UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ]
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2019
Commission file number: 001-13992
RCI HOSPITALITY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of
incorporation or organization)
76-0458229
(I.R.S. Employer
Identification No.)
10737 Cutten Road
Houston, Texas 77066
(Address of principal executive offices) (Zip Code)
(281) 397-6730
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.01 par value
Trading Symbol(s)
RICK
Name of each exchange on which registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth
company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes [ ]
No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed
second fiscal quarter was $204,593,354.
As of February 6, 2020, there were approximately 9,258,000 shares of common stock outstanding.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives,
goals, strategies, future events or performance and underlying assumptions and other statements, which are other than
statements of historical facts. Forward-looking statements may appear throughout this report, including without limitation,
the following sections: Item 1 – “Business,” Item 1A – “Risk Factors,” and Item 7 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by
words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will
continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ
materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and, in particular, the
risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the
Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on
our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with
(i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack
thereof in launching and building the company’s businesses, (iv) cyber security, (v) conditions relevant to real estate
transactions, (vi) our ability to regain and maintain compliance with the filing requirements of the SEC and the Nasdaq
Stock Market, and (vii) numerous other factors such as laws governing the operation of adult entertainment businesses,
competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any
revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements.
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TABLE OF CONTENTS
Page No.
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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Item 1. Business.
INTRODUCTION
PART I
RCI Hospitality Holdings, Inc. (sometimes referred to as “RCIHH” herein) is a holding company engaged in a number of
activities in the hospitality and related businesses. Through our subsidiaries, as of September 30, 2019, we operate a total
of 46 establishments (including one that was temporarily closed due to fire and reopened after year-end) that offer live
adult entertainment and/or restaurant and bar operations. We also operate a leading business communications company
(the “Media Group”) serving the multibillion-dollar adult nightclubs industry. We have two principal reportable
segments—Nightclubs and Bombshells. The terms “Company,” “we,” “our,” “us” and similar terms used in this Form
10-K refer to RCIHH and its subsidiaries. Except for executive officers of RCIHH, any employment referenced in this
document is not with RCIHH but solely with one of its subsidiaries. RCIHH was incorporated in the State of Texas in
1994.
Our fiscal year ends on September 30. References to years 2019, 2018, and 2017 are for fiscal years ended September 30,
2019, 2018, and 2017, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and
September 30.
Our corporate website address is www.rcihospitality.com. Upon written request, we make available free of charge our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after such material is electronically filed with the SEC under the Securities
Exchange Act of 1934, as amended (www.sec.gov). Information contained in the corporate website shall not be construed
as part of this Form 10-K.
OUR BUSINESS
We operate several businesses, which we aggregate for financial reporting into two reportable segments – Nightclubs and
Bombshells – and combine other operating segments into “Other.”
Nightclubs Segment
We operate our adult entertainment nightclubs through several brands that target many different demographics of
customers by providing a unique, quality entertainment environment. Our clubs do business as Rick’s Cabaret, Jaguars
Club, Tootsie’s Cabaret, XTC Cabaret, Club Onyx, Hoops Cabaret and Sports Bar, Scarlett’s Cabaret, Temptations Adult
Cabaret, Foxy’s Cabaret, Vivid Cabaret, Downtown Cabaret, Cabaret East, The Seville, Silver City Cabaret, and Kappa
Men’s Club. We also operate dance clubs under the brand name Studio 80.
We generate revenue on our nightclubs through the sale of alcoholic beverages, food and merchandise items; service in the
form of cover charge, dance fees, and room rentals; and through other related means such as ATM commissions and
vending income, among others.
During fiscal 2019, our Nightclub segment sales mix was 46% service revenue; 39% alcoholic beverages; and 15% food,
merchandise and other. Segment gross margin (revenues less cost of goods sold) was approximately 89%. We grew
Nightclubs segment revenue by 6.1% and income from operations by 16.3% from prior year.
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In November 2018, we acquired a club in Chicago, Illinois for $10.5 million with $6.0 million cash paid at closing and the
$4.5 million in a 6-year seller-financed note with interest at 7%. We have since rebranded the club as Rick’s Cabaret
Chicago. It generated $5.0 million in revenues during fiscal 2019 since acquisition date. See Note 15 to our consolidated
financial statements for details of the transaction.
Also in November 2018, we acquired a club in Pittsburgh, Pennsylvania for $15.0 million with $7.5 million cash paid at
closing and two seller notes payable. The first note is a 2-year 7% note for $2.0 million and the second is a 10-year 8%
note for 5.5 million. We have since rebranded the club as Rick’s Cabaret Pittsburgh. It generated $4.6 million in revenues
during fiscal 2019 since acquisition date. See Note 15 to our consolidated financial statements for details of the
transaction.
On November 5, 2019, the Company announced that its subsidiaries have signed definitive agreements to acquire the
assets and related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0
million. As of the filing of this report, closing of this transaction is still pending subject to certain conditions. Under the
terms of the agreements, Company subsidiaries will pay $7.2 million for the club and $7.8 million for the real estate using
$4.0 million in seller financing at 6.0% for the club with the balance of cash from an anticipated $11.0 million bank loan
at a blended rate of 6.25%.
A list of our nightclub locations is in Item 2— “Properties.”
Bombshells Segment
As of September 30, 2019, we operated eight Bombshells, all in Texas with one in Dallas, one in Austin, and six in the
Greater Houston area. The restaurant concept sets itself apart with décor that pays homage to all branches of the U.S.
military. Locations feature local DJs, large outdoor patios, and more than 75 state-of-the-art flat screen TVs for watching
your favorite sports. All food and drink menu items have military names. Bombshell Girls, with their military-inspired
uniforms, are a key attraction. Their mission, in addition to waitressing, is to interact with guests and generate a fun
atmosphere. Bombshells is also open to franchising under our subsidiary, BMB Franchising Services, Inc., which has been
approved to sell franchises in all 50 states.
During fiscal 2019, Bombshells sales mix was 58% alcoholic beverages and 42% food, merchandise and other. Segment
gross margin (revenues less cost of goods sold) was approximately 75%. We grew Bombshells segment revenue by 27.9%
and income from operations by 13.1% from prior year.
We opened the first Bombshells in March 2013 in Dallas, quickly becoming one of the most popular restaurant
destinations in the area. Within six years, eight more opened in the Austin and Houston, Texas areas, including two that
were opened in the current fiscal 2019. In September 2016, we closed one Bombshells location in Webster, Texas. In the
current fiscal 2019, we opened one Bombshells on Interstate 10 (BMB I-10), east of Houston in December 2018, and
another one on State Highway 249 (BMB 249), northwest of Houston in March 2019. BMB I-10 and BMB 249 generated
revenues of $4.3 million and $2.3 million, respectively, during fiscal 2019. Of the eight active Bombshells as of
September 30, 2019, six are freestanding pad sites and two are inline locations.
Subsequent to fiscal year 2019, we opened two new Bombshells units, one in October 2019 (BMB Katy) and another in
January 2020 (BMB 59).
For a list of our Bombshells locations, refer to Item 2—“Properties.”
Other Segment
We group together all operating segments other than Nightclubs and Bombshells as Other reportable segment. This is
made up of several wholly-owned subsidiaries composed primarily of our Media Group and Drink Robust. Our Media
Group is the leading business communications company serving the multibillion-dollar adult nightclubs industry and the
adult retail products industry. It owns a national industry convention and tradeshow; two national industry trade
publications; two national industry award shows; and more than a dozen industry and social media websites. Included in
the Media Group is ED Publications, publishers of the bimonthly ED Club Bulletin, the only national business magazine
serving the 2,200-plus adult nightclubs in North America, which collectively have annual revenues in excess of $5 billion,
according to the Association of Club Executives. ED Publications, founded in 1991, also publishes the Annual VIP Guide
of adult nightclubs, touring entertainers and industry vendors; produces the Annual Gentlemen’s Club Owners EXPO, a
national convention and tradeshow; and offers the exclusive ED VIP Club Card, honored at more than 850 adult
nightclubs. The Media Group produces two nationally recognized industry award shows for the readers of both ED Club
Bulletin and StorErotica magazines, and maintains a number of B-to-B and consumer websites for both industries. Drink
Robust is licensed to sell Robust Energy Drink in the United States.
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OUR STRATEGY
Our overall objective is to create value for our shareholders by developing and operating profitable businesses in the
hospitality and related space. We strive to achieve that by providing an attractive price-value entertainment and dining
experience; by attracting and retaining quality personnel; and by focusing on unit-level operating performance. Aside from
our operating strategy, we employ a capital allocation strategy.
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 the circumstances warrant. 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 buying back our own stock if the after-tax yield on free cash flow is above 10%;
● We consider disposing of underperforming units to free up capital for more productive use;
● 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 paying down our most expensive debt if it makes sense on a tax-adjusted basis, or there is an
otherwise strategic rationale.
COMPETITION
The adult entertainment and the restaurant/sports bar businesses are highly competitive with respect to price, service and
location. All of our nightclubs compete with a number of locally owned adult clubs, some of whose brands may have
name recognition that equals that of ours. The names “Rick’s” and “Rick’s Cabaret,” “Tootsie’s Cabaret,” “XTC
Cabaret,” “Scarlett’s,” “Silver City,” “Club Onyx,” “Downtown Cabaret,” “Temptations,” “The Seville,” “Jaguars,”
“Hoops Cabaret,” and “Foxy’s Cabaret” are proprietary. In the restaurant/sports bar business, “Bombshells” is also
proprietary. We believe that the combination of our existing brand name recognition and the distinctive entertainment
environment that we have created allows us to compete effectively in the industry and within the cities where we operate.
Although we believe that we are well positioned to compete successfully, there can be no assurance that we will be able to
maintain our high level of name recognition and prestige within the marketplace.
GOVERNMENTAL REGULATIONS
We are subject to various federal, state and local laws affecting our business activities. Particularly in Texas, the authority
to issue a permit to sell alcoholic beverages is governed by the Texas Alcoholic Beverage Commission (“TABC”), which
has the authority, in its discretion, to issue the appropriate permits. We presently hold a Mixed Beverage Permit and a Late
Hour Permit at numerous Texas locations. Minnesota, North Carolina, Louisiana, Arizona, Pennsylvania, Florida, New
York, and Illinois have similar laws that may limit the availability of a permit to sell alcoholic beverages or that may
provide for suspension or revocation of a permit to sell alcoholic beverages in certain circumstances. It is our policy, prior
to expanding into any new market, to take steps to ensure compliance with all licensing and regulatory requirements for
the sale of alcoholic beverages, as well as the sale of food.
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In addition to various regulatory requirements affecting the sale of alcoholic beverages, in many cities where we operate,
the location of an adult entertainment cabaret is subject to restriction by city, county or other governmental ordinance. The
prohibitions deal generally with distance from schools, churches and other sexually oriented businesses, and contain
restrictions based on the percentage of residences within the immediate vicinity of the sexually oriented business. The
granting of a sexually oriented business permit is not subject to discretion; the permit must be granted if the proposed
operation satisfies the requirements of the ordinance. In all states where we operate, management believes we are in
compliance with applicable city, county, state or other local laws governing the sale of alcohol and sexually oriented
businesses.
TRADEMARKS
Our rights to the trade names “RCI Hospitality Holdings, Inc.,” “Rick’s,” “Rick’s Cabaret,” “Tootsie’s Cabaret,” “Club
Onyx,” “XTC Cabaret,” “Temptations,” “Jaguars,” “Downtown Cabaret,” “Cabaret East,” Bombshells Restaurant and
Bar,” and “Vee Lounge” are established under common law, based upon our substantial and continuous use of these trade
names in interstate commerce, some of which have been in use at least as early as 1987. We have registered our service
mark, “RICK’S AND STARS DESIGN,” and the “BOMBSHELLS RESTAURANT & BAR” logo design with the United
States Patent and Trademark Office. We have also obtained service mark registrations from the Patent and Trademark
Office for “RICK’S AND STARS DESIGN” logo, “RCI HOSPITALITY HOLDINGS, INC.,” “RICK’S,” “RICK’S
CABARET,” “CLUB ONYX,” “XTC CABARET,” “SCARLETT’S CABARET,” “SILVER CITY CABARET,”
“BOMBSHELLS RESTAURANT AND BAR”, “THE SEVILLE CLUB”, “DOWN IN TEXAS SALOON”, “CLUB
DULCE”, “THE BLACK ORCHID”, “HOOPS CABARET”, “VEE LOUNGE,” “STUDIO 80”, “FOXY’S CABARET,”
and “EXOTIC DANCER” are registered through service mark registrations issued by the United States Patent and
Trademark Office. As of this date, we have pending registration applications for the names “TOOTSIES CABARET”,
“Toys for Tatas”, “In The Biz”, “Better Flight, Better Price!” and “Bombshells Officer’s Club”. We also own the rights to
numerous trade names associated with our media division. There can be no assurance that these steps we have taken to
protect our service marks will be adequate to deter misappropriation of our protected intellectual property rights.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of September 30, 2019, we had approximately 2,200 employees, of which approximately 280 are in management
positions, including corporate and administrative operations, and approximately 1,920 are engaged in entertainment, food
and beverage service, including bartenders, waitresses, and certain entertainers. None of our employees are represented by
a union. We consider our employee relations to be good. Additionally, as of September 30, 2019, we had independent
contractor entertainers, who are self-employed and conduct business at our locations on a non-exclusive basis. Our
entertainers at Rick’s Cabaret in Minneapolis, Minnesota and at Jaguars Club in Phoenix, Arizona act as commissioned
employees. All employees and independent contractors sign arbitration non-class-action participation agreements where
allowed by federal and state laws.
We believe that the adult entertainment industry standard of treating entertainers as independent contractors provides us
with safe harbor protection to preclude payroll tax assessment. We have prepared plans that we believe will protect our
profitability in the event that the sexually oriented business industry is required in all states to convert entertainers, who
are now independent contractors, into employees. See related discussion in “Risk Factors” below.
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Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described
below before deciding to purchase shares of our common stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occurs, our business, financial condition or results of operations could be
seriously harmed. The trading price of our common stock could, in turn, decline and you could lose all or part of your
investment.
Our business operations are subject to regulatory uncertainties which may affect our ability to continue operations of
existing nightclubs, acquire additional nightclubs, or be profitable.
Adult entertainment nightclubs are subject to local, state and federal regulations. Our business is regulated by local
zoning, local and state liquor licensing, local ordinances, and state and federal time place and manner restrictions. The
adult entertainment provided by our nightclubs has elements of speech and expression and, therefore, enjoys some
protection under the First Amendment to the United States Constitution. However, the protection is limited to the
expression, and not the conduct of an entertainer. While our nightclubs are generally well established in their respective
markets, there can be no assurance that local, state and/or federal licensing and other regulations will permit our
nightclubs to remain in operation or profitable in the future.
We have recorded impairment charges in past periods and may record additional impairment charges in future periods.
Our nightclubs are often acquired with a purchase price based on historical EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization). This results in certain nightclubs carrying a substantial amount of intangible asset value,
mostly allocated to licenses and goodwill. Generally accepted accounting principles require an annual impairment review
of these indefinite-lived intangible assets. As a result of our annual impairment review, we recorded impairment charges
of $6.0 million in 2019 (representing $4.2 million property and equipment impairment on two clubs, $1.6 million goodwill
impairment on four clubs, and $178,000 of license impairment on one club); $5.6 million in 2018 (representing a $1.6
million of property and equipment impairment on one club and one Bombshells, $834,000 goodwill impairment on two
clubs, and $3.1 million of license impairment on three clubs); and $7.6 million in 2017 (including $4.7 million of goodwill
impairment on three operating clubs and one property held for sale, $385,000 of property and equipment impairment on
one operating club, $1.4 million of license impairment on two clubs, and $1.2 million of other-than-temporary impairment
recognized on our cost method investment in Robust). If difficult market and economic conditions materialize over the
next year and/or we experience a decrease in revenue at one or more nightclubs or restaurants, we could incur a decline in
fair value of one or more of our nightclubs or restaurants. This could result in future impairment charges of up to the total
value of our intangible assets, including goodwill. We actively monitor our clubs and restaurants for any indication of
impairment.
We may deviate from our present capital allocation strategy.
We believe that our present capital allocation strategy will provide us with optimized returns. However, implementation of
our capital allocation strategy depends on the interplay of several factors such as our stock price, our outstanding common
shares, the interest rates on our debt, and the rate of return on available investments. If these factors are not conducive to
implementing our present capital allocation strategy, or we determine that adopting a different capital allocation strategy is
in the best interest of shareholders, we reserve the right to deviate from this approach. There can be no assurance that we
will not deviate from or adopt an alternative capital allocation strategy moving forward.
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We may need additional financing, or our business expansion plans may be significantly limited.
If cash generated from our operations is insufficient to satisfy our working capital and capital expenditure requirements,
we will need to raise additional funds through the public or private sale of our equity or debt securities. The timing and
amount of our capital requirements will depend on a number of factors, including cash flow and cash requirements for
nightclub acquisitions and new restaurant development. If additional funds are raised through the issuance of equity or
convertible debt securities, the ownership percentage of our then-existing shareholders will be reduced. We cannot ensure
that additional financing will be available on terms favorable to us, if at all. Any future equity financing, if available, may
result in dilution to existing shareholders; and debt financing, if available, may include restrictive covenants. Any failure
by us to procure timely additional financing, if needed, will have material adverse consequences on our business
operations.
There is substantial competition in the nightclub entertainment industry, which may affect our ability to operate
profitably or acquire additional clubs.
Our nightclubs face substantial competition. Some of our competitors may have greater financial and management
resources than we do. Additionally, the industry is subject to unpredictable competitive trends and competition for general
entertainment dollars. There can be no assurance that we will be able to remain profitable in this competitive industry.
The adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. If
federal or state law mandates that they be classified as employees, our business could be adversely impacted.
The adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. The
Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification
are subject to judicial and agency interpretation, and it could be determined that the independent contractor classification
is inapplicable. Further, if legal standards for classification of independent contractors change, it may be necessary to
modify our compensation structure for these adult entertainers, including by paying additional compensation or
reimbursing expenses. While we take steps to ensure that our adult entertainers are deemed independent contractors, if our
adult entertainers are determined to have been misclassified as independent contractors, we would incur additional
exposure under federal and state law, workers’ compensation, unemployment benefits, labor, employment and tort laws,
including for prior periods, as well as potential liability for employee benefits and tax withholdings. Any of these
outcomes could result in substantial costs to us, could significantly impair our financial condition and our ability to
conduct our business as we choose, and could damage our ability to attract and retain other personnel.
The adult entertainment industry is extremely volatile.
Historically, the adult entertainment, restaurant and bar industry has been an extremely volatile industry. The industry
tends to be extremely sensitive to the general local economy, in that when economic conditions are prosperous, adult
entertainment industry revenues increase, and when economic conditions are unfavorable, entertainment industry revenues
decline. Coupled with this economic sensitivity are the trendy personal preferences of the customers who frequent adult
cabarets. We continuously monitor trends in our customers’ tastes and entertainment preferences so that, if necessary, we
can make appropriate changes which will allow us to remain one of the premiere adult cabarets. However, any significant
decline in general corporate conditions or uncertainties regarding future economic prospects that affect consumer spending
could have a material adverse effect on our business. In addition, we have historically catered to a clientele base from the
upper end of the market. Accordingly, further reductions in the amounts of entertainment expenses allowed as deductions
from income under the Internal Revenue Code of 1954, as amended, could adversely affect sales to customers dependent
upon corporate expense accounts.
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Private advocacy group actions targeted at the kind of adult entertainment we offer could result in limitations and our
inability to operate in certain locations and negatively impact our business.
Our ability to operate successfully depends on the protection provided to us under the First Amendment to the U.S.
Constitution. From time to time, private advocacy groups have sought to target our nightclubs by petitioning for non-
renewal of certain of our permits and licenses. Furthermore, private advocacy groups which have influences on certain
financial institutions have managed to sway these financial institutions into not doing business with us. In addition to
possibly limiting our operations and financing options, negative publicity campaigns, lawsuits and boycotts could
negatively affect our businesses and cause additional financial harm by discouraging investors from investing in our
securities or requiring that we incur significant expenditures to defend our business.
Our revenues could be significantly affected by limitations relating to permits to sell alcoholic beverages.
We derive a significant portion of our revenues from the sale of alcoholic beverages. States in which we operate may have
laws which may limit the availability of a permit to sell alcoholic beverages, or which may provide for suspension or
revocation of a permit to sell alcoholic beverages in certain circumstances. The temporary or permanent suspension or
revocations of any such permits would have a material adverse effect on our revenues, financial condition and results of
operations. In all states where we operate, management believes we are in compliance with applicable city, county, state
or other local laws governing the sale of alcohol.
Activities or conduct at our nightclubs may cause us to lose necessary business licenses, expose us to liability, or result
in adverse publicity, which may increase our costs and divert management’s attention from our business.
We are subject to risks associated with activities or conduct at our nightclubs that are illegal or violate the terms of
necessary business licenses. Some of our nightclubs operate under licenses for sexually oriented businesses and are
afforded some protection under the First Amendment to the U.S. Constitution. While we believe that the activities at our
nightclubs comply with the terms of such licenses, and that the element of our business that constitutes an expression of
free speech under the First Amendment to the U.S. Constitution is protected, activities and conduct at our nightclubs may
be found to violate the terms of such licenses or be unprotected under the U.S. Constitution. This protection is limited to
the expression and not the conduct of an entertainer. An issuing authority may suspend or terminate a license for a
nightclub found to have violated the license terms. Illegal activities or conduct at any of our nightclubs may result in
negative publicity or litigation. Such consequences may increase our cost of doing business, divert management’s
attention from our business and make an investment in our securities unattractive to current and potential investors,
thereby lowering our profitability and our stock price.
We have developed comprehensive policies aimed at ensuring that the operation of each of our nightclubs is conducted in
conformance with local, state and federal laws. We have a “no tolerance” policy on illegal drug use in or around our
facilities. We continually monitor the actions of entertainers, waitresses and customers to ensure that proper behavior
standards are met. However, such policies, no matter how well designed and enforced, can provide only reasonable, not
absolute, assurance that the policies’ objectives are being achieved. Because of the inherent limitations in all control
systems and policies, there can be no assurance that our policies will prevent deliberate acts by persons attempting to
violate or circumvent them. Notwithstanding the foregoing limitations, management believes that our policies are
reasonably effective in achieving their purposes.
We rely heavily on information technology in our operations and any material failure, weakness, interruption or
breach of security could prevent us from effectively operating our business.
Our operations and corporate functions rely heavily on information systems, including point-of-sale processing,
management of our supply chain, payment of obligations, collection of cash, electronic communications, data
warehousing to support analytics, finance and accounting systems, mobile technologies to enhance the customer
experience, and other various processes and procedures, some of which are handled by third parties. Our ability to
efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. The
failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a
breach in security relating to these systems could result in delays in consumer service and reduce efficiency in our
operations. These problems could adversely affect our results of operations, and remediation could result in significant,
unplanned capital investments.
10
Security breaches of confidential customer information or personal employee information may adversely affect our
business.
A significant portion of our revenues are paid through debit and credit cards. Other restaurants and retailers have
experienced significant security breaches in which debit and credit card information or other personal information of their
customers have been stolen. We also maintain certain personal information regarding our employees. Although we aim to
safeguard our technology systems, they could potentially be vulnerable to damage, disability or failures due to physical
theft, fire, power outage, telecommunication failure or other catastrophic events, as well as from internal and external
security breaches, employee error or malfeasance, denial of service attacks, viruses, worms and other disruptive problems
caused by hackers and cyber criminals. A breach in our systems that compromises the information of our customers or
employees could result in widespread negative publicity, damage to our reputation, a loss of customers, and legal
liabilities. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions
arising from the actual or alleged theft of our customers’ debit and credit card information or if customer or employee
information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse
publicity resulting from such an event, may have a material adverse effect on our business.
Our acquisitions may result in disruptions in our business and diversion of management’s attention.
We have made and may continue to make acquisitions of complementary nightclubs, restaurants or related operations.
Any acquisitions will require the integration of the operations, products and personnel of the acquired businesses and the
training and motivation of these individuals. Such acquisitions may disrupt our operations and divert management’s
attention from day-to-day operations, which could impair our relationships with current employees, customers and
partners. We may also incur debt or issue equity securities to pay for any future acquisitions. These issuances could be
substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related costs or
amortization, or impairment costs for acquired goodwill and other intangible assets. If management is unable to fully
integrate acquired business, products or persons with existing operations, we may not receive the benefits of the
acquisitions, and our revenues and stock trading price may decrease.
The impact of new club or restaurant openings could result in fluctuations in our financial performance.
Performance of any new club or restaurant location will usually differ from its originally targeted performance due to a
variety of factors, and these differences may be material. New clubs and restaurants typically encounter higher customer
traffic and sales in their initial months, which may decrease over time. Accordingly, sales achieved by new or reconcepted
locations may not be indicative of future operating results. Additionally, we incur substantial pre-opening expenses each
time we open a new establishment, which expenses may be higher than anticipated. Due to the foregoing factors, results
for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for a full
fiscal year.
We must continue to meet NASDAQ Global Market Continued Listing Requirements, or we risk delisting.
Our securities are currently listed for trading on the NASDAQ Global Market. We must continue to satisfy NASDAQ’s
continued listing requirements or risk delisting which would have an adverse effect on our business. If our securities are
ever delisted from NASDAQ, they may trade on the over-the-counter market, which may be a less liquid market. In such
case, our shareholders’ ability to trade or obtain quotations of the market value of shares of our common stock would be
severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices
and larger spreads in the bid and ask prices for our securities. Additionally, we are presently not in compliance with
NASDAQ Listing Rule 5250(c)(1), which requires timely filing of all required periodic financial reports with the SEC.
Although we intend to regain compliance with Listing Rule 5250(c)(1) by filing all such reports as soon as practicable,
there is no assurance that we will be able to maintain compliance with Listing Rule 5250(c)(1) or any of the other
NASDAQ continued listing requirements.
11
We may be subject to allegations, defamations, or other detrimental conduct by third parties, which could harm our
reputation and cause us to lose customers and/or contribute to a deflation of our stock price.
We have been subject to allegations by third parties or purported former employees, negative internet postings, and other
adverse public exposure on our business, operations and staff compensation. We may also become the target of
defamations or other detrimental conduct by third parties or disgruntled former or current employees. Such conduct may
include complaints, anonymous or otherwise, to regulatory agencies, media or other organizations. We may be subject to
government or regulatory investigation or other proceedings as a result of such third-party conduct and may be required to
spend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we
will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Any government or
regulatory investigations initiated as a result of the above may cause a deflation in our stock price. Additionally,
allegations, directly or indirectly against us, may be posted on the internet, including social media platforms by anyone,
whether or not related to us, on an anonymous basis. Any negative publicity on us or our management can be quickly and
widely disseminated. Social media platforms and devices immediately publish the content of their subscribers and
participants post, often without filters or checks on accuracy of the content posted. Information posted may be inaccurate
and adverse to us, and it may harm our reputation, business or prospects. The harm may be immediate without affording
us an opportunity for redress or correction. Our reputation may be negatively affected as a result of the public
dissemination of negative and potentially false information about our business and operations, which in turn may cause us
to lose customers.
We could be subject to liability, penalties and other restrictive sanctions and adverse consequences arising out of an
SEC investigation.
We are cooperating with an SEC investigation as discussed in Note 11 to our consolidated financial statements included in
this Annual Report on Form 10-K. We cannot predict the outcome or impact of this matter, and there exists the possibility
that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC or any
other government agency were to pursue legal action in the future. Moreover, we expect to incur costs in responding to
related requests for information and subpoenas, and if instituted, in defending against any governmental proceedings.
We incur significant costs as a result of operating as a public company, and our management devotes substantial time
to new compliance initiatives.
