UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
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, 2020
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 ☒
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 ☒
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 ☐
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 ☒ 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 ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
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
$83,621,092.
As of December 8, 2020, there were approximately 8,999,910 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) the impact of the COVID-19 pandemic, and (vii) numerous other factors such as laws governing the
operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or
publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
2
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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40
40
87
87
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106
Item 1. Business.
INTRODUCTION
PART I
RCI Hospitality Holdings, Inc. is a holding company. Through our subsidiaries, we engaged in a number of activities in the hospitality
and related businesses. As of September 30, 2020, our subsidiaries operated a total of 48 establishments that offer live adult
entertainment and/or restaurant and bar operations. Together with its subsidiaries, RCI Hospitality Holdings, Inc. is collectively referred
to as “RCIHH,” the “Company,” “we,” “us,” or “our” in this report. We also operate a leading business communications company
serving the multibillion-dollar adult nightclubs industry. RCIHH was incorporated in the State of Texas in 1994 and became public in
1995.
Our fiscal year ends on September 30. References to years 2020, 2019, and 2018 are for fiscal years ended September 30, 2020, 2019,
and 2018, 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.
COVID-19 PANDEMIC
In March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health
emergency. The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in
consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal,
state and local governments. Since March 2020, we have temporarily closed and reopened several of our clubs and restaurants.
The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our
strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate
positive cash flows for us. Depending on the timing and number of locations we are allowed to open, and their ability to generate
positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets. The COVID-19 pandemic is
adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity
will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
To augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:
● Arranged and continue to arrange for deferment of principal and interest payment on certain of our debts;
● Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor
relations coverage, among others.
On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 3, 10 and 11 to
our consolidated financial statements. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an
aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None
of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the
entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for
qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its
forgiveness applications. As of the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small
Business Administration out of the twelve of our PPP loans granted. All of the notices received forgave 100% of each of the ten PPP
loans totaling the amount of $4.9 million. No assurance can be provided that the Company will in fact obtain forgiveness of the
remaining two PPP loans in whole or in part.
As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower
sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and
evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.
We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and
reopened several of our locations depending on changing government mandates. As of the release of this report, we have reopened many
of our club and Bombshells locations with certain operating hour restrictions and with limited occupancy.
OUR BUSINESS
We operate several businesses, which we aggregate for financial reporting purposes into two reportable segments – Nightclubs and
Bombshells. Businesses not included as Nightclubs or Bombshells are combined as “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 one dance club under the
brand name Studio 80.
We generate revenue from 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 2020, our Nightclub segment sales mix was 46% service revenue; 36% alcoholic beverages; and 18% food, merchandise
and other. Segment gross margin (revenues less cost of goods sold, divided by revenues) was approximately 89%. During the COVID-
19 pandemic, our Nightclubs segment revenue declined by 41% and income from operations declined by 74% from the prior year.
Same-stores sales for Nightclubs in 2020 was -9.0% with the impact of the pandemic excluded from comparable sales. With the impact
of the pandemic included in comparable sales (see Adjusted Same-Store Sales on page 23), same-store sales would be -41.7%.
4
Our Nightclubs segment continues to be heavily affected by the COVID-19 pandemic as most states have reissued directives for
lockdowns and stricter safety restrictions in the fall of 2020 due to the resurgence of cases.
On November 5, 2019, the Company announced that its subsidiaries had 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. The agreements terminated
prior to closing. We provided the sellers notice of the termination in April 2020.
A list of our nightclub locations is in Item 2— “Properties.”
Bombshells Segment
Our Bombshells segment operates a restaurant and bar concept that 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. As of
September 30, 2020, we operated ten Bombshells locations, all in Texas with one in Dallas, one in Austin, and eight in the Greater
Houston area.
During fiscal 2020, Bombshells sales mix was 63% alcoholic beverages and 37% food, merchandise and other. Segment gross margin
(revenues less cost of goods sold, divided by revenues) was approximately 77%. We grew Bombshells segment revenue by 40% and
income from operations by 300% from prior year despite the COVID-19 pandemic. This was a result of being able to open the
Bombshells locations as restaurants while bars were closed and the contribution of two new locations that opened in fiscal 2020. Same-
stores sales for Bombshells in 2020 was +18.3% with the impact of the pandemic excluded from comparable sales. With the impact of
the pandemic included in comparable sales (see Adjusted Same-Store Sales on page 23), same-store sales would be +6.5%.
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 fiscal 2019. In
September 2016, we closed one Bombshells location in Webster, Texas. 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. In the current
fiscal 2020, we opened one Bombshells in Katy, Texas (BMB Katy) in October 2019, and another on Southwest Freeway (BMB 59) in
Houston, Texas in January 2020. Of the ten active Bombshells as of September 30, 2020, eight are freestanding pad sites and two are
inline locations.
For a list of our Bombshells locations, refer to Item 2—“Properties.”
Other Segment
We group together all businesses not belonging to either 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.
5
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 other strategic rationale warrants. We calculate free cash flow as net cash flows from operating
activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes
that we are able to make better investment decisions.
Based on our current capital allocation strategy:
● We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum
cash on cash return of 25%-33%, absent an otherwise strategic rationale;
● We consider disposing of underperforming units to free up capital for more productive use;
● We consider buying back our own stock if the after-tax yield on free cash flow is above 10%;
● We consider paying down our most expensive debt if it makes sense on a tax-adjusted basis, or there is an otherwise strategic
rationale.
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.
6
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,”
“EXOTIC DANCER,” and “TOYS FOR TATAS” 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,” “In The Biz,”
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
Our people are employed by the parent company or by any of its subsidiaries. Executive officers are employed by the parent company;
shared services personnel and managers responsible for multiple clubs or restaurants are employed by RCI Management Services, Inc.;
and the rest are employed by the individual operating entities. As of September 30, 2020, we had the following employees:
Hourly
Salaried
Operations
Managers
Non-Managers
Corporate
Total
17
228
245
1,735
21
1,756
20
53
73
1,772
302
2,074
Additionally, as of September 30, 2020, 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. None of our employees are represented by a union. We consider our employee
relations to be good.
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.
7
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.
A summary of our risk factors is as follows:
Risks related to general macroeconomic and safety conditions
o
o
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has and
could continue to materially affect our operations, financial condition and results of operations for an extended period of time.
If we are unable to maintain compliance with certain of our debt covenants or unable to obtain waivers, we may be unable to
make additional borrowings and be declared in default where our debt will be made immediately due and payable. In addition,
global economic conditions may make it more difficult to access new credit facilities.
o We have recorded impairment charges in past periods and may record additional impairment charges in future periods.
Risks related to regulations and/or regulatory agencies
o 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.
o
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.
o Our revenues could be significantly affected by limitations relating to permits to sell alcoholic beverages.
o 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.
Risks related to our business
o We may deviate from our present capital allocation strategy.
o We may need additional financing, or our business expansion plans may be significantly limited.
o
o
o
There is substantial competition in the nightclub entertainment industry, which may affect our ability to operate profitably or
acquire additional clubs.
The adult entertainment industry is extremely volatile.
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.
o 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.
o
Security breaches of confidential customer information or personal employee information may adversely affect our business.
o Our acquisitions may result in disruptions in our business and diversion of management’s attention.
o
The impact of new club or restaurant openings could result in fluctuations in our financial performance.
o We incur significant costs as a result of operating as a public company, and our management devotes substantial time to new
compliance initiatives.
o We have identified a material weakness in our internal control over financial reporting.
o We may have uninsured risks in excess of our insurance coverage.
o Our previous liability insurer may be unable to provide coverage to us and our subsidiaries.
o
The protection provided by our service marks is limited.
o We are dependent on key personnel.
o A failure to maintain food safety throughout the supply chain and food-borne illness concerns may have an adverse effect on
our business.
o Other risk factors may adversely affect our financial performance.
Risk related to our common stock
o We must continue to meet NASDAQ Global Market Continued Listing Requirements, or we risk delisting.
o 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.
o 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.
o Anti-takeover effects of the issuance of our preferred stock could adversely affect our common stock.
o
Future sales or the perception of future sales of a substantial amount of our common stock may depress our stock price.
o Our stock price has been volatile and may fluctuate in the future.
o Cumulative voting is not available to our stockholders.
o Our directors and officers have limited liability and have rights to indemnification.
Details of our risk factors are as follows:
Risks related to general macroeconomic and safety conditions
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has and could
continue to materially affect our operations, financial condition and results of operations for an extended period of time.
The COVID-19 pandemic has had an adverse effect that is material on our business. The COVID-19 pandemic, federal, state and local
government responses to COVID-19, our customers’ responses to the pandemic, and our Company’s responses to the pandemic have all
disrupted and will continue to disrupt our business. In the United States, as well as globally, individuals are being encouraged to practice
social distancing, restricted from gathering in groups and, in some areas, placed on complete restriction from non-essential movements
outside of their homes. In response to the COVID-19 pandemic and these changing conditions, we temporarily closed all of our clubs
and restaurants on March 18, 2020. We furloughed club and restaurant employees, except for a limited number of unit managers, and
implemented cost savings measures throughout our operations. We have since reopened many of our club and Bombshells locations
with certain operating hour restrictions and with limited occupancy. The COVID-19 pandemic’s impact on the economy in general
could also adversely affect our customers’ financial condition, resulting in reduced spending at our clubs and restaurants. The COVID-
19 pandemic and these responses have affected and will continue to adversely affect our customer traffic, sales and operating costs and
we cannot predict how long the pandemic will last or what other government responses may occur.
If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The
COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee
that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
Our club and restaurant operations could be further disrupted if any of our employees are diagnosed with COVID-19 and the
circumstances require quarantine of some or all of a club or restaurant’s employees and disinfection of the facilities. If a significant
percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government
restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting our
liquidity, financial condition or results of operations. Those employees might seek and find other employment during our business
interruption, which could materially adversely affect our ability to properly staff and reopen our clubs and restaurants with experienced
team members when permitted to do so by governments.
