Item 1. Financial Statements.
RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| (unaudited) | | |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 37,500 | | | $ | 35,686 | |
| Accounts receivable, net | 3,955 | | | 7,570 | |
| Current portion of notes receivable | 226 | | | 220 | |
| Inventories | 3,749 | | | 2,659 | |
| Prepaid expenses and other current assets | 4,475 | | | 1,928 | |
| Assets held for sale | 6,989 | | | 4,887 | |
| Total current assets | 56,894 | | | 52,950 | |
| Property and equipment, net | 208,710 | | | 175,952 | |
| Operating lease right-of-use assets, net | 37,753 | | | 24,308 | |
| Notes receivable, net of current portion | 4,750 | | | 2,839 | |
| Goodwill | 61,399 | | | 39,379 | |
| Intangibles, net | 130,585 | | | 67,824 | |
| Other assets | 2,088 | | | 1,367 | |
| Total assets | $ | 502,179 | | | $ | 364,619 | |
| | | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities | | | |
| Accounts payable | $ | 5,767 | | | $ | 4,408 | |
| Accrued liabilities | 12,888 | | | 10,403 | |
| Current portion of debt obligations, net | 12,295 | | | 6,434 | |
| Current portion of operating lease liabilities | 2,730 | | | 1,780 | |
| Total current liabilities | 33,680 | | | 23,025 | |
| Deferred tax liability, net | 24,074 | | | 19,137 | |
| Debt, net of current portion and debt discount and issuance costs | 175,670 | | | 118,734 | |
| Operating lease liabilities, net of current portion | 36,719 | | | 24,150 | |
| Other long-term liabilities | 351 | | | 350 | |
| Total liabilities | 270,494 | | | 185,396 | |
| | | |
| Commitments and contingencies (Note 10) | | | |
| | | |
| Equity | | | |
Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding | — | | | — | |
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,286,198 and 8,999,910 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively | 93 | | | 90 | |
| Additional paid-in capital | 68,342 | | | 50,040 | |
| Retained earnings | 163,800 | | | 129,693 | |
| Total RCIHH stockholders’ equity | 232,235 | | | 179,823 | |
| Noncontrolling interests | (550) | | | (600) | |
| Total equity | 231,685 | | | 179,223 | |
| Total liabilities and equity | $ | 502,179 | | | $ | 364,619 | |
See accompanying notes to unaudited condensed consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share and number of share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | | | | | | |
| Sales of alcoholic beverages | $ | 29,738 | | | $ | 25,092 | | | $ | 83,504 | | | $ | 62,725 | |
| Sales of food and merchandise | 11,574 | | | 12,058 | | | 33,628 | | | 30,205 | |
| Service revenues | 25,444 | | | 16,880 | | | 67,821 | | | 38,442 | |
| Other | 3,958 | | | 3,830 | | | 11,289 | | | 8,945 | |
| Total revenues | 70,714 | | | 57,860 | | | 196,242 | | | 140,317 | |
| Operating expenses | | | | | | | |
| Cost of goods sold | | | | | | | |
| Alcoholic beverages sold | 5,177 | | | 4,621 | | | 14,907 | | | 11,613 | |
| Food and merchandise sold | 3,959 | | | 4,043 | | | 11,756 | | | 9,961 | |
| Service and other | 46 | | | 208 | | | 170 | | | 304 | |
| Total cost of goods sold (exclusive of items shown separately below) | 9,182 | | | 8,872 | | | 26,833 | | | 21,878 | |
| Salaries and wages | 17,387 | | | 13,870 | | | 50,422 | | | 36,556 | |
| Selling, general and administrative | 19,572 | | | 14,697 | | | 56,495 | | | 39,467 | |
| Depreciation and amortization | 2,565 | | | 2,057 | | | 7,636 | | | 6,197 | |
| Other charges (gains), net | 1,501 | | | (143) | | | 1,357 | | | 1,288 | |
| Total operating expenses | 50,207 | | | 39,353 | | | 142,743 | | | 105,386 | |
| Income from operations | 20,507 | | | 18,507 | | | 53,499 | | | 34,931 | |
| Other income (expenses) | | | | | | | |
| Interest expense | (3,028) | | | (2,281) | | | (8,496) | | | (7,079) | |
| Interest income | 103 | | | 72 | | | 321 | | | 194 | |
| Non-operating gains, net | 127 | | | 9 | | | 211 | | | 5,356 | |
| Income before income taxes | 17,709 | | | 16,307 | | | 45,535 | | | 33,402 | |
| Income tax expense | 3,767 | | | 3,986 | | | 10,056 | | | 5,540 | |
| Net income | 13,942 | | | 12,321 | | | 35,479 | | | 27,862 | |
| Net loss (income) attributable to noncontrolling interests | (40) | | | (19) | | | (50) | | | 174 | |
| Net income attributable to RCIHH common shareholders | $ | 13,902 | | | $ | 12,302 | | | $ | 35,429 | | | $ | 28,036 | |
| | | | | | | |
| Earnings per share | | | | | | | |
| Basic and diluted | $ | 1.48 | | | $ | 1.37 | | | $ | 3.76 | | | $ | 3.11 | |
| | | | | | | |
| Weighted average number of common shares outstanding | | | | | | | |
| Basic and diluted | 9,389,675 | | | 8,999,910 | | | 9,428,461 | | | 9,006,373 | |
| | | | | | | |
| Dividends per share | $ | 0.05 | | | $ | 0.04 | | | $ | 0.14 | | | $ | 0.12 | |
See accompanying notes to unaudited condensed consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except number of shares)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Treasury Stock | | Noncontrolling
Interests | | Total
Equity |
| Number
of Shares | | Amount | | | | Number
of Shares | | Amount | | |
Balance at September 30, 2021 | 8,999,910 | | | $ | 90 | | | $ | 50,040 | | | $ | 129,693 | | | — | | | $ | — | | | $ | (600) | | | $ | 179,223 | |
| Issuance of common shares | 500,000 | | | 5 | | | 30,357 | | | — | | | — | | | — | | | — | | | 30,362 | |
| Payment of dividends | — | | | — | | | — | | | (380) | | | — | | | — | | | — | | | (380) | |
| Net income (loss) | — | | | — | | | — | | | 10,575 | | | — | | | — | | | (11) | | | 10,564 | |
| Balance at December 31, 2021 | 9,499,910 | | | 95 | | | 80,397 | | | 139,888 | | | — | | | — | | | (611) | | | 219,769 | |
| Purchase of treasury shares | — | | | — | | | — | | | — | | | (45,643) | | | (2,845) | | | — | | | (2,845) | |
| Canceled treasury shares | (45,643) | | | (1) | | | (2,844) | | | — | | | 45,643 | | | 2,845 | | | — | | | — | |
| Payment of dividends | — | | | — | | | — | | | (474) | | | — | | | — | | | — | | | (474) | |
| Net income | — | | | — | | | — | | | 10,952 | | | — | | | — | | | 21 | | | 10,973 | |
| Balance at March 31, 2022 | 9,454,267 | | | 94 | | | 77,553 | | | 150,366 | | | — | | | — | | | (590) | | | 227,423 | |
| Purchase of treasury shares | — | | | — | | | — | | | — | | | (168,069) | | | (9,212) | | | — | | | (9,212) | |
| Canceled treasury shares | (168,069) | | | (1) | | | (9,211) | | | — | | | 168,069 | | | 9,212 | | | — | | | — | |
| Payment of dividends | — | | | — | | | — | | | (468) | | | — | | | — | | | — | | | (468) | |
| Net income | — | | | — | | | — | | | 13,902 | | | — | | | — | | | 40 | | | 13,942 | |
Balance at June 30, 2022 | 9,286,198 | | | $ | 93 | | | $ | 68,342 | | | $ | 163,800 | | | — | | | $ | — | | | $ | (550) | | | $ | 231,685 | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2020 | 9,074,569 | | | $ | 91 | | | $ | 51,833 | | | $ | 100,797 | | | — | | | $ | — | | | $ | (414) | | | $ | 152,307 | |
| Purchase of treasury shares | — | | | — | | | — | | | — | | | (74,659) | | | (1,794) | | | — | | | (1,794) | |
| Canceled treasury shares | (74,659) | | | (1) | | | (1,793) | | | — | | | 74,659 | | | 1,794 | | | — | | | — | |
| Payment of dividends | — | | | — | | | — | | | (360) | | | — | | | — | | | — | | | (360) | |
| Net income (loss) | — | | | — | | | — | | | 9,643 | | | — | | | — | | | (134) | | | 9,509 | |
| Balance at December 31, 2020 | 8,999,910 | | | 90 | | | 50,040 | | | 110,080 | | | — | | | — | | | (548) | | | 159,662 | |
| Payment of dividends | — | | | — | | | — | | | (360) | | | — | | | — | | | — | | | (360) | |
| Net income (loss) | — | | | — | | | — | | | 6,091 | | | — | | | — | | | (59) | | | 6,032 | |
| Balance at March 31, 2021 | 8,999,910 | | | 90 | | | 50,040 | | | 115,811 | | | — | | | — | | | (607) | | | 165,334 | |
| Payment of dividends | — | | | — | | | — | | | (360) | | | — | | | — | | | — | | | (360) | |
| Net income | — | | | — | | | — | | | 12,302 | | | — | | | — | | | 19 | | | 12,321 | |
Balance at June 30, 2021 | 8,999,910 | | | $ | 90 | | | $ | 50,040 | | | $ | 127,753 | | | — | | | $ | — | | | $ | (588) | | | $ | 177,295 | |
See accompanying notes to unaudited condensed consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except number of shares)
(unaudited)
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 35,479 | | | $ | 27,862 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 7,636 | | | 6,197 | |
| Deferred income tax benefit | (409) | | | (430) | |
| Gain on sale of businesses and assets | (1,282) | | | (626) | |
| Impairment of assets | 1,722 | | | 1,672 | |
| Unrealized loss on equity securities | 1 | | | 58 | |
| Amortization of debt discount and issuance costs | 199 | | | 160 | |
| Gain on debt extinguishment | (83) | | | (5,298) | |
| Noncash lease expense | 1,725 | | | 1,282 | |
| Gain on insurance | (408) | | | (294) | |
| Doubtful accounts expense (reversal) on notes receivable | 753 | | | (22) | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 3,411 | | | 4,309 | |
| Inventories | (492) | | | (107) | |
| Prepaid expenses, other current and other assets | (3,271) | | | 2,346 | |
| Accounts payable, accrued and other liabilities | 1,773 | | | (4,892) | |
| Net cash provided by operating activities | 46,754 | | | 32,217 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Proceeds from sale of businesses and assets | 4,611 | | | 3,213 | |
| Proceeds from insurance | 515 | | | 294 | |
| Proceeds from notes receivable | 127 | | | 95 | |
| Payments for property and equipment and intangible assets | (17,173) | | | (10,788) | |
| Acquisition of businesses, net of cash acquired | (44,302) | | | — | |
| Net cash used in investing activities | (56,222) | | | (7,186) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively | 35,820 | | | 2,176 | |
| Payments on debt obligations | (10,714) | | | (10,845) | |
| Purchase of treasury stock | (12,057) | | | (1,794) | |
| Payment of dividends | (1,322) | | | (1,080) | |
| Payment of loan origination costs | (445) | | | (25) | |
| Net cash provided by (used in) financing activities | 11,282 | | | (11,568) | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,814 | | | 13,463 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 35,686 | | | 15,605 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 37,500 | | | $ | 29,068 | |
| | | |
| CASH PAID DURING PERIOD FOR: | | | |
| Interest | $ | 7,915 | | | $ | 7,761 | |
| Income taxes | $ | 8,990 | | | $ | 4,047 | |
| | | | | | | | | | | |
| | | |
| Noncash investing and financing transactions: | | | |
| Debt incurred in connection with acquisition of businesses | $ | 33,200 | | | $ | — | |
| Debt incurred in connection with purchase of property and equipment | $ | 4,820 | | | $ | — | |
| Note receivable from sale of property | $ | 2,700 | | | $ | — | |
| Issuance of shares of common stock for acquisition of businesses: | | | |
| Number of shares | 500,000 | | | — | |
| Fair value | $ | 30,362 | | | $ | — | |
| Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases | $ | 21,247 | | | $ | 217 | |
| Unpaid liabilities on capital expenditures | $ | 1,325 | | | $ | 995 | |
See accompanying notes to unaudited condensed consolidated financial statements.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2021 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2021. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.