We will incur significant legal, accounting and other expenses that our non-public competition does not incur. The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the SEC,
have imposed various requirements on public companies, including requiring certain corporate governance practices. Our
management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these
rules and regulations increase our legal and financial compliance costs, and will make some activities more time-
consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial
reporting and effective disclosure controls and procedures. In particular, under Section 404 of the Sarbanes-Oxley Act, we
are required to perform system and process evaluation and testing on the effectiveness of our internal control over
financial reporting, and our independent registered public accounting firm is required to report on the effectiveness of our
internal control over financial reporting. In performing this evaluation and testing, both our management and our
independent registered public accounting firm concluded that our internal control over financial reporting is not effective
as of September 30, 2019 because of a material weakness. We are, however, addressing this issue and remediating our
material weakness. Upon finalizing the remediation of this material weakness, we believe our internal control will be
deemed effective. Correcting this issue, and thereafter our continued compliance with Section 404 will require that we
incur substantial accounting expense and expend significant management efforts. Moreover, if we are not able to correct
our internal control issues and comply with the requirements of Section 404 in a timely manner, or if in the future we or
our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting
that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to
sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and
management resources.
12
We have identified a material weakness in our internal control over financial reporting
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of September 30, 2019 and concluded that we did not maintain effective
internal control over financial reporting. Specifically, management identified a material weakness over financial statement
close and reporting—see Item 9A, “Controls and Procedures,” below. While certain actions have been taken to implement
a remediation plan to address this material weakness and to enhance our internal control over financial reporting, if this
material weakness is not remediated, it could adversely affect our ability to report our financial condition and results of
operations in a timely and accurate manner, which could negatively affect investor confidence in our company, and, as a
result, the value of our common stock could be adversely affected.
Our quarterly operating results may fluctuate and could fall below the expectations of securities analysts and investors
due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April
through September with the strongest operating results occurring from October through March. As a result, our quarterly
and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the
factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be
expected for any other fiscal quarter or for any fiscal year and same-store sales for any particular future period may
decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event,
the price of our common stock would likely decrease.
We may have uninsured risks in excess of our insurance coverage.
We maintain insurance in amounts we consider adequate for personal injury and property damage to which the business of
the Company may be subject. However, there can be no assurance that uninsured liabilities in excess of the coverage
provided by insurance, which liabilities may be imposed pursuant to the Texas “dram shop” statute or similar “dram shop”
statutes or common law theories of liability in other states where we operate or expand. For example, the Texas “dram
shop” statute provides a person injured by an intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to such person if it was apparent to the server that the individual being sold, served
or provided with an alcoholic beverage was obviously intoxicated to the extent that he presented a clear danger to himself
and others. An employer is not liable for the actions of its employee who over-serves if (i) the employer requires its
employees to attend a seller training program approved by the TABC; (ii) the employee has actually attended such a
training program; and (iii) the employer has not directly or indirectly encouraged the employee to violate the law. It is our
policy to require that all servers of alcohol working at our clubs in Texas be certified as servers under a training program
approved by the TABC, which certification gives statutory immunity to the sellers of alcohol from damage caused to third
parties by those who have consumed alcoholic beverages at such establishment pursuant to the TABC. There can be no
assurance, however, that uninsured liabilities may not arise in the markets in which we operate which could have a
material adverse effect on the Company.
Our previous liability insurer may be unable to provide coverage to us and our subsidiaries.
As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity
Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance
companies on that date.
On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order
(“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the
supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver
(“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means,
including gathering assets and marshaling those assets, as necessary. Further, the order stayed or abated pending lawsuits
involving IIC as the insurer until May 6, 2014.
On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar
Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of
insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the
Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were
further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer 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 obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising
from actions after that date. As of September 30, 2019, we have 2 remaining unresolved claims out of the original 71
claims.
13
The protection provided by our service marks is limited.
Our rights to the trade names “RCI Hospitality Holdings, Inc.,” “Rick’s,” “Rick’s Cabaret,” “Tootsie’s Cabaret,” “Club
Onyx,” “XTC Cabaret,” “Temptations,” “Jaguars,” “Downtown Cabaret,” “Cabaret East,” Bombshells Restaurant and
Bar,” and “Vee Lounge” are established under common law, based upon our substantial and continuous use of these trade
names in interstate commerce, some of which have been in use at least as early as 1987. We have registered our service
mark, “RICK’S AND STARS DESIGN,” and the “BOMBSHELLS RESTAURANT & BAR” logo design with the United
States Patent and Trademark Office. We have also obtained service mark registrations from the Patent and Trademark
Office for “RICK’S AND STARS DESIGN” logo, “RCI HOSPITALITY HOLDINGS, INC.,” “RICKS,” “RICK’S
CABARET,” “CLUB ONYX,” “XTC CABARET,” “SCARLETT’S CABARET,” “SILVER CITY CABARET,”
“BOMBSHELLS RESTAURANT AND BAR”, “THE SEVILLE CLUB”, “DOWN IN TEXAS SALOON”, “CLUB
DULCE”, “THE BLACK ORCHID”, “HOOPS CABARET”, “VEE LOUNGE,” “STUDIO 80”, “FOXY’S CABARET,”
and “EXOTIC DANCER” are registered through service mark registrations issued by the United States Patent and
Trademark Office. As of this date, we have pending registration applications for the names “TOOTSIES CABARET”,
“Toys for Tatas”, “In The Biz”, “Better Flight, Better Price!” and “Bombshells Officer’s Club”. We also own the rights to
numerous trade names associated with our media division. There can be no assurance that the steps we have taken to
protect our service marks will be adequate to deter misappropriation of our protected intellectual property rights.
Litigation may be necessary in the future to protect our rights from infringement, which may be costly and time
consuming. The loss of the intellectual property rights owned or claimed by us could have a material adverse effect on our
business.
Anti-takeover effects of the issuance of our preferred stock could adversely affect our common stock.
Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock in one or more series, to fix the
number of shares constituting any such series, and to fix the rights and preferences of the shares constituting any series,
without any further vote or action by the stockholders. The issuance of preferred stock by the Board of Directors could
adversely affect the rights of the holders of our common stock. For example, such issuance could result in a class of
securities outstanding that would have preferences with respect to voting rights and dividends and in liquidation over the
common stock, and could (upon conversion or otherwise) enjoy all of the rights appurtenant to common stock. The
Board’s authority to issue preferred stock could discourage potential takeover attempts and could delay or prevent a
change in control of the Company through merger, tender offer, proxy contest or otherwise by making such attempts more
difficult to achieve or costlier. There are no issued and outstanding shares of preferred stock; there are no agreements or
understandings for the issuance of preferred stock; and the Board of Directors has no present intention to issue preferred
stock.
Future sales or the perception of future sales of a substantial amount of our common stock may depress our stock
price.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in
the public market, or as a result of the perception that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock.
14
Our stock price has been volatile and may fluctuate in the future.
The trading price of our securities may fluctuate significantly. This price may be influenced by many factors, including:
● our performance and prospects;
● the depth and liquidity of the market for our securities;
● investor perception of us and the industry in which we operate;
● changes in earnings estimates or buy/sell recommendations by analysts;
● general financial and other market conditions; and
● domestic economic conditions.
Public stock markets have experienced, and may experience, extreme price and trading volume volatility. These broad
market fluctuations may adversely affect the market price of our securities.
We are dependent on key personnel.
Our future success is dependent, in a large part, on retaining the services of Eric Langan, our President and Chief
Executive Officer. Mr. Langan possesses a unique and comprehensive knowledge of our industry. While Mr. Langan has
no present plans to leave or retire in the near future, his loss could have a negative effect on our operating, marketing and
financial performance if we are unable to find an adequate replacement with similar knowledge and experience within our
industry. We maintain key-man life insurance with respect to Mr. Langan. Mr. Langan’s employment agreement recently
expired. Although we are presently in the process of negotiating a new employment agreement with Mr. Langan, there can
be no assurance that Mr. Langan will continue to be employed by us.
Cumulative voting is not available to our stockholders.
Cumulative voting in the election of Directors is expressly denied in our Articles of Incorporation. Accordingly, the holder
or holders of a majority of the outstanding shares of our common stock may elect all of our Directors.
Our directors and officers have limited liability and have rights to indemnification.
Our Articles of Incorporation and Bylaws provide, as permitted by governing Texas law, that our directors and officers
shall not be personally liable to us or any of our stockholders for monetary damages for breach of fiduciary duty as a
director or officer, with certain exceptions. The Articles further provide that we will indemnify our directors and officers
against expenses and liabilities they incur to defend, settle, or satisfy any civil litigation or criminal action brought against
them on account of their being or having been its directors or officers unless, in such action, they are adjudged to have
acted with gross negligence or willful misconduct.
The inclusion of these provisions in the Articles may have the effect of reducing the likelihood of derivative litigation
against directors and officers and may discourage or deter stockholders or management from bringing a lawsuit against
directors and officers for breach of their duty of care, even though such an action, if successful, might otherwise have
benefited us and our stockholders.
15
The Articles provide for the indemnification of our officers and directors, and the advancement to them of expenses in
connection with any proceedings and claims, to the fullest extent permitted by Texas law. The Articles include related
provisions meant to facilitate the indemnitee’s receipt of such benefits. These provisions cover, among other things: (i)
specification of the method of determining entitlement to indemnification and the selection of independent counsel that
will in some cases make such determination, (ii) specification of certain time periods by which certain payments or
determinations must be made and actions must be taken, and (iii) the establishment of certain presumptions in favor of an
indemnitee.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
A failure to maintain food safety throughout the supply chain and food-borne illness concerns may have an adverse
effect on our business.
Food safety is a top priority, and we dedicate substantial resources to ensuring that our guests enjoy safe, quality food
products. However, food safety issues could be caused at the point of source or by food suppliers or distributors and, as a
result, be out of our control. In addition, regardless of the source or cause, any report of food-borne illnesses such as E.
coli, hepatitis A, trichinosis or salmonella, and other food safety issues including food tampering or contamination, at one
of our restaurants or clubs could adversely affect the reputation of our brands and have a negative impact on our sales.
Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our
competitors could result in negative publicity about the food service industry generally and adversely impact our sales.
The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of
affected ingredients, resulting in higher costs and lower margins.
Other risk factors may adversely affect our financial performance.
Other risk factors that could cause our actual results to differ materially from those indicated in the forward-looking
statements by affecting, among many things, pricing, consumer spending and consumer confidence, include, without
limitation, changes in economic conditions and financial and credit markets, credit availability, increased fuel costs and
availability for our employees, customers and suppliers, health epidemics or pandemics or the prospects of these events
(such as reports on avian flu), consumer perceptions of food safety, changes in consumer tastes and behaviors,
governmental monetary policies, changes in demographic trends, terrorist acts, energy shortages and rolling blackouts, and
weather (including, major hurricanes and regional snow storms) and other acts of God.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of September 30, 2019, we own 48 real estate properties. On 35 of these properties, we operate clubs or restaurants.
We lease multiple other properties to third-party tenants. Three of our owned properties are in locations where we
previously operated clubs, but now lease the buildings to third parties. Five are non-income-producing properties for
corporate use, including our corporate office. We have two properties that are under construction for future Bombshells
sites (one opened in October 2019 and the other opened in January 2020), with one adjacent property that may be offered
for sale in the future. Eleven of our clubs and restaurants are in leased locations.
Our principal corporate office is located at 10737 Cutten Road, Houston, Texas 77066, consisting of a 21,000-square foot
corporate office and an 18,000-square foot warehouse facility.
16
Below is a list of locations we operated as of September 30, 2019:
Name of Establishment
Club Onyx, Houston, TX
Rick’s Cabaret, Minneapolis, MN
XTC Cabaret, Austin, TX
XTC Cabaret, San Antonio, TX
Rick’s Cabaret, New York City, NY
Club Onyx, Charlotte, NC
Rick’s Cabaret, San Antonio, TX
XTC Cabaret, South Houston
Rick’s Cabaret, Fort Worth, TX
Tootsie’s Cabaret, Miami Gardens, FL
XTC Cabaret, Dallas, TX
Rick’s Cabaret, Round Rock, TX
Cabaret East, Fort Worth, TX
Rick’s Cabaret DFW, Fort Worth, TX
Downtown Cabaret, Minneapolis, MN
Temptations, Aledo, TX
Silver City Cabaret, Dallas, TX
Jaguars Club, Odessa, TX
Jaguars Club, Phoenix, AZ
Jaguars Club, Lubbock, TX
Jaguars Club, Longview, TX
Jaguars Club, Tye, TX
Jaguars Club, Edinburg, TX
Jaguars Club, El Paso, TX
Jaguars Club, Harlingen, TX
Studio 80, Fort Worth, TX
Bombshells, Dallas, TX
Temptations, Sulphur, LA
Temptations, Beaumont, TX
Vivid Cabaret, New York, NY
Bombshells, Austin, TX
Rick’s Cabaret, Odessa, TX
Bombshells, Spring TX
Bombshells, Houston, TX
Foxy’s Cabaret, Austin TX
The Seville, Minneapolis, MN
Hoops Cabaret and Sports Bar, New York, NY
Bombshells, Highway 290 Houston, TX
Scarlett’s Cabaret, Washington Park, IL
Scarlett’s Cabaret, Miami, FL
Bombshells, Pearland, TX
Kappa Men’s Club, Kappa, IL
Rick’s Cabaret, Chicago, IL
Rick’s Cabaret, Pittsburgh, PA
Bombshells I-10, Houston, TX
Bombshells 249, Houston, TX
Fiscal Year
Acquired/Opened
1995
1998
1998
1998
2005
2005(1)
2006
2006(1)
2007
2008
2008
2009
2010
2011
2011
2011(1)
2012
2012
2012
2012
2012
2012
2012
2012
2012
2013(1)
2013
2013
2013
2014(1)
2014(1)
2014
2014(1)
2014(1)
2015
2015
2016(1)
2017(1)
2017(2)
2017(1)
2018
2018
2019
2019
2019
2019
(1) Leased location.
(2) This location was temporarily closed due to a fire and reopened in November 2019.
Our property leases are typically for a fixed rental rate without revenue percentage rentals. The lease terms generally have
initial terms of 10 to 20 years with renewal terms of 5 to 20 years. At September 30, 2019, certain of our owned properties
were collateral for mortgage debt amounting to approximately $91.2 million. Also, see more information in Notes 6, 9 and
11 to our consolidated financial statements.
Item 3. Legal Proceedings.
See the “Legal Matters” section within Note 11 to our consolidated financial statements within this Annual Report on
Form 10-K for the requirements of this Item, which section is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
17
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock is quoted on the NASDAQ Global Market under the symbol “RICK.”
Holders
On February 6, 2020, the closing stock price for our common stock as reported by NASDAQ was $18.00, and there were
approximately 150 stockholders of record of our common stock (excluding broker held shares in “street name”).
Currently, we estimate that there are approximately 5,900 stockholders having beneficial ownership in street name.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Colonial Stock Transfer Company, Inc., 66 Exchange Place, 1st
Floor, Salt Lake City, Utah 84111.
Dividend Policy
Prior to 2016, we had not paid cash dividends on our common stock. Starting in March 2016, in conjunction with our
share buyback program (see discussion below), our Board of Directors has declared regular quarterly cash dividends of
$0.03 per share, except for the fourth quarter of fiscal 2019 when we paid $0.04 per share. During fiscal 2019, 2018, and
2017, we paid an aggregate amount of $1.3 million, $1.2 million, and $1.2 million, respectively, for cash dividends.
Purchases of Equity Securities by the Issuer
Following is a summary of our purchases during the quarter ended September 30, 2019:
Period
July 1-31, 2019
August 1-31, 2019
September 1-30, 2019
Total
Total Number of
Shares (or Units)
Purchased
Average Price
Paid per Share (or
Unit)(1)
-
-
25,927
25,927
$
$
20.74
20.74
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
That May Yet be
Purchased Under
the Plans or
Programs
10,776,929
10,776,929
10,239,283
$
$
$
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs(2)
-
-
25,927
25,927
(1) Prices include any commissions and transaction costs.
(2) All shares were purchased pursuant to the repurchase plans approved by the Board of Directors.
Subsequent to September 30, 2019 through the filing date of this report, we purchased 332,671 shares of the Company’s
common stock for a total of $6.4 million. On February 6, 2020, the Board of Directors increased the repurchase
authorization by an additional $10.0 million.
18
Equity Compensation Plan Information
We have no stock options nor any other equity award outstanding under equity compensation plans as of September 30,
2019.
Equity Compensation Plan Information
(a)
(b)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation
Plans [Excluding
Securities Reflected
in Column (a)]
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by
security holders
Total
-
-
-
-
429,435(1)
-
-
-
429,435
(1) Includes shares that may be granted in the form of either incentive stock options or non-qualified stock options under
the 2010 Stock Option Plan (the “2010 Plan”). The 2010 Plan is administered by the Board of Directors or by a
compensation committee of the Board of Directors. The Board of Directors 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 2010 Plan.
Stock Performance Graph
The following chart compares the 5-year cumulative total stock performance of our common stock; the NASDAQ
Composite Index (IXIC); and the Dow Jones U.S. Restaurant & Bar Index (DJUSRU), our peer index. The graph assumes
a hypothetical investment of $100 on September 30, 2014 in each of our common stock and each of the indices, and that
all dividends were reinvested. The measurement points utilized in the graph consist of the last trading day as of September
30 each year, representing the last day of our fiscal year. The calculations exclude trading commissions and taxes. We
have selected the Dow Jones U.S. Restaurant & Bar Index as our peer index since it represents a broader group of
restaurant and bar operators that are more aligned to our core business operations. RICK is a component of the NASDAQ
Composite Index. The historical stock performance presented below is not intended to and may not be indicative of future
stock performance.
19
Item 6. Selected Financial Data.
The following tables set forth certain of the Company’s historical financial data. The selected historical consolidated
financial position data as of September 30, 2019 and 2018 (as revised) and results of operations data for the years ended
September 30, 2019, 2018 (as revised), and 2017 have been derived from the Company’s audited consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated
financial data as of September 30, 2017, 2016, and 2015 and for the years ended September 30, 2016 and 2015 have been
derived from the Company’s audited financial statements for such years, which are not included in this Annual Report on
Form 10-K. The selected historical consolidated financial data set forth are not necessarily indicative of the results of
future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and
accompanying notes included herein to enhance understanding of these data (in thousands, except per share data and
percentages).
Financial Statement Data:
Revenue
Income from operations(2)
Operating margin
Net income attributable to RCIHH(2)
Diluted earnings per share(2)
Capital expenditures
Dividends declared per share
Cash and cash equivalents
Total current assets
Total assets(2)
Total current liabilities (excluding current
portion of long-term debt)
Long-term debt (including current portion)
Total liabilities
Total RCIHH stockholders’ equity(2)
Common shares outstanding
Non-GAAP Measures and Other Data:
Adjusted EBITDA(1)
Non-GAAP operating income(1)
Non-GAAP operating margin(1)
Non-GAAP net income(1)
Non-GAAP diluted net income per share
(1)
Free cash flow(1)
Same-store sales
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2019
181,059
34,701
19.2%
19,175
1.99
21,184
0.13
2019
14,097
34,771
353,637
18,454
143,528
185,336
168,457
9,591
2019
46,242
37,945
21.0%
22,287
2.31
33,316
-0.3%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Years Ended September 30,
2017
144,896
23,139
$
$
$
$
2018
165,748
27,562
16.6%
20,879
2.15
25,263
0.12
$
$
$
$
16.0%
8,259
0.85
11,249
0.12
$
$
$
$
2016
134,860
20,693
15.3%
11,218
1.11
28,148
0.09
2018
17,726
36,802
329,732
14,798
140,627
176,400
153,435
9,719
September 30,
2017
$
$
$
$
$
$
$
9,922
26,242
299,884
13,671
124,352
164,659
132,745
9,719
$
$
$
$
$
$
$
2016
11,327
29,387
276,061
17,087
105,886
146,722
126,755
9,808
Years Ended September 30,
2017
37,348
30,668
$
$
$
$
2018
44,387
37,000
22.3%
21,160
2.18
23,242
4.6%
$
$
$
21.2%
13,953
1.43
19,281
4.9%
$
$
$
2016
34,531
27,566
20.4%
13,302
1.32
20,513
-1.3%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
135,449
20,727
15.3%
9,214
0.89
19,259
-
2015
8,020
16,935
266,527
15,580
94,349
138,973
121,691
10,285
2015
34,125
27,974
20.7%
13,873
1.34
14,889
-1.5%
(1) Reconciliation and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial
Measures” section of Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” that follows. These measures should be considered in addition to, rather than as a substitute for, U.S.
GAAP measures. Certain line items in the fiscal 2018 “Non-GAAP Financial Measures” section have been revised, as
affected by (2) below.
(2) We revised the consolidated balance sheet as of September 30, 2018 and the consolidated statements of income and
cash flows for the year ended September 30, 2018 due to certain misstatements in our goodwill impairment testing.
See Note 3 to our consolidated financial statements.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business
environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of
this report. This overview summarizes the MD&A, which includes the following sections:
● Our Business — a general description of our business and the adult nightclub industry, our objective, our
strategic priorities, our core capabilities, and challenges and risks of our business.
● Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments
and estimates.
● Operations Review — an analysis of our Company’s consolidated results of operations for the three years
presented in our consolidated financial statements.
● Liquidity and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview
of financial position.
OUR BUSINESS
The following are our operating segments:
Nightclubs
Bombshells
Other
Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving
primarily businessmen and professionals. These nightclubs are in Houston, Austin, San
Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Abilene,
Lubbock, El Paso and Odessa, Texas; Charlotte, North Carolina; Minneapolis, Minnesota;
New York, New York; Miami Gardens and Pembroke Park, Florida; Pittsburgh,
Pennsylvania; Phoenix, Arizona; and Washington Park, Kappa and Chicago, Illinois. No
sexual contact is permitted at any of our locations. We also own and operate a Studio 80
dance club in Fort Worth, Texas. We also own and lease to third parties real properties that
are adjacent to (or used to be locations of) our clubs.
Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston,
Dallas, Austin, Spring and Pearland, Texas under the brand name Bombshells Restaurant &
Bar.
Our wholly-owned subsidiaries own a media division (“Media Group”), including the
leading trade magazine serving the multibillion-dollar adult nightclubs industry and the
adult retail products industry. We also own an industry trade show, an industry trade
publication and more than a dozen industry and social media websites. Included here is
Drink Robust, which is licensed to sell Robust Energy Drink in the United States.
Our revenues are derived from the sale of liquor, beer, wine, food, merchandise; service revenues such as cover charges,
membership fees, and facility use fees; and other revenues such as commissions from vending and ATM machines, real
estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations. Other
revenues include Media Group revenues for the sale of advertising content and revenues from our annual Expo
convention, and Drink Robust sales. Our fiscal year-end is September 30.
21
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.
Our goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our
management and employees—to become more competitive and to accelerate growth.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States
(“GAAP”). The preparation of these consolidated financial statements requires our management to make assumptions and
estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical
and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a
regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial
statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be
determined with certainty, actual results may differ from our estimates, and such differences could be material.
A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements,
which is included in Item 8 – “Financial Statements and Supplementary Data” of this report. We believe that the following
accounting estimates are the most critical to aid in fully understanding and evaluating our financial results. These
estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently
uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit
Committee.
Long-Lived Assets
We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance
relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or
the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash
flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not
recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset
group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows
can be identified. Key estimates in the undiscounted cash flow model include management’s estimate of the projected
revenues and operating margins. If fair value is used to determine an impairment loss, an additional key assumption is the
selection of a weighted-average cost of capital to discount cash flows. Assets to be disposed of are separately presented in
the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer
depreciated. During the fourth quarter of 2019, we impaired two clubs for a total of $4.2 million; during the fourth quarter
of 2018, we impaired one club and one Bombshells by a total of $1.6 million; and during the fourth quarter of fiscal 2017,
we impaired one club by $385,000.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth
fiscal quarter, and are tested for impairment more frequently if events and circumstances indicate that the asset might be
impaired.
22
Our impairment calculations require management to make assumptions and to apply judgment in order to estimate fair
values. If our actual results are not consistent with our estimates and assumptions, we may be exposed to impairments that
could be material. We do not believe that there is a reasonable likelihood that there will be a change in the estimates or
assumptions we used that could cause a material change in our calculated impairment charges.
For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more
likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several
factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in
comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair
value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we
perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using
market-related valuation models, including earnings multiples, discounted cash flows, and comparable asset market
values. Key estimates in the discounted cash flow model include management’s estimate of the projected revenues and
operating margins, along with the selection of a weighted-average cost of capital to discount cash flows. We recognize
goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit,
not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the
year ended September 30, 2019, we identified four reporting units that were impaired and recognized a goodwill
impairment loss totaling $1.6 million. For the year ended September 30, 2018, we identified two reporting units that were
impaired and recognized a goodwill impairment loss totaling $834,000. For the year ended September 30, 2017, we
identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $4.7 million.
For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess
earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model. For
indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value is then
compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount
exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $178,000 in 2019
related to one club, $3.1 million in 2018 related to three clubs, and $1.4 million in 2017 related to two clubs.
Investment
During the fourth quarter of fiscal 2017, we also fully impaired our remaining investment in Drink Robust amounting to
$1.2 million. Available-for-sale investments are carried at fair value with the unrealized gain or loss recorded in other
comprehensive income until our adoption of Accounting Standards Update No. 2016-01 on October 1, 2018, at which the
change in fair value is recorded in current earnings. See Note 2 to our consolidated financial statements.
Income Taxes
We estimate certain components of our provision for income taxes. These estimates include depreciation and amortization
expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee tip income, effective
rates for state and local income taxes, and the deductibility of certain other items, among others. We adjust our annual
effective income tax rate as additional information on outcomes or events becomes available.
On December 22, 2017, the Tax Act was signed into law. The Tax Act contains significant changes to corporate taxation,
including reduction of the corporate tax rate from 35% to 21%, additional limitations on the tax deductibility of interest,
immediate deductions for certain new investments instead of deductions for depreciation expense over time, and
modification or repeal of many business deductions and credits. Our federal corporate income tax rate for fiscal 2018 was
24.5% percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our federal corporate
income tax rate was 21%.
Legal and Other Contingencies
As mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 11 to our consolidated financial
statements, we are involved in various suits and claims in the normal course of business. We record a liability when it is
probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in
both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of
management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in
excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome
of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although
management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved
against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s
consolidated financial statements for that reporting period could be materially adversely affected. In matters where there is
insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with
these claims in excess of our insurance coverage.
23
OPERATIONS REVIEW
Highlights of operations from fiscal 2019 compared to fiscal 2018 (with fiscal 2017 comparative data) are as follows:
● Revenues of $181.1 million compared to $165.7 million, a 9.2% increase
Nightclubs revenue of $148.6 million compared to $140.1 million in 2018, a 6.1% increase
Bombshells revenue of $30.8 million compared to $24.1 million in 2018, a 27.9% increase
Fiscal 2017 total revenues of $144.9 million (Nightclubs revenue of $124.7 million and Bombshells
revenue of $18.8 million)
● Consolidated same-store sales decrease of 0.3% (0.6% increase for Nightclubs and 6.1% decrease for
Bombshells)
Consolidated, Nightclubs and Bombshells same-store sales in 2018 (compared to 2017) of +4.6%,
+5.8% and -3.3%, respectively
Consolidated, Nightclubs and Bombshells same-store sales in 2017 (compared to 2016) of +4.9%,
+5.1% and +3.5%, respectively
● Diluted earnings per share (“EPS”) of $1.99 compared to $2.15, a 7.4% decrease (non-GAAP diluted EPS* of
$2.31 compared to $2.18, a 6.0% increase) (diluted EPS of $0.85 and non-GAAP diluted EPS of $1.43 in fiscal
2017)
● Free cash flow* of $33.3 million compared to $23.2 million, a 43.3% increase ($19.3 million in fiscal 2017)
* Reconciliation and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial
Measures” section of this Item. These measures should be considered in addition to, rather than as a substitute for,
U.S. GAAP measures.