Our suppliers could be adversely impacted by the COVID-19 pandemic. If our suppliers’ employees are unable to work, whether
because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face
shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply
interruptions.
The equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and the Company’s stock price
has fluctuated significantly.
We cannot predict how soon we will be able to reopen all our clubs and restaurants, as our ability to reopen our locations will depend in
part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is
unclear how quickly customers will return to our clubs and restaurants, which may be a function of continued concerns over safety
and/or depressed consumer sentiment due to adverse economic conditions, including job losses. Considering the significant uncertainty
as to when we can reopen some or all of our locations and the uncertain customer demand environment, in addition to the actions
described above, we have taken action to reduce our cash expenditures, which may impact our future growth, refer to Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further
information.
8
If we are unable to maintain compliance with certain of our debt covenants or unable to obtain waivers, we may be unable to make
additional borrowings and be declared in default where our debt will be made immediately due and payable. In addition, global
economic conditions may make it more difficult to access new credit facilities.
Our liquidity position is, in part, dependent upon our ability to borrow funds from financial institutions and/or private individuals.
Certain of our debts have financial covenants that require us to maintain certain operating income to debt service ratios. As of
September 30, 2020, we were in compliance with all covenants or have obtained waivers. However, as a result of the COVID-19
outbreak, our total revenues have decreased significantly, and we have implemented certain operational changes in order to address the
evolving challenges presented by the global pandemic on our operations. Due to the impact of COVID-19, our financial performance in
future fiscal quarters will be negatively impacted. A failure to comply with the financial covenants under our credit facility or obtain
waivers would give rise to an event of default under the terms of certain of our debts, allowing the lenders to accelerate repayment of
any outstanding debt.
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 periodic impairment review of indefinite-lived intangible assets, long-lived
assets, and goodwill to determine if, or when events and circumstances indicate that, the fair value of these assets is not recoverable. As
a result of our periodic impairment reviews, we recorded impairment charges of $10.6 million in 2020 (representing $7.9 million
goodwill impairment on seven club reporting units, $2.3 million of license impairment on two clubs, $302,000 property and equipment
impairment on one club and one Bombshells, and $104,000 of operating lease right-of-use asset impairment on one club); $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); and $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). A huge portion, if not all, of the impairments in 2020 relates to the current and projected decline in EBITDA caused by the
COVID-19 pandemic. 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 tangible and intangible assets, including goodwill. We
actively monitor our clubs and restaurants for any indication of impairment.
Risks related to regulations and/or regulatory agencies
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.
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.
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.
Risks related to our business
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.
9
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 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.
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.
10
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.
11
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.
12
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, 2020 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.
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, 2020 and concluded that we did not maintain effective internal control over financial
reporting. Specifically, management identified a material weakness over the income tax provision—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.
13
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, 2020, we have 2 remaining unresolved claims out of the original 71 claims.
14
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,”
“EXOTIC DANCER,” and “TOYS FOR TATAS” 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,” “In The Biz,”
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.
15
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, and
Bradley Chhay, our Chief Financial 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. Mr.
Chhay possesses thorough familiarity with our accounting system and how it affects our operations. Mr. Chhay is also vital in our due
diligence efforts when acquiring clubs. We maintain key-man life insurance with respect to Mr. Langan but not for Mr. Chhay. 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. We have not entered into a
formal employment agreement with Mr. Chhay since his appointment as CFO in September 2020.
16
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.
Risk related to our common stock
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.
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.
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.
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.
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.
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.
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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of September 30, 2020, we own 46 real estate properties. On 37 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. Six are non-income-producing properties for corporate use, including our corporate office, or
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.
17
Below is a list of locations we operated as of September 30, 2020:
Name of Establishment
Fiscal Year
Acquired/Opened
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
Bombshells, Katy, TX
Bombshells 59, Houston, TX
(1) Leased location.
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
2017(1)
2018
2018
2019
2019
2019
2019
2020
2020
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, 2020, certain of our owned properties were collateral for
mortgage debt amounting to approximately $86.7 million. See related information in Notes 7, 10 and 22 to our consolidated financial
statements.
Item 3. Legal Proceedings.
See the “Legal Matters” section within Note 12 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.
18
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Our common stock is quoted on the NASDAQ Global Market under the symbol “RICK.”
Holders
On December 8, 2020, the closing stock price for our common stock as reported by NASDAQ was $28.01, 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 5,500 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 and the second and fourth quarters of fiscal 2020 when we paid $0.04 per share. During fiscal 2020, 2019,
and 2018, we paid cash dividends totaling $1.3 million, $1.3 million, and $1.2 million, respectively.
Purchases of Equity Securities by the Issuer
Following is a summary of our purchases during the quarter ended September 30, 2020:
Period
July 1-31, 2020
August 1-31, 2020
September 1-30, 2020
Total
Total Number of Shares
(or Units) Purchased
Average Price Paid per
Share (or Unit)(1)
-
-
50,712
50,712
$
$
19.64
19.64
(1) Prices include any commissions and transaction costs.
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs(2)
Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
That May Yet be
Purchased Under the Plans
or Programs
-
-
50,712
50,712
$
$
$
11,751,514
11,751,514
10,755,434
(2) All shares were purchased pursuant to the repurchase plans approved by the Board of Directors.
Subsequent to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common stock
for a total of $1.8 million.
19
Equity Compensation Plan Information
The Company’s 2010 Stock Option Plan expired on September 30, 2020.
Stock Performance Graph
The following chart compares the 5-year cumulative total stock performance of our common stock; the NASDAQ Composite Index
(IXIC); the Russell 200 Index (RUT); and the Dow Jones U.S. Restaurant & Bar Index (DJUSRU), our peer index. The graph assumes a
hypothetical investment of $100 on September 30, 2015 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 and the Russell 2000 Index. The historical stock
performance presented below is not intended to and may not be indicative of future stock performance.
20
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, 2020 and 2019 and results of operations data for the years ended September 30, 2020, 2019 (as revised), 2018
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, 2018, 2017, and 2016 and for the years
ended September 30, 2017 and 2016 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
Operating margin
Net income (loss) attributable to RCIHH
Diluted earnings (loss) per share
Capital expenditures
Dividends declared per share
Cash and cash equivalents
Total current assets
Total assets
Total current liabilities (excluding current portion of
long-term debt and operating lease liabilities)
Long-term debt (including current portion)
Total liabilities
Total RCIHH stockholders’ equity
Common shares outstanding
Non-GAAP Measures(1) and Other Data:
Adjusted EBITDA
Non-GAAP operating income
Non-GAAP operating margin
Non-GAAP net income
Non-GAAP diluted earnings per share
Free cash flow
Same-store sales
2020
132,327
2,746
2.1%
(6,085)
(0.66)
5,736
0.14
2020
15,605
31,433
360,933
19,372
141,435
208,626
152,721
9,075
2020
22,357
13,903
10.5%
4,709
0.51
13,481
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Years Ended September 30,
2019(2)
181,059
34,701
19.2%
20,294
2.10
20,708
0.13
2019
14,097
35,890
354,756
18,454
143,528
185,336
169,576
9,591
2018
165,748
27,562
16.6%
20,879
2.15
25,263
0.12
$
$
$
$
$
$
September 30,
$
$
$
$
$
$
$
2018
17,726
36,802
329,732
14,798
140,627
176,400
153,435
9,719
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
144,896
23,139
16.0%
8,259
0.85
11,249
0.12
2017
9,922
26,242
299,884
13,671
124,352
164,659
132,745
9,719
Years Ended September 30,
2019
46,242
37,945
21.0%
23,570
2.44
33,316
$
$
$
$
$
2018
44,387
37,000
22.3%
21,160
2.18
23,242
$
$
$
$
$
2017
37,348
30,668
21.2%
13,953
1.43
19,281
2016
134,860
20,693
15.3%
11,218
1.11
28,148
0.09
2016
11,327
29,387
276,061
17,087
105,886
146,722
126,755
9,808
2016
34,531
27,566
20.4%
13,302
1.32
20,513
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-4.4%
-0.3%
+4.6%
+4.9%
-1.3%
(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.
(2) We revised the consolidated balance sheet as of September 30, 2019 and the consolidated statements of operations and cash flows
for the year ended September 30, 2019 due to an error in our income tax provision. See Note 4 to our consolidated financial
statements.
21
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.
Pre-COVID-19 Financial Performance
During our first quarter ended December 31, 2019, total revenues were $4.4 million higher, or 9.9%, than the same quarter in the prior
year. Consolidated same-store sales were up by 0.7%. During the first two months of the second quarter (January and February 2020),
our consolidated same-store sales were up by 12.4%, giving us a cumulative five-month same-store sales increase of 5.3%. With the
outbreak of the coronavirus and COVID-19 national emergency guidelines put in place, we experienced a significant downturn in sales
brought about by the temporary closure of all of our clubs and restaurants as of March 18, 2020.
Impact of COVID-19 Pandemic
Because of stay-at-home orders and social distancing guidelines put into place, our total revenues for the full fiscal year ended
September 30, 2020 declined by 26.9% versus last year. Though we earned no revenues from our core businesses during the period of
closures, we continued to incur expenses. To alleviate our cash flow situation, we instituted the following measures:
● Arranged and continue to arrange for deferment of principal and interest payment on certain of our debts;
● Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor
relations coverage, among others.
As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower
sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and
evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.
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, Pearland and Katy, 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.
22
Same-Store Sales. We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars
starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We
consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than
normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed
temporarily for more than 15 days until its next full 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.
Adjusted Same-Store Sales. Due to the disruption created by the COVID-19 pandemic and in an effort to minimize the complexity in the
calculation of same-store sales caused by closing and opening again our locations, we are presenting two alternative same-store sales
results calculated with and without the impact of closures caused by state and local government mandates. In the alternative calculation,
a comparable location will remain in the same-store sales base regardless of closing and reopening due to COVID-19 restrictions.