2. Recent Accounting Standards and Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. We adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on our consolidated financial statements.
3. Ongoing Impact of COVID-19 Pandemic and Potential Economic Slowdown
Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March 2020. We had a major disruption in our business operations that affected our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic. There have been several variants to the coronavirus since then that threatened our operations throughout the period of recovery. We continue to adhere to state and local government mandates regarding the pandemic.
Since early 2021, there has been a worldwide increase in inflation. In the event this global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets
We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles, and long-lived assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering a probable economic slowdown on sales and, to a lesser extent, the future assumed impact of the COVID-19 pandemic. Based on the evaluation we conducted during the interim period ended June 30, 2022, we determined that our assets are impaired in a total amount of $1.7 million comprised of $400,000 in goodwill (for one club), $1.0 million in property and equipment ($379,000 for one club and $650,000 for one Bombshells), and $293,000 in SOB license (for one club). See Note 6.
4. Acquisitions and Dispositions
On October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $3.0 million for $3.2 million, of which $2.7 million was in the form of a secured promissory note. This 7% note receivable has a term of eight years and is collectible in equal monthly installments of $21,544 in principal and interest with the remaining balance to be paid at maturity.
On October 8, 2021, the Company sold one of its clubs in South Houston for $300,000.
On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period, with interest rates on promissory notes reflective of market yields). The acquisition was structured by entering into nine asset purchase agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in that business except certain excluded assets, and two stock purchase agreements, where a newly formed subsidiary purchased 100% of the capital stock of two club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into a real estate purchase and sale agreement for six real estate properties and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the sellers. The acquisition gives the Company presence in four additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in four seller-financed notes (see Note 7), and 500,000 shares of our common stock. The preliminary fair value of the consideration transferred is as follows (in thousands):
| | | | | |
| Cash | $ | 36,800 | |
| Notes payable | 21,200 | |
| Common stock | 30,362 | |
| Total consideration fair value | $ | 88,362 | |
We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets are provisional pending receipt of the final valuations for those assets. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital adjustments, the amount of goodwill is estimated to be $13.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $9.3 million of the recognized goodwill will be deductible for tax
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 18, 2021:
| | | | | |
| Current assets | $ | 386 | |
| Property and equipment | 19,534 | |
| Licenses | 50,080 | |
| Tradenames | 7,460 | |
| Deferred tax liability | (2,903) | |
| Total net assets acquired | 74,557 | |
| Goodwill | 13,805 | |
| Acquisition price fair value | $ | 88,362 | |
Licenses and tradenames will not be amortized but will be tested at least annually for impairment.
The Company entered into leases with third parties for certain clubs where the real estate was not part of the acquisition. See Note 13.
In connection with this acquisition, we incurred acquisition-related expenses of approximately $403,000 ($162,000 recognized in fiscal 2021 and $241,000 recognized in fiscal 2022), of which $30,000 and $42,000 were expensed during the three and nine months ended June 30, 2021 and $7,000 and $241,000 were expensed during the three and nine months ended June 30, 2022, and in those periods included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.
From the date of acquisition until June 30, 2022, the eleven acquired clubs contributed revenues of $10.3 million and $24.7 million and income from operations of $3.6 million and $7.3 million during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statements of income. The following table presents the unaudited pro forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amounts and number of shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Nine Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Pro forma revenues | $ | 70,714 | | | $ | 64,407 | | | $ | 197,968 | | | $ | 155,184 | |
| Pro forma net income attributable to RCIHH common stockholders | $ | 13,931 | | | $ | 13,745 | | | $ | 34,876 | | | $ | 29,252 | |
| Pro forma earnings per share – basic and diluted | $ | 1.48 | | | $ | 1.45 | | | $ | 3.70 | | | $ | 3.08 | |
| | | | | | | |
| Pro forma weighted average number of common shares outstanding | 9,389,675 | | | 9,499,910 | | | 9,428,461 | | | 9,506,373 | |
The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021. Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary purchase price of $3.5 million, by which $2.5 million was paid in cash at closing and $1.0 million through a seller-financed 7-year promissory note with an interest rate of 4.0% per annum. The $3.5 million acquisition price is preliminarily allocated $2.0 million to real estate, $200,000 to tangible assets, and $1.3 million to goodwill, which is deductible for tax purposes. The note is payable $13,669 per month, including principal and interest. See Note 7. The Company incurred approximately $21,000 of acquisition-related costs for this acquisition, of which $11,000 was incurred in fiscal 2021 and $10,000 was incurred in the first quarter of fiscal 2022, both of which were included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $433,000 and $1,146,000 and loss from operations of $5,000 and $29,000 during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statement of income. The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company.
On December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased, for $7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating lease liability related to the discontinued lease.
On March 1, 2022, the Company acquired real estate in Stafford, Texas for $3.5 million for a future Bombshells location. The Company secured a $2.6 million loan in relation to the purchase (see Note 7).
On March 1, 2022, the Company acquired real estate in Lubbock, Texas for $400,000 to move one of our existing clubs due to eminent domain on the current location.
On March 23, 2022, the Company sold a property classified as held-for-sale with a carrying value of $1.9 million for $2.1 million in cash. The Company used $816,000 of the proceeds to pay off a loan related to the property.
On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $5.0 million under a 10% ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity. The Company acquired 100% of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement. Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.
The preliminary fair value of the consideration transferred is as follows (in thousands) as of May 2, 2022:
| | | | | |
| Cash | $ | 5,000 | |
| Notes payable | 11,000 | |
| Total consideration fair value | $ | 16,000 | |
We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired in this transaction, including the fair value of the contingent debt consideration. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital adjustments, the amount of goodwill is estimated to be $7.3 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
annually for impairment. The recognized goodwill will not be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022:
| | | | | |
| Current assets | $ | 172 | |
| Property and equipment | 5,336 | |
| Licenses | 4,510 | |
| Tradenames | 1,110 | |
| Deferred tax liability | (2,443) | |
| Total net assets acquired | 8,685 | |
| Goodwill | 7,315 | |
| Acquisition price fair value | $ | 16,000 | |
Licenses and tradenames will not be amortized but will be tested at least annually for impairment.
In connection with this acquisition, we incurred acquisition-related expenses of approximately $8,000 and $8,000 expensed during the three and nine months ended June 30, 2022, respectively, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.
From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $1.1 million and $1.1 million and income from operations of $497,000 and $497,000 during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statements of income.
The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.
On May 17, 2022, the Company sold a property classified as held-for sale with a carrying value of $1.1 million for $1.7 million in cash. The Company used $1.6 million of the proceeds to pay off a loan related to the property.
On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $3.3 million for a future Bombshells location. The Company secured a $2.2 million loan in relation to the purchase (see Note 7).
On July 12, 2022, the Company received $6.0 million from the Philadelphia Regional Port Authority for one of the Company's rental properties, with a carrying value of $4.9 million, due to eminent domain. The Company paid the current lessee a lease termination fee of $250,000, which will be included in other charges (gains), net in our consolidated statement of income for the year ending September 30, 2022. The Company used $2.1 million of the proceeds to pay down a loan related to the property.