The following common size tables present a comparison of our results of operations as a percentage of total revenues for
the past three fiscal years:
2019
2018
(As Revised)
2017
Revenues
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Cost of goods sold
Alcoholic beverages
Food and merchandise
Service and other
Total cost of goods sold (exclusive of items shown
separately below)
Salaries and wages
Selling, general and administrative
Depreciation and amortization
Other charges, net
Total operating expenses
Income from operations
Other income (expenses)
Interest expense
Interest income
Unrealized loss on equity securities
Income before income taxes
Income tax expense (benefit)
Net income
41.5%
14.3%
37.6%
6.6%
100.0%
20.4%
35.1%
0.7%
13.8%
27.5%
33.1%
5.0%
1.4%
80.8%
19.2%
-5.6%
0.2%
-0.3%
13.4%
2.7%
10.7%
41.7%
13.5%
38.7%
6.1%
100.0%
20.7%
36.3%
0.6%
13.8%
26.9%
32.5%
4.7%
5.5%
83.4%
16.6%
-6.0%
0.1%
-
10.8%
-1.9%
12.6%
41.7%
12.6%
40.1%
5.6%
100.0%
21.7%
40.5%
0.3%
14.3%
27.6%
32.3%
4.8%
5.0%
84.0%
16.0%
-6.0%
0.2%
-
10.1%
4.4%
5.7%
†
Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to
their respective revenue line.
24
Below is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar
amounts in thousands)
2019 vs. 2018
Amount
%
Increase (Decrease)
2018 vs. 2017
Amount
(As Revised)
%
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Cost of goods sold
Alcoholic beverages
Food and merchandise
Service and other
Total cost of goods sold (exclusive of items
shown separately below)
Salaries and wages
Selling, general and administrative
Depreciation and amortization
Other charges, net
Total operating expenses
Income from operations
Other income/expenses
Interest expense
Interest income
Unrealized loss on equity securities
Income before income taxes
Income tax expense/benefit
Net income
Revenues
$
$
6,020
3,397
3,951
1,943
15,311
976
923
129
2,028
5,286
6,072
1,350
(6,564)
8,172
7,139
255
75
612
6,347
7,981
(1,634)
8.7% $
15.1%
6.2%
19.3%
9.2%
6.8%
11.3%
28.7%
8.9%
11.9%
11.3%
17.5%
-71.5%
5.9%
25.9%
2.6%
32.1%
100.0%
35.6%
256.0%
-7.8% $
8,681
4,177
5,972
2,022
20,852
1,213
735
240
2,188
4,518
7,049
802
1,872
16,429
4,423
1,190
(32)
-
3,201
(9,477)
12,678
14.4%
22.9%
10.3%
25.1%
14.4%
9.2%
9.9%
114.8%
10.6%
11.3%
15.1%
11.6%
25.6%
13.5%
19.1%
13.6%
-12.0%
0.0%
21.9%
-149.0%
153.1%
Consolidated revenues increased by $15.3 million, or 9.2%, from 2018 to 2019, and increased by $20.9 million, or 14.4%,
from 2017 to 2018. The increase from 2018 to 2019 was mainly due to a 10.9% increase from newly acquired or
constructed units and a 0.3% increase in other revenues, partially offset by a 1.7% decrease from closed units and the
impact of the 0.3% decline in same-store sales. The increase from 2017 to 2018 was primarily due to 11.5% in newly
acquired or constructed or reconcepted locations, the impact of the 4.6% increase in consolidated same-store sales, and a
minimal increase in other revenues, partially offset by a 1.8% decrease from closed locations.
25
By reportable segment, revenues were as follows (in thousands):
Nightclubs
Bombshells
Other
2019
2018
2017
$
$
148,606
30,828
1,625
181,059
$
$
140,060
24,094
1,594
165,748
$
$
124,687
18,830
1,379
144,896
Nightclubs segment revenues. Nightclubs revenues increased by 6.1% and 12.3% from 2018 to 2019 and from 2017 to
2018, respectively. A breakdown of the changes compared to total change in Nightclubs revenues is as follows:
Impact of 0.6% and 5.8% increase in same-store sales, respectively, to
total revenues
Newly acquired and reconcepted units
Closed units
Other
2019 vs. 2018
2018 vs. 2017
0.5%
7.4%
(2.1)%
0.4%
6.1%
5.6%
8.5%
(1.8)%
0.1%
12.3%
By type of revenue line item, changes in Nightclubs segment revenue dollars are broken down as:
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
2019 vs. 2018
2018 vs. 2017
4.5%
2.5%
6.0%
22.6%
12.6%
12.2%
10.4%
27.0%
Nightclubs segment sales mix did not change much through the three fiscal years:
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
2019
2018
2017
38.5%
8.8%
45.7%
7.0%
100.0%
39.1%
9.1%
45.7%
6.1%
100.0%
39.0%
9.1%
46.5%
5.4%
100.0%
Included in the 2019 new units are Rick’s Cabaret Chicago and Rick’s Cabaret Pittsburgh, which were acquired in
November 2018 (see Note 15 to our consolidated financial statements) and contributed $5.0 million and $4.6 million in
revenues for 2019 since acquisition date. Included in the 2018 new units is Kappa Men’s Club, which was acquired in
May 2018.
Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.7 million in 2019, $1.2
million in 2018, and $1.1 million in 2017.
26
Bombshells segment revenues. Bombshells revenues increased by 27.9% from 2018 to 2019 and by 28.0% from 2017 to
2018. A breakdown of the changes compared to total changes in Bombshells revenues is as follows:
Impact of 6.1% and 3.3% decrease in same-store sales, respectively, to
total revenues
New units
Closed units
2019 vs. 2018
2018 vs. 2017
(5.1)%
32.4%
0.6%
27.9%
(3.2)%
32.5%
(1.4)%
28.0%
By type of revenue line item, changes in Bombshells segment revenues are broken down as:
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Bombshells segment sales mix for the three fiscal years is as follows:
2019 vs. 2018
2018 vs. 2017
24.7%
31.7%
224.0%
4.3%
21.5%
40.4%
(58.0)%
35.3%
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
2019
2018
2017
57.9%
41.5%
0.5%
0.1%
100.0%
59.4%
40.3%
0.2%
0.1%
100.0%
62.6%
36.7%
0.6%
0.1%
100.0%
Bombshells 290 was opened early in the fourth quarter of 2017. Bombshells Pearland was opened in the third quarter of
2018. Bombshells I-10 was opened in the first quarter of 2019, while Bombshells 249 was opened in the second quarter of
2019.
Other segment revenues. Other revenues included revenues from Drink Robust in 2019 and 2018. After a brief period
when a majority of our interest in Drink Robust was sold, we later reacquired Drink Robust in March 2018 (see Note 15 to
our consolidated financial statements). Drink Robust sales were $231,000, $141,000, and $0 in fiscal 2019, 2018, and
2017, respectively, which excludes intercompany sales to Nightclubs and Bombshells units. Media business revenues were
$1.4 million, $1.4 million, and $1.2 million in fiscal 2019, 2018, and 2017, respectively.
Operating Expenses
Total operating expenses, as a percent of revenues, were 80.8%, 83.4%, and 84.0% for the fiscal year 2019, 2018, and
2017, respectively. Significant contributors to the change in operating expenses as a percent of revenues are explained
below.
Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media
printing/binding and media. As a percentage of consolidated revenues, consolidated cost of goods sold was 13.8%, 13.8%,
and 14.3% for fiscal 2019, 2018, and 2017, respectively. See above for breakdown of percentages for each line item of
consolidated cost of goods sold as it relates to the respective consolidated revenue line. For the Nightclubs segment, cost
of goods sold was 11.2%, 11.8%, and 12.7% for fiscal 2019, 2018, and 2017, respectively, which was primarily caused by
sales mix shifting over to high-margin revenues. Bombshells cost of goods sold of 25.3%, 24.7%, and 24.8% for fiscal
2019, 2018, and 2017, respectively, which was mainly driven by food cost inflation.
27
Consolidated salaries and wages increased by $5.3 million, or 11.9%, from 2018 to 2019 and by $4.5 million, or 11.3%,
from 2017 to 2018. The dollar increase from 2018 to 2019 primarily came from newly opened units plus the impact of
pre-opening salaries and wages on still under-construction Bombshells units. The dollar increase from 2017 to 2018 was
mainly from new club and restaurant openings. As a percentage of revenues, consolidated salaries and wages has been
fairly stable at 27.5%, 26.9%, and 27.6% for fiscal year 2019, 2018, and 2017, respectively.
By reportable segment, salaries and wages are broken down as follows (in thousands):
Nightclubs
Bombshells
Other
General corporate
2019
2018
2017
32,267
8,887
617
8,062
49,833
$
$
30,788
5,804
789
7,166
44,547
$
$
28,329
4,393
970
6,337
40,029
$
$
Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and
above are included in general corporate.
The components of consolidated selling, general and administrative expenses are in the tables below (dollars in
thousands):
Taxes and permits
Advertising and marketing
Supplies and services
Insurance
Rent
Legal
Utilities
Charge card fees
Security
Accounting and professional fees
Repairs and maintenance
Other
$
$
Years Ended September 30,
2018
2017
2019
10,779 $
8,392
5,911
5,429
3,896
5,180
3,165
3,803
2,973
2,815
2,980
4,573
59,896 $
9,545 $
7,536
5,344
5,473
3,720
3,586
2,969
3,244
2,617
2,944
2,184
4,662
53,824 $
8,026
6,704
4,873
4,006
3,258
3,074
2,824
2,783
2,251
2,159
2,091
4,726
46,775
Percentage of Revenues
2018
2019
2017
6.0%
4.6%
3.3%
3.0%
2.2%
2.9%
1.7%
2.1%
1.6%
1.6%
1.6%
2.5%
33.1%
5.8%
4.5%
3.2%
3.3%
2.2%
2.2%
1.8%
2.0%
1.6%
1.8%
1.3%
2.8%
32.5%
5.5%
4.6%
3.4%
2.8%
2.2%
2.1%
1.9%
1.9%
1.6%
1.5%
1.4%
3.3%
32.3%
By reportable segment, selling, general and administrative expenses are broken down as follows (in thousands):
Nightclubs
Bombshells
Other
General corporate
2019
2018
2017
$
$
40,033
10,441
356
9,066
59,896
$
$
28
38,200
7,454
467
7,703
53,824
$
$
34,074
5,663
621
6,417
46,775
The significant variances in selling, general and administrative expenses are as follows:
Taxes and permits increased by $1.2 million, or 12.9%, from 2018 to 2019 primarily due to new units, higher taxes on
those new units, and increases in patron taxes and property taxes as a result of increased sales revenues. Taxes and permits
increased by $1.5 million, or 18.9%, from 2017 to 2018 primarily due to an increased operating activity and the previously
mentioned sales tax audit settlements in 2018. As a percentage of revenues, taxes and permits were 6.0%, 5.8%, and 5.5%
for 2019, 2018, and 2017, respectively.
Advertising and marketing increased by $856,000, or 11.4%, from 2018 to 2019 and increased by $832,000, or 12.4%,
from 2017 to 2018 mainly due to new units. As a percentage of revenues, advertising and marketing was relatively flat at
4.6%, 4.5%, and 4.6% for 2019, 2018, and 2017, respectively.
Insurance decreased nominally by $44,000, or 0.8%, from 2018 to 2019. It increased by $1.5 million, or 36.6%, from 2017
to 2018 primarily due to an increase in general liability insurance premiums and additional property insurance.
Rent expense increased by $176,000, or 4.7%, from 2018 to 2019 mainly due to adjustments in deferred rent liability in
fiscal year 2018. Rent expense increased by $462,000, or 14.2% from 2017 to 2018 primarily due to Scarlett’s Miami,
which was acquired in May 2017, and Bombshells 290, which was opened in July 2017. As a percentage of revenues, rent
expense has been flat at 2.2% in all three years.
Legal expenses increased in 2019 from 2018 by $1.6 million, or 44.5%, mainly due to SEC-related matters. Legal
expenses increased by $512,000, or 16.7%, from 2017 to 2018 primarily due to increased legal activity on on-going
litigation cases.
Charge card fees increased by $559,000, or 17.5%, from 2018 to 2019, and by $461,000, or 16.6%, from 2017 to 2018.
Both increases were directly related to higher revenues from prior year. As a percentage of revenues, charge card fees
were 2.1%, 2.0%, and 1.9% in 2019, 2018, and 2017, respectively.
Accounting and professional fees decreased by $129,000, or 4.4%, from 2018 to 2019 mainly due to consulting services
during our ERP implementation in 2018. Accounting and professional fees increased by $785,000, or 36.4%, from 2017 to
2018 primarily due to our hiring of an outside internal controls consultant in 2018 and the previously mentioned ERP
implementation consultants.
29
Depreciation and amortization increased by $1.4 million, or 17.5%, from 2018 to 2019, and increased by $802,000, or
11.6%, from 2017 to 2018 coming from newly acquired and constructed units.
The components of other charges, net are in the table below (dollars in thousands):
2019
Years Ended September 30,
2018
(As Revised)
2017
Percentage of Revenues
2018
2019
2017
Impairment of assets
Settlement of lawsuits
Loss (gain) on sale of businesses and
assets
Gain on insurance
Gain on settlement of patron tax
Total other charges, net
$
$
6,040 $
225
5,570 $
1,669
7,639
317
(2,877)
(768)
-
2,620 $
1,965
(20)
-
9,184 $
(542)
-
(102)
7,312
3.3%
0.1%
-1.6%
-0.4%
-
1.4%
3.4%
1.0%
1.2%
-0.0%
-
5.5%
5.3%
0.2%
-0.4%
-
-0.1%
5.0%
The significant variances in other charges, net are discussed below:
During the year ended September 30, 2017, we recorded aggregate impairment charges of $7.6 million ($1.4 million in the
third quarter and $6.2 million in the fourth quarter) for the goodwill of four club locations ($4.7 million), including one
that we have put up for sale during the fiscal year; for property and equipment of one club ($385,000); for SOB license of
two club locations ($1.4 million), and for our remaining investment in Drink Robust ($1.2 million). During the year ended
September 30, 2018, we recorded a loss on the note owed to us the by former owner of Drink Robust in relation to our
reacquisition of Drink Robust ($1.55 million in the second quarter), impairment related to licenses of three clubs ($3.1
million in the fourth quarter), impairment related to goodwill of two clubs ($834,000 in the fourth quarter), and
impairment related to long-lived assets of a club that closed and a still-operating Bombshells ($1.6 million in the fourth
quarter). During the year ended September 30, 2019, we recorded aggregate impairment charges amounting to $6.0
million related to goodwill of four clubs ($1.6 million), SOB license of one club ($178,000), and property and equipment
of two clubs ($4.2 million). See Notes 15 and 17 to our consolidated financial statements for further discussion.
Income from Operations
Below is a table which reflects segment contribution to income from operations (in thousands):
Nightclubs
Bombshells
Other
General corporate
2019
2018
(As Revised)
2017
$
$
50,724
2,307
(309)
(18,021)
34,701
$
$
43,624
2,040
(252)
(17,850)
27,562
$
$
35,138
3,084
(522)
(14,561)
23,139
Our operating margin (income from operations divided by revenues) was 19.2% in 2019, 16.6% in 2018, and 16.0% in
2017. Nightclubs operating margin was 34.1%, 31.1%, and 28.2% in 2019, 2018, and 2017, respectively, primarily due to
the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $5.9 million,
$4.4 million, and $6.5 million for 2019, 2018, and 2017, respectively. Bombshells operating margin was 7.4%, 8.5%, and
16.4% in 2019, 2018, and 2017, respectively, mainly due to pre-opening expenses in 2019 (particularly in salaries and
wages and selling, general and administrative expenses) and impairment of assets of $1.1 million in 2018.
30
Excluding the impact of settlement of lawsuits, impairment of assets, gain on insurance, gain on patron tax settlement, and
gain on sale of businesses and assets, operating margin for the Nightclub segment would have been 35.9%, 35.1%, and
33.1% for 2019, 2018, and 2017, respectively. Excluding the impact of impairment of assets, loss on sale of assets, and
settlement of lawsuits, Bombshells segment operating margin would have been 7.6%, 15.1%, and 16.4% for 2019, 2018,
and 2017, respectively. Refer to discussion of Non-GAAP Financial Measures on page 32.
Interest Expense
Interest expense increased by $255,000 from 2018 to 2019, and increased by $1.2 million from 2017 to 2018. The increase
in interest expense is due to higher average debt balance partially offset by lower weighted average interest rate. During
the first quarter of 2018, we significantly increased our debt balance with our $81 million refinancing, but that transaction
also significantly reduced our weighted average interest rate. During 2019, our debt repayments were significantly higher
than our borrowing, excluding borrowings from acquisitions, thereby reducing interest expense as a percentage of
revenue.
We consider rent plus interest expense as our occupancy costs since most of our debts are for real property where our
clubs and restaurants are located. For occupancy cost purposes, we exclude non-real-estate-related interest expense. As a
percentage of revenues, total occupancy costs, with its components, are shown below.
Rent
Interest
Total occupancy cost
Income Taxes
2019
2018
2017
2.2%
5.6%
7.8%
2.2%
5.4%
7.7%
2.2%
6.0%
8.3%
Income taxes were an expense of $4.9 million in 2019, a benefit of $3.1 million in 2018, and an expense of $6.4 million in
2017. Our effective income tax rate was a 20.1% expense in 2019, a 17.5% benefit in 2018, and a 43.4% expense in 2017.
The components of our annual effective income tax rate are the following:
Computed expected income tax expense
State income taxes, net of federal benefit
Deferred taxes on subsidiaries acquired/sold
Permanent differences
Change in deferred tax liability rate
Reserve for uncertain tax position
Tax credits
Other
Total effective income tax rate
2019
2018
2017
21.0%
2.8%
-
0.2%
-
-
-3.7%
-0.1%
20.1%
24.5%
4.5%
4.0%
0.5%
-49.5%
-
-4.5%
3.1%
-17.5%
34.0%
2.0%
-
0.7%
9.1%
2.8%
-3.9%
-1.3%
43.4%
During fiscal year 2017, due to higher income before tax, our income tax rate has increased to 37%, of which has
impacted the fourth quarter with the change in rate from 35% in the first nine months of the year and in prior years. A full
year impact in the change in rate of our deferred tax liability has also been recognized in the fourth quarter. The change in
deferred tax liability rate for 2017 is due to the 1% increase in our effective tax rate from the increase in the federal rate
and also an increase in the states rate. This amount results from increasing by 2% the rate applied to our entire deferred tax
liabilities at the beginning of the year. The reserve for uncertain tax positions results from an audit of the returns of one of
the states in which we operate. As a result of the items discussed above which affected the fiscal year, the fourth quarter
effective tax rate rose to 99.6% expense on a pre-tax loss.
On December 22, 2017, during our first quarter 2018, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law,
which provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, such as a reduction in the
statutory federal corporate tax rate from a maximum of 35% to a flat 21% rate effective from January 1, 2018 forward and
changes and limitations to certain tax deductions. The Company has a fiscal year end of September 30, so the change to
the statutory corporate tax rate results in a blended federal statutory rate of 24.5% for its fiscal year 2018. The increase in
state tax effective rate from 2017 to 2018 was mainly caused by the impact of return-to-provision true-up, which has an
expense impact in 2018 while having a benefit in 2017.
During fiscal 2019, the effective income tax rate has normalized to 20.1%, with the rate difference from the statutory
federal corporate tax rate of 21% coming from offsetting impact of state income tax, net of federal benefit, and tax credits
that are mostly FICA tip credits.
31
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP
financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past
performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a
company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in
or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor
non-GAAP financial measures because it describes the operating performance of the Company and helps management and
investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not
representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly
comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial
measures, we further set forth our rationale as follows:
Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-
GAAP operating margin by excluding the following items from income from operations and operating margin: (a)
amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or
losses on insurance, (e) settlement of lawsuits, and (f) gains or losses on settlement of patron tax case. 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
shareholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of
assets, (c) costs and charges related to debt refinancing, (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) settlement of lawsuits, (h) gains or losses on
settlement of patron tax case, and (i) 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 20.1%, 24.5%
and 37.0% effective tax rate of the pre-tax non-GAAP income before taxes for the 2019, 2018 and 2017, 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. The calculated amount for adjustment (i) above in fiscal 2018 was
significantly affected by the change in the statutory federal corporate tax rate caused by the Tax Act.
Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to
RCIHH common shareholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest
expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance (f) unrealized gains or losses
on equity securities, (g) impairment of assets, (h) settlement of lawsuits, (i) gains or losses on settlement of patron tax
case. We believe that adjusting for such items helps management and investors better understand our operating activities.
Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust
for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are,
therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline
to assess the unleveraged performance return on our investments. Adjusted EBITDA multiple is also used as a target
benchmark for our acquisitions of nightclubs.
We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section
for further discussion.
32
The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per
share amounts and percentages):
For the Year Ended
September 30,
2018
2019
2017
$
$
$
$
$
$
$
$
Reconciliation of GAAP net income to Adjusted
EBITDA
Net income attributable to RCIHH common
shareholders(1)
Income tax expense (benefit)
Interest expense, net
Settlement of lawsuits
Gain on settlement of patron tax case
Impairment of assets(1)
Loss (gain) on sale of businesses and assets
Depreciation and amortization
Unrealized loss on equity securities
Gain on insurance
Adjusted EBITDA
Reconciliation of GAAP net income to non-GAAP
net income
Net income attributable to RCIHH common
shareholders(1)
Amortization of intangibles
Settlement of lawsuits
Gain on settlement of patron tax case
Impairment of assets(1)
Loss (gain) on sale of businesses and assets
Costs and charges related to debt refinancing
Unrealized loss on equity securities
Gain on insurance
Net income tax effect of adjustments above
Non-GAAP net income
Reconciliation of GAAP diluted earnings per share
to non-GAAP diluted earnings per share
Diluted shares
GAAP diluted earnings per share(1)
Amortization of intangibles
Settlement of lawsuits
Gain on settlement of patron tax case
Impairment of assets(1)
Loss (gain) on sale of businesses and assets
Costs and charges related to debt refinancing
Unrealized loss on equity securities
Gain on insurance
Net income tax effect of adjustments above
Non-GAAP diluted earnings per share
Reconciliation of GAAP operating income to non-
GAAP operating income
Income from operations(1)
Amortization of intangibles
Settlement of lawsuits
Gain on settlement of patron tax case
Impairment of assets(1)
Loss (gain) on sale of businesses and assets
Gain on insurance
Non-GAAP operating income
Reconciliation of GAAP operating margin to non-
GAAP operating margin
GAAP operating margin(1)
Amortization of intangibles
Settlement of lawsuits
Gain on settlement of patron tax case
Impairment of assets(1)
Loss (gain) on sale of businesses and assets
Gain on insurance
$
$
$
$
$
$
$
$
19,175
4,863
9,900
225
-
6,040
(2,877)
9,072
612
(768)
46,242
19,175
624
225
-
6,040
(2,877)
-
612
(768)
(744)
22,287
$
$
$
$
20,879
(3,118)
9,720
1,669
-
5,570
1,965
7,722
-
(20)
44,387
20,879
254
1,669
-
5,570
1,965
827
-
(20)
(9,984)
21,160
For the Year Ended
September 30,
2018
2019
$
$
$
$
9,657
1.99
0.06
0.02
-
0.63
(0.30)
-
0.06
(0.08)
(0.08)
2.31
34,701
624
225
-
6,040
(2,877)
(768)
37,945
19.2%
0.3%
0.1%
-
3.3%
-1.6%
-0.4%
9,719
2.15
0.03
0.17
-
0.57
0.20
0.09
-
(0.00)
(1.02)
2.18
27,562
254
1,669
-
5,570
1,965
(20)
37,000
16.6%
0.2%
1.0%
-%
3.4%
1.2%
-0.0%
2017
8,259
6,359
8,498
317
(102)
7,639
(542)
6,920
-
-
37,348
8,259
217
317
(102)
7,639
(542)
-
-
-
(1,835)
13,953
9,743
0.85
0.02
0.03
(0.01)
0.78
(0.06)
-
-
-
(0.18)
1.43
23,139
217
317
(102)
7,639
(542)
-
30,668
16.0%
0.1%
0.2%
-0.1%
5.3%
-0.4%
-
Non-GAAP operating margin
21.0%
22.3%
21.2%
* Per share amounts and percentages may not foot due to rounding.
(1) These amounts have been revised for fiscal 2018, as explained in Note 3 to our consolidated financial statements.
The adjustments to reconcile net income attributable to RCIHH common shareholders to non-GAAP net income exclude
the impact of adjustments related to noncontrolling interests, which is immaterial. In the calculation of non-GAAP diluted
earnings per share for fiscal 2017, we take into consideration the adjustment to net income from assumed conversion of
debentures (see Note 2 to the consolidated financial statements).
33
LIQUIDITY AND CAPITAL RESOURCES
We believe our ability to generate cash from operating activities is one of our fundamental financial strengths. The near-
term outlook for our business remains strong, and we expect to generate substantial cash flows from operations in fiscal
2020 and beyond. As a result of our expected cash flows from operations, we have significant flexibility to meet our
financial commitments. The Company has not recently raised capital through the issuance of equity securities. Instead, we
use debt financing to lower our overall cost of capital and increase our return on equity. We have a history of borrowing
funds in private transactions and from sellers in acquisition transactions and continue to have the ability to borrow funds at
reasonable interest rates in that manner. We also have historically utilized these cash flows to invest in maintenance
capital expenditures for existing units, adult nightclubs acquisitions, and restaurants/sports bars construction.
The following table presents a summary of our cash flows from operating, investing, and financing activities (in
thousands):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
$
$
Year Ended September 30,
2018
25,769
(26,339)
8,374
7,804
2019
37,174
(27,147)
(13,656)
(3,629) $
$
$
$
2017
21,094
(18,524)
(3,975)
(1,405)
We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units,
and investments in technology. We also utilize capital to repurchase our common stock as part of our share repurchase
program based on our capital allocation strategy guidelines and to pay our quarterly dividends.
As of September 30, 2019, we had negative working capital of $2.3 million (excluding the impact of assets held for sale
amounting to $2.9 million) compared to working capital of $55,000 as of September 30, 2018 (excluding the impact of
assets held for sale amounting to $2.9 million). The decrease in working capital is principally due to the following items:
● Net payments of long-term debt to our lenders;
● Business acquisitions and purchase of capital expenditures; and
● Partially offset by operating cash flow for the year.
We believe that our current sources of liquidity and capital will be more than sufficient to finance our continued
operations and growth plans not only within the next 12 months, but for the next 18 to 24 months. Refer to sections on
Debt Financing and Contractual Obligations and Commitments below for a discussion of long-term liquidity and capital
resources.
34
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
Net income
Depreciation and amortization
Deferred tax expense (benefit)
Impairment of assets
Net change in operating assets and liabilities
Other
$
$
2019
$
Year Ended September 30,
2018
(As Revised)
20,960
$
7,722
(6,775)
5,570
(5,156)
3,448
25,769
19,326
9,072
821
6,040
3,941
(2,026)
37,174
$
$
2017
8,282
6,920
2,273
7,639
(3,645)
(375)
21,094
Net cash flows from operating activities increased from 2018 to 2019 primarily from higher income from operations plus
lower income taxes paid. Net cash flows from operating activities increased from 2017 to 2018 mainly due to higher
income from operations partially offset by higher income taxes and interest expense in 2018.
