years ended September 30, 2022, 2021, and 2020, respectively.
15. Insurance Recoveries
One of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2019. Both of these casualties received insurance recoveries in subsequent fiscal years. During the fourth quarter of 2021, one club in Sulphur, Louisiana incurred damage from a hurricane. We wrote off the net carrying value of the assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the insurance claims have been resolved.
In relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Included in | | 2022 | | 2021 | | 2020 |
Consolidated balance sheets (period end) | | | | | | | |
Insurance receivable | Account receivable, net | | $ | — | | | $ | 186 | | | $ | 191 | |
| | | | | | | |
Consolidated statements of operations – loss (gain) | | | | | | | |
Business interruption | Other charges, net | | $ | — | | | $ | — | | | $ | (176) | |
Property | Other charges, net | | $ | (463) | | | $ | (1,337) | | | $ | 596 | |
| | | | | | | |
Consolidated statements of cash flows | | | | | | | |
Proceeds from business interruption insurance claims | Operating activity | | $ | — | | | $ | 106 | | | $ | 384 | |
Proceeds from property insurance claims | Investing activity | | $ | 648 | | | $ | 1,152 | | | $ | 945 | |
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
15. Insurance Recoveries – continued
The net property insurance gain/loss amount in fiscal 2022, 2021, and 2020 was net of assets written off and expenses amounting to $0, $88,000, and $728,000, respectively.
16. Acquisitions and Dispositions
2020 Dispositions
On April 1, 2020, the Company sold a corporate housing property to an employee for $375,000 in cash with an approximate gain of $20,000.
On May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $1.5 million in cash. Net gain on the transaction was $583,000 after closing costs. The net proceeds of $1.4 million were used to pay down related debt.
On August 6, 2020, the Company sold another corporate housing property for $176,000 in cash with an approximate gain of $26,000. The net proceeds of $160,500 were used to pay down related debt.
2021 Acquisitions
On December 28, 2020, the Company acquired the real estate and other business assets of a club in Centreville, Illinois for $500,000 in cash. The Company is leasing out this property to a club operator for $48,000 annually.
On January 26, 2021, the Company acquired land for a future Bombshells location in Arlington, Texas for $2.9 million. The Company paid approximately $754,000 in cash including closing costs and financed $2.175 million with a bank lender for a 20-year promissory note with an initial interest rate of 3.99% per annum. See Note 9.
On March 10, 2021, the Company acquired approximately 57,000-square foot of land across the street from our corporate office for $475,000 in cash. The Company plans to build a warehouse on that land.
On March 22, 2021, the Company acquired land adjacent to a Bombshells location in Houston, Texas for $1.04 million in cash.
On April 7, 2021, the Company acquired land near our Bombshells location in Pearland, Texas for $1.275 million in cash.
2021 Dispositions
On May 7, 2021, the Company sold one of the properties held for sale for $3.1 million. The property had a carrying value of $2.3 million. We recorded a net gain of approximately $657,000 after closing costs and we paid related debt amounting to $2.0 million from the proceeds of the sale. See Note 7.
On September 21, 2021, the Company sold land where a club used to be operated for $2.25 million with a net gain of approximately $54,000 after closing costs. We paid $1.2 million of related debt with the proceeds of the sale.
2022 Acquisitions
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 $87.9 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). We used the Finnerty Model to estimate the discount on stock marketability. 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,
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions – continued
and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment business 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 9), 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 | 29,933 | |
Total consideration fair value | $ | 87,933 | |
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 at $15.4 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible 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 $7.1 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 | 19,273 | |
Licenses | 47,390 | |
Tradenames | 6,934 | |
Leases acquired in-place | 261 | |
Deferred tax liability | (1,741) | |
Total net assets acquired | 72,503 | |
Goodwill | 15,430 | |
Acquisition price fair value | $ | 87,933 | |
Licenses and tradenames, except for those associated with certain leased locations, will not be amortized but will be tested at least annually for impairment.
The Company entered into leases with third parties for certain acquired clubs where the real estate was not part of the acquisition. See Note 20.