On July 21, 2022, the Company acquired a club in Odessa, Texas for a total of $1.8 million, of which $1.0 million was for the real estate and $800,000 for the adult entertainment business. The Company paid $1.0 million at closing for the real estate and executed an $800,000 6% seller-financed promissory note for the business. The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest. See Note 7. Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired and the debt consideration, along with the determination of any goodwill or gain on the transaction. The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company.
On July 27, 2022, the Company completed an acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $25.0 million. The acquisition price includes (1) $20.0 million for the adult entertainment business covered in a stock purchase agreement payable $10.0 million in cash at closing and $10.0 million under a 6% ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million for the real estate property covered in an asset purchase agreement payable under a 6% ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest. In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired and the debt consideration, along with the determination of any goodwill or gain on the transaction.
The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.
5. Revenues
The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of income. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.
Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| Nightclubs | | Bombshells | | Other | | Total | | Nightclubs | | Bombshells | | Other | | Total |
| Sales of alcoholic beverages | $ | 21,061 | | | $ | 8,677 | | | $ | — | | | $ | 29,738 | | | $ | 16,130 | | | $ | 8,962 | | | $ | — | | | $ | 25,092 | |
| Sales of food and merchandise | 4,639 | | | 6,935 | | | — | | | 11,574 | | | 5,062 | | | 6,996 | | | — | | | 12,058 | |
| Service revenues | 25,287 | | | 157 | | | — | | | 25,444 | | | 16,772 | | | 108 | | | — | | | 16,880 | |
| Other revenues | 3,697 | | | 20 | | | 241 | | | 3,958 | | | 3,067 | | | 11 | | | 752 | | | 3,830 | |
| $ | 54,684 | | | $ | 15,789 | | | $ | 241 | | | $ | 70,714 | | | $ | 41,031 | | | $ | 16,077 | | | $ | 752 | | | $ | 57,860 | |
| | | | | | | | | | | | | | | |
| Recognized at a point in time | $ | 54,320 | | | $ | 15,777 | | | $ | 241 | | | $ | 70,338 | | | $ | 40,599 | | | $ | 16,075 | | | $ | 751 | | | $ | 57,425 | |
| Recognized over time | 364 | | * | 12 | | | — | | | 376 | | | 432 | | * | 2 | | | 1 | | | 435 | |
| $ | 54,684 | | | $ | 15,789 | | | $ | 241 | | | $ | 70,714 | | | $ | 41,031 | | | $ | 16,077 | | | $ | 752 | | | $ | 57,860 | |
| | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2022 | | Nine Months Ended June 30, 2021 |
| Nightclubs | | Bombshells | | Other | | Total | | Nightclubs | | Bombshells | | Other | | Total |
| Sales of alcoholic beverages | $ | 57,901 | | | $ | 25,603 | | | $ | — | | | $ | 83,504 | | | $ | 38,398 | | | $ | 24,327 | | | $ | — | | | $ | 62,725 | |
| Sales of food and merchandise | 13,726 | | | 19,902 | | | — | | | 33,628 | | | 12,567 | | | 17,638 | | | — | | | 30,205 | |
| Service revenues | 67,472 | | | 349 | | | — | | | 67,821 | | | 38,216 | | | 226 | | | — | | | 38,442 | |
| Other revenues | 10,540 | | | 39 | | | 710 | | | 11,289 | | | 7,834 | | | 27 | | | 1,084 | | | 8,945 | |
| $ | 149,639 | | | $ | 45,893 | | | $ | 710 | | | $ | 196,242 | | | $ | 97,015 | | | $ | 42,218 | | | $ | 1,084 | | | $ | 140,317 | |
| | | | | | | | | | | | | | | |
| Recognized at a point in time | $ | 148,386 | | | $ | 45,879 | | | $ | 709 | | | $ | 194,974 | | | $ | 95,816 | | | $ | 42,215 | | | $ | 1,080 | | | $ | 139,111 | |
| Recognized over time | 1,253 | | * | 14 | | | 1 | | | 1,268 | | | 1,199 | | * | 3 | | | 4 | | | 1,206 | |
| $ | 149,639 | | | $ | 45,893 | | | $ | 710 | | | $ | 196,242 | | | $ | 97,015 | | | $ | 42,218 | | | $ | 1,084 | | | $ | 140,317 | |
* Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606.
The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2021 | | Consideration
Received | | Recognized in
Revenue | | Balance at June 30, 2022 |
| Ad revenue | $ | 84 | | | $ | 530 | | | $ | (480) | | | $ | 134 | |
| Expo revenue | 151 | | | 306 | | | — | | | 457 | |
| Other (including franchise fees) | 119 | | | 16 | | | (5) | | | 130 | |
| $ | 354 | | | $ | 852 | | | $ | (485) | | | $ | 721 | |
Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
6. Selected Account Information
The components of accounts receivable, net are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| Credit card receivables | $ | 1,800 | | | $ | 1,447 | |
| Income tax refundable | 741 | | | 4,472 | |
| Insurance receivable | 78 | | | 185 | |
| ATM in-transit | 433 | | | 277 | |
Other (net of allowance for doubtful accounts of $19 and $382, respectively) | 903 | | | 1,189 | |
| Total accounts receivable, net | $ | 3,955 | | | $ | 7,570 | |
Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to $0 and $102,000 as of June 30, 2022 and September 30, 2021, respectively.
The components of prepaid expenses and other current assets are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| Prepaid insurance | $ | 2,562 | | | $ | 277 | |
| Prepaid legal | 77 | | | 112 | |
| Prepaid taxes and licenses | 581 | | | 380 | |
| Prepaid rent | 387 | | | 309 | |
| Other | 868 | | | 850 | |
| Total prepaid expenses and other current assets | $ | 4,475 | | | $ | 1,928 | |
A reconciliation of goodwill as of June 30, 2022 and September 30, 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Gross | | Accumulated Impairment | | Net |
Balance at September 30, 2021 | $ | 59,967 | | | $ | 20,588 | | | $ | 39,379 | |
| Acquisitions (see Note 4) | 22,420 | | | — | | | 22,420 | |
| Impairment (see Note 3) | — | | | 400 | | | (400) | |
Balance at June 30, 2022 | $ | 82,387 | | | $ | 20,988 | | | $ | 61,399 | |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of intangible assets, net are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| Indefinite-lived: | | | |
| Licenses | $ | 119,483 | | | $ | 65,186 | |
| Trademarks | 10,785 | | | 2,215 | |
| Domain names | 23 | | | 23 | |
| | | |
| Definite-lived: | | | |
| Noncompete agreements | 70 | | | 182 | |
| Discounted leases | 80 | | | 86 | |
| Software | 144 | | | 132 | |
| Total intangible assets, net | $ | 130,585 | | | $ | 67,824 | |
The components of accrued liabilities are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| Insurance | $ | 2,193 | | | $ | 54 | |
| Sales and liquor taxes | 2,024 | | | 2,261 | |
| Payroll and related costs | 3,553 | | | 3,220 | |
| Property taxes | 1,710 | | | 2,178 | |
| Interest | 472 | | | 145 | |
| Patron tax | 429 | | | 452 | |
| Unearned revenues | 721 | | | 354 | |
| Lawsuit settlement | 181 | | | 378 | |
| Other | 1,605 | | | 1,361 | |
| Total accrued liabilities | $ | 12,888 | | | $ | 10,403 | |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of selling, general and administrative expenses are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Taxes and permits | $ | 2,418 | | | $ | 2,345 | | | $ | 7,015 | | | $ | 6,457 | |
| Advertising and marketing | 2,460 | | | 1,929 | | | 7,091 | | | 4,502 | |
| Supplies and services | 2,068 | | | 1,701 | | | 6,223 | | | 4,417 | |
| Insurance | 2,481 | | | 1,474 | | | 7,357 | | | 4,358 | |
| Legal | 328 | | | 1,255 | | | 2,286 | | | 2,928 | |
| Lease | 1,736 | | | 992 | | | 4,948 | | | 2,941 | |
| Charge card fees | 1,829 | | | 988 | | | 4,626 | | | 2,247 | |
| Utilities | 1,151 | | | 873 | | | 3,194 | | | 2,444 | |
| Security | 1,081 | | | 1,073 | | | 3,218 | | | 2,763 | |
| Accounting and professional fees | 818 | | | 336 | | | 2,786 | | | 1,348 | |
| Repairs and maintenance | 960 | | | 787 | | | 2,588 | | | 2,037 | |
| Other | 2,242 | | | 944 | | | 5,163 | | | 3,025 | |
| Total selling, general and administrative expenses | $ | 19,572 | | | $ | 14,697 | | | $ | 56,495 | | | $ | 39,467 | |
The components of other charges (gains), net are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Impairment of assets | $ | 1,722 | | | $ | 271 | | | $ | 1,722 | | | $ | 1,672 | |
| Settlement of lawsuits | 132 | | | 127 | | | 709 | | | 280 | |
| Gain on disposal of businesses and assets | (266) | | | (541) | | | (666) | | | (455) | |
| Gain on insurance | (87) | | | — | | | (408) | | | (209) | |
| Other charges (gains), net | $ | 1,501 | | | $ | (143) | | | $ | 1,357 | | | $ | 1,288 | |
The components of non-operating gains (losses), net are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Gain on debt extinguishment | $ | 53 | | | $ | — | | | $ | 138 | | | $ | 5,329 | |
| Unrealized gain (loss) on equity securities | — | | | 9 | | | (1) | | | (58) | |
| Other | 74 | | | — | | | 74 | | | 85 | |
| Non-operating gains, net | $ | 127 | | | $ | 9 | | | $ | 211 | | | $ | 5,356 | |
7. Debt
On October 12, 2021, we closed 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
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12) 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. The proceeds from this financing transaction was used as part of the cash payment on the October 18, 2021 acquisition (see Note 4) at closing.