Cash Flows from Investing Activities
Following are our summarized cash flows from investing activities (in thousands):
Proceeds from sale of businesses and assets
Proceeds from insurance and notes receivable
Issuance of notes receivable
Additions to property and equipment
Acquisition of businesses, net of cash acquired
Year Ended September 30,
2018
2017
2019
$
$
$
7,223
258
(420)
(20,708)
(13,500)
(27,147) $
$
811
147
-
(25,263)
(2,034)
(26,339) $
2,145
107
-
(11,249)
(9,527)
(18,524)
We opened four new units in 2019 (acquired two clubs in Chicago, Illinois and Pittsburgh, Pennsylvania, and built two
new Bombshells in Houston, Texas); opened two new units in 2018 (one acquired club in Kappa, Illinois and one built
Bombshells in Pearland, Texas); and opened five new units in 2017 (including two acquired and one reconcepted from a
Bombshells to a club). See Note 15 to our consolidated financial statements. As of September 30, 2019, 2018, and 2017,
we had $8.9 million, $6.4 million, and $1.6 million in construction-in-progress related mostly to Bombshells opening in
the subsequent fiscal year.
Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2019, 2018,
and 2017 (in thousands):
Purchase of real estate*
New capital expenditures in new clubs and
Bombshells units and equipment
Maintenance capital expenditures
Total capital expenditures, excluding business
acquisitions
2019
$
Year Ended September 30,
2018
12,260
$
$
-
16,850
3,858
10,476
2,527
2017
6,024
3,412
1,813
$
20,708
$
25,263
$
11,249
* Excludes real estate acquired through business acquisitions.
35
Cash Flows from Financing Activities
Following are our summarized cash flows from financing activities (in thousands):
Proceeds from long-term debt
Payments on long-term debt
Payment of dividends
Purchase of treasury stock
Payment of loan origination costs
Debt prepayment penalty
Distribution of noncontrolling interests
$
$
$
$
Year Ended September 30,
2018
84,233
(72,830)
(1,168)
-
(1,138)
(543)
(180)
8,374
2019
13,511
(22,924)
(1,252)
(2,901)
(20)
-
(70)
(13,656) $
$
2017
12,399
(13,080)
(1,170)
(1,099)
(735)
(75)
(215)
(3,975)
We purchased shares of our common stock representing 128,040 shares, 0 shares, and 89,685 shares in 2019, 2018, and
2017, respectively. We have paid quarterly dividends of $0.03 per share for fiscal 2019, 2018 and 2017, except for the
fourth quarter of 2019 where we paid $0.04 per share. See Note 9 to our consolidated financial statements for a detailed
discussion of our debt obligations.
Non-GAAP Cash Flow Measure
Management also uses certain non-GAAP cash flow measures such as free cash flows. We define free cash flow as net
cash provided by operating activities less maintenance capital expenditures. See table below (in thousands):
Net cash provided by operating activities
Less: Maintenance capital expenditures
Free cash flow
2019
2018
2017
$
$
37,174
3,858
33,316
$
$
25,769
2,527
23,242
$
$
21,094
1,813
19,281
We do not include total capital expenditures as a reduction from net cash flow from operating activities to arrive at free
cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and
restaurants are our primary uses of free cash flow. Our free cash flow after long-term debt repayments was $10.4 million,
$(49.6) million, and $6.2 million during fiscal 2019, 2018, and 2017, respectively. Free cash flow after long-term debt
repayments in fiscal 2018 was significantly impacted by our $81.2 million refinancing in December 2017.
Debt Financing
See Note 9 to our consolidated financial statements for detail regarding our long-term debt activity.
36
Contractual Obligations and Commitments
We have long-term contractual obligations primarily in the form of debt obligations and operating leases. The following
table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent
payments. Future interest payments related to debt were estimated using the interest rate in effect at September 30, 2019.
Total
2020
Payments Due by Period
2022
2023
2021
Long-term debt – regular
Long-term debt – balloon
Interest payments
Operating leases(a)
$ 80,442 $
64,561
52,566
36,225
8,822 $
7,163
9,435
3,237
9,499 $
6,466
8,223
3,154
7,756 $
6,273
6,430
3,057
7,279 $
1,970
5,829
2,889
2024
Thereafter
7,685 $ 39,401
42,689
17,395
21,038
-
5,254
2,850
(a) Effective October 1, 2019, we will adopt Accounting Standards Update No. 2016-02, Leases (Topic 842), which
will significantly affect our accounting of all leases. See Note 2 to our consolidated financial statements.
However, we do not expect changes in our contractual obligations for future lease payments related to all of our
leases existing as of September 30, 2019, except for any expected exercise of renewal options allowed in the
adoption of ASC 842.
Other than the debt refinancing and other notes payable financing described in Note 9 to the consolidated financial
statements, we are not aware of any event or trend that would potentially significantly affect liquidity. In the event such a
trend develops, we believe our working capital and capital expenditure requirements will be adequately met by cash flows
from operations. 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 (dollars in thousands):
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Net cash provided by operating activities
Adjusted EBITDA*
Free cash flow*
Long-term debt (end of period)
2019
75,140
25,830
68,055
12,034
181,059
37,174
46,242
33,316
143,528
$
$
$
$
$
$
Increase
(Decrease)
8.7% $
15.1%
6.2%
19.3%
9.2% $
44.3% $
4.2% $
43.3% $
2.1% $
2018
69,120
22,433
64,104
10,091
165,748
25,769
44,387
23,242
140,627
Increase
(Decrease)
14.4% $
22.9%
10.3%
25.1%
14.4% $
22.2% $
18.8% $
20.5% $
13.1% $
2017
60,439
18,256
58,132
8,069
144,896
21,094
37,348
19,281
124,352
* See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and
Liquidity and Capital Resources above.
37
We have not established financing other than the notes payable discussed in Note 9 to the consolidated financial
statements. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future,
if at all, should the need arise.
Share Repurchase
As part of our capital allocation strategy, we buy back shares in the open market or through negotiated purchases, as
authorized by our Board of Directors. During fiscal years 2019, 2018, and 2017, we paid for treasury stock amounting to
$2.9 million, $0, and $1.1 million representing 128,040 shares, 0 shares, and 89,685 shares, respectively. We have $10.2
million remaining to purchase additional shares as of September 30, 2019. Subsequent to September 30, 2019 through the
filing date of this report, we purchased 332,671 shares of the Company’s common stock for a total of $6.4 million. On
February 6, 2020, the Board of Directors increased the repurchase authorization by an additional $10.0 million.
For additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
IMPACT OF INFLATION
We have not experienced a material overall impact from inflation in our operations during the past several years. 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.
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 eight of the existing Bombshells as of September 30, 2019 are located in Texas. Our growth
strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to
obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations
that are consistent with our income targets.
38
During fiscal 2017, we acquired two clubs, one in Florida (Scarlett’s Miami) and another in Illinois (Hollywood
Showclub) and certain adjacent real estate for an aggregate purchase price of $30.2 million. See Note 15 to the
consolidated financial statements for details of the transactions. We subsequently relaunched Hollywood Showclub as
Scarlett’s St. Louis.
During fiscal 2018, we reacquired Drink Robust (see Note 15 to our consolidated financial statements). Also in fiscal
2018, we acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest at 8%. The
Kappa transaction provides for the purchase of the real estate for $825,000 and other non-real-estate business assets for
$180,000, with goodwill amounting to $495,000. See Note 15 to the consolidated financial statements for details of the
transactions.
During fiscal 2019, we acquired two clubs, one in Illinois (rebranded as Rick’s Cabaret Chicago) and another in
Pennsylvania (rebranded as Rick’s Cabaret Pittsburgh) for an aggregate purchase price of $25.5 million. See Note 15 to
the consolidated financial statements for details of the transactions.
We opened two Bombshells units in fiscal 2019.
In October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000
in cash at closing and a 9% note payable over a 10-year period. See Note 15 to the consolidated financial statements for
details of the disposition.
Subsequent to the end of fiscal 2019, we opened two Bombshells units.
On November 5, 2019, the Company announced that its subsidiaries have signed definitive agreements to acquire the
assets and related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0
million. As of the filing of this report, closing of this transaction is still pending subject to certain conditions. Under the
terms of the agreements, Company subsidiaries will pay $7.2 million for the club and $7.8 million for the real estate using
$4.0 million in seller financing at 6.0% for the club with the balance of cash from an anticipated $11.0 million bank loan
at a blended rate of 6.25%.
We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our
business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt
or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on
reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have
an adverse effect on our growth strategy.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The items in our financial statements subject to market risk are potential debt instruments with variable interest rates. We
do not carry any debt with a variable interest rate in effect as of September 30, 2019. Certain of our debt have variable
interest rates, but will only be effective in future years.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item begins on page 40.
39
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2019 and 2018
Consolidated Statements of Income for the years ended September 30, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the years ended September 30, 2019, 2018, and 2017
Consolidated Statements of Changes in Equity for the years ended September 30, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended September 30, 2019, 2018, and 2017
Notes to Consolidated Financial Statements
40
41
42
43
44
45
46
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
RCI Hospitality Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of RCI Hospitality Holdings, Inc. (the “Company”) as of
September 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the years in the three-year period ended September 30, 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the
results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2019, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), RCI Hospitality Holdings, Inc.’s internal control over financial reporting as of September 30, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and our report dated February 13, 2020 expressed an adverse
opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2019.
Marlton, New Jersey
February 13, 2020
41
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Current portion of notes receivable
Inventories
Prepaid insurance
Other current assets
Assets held for sale
Total current assets
Property and equipment, net
Notes receivable, net of current portion
Goodwill
Intangibles, net
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Current portion of long-term debt
Total current liabilities
Deferred tax liability, net
Long-term debt, net of current portion and debt discount and issuance costs
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none
issued and outstanding
Common stock, $0.01 par value per share; 20,000 shares authorized;
9,591 and 9,719 shares issued and outstanding as of September 30, 2019
and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total RCIHH stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
September 30,
2019
2018
(As Revised)
$
$
$
14,097
6,289
954
2,598
5,446
2,521
2,866
34,771
183,956
4,211
53,630
75,951
1,118
353,637
3,810
14,644
15,754
34,208
21,658
127,774
1,696
185,336
17,726
7,320
-
2,353
4,910
1,591
2,902
36,802
172,403
2,874
43,591
71,532
2,530
329,732
2,825
11,973
19,047
33,845
19,552
121,580
1,423
176,400
-
-
96
61,312
107,049
-
168,457
(156)
168,301
353,637
$
97
64,212
88,906
220
153,435
(103)
153,332
329,732
$
$
$
$
See accompanying notes to consolidated financial statements.
42
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
2019
Years Ended September 30,
2018
(As Revised)
2017
Revenues
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Operating expenses
Cost of goods sold
Alcoholic beverages sold
Food and merchandise sold
Service and other
Total cost of goods sold (exclusive of items
shown separately below)
Salaries and wages
Selling, general and administrative
Depreciation and amortization
Other charges, net
Total operating expenses
Income from operations
Other income (expenses)
Interest expense
Interest income
Unrealized loss on equity securities
Income before income taxes
Income tax expense (benefit)
Net income
Net income attributable to noncontrolling interests
Net income attributable to RCIHH common
shareholders
Earnings per share
Basic
Diluted
Weighted average number of common shares
outstanding
Basic
Diluted
Dividends per share
$
$
$
$
$
$
$
$
$
75,140
25,830
68,055
12,034
181,059
15,303
9,056
578
24,937
49,833
59,896
9,072
2,620
146,358
34,701
(10,209)
309
(612)
24,189
4,863
19,326
(151)
19,175
1.99
1.99
9,657
9,657
$
$
$
$
69,120
22,433
64,104
10,091
165,748
14,327
8,133
449
22,909
44,547
53,824
7,722
9,184
138,186
27,562
(9,954)
234
-
17,842
(3,118)
20,960
(81)
20,879
2.15
2.15
9,719
9,719
0.13
$
0.12
$
60,439
18,256
58,132
8,069
144,896
13,114
7,398
209
20,721
40,029
46,775
6,920
7,312
121,757
23,139
(8,764)
266
-
14,641
6,359
8,282
(23)
8,259
0.85
0.85
9,731
9,743
0.12
See accompanying notes to consolidated financial statements.
43
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Amount reclassified from accumulated other
comprehensive income
Other comprehensive income:
Unrealized holding gain on available-for-sale
securities, net of tax of $85 in 2018
Comprehensive income
Comprehensive income attributable to
noncontrolling interests
Comprehensive income attributable to RCI
Hospitality Holdings, Inc.
2019
Years Ended September 30,
2018
(As Revised)
2017
$
19,326
$
20,960
$
(220)
-
-
19,106
(151)
220
21,180
(81)
$
18,955
$
21,099
$
8,282
-
-
8,282
(23)
8,259
See accompanying notes to consolidated financial statements.
44
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 2019, 2018, and 2017
(in thousands)
Common Stock Additional
Number
of Shares Amount Capital Earnings
Paid-In Retained Comprehensive Number
Accumulated
Other
Treasury Stock
of Shares Amount
- $
- $
Balance at September 30, 2016
Purchase of treasury shares
Canceled treasury shares
Payment of dividends
Payments to noncontrolling interests
Divestiture in Drink Robust
Net income
9,808 $
-
(89)
-
-
-
-
97 $
-
-
-
-
-
-
64,552 $ 62,106 $
-
(1,099)
-
-
-
-
-
-
(1,170)
-
-
8,259
Balance at September 30, 2017
Payment of dividends
Payments to noncontrolling interests
Equity impact of additional investment
in TEZ
Change in marketable securities
Net income (as revised)
9,719
-
-
-
-
-
97
-
-
-
-
-
63,453
-
-
69,195
(1,168)
-
759
-
-
-
20,879
Balance at September 30, 2018 (as
revised)
Reclassification upon adoption of ASU
2016-01
Purchase of treasury shares
Canceled treasury shares
Payment of dividends
Payments to noncontrolling interests
Divestiture in other entities
Net income
9,719
97
64,212
88,906
-
-
(128)
-
-
-
-
-
-
(1)
-
-
-
-
-
-
(2,900)
-
-
-
-
220
-
-
(1,252)
-
-
19,175
Income
-
-
-
-
-
-
-
-
-
-
-
220
-
220
(220)
-
-
-
-
-
-
(89)
89
-
-
-
-
(1,099)
1,099
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(128)
128
-
-
-
-
-
(2,901)
2,901
-
-
-
-
Interests
Noncontrolling Total
Equity
2,584 $129,339
(1,099)
-
-
-
(1,170)
-
(215)
(215)
88
88
8,282
23
2,480
-
(180)
135,225
(1,168)
(180)
(2,484)
-
81
(1,725)
220
20,960
(103) 153,332
-
-
-
-
(70)
(134)
151
-
(2,901)
-
(1,252)
(70)
(134)
19,326
Balance at September 30, 2019
9,591 $
96 $
61,312 $ 107,049 $
-
- $
- $
(156) $168,301
See accompanying notes to consolidated financial statements.
45
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Deferred tax expense (benefit)
Loss (gain) on sale of businesses and assets
Impairment of assets
Amortization of debt discount and issuance costs
Unrealized loss on equity securities
Gain on insurance
Gain on settlement of patron tax
Deferred rent expense
Debt prepayment penalty
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid insurance, other current assets and
other assets
Accounts payable and accrued liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets
Proceeds from notes receivable
Proceeds from insurance
Issuance of notes receivable
Additions to property and equipment
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt
Payments on long-term debt
Purchase of treasury stock
Payment of dividends
Payment of loan origination costs
Debt prepayment penalty
Distribution to noncontrolling interests
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF
YEAR
CASH PAID DURING YEAR FOR:
Interest paid, net of amounts capitalized
Income taxes paid (net of refunds of $42, $42 and
$794 in 2019, 2018 and 2017, respectively)
Non-cash investing and financing transactions:
Debt incurred with seller in connection with
acquisition of businesses
Notes receivable received as proceeds from sale of
assets
Unrealized gain on marketable securities
Note payable reduction from sale proceeds of
property
Refinanced long-term debt
Net increase in notes payable from trade-in of
aircraft
2019
Years Ended September 30,
2018
(As Revised)
2017
$
19,326
$
20,960
$
8,282
9,072
821
(2,966)
6,040
334
612
(288)
-
282
-
1,576
(216)
(681)
3,262
37,174
7,223
158
100
(420)
(20,708)
(13,500)
(27,147)
13,511
(22,924)
(2,901)
(1,252)
(20)
-
(70)
(13,656)
(3,629)
17,726
14,097
9,797
3,686
$
$
$
7,722
(6,775)
2,162
5,570
560
-
(20)
-
203
543
(3,622)
(199)
(2,589)
1,254
25,769
811
127
20
-
(25,263)
(2,034)
(26,339)
84,233
(72,830)
-
(1,168)
(1,138)
(543)
(180)
8,374
7,804
9,922
17,726
9,685
5,832
2019
Years Ended September 30,
2018
12,000
1,775
-
-
400
-
$
$
$
$
$
$
1,000
-
305
-
8,354
5,063
6,920
2,273
(838)
7,639
218
-
-
(102)
272
75
878
(19)
(1,526)
(2,978)
21,094
2,145
107
-
-
(11,249)
(9,527)
(18,524)
12,399
(13,080)
(1,099)
(1,170)
(735)
(75)
(215)
(3,975)
(1,405)
11,327
9,922
8,347
4,096
2017
20,552
-
-
1,500
8,000
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Unpaid liabilities on capital expenditures
$
476
$
-
$
-
See accompanying notes to consolidated financial statements.
46
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
1. Nature of Business
RCI Hospitality Holdings, Inc. (the “Company”) is a holding company incorporated in Texas in 1994. Through its
subsidiaries, the Company currently owns and operates establishments that offer live adult entertainment, restaurant,
and/or bar operations. These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Odessa,
Lubbock, Longview, Abilene, Edinburg, El Paso, Harlingen and Beaumont, Texas, as well as Minneapolis, Minnesota;
Pittsburgh, Pennsylvania; Charlotte, North Carolina; New York, New York; Pembroke Park and Miami Gardens, Florida;
Phoenix, Arizona; Sulphur, Louisiana; and Chicago, Washington Park and Kappa, Illinois. The Company also owns and
operates media businesses for adults. The Company’s corporate offices are located in Houston, Texas.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or
“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling
interest is owned. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on September 30. References to years 2019, 2018, and 2017 are for fiscal years ended September 30,
2019, 2018, and 2017, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and
September 30.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying
notes. Estimates and assumptions are based on historical experience, forecasted future events, and various other
assumptions that we believe to be reasonable under the circumstances. Estimates and assumptions may vary under
different circumstances and conditions. We evaluate our estimates and assumptions on an ongoing basis.
Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when
purchased. The Company maintains deposits in several financial institutions, which may at times exceed amounts covered
by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced
any losses related to amounts in excess of FDIC limits.
47
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Accounts and Notes Receivable
Accounts receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally
converted to cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily
comprised of receivables for advertising sales and Expo registration. Accounts receivable also include employee advances,
construction advances, and other miscellaneous receivables. Long-term notes receivable, which have original maturity of
more than one year, include consideration from the sale of certain investment interest entities and real estate. The
Company recognizes interest income on notes receivable based on the terms of the agreement and based upon
management’s evaluation that the notes receivable and interest income will be collected. The Company recognizes
allowances for doubtful accounts or notes when, based on management judgment, circumstances indicate that accounts or
notes receivable will not be collected. Allowance for doubtful accounts balance was $101,000 and $0 as of September 30,
2019 and 2018, respectively (see Note 5).
Inventories
Inventories include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the
lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates
over the estimated useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for
leasehold improvements. Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have
estimated useful lives of 5 to 7 years, while leasehold improvements are depreciated at the shorter of the lease term or
estimated useful life. Expenditures for major renewals and betterments that extend the useful lives are capitalized.
Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold, retired or abandoned
and the related accumulated depreciation are written off from the accounts, and any gains or losses are charged or credited
in the accompanying consolidated statement of income of the respective period. Interest expense from related debt
incurred during site construction is capitalized, which amounted to $597,000 in fiscal 2019, $319,000 in fiscal 2018, and
$43,000 in fiscal 2017.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for
impairment. Definite-lived intangible assets are amortized on a straight-line basis over their estimated lives.
The costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets. The
costs of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred.
Annual license renewal fees are expensed over their renewal term.
Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth
fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
48
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more
likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several
factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in
comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair
value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we
perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using
market-related valuation models, including earnings multiples, discounted cash flows, and comparable asset market
values. We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair
value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our
Step 1 analysis. For the year ended September 30, 2019, we identified four reporting units that were impaired and
recognized a goodwill impairment loss totaling $1.6 million. For the year ended September 30, 2018, we identified two
reporting units that were impaired and recognized a goodwill impairment loss totaling $834,000. For the year ended
September 30, 2017, we identified four reporting units that were impaired and recognized a goodwill impairment loss
totaling $4.7 million. See Note 17.
For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess
earnings of the asset. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The
fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the
carrying amount exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to
$178,000 in 2019 related to one club, $3.1 million in 2018 related to three clubs, and $1.4 million in 2017 related to two
clubs, which are included in other charges, net in the consolidated statements of income. See Note 17.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property, plant, and equipment, and intangible assets subject to
amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant
underperformance relative to historical or projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for the overall business, and significant negative industry or economic trends.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the
estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset
group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the
fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the
lowest level for which cash flows can be identified. Assets to be disposed of are separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. For assets
held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or inactive
markets (level 2) developed using observable data. The assets and liabilities of a disposal group classified as held for sale
are presented separately in the appropriate asset and liability sections of the balance sheet. During the fourth quarter of
fiscal 2019, the Company impaired two clubs for a total of $4.2 million; during the fourth quarter 2018, the Company
impaired one club and one Bombshells for a total of $1.6 million; and during the fourth quarter of 2017, the Company
impaired one club for $385,000. See Notes 6 and 17.
49
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Fair Value of Financial Instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this
additional information in the notes to consolidated financial statements when the fair value is different than the carrying
value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued
liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value
of notes receivable and short and long-term debt also approximates fair value since these instruments bear market rates of
interest. None of these instruments are held for trading purposes.
Comprehensive Income
Comprehensive income is the total of net income or loss and all other changes in net assets arising from non-owner
sources, which are referred to as items of other comprehensive income. An analysis of changes in components of
accumulated other comprehensive income is presented in the consolidated statements of comprehensive income.
Revenue Recognition
See “Impact of Recently Issued Accounting Standards” section below regarding ASC 606 and Note 4.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways,
which are used for promotional purposes. Advertising and marketing expenses are expensed as incurred and are included
in selling, general and administrative expenses in the accompanying consolidated statements of income. See Note 5.
Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local
jurisdictions where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to
reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax
asset will not be realized.
50
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
U.S. GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. We recognize
penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and
recognize interest accrued related to unrecognized tax benefits in interest expense.
Investments
Investments in companies in which the company has a 20% to 50% interest are accounted for using the equity method,
which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses.
Investments in companies in which the Company owns less than a 20% interest, or where the Company does not exercise
significant influence, are accounted for at cost and reviewed for any impairment. Cost and equity method investments are
included in other assets in the Company’s consolidated balance sheets. The Company sold 31% of Drink Robust on
September 29, 2016, retaining 20%. Because the Company had no ability to direct the management of the investee
company or exert significant influence, the investment was accounted for at cost beginning on the date of sale. During the
fourth quarter of fiscal 2017, we determined our investment in Drink Robust was impaired and recognized an other-than-
temporary impairment totaling $1.2 million which brought our carrying value of this investment to zero. In relation to the
reacquisition of Drink Robust in 2018, we have consolidated the operations of Drink Robust and eliminated the
investment in consolidation. See Note 15.
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that
may arise from outstanding dilutive common restricted stock, stock options and warrants (the number of which is
computed using the treasury stock method) and from outstanding convertible debentures (the number of which is
computed using the if-converted method). Diluted earnings per share considers the potential dilution that could occur if
the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted
into common stock that then shared in the Company’s earnings or losses (as adjusted for interest expense, that would no
longer be incurred if the debentures were converted).
51
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Net earnings applicable to common stock and the weighted average number of shares used for basic and diluted earnings
(loss) per share computations are summarized in the table that follows (in thousands, except per share data):
Numerator -
Net income attributable to RCIHH shareholders -
basic
Adjustment to net income from assumed conversion
of debentures(1)
Adjusted net income attributable to RCIHH
shareholders - diluted
Denominator -
Weighted average number of common shares
outstanding - basic
Effect of potentially dilutive convertible debentures
Adjusted weighted average number of common
shares outstanding - diluted
Basic earnings per share
Diluted earnings per share
$
$
$
$
For the Year Ended
September 30,
2018
2019
2017
19,175
$
20,879
$
8,259
-
-
5
19,175
$
20,879
$
8,264
9,657
-
9,657
9,719
-
9,719
1.99
1.99
$
$
2.15
2.15
$
$
9,731
12
9,743
0.85
0.85
(1) Represents interest expense on dilutive convertible securities that would not occur if they were assumed converted.
(2) There were no outstanding warrants and options to be considered for the EPS computation for all periods presented.
Convertible debentures amounting to $0, $0, and $0.9 million were dilutive in 2019, 2018, and 2017, respectively.
Stock Options
The Company recognizes all employee stock-based compensation as a cost in the consolidated financial statements.
Equity-classified awards are measured at the grant date fair value of the award and recognized as expense over their
requisite service period. The Company estimates grant date fair value using the Black-Scholes option-pricing model. The
critical estimates are volatility, expected life and risk-free rate.
At September 30, 2019 and 2018, the Company has no stock options outstanding.
52
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Legal and Other Contingencies
The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
There is significant judgment required in both the probability determination and as to whether an exposure can be
reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have
incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted
legal and other claims. The Company recognizes legal fees and expenses, including those related to legal contingencies, as
incurred.
Generally, the Company recognizes gain contingencies when they are realized or when all related contingencies have been
resolved.
The Company maintains insurance that covers claims arising from risks associated with the Company’s business including
claims for workers’ compensation, general liability, property, auto, and business interruption coverage. The Company
carries substantial insurance to cover such risks with large deductibles and/or self-insured retention. These policies have
been structured to limit our per-occurrence exposure. The Company believes, and the Company’s experience has been,
that such insurance policies have been sufficient to cover such risks.
Fair Value Accounting
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market
participants would use in pricing an asset or liability in the principal or most advantageous market. When considering
market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between
observable and unobservable inputs, which are categorized in one of the following levels.
U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
● Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
● Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.
● Level 3 – Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
The Company classifies its marketable securities as available-for-sale, which are reported at fair value. Unrealized holding
gains and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income
and were reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October
1, 2018. Realized gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities
classified as available-for-sale are included in comprehensive income. The Company measures the fair value of its
marketable securities based on quoted prices for identical securities in active markets, or Level 1 inputs. Available-for-sale
securities, which are included in other assets in the consolidated balance sheets, had a balance of $148,000 and $760,000
as of September 30, 2019 and 2018.
53
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
In accordance with U.S. GAAP, the Company reviews its marketable securities to determine whether a decline in fair
value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary,
the Company writes down the cost basis of the security and include the loss in current earnings as opposed to an
unrealized holding loss. No losses or other-than-temporary impairments in our marketable securities portfolio were
recognized during the years ended September 30, 2019, 2018, and 2017.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and
equipment, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value
in the consolidated balance sheets. For these assets, the Company does not periodically adjust carrying value to fair value
except in the event of impairment. If it is determined that impairment has occurred, the carrying value of the asset is
reduced to fair value and the difference is included in other charges, net in the consolidated statements of income.