In connection with this acquisition, we incurred acquisition-related expenses of approximately $414,000, of which $173,000 was recognized in fiscal 2021 and $241,000 was recognized in fiscal 2022, and in both periods included in selling, general and administrative expenses in our consolidated statements of operations. We recorded $1.8 million in measurement period adjustments related to amortization of definite-lived intangibles and debt discount during fiscal 2022.
From the date of acquisition until September 30, 2022, the eleven acquired clubs contributed revenues of $35.4 million and income from operations of $12.5 million, which are included in our consolidated statement of operations for the year ended September 30, 2022. The following table presents the unaudited pro forma combined results of operations of the Company
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions – continued
and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amount and number of shares):
| | | | | | | | | | | |
| 2022 | | 2021 |
Pro forma revenues | $ | 269,347 | | | $ | 217,996 | |
Pro forma net income attributable to RCIHH common stockholders | $ | 45,623 | | | $ | 25,290 | |
Pro forma earnings per share - basic and diluted | $ | 4.86 | | | $ | 2.66 | |
| | | |
Pro forma weighted average number of common shares outstanding - basic and diluted | 9,383,445 | | 9,504,744 |
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.
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, of 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 $2.1 million to real estate, $200,000 to tangible assets, and $1.2 million to goodwill, which is deductible for tax purposes. The note is payable $13,669 per month, including principal and interest. See Note 9. 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 fiscal 2022, both of which were included in selling, general and administrative expenses in our consolidated statements of operations. From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $1.6 million and income from operations of $276,000, which are included in our consolidated statement of operations for the year ended September 30, 2022. 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 assets and corresponding operating lease liability related to the discontinued lease, both of which amounted to $5.9 million.
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 9.
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. See 2023 Disposition below.
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
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions – continued
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.
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 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 $6.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible 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. 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 | 4,900 | |
Tradenames | 1,460 | |
Deferred tax liability | (2,627) | |
Total net assets acquired | 9,241 | |
Goodwill | 6,759 | |
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 the acquisition, we incurred acquisition-related expenses of approximately $28,000, which is included in selling, general and administrative expenses in our consolidated statement of operations for the year ended September 30, 2022.
From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $2.8 million and income from operations of $1.4 million, which are included in our consolidated statement of operations for the year ended September 30, 2022. 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 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 9.
On July 21, 2022, the Company acquired a club in Odessa, Texas for a total acquisition price 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 in cash 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 9. The $1.8 million acquisition price is preliminarily allocated $11,000 to current assets, $1.1 million to property and equipment, and $684,000 to licenses. From the date of acquisition until September 30, 2022, the acquired club contributed very minimal revenues and income from operations. 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.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions – continued
On July 27, 2022, the Company completed the acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $25.0 million. The acquisition includes (1) $20.0 million for the adult entertainment business covered in a stock purchase agreement paid $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. The total preliminary fair value of the consideration transferred is $23.4 million, which includes a discount on the $10.0 million promissory note to reflect market participant yield expectations.
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 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 $5.6 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible 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. 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 July 27, 2022:
| | | | | |
Current assets | $ | 71 | |
Property and equipment | 4,921 | |
Licenses | 16,810 | |
Deferred tax liability | (3,979) | |
Total net assets acquired | 17,823 | |
Goodwill | 5,577 | |
Acquisition price fair value | $ | 23,400 | |
From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $2.0 million and income from operations of $802,000, which are included in our consolidated statement of operations for the year ended September 30, 2022. In connection with this acquisition, we incurred acquisition-related expenses of approximately $161,000, which was included in selling, general and administrative expenses in our consolidated statements of operations of fiscal 2022.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 August 18, 2022, the Company purchased real estate in Hunstville, Alabama amounting to $2.1 million for a future Bombshells location. The Company paid $525,000 in cash at closing and entered into a bank financing for the $1.6 million remainder (see Note 9).
On September 12, 2022, the Company entered into a joint venture with a private investment company to acquire real estate in Austin, Texas amounting to $2.2 million for a future Bombshells location. The Company has a 51% interest in the joint venture and paid its $1.1 million share for the real estate purchase while the investment of the private investment company was recorded as noncontrolling interest in our consolidated balance sheet.
2022 Dispositions
On October 8, 2021, the Company sold one of its clubs in South Houston for $300,000.