On October 18, 2021, in relation to an acquisition (see Note 4), the Company executed four seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% secured 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% secured 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.
On November 8, 2021, in relation to an acquisition (see Note 4), 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.
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 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 12). 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, among which is to maintain a debt service coverage of not less than 1.4 times, reviewed annually.
On March 1, 2022, the Company borrowed $2.6 million from a bank lender in relation to a purchase of real estate (see Note 4). 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.
On May 2, 2022, in relation to a club acquisition (see Note 4), the Company executed two seller-financed notes totaling $11.0 million.
On May 23, 2022, the Company borrowed $2.2 million from a bank lender in relation to a purchase of real estate (see Note 4). 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.
Future maturities of long-term debt as of June 30, 2022 are as follows: $12.6 million, $10.4 million, $28.7 million, $8.2 million, $8.7 million and $121.3 million for the twelve months ending June 30, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively. Of the maturity schedule mentioned above, $651,000, $2,195,000, $20.5 million, $0, $0 and $73.4 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $1.9 million and $1.6 million as of June 30, 2022 and September 30, 2021, respectively.
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 4). The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest.
On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 4), 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.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Equity
On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock with a fair value of $30.4 million at issuance. See Note 4.
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 is subject to approval of shareholders, and in the event that the 2022 Plan is not approved by the shareholders within one year of the date of adoption of the 2022 Plan by the board, or less than the required amount of votes of shareholders are received in favor of approval of the 2022 Plan at a duly held meeting of shareholders within one year of the board’s adoption of the 2022 Plan, then we will unwind and terminate the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled. 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.
On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. As of June 30, 2022, we have approximately $21.9 million remaining to purchase additional shares.
Subsequent to the reporting date until August 5, 2022, the Company purchased 42,250 shares of its own common stock at a cost of $2.3 million.
9. Income Taxes
Income tax expense was $3.8 million and $10.1 million during the three and nine months ended June 30, 2022, respectively, compared to $4.0 million and $5.5 million during the three and nine months ended June 30, 2021, respectively. The effective income tax expense rate was 21.3% and 22.1% for the three and nine months ended June 30, 2022, respectively, compared to 24.4% and 16.6% for the three and nine months ended June 30, 2021, respectively. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the prior period, as presented below.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Federal statutory income tax expense | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 2.9 | % | | 4.8 | % | | 2.9 | % | | 4.9 | % |
| Permanent differences | 0.4 | % | | (0.1) | % | | 0.4 | % | | (3.7) | % |
| Change in valuation allowance | — | % | | — | % | | — | % | | (3.8) | % |
| Tax credits | (3.2) | % | | (1.2) | % | | (2.8) | % | | (1.8) | % |
| Other | 0.1 | % | | — | % | | 0.5 | % | | — | % |
| Total income tax expense | 21.3 | % | | 24.4 | % | | 22.1 | % | | 16.6 | % |
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year ended September 30, 2019 and subsequent years remain open to federal tax examination. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters.
On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief became 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
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were 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 has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company 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 has been repaid as debt plus accrued interest.
10. Commitments and Contingencies
Legal Matters
Texas Patron Tax
In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.
In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest.
On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability. The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to $0 and $813,000 as of June 30, 2022 and September 30, 2021, respectively.
A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron 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 Fee 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.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 had 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 June 30, 2022, we have 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 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 complaints sought unspecified damages, costs, and attorneys’ fees. These lawsuits were Hoffman v. RCI Hospitality Holdings, Inc., et al. (filed May 21, 2019, naming the Company and Eric Langan); Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall (who is no longer an officer of the Company)); and Grossman v. RCI Hospitality Holdings, Inc., et al. (filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also added former directors Nourdean Anakar and Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims. On June 14, 2021, a scheduling order was entered in the case, setting January 9, 2023 as the trial date. On December 22, 2021, an amended scheduling order was entered, extending the trial date to April 7, 2023 and extending all other case deadlines. The Company vigorously defended against this action. 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 15, 2022, counsel for Plaintiffs filed an Unopposed Motion for (I) Preliminary Approval of Class Action Settlement; (II) Certification of the Settlement Class; and (III) Approval of the Notice of Settlement. On April 28, 2022, the Court entered an Order preliminarily approving the Class Action Settlement and Notice. The Court set the final approval hearing for June 24, 2022. Plaintiffs sought to extend the hearing until August to comply with certain potential notice and related obligations to the purported class, and Defendants concurred with the request. On July 8, 2022, plaintiffs moved for final approval of the settlement and a hearing has been set for August 12, 2022.
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-
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 include alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The Company contends that there is insurance coverage under an applicable insurance policy. The insurer has raised several issues regarding coverage under the policy. At this time, this disagreement remains unresolved. The Company has denied all allegations, continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.
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 $4.0 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.
As set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.
General
In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.
Settlements of lawsuits for the three and nine months ended June 30, 2022 amount to approximately $132,000 and $709,000, respectively, and for the three and nine months ended June 30, 2021 amount to approximately $127,000 and $280,000, respectively. As of June 30, 2022 and September 30, 2021, the Company has accrued $181,000 and $378,000 in accrued liabilities, respectively, related to settlement of lawsuits.
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. 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 unaudited condensed consolidated financial statements.
Below is the financial information related to the Company’s segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues (from external customers) | | | | | | | |
| Nightclubs | $ | 54,684 | | | $ | 41,031 | | | $ | 149,639 | | | $ | 97,015 | |
| Bombshells | 15,789 | | | 16,077 | | | 45,893 | | | 42,218 | |
| Other | 241 | | | 752 | | | 710 | | | 1,084 | |
| $ | 70,714 | | | $ | 57,860 | | | $ | 196,242 | | | $ | 140,317 | |
| | | | | | | |
| Income (loss) from operations | | | | | | | |
| Nightclubs | $ | 22,459 | | | $ | 18,350 | | | $ | 60,321 | | | $ | 37,313 | |
| Bombshells | 3,065 | | | 4,404 | | | 9,335 | | | 10,263 | |
| Other | (82) | | | 321 | | | (159) | | | 107 | |
| General corporate | (4,935) | | | (4,568) | | | (15,998) | | | (12,752) | |
| $ | 20,507 | | | $ | 18,507 | | | $ | 53,499 | | | $ | 34,931 | |
| | | | | | | |
| Depreciation and amortization | | | | | | | |
| Nightclubs | $ | 1,880 | | | $ | 1,380 | | | $ | 5,633 | | | $ | 4,117 | |
| Bombshells | 449 | | | 459 | | | 1,332 | | | 1,377 | |
| Other | 6 | | | 8 | | | 19 | | | 80 | |
| General corporate | 230 | | | 210 | | | 652 | | | 623 | |
| $ | 2,565 | | | $ | 2,057 | | | $ | 7,636 | | | $ | 6,197 | |
| | | | | | | |
| Capital expenditures | | | | | | | |
| Nightclubs | $ | 1,678 | | | $ | 2,479 | | | $ | 12,568 | | | $ | 5,810 | |
| Bombshells | 1,188 | | | 1,329 | | | 3,393 | | | 4,584 | |
| Other | 145 | | | — | | | 693 | | | 1 | |
| General corporate | 172 | | | 262 | | | 519 | | | 393 | |
| $ | 3,183 | | | $ | 4,070 | | | $ | 17,173 | | | $ | 10,788 | |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| Total assets | | | |
| Nightclubs | $ | 409,251 | | | $ | 280,561 | |
| Bombshells | 57,483 | | | 52,073 | |
| Other | 2,622 | | | 1,573 | |
| General corporate | 32,823 | | | 30,412 | |
| $ | 502,179 | | | $ | 364,619 | |
Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended June 30, 2022 amounting to $3.4 million and $31,000, respectively, and for the nine months ended June 30, 2022 amounting to $9.9 million and $231,000, respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2022 amounting to $42,000 and $164,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended June 30, 2021 amounting to $2.8 million and $32,000, respectively, and for the nine months ended June 30, 2021 amounting to $8.4 million and $173,000, respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2021 amounting to $20,000 and $95,000, respectively. 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 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.
12. 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 June 30, 2022 and September 30, 2021, was $116.5 million and $99.7 million, respectively.
Included in the $17.0 million borrowing on October 12, 2021 (see Note 7) are notes borrowed from related parties—one note for $500,000 (Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay) 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 $42,093 and $69,242 during the three and nine months ended June 30, 2022, respectively, and $3,182 and $118,092 during the three and nine months ended June 30, 2021, respectively. As of June 30, 2022 and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $12,093 and $12,205, respectively, in unpaid billings.
TW Mechanical LLC 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 and 2021. 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 $0 and $3,809 for the three and nine months ended June 30, 2022, respectively, and $0 and $0 for the three and nine months ended June 30, 2021, respectively. Amounts billed directly to the Company were $16,500 and $101,200 for the three and nine months ended June 30, 2022, respectively, and $325,425 and $388,176 for the three and nine months
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ended June 30, 2021, respectively. As of June 30, 2022 and September 30, 2021, the Company owed TW Mechanical $6,037 and $7,500, respectively, in unpaid direct billings.
13. Leases
The Company leases certain facilities and equipment under operating leases. In relation to an acquisition that was completed on October 18, 2021 (see Note 4), the Company entered into leases with third parties for certain clubs where the real estate locations were not part of the acquisition.
Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and nine months ended June 30, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, 2022 | | Three Months Ended
June 30, 2021 | | Nine Months Ended
June 30, 2022 | | Nine Months Ended
June 30, 2021 |
| Operating lease expense – fixed payments | $ | 1,215 | | | $ | 828 | | | $ | 3,482 | | | $ | 2,485 | |
| Variable lease expense | 404 | | | 47 | | | 971 | | | 155 | |
Short-term and other lease expense (includes $53 and $73 recorded in advertising and marketing for the three months ended June 30, 2022 and 2021, respectively, and $183 and $232 for the nine months ended June 30, 2022 and 2021, respectively; and $120 and $106 recorded in repairs and maintenance for the three months ended June 30, 2022 and 2021, respectively, and $310 and $310 for the nine months ended June 30, 2022 and 2021, respectively; see Note 6) | 290 | | | 296 | | | 988 | | | 843 | |
| Sublease income | (1) | | | (2) | | | (4) | | | (5) | |
| Total lease expense, net | $ | 1,908 | | | $ | 1,169 | | | $ | 5,437 | | | $ | 3,478 | |
| | | | | | | |
| Other information: | | | | | | | |
| Operating cash outflows from operating leases | $ | 1,855 | | | $ | 1,147 | | | $ | 5,294 | | | $ | 3,400 | |
| Weighted average remaining lease term – operating leases | | | | | 11 years | | 12 years |
| Weighted average discount rate – operating leases | | | | | 5.6 | % | | 6.0 | % |
Future maturities of operating lease liabilities as of June 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Principal Payments | | Interest Payments | | Total Payments |
| July 2022 - June 2023 | $ | 2,730 | | | $ | 2,141 | | | $ | 4,871 | |
| July 2023 - June 2024 | 2,952 | | | 1,979 | | | 4,931 | |
| July 2024 - June 2025 | 3,194 | | | 1,808 | | | 5,002 | |
| July 2025 - June 2026 | 3,457 | | | 1,622 | | | 5,079 | |
| July 2026 - June 2027 | 3,569 | | | 1,423 | | | 4,992 | |
| Thereafter | 23,547 | | | 5,571 | | | 29,118 | |
| $ | 39,449 | | | $ | 14,544 | | | $ | 53,993 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2021.
Overview
RCI Hospitality Holdings, Inc. (“RCIHH”) is a holding company. Through our subsidiaries, we engage in a number of activities in the hospitality and related businesses. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc.
Through our subsidiaries, as of June 30, 2022, we operated a total of 60 establishments that offer live adult entertainment and/or restaurant and bar operations, including one club that is temporarily closed. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.
Ongoing Impact of COVID-19 Pandemic and Potential Economic Slowdown
Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March 2020. We had a major disruption in our business operations that affected our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic. There have been several variants to the coronavirus since then that threatened our operations throughout the period of recovery. We continue to adhere to state and local government mandates regarding the pandemic.
Since early 2021, there has been a worldwide increase in inflation. In the event this global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 filed with the SEC on December 14, 2021.
During the three and nine months ended June 30, 2022, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.
Results of Operations
Highlights of the Company's operating results are as follows:
Third Quarter 2022
•Total revenues were $70.7 million compared to $57.9 million during the comparable prior-year period, a 22.2% increase (Nightclubs revenue of $54.7 million compared to $41.0 million, a 33.3% increase; and Bombshells revenue of $15.8 million compared to $16.1 million, a 1.8% decrease)
•Consolidated same-store sales decreased by 0.1% (Nightclubs increased by 4.8% while Bombshells decreased by 12.3%) (refer to the definition of same-store sales in the discussion of revenues below)
•Thirteen newly acquired clubs contributed $11.8 million to revenues, while a newly constructed Bombshells contributed $1.7 million
•Basic and diluted earnings per share (“EPS”) of $1.48 compared to $1.37 (non-GAAP diluted EPS* of $1.60 compared to $1.36) during the comparable prior-year period
•Net cash provided by operating activities of $18.9 million compared to $15.0 million during the comparable prior-year period, a 26.2% increase (free cash flow* of $18.0 million compared to $13.0 million, a 39.1% increase)
Year-to-Date 2022
•Total revenues were $196.2 million compared to $140.3 million during the comparable prior-year period, a 39.9% increase (Nightclubs revenue of $149.6 million compared to $97.0 million, a 54.2% increase; and Bombshells revenue of $45.9 million compared to $42.2 million, a 8.7% increase)
•Consolidated same-store sales increased by 8.4% (Nightclubs increased by 13.2% while Bombshells decreased by 1.6%) (refer to the definition of same-store sales in the discussion of Revenues below)
•Thirteen newly acquired clubs contributed $27.0 million to revenues, while a newly constructed Bombshells contributed $4.3 million
•Basic and diluted EPS of $3.76 compared to $3.11 (non-GAAP diluted EPS* of $3.89 compared to $2.50) during the comparable prior-year period
•Net cash provided by operating activities of $46.8 million compared to $32.2 million during the comparable prior-year period, a 45.1% increase (free cash flow* of $44.4 million compared to $27.6 million, a 60.7% increase)
*Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, 2022 | | For the Three Months Ended
June 30, 2021 | | Better (Worse) |
| Amount | | % of Revenues | | Amount | | % of Revenues | | Amount | | % |
| Revenues | | | | | | | | | | | |
| Sales of alcoholic beverages | $ | 29,738 | | | 42.1 | % | | $ | 25,092 | | | 43.4 | % | | $ | 4,646 | | | 18.5 | % |
| Sales of food and merchandise | 11,574 | | | 16.4 | % | | 12,058 | | | 20.8 | % | | (484) | | | (4.0) | % |
| Service revenues | 25,444 | | | 36.0 | % | | 16,880 | | | 29.2 | % | | 8,564 | | | 50.7 | % |
| Other | 3,958 | | | 5.6 | % | | 3,830 | | | 6.6 | % | | 128 | | | 3.3 | % |
| Total revenues | 70,714 | | | 100.0 | % | | 57,860 | | | 100.0 | % | | 12,854 | | | 22.2 | % |
| Operating expenses | | | | | | | | | | | |
| Cost of goods sold | | | | | | | | | | | |
| Alcoholic beverages sold | 5,177 | | | 17.4 | % | | 4,621 | | | 18.4 | % | | (556) | | | (12.0) | % |
| Food and merchandise sold | 3,959 | | | 34.2 | % | | 4,043 | | | 33.5 | % | | 84 | | | 2.1 | % |
| Service and other | 46 | | | 0.2 | % | | 208 | | | 1.0 | % | | 162 | | | 77.9 | % |
| Total cost of goods sold (exclusive of items shown separately below) | 9,182 | | | 13.0 | % | | 8,872 | | | 15.3 | % | | (310) | | | (3.5) | % |
| Salaries and wages | 17,387 | | | 24.6 | % | | 13,870 | | | 24.0 | % | | (3,517) | | | (25.4) | % |
| Selling, general and administrative | 19,572 | | | 27.7 | % | | 14,697 | | | 25.4 | % | | (4,875) | | | (33.2) | % |
| Depreciation and amortization | 2,565 | | | 3.6 | % | | 2,057 | | | 3.6 | % | | (508) | | | (24.7) | % |
| Other charges (gains), net | 1,501 | | | 2.1 | % | | (143) | | | (0.2) | % | | (1,644) | | | (1149.7) | % |
| Total operating expenses | 50,207 | | | 71.0 | % | | 39,353 | | | 68.0 | % | | (10,854) | | | (27.6) | % |
| Income from operations | 20,507 | | | 29.0 | % | | 18,507 | | | 32.0 | % | | 2,000 | | | 10.8 | % |
| Other income (expenses) | | | | | | | | | | | |
| Interest expense | (3,028) | | | (4.3) | % | | (2,281) | | | (3.9) | % | | (747) | | | (32.7) | % |
| Interest income | 103 | | | 0.1 | % | | 72 | | | 0.1 | % | | 31 | | | 43.1 | % |
| Non-operating gains, net | 127 | | | 0.2 | % | | 9 | | | — | % | | 118 | | | 1311.1 | % |
| Income before income taxes | 17,709 | | | 25.0 | % | | 16,307 | | | 28.2 | % | | 1,402 | | | 8.6 | % |
| Income tax expense | 3,767 | | | 5.3 | % | | 3,986 | | | 6.9 | % | | 219 | | | 5.5 | % |
| Net income | $ | 13,942 | | | 19.7 | % | | $ | 12,321 | | | 21.3 | % | | $ | 1,621 | | | 13.2 | % |
*Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.
Revenues
Consolidated revenues for the third quarter increased by approximately $12.9 million, or 22.2%, versus the comparable prior-year quarter due primarily to partial recovery from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales decreased by 0.1%. The total increase in consolidated revenues was primarily from a 23.4% increase from new units and partially offset by a 0.1% decrease from last year’s COVID-19 closures, a 0.1% decrease from the impact of same-store sales growth, and a 1.0% decrease from non-core operations.
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 month 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 definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.
Segment contribution to total revenues was as follows (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended
June 30, |
| 2022 | | 2021 |
| Nightclubs | $ | 54,684 | | | $ | 41,031 | |
| Bombshells | 15,789 | | | 16,077 | |
| Other | 241 | | | 752 | |
| $ | 70,714 | | | $ | 57,860 | |
Nightclubs revenues increased by 33.3% for the quarter ended June 30, 2022 compared to the prior-year quarter primarily due to the contribution of newly acquired clubs and the impact of the increase in same-store sales. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 4.8%. Newly acquired clubs contributed $11.8 million to the total Nightclubs revenue increase of $13.7 million. By type of revenue, service revenue increased by 50.8%, alcoholic beverage sales increased by 30.6%, and food, merchandise and other revenue increased by 2.5%.
Bombshells revenues decreased by 1.8%, of which 12.3% was for same-store sales decrease with the offsetting increase caused by one new location. By type of revenue, food and merchandise sales were flat while alcoholic beverage sales decreased by 3.2%.
Operating Expenses
Total operating expenses, as a percent of revenues, increased to 71.0% from 68.0% from last year’s third quarter, with a $10.9 million increase, or 27.6%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current-year quarter and additional fixed expenses partly from new units plus the impairment charge in the current quarter. Significant contributors to the changes in operating expenses are explained below.