Assets and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):
Description
Property and equipment, net
Indefinite-lived intangibles
Definite-lived intangibles
Goodwill
Other assets (equity securities)
Description
Goodwill
Property and equipment, net
Indefinite-lived intangibles
Notes receivable
Other assets (equity securities)
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Asset
Significant Other
Observable Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
-
-
-
-
148
$
-
-
-
-
-
10,926
5,323
200
11,627
-
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Asset
Significant Other
Observable Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
-
-
-
-
760
$
-
-
-
-
-
1,999
141
4,618
0
-
$
$
September 30,
2019
10,926
5,323
200
11,627
148
September 30,
2018
1,999
141
4,618
0
760
$
$
54
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
Description
Goodwill
Property and equipment, net
Indefinite-lived intangibles
Assets held for sale
Other assets (equity securities)
Unrealized Gain (Loss/Impairments) Recognized
Years Ended September 30,
2019
$
2018
(As Revised)
2017
$
(1,638)
(4,224)
(178)
-
(612)
$
(834)
(1,615)
(3,121)
-
305
(4,697)
(385)
(1,401)
-
(1,156)
Impact of Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with Customers (“ASU 2014-09” and codified as Accounting Standards Codification
No. 606, “ASC 606”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle
of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that
reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a
five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the
revenue recognition process than are required under existing GAAP. The standard’s effective date has been deferred by
the issuance of ASU No. 2015-14, and is effective for annual periods beginning after December 15, 2017, and interim
periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of
adoption (which includes additional footnote disclosures). Early application is permitted but not before December 15,
2016, the ASU’s original effective date. The Company adopted the new revenue recognition standard as of October 1,
2018 using the cumulative effect method, which did not have a material impact on its consolidated financial statements.
See Note 4 for new disclosures as required by ASC 606.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which amends the guidance on the classification and
measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an
entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the
presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain
disclosure requirements associated with the fair value of financial instruments. The amendments of the ASU are effective
for us for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company adopted ASU 2016-01 as of October 1, 2018. Our adoption required the Company to reclassify $220,000 from
accumulated other comprehensive income to retained earnings as of the beginning of the quarter ended December 31,
2018. All succeeding unrealized gains or losses related the changes in the market value of our equity securities are
included in other income/expenses in our consolidated statement of income.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), on accounting for leases which requires
lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The
guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases,
and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. In
July 2018, the FASB issued ASU 2018-11 providing for certain practical expedients in the implementation of ASU 2016-
02. The guidance requires the use of a modified retrospective approach. We will adopt ASU 2016-02 and related
amendments as of the beginning of our fiscal first quarter ending December 31, 2019. We will be electing the package of
practical expedients permitted under the transition guidance within the new standard, which among other things, allows us
to retain historical lease classification, as well as relief from reviewing expired and existing contracts to determine if they
contain leases. We expect our total assets as of October 1, 2019 to have an increase of approximately $24.5 million due to
the recognition of operating lease right-of-use assets, and a corresponding increase in total liabilities due to the recognition
of operating lease liabilities after the reversal of our deferred rent liability balance as of September 30, 2019. We do not
expect ASC 842 to have an impact on our consolidated statements of income and cash flows. As a result of the adoption of
ASC 842, we do not expect our future minimum lease payments for the fiscal first quarter ending December 31, 2019
related to leases existing as of September 30, 2019 to be materially different from the amounts disclosed in future
minimum lease commitments in Note 11.
55
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies - continued
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses
for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model
which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of
other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded
through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These
changes will result in earlier recognition of credit losses. The ASU is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. We are still evaluating the impact of this
ASU, including all related updates, on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial
statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in
which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) is
recorded. The ASU requires financial statement preparers to disclose (1) a description of the accounting policy for
releasing income tax effects from AOCI; (2) whether they elect to reclassify the stranded income tax effects from the Tax
Act; and (3) information about the other income tax effects that are reclassified. The amendments affect any organization
that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items
of other comprehensive income for which the related tax effects are presented in other comprehensive income as required
by GAAP. The ASU is effective for all organizations for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either
in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Act is recognized. We believe that the adoption of this ASU will not have a material
impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the
disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 with certain removals, modifications,
and additions. Eliminated disclosures that may affect the Company include (1) transfers between level 1 and level 2 of the
fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers between levels of the fair
value hierarchy. Modified disclosures that may affect the Company include (1) a requirement to disclose the timing of
liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has
communicated the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that
the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the
reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes in unrealized gains
and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the
end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs used
to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon
issuance of the ASU and delay adoption of the additional disclosures until the effective date. We are still evaluating the
impact of this ASU on the Company’s consolidated financial statements.
In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns
the guidance for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that
the fair value of the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may
apply. However, if there has been a significant lapse of time between the date the asset was acquired and the lease
commencement date, the definition of fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts
both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts
the new leases standard. The update is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. We are still evaluating the impact of this ASU on the Company’s consolidated financial
statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the
incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are
ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date
losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax
related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step
up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted
changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities
for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period
should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an
entity that elects early adoption should adopt all the amendments in the same period. We are still evaluating the impact of
this ASU on the Company’s consolidated financial statements.
56
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
3. Revision of Prior Year Immaterial Misstatement
During the quarter ended December 31, 2018 (first quarter of fiscal 2019), the Company identified certain mechanical
errors in its goodwill impairment analysis that was performed for its annual impairment testing for fiscal year ended
September 30, 2018. These errors related to the use of an incorrect income tax rate assumption and the exclusion of certain
debt service payments as part of our goodwill impairment testing for two of our reporting units, which resulted in a
goodwill impairment charge of $834,000.
The Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined
that for both the quarter and fiscal year ended September 30, 2018, the errors were immaterial. The Company has decided
to correct these immaterial errors as revisions to our previously issued financial statements and has adjusted this Form
10-K insofar as fiscal 2018 is concerned.
The tables below present the impact of the revision in the Company’s consolidated financial statements (in thousands):
Statement of Income/Comprehensive Income:
Other charges, net
Total operating expenses
Income from operations
Income before income taxes
Net income
Net income attributable to RCIHH common stockholders
Earnings per share - basic
Earnings per share - diluted
Comprehensive income
Comprehensive income attributable to RCI Hospitality
Holdings, Inc.
Balance Sheet/Statement of Changes in Equity
Goodwill
Total assets
Retained earnings
Total RCIHH stockholders’ equity
Total equity
Total liabilities and equity
Fiscal Year Ended September 30, 2018
As Previously
Reported
Adjustments
As Revised
8,350 $
137,352
28,396
18,676
21,794
21,713
2.23 $
2.23 $
22,014 $
21,933
834 $
834
(834)
(834)
(834)
(834)
(0.08) $
(0.08) $
(834) $
(834)
9,184
138,186
27,562
17,842
20,960
20,879
2.15
2.15
21,180
21,099
September 30, 2018
As Previously
Reported
Adjustment
As Revised
44,425 $
330,566
89,740
154,269
154,166
330,566
(834) $
(834)
(834)
(834)
(834)
(834)
43,591
329,732
88,906
153,435
153,332
329,732
$
$
$
$
$
57
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
3. Revision of Prior Year Immaterial Misstatement - continued
The table below presents the impact of the revision in the Company’s notes to its consolidated financial statements related
to unaudited quarterly results of operations (in thousands):
Quarter Ended September 30, 2018
As Previously
Reported
Adjustment
As Revised
Income from operations
Net loss attributable to RCIHH common stockholders
Loss per share - basic
Loss per share - diluted
$
$
$
1,533 $
(2,672)
(0.27) $
(0.27) $
(834) $
(834)
(0.09) $
(0.09) $
699
(3,506)
(0.36)
(0.36)
The consolidated statements of cash flows are not presented because there is no impact on total cash flows from operating
activities, investing activities and financing activities. Certain components of net cash provided by operating activities
changed, as caused by the revision, but the net change amounted to zero for both quarter and fiscal year ended September
30, 2018.
4. Revenues
On October 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (formerly ASU
2014-09). The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other
revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional
allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from
customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated
statements of 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. Other rental revenues are recognized when earned
(recognized over time) and are more appropriately covered by guidance under ASC Topic 840, Leases (under ASC 842
commencing on October 1, 2019).
58
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
4. Revenues - continued
Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 18), are shown
below (in thousands).
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Recognized at a point in time
Recognized over time
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Recognized at a point in time
Recognized over time
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Recognized at a point in time
Recognized over time
Nightclubs
Bombshells
Other
Total
Fiscal 2019
$
$
$
$
$
$
$
$
$
$
$
$
57,277
13,051
67,893
10,385
148,606
146,938
1,668
148,606
Nightclubs
54,800
12,732
64,054
8,474
140,060
138,847
1,213
140,060
Nightclubs
48,655
11,346
58,013
6,673
124,687
123,557
1,130
124,687
$
$
$
$
$
$
$
$
$
$
$
$
17,863
12,779
162
24
30,828
30,828
-
30,828
$
$
$
$
-
-
-
1,625
1,625
1,572
53
1,625
Fiscal 2018
Bombshells
Other
14,320
9,701
50
23
24,094
24,094
-
24,094
$
$
$
$
-
-
-
1,594
1,594
1,516
78
1,594
Fiscal 2017
Bombshells
Other
11,784
6,910
119
17
18,830
18,830
-
18,830
$
$
$
$
-
-
-
1,379
1,379
1,273
106
1,379
$
$
$
$
$
$
$
$
$
$
$
$
75,140
25,830
68,055
12,034
181,059
179,338
1,721
181,059
Total
69,120
22,433
64,104
10,091
165,748
164,457
1,291
165,748
Total
60,439
18,256
58,132
8,069
144,896
143,660
1,236
144,896
* Rental revenue (included in Other Revenues) is covered by ASC Topic 840 until the end of fiscal 2019. Effective
October 1, 2019, rental revenue will be reported under the guidance of ASC 842. All other revenues are covered by ASC
Topic 606.
59
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
4. Revenues - continued
The Company does not have contract assets with customers. The Company’s unconditional right to consideration for
goods and services transferred to the customer is included in accounts receivable, net in our consolidated balance sheet. A
reconciliation of contract liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is
presented below:
Ad revenue
Expo revenue
Other
Balance at September 30,
2018
Consideration
Received
Recognized in
Revenue
Balance at September 30,
2019
$
$
126 $
-
8
134 $
602 $
602
52
1,256 $
(652) $
(602)
(53)
(1,307) $
76
-
7
83
5. Selected Account Information
The components of accounts receivable, net are as follows (in thousands):
Credit card receivables
Income tax refundable
Insurance receivable
ATM-in-transit
Other (net of allowance for doubtful accounts of $101 and $0, respectively)
September 30,
2019
2018
$
$
1,396
1,781
1,197
780
1,135
6,289
$
$
2,273
2,137
-
933
1,977
7,320
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.
The components of accrued liabilities are as follows (in thousands):
Insurance
Payroll and related costs
Property taxes
Sales and liquor taxes
Patron tax
Lawsuit settlement
Unearned revenues
Other
September 30,
2019
2018
4,937
2,892
1,675
3,086
595
115
83
1,261
14,644
$
$
3,807
2,293
1,796
1,883
532
230
134
1,298
11,973
$
$
60
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
5. Selected Account Information - continued
The components of selling, general and administrative expenses are as follows (in thousands):
Taxes and permits
Advertising and marketing
Supplies and services
Insurance
Rent
Legal
Utilities
Charge cards fees
Security
Accounting and professional fees
Repairs and maintenance
Other
2019
Years Ended September 30,
2018
2017
$
$
10,779
8,392
5,911
5,429
3,896
5,180
3,165
3,803
2,973
2,815
2,980
4,573
59,896
$
$
9,545
7,536
5,344
5,473
3,720
3,586
2,969
3,244
2,617
2,944
2,184
4,662
53,824
$
$
8,026
6,704
4,873
4,006
3,258
3,074
2,824
2,783
2,251
2,159
2,091
4,726
46,775
The components of other charges, net are as follows (in thousands):
Impairment of assets
Settlement of lawsuits
Loss (gain) on sale of businesses and assets
Gain on insurance
Gain on settlement of patron tax
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
Buildings and land
Equipment
Leasehold improvements
Furniture
Total property and equipment
Less accumulated depreciation
Property and equipment, net
2019
Years Ended September 30,
2018
(As Revised)
2017
$
$
6,040
225
(2,877)
(768)
-
2,620
$
$
$
5,570
1,669
1,965
(20)
-
9,184
$
$
7,639
317
(542)
-
(102)
7,312
September 30,
2019
2018
$
159,969
37,031
32,868
9,393
239,261
(55,305)
149,683
34,572
30,414
8,739
223,408
(51,005)
$
183,956
$
172,403
Included in buildings and leasehold improvements above are construction-in-progress amounting to $8.9 million and $6.4
million as of September 30, 2019 and 2018, respectively, which are mostly related to Bombshells projects.
Depreciation expense was approximately $8.4 million, $7.5 million, and $6.7 million for fiscal years 2019, 2018, and
2017, respectively. Impairment loss for property and equipment was $4.2 million, $1.6 million, and $385,000 for fiscal
2019, 2018, and 2017, respectively.
61
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
7. Assets Held for Sale
As of September 30, 2018, the Company had five real estate properties for sale. The aggregate estimated fair value of the
properties less cost to sell as of September 30, 2018 was approximately $2.9 million and reclassified to assets held for sale
in the Company’s consolidated balance sheet. The assets were measured at the carrying value as adjusted for depreciation
which was lower than the fair value at the date reclassified.
During fiscal 2019, we sold all the properties held for sale as of September 30, 2018. See Note 15.
In September 2019, the Company classified as held-for-sale two separate parcels of land subdivided from previously
constructed Bombshells pad sites located in Houston, Texas. The aggregate estimated fair value of the properties less cost
to sell as of September 30, 2019 was approximately $2.9 million.
The Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within
12 months through property listings by our real estate brokers.
The assets held for sale do not have liabilities associated with them that need to be directly settled from the proceeds in the
event of a transaction. The gain or loss on the sale of these properties held for sale is included in other charges, net in our
consolidated statements of income.
62
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in thousands):
Indefinite useful lives:
Goodwill
Licenses
Tradename
Definite useful lives:
Discounted leases
Non-compete agreements
Software
Distribution agreement
Total goodwill and other intangible assets
September 30,
2019
2018
(As Revised)
53,630
72,597
2,215
128,442
101
565
315
158
1,139
129,581
$
$
43,591
67,523
2,215
113,329
108
588
834
264
1,794
115,123
$
$
Amortization Period
18 & 6 years
5 years
5 years
3 years
Definite-
Lived
Intangibles
2019
Indefinite-
Lived
Intangibles
Goodwill
Definite-
Lived
Intangibles
2018
Indefinite-
Lived
Intangibles
Beginning balance
Acquisitions
Impairment
Amortization
Ending balance
$
$
1,794 $
243
-
(898)
1,139 $
69,738 $
5,252
(178)
-
74,812 $
43,591 $
11,677
(1,638)
-
53,630 $
1,565 $
483
-
(254)
1,794 $
Goodwill
(As Revised)
43,866
559
(834)
-
43,591
72,859 $
-
(3,121)
-
69,738 $
As of September 30, 2019 and 2018, the accumulated impairment balance of indefinite-lived intangibles was $6.1 million
and $5.9 million, respectively, while the accumulated impairment balance of goodwill was $6.3 million and $4.7 million,
respectively. Future amortization expense related to definite-lived intangible assets that are subject to amortization at
September 30, 2019 is: 2020 - $519,000; 2021 - $353,000; 2022 - $134,000; 2023 - $59,000; 2024 - $11,000; and
thereafter - $63,000.
Indefinite-lived intangible assets consist of sexually oriented business licenses and tradename, which were obtained as part
of acquisitions. These licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual
renewal applications, which are done at minimal costs to the Company. The discounted cash flow of the income approach
method was used in calculating the value of these licenses in a business combination, while the relief from royalty method
was used in calculating the value of tradenames. During the fiscal year ended September 30, 2019, the Company
recognized a $178,000 impairment related to one club’s SOB license and a $1.6 million impairment related to the
goodwill of four reporting units. During the fiscal year ended September 30, 2018, the Company recognized a $3.1 million
impairment related to three clubs’ SOB licenses and an $834,000 impairment related to the goodwill of two reporting
units. During the year ended September 30, 2017, the Company recognized an impairment loss of $4.7 million related to
the goodwill of four reporting units, including one held for sale, as well as an impairment loss of $1.4 million related to
two locations’ SOB licenses. See Note 17.
63
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt
Long-term debt consisted of the following (in thousands):
Notes payable at 5.5%, matures January 2023
Non-interest-bearing debts to State of Texas, mature March 2022 and May 2022,
interest imputed at 9.6%
Note payable at 5.45%, matures December 2027
Note payable at 5.95%, matures December 2027
Note payable at 12%, matures October 2021
Note payable at 4.99%, collateralized by aircraft, paid June 2019
Notes payable at 12%, mature May 2020
Note payable at 8%, matures May 2020, as amended, subsequently extended
Note payable at 8%, matures May 2029
Note payable at 5.75%, matures December 2027
Note payable at 5.99%, matures December 2032
Note payable at 5%, matures August 2029
Note payable at 5%, matures April 2020
Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030
Note payable at 8%, matures May 2021
Note payable at 5.95%, matures August 2039
Note payable at 12%, matures August 2021
Note payable at 9%, matures September 2028
Note payable at 6.1%, paid February 2019
Note payable at 5.95%, matures September 2028
Note payable at 7%, paid April 2019
Note payable at 6%, matures February 2040
Note payable at 5.49%, matures December 2038
Note payable at 7%, matures November 2024
Note payable at 7%, matures November 2020
Notes payable at 12%, mature November 2021
Note payable at 8%, matures November 2028
Total debt
Less unamortized debt discount and issuance costs
Less current portion
September 30,
2019
2018
*
$
981 $
1,071
*(a)
*(a)
(a)
**
**
*(a)
*(a)
*(a)
*(a)
*
*(a)
*
*(a)
*(a)
*(a)
**
**
**
3,379
9,877
6,776
5,518
-
2,040
3,025
13,569
51,167
6,555
3,709
2,099
2,619
771
6,858
4,000
1,263
-
1,511
-
3,608
2,156
3,982
2,000
2,350
5,190
145,003
(1,475)
(15,754)
4,470
10,258
7,544
6,219
912
2,940
3,025
14,464
58,826
6,877
4,257
3,079
960
945
3,168
4,000
1,350
1,500
1,550
5,000
-
-
-
-
-
-
142,415
(1,788)
(19,047)
Total long-term portion of debt
$
127,774 $
121,580
* Collateralized by real estate
** Collateralized by stock in subsidiary
(a) These commercial bank debts are guaranteed by the Company’s CEO. See Note 20.
64
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt - continued
Following is a summary of long-term debt at September 30 (in thousands):
Secured by real estate
Secured by stock in subsidiary
Secured by other assets
Unsecured
2019
2018
$
$
90,257
27,766
8,711
18,269
145,003
$
$
93,437
17,489
7,789
23,700
142,415
In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount
of $ 1.5 million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable
interest rate of 5.5%. The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the
Company also acquired the related real estate and executed notes to the seller for $6.5 million. The notes are also payable
over eleven years at $53,110 per month including interest and have the same adjustable interest rate of 5.5%. The real
estate notes, with original principal of $6.5 million, has been fully paid in relation to the first note of the December 2017
Refinancing Loan, as discussed below.
In 2015, the Company reached a settlement with the State of Texas over payment of the state’s Patron Tax on adult club
customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of
$119,000, without interest, over 84 months, beginning in June 2015, for all but two nonsettled locations. For accounting
purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present
value for the settlement of $7.2 million. In March 2017, the Company settled with the State of Texas for one of the two
remaining unsettled Patron Tax locations. The Company agreed to pay a total of $687,815 with $195,815 paid at the time
the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest. Going
forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5 per customer.
On July 30, 2015, a subsidiary of the Company acquired the building in which the Company’s Miami Gardens, Florida
nightclub operates. The cost was $15,300,000 and was purchased with an $11,325,000 note, payable in monthly
installments of approximately $78,000 including interest at 5.45% and matures in five years, and the balance with cash.
The building has several other third-party tenants in addition to the Company’s nightclub. There are certain financial
covenants with which the Company must be in compliance related to this financing. This note has been fully refinanced in
relation to the second note of the December 2017 Refinancing Loan, as discussed below.
In August 2016, the Company refinanced two notes payable with an aggregate carrying value of $6.1 million with a $9.0
million bank note at an interest rate of 5.95%. The note matures in 10 years with monthly installments of $100,062 and a
balloon payment at maturity for the remaining balance. This note has been fully refinanced in relation to the third note of
the December 2017 Refinancing Loan, as discussed below.
On October 5, 2016, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million. The new
unsecured debt is payable $118,817 per month, including interest at 12%, and matures in five years with a balloon
payment for the remaining balance at maturity. This note has been partially paid in relation to the first note of the
December 2017 Refinancing Loan, as discussed below.
In June 2010, the Company borrowed $518,192 from a lender. The funds were used to purchase an aircraft. The debt bore
interest at 6.30% with monthly principal and interest payments of $3,803 beginning in July 2010, maturing June 2030.
This note was refinanced with a bank in April 2017 with the borrowing of $952,690 at 4.99% for 20 years, together with a
purchase of a new aircraft. Monthly payments for the new note was at $6,286, including interest, beginning in May 2017.
This note has been paid off in 2019.
On May 1, 2017, the Company raised $5.4 million through the issuance of 12% unsecured promissory notes to certain
investors, which notes mature on May 1, 2020. The notes pay interest-only in equal monthly installments, with a lump
sum principal payment at maturity. On August 15, 2018 and September 26, 2018, the Company refinanced $2.0 million
and $500,000 of the notes, respectively. The $2.0 million note was exchanged for a $4.0 million 12% note maturing in
three years with interest-only payments until maturity, where the full principal is to be paid. The $500,000 note was
exchanged for a $1.35 million 9% note maturing in 10 years with monthly payments of $17,101, including interest. On
November 1, 2018, the Company refinanced two notes with a total principal of $400,000 with certain investors. See
succeeding paragraph related to November 1, 2018 financing below. Included in the balance of long-term debt as of
September 30, 2019 and 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer
employee in which the terms of the note are the same as the rest of the lender group.
On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 15), the Company executed two promissory notes with
the sellers: (i) a 5% short-term note for $5.0 million payable in lump sum after six months from closing date and (ii) a 12-
year amortizing 8% note for $15.6 million. The 12-year note is payable $168,343 per month, including interest. The
Company amended the $5.0 million short-term note payable, which had a remaining balance of $3.0 million as of
amendment date, several times extending the maturity date to October 1, 2022 and increasing the interest rate to 8% for its
remaining term.
65
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt - continued
On December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank
for $81.2 million. The December 2017 Refinancing Loan fully refinanced 20 of the Company’s notes payable and partially
paid down 1 note payable (collectively, “Repaid Notes”) with interest rates ranging from 5% to 12% covering 43 parcels
of real properties the Company previously acquired (“Properties”). The December 2017 Refinancing Loan consists of
three promissory notes:
i) The first note amounts to $62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five
years, then repriced one time at the then current U.S. Treasury rate plus 3.5%, with a floor rate of 5.75%, and
payable in monthly installments of $442,058, based upon a 20-year amortization period, with the balance payable
at maturity;
ii) The second note amounts to $10.6 million with a term of 10 years at a 5.45% fixed interest rate until July 2020,
after which to be repriced at a fixed interest rate of 5.75% until the fifth anniversary of this note, and then to be
repriced again at the then interest rate of the first note. This note is payable $78,098 monthly for principal and
interest until July 2020, based upon a 20-year amortization period, after which the monthly payment for principal
and interest is adjusted accordingly based on the repricing, with the balance payable at maturity; and
iii) The third note amounts to $8.1 million with a term of 10 years at a 5.95% fixed interest rate until August 2021,
after which to be repriced at 5.75% until the fifth anniversary of this note, and then to be repriced again at the
then interest of the first note. This note is payable $100,062 monthly for principal and interest until August 2021,
based upon a 20-year amortization period, after which the monthly payment for principal and interest is adjusted
accordingly based on the repricing, with the balance payable at maturity.
In addition to the monthly principal and interest payments as provided above, the Company paid monthly installments of
principal of $250,000, applied to the first note, until the loan-to-value ratio of the Properties, based upon reduced principal
balance of the December 2017 Refinancing Loan and the then current value of the Properties, is not greater than 65%. The
loan-to-value ratio of the Properties fell below 65% in October 2019, hence, we stopped paying the additional $250,000
monthly. The December 2017 Refinancing Loan has eliminated balloon payments of the Repaid Notes worth $2.9 million
originally scheduled in fiscal 2018, $19.4 million originally scheduled in fiscal 2020 and $5.3 million originally scheduled
in fiscal 2021. There are certain financial covenants with which the Company must be in compliance related to this
financing.
66
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt - continued
In connection with the Repaid Notes, we wrote off $279,000 of unamortized debt issuance costs to interest expense. Prior
to September 30, 2017, the Company paid a portion of debt issuance costs amounting to $612,500, which was included in
other assets until the closing of the transaction. At closing, the Company paid an additional $764,000 in debt issuance
costs, which together with the $612,500 prepayment will be amortized for the term of the loan using the effective interest
rate method. We also paid prepayment penalties amounting to $543,000 on the Repaid Notes, which was included in
interest expense in our consolidated statement of income for the year ended September 30, 2018.
Included in the $62.5 million first note of the December 2017 Refinancing Loan was $4.6 million that was escrowed at
closing due to the bank lender of one of the Repaid Notes. The amount was released from escrow in June 2018 when the
construction, for which the original note was borrowed, was completed.
On December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The
transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with
an assumption of the old aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with
monthly payments of $59,869, which includes interest.
On February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million
with the difference paid by the Company in cash. The bank note bears interest at 5.25% adjusted after 36 months to prime
plus 1% with a floor of 5.2% and matures on February 15, 2038. The bank note is payable interest-only during the first 18
months, after which monthly payments of principal and interest will be made based on a 20-year amortization with the
remaining balance to be paid at maturity. On August 28, 2018, this note was refinanced for additional construction loan
having a maximum availability of $7.4 million. The new note has an initial interest rate of 5.95%, subject to a repricing
after 72 months to prime plus 1% with a 5.9% floor. The note is payable $53,084 per month, including interest, for 72
months, then adjusted based on repriced interest rate until its August 2039 maturity.
On February 20, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over
prime with a 5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million. The
construction loan agreement bears an interest rate of prime plus 0.5% with a floor of 5.0% and matures on August 20,
2029. During the first 18 months of the construction loan, the Company will make monthly interest-only payments, and
after such, monthly payments of principal and interest will be made based on a 20-year amortization with the remaining
balance to be paid at maturity. There are certain financial covenants with which the Company must be in compliance
related to this financing.
On April 24, 2018, the Company acquired certain land for future development of a Bombshells in Houston, Texas for $5.5
million, financed with a bank note for $4.0 million, payable interest only at prime plus 0.5% with a floor of 5% per
annum. The note matures in 24 months, by which date the principal is payable in full. On September 17, 2018, the
Company and the bank lender agreed to carve out a portion of the loan that relates to the land where the Bombshells
location is to be built amounting to $960,000, and added a construction loan with a maximum availability of $2.9 million.
The new $2.9 million construction loan has an interest rate of prime plus 0.5%, with a 5.5% floor, and payable in 12 years.
The first 24 months will be interest-only payments, after which monthly payments of principal and interest will be made
based on a 20-year amortization. There are certain financial covenants with which the Company must be in compliance
related to this financing.
On May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note
with interest at 8%. The note matures in three years and is payable in monthly installments of $20,276, including interest,
based on a five-year amortization with the remaining balance to be paid at maturity.
67
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt - continued
On August 15, 2018, the Company refinanced a $2.0 million note payable for $4.0 million from a private lender by
executing a 12% 3-year note payable $40,000 monthly starting September 15, 2018, with the remaining principal and
interest balance payable at maturity.