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.
We adopted ASC 842, Leases, as of October 1, 2019. Our adoption of ASC 842 resulted in an increase of $27.3 million in our total
assets as of the adoption date due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent
liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities.
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 second quarter of 2020, we
impaired two clubs to a total of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use
asset for $104,000. 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.
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.
23
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, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9
million. 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 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 $2.3 million in 2020 related to two clubs, $178,000 in 2019 related to one club, and $3.1 million in 2018
related to three clubs.
Investment
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.
Income Taxes
We estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from
temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases. These
estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on
employee tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others. We
adjust our annual effective income tax rate as additional information on outcomes or events becomes available. When necessary, we
record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be realized.
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% and represents a blended income tax rate for
that fiscal year. For fiscal 2020 and 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 12 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.
24
OPERATIONS REVIEW
Highlights of operations from fiscal 2020 compared to fiscal 2019 (with fiscal 2018 comparative data) are as follows:
● Consolidated revenues of $132.3 million compared to $181.1 million, a 26.9% decrease
Nightclubs revenue of $88.4 million compared to $148.6 million in 2019, a 40.5% decrease
Bombshells revenue of $43.2 million compared to $30.8 million in 2019, a 40.2% increase
Fiscal 2018 total revenues of $165.7 million (Nightclubs revenue of $140.1 million and Bombshells revenue of $24.1
million)
● Consolidated same-store sales, as defined on page 23, decrease of 4.4% (9.0% decrease for Nightclubs and 18.3% increase for
Bombshells); adjusted to keep the impact of the COVID-19 pandemic in same-store sales, adjusted consolidated same-store
sales, as defined on page 23, decreased by 34.7% (41.7% decrease for Nightclubs and 6.5% increase for Bombshells)
Consolidated, Nightclubs and Bombshells same-store sales in 2019 (compared to 2018) of -0.3%, +0.6% and -6.1%,
respectively
Consolidated, Nightclubs and Bombshells same-store sales in 2018 (compared to 2017) of +4.6%, +5.8% and -3.3%,
respectively
● Diluted earnings (loss) per share of $(0.66) compared to $2.10, a 131% decrease (non-GAAP diluted EPS* of $0.51 compared
to $2.44, a 79% decrease) (diluted EPS of $2.15 and non-GAAP diluted EPS of $2.18 in fiscal 2018)
● Free cash flow* of $13.5 million compared to $33.3 million, a 59.5% decrease ($23.2 million in fiscal 2018)
* 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 (see Note 4 to our consolidated financial statements regarding revision of prior year immaterial misstatement in fiscal 2019):
2020
2019
2018
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 (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
44.6%
18.5%
31.1%
5.8%
100.0%
18.8%
33.0%
0.5%
14.7%
29.5%
39.1%
6.7%
8.0%
97.9%
2.1%
(7.4)%
0.2%
(0.0)%
(5.1)%
(0.4)%
(4.8)%
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%
2.1%
11.3%
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%
†
Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective
revenue line.
25
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)
Increase (Decrease)
2020 vs. 2019
2019 vs. 2018
Amount
%
Amount
%
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/loss before income taxes
Income tax expense/benefit
Net income/loss
Revenues
$
$
(16,060)
(1,370)
(26,893)
(4,409)
(48,732)
(4,206)
(985)
(311)
(5,502)
(10,763)
(8,204)
(236)
7,928
(16,777)
(31,955)
(398)
15
(548)
(30,994)
(4,237)
(26,757)
(21.4)% $
(5.3)%
(39.5)%
(36.6)%
(26.9)%
(27.5)%
(10.9)%
(53.8)%
(22.1)%
(21.6)%
(13.7)%
(2.6)%
302.6%
(11.5)%
(92.1)%
(3.9)%
4.9%
(89.5)%
(128.1)%
(113.2)%
(130.9)% $
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
6,862
(515)
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%
220.1%
(2.5)%
Consolidated revenues decreased by $48.7 million, or 26.9%, from 2019 to 2020, and increased by $15.3 million, or 9.2%, from 2018 to
2019. The decrease from 2019 to 2020 was mainly caused by significantly lower traffic due to the COVID-19 restrictions. Excluding
COVID-19 impact, consolidated same-store sales decrease was 4.4%. Including the impact of COVID-19 on comparable units, same-
store sales would be a decrease of 34.7%. 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.
26
By reportable segment, revenues were as follows (in thousands):
Nightclubs
Bombshells
Other
2020
2019
2018
$
$
88,373
43,215
739
132,327
$
$
148,606
30,828
1,625
181,059
$
$
140,060
24,094
1,594
165,748
Nightclubs segment revenues. Nightclubs revenues decreased by 40.5% from 2019 to 2020 and increased by 6.1% from 2018 to 2019. A
breakdown of the changes compared to total change in Nightclubs revenues is as follows:
Impact of 9.0% decrease and 0.6% increase in same-store sales, respectively, to
total revenues (excluding COVID-19 impact)
Newly acquired and reconcepted units
Closed units (including COVID-19 impact)
Other
2020 vs. 2019
2019 vs. 2018
(4.9)%
0.9%
(36.3)%
(0.2)%
(40.5)%
0.5%
7.4%
(2.1)%
0.4%
6.1%
Including the impact of COVID-19 on comparable Nightclubs locations (see Adjusted Same-Store Sales on page 23), the breakdown
would have been:
Impact of 41.7% decrease and 0.6% increase in same-store sales, respectively, to
total revenues (including COVID-19 impact)
Newly acquired and reconcepted units
Closed units (excluding COVID-19 impact)
Other
2020 vs. 2019
2019 vs. 2018
(40.3)%
0.9%
(0.9)%
(0.2)%
(40.5)%
By type of revenue line item, changes in Nightclubs segment revenue dollars are broken down as:
2020 vs. 2019
2019 vs. 2018
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
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
2020
2019
2018
36.2%
9.7%
46.4%
7.7%
100.0%
38.5%
8.8%
45.7%
7.0%
100.0%
(44.2)%
(34.4)%
(39.6)%
(34.0)%
39.1%
9.1%
45.7%
6.1%
100.0%
0.5%
7.4%
(2.1)%
0.4%
6.1%
4.5%
2.5%
6.0%
22.6%
Included in the 2018 new units is Kappa Men’s Club, which was acquired in May 2018. Included in the 2019 new units are Rick’s
Cabaret Chicago and Rick’s Cabaret Pittsburgh, which were acquired in November 2018 (see Note 16 to our consolidated financial
statements) and contributed $5.0 million and $4.6 million in revenues for 2019 since acquisition date. No new clubs were acquired or
constructed in 2020.
Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.3 million in 2020, $1.7 million in
2019, and $1.2 million in 2018.
27
Bombshells segment revenues. Bombshells revenues increased by 40.2% from 2019 to 2020 and by 27.9% from 2018 to 2019. A
breakdown of the changes compared to total changes in Bombshells revenues is as follows:
Impact of 18.3% increase and 6.1% decrease in same-store sales, respectively, to
total revenues (excluding COVID-19 impact)
New units
Closed units (including COVID-19 impact)
2020 vs. 2019
2019 vs. 2018
9.7%
35.0%
(4.5)%
40.2%
(5.1)%
32.4%
0.6%
27.9%
Including the impact of COVID-19 on comparable Bombshells locations (see Adjusted Same-Store Sales on page 23), the breakdown
would have been:
Impact of 6.5% increase and 6.1% decrease in same-store sales, respectively, to
total revenues (including COVID-19 impact)
New units
Closed units (excluding COVID-19 impact)
2020 vs. 2019
2019 vs. 2018
5.1%
35.0%
0.1%
40.2%
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 and other revenues
Bombshells segment sales mix for the three fiscal years is as follows:
2020 vs. 2019
2019 vs. 2018
51.9%
24.4%
0.0%
(5.1)%
32.4%
0.6%
27.9%
24.7%
31.7%
154.8%
Sales of alcoholic beverages
Sales of food and merchandise
Service and other revenues
2020
2019
2018
62.8%
36.8%
0.4%
100.0%
57.9%
41.5%
0.6%
100.0%
59.4%
40.3%
0.3%
100.0%
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. Bombshells Katy was opened in the first quarter of 2020, while Bombshells
59 was opened in the second quarter of 2020.
Other segment revenues. Other revenues included revenues from Drink Robust in all three fiscal years presented. 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 16 to our
consolidated financial statements). Drink Robust sales were $150,000, $231,000, and $141,000 in fiscal 2020, 2019, and 2018,
respectively, which excludes intercompany sales to Nightclubs and Bombshells units. Media business revenues were $589,000, $1.4
million, and $1.4 million in fiscal 2020, 2019, and 2018, respectively. Due to the COVID-19 pandemic, the 2020 ED EXPO that was
supposed to be held in August 2020 was canceled. All unearned sponsorship and advertising revenues related to the event were either
further deferred or refunded and no revenue was recognized.
Operating Expenses
Total operating expenses, as a percent of revenues, were 97.9%, 80.8%, and 83.4% for the fiscal year 2020, 2019, and 2018,
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 14.7%, 13.8%, and 13.8%
for fiscal 2020, 2019, and 2018, 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 10.7%, 11.2%, and
11.8% for fiscal 2020, 2019, and 2018, respectively, which was primarily caused by sales mix shifting over to higher-margin service
revenues. Bombshells cost of goods sold was 22.6%, 25.3%, and 24.7% for fiscal 2020, 2019, and 2018, respectively, which was mainly
driven by the shift in sales mix to higher-margin alcoholic beverage sales in 2020 and from food cost inflation in 2019. A significant
decrease in cost of goods sold dollars was caused by COVID-19-related closures and indoor dining occupancy restrictions.
28
Consolidated salaries and wages decreased by $10.8 million, or 21.6%, from 2019 to 2020 and increased by $5.3 million, or 11.9%,
from 2018 to 2019. The dollar decrease from 2019 to 2020 was mainly from furloughed employees due to COVID-19. 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. As a percentage of revenues, consolidated salaries and wages has been fairly stable at 27.5% and 26.9%
for 2019 and 2018, respectively, but rose to 29.5% in 2020 due to fixed salaries paid on significantly lower sales.