Cost of goods sold increased by $310,000, or 3.5%, mainly due to higher sales but offset by the mix of higher-margin service revenue increasing from 29.2% to 36.0%. As a percent of total revenues, cost of goods sold decreased to 13.0% from 15.3% mainly due to the sales mix shift mentioned above.
Salaries and wages increased by $3.5 million, or 25.4%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were 24.6% from 24.0% mainly due to additional employees from new units partially offset by fixed salaries paid on higher sales.
Selling, general and administrative expenses increased by $4.9 million, or 33.2%, primarily due to increased variable expenses related to sales activity during the current-year quarter and other increases from insurance, accounting and professional fees, and advertising.
Depreciation and amortization increased by $508,000, or 24.7% due to new depreciable assets from newly acquired and constructed units.
Other charges, net was a net charge of $1.5 million in the current quarter while a net gain of $143,000 in the comparable prior-year quarter. The swing was mainly from impairment charges of $1.7 million in the current third quarter.
Income (Loss) from Operations
For the three months ended June 30, 2022 and 2021, our consolidated operating margin was 29.0% and 32.0%, respectively. The main drivers for the decrease in operating margin are the presence of less variable costs and expenses such as impairment charge, insurance, and accounting and professional fees, partially offset by the increase in mix of higher-margin service revenue.
Segment contribution to income (loss) from operations is presented in the table below (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended
June 30, |
| 2022 | | 2021 |
| Nightclubs | $ | 22,459 | | | $ | 18,350 | |
| Bombshells | 3,065 | | | 4,404 | |
| Other | (82) | | | 321 | |
| General corporate | (4,935) | | | (4,568) | |
| $ | 20,507 | | | $ | 18,507 | |
Nightclubs operating margin was 41.1% and 44.7% for the three months ended June 30, 2022 and 2021, respectively, while operating margin for Bombshells was 19.4% and 27.4%, respectively. The decreases in both Nightclubs and Bombshells operating margin were mainly due to increases in salaries and wages and certain selling, general and administrative expenses plus the impairment charge.
Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 36.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2022 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
| Income (loss) from operations | $ | 22,459 | | | $ | 3,065 | | | $ | (82) | | | $ | (4,935) | | | $ | 20,507 | |
| Amortization of intangibles | 23 | | | 1 | | | — | | | 1 | | | 25 | |
| Settlement of lawsuits | 124 | | | 8 | | | — | | | — | | | 132 | |
| Impairment of assets | 1,072 | | | 650 | | | — | | | — | | | 1,722 | |
| Gain on sale of businesses and assets | (264) | | | — | | | — | | | (2) | | | (266) | |
| Gain on insurance | (87) | | | — | | | — | | | — | | | (87) | |
| Non-GAAP operating income (loss) | $ | 23,327 | | | $ | 3,724 | | | $ | (82) | | | $ | (4,936) | | | $ | 22,033 | |
| | | | | | | | | |
| GAAP operating margin | 41.1 | % | | 19.4 | % | | (34.0) | % | | (7.0) | % | | 29.0 | % |
| Non-GAAP operating margin | 42.7 | % | | 23.6 | % | | (34.0) | % | | (7.0) | % | | 31.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2021 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
| Income (loss) from operations | $ | 18,350 | | | $ | 4,404 | | | $ | 321 | | | $ | (4,568) | | | $ | 18,507 | |
| Amortization of intangibles | 47 | | | 4 | | | — | | | — | | | 51 | |
| Settlement of lawsuits | 123 | | | 4 | | | — | | | — | | | 127 | |
| Impairment of assets | 271 | | | — | | | — | | | — | | | 271 | |
| Loss (gain) on sale of businesses and assets | (512) | | | 9 | | | — | | | (38) | | | (541) | |
| Non-GAAP operating income (loss) | $ | 18,279 | | | $ | 4,421 | | | $ | 321 | | | $ | (4,606) | | | $ | 18,415 | |
| | | | | | | | | | |
| GAAP operating margin | 44.7 | % | | 27.4 | % | | 42.7 | % | | (7.9) | % | | 32.0 | % |
| Non-GAAP operating margin | 44.5 | % | | 27.5 | % | | 42.7 | % | | (8.0) | % | | 31.8 | % |
Other Income/Expenses
Interest expense increased by $747,000, or 32.7%, primarily caused by a higher average debt balance and partially offset by a lower average interest rate.
Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $4.8 million and $3.3 million for the quarters ended June 30, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs
were 6.7% and 5.7% during the quarters ended June 30, 2022 and 2021, respectively, primarily due to the interest from higher average debt balance and the increased mix of our clubs where we lease our locations from third parties.
Income Taxes
Income tax expense was $3.8 million during the quarter ended June 30, 2022 compared to $4.0 million during the quarter ended June 30, 2021. The effective income tax rate was 21.3% and 24.4% for the quarters ended June 30, 2022 and 2021, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below.
| | | | | | | | | | | |
| For the Three Months Ended
June 30, |
| 2022 | | 2021 |
| Federal statutory income tax expense | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 2.9 | % | | 4.8 | % |
| Permanent differences | 0.4 | % | | (0.1) | % |
| Tax credit | (3.2) | % | | (1.2) | % |
| Other | 0.1 | % | | — | % |
| Total income tax expense | 21.3 | % | | 24.4 | % |
| | | |
Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021
The following table summarizes our results of operations for the nine months ended June 30, 2022 and 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended
June 30, 2022 | | For the Nine Months Ended
June 30, 2021 | | Better (Worse) |
| Amount | | % of Revenues | | Amount | | % of Revenues | | Amount | | % |
| Revenues | | | | | | | | | | | |
| Sales of alcoholic beverages | $ | 83,504 | | | 42.6 | % | | $ | 62,725 | | | 44.7 | % | | $ | 20,779 | | | 33.1 | % |
| Sales of food and merchandise | 33,628 | | | 17.1 | % | | 30,205 | | | 21.5 | % | | 3,423 | | | 11.3 | % |
| Service revenues | 67,821 | | | 34.6 | % | | 38,442 | | | 27.4 | % | | 29,379 | | | 76.4 | % |
| Other | 11,289 | | | 5.8 | % | | 8,945 | | | 6.4 | % | | 2,344 | | | 26.2 | % |
| Total revenues | 196,242 | | | 100.0 | % | | 140,317 | | | 100.0 | % | | 55,925 | | | 39.9 | % |
| Operating expenses | | | | | | | | | | | |
| Cost of goods sold | | | | | | | | | | | |
| Alcoholic beverages sold | 14,907 | | | 17.9 | % | | 11,613 | | | 18.5 | % | | (3,294) | | | (28.4) | % |
| Food and merchandise sold | 11,756 | | | 35.0 | % | | 9,961 | | | 33.0 | % | | (1,795) | | | (18.0) | % |
| Service and other | 170 | | | 0.2 | % | | 304 | | | 0.6 | % | | 134 | | | 44.1 | % |
| Total cost of goods sold (exclusive of items shown separately below) | 26,833 | | | 13.7 | % | | 21,878 | | | 15.6 | % | | (4,955) | | | (22.6) | % |
| Salaries and wages | 50,422 | | | 25.7 | % | | 36,556 | | | 26.1 | % | | (13,866) | | | (37.9) | % |
| Selling, general and administrative | 56,495 | | | 28.8 | % | | 39,467 | | | 28.1 | % | | (17,028) | | | (43.1) | % |
| Depreciation and amortization | 7,636 | | | 3.9 | % | | 6,197 | | | 4.4 | % | | (1,439) | | | (23.2) | % |
| Other charges (gains), net | 1,357 | | | 0.7 | % | | 1,288 | | | 0.9 | % | | (69) | | | (5.4) | % |
| Total operating expenses | 142,743 | | | 72.7 | % | | 105,386 | | | 75.1 | % | | (37,357) | | | (35.4) | % |
| Income from operations | 53,499 | | | 27.3 | % | | 34,931 | | | 24.9 | % | | 18,568 | | | 53.2 | % |
| Other income (expenses) | | | | | | | | | | | |
| Interest expense | (8,496) | | | (4.3) | % | | (7,079) | | | (5.0) | % | | (1,417) | | | (20.0) | % |
| Interest income | 321 | | | 0.2 | % | | 194 | | | 0.1 | % | | 127 | | | 65.5 | % |
| Non-operating gains, net | 211 | | | 0.1 | % | | 5,356 | | | 3.8 | % | | (5,145) | | | (96.1) | % |
| Income before income taxes | 45,535 | | | 23.2 | % | | 33,402 | | | 23.8 | % | | 12,133 | | | 36.3 | % |
| Income tax expense | 10,056 | | | 5.1 | % | | 5,540 | | | 3.9 | % | | (4,516) | | | (81.5) | % |
| Net income | $ | 35,479 | | | 18.1 | % | | $ | 27,862 | | | 19.9 | % | | $ | 7,617 | | | 27.3 | % |
*Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.
Revenues
Consolidated revenues for the nine months ended June 30, 2022 increased by approximately $55.9 million, or 39.9%, versus to the comparable prior-year period due primarily to partial recovery from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales increased by 8.4%. The 39.9% increase in consolidated revenues was primarily from a 22.3% increase from new units, a 9.9% increase from last year’s COVID-19 closures, a 7.9% increase from the impact of same-store sales growth, with a partially offsetting 0.2% decrease from non-core operations.
Refer to the definition of same-store sales in the Revenues section of the third quarter discussion above.