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
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions – continued
lessee a termination fee of $250,000, which is included in other charges/gains, net in our consolidated statement of operations. The Company used $2.1 million of the proceeds to pay down a loan related to the property.
See also Note 7 for dispositions of real estate properties that had been classified as held-for-sale.
2023 Acquisitions
On October 10, 2022, the Company purchased real estate in Lubbock, Texas amounting to $3.4 million for a future Bombshells location. The Company paid $1.1 million in cash at closing and entered into a bank financing for the $2.3 million remainder (see Note 9). The site includes extra land that will be listed for sale once the Bombshells unit is completed.
On October 11, 2022, the Company purchased a hangar in Arcola, Texas amounting to $754,000 in cash.
On October 26, 2022, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $9.0 million. The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note (see Note 9). In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business. Due to the proximity of the closing date to the filing 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.
On November 8, 2022, the Company purchased real estate in Aurora, Colorado amounting to $850,000 in cash for a future Bombshells location.
On December 5, 2022, the Company purchased real estate in Central City, Colorado amounting to $2.4 million in cash for the development of a Rick's Cabaret Steakhouse and Casino business.
On December 12, 2022, we and certain subsidiaries entered into definitive agreements to acquire five gentlemen's clubs, five related real estate properties, associated intellectual properties, and certain automated teller machines for a total purchase price of $66.5 million, payable with a total of $25.0 million in cash, a total of $25.5 million in seller financing, and 200,000 restricted shares of common stock based on an $80 per share price, subject to lock-up, leak out restrictions. The five clubs, which are all located in Texas, are being purchased through five different asset purchase agreements, under which a newly formed wholly-owned subsidiary of the Company will acquire from each club-owning entity all of the tangible and intangible assets and personal property used in the business of that club, except for certain excluded assets.
2023 Disposition
On November 4, 2022, the Company received $1.0 million from the Texas Department of Transportation for one of the Company's club properties in Lubbock, Texas due to eminent domain.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
17. Quarterly Results of Operations (Unaudited)
The following tables summarize unaudited quarterly data for fiscal 2022, 2021, and 2020 (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| December 31, 2021 | | March 31, 2022 | | June 30, 2022 | | September 30, 2022 |
Revenues(1) | $ | 61,836 | | | $ | 63,692 | | | $ | 70,714 | | | $ | 71,378 | |
Income from operations(1) | $ | 15,911 | | | $ | 17,081 | | | $ | 20,507 | | | $ | 17,960 | |
Net income attributable to RCIHH stockholders(1) | $ | 10,575 | | | $ | 10,952 | | | $ | 13,902 | | | $ | 10,612 | |
Earnings per share(1) | | | | | | | |
Basic and diluted | $ | 1.12 | | | $ | 1.15 | | | $ | 1.48 | | | $ | 1.15 | |
Weighted average number of common shares outstanding | | | | | | | |
Basic and diluted | 9,407,519 | | 9,489,085 | | 9,389,675 | | 9,249,864 |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| December 31, 2020 | | March 31, 2021 | | June 30, 2021 | | September 30, 2021 |
Revenues(2) | $ | 38,398 | | | $ | 44,059 | | | $ | 57,860 | | | $ | 54,941 | |
Income from operations(2) | $ | 6,583 | | | $ | 9,841 | | | $ | 18,507 | | | $ | 3,617 | |
Net income attributable to RCIHH stockholders(2) | $ | 9,643 | | | $ | 6,091 | | | $ | 12,302 | | | $ | 2,300 | |
Earnings per share(2) | | | | | | | |
Basic and diluted | $ | 1.07 | | | $ | 0.68 | | | $ | 1.37 | | | $ | 0.26 | |
Weighted average number of common shares outstanding | | | | | | | |
Basic and diluted | 9,019,088 | | 8,999,910 | | 8,999,910 | | 8,999,910 |
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
17. Quarterly Results of Operations (Unaudited) – continued
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| December 31, 2019 | | March 31, 2020 | | June 30, 2020 | | September 30, 2020 |
Revenues | $ | 48,394 | | | $ | 40,426 | | | $ | 14,721 | | | $ | 28,786 | |
Income (loss) from operations(3) | $ | 9,686 | | | $ | (2,475) | | | $ | (4,657) | | | $ | 192 | |
Net income (loss) attributable to RCIHH stockholders(3) | $ | 5,634 | | | $ | (3,452) | | | $ | (5,474) | | | $ | (2,793) | |