By reportable segment, salaries and wages are broken down as follows (in thousands):
Nightclubs
Bombshells
Other
General corporate
2020
2019
2018
$
$
19,590
10,427
491
8,562
39,070
$
$
32,267
8,887
617
8,062
49,833
$
$
30,788
5,804
789
7,166
44,547
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,
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
2018
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
2020
8,071
5,367
4,711
5,777
4,060
4,725
2,945
2,382
2,582
3,463
2,289
5,320
$ 51,692
Percentage of Revenues
2019
2018
2020
6.1%
4.1%
3.6%
4.4%
3.1%
3.6%
2.2%
1.8%
2.0%
2.6%
1.7%
4.0%
39.1%
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%
By reportable segment, selling, general and administrative expenses are broken down as follows (in thousands):
Nightclubs
Bombshells
Other
General corporate
2020
2019
2018
$
$
$
$
30,105
11,735
268
9,584
51,692
29
40,033
10,441
356
9,066
59,896
$
$
38,200
7,454
467
7,703
53,824
The significant variances in selling, general and administrative expenses are as follows:
In light of decreased sales activity caused by the COVID-19 pandemic, most of our selling, general and administrative expenses for
2020 decreased, except for relatively fixed expenses such as insurance, rent, and accounting and professional fees. As a percentage of
revenues, relatively fixed expenses increased in rate due to lower sales, while more discretionary/controllable expenses such as
advertising and marketing were kept to a minimum. Discussions below relate mainly to significant fluctuations from 2018 to 2019.
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. As a percentage of revenues, taxes and permits
were 6.0% and 5.8% for 2019 and 2018, respectively.
Advertising and marketing increased by $856,000, or 11.4%, from 2018 to 2019 mainly due to new units. As a percentage of revenues,
advertising and marketing was relatively flat at 4.6% and 4.5% for 2019 and 2018, respectively.
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.
As a percentage of revenues, rent expense has been flat at 2.2% in 2019 and 2018.
Legal expenses increased in 2019 from 2018 by $1.6 million, or 44.5%, mainly due to SEC-related matters.
Charge card fees increased by $559,000, or 17.5%, from 2018 to 2019 mainly from higher revenues. As a percentage of revenues,
charge card fees were 2.1% and 2.0% in 2019 and 2018, 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.
30
Depreciation and amortization decreased by $236,000, or 2.6%, from 2019 to 2020 and increased by $1.4 million, or 17.5%, from 2018
to 2019. The increase from 2018 to 2019 came from newly acquired and constructed units, while the decrease from 2019 to 2020 was
mainly due to properties sold or disposed during the current and prior year.
The components of other charges, net are in the table below (dollars in thousands):
Impairment of assets
Settlement of lawsuits
Loss (gain) on sale of businesses and assets
Loss (gain) on insurance
Total other charges, net
Years Ended September 30,
2019
$ 6,040
225
(2,877)
(768)
$ 2,620
2020
$ 10,615
174
(661)
420
$ 10,548
2018
$ 5,570
1,669
1,965
(20)
$ 9,184
Percentage of Revenues
2019
2018
2020
8.0%
0.1%
(0.5)%
0.3%
8.0%
3.3%
0.1%
(1.6)%
(0.4)%
1.4%
3.4%
1.0%
1.2%
(0.0)%
5.5%
The significant variances in other charges, net are discussed below:
During the year ended September 30, 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill
of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one club and one
Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000). 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). 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 SOB 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). See Notes 16 and 18 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
2020
2019
2018
$
$
13,118
9,245
(684)
(18,933)
2,746
$
$
50,724
2,307
(309)
(18,021)
34,701
$
$
43,624
2,040
(252)
(17,850)
27,562
Our operating margin (income from operations divided by revenues) was 2.1% in 2020, 19.2% in 2019, and 16.6% in 2018. Nightclubs
operating margin was 14.8%, 34.1%, and 31.1% in 2020, 2019, and 2018, respectively, primarily due to the impact of the COVID-19
pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of
$10.4 million, $5.9 million, and $4.4 million for 2020, 2019, and 2018, respectively. Bombshells operating margin was 21.4%, 7.5%,
and 8.5% in 2020, 2019, and 2018, respectively, mainly due to two new units partially offset by COVID-19 impact in 2020, 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.
31
Excluding the impact of settlement of lawsuits, impairment of assets, gain on insurance, gain on sale of businesses and assets, and
amortization of intangibles, operating margin for the Nightclub segment would have been 26.8%, 35.9%, and 35.1% for 2020, 2019, and
2018, respectively. Excluding the impact of impairment of assets, loss on sale of assets, settlement of lawsuits, and amortization of
intangibles, Bombshells segment operating margin would have been 22.0%, 7.6%, and 15.1% for 2020, 2019, and 2018, respectively.
Refer to discussion of Non-GAAP Financial Measures on page 33.
Interest Expense
Interest expense decreased by $398,000 from 2019 to 2020 and increased by $255,000 from 2018 to 2019. The decrease in interest
expense in 2020 was primarily due to the lower average debt balance. The increase in interest expense in 2019 was 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. During 2020, with the onset of the COVID-19 pandemic, certain debt principal
and interest payments have been deferred, but we continue to accrue interest on these debts.
We consider rent plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and
restaurants are located. For occupancy cost purposes, we exclude non-real-estate-related interest expense. Total occupancy cost rate
(total occupancy cost as a percentage of revenues) increased in 2020 due to lower sales activity (i.e. base) caused by the pandemic as
shown below.
Rent
Interest
Total occupancy cost
Income Taxes
2020
2019
2018
3.1%
7.4%
10.5%
2.2%
5.6%
7.8%
2.2%
5.4%
7.7%
Income taxes were a benefit of $493,000 in 2020, an expense of $3.7 million in 2019, and a benefit of $3.1 million in 2018. Our
effective income tax rate was a 7.2% benefit in 2020, a 15.5% expense in 2019, and a 17.5% benefit in 2018. 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
Change in valuation allowance
Tax credits
Other
Total effective income tax rate
2020
2019
2018
21.0%
(3.7)%
-
(5.8)%
-
(18.7)%
13.9%
0.6%
7.2%
21.0%
2.8%
-
0.2%
-
-
(3.7)%
(4.8)%
15.5%
24.5%
4.5%
4.0%
0.5%
(49.5)%
-
(4.5)%
3.1%
(17.5)%
On December 22, 2017, during our first quarter 2018, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which provided
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 resulted in a blended
federal statutory rate of 24.5% for its fiscal year 2018.
During fiscal 2020 and 2019, the effective income tax rate has changed to 7.2% and 15.5%, respectively, 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. The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the
pandemic and the recognition of a deferred tax asset valuation allowance amounting to $1.3 million.
32
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, and (e) settlement of lawsuits.
We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating
margin without the impact of items that are not a result of our day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income
per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted
earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets, (c) 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 loss on equity securities,
(g) settlement of lawsuits, (h) the income tax effect of the above described adjustments, and (i) deferred tax asset valuation allowance.
Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at
26.0%, 15.5%, and 24.5% effective tax rate of the pre-tax non-GAAP income before taxes for the 2020, 2019, and 2018, 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 (h) 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
stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of
businesses and assets, (e) gains or losses on insurance (f) unrealized gains or losses on equity securities, (g) impairment of assets, and
(h) settlement of lawsuits. 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.
33
The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts
and percentages):
$
$
$
$
$
$
$
$
Reconciliation of GAAP net income (loss) to Adjusted EBITDA
Net income (loss) attributable to RCIHH common stockholders
Income tax expense (benefit)
Interest expense, net
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Depreciation and amortization
Unrealized loss on equity securities
Loss (gain) on insurance
Adjusted EBITDA
Reconciliation of GAAP net income (loss) to non-GAAP net
income
Net income (loss) attributable to RCIHH common stockholders
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Costs and charges related to debt refinancing
Unrealized loss on equity securities
Loss (gain) on insurance
Deferred tax asset valuation allowance
Net income tax effect
Non-GAAP net income
Reconciliation of GAAP diluted earnings (loss) per share to non-
GAAP diluted earnings per share
Diluted shares
GAAP diluted earnings (loss) per share
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Costs and charges related to debt refinancing
Unrealized loss on equity securities
Loss (gain) on insurance
Deferred tax asset valuation allowance
Net income tax effect
Non-GAAP diluted earnings per share
Reconciliation of GAAP operating income to non-GAAP
operating income
Income from operations
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Loss (gain) on insurance
Non-GAAP operating income
Reconciliation of GAAP operating margin to non-GAAP
operating margin
GAAP operating margin
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Loss (gain) on insurance
Non-GAAP operating margin
2020
For the Year Ended
September 30,
2019
2018
(6,085)
(493)
9.487
174
10,615
(661)
8,836
64
420
22,357
(6,085)
609
174
10,615
(661)
-
64
420
1,273
(1,700)
4,709
$
$
$
$
20,294
3,744
9,900
225
6,040
(2,877)
9,072
612
(768)
46,242
20,294
624
225
6,040
(2,877)
-
612
(768)
-
(580)
23,570
$
$
$
$
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
2020
For the Year Ended
September 30,
2019
2018
$
$
$
$
9,199
(0.66)
0.07
0.02
1.15
(0.07)
-
0.01
0.05
0.14
(0.18)
0.51
2,746
609
174
10,615
(661)
420
13,903
2.1%
0.5%
0.1%
8.0%
(0.5)%
0.3%
10.5%
$
$
$
$
9,657
2.10
0.06
0.02
0.63
(0.30)
-
0.06
(0.08)
-
(0.05)
2.44
34,701
624
225
6,040
(2,877)
(768)
37,945
19.2%
0.3%
0.1%
3.3%
(1.6)%
(0.4)%
21.0%
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)%
22.3%
* Per share amounts and percentages may not foot due to rounding.