Segment contribution to total revenues was as follows (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended
June 30, |
| 2022 | | 2021 |
| Nightclubs | $ | 149,639 | | | $ | 97,015 | |
| Bombshells | 45,893 | | | 42,218 | |
| Other | 710 | | | 1,084 | |
| $ | 196,242 | | | $ | 140,317 | |
Nightclubs revenues increased by 54.2% for the nine months ended June 30, 2022 compared to the comparable prior-year period, where the prior-year first quarter was still heavily impacted by government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 13.2%. Newly acquired clubs contributed $27.0 million to the total Nightclubs revenue increase of $52.6 million. By type of revenue, service revenue increased by 76.6%, alcoholic beverage sales increased by 50.8%, and food, merchandise and other revenue increased by 18.9%.
Bombshells revenues increased by 8.7%, of which 1.6% was from an offsetting same-store sales decrease with the remaining 10.3% increase caused by one new location. By type of revenue, food, merchandise and other revenue increased by 13.4% while alcoholic beverages sales increased by 5.2%.
Operating Expenses
Total operating expenses, as a percent of revenues, decreased to 72.7% from 75.1% from last year’s nine-month period, although there was an $37.4 million increase, or 35.4%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current nine-month period. Significant contributors to the changes in operating expenses are explained below.
Cost of goods sold increased by $5.0 million, or 22.6%, mainly due to higher sales. As a percent of total revenues, cost of goods sold decreased to 13.7% from 15.6% mainly due to the increase in sales mix of higher-margin service revenues.
Salaries and wages increased by $13.9 million, or 37.9%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were 25.7% from 26.1% mainly due to fixed salaries paid on higher sales partially offset by additional employees from new units.
Selling, general and administrative expenses increased by $17.0 million, or 43.1%, primarily due to increased variable expenses related to sales activity during the current period.
Depreciation and amortization increased by $1.4 million, or 23.2% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.
Income (Loss) from Operations
For the nine months ended June 30, 2022 and 2021, our consolidated operating margin was 27.3% and 24.9%, respectively. The main drivers for the increase in operating margin are the increase in mix of higher-margin service revenue and the leveraging of fixed expenses on higher sales.
Segment contribution to income (loss) from operations is presented in the table below (in thousands):
| | | | | | | | | | | |
| For the Nine Months
Ended June 30, |
| 2022 | | 2021 |
| Nightclubs | $ | 60,321 | | | $ | 37,313 | |
| Bombshells | 9,335 | | | 10,263 | |
| Other | (159) | | | 107 | |
| General corporate | (15,998) | | | (12,752) | |
| $ | 53,499 | | | $ | 34,931 | |
Nightclubs operating margin was 40.3% and 38.5% for the nine months ended June 30, 2022 and 2021, respectively, while operating margin for Bombshells was 20.3% and 24.3%, respectively. The increase in Nightclubs operating margin was mainly due to the increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The decrease in Bombshells operating margin was mainly from preopening expenses related to the new Bombshells unit and the impairment in the current year.
Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 36.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, 2022 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
| Income (loss) from operations | $ | 60,321 | | | $ | 9,335 | | | $ | (159) | | | $ | (15,998) | | | $ | 53,499 | |
| Amortization of intangibles | 117 | | | 5 | | | — | | | 2 | | | 124 | |
| Settlement of lawsuits | 578 | | | 18 | | | — | | | 113 | | | 709 | |
| Impairment of assets | 1,072 | | | 650 | | | — | | | — | | | 1,722 | |
| Loss (gain) on sale of businesses and assets | (344) | | | 17 | | | — | | | (339) | | | (666) | |
| Gain on insurance | (408) | | | — | | | — | | | — | | | (408) | |
| Non-GAAP operating income (loss) | $ | 61,336 | | | $ | 10,025 | | | $ | (159) | | | $ | (16,222) | | | $ | 54,980 | |
| | | | | | | | | |
| GAAP operating margin | 40.3 | % | | 20.3 | % | | (22.4) | % | | (8.2) | % | | 27.3 | % |
| Non-GAAP operating margin | 41.0 | % | | 21.8 | % | | (22.4) | % | | (8.3) | % | | 28.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, 2021 |
| Nightclubs | | Bombshells | | Other | | Corporate | | Total |
| Income (loss) from operations | $ | 37,313 | | | $ | 10,263 | | | $ | 107 | | | $ | (12,752) | | | $ | 34,931 | |
| Amortization of intangibles | 141 | | | 11 | | | 57 | | | — | | | 209 | |
| Settlement of lawsuits | 237 | | | 38 | | | 5 | | | — | | | 280 | |
| Impairment of assets | 1,672 | | | — | | | — | | | — | | | 1,672 | |
| Loss (gain) on sale of businesses and assets | (498) | | | 56 | | | — | | | (13) | | | (455) | |
| Gain on insurance | (165) | | | — | | | — | | | (44) | | | (209) | |
| Non-GAAP operating income (loss) | $ | 38,700 | | | $ | 10,368 | | | $ | 169 | | | $ | (12,809) | | | $ | 36,428 | |
| | | | | | | | | | |
| GAAP operating margin | 38.5 | % | | 24.3 | % | | 9.9 | % | | (9.1) | % | | 24.9 | % |
| Non-GAAP operating margin | 39.9 | % | | 24.6 | % | | 15.6 | % | | (9.1) | % | | 26.0 | % |
Other Income/Expenses
Interest expense increased by $1.4 million, or 20.0%, which was mainly caused by a higher average debt balance and partially offset by a lower average interest rate.
Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $13.4 million and $10.0 million for the nine months ended June 30, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs were 6.9% and 7.1% during the nine months ended June 30, 2022 and 2021, respectively, primarily due to the increase in sales base partially offset by higher interest expense from higher average debt balance and more leased properties from new acquisitions.
Non-operating gains decreased by $5.1 million, which was primarily the gain on debt extinguishment from the PPP loans during last year's first quarter.
Income Taxes
Income tax expense was $10.1 million during the nine months ended June 30, 2022 compared to $5.5 million during the comparable prior-year period. The effective income tax rate was 22.1% and 16.6% for the nine months ended June 30, 2022 and 2021, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits,
including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the prior period, as presented below.
| | | | | | | | | | | |
| For the Nine Months Ended
June 30, |
| 2022 | | 2021 |
| Computed expected income tax expense | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 2.9 | % | | 4.9 | % |
| Permanent differences | 0.4 | % | | (3.7) | % |
| Change in valuation allowance | — | % | | (3.8) | % |
| Tax credit | (2.8) | % | | (1.8) | % |
| Other | 0.5 | % | | — | % |
| Total income tax expense | 22.1 | % | | 16.6 | % |
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) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) settlement of lawsuits, and (e) impairment of assets. 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 gains or losses on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, and (h) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 21.6% and 24.3% effective tax rate of the pre-tax non-GAAP income before taxes for the nine months ended June 30, 2022 and 2021, 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, and (i) gain on debt extinguishment. 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 our unleveraged performance return on our investments. Adjusted EBITDA is also the 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 three and nine months ended June 30, 2022 and 2021 (in thousands, except per share, number of shares and percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Reconciliation of GAAP net income to Adjusted EBITDA | | | | | | | |
| Net income attributable to RCIHH common stockholders | $ | 13,902 | | | $ | 12,302 | | | $ | 35,429 | | | $ | 28,036 | |
| Income tax expense | 3,767 | | | 3,986 | | | 10,056 | | | 5,540 | |
| Interest expense, net | 2,925 | | | 2,209 | | | 8,175 | | | 6,885 | |
| Settlement of lawsuits | 132 | | | 127 | | | 709 | | | 280 | |
| Impairment of assets | 1,722 | | | 271 | | | 1,722 | | | 1,672 | |
| Gain on sale of businesses and assets | (266) | | | (541) | | | (666) | | | (455) | |
| Gain on debt extinguishment | (53) | | | — | | | (138) | | | (5,329) | |
| Unrealized loss (gain) on equity securities | — | | | (9) | | | 1 | | | 58 | |
| Gain on insurance | (87) | | | — | | | (408) | | | (209) | |
| Depreciation and amortization | 2,565 | | | 2,057 | | | 7,636 | | | 6,197 | |
| Adjusted EBITDA | $ | 24,607 | | | $ | 20,402 | | | $ | 62,516 | | | $ | 42,675 | |
| | | | | | | |
| Reconciliation of GAAP net income to non-GAAP net income | | | | | | | |
| Net income attributable to RCIHH common stockholders | $ | 13,902 | | | $ | 12,302 | | | $ | 35,429 | | | $ | 28,036 | |
| Amortization of intangibles | 25 | | | 51 | | | 124 | | | 209 | |
| Settlement of lawsuits | 132 | | | 127 | | | 709 | | | 280 | |
| Impairment of assets | 1,722 | | | 271 | | | 1,722 | | | 1,672 | |
| Gain on sale of businesses and assets | (266) | | | (541) | | | (666) | | | (455) | |
| Gain on debt extinguishment | (53) | | | — | | | (138) | | | (5,329) | |
| Unrealized loss (gain) on equity securities | — | | | (9) | | | 1 | | | 58 | |
| Gain on insurance | (87) | | | — | | | (408) | | | (209) | |
| Net income tax effect | (312) | | | 39 | | | (59) | | | (1,702) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP net income | $ | 15,063 | | | $ | 12,240 | | | $ | 36,714 | | | $ | 22,560 | |
| | | | | | | |
| Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share | | | | | | | |
| Diluted shares | 9,389,675 | | | 8,999,910 | | | 9,428,461 | | | 9,006,373 | |
| GAAP diluted earnings per share | $ | 1.48 | | | $ | 1.37 | | | $ | 3.76 | | | $ | 3.11 | |
| Amortization of intangibles | 0.00 | | | 0.01 | | | 0.01 | | | 0.02 | |
| Settlement of lawsuits | 0.01 | | | 0.01 | | | 0.08 | | | 0.03 | |
| Impairment of assets | 0.18 | | | 0.03 | | | 0.18 | | | 0.19 | |
| Gain on sale of businesses and assets | (0.03) | | | (0.06) | | | (0.07) | | | (0.05) | |
| Gain on debt extinguishment | (0.01) | | | 0.00 | | | (0.01) | | | (0.59) | |
| Unrealized loss (gain) on equity securities | 0.00 | | | 0.00 | | | 0.00 | | | 0.01 | |
| Gain on insurance | (0.01) | | | 0.00 | | | (0.04) | | | (0.02) | |
| Net income tax effect | (0.03) | | | 0.00 | | | (0.01) | | | (0.19) | |
| Non-GAAP diluted earnings per share | $ | 1.60 | | | $ | 1.36 | | | $ | 3.89 | | | $ | 2.50 | |
| | | | | | | |
| Reconciliation of GAAP operating income to non-GAAP operating income | | | | | | | |
| Income from operations | $ | 20,507 | | | $ | 18,507 | | | $ | 53,499 | | | $ | 34,931 | |
| Amortization of intangibles | 25 | | | 51 | | | 124 | | | 209 | |
| Settlement of lawsuits | 132 | | | 127 | | | 709 | | | 280 | |
| Impairment of assets | 1,722 | | | 271 | | | 1,722 | | | 1,672 | |
| Gain on sale of businesses and assets | (266) | | | (541) | | | (666) | | | (455) | |
| Gain on insurance | (87) | | | — | | | (408) | | | (209) | |
| Non-GAAP operating income | $ | 22,033 | | | $ | 18,415 | | | $ | 54,980 | | | $ | 36,428 | |
| | | | | | | |
| Reconciliation of GAAP operating margin to non-GAAP operating margin | | | | | | | |
| Income from operations | 29.0 | % | | 32.0 | % | | 27.3 | % | | 24.9 | % |
| Amortization of intangibles | 0.0 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % |
| Settlement of lawsuits | 0.2 | % | | 0.2 | % | | 0.4 | % | | 0.2 | % |
| Impairment of assets | 2.4 | % | | 0.5 | % | | 0.9 | % | | 1.2 | % |
| Gain on sale of businesses and assets | (0.4) | % | | (0.9) | % | | (0.3) | % | | (0.3) | % |
| Gain on insurance | (0.1) | % | | 0.0 | % | | (0.2) | % | | (0.1) | % |
| Non-GAAP operating margin | 31.2 | % | | 31.8 | % | | 28.0 | % | | 26.0 | % |
* Per share amounts and percentages may not foot due to rounding.