Earnings (loss) per share(3) | | | | | | | |
Basic and diluted | $ | 0.60 | | | $ | (0.37) | | | $ | (0.60) | | | $ | (0.31) | |
Weighted average number of common shares outstanding | | | | | | | |
Basic and diluted | 9,321,933 | | 9,224,960 | | 9,125,281 | | 9,124,214 |
| | | | | |
(1) | Fiscal year 2022 results of operations were significantly higher than prior year due to the fifteen acquired clubs and one new Bombshells. Net income attributable to RCIHH stockholders and earnings per share were impacted by $1.9 million in asset impairments ($1.7 million in the third quarter and $166,000 in the fourth quarter) and $2.4 million gain on sale or disposition of businesses and assets ($342,000 in the first quarter, $58,000 in the second quarter, $266,000 in the third quarter, and $1.7 million in the fourth quarter). Quarterly effective income tax expense rate was 21.7%, 23.4%, 21.3%, and 27.1% from first to fourth quarter, respectively, including the impact of the $343,000 deferred tax asset valuation allowance in the fourth quarter. |
| |
(2) | Fiscal year 2021 revenues were significantly higher compared to prior year, except for the first quarter, which was still affected by the lockdowns and social restrictions of the COVID-19 pandemic. Net income attributable to RCIHH stockholders and earnings per share were heavily impacted by the gain on debt extinguishment ($4.9 million in the first quarter and $380,000 in the second quarter), asset impairments totaling $13.6 million ($1.4 million in the second quarter, $271,000 in the third quarter, and $11.9 million in the fourth quarter), and gain on insurance totaling $1.3 million ($197,000 in the first quarter, $12,000 in the second quarter, and $1.0 million in the fourth quarter). Quarterly effective income tax expense (benefit) rate was (4.2)%, 24.3%, 24.4%, and (210.4)% from first to fourth quarter, respectively, including the impact of the release of a $462,000 deferred tax asset valuation allowance in the fourth quarter. |
| |
(3) | Fiscal year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic. Income (loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included the impact of a $10.6 million in asset impairments ($8.2 million in the second quarter, $982,000 in the third quarter, and $1.4 million in the fourth quarter). Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter was also affected by the $1.3 million valuation allowance on our deferred tax assets. Quarterly effective income tax expense (benefit) rate was 22.0%, (28.9)%, (20.5)%, and 36.3% from first to fourth quarter, respectively. |
Our nightclub operations are normally affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.
18. Segment Information
The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
18. Segment Information – continued
Below is the financial information related to the Company’s reportable segments (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenues (from external customers) | | | | | |
Nightclubs | $ | 206,251 | | | $ | 137,348 | | | $ | 88,373 | |
Bombshells | 59,925 | | | 56,621 | | | 43,215 | |
Other | 1,444 | | | 1,289 | | | 739 | |
| $ | 267,620 | | | $ | 195,258 | | | $ | 132,327 | |
| | | | | |
Income (loss) from operations | | | | | |
Nightclubs | $ | 82,798 | | | $ | 43,815 | | | $ | 13,056 | |
Bombshells | 11,504 | | | 13,264 | | | 9,237 | |
Other | 57 | | | 35 | | | (614) | |
General corporate | (22,900) | | | (18,566) | | | (18,933) | |
| $ | 71,459 | | | $ | 38,548 | | | $ | 2,746 | |
| | | | | |
Capital expenditures | | | | | |
Nightclubs | $ | 17,477 | | | $ | 6,890 | | | $ | 3,477 | |
Bombshells | 3,586 | | | 5,895 | | | 2,114 | |
Other | 841 | | | 157 | | | — | |
General corporate | 2,099 | | | 569 | | | 145 | |
| $ | 24,003 | | | $ | 13,511 | | | $ | 5,736 | |
| | | | | |
Depreciation and amortization | | | | | |
Nightclubs | $ | 9,604 | | | $ | 5,494 | | | $ | 5,799 | |
Bombshells | 1,783 | | | 1,824 | | | 1,785 | |
Other | 85 | | | 87 | | | 415 | |
General corporate | 919 | | | 833 | | | 837 | |
| $ | 12,391 | | | $ | 8,238 | | | $ | 8,836 | |
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Total assets | | | |
Nightclubs | $ | 428,104 | | | $ | 280,561 | |
Bombshells | 62,021 | | | 52,073 | |
Other | 2,635 | | | 1,573 | |
General corporate | 37,978 | | | 30,412 | |
| $ | 530,738 | | | $ | 364,619 | |
Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $14.0 million, $11.5 million, and $11.1 million for 2022, 2021, and 2020, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to $261,000, $141,000, and $70,000 for the same respective years. These intercompany revenue amounts are eliminated upon consolidation.