On September 6, 2018, the Company borrowed $1.55 million from a bank lender to finance the acquisition of the
remaining not-owned interest in a joint venture. The 10-year note payable has an initial interest rate of 5.95% until after
five years when the interest rate is adjusted to the U.S. Treasury rate plus 3.5%, with a 5.95% floor. Monthly payments of
$11,138, including interest, is due for five years until an adjustment in monthly payments based on the interest rate
repricing. The Company paid approximately $40,000 in debt issuance costs at closing.
On September 14, 2018, the Company acquired land worth $2.75 million for a future Bombshells location by executing a
note with a bank lender for $1.5 million and paying the remainder in cash. The 6.1% one-year note has monthly interest-
only payments of $7,625 with the full principal payable at maturity. The Company paid approximately $22,000 in debt
issuance costs at closing.
On September 25, 2018, the Company borrowed $5.0 million through a credit facility with a bank lender. The loan has a
7% fixed interest rate. The loan was payable $200,000 weekly, which included interest, until maturity. This loan was fully
paid in April 2019.
On September 26, 2018, the Company refinanced a $500,000 12% note payable for $1.35 million from a private lender by
executing a 9% 10-year note payable $17,101 monthly, including interest, until maturity.
On November 1, 2018, the Company raised $2.35 million through the issuance of 12% unsecured promissory notes to
certain investors, which notes mature on November 1, 2021. The notes pay interest-only in equal monthly installments,
with a lump sum principal payment at maturity. Among the promissory notes are two notes with a principal of $450,000
and $200,000. The $450,000 note was in exchange for a $300,000 12% note and the $200,000 note was in exchange for a
$100,000 note, both of which were included in the May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami. Also
included in the $2.35 million borrowing is a $500,000 note borrowed from a related party (see Note 20) and two notes
totaling $400,000 borrowed from a non-officer employee and a family member of a non-officer employee in which the
terms of the notes are the same as the rest of the lender group.
On November 1, 2018, we acquired a club in Chicago that was partially financed by a $4.5 million 6-year 7% seller note.
See additional details in Note 15.
On November 5, 2018, we acquired a club in Pittsburgh that was partially financed by two seller notes payable. See
additional details in Note 15.
On December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed
the remaining $2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118,
including interest.
On February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate
of 6.1%, with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime
plus 0.5% with a 6.0% floor per annum. The new construction loan, which has a maximum availability of $4.1 million,
matures in 252 months from closing date and is payable interest-only for the first 12 months, then principal and interest of
$29,571 monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the
adjusted interest rate. The Company paid approximately $69,000 in loan costs of which approximately $19,600 was
capitalized as debt issuance costs on the new construction loan with the remaining charged to interest expense. The
Company also wrote off the remaining unamortized debt issuance costs of the old bank note to interest expense. There are
certain financial covenants with which the Company must be in compliance related to this financing.
68
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. Long-term Debt – continued
Future maturities of long-term debt consist of the following (in thousands):
2020
2021
2022
2023
2024
Thereafter
10. Income Taxes
Regular
Amortization
Balloon
Payments
$
$
8,822
9,499
7,756
7,279
7,685
39,401
80,442
$
$
7,163
6,466
6,273
1,970
-
42,689
64,561
Total Payments
15,985
$
15,965
14,029
9,249
7,685
82,090
145,003
$
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction
in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate
for fiscal 2018 was 24.5% percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our
federal corporate income tax rate was 21%.
Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our
deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future
periods. The remeasurement resulted in a $8.8 million one-time adjustment of our net deferred tax liabilities reflected in
our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our
consolidated statements of earnings for the fiscal year ended September 30, 2018. We recorded no remeasurement
adjustment related to SEC Staff Accounting Bulletin No. 118.
Income tax expense (benefit) consisted of the following (in thousands):
Current
Federal
State and local
Total current income tax expense
Deferred
Federal
State and local
Total deferred income tax expense (benefit)
2019
Years Ended September 30,
2018
2017
$
$
3,005
1,037
4,042
$
2,438
1,219
3,657
913
(92)
821
(8,096)
1,321
(6,775)
Total income tax expense (benefit)
$
4,863
$
(3,118)
$
The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
69
2,989
1,097
4,086
1,545
728
2,273
6,359
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Income Taxes - continued
Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal
statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):
Computed expected income tax expense
State income taxes, net of federal benefit
Deferred taxes on subsidiaries acquired/sold
Permanent differences
Change in deferred tax liability rate
Reserve for uncertain tax position
Tax credits
Other
Total income tax expense (benefit)
2019
Years Ended September 30,
2018
2017
$
$
5,080
672
-
45
-
-
(900)
(34)
4,863
$
$
4,371
804
709
85
(8,832)
-
(808)
553
(3,118)
$
$
4,979
291
-
108
1,329
406
(564)
(190)
6,359
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of
the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Patron tax
Capital loss carryforwards
Deferred tax liabilities:
Intangibles
Property and equipment
Other
Net deferred tax liability
September 30,
2019
2018
$
$
621
420
1,041
(14,491)
(8,024)
(184)
(22,699)
(21,658)
$
$
948
763
1,711
(13,110)
(7,206)
(947)
(21,263)
(19,552)
Included in the Company’s deferred tax liabilities at September 30, 2019 and 2018 is approximately $19.3 million and
$17.3 million, respectively, representing the tax effect of indefinite-lived intangible assets from club acquisitions which
are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet
until the related clubs are sold or impaired.
The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize
accrued interest related to unrecognized tax benefits as a component of accrued liabilities. We recognize penalties related
to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest
accrued related to unrecognized tax benefits in interest expense. During the year ended September 30, 2019 and 2018, the
Company has accrued $0 and $165,000, respectively, (all related to previous years’ taxes) in uncertain state tax positions.
In fiscal 2018, the Company released $700,000 of uncertain tax positions due to a settlement with New York state. In
fiscal 2019, the Company released the remaining amount accrued when the examination was closed.
70
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Income Taxes - continued
The following table shows the changes in the Company’s uncertain tax positions (in thousands):
Balance at beginning of year
Additions for tax positions of prior years
Decrease related to settlements with taxing authorities
Reduction due to lapse from closed examination
Balance at end of year
2019
Years Ended September 30,
2018
2017
$
$
$
165
-
-
(165)
$
865
-
(700)
-
-
$
165
$
240
625
-
-
865
The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any
federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions
within the next twelve months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal
year ended September 30, 2016 and subsequent years remain open to tax examination. The Company’s federal income tax
returns for the years ended September 30, 2015, 2014 and 2013 have been examined by the Internal Revenue Service with
no changes. These years are now under examination for payroll taxes. The Company is also being examined for state
income taxes, the outcome of which may occur within the next twelve months.
11. Commitments and Contingencies
Leases
The Company leases certain equipment and facilities under operating leases, of which rent expense was approximately
$3.9 million, $3.8 million, and $3.3 million for the years ended September 30, 2019, 2018, and 2017, respectively. These
leases include a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town
Bombshells management and trainers, of which rent expense totaled $78,000, $55,250, and $0 for the years ended
September 30, 2019, 2018, and 2017, respectively (this lease terminated on December 31, 2019). Rent expense for the
Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded using the
straight-line method over the initial lease term whereby an equal amount of rent expense is attributed to each period during
the term of the lease, regardless of when actual payments are made. Generally, this results in rent expense in excess of
cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference
between rent expense recognized and actual rental payments is accumulated and included in other long-term liabilities in
the consolidated balance sheets.
71
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
11. Commitments and Contingencies - continued
Undiscounted future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease obligations
$
$
3,237
3,154
3,057
2,889
2,850
21,038
36,225
Included in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as
advertising and marketing expenses, and included in selling, general and administrative expenses in our consolidated
statements of income, in the amount of $255,000, $254,000, and $106,000 for the fiscal year ended September 30, 2019,
2018, and 2017, respectively.
Legal Matters
Texas Patron Tax
In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult
club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly
installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations.
The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For
accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net
present value for the settlement of $7.2 million. As a consequence, the Company has recorded an $8.2 million pre-tax gain
for the third quarter ending June 30, 2015, representing the difference between the $7.2 million and the amount previously
accrued for the tax.
In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations.
To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the
settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest.
The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance
sheets, amounted to $3.4 million and $4.5 million as of September 30, 2019 and 2018, respectively.
A Declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas
Comptroller administrative rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented
Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well
as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On
November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding
the scope of the Comptroller’s authority. Constitutional challenges remain and will be resolved at trial.
72
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Legal Matters – continued
Indemnity Insurance Corporation
As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity
Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance
companies on that date.
On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order
(“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the
supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver
(“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means,
including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits
involving IIC as the insurer until May 6, 2014.
On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar
Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of
insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the
Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were
further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance
coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these
claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy
receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline
and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown
at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the
Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims
arising from actions after that date. As of September 30, 2019, we have 2 unresolved claims out of the original 71 claims.
Shareholder Class and Derivative Actions
In May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc.
and certain of its officers in the Southern District of Texas, Houston Division. The complaints allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially
false and misleading statements made in the Company’s SEC filings and disclosures as they relate to various alleged
transactions by the Company and management. The complaints seek unspecified damages, costs, and attorneys’ fees.
These lawsuits are Hoffman v. RCI Hospitality Holdings, Inc., et al. (filed May 21, 2019, naming the Company and Eric
Langan); Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming the Company, Eric Langan, and Phil
Marshall); 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. The Company intends to vigorously defend against this action. This
action is in its preliminary phase, and a potential loss cannot yet be estimated.
On August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against
officers and directors, Eric S. Langan, Phillip Marshall, Nour-Dean Anakar, Yura Barabash, Luke Lirot, Travis Reese,
former director Steven Jenkins, and RCI Hospitality Holdings, Inc., as nominal defendant. The action alleges that the
individual officers and directors made or caused the Company to make a series of materially false and/or misleading
statements and omissions regarding the Company’s business, operations, prospects, and legal compliance and engaged in
or caused the Company to engage in, inter alia, related party transactions, questionable uses of corporate assets, and failure
to maintain internal controls. The action asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control,
gross mismanagement, waste of corporate assets, and violations of Sections 14(a), 10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaint seeks injunctive relief, damages, restitution, costs, and attorneys’ fees. The case,
Cecere v. Langan, et al., is in its early stage, and a potential loss cannot yet be estimated.
73
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Legal Matters – continued
SEC Matter and Internal Review
In mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated
with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these
events, a special committee of the Company’s audit committee engaged independent outside counsel to conduct an
internal review. Management of the Company fully cooperated with the internal review conducted by the special
committee and its outside counsel. The board of directors has implemented the recommendations resulting from the
internal review. As of the date hereof, the internal review has been completed subject to any ongoing cooperation with
regulatory authorities.
Since the initiation of the informal inquiry by the SEC in early 2019, the Company and its management have fully
cooperated and continue to fully cooperate with the SEC matter, which has now converted to a formal investigation and is
ongoing. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the
investigation. The Company is also unable to predict what, if any, action may be taken as a result of the investigation. Any
determination by the SEC that the Company’s activities were not in compliance with federal securities laws or regulations,
however, could result in the imposition of fines, penalties, disgorgement, or equitable relief, which could have a material
adverse effect on the Company.
Other
On March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against
the Company and several of its subsidiaries. Plaintiffs allege that their images were misappropriated, intentionally altered
and published without their consent by clubs affiliated with the Company. The causes of action asserted in Plaintiffs’
Complaint include alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and
common law theories. The Company contends that there is insurance coverage under an applicable insurance policy. The
insurer has raised several issues regarding coverage under the policy. At this time, this disagreement remains unresolved.
The Company has denied all allegations, continues to vigorously defend against the lawsuit and continues to believe the
matter is covered by insurance.
The Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston
Bombshells which was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB
Dining Services (Willowbrook), Inc., breached a lease agreement by constructing an outdoor patio, which allegedly
interfered with the common areas of the shopping center, and by failing to provide Plaintiff with proposed plans before
beginning construction. Plaintiff also asserts RCI Hospitality Holdings, Inc. is liable as guarantor of the lease. The lease
was for a Bombshells restaurant to be opened in the Willowbrook Shopping Center in Houston, Texas. Both RCI
Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied liability and assert that Plaintiff has
failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc. asserts that Plaintiff
affirmatively represented that the patio could be constructed under the lease and has filed counter claims and third-party
claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord breached the
applicable agreements. The case was tried to a jury in late September 2018 and an adverse judgment was entered in
January 2019 in the amount totaling $1.0 million, which includes damages, attorney fees and interest. The matter is being
appealed. The appeal process required that a check be deposited in the registry of the court in the amount of $690,000,
which was deposited in April 2019 and included in other current assets in our consolidated balance sheet as of September
30, 2019. Management believes that the case has no merit and is vigorously defending itself in the appeal.
74
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Legal Matters – continued
On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our
subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County.
The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment
operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop
negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both
defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is
approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed a motion for
judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In
September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of
Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court.
It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend
itself.
As set forth in the risk factors included elsewhere in this 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.
Settlement of lawsuits for the years ended September 30, 2019, 2018, and 2017 total $225,000, $1.7 million, and
$317,000, respectively. As of September 30, 2019 and 2018, the Company has accrued $115,000 and $230,000 in accrued
liabilities, respectively, related to settlement of lawsuits.
75
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
12. Common Stock
During the year ended September 30, 2017, the following common stock transactions occurred:
● The Company acquired 89,685 shares of its own common stock at a cost of $1.1 million. These shares were
subsequently retired.
● The Company paid quarterly dividends of $0.03 per share for an aggregate amount of $1.2 million.
During the year ended September 30, 2018, the Company paid quarterly dividends of $0.03 per share for an aggregate
amount of $1.2 million.
During the year ended September 30, 2019, the following common stock transactions occurred:
● The Company acquired 128,040 shares of its own common stock at a cost of $2.9 million. These shares were
subsequently retired.
● The Company paid quarterly dividends of $0.03 per share, except for the fourth quarter when $0.04 per share was
paid, for an aggregate amount of $1.3 million.
Subsequent to September 30, 2019 through the filing date of this report, we purchased 332,671 shares of the Company’s
common stock for a total of $6.4 million. On February 6, 2020, the Board of Directors increased the repurchase
authorization by an additional $10.0 million.
13. Employee Retirement Plan
The Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The
Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a
matching contribution of up to 3% of the employee’s salary. Expenses related to matching contributions to the Plan
approximated $164,000, $160,000, and $131,000 for the years ended September 30, 2019, 2018, and 2017, respectively.
14. Insurance Recoveries
One of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and
another club in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2018. We wrote off the net
carrying value of the assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much
as the insurers have paid us or where contingencies relating to the insurance claims have been resolved.
In relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):
Consolidated balance sheets (period end)
Insurance receivable
Account receivable, net
Included in
Consolidated statements of income
Business interruption
Net property insurance claims
Other charges, net
Other charges, net
Consolidated statements of cash flows
Business interruption
Proceeds from property insurance claims
Operating activity
Investing activity
For the Year Ended September 30,
2018
2019
2017
$
$
$
$
$
1,197
(484)
(284)
100
100
$
$
$
$
$
-
-
(20)
-
20
$
$
$
$
$
-
-
-
-
-
The net property insurance claims amount in fiscal 2019 is net of assets written off and expenses amounting to $629,000.
The $1.2 million balance of insurance receivable as of September 30, 2019 was collected in October and November 2019.
15. Acquisitions and Dispositions
2017 Acquisitions
On April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St. Louis
area, as well as the club’s building and land, adjacent land, and a nearby building and land that can be used for another
gentlemen’s club. The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at
closing.
The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in
thousands):
Land and building
Furniture and equipment
Noncompete
Other assets
$
2,320
141
200
74
Goodwill
Accrued liability
Net assets
1,539
(75)
4,199
$
Management believes that the recorded goodwill represents the Company’s expansion into the Greater St. Louis area.
Goodwill is not amortized but is tested at least annually for impairment. The goodwill amount of $1.5 million, which was
recognized in the Nightclubs segment, is deductible for tax purposes.
76
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
15. Acquisitions and Dispositions - continued
On May 8, 2017, a subsidiary of the Company acquired the company that owns Scarlett’s Cabaret Miami in Pembroke
Park, Florida along with certain related intellectual property for a total consideration of $26.0 million, payable $5.4
million at closing, $5.0 million after six months through a short-term 5% note, and $15.6 million through a 12-year
amortizing 8% note. See Note 9.
The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in
thousands):
Inventory
Leasehold improvements
Furniture and equipment
Noncompete
SOB license
Tradename
Goodwill
Net assets
$
$
109
1,222
633
400
20,196
2,215
1,177
25,952
Management believes that the recorded goodwill represents the Company’s strong market positioning in the South Florida
area and with its different clientele from Tootsie’s Cabaret, which is five miles away, the two are complementary to each
other including management synergies. Goodwill for this acquisition is not amortized but is tested at least annually for
impairment. The goodwill amount of $1.2 million, which was recognized in the Nightclubs segment, is deductible for tax
purposes.
In conjunction with the acquisition, the Company made an election under IRS Code 338(h)10 to treat the acquisition as an
asset purchase for tax purposes. As a result, no deferred taxes were recorded upon acquisition.
The Company’s pro forma results of operations for the 2017 acquisitions have not been presented because it is
impracticable for management to provide assumptions and estimates in pre-acquisition prior periods without undue cost
and effort, notwithstanding the effect of the acquisitions was not material to our consolidated financial statements. Since
the acquisition dates, the two acquisitions generated combined revenues of $5.6 million and combined income from
operations of $2.2 million that are included in the Company’s consolidated statements of income for the year ended
September 30, 2017. We estimate their combined revenues to be $14.6 million and combined income from operations to
be $6.5 million for the year ended September 30, 2017 if the acquisitions occurred at the beginning of the fiscal year.
2017 Dispositions
On January 13, 2017, we closed the sale on one of our non-income-producing properties, included in assets held for sale in
our consolidated balance sheet as of September 30, 2016, for $2.2 million in cash, recognizing approximately $116,000
loss on the sale. Proceeds were used to pay off the remaining $1.5 million of a related 11% balloon note, which was due in
2018. The Company paid a $75,000 prepayment penalty to pay off the debt.
On June 6, 2017, the Company closed on the sale of another non-income-producing property, which was included in assets
held for sale on the Company’s consolidated balance sheet as of September 30, 2016, for $1.5 million, recognizing
approximately $0.9 million gain on the sale. The buyer owned one of the Company’s notes payable, hence, the Company
exchanged the property for a $1.5 million reduction in its note payable.
77
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
15. Acquisitions and Dispositions - continued
2018 Acquisitions
At September 30, 2017, the Company held a $2.0 million note receivable related to the Drink Robust, Inc. (“Drink
Robust”) disposition that occurred in September 2016. The note required interest-only monthly payments at a per annum
rate of 4% beginning January of 2017 and principal and interest payments due monthly commencing in January 2018 and
ending December 2032. Interest payments from January 2017 through December 2017 were made in the form of shares of
the common stock of a manufacturing company. Cash was received for the January 2018 principal and interest payment;
however, in April of 2018, the Company was informed that the note holder did not intend to make any future principal or
interest payments due on the note. The Company had recourse to the personal assets of the note holder in the amount of
$500,000 and entered into negotiations for settlement of the note in April 2018. On April 26, 2018, the Company forgave
the $500,000 guaranteed portion of the note for 750,000 shares of common stock of the manufacturing company.
Additionally, as part of the settlement, the Company acquired 78.5% of the remaining 80% ownership interest in Drink
Robust, bringing its ownership interest to 98.5% with the payment of an outstanding liability to the Drink Robust
distributor of $250,000. As a result of the payment, Drink Robust also obtained a three-year exclusive right of distribution
for the Robust Energy Drinks in the United States. The Company estimated of the fair value of the shares of the
manufacturing company and the interest acquired in Drink Robust. The estimated fair value totals $450,000, which is net
of the consideration of $250,000 owed to the Drink Robust distributor. As a result of the transaction, the Company
impaired $1.55 million of the note receivable during the quarter ended March 31, 2018, with a remaining balance of
$450,000 recorded within long-term assets at June 30, 2018. The Company accounted for the acquisition in the third
quarter of 2018, when the transaction was executed and has finalized its estimate of the fair value of the shares acquired in
the transaction, as well as its accounting for such ownership. The Company then acquired the remaining 1.5% interest in
Drink Robust from an individual investor to complete its 100% ownership.
On May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note
with interest at 8%. The transaction provides for the purchase of the real estate for $825,000 and other non-real estate
business assets for $180,000, with goodwill amounting to $495,000, which is deductible for tax purposes. Since the
acquisition date, the acquired club generated revenues of approximately $442,000 that are included in the Company’s
consolidated statements of income for the year ended September 30, 2018.
On September 6, 2018, a subsidiary acquired the remaining 49% of TEZ Real Estate that it did not own for $1,550,000 in
cash. The acquisition was principally funded by a loan on the property from a commercial bank. The Company accounted
for the transaction as an equity transaction in accordance with ASC 505. The difference between the fair value of the
consideration paid and the amount by which the noncontrolling interest was adjusted, in the amount of approximately
$759,000 (net of tax), was recognized in additional paid-in capital.
2018 Disposition
On December 11, 2017, the Company sold one of the properties held for sale for $675,000, recognizing a gain of
$481,000. During the quarter ended June 30, 2018, the Company decided to offer for sale a real estate property in Dallas,
Texas, which was a location of a recently closed club, with an estimated fair value of $2.0 million. During the quarter
ended September 30, 2018, the Company reclassified two properties held for sale with an aggregate carrying value of $7.2
million into held and used property and equipment, net in the consolidated balance sheet as of September 30, 2018. Also,
during the quarter ended September 30, 2018, the Company decided to offer four real estate properties for sale, with an
aggregate fair value less cost to sell of approximately $2.5 million.
2019 Acquisitions
On November 1, 2018, the Company acquired the stock of a club in Chicago for $10.5 million with $6.0 million cash paid
at closing and the $4.5 million in a 6-year seller-financed note with interest at 7%. The Company paid approximately
$37,000 in acquisition-related costs for this transaction, which is included in selling, general and administrative expenses
in our consolidated statement of income. The club generated revenue of approximately $5.0 million since acquisition date.
In relation to this acquisition, on September 25, 2018, the Company borrowed $5.0 million through a credit facility with a
bank lender. The loan has a 7% fixed interest rate with a maturity date in May 2019. The loan was fully paid as of June 30,
2019. Goodwill and SOB license for the Chicago acquisition are not amortized but are tested at least annually for
impairment. Goodwill recognized for this transaction is not deductible for tax purposes. Noncompete is amortized on a
straight-line basis over five years from acquisition date.
78
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
15. Acquisitions and Dispositions - continued
The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in
thousands):
Land and building
Inventory
Furniture and equipment
Noncompete
SOB license
Goodwill
Deferred tax liability
Net assets
$
$
4,325
57
50
100
5,252
2,003
(1,287)
10,500
On November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $15.0 million, with $7.5 million cash
paid at closing and two seller notes payable. The first note is a 2-year 7% note for $2.0 million, and the second is a 10-year
8% note for $5.5 million. The Company paid acquisition-related costs for this transaction of approximately $134,000,
which is included in selling, general and administrative expenses in our consolidated statement of income. The club
generated revenue of approximately $4.6 million since acquisition date. Goodwill for the Pittsburgh acquisition is not
amortized but is tested at least annually for impairment. Goodwill recognized for this transaction is deductible for tax
purposes. Noncompete is amortized on a straight-line basis over five years from acquisition date.
The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in
thousands):
Land and building
Inventory
Furniture and equipment
Noncompete
Goodwill
Net assets
2019 Dispositions
$
$
5,000
23
200
100
9,677
15,000
In October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000
in cash at closing and a $625,000 9% note payable to us over a 10-year period. The note is payable interest-only for twelve
months at the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and
interest is payable in 108 equal installments of $5,078 per month until October 2028. The buyer will lease the property
from the Company’s real estate subsidiary under the following terms: $36,000 per month lease payments for ten years;
renewal option for a succeeding ten years at a minimum of $48,000 per month; lessee has option to purchase the property
for $6.0 million during a term beginning November 2023 and expiring in October 2028. The Company recorded a gain on
the sale transaction of approximately $879,000, which is included in other charges (gains), net in our consolidated
statement of income during the quarter ended December 31, 2018. In July 2019, the Company and the buyer agreed to
modify the promissory note to include in principal (i) rental payments from April to September 2019, (ii) accrued property
taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest payments for a total principal balance of
$879,085. The note, as modified, still bears interest at 9% and is payable in 108 equal monthly installments of $11,905,
including principal and interest, until July 2028.
79
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
15. Acquisitions and Dispositions - continued
In November 2018, the Company sold two assets held for sale in Houston and San Antonio, Texas for a combined sales
price of $868,000. Net gain on the two transactions amounted to $273,000 after closing costs. The Company used the
proceeds to pay down $945,000 in loans related to the properties.
On January 24, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4 million,
payable $163,000 in cash at closing, net of closing costs and property taxes of $87,000, and a $1.15 million 8% note
payable over a three-year period. The note is payable $9,619 per month, principal and interest, for the first 35 months with
the remaining balance payable at maturity. The buyer has the option to extend the maturity date by one year at least 60
days prior to maturity, as long as the buyer is not in default. The Company recorded a gain on the sale transaction of
approximately $383,000.
On March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales
price of $1.4 million in cash. Net gain on the transaction amounted to approximately $628,000 after closing costs. The
Company used $980,000 of the proceeds to pay off a loan related to the property.
In April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales
price of $1.1 million in cash. Net gain on the transaction amounted to approximately $331,000 after closing costs. The
Company used $942,000 of the proceeds to pay off a loan related to the property.
In June 2019, the Company sold a property located in Lubbock, Texas for $350,000 in cash. Net loss on the transaction
amounted to $376,000 after closing costs. The Company used $331,000 of the proceeds from the sale to pay down debt.
In June 2019, the Company sold an aircraft for $690,000 in cash. Net loss on the transaction amounted to $9,000 after
closing costs. The Company used $666,000 of the proceeds from the sale to pay down related debt.
On July 23, 2019, the Company sold an aircraft for a total sales price of $382,000 for net gain of $16,000. Proceeds were
used to pay off the remaining note payable balance of approximately $217,000.
On September 30, 2019, the Company sold its Bombshells Webster location for a total sales price of $85,000 in cash. Net
loss on the transaction amounted to approximately $156,000.
2020 Acquisition
On November 5, 2019, the Company announced that its subsidiaries have signed definitive agreements to acquire the
assets and related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0
million. As of the filing of this report, closing of this transaction is still pending subject to certain conditions. Under the
terms of the agreements, Company subsidiaries will pay $7.2 million for the club and $7.8 million for the real estate using
$4.0 million in seller financing at 6.0% for the club with the balance of cash from an anticipated $11.0 million bank loan
at a blended rate of 6.25%.