The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of
adjustments related to noncontrolling interests, which is immaterial.
34
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2020, our cash and cash equivalents were approximately $15.6 million compared to $14.1 million at September 30,
2019. Because of the large volume of cash we handle, we have very stringent cash controls. As of September 30, 2020, we had negative
working capital of $5.9 million compared to a negative working capital of $1.2 million as of September 30, 2019, excluding net assets
held for sale of $0 and $2.9 million as of September 30, 2020 and September 30, 2019, respectively. Although we believe that our
ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and
restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations in accordance
with local and state guidelines and it is too early to know when and if they will generate positive cash flows for us. Depending on the
timing and number of locations we are allowed to open, and their ability to generate positive cash flow, we may need to borrow funds to
meet our obligations or consider selling certain assets. Based upon the current state of allowed openings in Texas, revenues seem
favorable. We are hopeful that we can become profitable within a relatively short period of time after a majority of our locations have
reopened, assuming these results can be sustained and the other locations, once opened, follow these early results. But if the business
interruptions and occupancy limitations caused by COVID-19 last longer than we expect, we may need to seek other sources of
liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no
guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19
pandemic lasts.
Our net cash flow from operating activities for 2020 has gone down to less than half of last year’s result. To augment the current and
expected future decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:
● Arranged and continue to arrange for deferment of principal and interest payment on certain of our debts;
● Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor
relations coverage, among others.
On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program of the CARES Act for its
restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000
for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received
$124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes
it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if
they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has
submitted its forgiveness applications. As of the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the
Small Business Administration out of the twelve of our PPP loans granted. All of the notices received forgave 100% of each of the ten
PPP loans totaling the amount of $4.9 million. No assurance can be provided that the Company will in fact obtain forgiveness of the
remaining two PPP loans in whole or in part.
As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower
sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and
evaluate our cash flow situation and will determine any further measures to be instituted, including refinancing several of our debt
obligations.
We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and
reopened several of our locations depending on changing government mandates. As of the release of this report, we have reopened many
of our club and Bombshells locations with certain operating hour restrictions and with limited occupancy.
We have 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 stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in
acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing
notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these financing
options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property
and equipment, adult nightclubs, and restaurants/sports bars.
Though our cash flows are not as we expected at the beginning of the year, we expect to generate adequate cash flows from operations
for the next 12 months from the issuance of this report.
The following table presents a summary of our net cash flows from operating, investing, and financing activities (in thousands):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
$
$
15,632
(994)
(13,130)
1,508
$
$
$
37,174
(27,147)
(13,656)
(3,629) $
25,769
(26,339)
8,374
7,804
2020
Year Ended September 30,
2019
2018
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.
35
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
Net income (loss)
Depreciation and amortization
Deferred tax expense (benefit)
Impairment of assets
Net change in operating assets and liabilities
Other
Net cash provided by operating activities
2020
Year Ended September 30,
2019
2018
$
$
(6,312) $
8,836
(1,268)
10,615
1,380
2,381
15,632
$
20,445
9,072
821
6,040
2,822
(2,026)
37,174
$
$
20,960
7,722
(6,775)
5,570
(5,156)
3,448
25,769
Net cash flows from operating activities significantly decreased from 2019 to 2020 mainly due to the impact of the COVID-19
pandemic on our operations and partially offset by lower interest and income taxes paid. Net cash flows from operating activities
increased from 2018 to 2019 primarily from higher income from operations plus lower income taxes paid.
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
Payments for property and equipment and intangible
assets
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
2020
Year Ended September 30,
2019
2018
$
2,221
2,521
-
(5,736)
-
(994) $
$
7,223
258
(420)
811
147
-
(20,708)
(13,500)
(27,147) $
(25,263)
(2,034)
(26,339)
$
$
We opened two new Bombshells units in 2020 (one in Katy, Texas and another on Southwest Freeway in Houston, Texas); opened four
new units in 2019 (acquired two clubs in Chicago, Illinois and Pittsburgh, Pennsylvania, and built two new Bombshells in Houston,
Texas); and opened two new units in 2018 (one acquired club in Kappa, Illinois and one built Bombshells in Pearland, Texas). See Note
16 to our consolidated financial statements. As of September 30, 2020, 2019, and 2018, we had $20,000, $8.9 million, and $6.4 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, 2020, 2019, and 2018 (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
$
$
* Excludes real estate acquired through business acquisitions.
2020
Year Ended September 30,
2019
2018
-
$
-
$
12,260
3,585
2,151
16,850
3,858
10,476
2,527
5,736
$
20,708
$
25,263
36
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
Net cash provided by (used in) financing activities
2020
Year Ended September 30,
2019
2018
$
$
$
6,503
(8,832)
(1,286)
(9,484)
-
-
(31)
(13,130) $
$
13,511
(22,924)
(1,252)
(2,901)
(20)
-
(70)
(13,656) $
84,233
(72,830)
(1,168)
-
(1,138)
(543)
(180)
8,374
We purchased shares of our common stock representing 516,102 shares, 128,040 shares, and 0 shares in 2020, 2019, and 2018,
respectively. We have paid quarterly dividends of $0.03 per share for fiscal 2020, 2019, and 2018, except for the fourth quarter of 2019
and the second and fourth quarter of 2020 where we paid $0.04 per share. See Note 10 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. We use free cash flow as the baseline for the implementation of our capital
allocation strategy. See table below (in thousands):
Net cash provided by operating activities
Less: Maintenance capital expenditures
Free cash flow
2020
2019
2018
$
$
15,632
2,151
13,481
$
$
37,174
3,858
33,316
$
$
25,769
2,527
23,242
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 $4.6 million, $10.4 million, and $(49.6) million during fiscal
2020, 2019, and 2018, 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 10 to our consolidated financial statements for detail regarding our long-term debt activity.
37
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, 2020.
Long-term debt – regular
Long-term debt – balloon
Interest payments on debt
Operating leases(a)
$
Total
90,252
52,422
51,559
39,413
$
2021
12,098
4,405
8,835
3,221
$
2022
11,032
2,350
7,798
3,233
$
$
8,090
3,676
6,920
3,065
2024
2025
$
8,642
-
6,307
3,058
8,479
-
5,703
3,124
Thereafter
41,911
$
41,991
15,996
23,712
Payments Due by Period
2023
(a) Effective October 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), which will significantly
affect our accounting of all leases. See Notes 2 and 22 to our consolidated financial statements.
Other than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not
aware of any event or trend that would adversely impact our liquidity. In our opinion, working capital is not a true indicator of our
financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our
industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities
normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our
industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the
long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term
debt.
The following table presents a summary of such indicators (dollars in thousands):
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*
Debt (end of period)
2020
Increase
(Decrease)
2019
Increase
(Decrease)
$
$
$
$
$
$
59,080
24,460
41,162
7,625
132,327
15,632
22,357
13,481
141,435
(21.4)% $
(5.3)%
(39.5)%
(36.6)%
(26.9)% $
(57.9)% $
(51.7)% $
(59.5)% $
(1.5)% $
75,140
25,830
68,055
12,034
181,059
37,174
46,242
33,316
143,528
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
* See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and
Capital Resources above.
38
We have not established financing other than the notes payable discussed in Note 10 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 2020, 2019, and 2018, we paid for treasury stock amounting to $9.5 million, $2.9 million, and $0
representing 516,102 shares, 128,040 shares, and 0 shares, respectively. On February 6, 2020, the Board of Directors increased the
repurchase authorization by an additional $10.0 million. We have $10.8 million remaining to purchase additional shares as of September
30, 2020. Subsequent to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s
common stock for a total of $1.8 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), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter
were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from
year to year.
GROWTH STRATEGY
We believe that 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 ten of the existing Bombshells as of September 30, 2020 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.
39
During fiscal 2018, we reacquired Drink Robust (see Note 16 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 16 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 16 to the consolidated financial
statements for details of the transactions.
We opened two new 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 16 to the consolidated financial statements for details of the disposition.
We opened two new Bombshells units in fiscal 2020.
On November 5, 2019, we announced that our subsidiaries had 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. The agreements terminated prior to
closing. We provided the sellers notice of the termination in April 2020.
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, 2020. 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 41.
40
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, 2020 and 2019
Consolidated Statements of Operations for the years ended September 30, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2020, 2019, and 2018
Consolidated Statements of Changes in Equity for the years ended September 30, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended September 30, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
41
42
43
44
45
46
47
48
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,
2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows
for each of the years in the three-year period ended September 30, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the
years in the three-year period ended September 30, 2020, 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, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and our report dated December 14, 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
December 14, 2020
42
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
2020
2019
(As Revised)
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
Operating lease right-of-use assets, 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
Current portion of operating lease liabilities
Total current liabilities
Deferred tax liability, net
Debt, net of current portion and debt discount and issuance costs
Operating lease liabilities, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 12)
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; 9,075
shares and 9,591 shares issued and outstanding as of September 30, 2020 and
2019, respectively
Additional paid-in capital
Retained earnings
Total RCIHH stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
$
$
$
$
$
$
15,605
6,767
201
2,372
4,884
1,604
-
31,433
181,383
25,546
2,908
45,686
73,077
900
360,933
4,799
14,573
16,304
1,628
37,304
20,390
125,131
25,439
362
208,626
14,097
7,408
954
2,598
5,446
2,521
2,866
35,890
183,956
-
4,211
53,630
75,951
1,118
354,756
3,810
14,644
15,754
-
34,208
21,658
127,774
-
1,696
185,336
-
-
91
51,833
100,797
152,721
(414)
152,307
360,933
$
96
61,312
108,168
169,576
(156)
169,420
354,756
See accompanying notes to consolidated financial statements.