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 June 30, 2022, our cash and cash equivalents were approximately $37.5 million 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 June 30, 2022, we had working capital of $20.5 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 $4.2 million and $1.1 million, respectively) amounting to $2.7 million and $3.8 million as of June 30, 2022 and September 30, 2021, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. Revenues seem favorable now that all our locations are not under
pandemic-related closure mandates. 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 continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable. Currently, all of our locations are open except one club that is being renovated and/or remodeled.
We have not recently raised capital through the issuance of equity securities although we have recently issued shares of our common stock to partly pay for an acquisition (see next paragraph). 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 with the significant global impact of the COVID-19 pandemic, 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.
On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period). 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, and 500,000 shares of our common stock with a fair value of $30.4 million at issuance.
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 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. 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, among which to maintain a debt service coverage of not less than 1.4 times, reviewed annually.
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 and 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 $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.
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 cash flows from operating, investing, and financing activities (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| Operating activities | $ | 46,754 | | | $ | 32,217 | |
| Investing activities | (56,222) | | | (7,186) | |
| Financing activities | 11,282 | | | (11,568) | |
| Net increase in cash and cash equivalents | $ | 1,814 | | | $ | 13,463 | |
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| Net income | $ | 35,479 | | | $ | 27,862 | |
| Depreciation and amortization | 7,636 | | | 6,197 | |
| Deferred income tax benefit | (409) | | | (430) | |
| Impairment of assets | 1,722 | | | 1,672 | |
| Gain on debt extinguishment | (83) | | | (5,298) | |
| Net change in operating assets and liabilities | 1,421 | | | 1,656 | |
| Other | 988 | | | 558 | |
| Net cash provided by operating activities | $ | 46,754 | | | $ | 32,217 | |
Net cash provided by operating activities increased from year to year primarily driven by the impact of higher sales partially offset by higher interest expense and income taxes paid.
Cash Flows from Investing Activities
Following are our cash flows from investing activities (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| Payments for property and equipment and intangible assets | $ | (17,173) | | | $ | (10,788) | |
| Acquisition of businesses | (44,302) | | | — | |
| Proceeds from sale of businesses and assets | 4,611 | | | 3,213 | |
| Proceeds from insurance | 515 | | | 294 | |
| Proceeds from notes receivable | 127 | | | 95 | |
| Net cash used in investing activities | $ | (56,222) | | | $ | (7,186) | |
Following is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| New facilities, equipment, and intangible assets | $ | 14,788 | | | $ | 6,180 | |
| Maintenance capital expenditures | 2,385 | | | 4,608 | |
| Total capital expenditures | $ | 17,173 | | | $ | 10,788 | |
The capital expenditures during the nine months ended June 30, 2022 were composed of primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. The capital expenditures during the nine months ended June 30, 2021 were composed of primarily of real estate and construction of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license purchase. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.
Cash Flows from Financing Activities
Following are our cash flows from financing activities (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2022 | | 2021 |
| Proceeds from debt obligations | $ | 35,820 | | | $ | 2,176 | |
| Payments on debt obligations | (10,714) | | | (10,845) | |
| Purchase of treasury stock | (12,057) | | | (1,794) | |
| Payment of dividends | (1,322) | | | (1,080) | |
| Payment of loan origination costs | (445) | | | (25) | |
| Net cash provided by (used in) financing activities | $ | 11,282 | | | $ | (11,568) | |
We purchased 213,712 shares of our common stock at an average price of $56.42 during the nine months ended June 30, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the nine months ended June 30, 2021. On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. As of June 30, 2022, we have approximately $21.9 million remaining to purchase additional shares.
Subsequent to the reporting date until August 5, 2022, the Company purchased 42,250 shares of its own common stock at a cost of $2.3 million.
We paid quarterly dividends of $0.04 per share in both the current- and prior-year periods, except for the second and third quarters of fiscal 2022 where we paid $0.05 per share.
See Note 7 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations.
Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate 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.
Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands):
| | | | | | | | | | | |
| For the Nine Months
Ended June 30, |
| 2022 | | 2021 |
| Net cash provided by operating activities | $ | 46,754 | | | $ | 32,217 | |
| Less: Maintenance capital expenditures | 2,385 | | | 4,608 | |
| Free cash flow | $ | 44,369 | | | $ | 27,609 | |
Our free cash flow for the current nine-month period increased by 60.7% compared to the comparable prior-year period primarily due to higher sales, net of related expense payments and lower maintenance capital expenditures, partially offset by higher interest expense payments and higher income tax payments in the current year.
We do not include capital expenditures related to new facilities construction, equipment and intangibles assets 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.
Other than the potentially prolonged effect of the COVID-19 pandemic, the potential economic slowdown, and the notes payable financing described above, we are not aware of any event or trend that would potentially significantly affect 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 down turns. 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 for the nine months ended June 30 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Increase
(Decrease) | | 2021 | | Increase
(Decrease) | | 2020 |
| Sales of alcoholic beverages | $ | 83,504 | | | 33.1 | % | | $ | 62,725 | | | 38.5 | % | | $ | 45,285 | |
| Sales of food and merchandise | 33,628 | | | 11.3 | % | | 30,205 | | | 73.8 | % | | 17,378 | |
| Service revenues | 67,821 | | | 76.4 | % | | 38,442 | | | 11.6 | % | | 34,448 | |
| Other | 11,289 | | | 26.2 | % | | 8,945 | | | 39.1 | % | | 6,430 | |
| Total revenues | $ | 196,242 | | | 39.9 | % | | $ | 140,317 | | | 35.5 | % | | $ | 103,541 | |
| Net income (loss) attributable to RCIHH common stockholders | $ | 35,429 | | | 26.4 | % | | $ | 28,036 | | | (951.6) | % | | $ | (3,292) | |
| Net cash provided by operating activities | $ | 46,754 | | | 45.1 | % | | $ | 32,217 | | | 165.2 | % | | $ | 12,147 | |
| Adjusted EBITDA* | $ | 62,516 | | | 46.5 | % | | $ | 42,675 | | | 137.4 | % | | $ | 17,973 | |
| Free cash flow* | $ | 44,369 | | | 60.7 | % | | $ | 27,609 | | | 175.1 | % | | $ | 10,036 | |
| Debt (end of period) | $ | 187,965 | | | 47.3 | % | | $ | 127,603 | | | (10.6) | % | | $ | 142,736 | |
*See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations.
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). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.
Capital Allocation Strategy
Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions.
Based on our current capital allocation strategy:
•We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale;
•We consider disposing of underperforming units to free up capital for more productive use;
•We consider buying back our own stock if the after-tax yield on free cash flow is above 10%;
•We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale.
Growth Strategy
We believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. Our growth strategy involves the following: (i) to acquire existing units in locations that are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed; (ii) to open new units after market analysis; (iii) to franchise our Bombshells brand; (iv) to form joint ventures or partnerships to reduce start-up and operating costs, with us contributing equity in the form of our brand name
and management expertise; (v) to develop new club concepts that are consistent with our management and marketing skills; (vi) to develop and open our restaurant concepts as our capital and manpower allow; and (vii) to control the real estate in connection with club operations, although some units may be in leased premises.
We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All eleven of the existing company-owned Bombshells as of June 30, 2022 are located in Texas. Our first franchisee for Bombshells restaurants in the San Antonio, Texas area opened in June 2022. 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 are currently in the process of site selection for new Bombshells locations and made purchases of real estate in Stafford and Rowlett, both in Texas, for future Bombshells sites.
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.