General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
18. Segment Information – continued
and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.
Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.
19. Related Party Transactions
Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of September 30, 2022 and 2021 was $115.1 million and $99.7 million, respectively.
Included in the $17.0 million borrowing on October 12, 2021 (see Note 9) are notes borrowed from related parties—one note for $500,000 (Ed Anakar, see above) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the notes are the same as the rest of the lender group.
We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were approximately $207,000 in fiscal 2022, $118,000 in fiscal 2021, and $59,000 in fiscal 2020. As of September 30, 2022 and 2021, we owed Nottingham Creations and Sherwood Forest $92,808 and $12,205, respectively, in unpaid billings.
TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2022, 2021, and 2020. A son-in-law of Eric Langan owns a 50% interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were approximately $3,809, $0, and $19,000 for the fiscal years 2022, 2021, and 2020, respectively. Amounts billed directly to the Company were approximately $133,000, $425,000, and $62,000 for the fiscal years 2022, 2021, and 2020, respectively. As of September 30, 2022 and 2021, the Company owed TW Mechanical approximately $9,338 and $7,500, respectively, in unpaid direct billings.
20. Leases
The Company leases certain facilities and equipment under operating leases per ASC 842, which the Company adopted on October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments and additional lease payments contingent on sales. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.
We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.
Included in lease expense in our consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $19,500 for the year ended September 30, 2020. This lease terminated on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
20. Leases – continued
Future maturities of operating lease liabilities as of September 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Principal Portion | | Interest Portion | | Total Payments |
October 2022 - September 2023 | $ | 2,795 | | | $ | 2,100 | | | $ | 4,895 | |
October 2023 - September 2024 | 3,006 | | | 1,938 | | | 4,944 | |
October 2024 - September 2025 | 3,261 | | | 1,763 | | | 5,024 | |
October 2025 - September 2026 | 3,516 | | | 1,573 | | | 5,089 | |
October 2026 - September 2027 | 3,522 | | | 1,373 | | | 4,895 | |
Thereafter | 22,696 | | | 5,246 | | | 27,942 | |
| $ | 38,796 | | | $ | 13,993 | | | $ | 52,789 | |
Total lease expense under ASC 842 was included in selling, general and administrative expenses in our consolidated statement of operations, except for sublease income which was included in other revenue, for the years ended September 30, 2022, 2021, and 2020 as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating lease expense – fixed payments | $ | 4,738 | | | $ | 3,325 | | | $ | 3,244 | |
Variable lease expense | 1,397 | | | 349 | | | 381 | |
Short-term equipment and other lease expense (includes $258, $298 and $315 recorded in advertising and marketing for fiscal 2022, 2021 and 2020, respectively, and $435, $397 and $372 recorded in repairs and maintenance, respectively; see Note 5) | 1,264 | | | 955 | | | 1,122 | |
Sublease income | (4) | | | (6) | | | (9) | |
Total lease expense, net | $ | 7,395 | | | $ | 4,623 | | | $ | 4,738 | |
| | | | | |
Other information: | | | | | |
Operating cash outflows from operating leases | $ | 7,200 | | | $ | 4,522 | | | $ | 4,562 | |
Weighted average remaining lease term | 11 years | | 12 years | | 13 years |
Weighted average discount rate | 5.6 | % | | 6.0 | % | | 6.1 | % |
In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral of payments as if the lease is unchanged. Any reduction in total lease expense during the period caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.
We recorded impairment charges of operating lease right-of-use assets amounting to $0, $0, and $104,000 during fiscal years 2022, 2021, and 2020, respectively.