43
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2020
Years Ended September 30,
2019
(As Revised)
2018
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 (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net loss (income) attributable to noncontrolling interests
Net income (loss) attributable to RCIHH common stockholders
Earnings (loss) per share
Basic and diluted
Weighted average number of common shares outstanding
Basic and diluted
Dividends per share
$
$
$
$
59,080
24,460
41,162
7,625
132,327
11,097
8,071
267
19,435
39,070
51,692
8,836
10,548
129,581
2,746
(9,811)
324
(64)
(6,805)
(493)
(6,312)
227
(6,085)
$
$
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
3,744
20,445
(151)
20,294
(0.66)
$
2.10
$
$
$
9,199
9,657
0.14
$
0.13
$
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
9,719
0.12
See accompanying notes to consolidated financial statements.
44
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
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 (loss)
Comprehensive loss (income) attributable to noncontrolling interests
Comprehensive income (loss) attributable to RCI Hospitality
Holdings, Inc.
$
$
2020
Years Ended September 30,
2019
(As Revised)
2018
(6,312)
-
$
20,445
(220)
$
20,960
-
-
(6,312)
227
-
20,225
(151)
220
21,180
(81)
(6,085)
$
20,074
$
21,099
See accompanying notes to consolidated financial statements.
45
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 2020, 2019, and 2018
(in thousands)
Common Stock
Number
of Shares Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Treasury Stock
Comprehensive Number
Noncontrolling
Interests
Total
Equity
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
Balance at September 30, 2018
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 (as revised)
Balance at September 30, 2019 (as
revised)
Purchase of treasury shares
Canceled treasury shares
Payment of dividends
Payments to noncontrolling interest
Net loss
9,719 $
-
-
97 $ 63,453 $ 69,195 $
-
-
(1,168)
-
-
-
-
-
-
-
-
-
759
-
-
-
-
20,879
9,719
97
64,212
88,906
-
-
(128)
-
-
-
-
9,591
-
(516)
-
-
-
-
-
(1)
-
-
-
-
96
-
(5)
-
-
-
-
-
(2,900)
-
-
-
-
220
-
-
(1,252)
-
-
20,294
61,312
-
(9,479)
-
-
-
108,168
-
-
(1,286)
-
(6,085)
Balance at September 30, 2020
9,075 $
91 $ 51,833 $100,797 $
of Shares Amount
- $
-
-
- $
-
-
-
-
-
-
-
(128)
128
-
-
-
-
-
(516)
516
-
-
-
-
-
-
-
-
(2,901)
2,901
-
-
-
-
-
(9,484)
9,484
-
-
-
Income
-
-
-
-
220
-
220
(220)
-
-
-
-
-
-
-
-
-
-
-
-
-
2,480 $135,225
(1,168)
(180)
-
(180)
(2,484)
-
81
(1,725)
220
20,960
(103)
153,332
-
-
-
-
(70)
(134)
151
(156)
-
-
-
(31)
(227)
-
(2,901)
-
(1,252)
(70)
(134)
20,445
169,420
(9,484)
-
(1,286)
(31)
(6,312)
- $
- $
(414) $152,307
See accompanying notes to consolidated financial statements.
46
RCI HOSPITALITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2020
Years Ended September 30,
2019
(As Revised)
2018
$
(6,312)
$
20,445
$
20,960
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) 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
Doubtful accounts expense on notes receivable
Unrealized loss on equity securities
Loss (gain) on insurance
Noncash lease expense
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
Payments for property and equipment and intangible assets
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 $153, $42, and $42 in 2020,
2019, and 2018, 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
Accounts receivable converted to notes receivable
Refinanced long-term debt
Net increase in notes payable from trade-in of aircraft
Operating lease right-of-use assets established upon adoption of ASC
842
Deferred rent liabilities reclassified upon adoption of ASC 842
Operating lease liabilities established upon adoption of ASC 842
Unpaid liabilities on capital expenditures
$
$
$
$
$
$
$
$
$
$
$
$
$
8,836
(1,268)
(777)
10,615
236
602
64
596
1,660
-
-
(294)
226
1,633
(185)
15,632
2,221
1,576
945
-
(5,736)
-
(994)
6,503
(8,832)
(9,484)
(1,286)
-
-
(31)
(13,130)
1,508
14,097
15,605
8,695
2,200
$
$
$
9,072
821
(2,966)
6,040
334
-
612
(288)
-
282
-
457
(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
2020
Years Ended September 30,
2019
-
-
-
122
11,292
-
27,310
1,241
28,551
29
$
$
$
$
$
$
$
$
$
$
12,000
1,775
-
-
400
-
-
-
-
476
$
$
$
$
$
$
$
$
$
$
$
$
$
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
2018
1000
-
305
-
8,354
5,063
-
-
-
-
See accompanying notes to consolidated financial statements.
47
1. Nature of Business
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
RCI Hospitality Holdings, Inc. (the “Company,” “we,” “us,” or “our”) is a holding company incorporated in Texas in 1994. Through its
subsidiaries, the Company currently owns and operates establishments that offer live adult entertainment, restaurant, and/or bar
operations. These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, 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 2020, 2019, and 2018 are for fiscal years ended September 30, 2020, 2019,
and 2018, 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.
48
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 related to accounts receivable was $261,000
and $101,000 as of September 30, 2020 and 2019, respectively (see Note 6). Allowance for doubtful accounts balance related to notes
receivable was $182,000 and $0 as of September 30, 2020 and 2019, respectively.
Inventories
Inventories include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at net realizable value.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the
estimated useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.
Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to 7 years,
while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures for major renewals
and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred.
The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off from the accounts, and any gains
or losses are charged or credited in the accompanying consolidated statement of operations of the respective period. Interest expense
from related debt incurred during site construction is capitalized, which amounted to $156,000 in 2020, $597,000 in fiscal 2019, and
$319,000 in fiscal 2018.
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.
49
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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, 2020, we identified seven reporting units that were impaired and
recognized a goodwill impairment loss totaling $7.9 million. See related discussion in Note 3. 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. See Note 18.
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 $2.3 million in 2020 related to two clubs (see Note 3), $178,000
in 2019 related to one club, and $3.1 million in 2018 related to three clubs, which are included in other charges, net in the consolidated
statements of operations. See Note 18.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use
assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant
underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired
assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the
estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss
is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location,
which is also our reporting unit or the lowest level for which cash flows can be identified. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer
depreciated. For assets held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or
inactive markets (level 2) developed using observable data. The assets and liabilities of a disposal group classified as held for sale are
presented separately in the appropriate asset and liability sections of the balance sheet. During fiscal 2020, the Company impaired one
club and one Bombshells unit for a total of $302,000; during fiscal 2019, the Company impaired two clubs for a total of $4.2 million;
and during fiscal 2018, the Company impaired one club and one Bombshells for a total of $1.6 million. The Company also impaired one
club in fiscal of 2020 for operating lease right-of-use assets amounting to $104,000. See Notes 7 and 18.
50
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 (Loss)
Comprehensive income (loss) 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 (loss). An analysis of changes in components of accumulated other
comprehensive income is presented in the consolidated statements of comprehensive income (loss).
Revenue Recognition
The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-
of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified
in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are
presented on a net basis in the accompanying consolidated statements of operations. The Company recognizes revenue when it satisfies
a performance obligation (point in time of sale) by transferring control over a product or service to a customer.
Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the
sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses
related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during
our fiscal fourth quarter. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more
appropriately covered by guidance under ASC 842, Leases (ASC 840 in prior year).
Refer to Notes 5 and 22 for additional disclosures on revenues and leases, respectively.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used
for promotional purposes. Advertising and marketing expenses are expensed as incurred and are included in selling, general and
administrative expenses in the accompanying consolidated statements of operations. See Note 6.
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.
51
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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. In relation to the reacquisition of Drink Robust in 2018, which we partially sold in fiscal 2016, we have consolidated the
operations of Drink Robust and eliminated the investment in consolidation. See Note 16.
Paycheck Protection Program
The Company’s policy is to account for the Paycheck Protection Program (“PPP”) loan as debt (see Note 10). The Company will
continue to record the loan as debt until either (1) the loans are partially or entirely forgiven and the Company has been legally released
from the obligation, at which point the amount forgiven will be recorded as income, or (2) the Company pays off the loans.
Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of
securities that could share in the earnings or losses of the Company. Potential common stock shares consist of shares that may arise from
outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock
method) and from outstanding convertible debentures (the number of which is computed using the if-converted method). Diluted
earnings (loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock
options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses
(as adjusted for interest expense, that would no longer be incurred if the debentures were converted).
52
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
During the years ended September 30, 2020, 2019, and 2018, the Company did not have any outstanding dilutive securities that are
considered adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted earnings (loss) per
share.
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, 2020 and 2019, the Company has no stock options outstanding, and as of September 30, 2020, the Company’s 2010
Stock Option Plan contractually expired.
53
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 (loss). The Company measures the fair value of its marketable securities based on quoted prices for identical
securities in active markets, or Level 1 inputs. Available-for-sale securities, which are included in other assets in the consolidated
balance sheets, had a balance of $84,000 and $148,000 as of September 30, 2020 and 2019.
54
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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, 2020, 2019, and 2018.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment,
goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated
balance sheets. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment.
If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in
other charges, net in the consolidated statements of operations.
Assets and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):
Description
Property and equipment
Indefinite-lived intangibles
Goodwill
Operating lease right-of-use assets*
Operating lease liabilities*
Other assets (equity securities)
$
September 30,
2020
6,042
656
5,883
27,310
(28,551)
84
*
Measured at October 1, 2019 upon the adoption of ASC 842.