80
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Quarterly Results of Operations (Unaudited)
The following tables summarize unaudited quarterly data for fiscal 2019, 2018, and 2017 (in thousands, except per share
data):
$
$
$
$
$
$
$
$
$
$
$
$
$
Revenues
Income from operations(1)
Net income attributable to
RCIHH shareholders(1)
Earnings per share(1)
Basic and diluted
Weighted average number of
common shares outstanding
Basic and diluted
Revenues
Income from operations(2)
Net income (loss) attributable
to RCIHH shareholders(2)
Earnings (loss) per share(2)
Basic and diluted
Weighted average number of
common shares outstanding
Basic and diluted
Revenues
Income from operations(3)
Net income (loss) attributable
to RCIHH shareholders(3)
Earnings (loss) per share(3)
Basic
Diluted
Weighted average number of
common shares outstanding
Basic
Diluted
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
For the Three Months Ended
44,023 $
11,132 $
44,826 $
11,166 $
47,027 $
9,974 $
6,344 $
6,735 $
5,638 $
0.65 $
0.70 $
0.59 $
45,183
2,429
458
0.05
9,713
9,679
9,620
9,616
December 31, 2017
March 31, 2018
June 30, 2018
September 30, 2018
For the Three Months Ended
41,212 $
9,140 $
41,226 $
8,231 $
42,634 $
9,492 $
14,311 $
4,685 $
5,389 $
1.47 $
0.48 $
0.55 $
40,676
699
(3,506)
(0.36)
9,719
9,719
9,719
9,719
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
For the Three Months Ended
33,739 $
6,333 $
34,518 $
7,487 $
37,429 $
7,883 $
2,898 $
3,759 $
3,841 $
0.30 $
0.30 $
0.39 $
0.39 $
0.40 $
0.40 $
9,768
9,814
9,719
9,721
9,719
9,719
81
39,210
1,436
(2,239)
(0.23)
(0.23)
9,719
9,719
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Fiscal year 2019 income from operations, net income attributable to RCIHH shareholders, and earnings per share
included the impact of a $6.0 million in asset impairments in the fourth quarter, a $2.9 million net gain on sale of
businesses and assets ($1.2 million in the first quarter, $1.1 million in the second quarter, $0.3 million in the third
quarter and $0.4 million in the fourth quarter), and a $0.8 million net gain on insurance ($0.1 million net loss in
the third quarter and $0.9 million net gain in the fourth quarter). Quarterly effective income tax expense (benefit)
rate was 22.0%, 22.3%, 24.1%, and (371.7%) from first to fourth quarter, respectively.
(2) Fiscal year 2018 income from operations, net income attributable to RCIHH shareholders, and earnings per share
included the impact of a $1.6 million loss on disposition in the second quarter, a $5.6 million in asset
impairments ($1.6 million in the second quarter and $4.0 million in the fourth quarter), and a $8.8 million
deferred income tax benefit related to the revaluation of deferred tax assets and liabilities ($9.7 million credit in
the first quarter, $38,000 expense in the second quarter, and $827,000 expense in the fourth quarter). Quarterly
effective income tax expense (benefit) rate was (134.3%), 24.2%, 25.3%, and 103.8% from first to fourth quarter,
respectively. See Note 3 related to revision of prior year immaterial misstatement.
(3) Fiscal year 2017 income from operations, net income attributable to RCIHH shareholders, and earnings per share
included the impact of $7.6 million in asset impairment ($1.4 million in the third quarter and $6.2 in the fourth
quarter) and $1.3 million additional income tax expense due to change in deferred tax liability rate in the fourth
quarter. Quarterly effective income tax expense rate was 33.3%, 33.7%, 32.9%, and 99.6% from first to fourth
quarter, respectively.
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.
82
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
17. Impairment of Assets
During the year ended September 30, 2017, we recorded aggregate impairment charges of $7.6 million comprised of $4.7
million for the goodwill of four club locations, including one that we have put up for sale during the fiscal year, $385,000
for property and equipment of one club, $1.4 million for SOB license of two club locations, and $1.2 million of
investment impairment.
During the year ended September 30, 2018, we recorded aggregate impairment charges of $5.6 million comprised of $1.6
million for long-lived assets of one club and one Bombshells, $834,000 for goodwill impairment of two clubs, and $3.1
million for SOB licenses of three clubs.
During the year ended September 30, 2019, we recorded aggregate impairment charges of $6.0 million comprised of $1.6
million for the goodwill of four club locations, $4.2 million for property and equipment of two clubs, and $178,000 for
SOB license of one club.
18. Segment Information
The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified
such segments based on management responsibility and the nature of the Company’s products, services and costs. There
are no major distinctions in geographical areas served as all operations are in the United States. The Company measures
segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable
segment. The Other category below includes our media and energy drink divisions that are not significant to the
consolidated financial statements.
83
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
18. Segment Information - continued
Below is the financial information related to the Company’s reportable segments (in thousands):
2019
2018
2017
Revenues (from external customers)
Nightclubs
Bombshells
Other
Income (loss) from operations(1)
Nightclubs
Bombshells
Other
General corporate
Capital expenditures
Nightclubs
Bombshells
Other
General corporate
Depreciation and amortization
Nightclubs
Bombshells
Other
General corporate
Total assets(1)
Nightclubs
Bombshells
Other
General corporate
$
$
$
$
$
$
$
$
$
$
148,606
30,828
1,625
181,059
50,724
2,307
(309)
(18,021)
34,701
6,645
10,933
27
3,579
21,184
6,401
1,374
416
881
9,072
September 30, 2019
274,071
44,144
1,773
33,649
353,637
$
$
$
$
$
$
$
$
$
$
140,060
24,094
1,594
165,748
43,624
2,040
(252)
(17,850)
27,562
2,052
22,522
33
656
25,263
5,404
1,265
179
874
7,722
September 30, 2018
252,335
39,560
1,978
35,859
329,732
$
$
$
$
$
$
$
$
$
$
124,687
18,830
1,379
144,896
35,138
3,084
(522)
(14,561)
23,139
5,142
4,489
14
1,604
11,249
5,186
1,025
50
659
6,920
September 30, 2017
254,432
18,870
780
25,802
299,884
(1) See Note 3 for a discussion of revision of prior year immaterial misstatement.
Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to
$10.0 million, $9.0 million, and $8.8 million for 2019, 2018, and 2017, respectively, and intercompany sales of Robust
Energy Drink of Other segment amounting to $140,000, $26,000, and $0, for the same respective years. These revenue
items 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.
84
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
19. Noncontrolling Interests
Noncontrolling interests represent the portion of equity in a consolidated entity held by owners other than the
consolidating parent. Noncontrolling interests are reported in the consolidated balance sheets within equity. Revenue,
expenses and net income attributable to both the Company and the noncontrolling interests are reported in the consolidated
statements of income.
Until September 2018, our consolidated financial statements included noncontrolling interests related to the Company’s
ownership of 51% of an entity which owns the real estate for the Company’s nightclub in Philadelphia. The Company
acquired the remaining not-owned portion of the entity in September 2018.
Our consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of
51% of an entity which owns one of the Company’s nightclubs in New York City.
20. Related Party Transactions
Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the
Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of
our commercial bank indebtedness, net of debt discount and issuance costs, as of September 30, 2019 and 2018 is $86.8
million and $90.4 million, respectively.
Included in the $2.35 million borrowing on November 1, 2018 (see Note 9) was a $500,000 note borrowed from a related
party (Ed Anakar, an employee of the Company and brother of our director Nourdean Anakar). The terms of this related
party note are the same as the rest of the lender group in the November 1, 2018 transaction.
We used the services of Sherwood Forest Creations, LLC (“Sherwood Forest”) and its predecessor, Creative Steel Designs
(“Creative Steel”), furniture fabrication companies that manufacture tables, chairs and other furnishings for our
Bombshells locations, as well as providing ongoing maintenance. Sherwood Forest is owned by a brother of Eric Langan,
and Creative Steel was owned by his father. Amounts billed to us for goods and services provided by Sherwood Forest
were approximately $134,000 in fiscal 2019, $321,000 in fiscal 2018, and an aggregate of $135,000 by Sherwood Forest
and Creative Steel in fiscal 2017. As of September 30, 2019 and 2018, we owed Sherwood Forest $6,588 and $73,377,
respectively, in unpaid billings.
TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor
providing construction services to the Company, as well as directly to the Company during fiscal 2018 and 2019. TW
Mechanical is 20% owned by the son-in-law of Eric Langan. Amounts billed by TW Mechanical to the third-party general
contractor were $452,000, $120,000, and $0 for the fiscal years ended 2019, 2018 and 2017 respectively. Amounts billed
directly to the Company were $47,000, $7,000 and $0 for the fiscal years ended 2019, 2018, and 2017 respectively. As of
September 30, 2019 and 2018, we owed TW Mechanical $0 and $0, respectively, in unpaid direct billings.
85
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no disagreements with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this report, an evaluation was carried out by certain members of Company
management, with the participation of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of
the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange
Commission’s (“SEC”) Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of
September 30, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed
in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
management, including the CEO and the CFO, to allow timely decisions regarding required disclosures.
Due to a material weakness in internal control over financial reporting described below, management concluded that the
Company’s disclosure controls and procedures were not effective as of September 30, 2019. Notwithstanding the
existence of this material weakness, management believes that the consolidated financial statements in this annual report
filed on Form 10-K present, in all material respects, the Company’s financial condition as reported, in conformity with
United States Generally Accepted Accounting Principles (“U.S. GAAP”).
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our
assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being
made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal
control over financial reporting as of September 30, 2019, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
We identified a material weakness in internal control related to ineffective financial statement close and reporting controls
in the areas of management review of financial statement information, independent review of journal entries, disclosure of
related party transactions and accounting for loss contingencies. Based on this material weakness, the Company’s
management concluded that at September 30, 2019, the Company’s internal control over financial reporting was not
effective.
86
The Company’s independent registered public accounting firm, Friedman, LLP, has expressed an adverse opinion on our
internal control over financial reporting as of September 30, 2019 in the audit report that appears at the end of Part II of
this Annual Report on Form 10-K.
Remediation Plan for Existing Material Weakness
Management is committed to the remediation of the material weakness described above, as well as the continued
improvement of the Company’s internal control over financial reporting. Management has been implementing, and
continues to implement, measures designed to ensure that control deficiencies contributing to the material weakness are
remediated, such that these controls are designed, implemented, and operating effectively.
To address the material weakness, management has completed, or is in the process of:
● developing policies and procedures to enhance the precision of management review of financial statement
information;
● implementing policies and procedures to enhance independent review of journal entries;
● developing and implementing procedures to ensure the completeness of related party disclosures; and
● developing and implementing procedures related to the identification and accounting for loss contingencies.
We believe that these actions will remediate the material weakness. The material weakness will not be considered
remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded,
through testing, that these controls are operating effectively.
Previously Reported Material Weaknesses in Internal Control Over Financial Reporting
As disclosed in Part II Item 9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2018, we identified material weaknesses in internal control related to the control environment, risk
assessment and monitoring, revenues, complex accounting and management estimates, financial statement close and
reporting, information technology and segregation of duties.
Remediation Efforts to Address Material Weaknesses
Control Environment, Risk Assessment and Monitoring
Our Board of Directors has directed senior management to ensure that a proper, consistent tone is communicated
throughout the organization. We have implemented a new Code of Conduct and Disclosure Committee charter, appointed
a new Chief Compliance Officer and retained an external consulting firm to act as an internal audit department and to
assist in implementing an enterprise risk assessment.
Control Activities
Revenues – We designed and implemented mitigating or compensating controls around the revenue process.
Complex Accounting and Management Estimates – We added review procedures and controls over complex accounting
and estimates to prevent instances of incorrect accounting, financial statement preparation, and valuation decisions, by
increasing our own level of competency as well as using third-party consultants to assist where necessary.
Information Technology – We improved and strengthened the operation of Information Technology controls in fiscal year
2019, including the review of security logs and analysis of segregation of duty conflicts.
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Segregation of Duties – Our Enterprise Resource Planning (“ERP”) system includes proper segregation of duties within
our journal entry process and an analysis of segregation of duties conflicts, which were more fully utilized in fiscal year
2019. We also hired a Director of ERP & Business Intelligence.
During the fourth quarter of 2019, we completed our testing of the operating effectiveness of the implemented controls
and, with the exception of the remaining material weakness in financial close and reporting described above, management
has concluded that the previously reported material weaknesses have been remediated.
Changes in Internal Control Over Financial Reporting
Except for the changes in connection with our implementation of the remediation plan discussed above, there have been
no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the
Exchange Act) that occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None
88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
RCI Hospitality Holdings, Inc.
Adverse Opinion on Internal Control over Financial Reporting
We have audited RCI Hospitality Holdings, Inc.’s (the “Company’s”) internal control over financial reporting as of
September 30, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of
the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of September 30, 2019, based on criteria
established in Internal Control—Integrated Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following material weakness has been identified and
included in management’s assessment:
Ineffective financial statement close and reporting controls in the areas of management review of financial
statement information, independent review of journal entries, disclosure of related party transactions and
accounting for loss contingencies.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of
the 2019 consolidated financial statements, and this report does not affect our report dated February 13, 2020, on those
consolidated financial statements.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective
actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets and the related consolidated statements of income, comprehensive
income, stockholders’ equity, and cash flows of the Company, and our report dated February 13, 2020, expressed an
unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A -
Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Friedman LLP
Marlton, New Jersey
February 13, 2020
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Item 10. Directors, Executive Officers and Corporate Governance.
DIRECTORS AND EXECUTIVE OFFICERS
PART III
Our Directors are elected annually and hold office until the next annual meeting of our stockholders or until their
successors are elected and qualified. Officers are appointed by the Board of Directors annually and serve at the discretion
of the Board of Directors (subject to any existing employment agreements). There is no family relationship between or
among any of our directors and executive officers. Our Board of Directors consists of seven persons. The following table
sets forth our Directors and executive officers:
Name
Eric S. Langan
Phillip Marshall
Travis Reese
Luke Lirot
Nourdean Anakar
Yura Barabash
Elain J. Martin
Arthur Allan Priaulx
Age
51
70
50
63
62
44
62
79
Position
Director, Chairman, Chief Executive Officer, President
Chief Financial Officer
Director and Executive Vice President
Director
Director
Director
Director
Director
Eric S. Langan has been a director since 1998, and our President, CEO and Chairman since 1999. He began his career in
the hospitality industry in 1989 and has developed significant expertise in sports bar/restaurants and adult entertainment
nightclubs, including related areas of real estate development and finance. Mr. Langan built the XTC Cabaret nightclub
brand and merged it into RCI in 1998, expanding the scope of the company. He has been instrumental in bringing
professional marketing, management, finance, and technology practices and systems to the gentlemen’s club industry. As
one of the original founders of the National Association of Club Executives (ACE), Mr. Langan has been an active
member of its Board of Directors since 1999. Through these activities, Mr. Langan has acquired the knowledge and skills
necessary to successfully operate adult entertainment businesses.
Phillip Marshall has served as our Chief Financial Officer since May 2007. He was previously controller of Dorado
Exploration, Inc., an oil and gas exploration and production company, from February 2007 to May 2007. He previously
served as Chief Financial Officer of CDT Systems, Inc., a publicly held water technology company, from July 2003 to
September 2006. In 1972, Mr. Marshall began his public accounting career with the international accounting firm, KMG
Main Hurdman. After its merger with Peat Marwick, Mr. Marshall served as an audit partner at KPMG for several years.
After leaving KPMG, Mr. Marshall was partner in charge of the audit practice at Jackson & Rhodes in Dallas from 1992
to 2003, where he specialized in small publicly held companies. Mr. Marshall is also a trustee of United Mortgage Trust,
United Development Funding IV and United Development Funding V, publicly held real estate investment trusts.
Travis Reese became a director and our Executive Vice President in 1999. From 1997 through 1999, Mr. Reese had been a
senior network administrator at St. Vincent’s Hospital in Santa Fe, New Mexico. During 1997, Mr. Reese was a computer
systems engineer with Deloitte & Touche. From 1995 until 1997, Mr. Reese was Vice President with Digital Publishing
Resources, Inc., an Internet service provider. From 1994 until 1995, Mr. Reese was a pilot with Continental Airlines. From
1992 until 1994, Mr. Reese was a pilot with Hang On, Inc., an airline company. Mr. Reese has an Associate’s Degree in
Aeronautical Science from Texas State Technical College. Mr. Reese has been involved in the adult entertainment
industry since 1992. His experience and knowledge in this industry is essential to the Board’s oversight of our businesses.
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Luke Lirot became a director on July 31, 2007. Mr. Lirot received his law degree from the University of San Francisco in
1986. After serving as an intern in the San Francisco Public Defender’s Office in 1986, Mr. Lirot returned to Florida and
established a private law practice where he continues to practice and specializes in adult entertainment issues. He is a past
President of the First Amendment Lawyers’ Association and has actively participated in numerous state and federal legal
matters. Mr. Lirot represents as counsel scores of individuals and entities within our industry. Having practiced in this area
for over 30 years, he is aware of virtually every type of legal issue that can arise, making him an important member of the
Board.
Nourdean Anakar became a director on September 14, 2010. Mr. Anakar is a seasoned gaming and hospitality senior
executive with a 28-year successful track record in leading the development and management of top ranked gaming and
hospitality operations in the United States, Europe, and Latin America. He was Chairman and CEO of Sorteo Games Inc.
from 2002 through 2014 and since 2015 has been a partner of the McKinney Capital Group and oversees all international
developments. He received his BA in Management Science from Duke University and CHA in Hospitality Management
from the Conrad Hilton College at the University of Houston. Mr. Anakar’s experience managing and developing
businesses in industries with similar characteristics to ours make him an excellent fit to the Board.
Yura Barabash became a director on September 19, 2017. Mr. Barabash has been a Director of SportUpdate BV, private
digital media company in the Netherlands, since December 2017. Mr. Barabash has extensive corporate finance
experience across multiple industries domestically and internationally, and has been involved in multiple equity and debt
financings and M&A transactions for public and private companies in the US, China, Brazil, EU and Russia. From 2016 to
June 2019 he was a Senior Vice President of Finance at Motorsport Network LLC (www.motorsportnetwork.com) in
Miami, the largest motorsport data enabled digital media company in the world. Prior to joining Motorsport Network, he
was an investment banker at Primary Capital from 2011 until 2016. Previously, Mr. Barabash was an investment banker at
Rodman & Renshaw and Merrill Lynch. He holds a B.A. from Sevastopol City University in Ukraine and a Master in
International Affairs from Columbia University in New York City, and is fluent in Russian. Mr. Barabash is a valuable
member of the Board of Directors based on his extensive corporate finance and investment banking experience across
multiple industries domestically and internationally with a wide range of transactions (debt and equity). He also possesses
extensive financial modeling and investor relationship experience and experience in diligence, governance and accounting.
Elaine J. Martin became a director on August 8, 2019. She is co-founder and general partner of two privately-held
Houston area businesses for which she provides a broad array of management and accounting functions on a day-to-day
basis. In 1993, she co-founded Medco Manufacturing LLC, which develops, manufactures and sells, under Food and Drug
Administration (FDA) guidelines, equipment and disposable products used by plastic surgeons in domestic and
international markets. In 1989, Ms. Martin co-founded Aero Tech Aviation LLC, which trains foreign nationals for the
Federal Aviation Administration (FAA) Air Frame and Power Plant examination, for their license to repair US-origin
aircraft. Earlier in her career, she was a Registered Nurse specializing in cosmetic surgery. Ms. Martin received her BS in
Biology and Chemistry from Houston Baptist University. Her volunteer activities have included serving as a member of
the Board of Directors of Texas A&M University Mothers’ Club (Aggie Moms). Ms. Martin’s business acumen and
experience running companies make her an important member of the Board.
Arthur Allan Priaulx became a director on August 8, 2019. He has more than 45 years of experience in the
communications industry. Earlier in his career, he was Vice President and General Manager of King Features Division of
Hearst Corporation, in charge of worldwide newspaper activities and product licensing. He was also publisher of
American Banker, a leading trade publication in the financial services industry, when it was owned by Thomson Financial.
In 1993, he founded Resource Media Group, a New York-based financial media and investor relations firm. His clients
included a wide range of companies, including RCI Hospitality Holdings, Inc., for which he provided public and investor
relations services from 1994 to 2013. Mr. Priaulx has been retired since 2014. He attended Dartmouth College and
University of Southampton in the U.K. He has also completed graduate-level courses at INSEAD Business School in
France and the Wharton School of the University of Pennsylvania. His volunteer activities have included serving as
national vice president of United Cerebral Palsy.
On August 8, 2019, Steven Jenkins resigned from the board. He has confirmed that his decision was not due to a
disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
91
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
We have an Audit Committee whose members are Yura Barabash, Elaine Martin and Arthur Allan Priaulx. All members
of the Audit Committee are independent directors. The purpose of the Audit Committee is to (i) oversee our accounting
and financial reporting processes, our disclosure controls and procedures and system of internal controls and audits of our
consolidated financial statements, (ii) oversee the relationship with our independent auditors, including appointing or
changing our auditors and ensuring their independence, and (iii) provide oversight regarding significant financial matters.
The Audit Committee meets privately with our Chief Financial Officer and with our independent registered public
accounting firm and evaluates the responses by the Chief Financial Officer both to the facts presented and to the
judgments made by our outside independent registered public accounting firm. Yura Barabash serves as the Audit
Committee’s financial expert.
In August 2015, our Board adopted a new Charter for the Audit Committee. A copy of the Audit Committee Charter can
be found on our website at www.rcihospitality.com/investor. The Charter establishes the independence of our Audit
Committee and sets forth the scope of the Audit Committee’s duties. The Audit Committee conducts an ongoing review of
our financial reports and other financial information prior to their being filed with the SEC, or otherwise provided to the
public. The Audit Committee also reviews our systems, methods and procedures of internal controls in the areas of:
financial reporting, audits, treasury operations, corporate finance, managerial, financial and SEC accounting, compliance
with law, and ethical conduct. NASDAQ Stock Market Rules require all members of the Audit Committee to be
independent. The Audit Committee is objective, and reviews and assesses the work of our independent registered public
accounting firm and our internal accounting department.
92
NOMINATING COMMITTEE
We have a Nominating Committee whose current members are Elaine Martin, Luke Lirot, Yura Barabash and Arthur
Allan Priaulx. In July 2004, the Board unanimously adopted a Charter with regard to the process to be used for identifying
and evaluating nominees for director. The Charter establishes the independence of our Nominating Committee and sets
forth the scope of the Nominating Committee’s duties. NASDAQ Stock Market Rules require all members of the
Nominating Committee to be independent. Pursuant to its Charter, the Committee has the power and authority to consider
Board nominees and proposals submitted by our stockholders and to establish any procedures, including procedures to
facilitate stockholder communication with the Board of Directors, and to make any such disclosures required by applicable
law in the course of exercising such authority. A copy of the Nominating Committee’s Charter can be found on our
website at www.rcihospitality.com/investor.
COMPENSATION COMMITEE
We have a Compensation Committee whose current members are Elaine Martin, Luke Lirot, Yura Barabash and Arthur
Allan Priaulx. In June 2014, the Compensation Committee adopted a Charter with regard to the Compensation
Committee’s responsibilities, including evaluating, reviewing and determining the compensation of our Chief Executive
Officer and other executive officers. A copy of the Compensation Committee’s Charter can be found on our website at
www.rcihospitality.com/investor.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own
beneficially more than ten percent of our common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Based solely upon a review of Forms 3, 4 and 5 furnished to us during the fiscal
year ended September 30, 2019, we believe that the directors, executive officers, and greater than ten percent beneficial
owners have complied with all applicable filing requirements during the fiscal year ended September 30, 2019, except for
an untimely Form 4 filed on February 12, 2020 for each of Eric Langan, our Chief Executive Officer; Phillip Marshall, our
Chief Financial Officer; and Travis Reese, our Director and Executive Vice President.
CODE OF ETHICS
We have adopted a code of ethics for our principal executive and senior financial officers, a copy of which can be found
on our website at www.rcihospitality.com.
93
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
This compensation discussion and analysis describes the material elements of the Company’s compensation programs as
they relate to our executive officers who are listed in the compensation tables appearing below. This compensation
discussion and analysis focuses on the information contained in the following tables and related footnotes. The individuals
who served as the Company’s Chief Executive Officer and Chief Financial Officer during fiscal 2019, as well as any other
individuals included in the Summary Compensation Table, are referred to as “named executive officers.”
Overview of Compensation Committee Role and Responsibilities
The Compensation Committee of the Board of Directors oversees our compensation plans and policies, reviews and
approves all decisions concerning the named executive officers’ compensation, which may further be approved by the
Board, and administers our stock option and equity plans, including reviewing and approving stock option grants and
equity awards under the plans. The Compensation Committee’s membership is determined by the Board and is composed
entirely of independent directors.
Management plays a role in the compensation-setting process. The most significant aspects of management’s role are to
evaluate employee performance and recommend salary levels and equity compensation awards. Our Chief Executive
Officer often makes recommendations to the Compensation Committee and the Board concerning compensation for other
executive officers. Our Chief Executive Officer is a member of the Board but does not participate in Board decisions
regarding any aspect of his own compensation. The Compensation Committee can retain independent advisors or
consultants.
Compensation Committee Process
The Compensation Committee reviews executive compensation in connection with the evaluation and approval of an
employment agreement, an increase in responsibilities or other factors. With respect to equity compensation awarded to
other employees, the Compensation Committee or the Board grants stock options, often after receiving a recommendation
from our Chief Executive Officer. The Compensation Committee also evaluates proposals for incentive and performance
equity awards, and other compensation.
Compensation Philosophy
The Compensation Committee emphasizes the important link between the Company’s performance, which ultimately
affects stockholder value, and the compensation of its executives. Therefore, the primary goal of the Company’s executive
compensation policy is to try to align the interests of the executive officers with the interests of the stockholders. In order
to achieve this goal, the Company attempts to (i) offer compensation opportunities that attract and retain executives whose
abilities and skills are critical to the long-term success of the Company and reward them for their efforts in ensuring the
success of the Company, (ii) align the Company’s compensation programs with the Company’s long-term business
strategies and objectives, and (iii) provide variable compensation opportunities that are directly linked to the Company’s
performance and stockholder value, including an equity stake in the Company. Our named executive officers’
compensation utilizes two primary components — base salary and long-term equity compensation — to achieve these
goals. We have not, however, granted any equity awards to our executive officers since 2014. Additionally, the
Compensation Committee may award discretionary bonuses to certain executives based on the individual’s contribution to
the achievement of the Company’s strategic objectives.
94
Setting Executive Compensation
We fix executive base compensation at a level we believe enables us to hire and retain individuals in a competitive
environment and to reward satisfactory individual performance and a satisfactory level of contribution to our overall
business goals. We also take into account the compensation that is paid by companies that we believe to be our
competitors and by other companies with which we believe we generally compete for executives.
In establishing compensation packages for executive officers, numerous factors are considered, including the particular
executive’s experience, expertise and performance, our company’s overall performance and compensation packages
available in the marketplace for similar positions. In arriving at amounts for each component of compensation, our
Compensation Committee strives to strike an appropriate balance between base compensation and incentive
compensation. The Compensation Committee also endeavors to properly allocate between cash and non-cash
compensation and between annual and long-term compensation.
The Role of Shareholder Say-on-Pay Votes
At our annual meeting of shareholders held on August 29, 2018, approximately 96% of the shareholders who voted on the
“say-on-pay” proposal approved the compensation of our named executive officers, as disclosed in the proxy statement.
Although this advisory shareholder vote on executive compensation is non-binding, the Compensation Committee will
consider the outcome of the vote when making future compensation decisions for named executive officers.
Base Salary
The Company provides executive officers and other employees with base salary to compensate them for services rendered
during the fiscal year. Subject to the provisions contained in employment agreements with executive officers concerning
base salary amounts, base salaries of the executive officers are established based upon compensation data of comparable
companies in our market, the executive’s job responsibilities, level of experience, individual performance and contribution
to the business. We believe it is important for the Company to provide adequate fixed compensation to highly qualified
executives in our competitive industry. In making base salary decisions, the Compensation Committee uses its discretion
and judgment based upon personal knowledge of industry practice but does not apply any specific formula to determine
the base salaries for the executive officers.
Equity-Based Awards—Equity Compensation Plans
Although we have not granted any equity awards to our executive officers since 2014, the Compensation Committee has
historically used equity awards, usually in the form of stock options, primarily to motivate our named executive officers to
realize benefits from longer-term strategies that increase stockholder value, and to promote commitment and retention.
Equity awards may vest either at a particular date in the future or upon the achievement of performance criteria that the
Company believes are critical to its long-term success.
The Compensation Committee believes that stock options are an important form of long-term incentive compensation
because they align the executive officer’s interests with the interests of stockholders, since the options have value only if
our stock price increases over time. From time to time, the Compensation Committee may consider circumstances that
warrant the grant of full value awards such as restricted stock units. Examples of these circumstances include, among
others, attracting a new executive to the team; recognizing a promotion to the executive team; retention; and rewarding
outstanding long-term contributions.