Description
Property and equipment
Indefinite-lived intangibles
Definite-lived intangibles
Goodwill
Other assets (equity securities)
$
September 30,
2019
10,926
5,323
200
11,627
148
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Asset
(Level 1)
-
-
-
-
-
84
Significant Other
Observable Inputs
(Level 2)
$
-
-
-
-
-
-
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Asset
(Level 1)
Significant Other
Observable Inputs
(Level 2)
$
-
-
-
-
148
-
-
-
-
-
$
$
Significant
Unobservable
Inputs
(Level 3)
6,042
656
5,883
27,310
(28,551)
-
Significant
Unobservable
Inputs
(Level 3)
10,926
5,323
200
11,627
-
$
$
55
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Description
Goodwill
Property and equipment, net
Indefinite-lived intangibles
Operating lease right-of-use assets
Other assets (equity securities)
Impact of Recently Issued Accounting Standards
Unrealized Gain (Loss/Impairments) Recognized
Years Ended September 30,
2019
2018
2020
$
$
(7,944)
(302)
(2,265)
(104)
(64)
$
(1,638)
(4,224)
(178)
-
(612)
(834)
(1,615)
(3,121)
-
305
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted ASU 2016-02 and related amendments as of
October 1, 2019 and elected 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. Our adoption of the new leasing standard resulted in an increase of $27.3 million in our total assets as
of October 1, 2019 due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent liability of $1.2
million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities. Our adoption of ASC 842
did not have an impact on our consolidated statements of operations and cash flows, except for additional required disclosures. See
additional disclosures in Note 22.
56
2. Summary of Significant Accounting Policies - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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. Our evaluation indicates that our consolidated
financial statements will not be significantly impacted upon adoption of this guidance.
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 accumulated other comprehensive income (“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 adopted ASU 2018-02 as of October 1, 2019. Our adoption
of this guidance did not have an 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. Our evaluation indicates that fair value disclosures in our consolidated financial statements will be minimally impacted
by the requirements of this ASU.
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. Our evaluation indicates that our consolidated financial statements
will not be significantly impacted upon adoption of this guidance.
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.
57
3. Liquidity and Impact of COVID-19 Pandemic
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
In March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health
emergency. The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in
consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal,
state and local governments. Since March 2020, we have temporarily closed and reopened several of our clubs and restaurants.
The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our
strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate
positive cash flows for us. Depending on the timing and number of locations we are allowed to open, and their ability to generate
positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets. The COVID-19 pandemic is
adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity
will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
To augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:
● Arranged and continue to arrange for deferment of principal and interest payment on certain of our debts;
● Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor
relations coverage, among others.
On May 8, 2020, the Company received approval and funding under the PPP of the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 10 and 11. Ten of our restaurant subsidiaries received
amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1
million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received
funding under the PPP. The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP,
certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has
currently utilized all of the PPP funds and has submitted its forgiveness applications. As of the filing of this report, we have received ten
Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of the
notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9 million. No assurance can be provided that the
Company will in fact obtain forgiveness of the remaining two PPP loans in whole or in part.
As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower
sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and
evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.
We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and
reopened several of our locations depending on changing government mandates. As of the release of this report, we have reopened many
of our club and Bombshells locations with certain operating hour restrictions and with limited occupancy.
Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets
We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived
intangibles, and long-lived assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering future
assumed impact of COVID-19 pandemic on sales. Based on our evaluation we conducted during the quarters since the pandemic
emerged, we determined that as of September 30, 2020 our assets are impaired in a total amount of approximately $10.6 million
comprised of $7.9 million in goodwill, $2.3 million in SOB licenses, $302,000 in property and equipment, and $104,000 in operating
lease right-of-use assets.
58
4. Revision of Prior Year Immaterial Misstatement
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
During the fourth quarter ended September 30, 2020, the Company identified an error in the calculation of income taxes in relation to a
disposed entity during the fiscal 2019 first quarter ended December 31, 2018. The error related to the recognition of income tax
receivable on the disposed entity. The Company determined the amount of the income tax receivable to be recognized with a consequent
credit to income tax expense as $1.1 million.
The Company assessed the materiality of the error considering both qualitative and quantitative factors and determined that the error
was immaterial for fiscal 2019 but material if recorded as an out-of-period adjustment in fiscal 2020. Therefore, the Company has
decided to correct the error as a revision to our previously issued financial statements and has adjusted this Form 10-K insofar as fiscal
2019 is concerned.
The tables below present the impact of the revision in the Company’s consolidated financial statements (in thousands, except per share
amounts):
Consolidated Statement of Income/Comprehensive Income:
As previously reported —
Income tax expense
Net income
Net income attributable to RCIHH common stockholders
Earnings per share - basic and diluted
Comprehensive income
Comprehensive income attributable to RCIHH common stockholders
Adjustments —
Income tax expense
Net income
Net income attributable to RCIHH common stockholders
Earnings per share - basic and diluted
Comprehensive income
Comprehensive income attributable to RCIHH common stockholders
As revised —
Income tax expense
Net income
Net income attributable to RCIHH common stockholders
Earnings per share - basic and diluted
Comprehensive income
Comprehensive income attributable to RCIHH common stockholders
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Fiscal 2019
First Quarter
Full Year
1,811
6,404
6,344
0.65
6,404
6,344
(1,119)
1,119
1,119
0.12
1,119
1,119
692
7,523
7,463
0.77
7,523
7,463
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,863
19,326
19,175
1.99
19,106
18,955
(1,119)
1,119
1,119
0.12
1,119
1,119
3,744
20,445
20,294
2.10
20,225
20,074
December 31,
2018
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
March 31,
2020
June 30,
2020
Consolidated Balance
Sheet:
As previously
reported —
Accounts
receivable, net
Total current
assets
Total assets
Retained
earnings
Total RCIHH
stockholders’
equity
Total equity
Adjustments —
Accounts
receivable, net
Total current
assets
Total assets
Retained
earnings
Total RCIHH
stockholders’
equity
Total equity
As revised —
Accounts
receivable, net
Total current
assets
Total assets
Retained
earnings
Total RCIHH
stockholders’
equity
Total equity
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,583
25,067
349,522
95,179
159,133
159,090
1,119
1,119
1,119
1,119
1,119
1,119
6,702
26,186
350,641
96,298
160,252
160,209
$
$
$
$
$
$
$
$
$
$
$
$
5,579
21,859
350,873
101,623
163,971
163,936
6,698
22,978
351,992
102,742
165,090
165,055
$
$
$
$
$
$
$
$
$
$
$
$
5,001
22,597
350,878
106,976
168,921
168,906
6,120
23,716
351,997
108,095
170,040
170,025
$
$
$
$
$
$
$
$
$
$
$
$
6,289
34,771
353,637
107,049
168,457
168,301
7,408
35,890
354,756
108,168
169,576
169,420
$
$
$
$
$
$
$
$
$
$
$
$
3,131
30,899
376,173
112,404
167,371
167,205
4,250
32,018
377,292
113,523
168,490
168,324
$
$
$
$
$
$
$
$
$
$
$
$
3,559
26,767
361,896
108,584
161,504
161,276
4,678
27,886
363,015
109,703
162,623
162,395
$
$
$
$
$
$
$
$
$
$
$
$
5,529
28,350
360,374
102,837
155,757
155,435
6,648
29,469
361,493
103,956
156,876
156,554
The consolidated statement of cash flows are not presented because there is no impact on total cash flows from operating, investing, and
financing activities. Certain components of net cash provided by operating activities changed due to the revision but the net change
amounted to zero for both the quarter ended December 31, 2018 and fiscal year ended September 30, 2019.
59
5. Revenues
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 19), 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 2020
$
$
$
$
$
$
$
$
$
$
$
$
31,950
8,561
41,004
6,858
88,373
87,049
1,324
88,373
Nightclubs
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
$
$
$
$
$
$
$
$
$
$
$
$
27,130
15,899
158
28
43,215
43,215
-
43,215
$
$
$
$
-
-
-
739
739
725
14
739
Fiscal 2019
Bombshells
Other
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
$
$
$
$
$
$
$
$
$
$
$
$
59,080
24,460
41,162
7,625
132,327
130,989
1,338
132,327
Total
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
* Lease revenue (included in Other Revenues) is covered by ASC 842 in the current year (and ASC 840 in the prior years. All other
revenues are covered by ASC Topic 606.
60
5. Revenues - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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
$
126 $
-
8
134 $
$
Consideration
Received
Recognized
in Revenue
Balance at
September
30, 2019
Consideration
Received
Recognized
in Revenue
602 $
602
52
(652) $
(602)
(53)
1,256 $ (1,307) $
76 $
-
7
83 $
538 $
211
40
789 $
Balance at
September
30, 2020
92
211
33
336
(522) $
-
(14)
(536) $
6. 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 $261 and $101, respectively)
September 30,
2020
2019
(As Revised)
880
4,325
191
160
1,211
6,767
$
$
1,396
2,900
1,197
780
1,135
7,408
$
$
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
Interest
Patron tax
Lawsuit settlement
Unearned revenues
Other
September 30,
2020
2019
4,405
2,419
2,003
2,613
1,390
309
100
336
998
14,573
$
$
4,937
2,892
1,675
3,086
508
595
115
83
753
14,644
$
$
61
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
6. 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
Lease
Legal
Utilities
Charge cards fees
Security
Accounting and professional fees
Repairs and maintenance
Other
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
Loss (gain) on insurance
7. 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
2020
Years Ended September 30,
2019
2018
8,071
5,367
4,711
5,777
4,060
4,725
2,945
2,382
2,582
3,463
2,289
5,320
51,692
$
$
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
2020
Years Ended September 30,
2019
10,615
174
(661)
420
10,548
$
$
6,040
225
(2,877)
(768)
2,620
$
$
$
$
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
2018
5,570
1,669
1,965
(20)
9,184
$
$
$
$
September 30,
2020
2019
163,938
37,000
29,776
9,614
240,328
(58,945)
181,383
$
$
159,969
37,031
32,868
9,393
239,261
(55,305)
183,956
$
$
Included in buildings and leasehold improvements above are construction-in-progress amounting to $20,000 and $8.9 million as of
September 30, 2020 and 2019, respectively, which are mostly related to Bombshells projects.