Our equity grant practices require that stock options and other equity compensation have prices not less than the fair
market value on the date of grant. The fair market value of our stock option awards has historically been the NASDAQ
closing price on the date of grant.
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Retirement Savings Plan
The Company maintains a retirement savings plan for the benefit of our executives and employees. Our Simple IRA Plan
is intended to qualify as a defined contribution arrangement under the Internal Revenue Code (the “Code”). Participants
may elect to defer a percentage of their eligible pretax earnings each year or contribute a fixed amount per pay period up
to the maximum contribution permitted by the Code. All participants’ plan accounts are 100% vested at all times. All
assets of our Simple IRA Plan are invested based on participant-directed elections. We make certain matching
contributions to the Simple IRA Plan, which are also 100% vested.
Perquisites and Other Personal Benefits
The Company’s executive officers participate in the Company’s other benefit plans on the same terms as other employees
on a non-discriminatory basis. These plans include medical, dental, life and disability insurance. Relocation benefits also
are reimbursed and are individually negotiated when they occur. The Company reimburses each executive officer for all
reasonable business and other expenses incurred by them in connection with the performance of their duties and
obligations under their employment agreements. The Company does not provide named executive officers with any
significant perquisites or other personal benefits except for personal travel using Company-owned automobiles and/or
aircrafts. In September 2019, the board of directors approved an aircraft policy allowing personal use of Company
aircrafts as follows: (1) 25 hours per fiscal quarter for our CEO, and (2) 12 hours each per fiscal quarter for our CFO and
our EVP.
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation for services to us for the fiscal years ended September 30, 2019,
2018, and 2017 of our named executive officers.
Name and
Principal Position
Eric S. Langan
President and Chief Executive Officer
Phillip K. Marshall
Chief Financial Officer
Travis Reese
Executive Vice President
Stock
Option
Salary
Awards
Awards
All Other
Compensation
(1)
Year
2019
2018
2017
($)
1,200,000
1,015,384
900,000
2019
2018
2017
2019
2018
2017
325,000
294,231
263,942
390,000
346,854
320,000
($)
($)
-
-
-
-
-
-
-
-
-
($)
81,355
119,904
158,673
34,067
32,580
27,396
76,622
73,722
66,579
-
-
-
-
-
-
-
-
-
Total
($)
1,281,355
1,135,288
1,058,673
359,067
326,811
291,338
466,622
420,576
386,579
(1) All Other Compensation consists of SIMPLE IRA matching contributions, automobile expenses, and personal use of
aircraft. We account for personal use of aircraft to be the aggregate incremental cost of personal use of the company
aircraft as calculated based on a cost-per-flight-hour charge developed by a nationally recognized and independent
service. The charge reflects the direct cost of operating the aircraft, including fuel, additives, lubricants, maintenance
labor, airframe parts, engine restoration, major periodic maintenance, and an allowance for propeller maintenance. We
added actual airport/hangar fees charged to the company on a per-flight basis. The charge does not include fixed costs
that do not change based on usage, such as aircraft depreciation, home hangar expenses, and general taxes and
insurance. We value automobile expenses based on the annual depreciation rate of automobiles assigned for use by
the particular officer, plus cost of insurance, registration, repairs, maintenance, and fuel.
A table of All Other Compensation for fiscal 2019 for our named executive officers is presented below:
Name
Eric S. Langan
Phillip K. Marshall
Travis Reese
SIMPLE IRA
Matching
Contribution
($)
16,630
9,750
11,700
Automobile
Expenses
Personal Use of
Aircraft
Total All Other
Compensation
($)
46,877
-
8,444
($)
81,355
34,067
76,622
($)
17,848
24,317
56,478
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CEO Pay Ratio
We reviewed a comparison of annual total compensation of our CEO to the annual compensation of our median employee
who was selected from all employees who were employed (other than the CEO) during our fiscal year ended September
30, 2019.
The SEC’s rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s
annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make
reasonable estimates and assumptions that reflect their employee populations and compensation practices. As a result, the
pay ratio reported by other companies may not be comparable to the pay ratio reported below, as other companies have
different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates
and assumptions in calculating their own pay ratios.
We used the same median employee that was identified in our Form 10-K for the fiscal year ended September 30, 2018.
The compensation for our CEO in fiscal 2019 of $1,281,355 was approximately 62 times the compensation of our median
employee of $20,534.
GRANTS OF PLAN-BASED AWARDS
There were no grants of plan-based awards for the year ended September 30, 2019.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
There were no outstanding equity awards as of September 30, 2019.
OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2019
There were no stock options exercised nor stock that vested during the fiscal year ended September 30, 2019.
97
DIRECTOR COMPENSATION
We pay the expenses of our directors in attending board meetings. We paid no equity-based compensation during the
fiscal year ended September 30, 2019, and we paid our independent directors $20,000 in cash for the fiscal year.
Following is a schedule of all compensation paid to our directors in the year ended September 30, 2019:
Name
Nourdean Anakar
Steve L. Jenkins
Luke C. Lirot
Yura Barabash
Elaine Martin
Arthur Allan Priaulx
Eric S. Langan
Travis Reese
Fees earned
or paid in
cash
($)
20,000
20,000
20,000
20,000
-
-
-
-
During September 2019, the board of directors unanimously approved increasing the compensation of the non-executive
directors to $30,000 in cash for the 2020 fiscal year, payable $7,500 each quarter.
EMPLOYMENT AGREEMENTS
On January 31, 2020, the employment agreements with each of our executive officers, including Eric S. Langan, our Chief
Executive Officer and President, Phillip Marshall, our Chief Financial Officer, and Travis Reese, our Executive Vice
President, expired. We are presently in the process of negotiating new employment agreements with each of these
individuals. During this process, the Compensation Committee has determined that these executive officers will continue
to receive the pay and benefits provided under their previous employment agreements. Under their respective agreements,
Mr. Langan’s annual salary was $1,200,000, Mr. Marshall’s annual salary was $325,000, and Mr. Reese’s annual salary
was $390,000. Each of the agreements also provided for bonus eligibility, expense reimbursement, participation in all
benefit plans maintained by us for salaried employees and two weeks paid vacation.
Currently, our executive officers do not have long-term incentive plans or defined benefit or actuarial plans outstanding.
EMPLOYEE STOCK OPTION PLANS
As of September 30, 2019, there are no stock options outstanding under our 2010 Stock Option Plan, as amended.
98
COMPENSATION POLICIES AND PRACTICES AS THEY RELATE TO RISK MANAGEMENT
We attempt to make our compensation programs discretionary, balanced and focused on the long term. We believe goals
and objectives of our compensation programs reflect a balanced mix of quantitative and qualitative performance measures
to avoid excessive weight on a single performance measure. Our approach to compensation practices and policies
applicable to employees and consultants is consistent with that followed for our executives. Based on these factors, we
believe that our compensation policies and practices do not create risks that are reasonably likely to have a material
adverse effect on us.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis
to be included in this Form 10-K. Based on the reviews and discussions referred to above, the Compensation Committee
recommends to the Board of Directors that the Compensation Discussion and Analysis referred to above be included in
this report. This report is furnished by the Compensation Committee of our Board of Directors, whose members are:
Elaine Martin
Luke Lirot
Yura Barabash
Arthur Allan Priaulx
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Ms. Martin and Messrs. Lirot, Barabash, and Priaulx. No interlocking
relationship exists between any member of the Compensation Committee and any member of any other company’s Board
of Directors or compensation committee.
99
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information at February 6, 2020, with respect to the beneficial ownership of shares
of common stock by (i) each person known to us who owns beneficially more than 5% of the outstanding shares of
common stock, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our executive officers and
directors as a group. Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o RCI
Hospitality Holdings, Inc., 10737 Cutten Road, Houston, Texas 77066. We have determined beneficial ownership in
accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information
furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect
to all shares of common stock that they beneficially own, subject to applicable community property laws. Applicable
percentage ownership is based on 9,258,000 shares of common stock outstanding at February 6, 2020. In computing the
number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we
deemed outstanding shares of common stock subject to stock options or warrants held by that person that are currently
exercisable or exercisable within 60 days of February 6, 2020 and shares of common stock issuable upon conversion of
other securities held by that person that are currently convertible or convertible within 60 days of February 6, 2020. We
did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other
person. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
Name/Address
Executive Officers and Directors
Eric S. Langan
Phillip K. Marshall
Yura Barabash
Travis Reese
Nourdean Anakar
Luke Lirot
Elaine Martin
Arthur Allan Priaulx
Number of
shares
Title of class
Percent of
Class (1)
701,870(2)
Common stock
7.58%
16,000(3)
Common stock
-0-
Common stock
14,141(4)
Common stock
-0-
518
975
Common stock
Common stock
Common stock
2,000
Common stock
*
*
*
*
*
*
*
All of our Directors and Officers as a Group of eight persons
731,764
Common stock
7.90%
Other > 5% Security Holders (5)
Cooper Capital Securities, L.P. (6)
547,170
Common stock
BlackRock, Inc. (7)
596,667
Common stock
5.91%
6.44%
(1) These percentages exclude treasury shares in the calculation of percentage of class.
(2) Includes 1,870 shares held in an investment club over which Mr. Langan has shared voting and investment
power. As of the date of this report, Mr. Langan owns approximately 21.7% of the investment club.
(3) Includes 1,870 shares held in an investment club over which Mr. Marshall has shared voting and investment
power. As of the date of this report, Mr. Marshall owns approximately 4.6% of the investment club.
(4) Includes 1,870 shares held in an investment club over which Mr. Reese has shared voting and investment power.
As of the date of this report, Mr. Reese owns approximately 0.9% of the investment club.
(5) A representative of Renaissance Technologies LLC (“RTC”) has communicated to us that RTC no longer
beneficially owns more than 5% of our outstanding shares of common stock. RTC has not yet filed with the SEC
a Schedule 13G/A to reflect this change, but the change is consistent with RTC’s latest Form 13F report. RTC’s
most recently available Schedule 13G/A filed on February 13, 2019 by RTC and Renaissance Technologies
Holdings Corporation (the majority owner of RTC) reflects that RTC beneficially owned 703,700 shares of
common stock (which would represent 7.32% of outstanding common stock), with sole voting power over
613,400 shares, sole dispositive power over 652,575 shares, and shared dispositive power over 51,125 shares.
The address for both entities is 800 Third Avenue, New York, New York 10022.
(6) Based on the most recently available Schedule 13G/A filed with the SEC on February 10, 2020 by Cooper
Capital Securities, L.P., Cooper Capital Management, LLC, Adam Mikkelsen and Yilaap Lai. Cooper Capital
Management is the general partner of Cooper Capital Securities; Adam Mikkelsen is the managing member of
Cooper Capital Management; and Yilaap Lai is the limited partner of Cooper Capital Securities. Cooper Capital
Securities beneficially owned 547,170 shares, with shared voting power over 425,852 shares, and shared
dispositive power over 425,852 shares. The address of Cooper Capital Securities is 520 Newport Center Drive,
Suite 500, Newport Beach, California 92660.
(7)
Based on the most recently available Schedule 13G filed with the SEC on February 7, 2020 by BlackRock Inc.
BlackRock beneficially owned 596,667 shares, with sole voting power over 581,097 shares and sole dispositive
power over 596,667 shares. The address of BlackRock is 55 East 52nd Street, New York, New York 10055.
The Company is not aware of any arrangements that could result in a change in control of the Company.
The disclosure required by Item 201(d) of Regulation S-K is set forth in Item 5 herein and is incorporated herein by
reference.
100
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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.
We paid Ed Anakar, our director of operations – club division, employment compensation of $550,000, $488,462, and
$450,000 during the fiscal years ended September 30, 2019, 2018, and 2017 respectively. Ed Anakar is the brother of
Nourdean Anakar, a director of the Company.
In November 2018, we borrowed $500,000 from Ed Anakar. The note bears interest at the rate of 12% per annum and
matures in November 2021. The note is payable in monthly installments of interest only with a balloon payment of all
unpaid principal and interest due at maturity.
We used the services of Sherwood Forest Creations, LLC (“Sherwood Forest”) and its predecessor, Creative Steel Designs
(“Creative Steel”), furniture fabrication companies that manufacture tables, chairs and other furnishings for our
Bombshells locations, as well as providing ongoing maintenance. Sherwood Forest is owned by a brother of Eric Langan,
and Creative Steel was owned by his father. Amounts billed to us for goods and services provided by Sherwood Forest
were approximately $134,000 in fiscal 2019, $321,000 in fiscal 2018, and an aggregate of $135,000 by Sherwood Forest
and Creative Steel in fiscal 2017. As of September 30, 2019 and 2018, we owed Sherwood Forest $6,588 and $73,377,
respectively, in unpaid billings.
TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor
providing construction services to the Company, as well as directly to the Company during fiscal 2018 and 2019. TW
Mechanical is 20% owned by the son-in-law of Eric Langan. Amounts billed by TW Mechanical to the third-party general
contractor were $452,000, $120,000, and $0 for the fiscal years ended 2019, 2018 and 2017 respectively. Amounts billed
directly to the Company were $47,000, $7,000 and $0 for the fiscal years ended 2019, 2018, and 2017 respectively. As of
September 30, 2019 and 2018, we owed TW Mechanical $0 and $0, respectively, in unpaid direct billings.
Review, Approval, or Ratification of Related Transactions
On September 23, 2019, the Board of Directors, acting upon the recommendation of its Audit Committee, adopted a new
written related party transaction policy, under which related party transactions are subject to review, approval, rejection,
modification and/or ratification by the Audit Committee. The policy provides that prior to the entry into any transaction
between the Company and one of its officers, directors, 5% shareholders or an immediate family member of any of the
foregoing (a “related party”), such transaction will be reported to the Company’s chief compliance officer. The
Company’s chief compliance officer will undertake an evaluation of the transaction. If that evaluation indicates that the
transaction would require the Audit Committee’s approval, the Company’s chief compliance officer will report this
transaction to the Audit Committee. The Audit Committee will review the material facts of all related party transactions
that require the Audit Committee’s approval and either approve or disapprove of the entry into the related party
transaction. If advance Audit Committee approval of a related party transaction is not feasible, then the related party
transaction will be considered and, if the Audit Committee determines it to be appropriate, ratified at the Audit
Committee’s next regularly scheduled meeting. In determining whether to approve or ratify a related party transaction, the
Audit Committee will take into account factors it deems appropriate. In the event that the Audit Committee determines not
to ratify and approve the related party transaction, then the Audit Committee will instruct that the related party transaction
be rescinded or unwound. The Audit Committee will not approve or ratify any related party transaction unless it deems
that the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the
same or similar circumstances and the extent of the related party’s interest in the transaction. No director will participate
in any discussion or approval of a related party transaction for which he or she is a related party, except that the director
shall provide all material information concerning the transaction to the Audit Committee.
In reviewing related party transactions under the policy, the Audit Committee will review and consider one or more of the
following as it seems appropriate for the circumstances: (1) the related party’s interest in the related party transaction; (2)
the approximate dollar value of the amount involved in the related party transaction; (3) the approximate dollar value of
the amount of the related party’s interest in the transaction without regard to the amount of any profit or loss; (4) whether
the transaction was undertaken in the ordinary course of business of the Company; (5) whether the transaction with the
related party is proposed to be, or was, entered into on terms no less favorable to the Company than terms that could have
been reached with an unrelated third party; (6) the purpose of, and the potential benefits to the Company of, the related
party transaction; (7) whether the related party transaction would impair the independence of an outside director; (8)
required public disclosure, if any; and (9) any other information regarding the related party transaction or the related party
in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular
transaction. The Audit Committee will review all relevant information available to it about the related party transaction.
The Audit Committee may approve or ratify the related party transaction only if the Audit Committee determines in good
faith that, under all of the circumstances, the transaction is fair as to the Company. The Audit Committee, in its sole
discretion, may impose such condition as it deems appropriate on the Company or the related party in connection with
approval of the related party transaction.
Our Audit Committee is composed of all independent directors, including Yura Barabash, Elaine Martin and Arthur Allan
Priaulx. We additionally have two other independent directors, Nourdean Anakar and Luke Lirot, who are not on the
Audit Committee. The definition of “independent” used herein is based on the independence standards of The NASDAQ
Stock Market LLC.
101
Item 14. Principal Accounting Fees and Services.
The following table sets forth the aggregate fees paid or accrued for professional services and the aggregate fees paid or
accrued for audit-related services and all other services rendered by BDO USA, LLP for the audit of our annual financial
statements fiscal year 2018, partial fiscal 2019 and by Friedman LLP for partial fiscal 2019 (in thousands).
Audit fees
Audit-related fees
Tax fees
All other fees
Total
Friedman 2019
BDO 2019
BDO 2018
$
$
$
401
-
-
-
$
670
-
208
237
879
-
351
-
401
$
1,115
$
1,230
“Audit fees” include fees billed for professional services rendered in connection with the annual audit and quarterly
reviews of the Company’s consolidated financial statements, the audit of internal control over financial reporting as
required by the Sarbanes-Oxley Act of 2002, and assistance with securities filings other than periodic reports.
There were no “Audit-related fees” in Fiscal 2019 or 2018.
The category of “Tax fees” includes consultation related to tax compliance and tax structuring.
“All other fees” include fees billed for professional services rendered in connection with the SEC investigation.
All above audit services, audit-related services and tax services were pre-approved by the Audit Committee, which
concluded that the provision of such services by Friedman, LLP or BDO USA, LLP was compatible with the maintenance
of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s outside auditor independence
policy provides for pre-approval of all services performed by the outside auditors.
102
Item 15. Exhibits, Financial Statement Schedules.
Exhibit No.
Description
PART IV
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
16.1
21.1
23.1
Articles of Incorporation dated December 9, 1994. (Incorporated by reference from Form SB-2 filed with
the SEC on January 11, 1995.) *
Certificate of Amendment to Articles of Incorporation dated September 9, 2008. (Incorporated by reference
from Definitive Schedule 14A filed with the SEC on July 21, 2008.) *
Certificate of Amendment to Articles of Incorporation dated August 6, 2014. (Incorporated by reference
from Definitive Schedule 14A filed with the SEC on June 24, 2014.) *
Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on March
16, 2016.) *
Consolidated, Amended and Restated Promissory Note for $62,539,366.08 with Centennial Bank
(Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *
Amended and Restated Promissory Note for $10,558,311.35 with Centennial Bank (Incorporated by
reference from Form 8-K filed with the SEC on December 19, 2017) *
Amended and Restated Promissory Note for $8,147,572.57 with Centennial Bank (Incorporated by
reference from Form 8-K filed with the SEC on December 19, 2017) *
Employment Agreement with Eric S. Langan. (Incorporated by reference from Form 8-K filed with the
SEC on May 4, 2018.) *
Employment Agreement with Travis Reese. (Incorporated by reference from Form 8-K filed with the SEC
on May 4, 2018.) *
Employment Agreement with Phillip K. Marshall. (Incorporated by reference from Form 8-K filed with the
SEC on May 4, 2018.) *
Loan Agreement between RCI Holdings, Inc. and Centennial Bank (Incorporated by reference from Form
8-K filed with the SEC on December 19, 2017) *
Absolute Unconditional and Continuing Guaranty of RCI Hospitality Holdings, Inc. to Centennial Bank
(Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *
Absolute Unconditional and Continuing Guaranty of Eric S. Langan to Centennial Bank (Incorporated by
reference from Form 8-K filed with the SEC on December 19, 2017) *
Letter from BDO USA, LLP to the Securities and Exchange Commission (Incorporated by reference from
Form 8-K filed with the SEC on July 18, 2019) *
Subsidiaries
Consent of Friedman LLP
103
31.1
31.2
32.1
Certification of Chief Executive Officer of RCI Hospitality Holdings, Inc. required by Rule 13a-14(1) or
Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of RCI Hospitality Holdings, Inc. required by Rule 13a-14(1) or
Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer of RCI Hospitality Holdings, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definitions Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Incorporated by reference from our previous filings with the SEC.
Item 16. Form 10-K Summary.
None.
104
In accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 13, 2020.
SIGNATURES
RCI Hospitality Holdings, Inc.
By: /s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer and President
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in
the capacities and on the dates indicated:
Signature
Title
Date
/s/ Eric S. Langan
Eric S. Langan
/s/ Phillip K. Marshall
Phillip K. Marshall
/s/ Travis Reese
Travis Reese
/s/ Nourdean Anakar
Nourdean Anakar
/s/ Yura Barabash
Yura Barabash
/s/ Luke Lirot
Luke Lirot
/s/ Elaine Martin
Elaine Martin
/s/ Arthur Allan Priaulx
Arthur Allan Priaulx
Director, Chief Executive Officer, and President
February 13, 2020
Chief Financial Officer and Principal Accounting Officer
February 13, 2020
Director and Executive Vice President
February 13, 2020
Director
Director
Director
Director
Director
105
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
Name
12291 CBW LLC
2151 Manana, Inc.
BGC 135 9th Street, Inc.
BMB Dining Services (249), Inc.
BMB Dining Services (290), Inc.
BMB Dining Services (59), Inc.
BMB Dining Services (Austin), Inc.
BMB Dining Services (Beaumont), Inc.
BMB Dining Services (Frisco), Inc.
BMB Dining Services (Fuqua), Inc.
BMB Dining Services (I-10 East), Inc.
BMB Dining Services (Katy), Inc.
BMB Dining Services (Pearland), Inc.
BMB Dining Services (Spring), Inc.
BMB Dining Services (Stemmons), Inc.
BMB Dining Services (Willowbrook), Inc.
BMB Franchising Services, Inc.
CA Ault Investments, Inc.
Cabaret North Parking, Inc.
California Grill LLC
Citation Land LLC
Drink Robust, Inc.
E. D. Publications, Inc.
Fantastic Dining, Inc.
Fine Dining Club Inc.
Global Marketing Agency, Inc.
Green Star Inc.
Hotel Development Texas Ltd.
Jaguars Acquisition, Inc.
Jaguars Holdings, Inc.
JAI Dining Services (Beaumont), Inc.
JAI Dining Services (Edinburg), Inc.
JAI Dining Services (El Paso), Inc.
JAI Dining Services (Harlingen), Inc.
JAI Dining Services (Longview), Inc.
JAI Dining Services (Lubbock), Inc.
JAI Dining Services (Odessa II), Inc.
JAI Dining Services (Odessa), Inc.
JAI Dining Services (Phoenix), Inc.
JAI Dining Services (Tye), Inc.
Joint Ventures, Inc.
JW Lee, Inc.
Kingsbury Acquisition, Inc.
Manana Entertainment, Inc.
Miami Gardens Square One, Inc.
New Spiros, LLC
North IH 35 Investments, Incorporated
Peregrine Enterprises, Inc.
Pooh Bah Enterprises, Inc.
RB Restaurants, Inc.
RCI 33rd Street Ventures, Inc.
RCI Dating Services, Inc.
RCI Debit Services, Inc.
RCI Dining (DFW), LLC
Subsidiaries of the Registrant
Exhibit 21
State of Organization
Texas
Texas
Pennsylvania
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Florida
Illinois
Texas
Florida
Texas
Texas
New York
Illinois
Texas
New York
Texas
Texas
Texas
Name
State of Organization
RCI Dining Services (16328 I-35), Inc.
RCI Dining Services (37th Street), Inc.
RCI Dining Services (Airport Freeway), Inc.
RCI Dining Services (Beaumont), Inc.
RCI Dining Services (Charlotte), Inc.
RCI Dining Services (Glenwood), Inc.
RCI Dining Services (Harvey), Inc.
RCI Dining Services (Hobby), Inc.
RCI Dining Services (Imperial Valley), Inc.
RCI Dining Services (Inwood), Inc.
RCI Dining Services (Kappa), Inc.
RCI Dining Services (Manana), Inc.
RCI Dining Services (New York), Inc.
RCI Dining Services (Pembroke Park), Inc.
RCI Dining Services (Round Rock), Inc.
RCI Dining Services (Stemmons), Inc.
RCI Dining Services (Stemmons2), Inc.
RCI Dining Services (Sulphur), Inc.
RCI Dining Services (Superior Parkway), Inc.
RCI Dining Services (Tarrant County), Inc.
RCI Dining Services (Vee), Inc.
RCI Dining Services (Washington Park), Inc.
RCI Dining Services MN (4th Street), Inc.
RCI Entertainment (3105 I-35), Inc.
RCI Entertainment (3315 N FWY FW), Inc.
RCI Entertainment (Austin), Inc.
RCI Entertainment (Dallas), Inc.
RCI Entertainment (Fort Worth), Inc.
RCI Entertainment (Media Holdings), Inc.
RCI Entertainment (Minnesota), Inc.
RCI Entertainment (New York), Inc.
RCI Entertainment (North Carolina), Inc.
RCI Entertainment (North FW), Inc.
RCI Entertainment (Northwest Hwy), Inc.
RCI Entertainment (Philadelphia), Inc.
RCI Entertainment (San Antonio), Inc.
RCI Entertainment (Texas), Inc.
RCI Entertainment MN (300 South 3rd Street), Inc.
RCI Holdings, Inc.
RCI IH 635 Property, Inc.
RCI Internet Services, Inc.
RCI Leasing LLC
RCI Management Services, Inc.
RCI Wireway, Inc.
S Willy’s Lubbock LLC
Sadco, Inc.
SP Administration, Inc.
Spiros Partners Ltd.
Stellar Management Corporation
StorErotica, Inc.
Tantra Dance, Inc.
Tantra Parking, Inc.
TEZ Management LLC
TEZ Real Estate LP
Top Shelf Entertainment LLC
Trumps, Inc.
TRR Leasing, Inc.
TT Leasing LLC
WKC, Inc.
XTC Cabaret (Dallas), Inc.
XTC Cabaret, Inc.
Texas
New York
Texas
Texas
North Carolina
Minnesota
Illinois
Texas
Texas
Texas
Illinois
Texas
New York
Florida
Texas
Texas
Texas
Louisiana
Texas
Texas
Texas
Illinois
Minnesota
Texas
Texas
Texas
Texas
Texas
Texas
Minnesota
New York
North Carolina
Texas
Texas
Pennsylvania
Texas
Texas
Minnesota
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Florida
Delaware
Texas
Texas
Pennsylvania
Pennsylvania
North Carolina
Texas
Texas
Texas
Texas
Texas
Texas
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-174207 and No.
333-194343) and Form S-8 (No. 333-193114) of RCI Hospitality Holdings, Inc. (the “Company”) of our reports dated
February 13, 2020, relating to the consolidated financial statements, and the effectiveness of the Company’s internal
control over financial reporting, which appear in this Form 10-K. Our report on the effectiveness of internal control over
financial reporting expresses an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2019.
Exhibit 23.1
/s/ Friedman LLP
Marlton, New Jersey
February 13, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Eric S. Langan, Chief Executive Officer of RCI Hospitality Holdings, Inc., certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of RCI Hospitality Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under my supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal year that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s independent registered public accounting firm and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 13, 2020
By: /s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Phillip K. Marshall, Chief Financial Officer and Principal Accounting Officer of RCI Hospitality Holdings, Inc., certify
that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of RCI Hospitality Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under my supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal year that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s independent registered public accounting firm and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 13, 2020
By: /s/ Phillip K. Marshall
Phillip K. Marshall
Chief Financial Officer/Principal Accounting Officer
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. Sec.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of RCI Hospitality Holdings, Inc. (the “Company”) on Form 10-K for the
year ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on their knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer
February 13, 2020
/s/ Phillip K. Marshall
Phillip K. Marshall
Chief Financial Officer
February 13, 2020
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signature that appears in typed form within the electronic version of this written statement required
by Section 906, has been provided to RCI Hospitality Holdings, Inc. and will be retained by RCI Hospitality Holdings,
Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K
and shall not be considered filed as part of the Form 10-K.