Depreciation expense was approximately $8.2 million, $8.4 million, and $7.5 million for fiscal years 2020, 2019, and 2018,
respectively. Impairment loss for property and equipment was $302,000, $4.2 million, and $1.6 million for fiscal 2020, 2019, and 2018,
respectively.
62
8. Assets Held for Sale
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2019, the Company had two real estate properties for sale. The aggregate estimated fair value of the properties less
cost to sell as of September 30, 2019 was approximately $2.9 million and was 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 the three months ended December 31, 2019, the Company classified as held-for-sale another real estate property with an
aggregate estimated fair value of the property less cost to sell of $1.9 million. This property was later reclassified out of held-for-sale
assets and back to property and equipment during the three months ended June 30, 2020 due to a change in management’s plan with the
property.
During the three months ended June 30, 2020, the Company sold one held-for-sale property valued at $853,000 for $1.5 million.
During the three months ended September 30, 2020, the Company reverted the remaining held-for-sale real estate property with a value
of $2.0 million as held and used.
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.
No liabilities were associated with held-for-sale assets as of September 30, 2019. Gains or losses on the sale of properties held for sale
are included in other charges (gains), net within the consolidated statements of operations.
63
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
9. 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
Beginning balance
Acquisitions
Impairment
Amortization
Ending balance
September 30,
2020
2019
$
$
45,686
70,332
2,215
118,233
Amortization Period
18 & 6 years
5 years
5 years
3 years
$
93
362
23
52
530
118,763
$
53,630
72,597
2,215
128,442
101
565
315
158
1,139
129,581
Definite-
Lived
Intangibles
1,139
$
-
-
(609)
530
$
2020
Indefinite-
Lived
Intangibles
$ 74,812
-
(2,265)
-
$ 72,547
Goodwill
$ 53,630
-
(7,944)
-
$ 45,686
Definite-
Lived
Intangibles
1,794
$
243
-
(898)
1,139
$
2019
Indefinite-
Lived
Intangibles
$ 69,738
5,252
(178)
-
$ 74,812
Goodwill
$ 43,591
11,677
(1,638)
-
$ 53,630
As of September 30, 2020 and 2019, the accumulated impairment balance of indefinite-lived intangibles was $8.4 million and $6.1
million, respectively, while the accumulated impairment balance of goodwill was $14.3 million and $6.3 million, respectively. Future
amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2020 is: 2021 -
$263,000; 2022 - $134,000; 2023 - $59,000; 2024 - $11,000; 2025 - $7,000; and thereafter - $56,000.
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, 2020, the Company recognized a $2.3 million impairment related to two clubs’ SOB
licenses and a $7.9 million impairment related to the goodwill of seven reporting units (see Note 3). 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. See Note 18.
64
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. 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 5.75%, matures December 2027, as amended
Note payable at 5.95%, matures December 2027, as amended
Note payable at 12%, matures February 2030, as amended
Notes payable at 12%, mature November 2021, as amended
Note payable at 8%, matures October 2022, as amended
Note payable at 8%, matures May 2029
Note payable at 5.75%, matures December 2027, as amended
Note payable at 5.99%, matures September 2033, as amended
Note payable at 5%, matures August 2029
Note payable at prime plus 0.5% with a 5.5% floor, matures September 2035, as amended
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, as amended
Note payable at 12%, matures February 2030, as amended
Note payable at 9%, matures September 2028
Note payable at 5.95%, matures September 2028, as amended
Note payable at 6%, matures February 2040, as amended
Note payable at 5.49%, matures March 2039, as amended
Note payable at 7%, matures November 2024
Note payable at 7%, matures February 2021, as amended
Notes payable at 12%, mature November 2021
Note payable at 8%, matures November 2028
Paycheck Protection Program loans at 1%, matures May 2022
Total debt
Less unamortized debt discount and issuance costs
Less current portion
Total long-term portion of debt, net
*
These commercial bank debts are guaranteed by the Company’s CEO. See Note 21.
65
September 30,
2020
2019
(d)(1) $
886
$
981
(d)(2)
*(a)
(6ii)
(7)
*(a)
(6iii)
(7)
(d)(3)
(25)
(d)(4)
(26)
(b)(5)
(23)
(b)(5)
*(a)
(6i)(7)
(8)(9)
(c)
(10)
*(a)
(12)
*(a)
(13)
*(a)
(13)
(a)
(14)
*(a)
(11)
(d)
(15)
(24)
(a)
(17)
*(a)
(16)
*(a)
(22)
(c)
(21)
(b)
(19)
(b)
(20)
(d)
(18)
(b)
(20)
(d)
(27)
2,177
3,379
9,715
9,877
5,787
5,031
1,940
3,025
12,599
6,776
5,518
2,040
3,025
13,569
49,830
51,167
6,395
2,165
2,099
2,861
582
6,979
3,875
1,167
1,489
4,066
2,125
3,319
2,000
2,350
4,790
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
5,422
142,674
(1,239)
(16,304)
125,131
$
-
145,003
(1,475)
(15,754)
127,774
$
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Debt - continued
Following is a summary of long-term debt at September 30 (in thousands):
(a) Secured by real estate
(b) Secured by stock in subsidiary
(c) Secured by other assets
(d) Unsecured
2020
2019
86,740
25,733
8,520
21,681
142,674
$
$
90,258
27,766
8,711
18,269
145,003
$
$
(1) In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $1.5
million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate of 5.5%.
The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the Company also acquired the related
real estate and executed notes to the seller for $6.5 million, which have been paid off in relation to the December 2017 Refinancing
Loan, as discussed below. The notes are also payable over eleven years at $53,110 per month including interest and have the same
adjustable interest rate of 5.5%.
(2) In 2015, the Company reached a settlement with the State of Texas over payment of the state’s Patron Tax on adult club customers.
To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without
interest, over 84 months, beginning in June 2015, for all but two nonsettled locations. For accounting purposes, the Company has
discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. In
March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. The Company
agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly
installments of $8,200 without interest. In March 2017, the present value of the second note was approximately $390,000 after
discounting using an imputed interest rate of 9.6%. Going forward, the Company agreed to remit the Patron Tax on a regular basis,
based on the current rate of $5 per customer.
(3) On 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. Also
refer to the February 20, 2020 loan restructuring below.
(4) 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, 2020 and 2019 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. Refer to May 1, 2020 extension below.
(5) On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 16), 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. Refer to December 2019 amendment below.
66
10. Debt - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
(6) 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 was 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 was 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.
(7) 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. We obtained waivers of compliance from the bank lender for financial
covenants as of September 30, 2020.
67
10. Debt - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
(8) 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
operations for the year ended September 30, 2018.
(9) 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. In March and August 2020, certain principal and interest payments for the three notes of the
December 2017 Refinancing Loan were deferred to their maturity dates.
(10) On December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The transaction
was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the old
aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with monthly payments of $59,869, which
includes interest. In March 2020, this loan was extended to September 2033.
(11) 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. In
May 2020, certain principal and interest payments for this note were deferred to its maturity date.
(12) 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. We are in compliance with these financial covenants as of
September 30, 2020.
(13) 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. In March and July 2020, in view of the pandemic, the bank lender and the
Company agreed to defer the maturity of this note to October 2020. In September 2020, they further negotiated to refinance the note
with a deferral of maturity to September 2035 with monthly amortization payments of $16,396, including interest. 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. We are in compliance with these
financial covenants as of September 30, 2020.
(14) 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.
68
10. Debt - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
(15) 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. See February 20, 2020 extension below.
(16) 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. In March and August 2020, certain principal and interest payments for this note were deferred to its maturity
date. There are certain financial covenants with which the Company must be in compliance related to this note. We obtained a waiver of
compliance from the bank lender for financial covenants as of September 30, 2020.
(17) 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.
(18) 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 are two notes for
$500,000 and $100,000 borrowed from related parties (see Note 21) and one note for $300,000 borrowed from a non-officer employee
in which the terms of the notes are the same as the rest of the lender group.
(19) 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 related to the acquisition in Note 16.
(20) On November 5, 2018, we acquired a club in Pittsburgh that was partially financed by 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. See additional details related to the acquisition in
Note 16. On September 30, 2020, the maturity date for the first note was extended to February 2021.
(21) 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. Certain
principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity date.
(22) 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. In
March 2020, certain principal and interest payments for this note were deferred to its maturity date. We are in compliance with these
financial covenants as of September 30, 2020.
(23) In December 2019, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May
2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2022. The amendment
did not have an impact in the Company’s results of operations and cash flows.
(24) On February 20, 2020, in relation to a $4.0 million 12% note payable earlier refinanced on August 15, 2018, the Company
restructured the note with a private lender by executing a 12% 10-year note payable $57,388 monthly, including interest, starting March
2020. The restructured note eliminates a scheduled balloon principal payment of $4.0 million in August 2021. The refinancing did not
have an impact on the Company’s results of operations and cash flows.
(25) On February 20, 2020, in relation to a $9.9 million 12% note payable that was partially paid during the December 2017 Refinancing
Loan, the Company restructured the note, which had a balance of $5.2 million as of the amendment date, by executing a 12% 10-year
note payable $74,515 monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal
payment of $3.8 million in October 2021. As a result of the refinancing, the Company wrote off approximately $25,400 in unamortized
debt issuance cost as interest expense in our consolidated statement of operations for the year ended September 30, 2020.
(26) On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000 of $2,040,000 of notes to individuals that
were due on May 1, 2020. The Company paid $300,000 to certain lenders and received $200,000 in new debt from existing lenders and
their affiliates. The aggregate amount of debt due on these notes is now $1,940,000. In October 2020, $1,690,000 of these notes were
again extended to November 2021.
(27) On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service
entity and lounge amounting to $5.4 million. If not forgiven, under the terms of the loans as provided by the CARES Act, the twelve
PPP loans bear an interest rate of 1% per annum. As of the filing of this report, we have received ten Notices of PPP Forgiveness
Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of the notices received forgave 100%
of each of the ten PPP loans totaling the amount of $4.9 million. See Notes 3 and 11.
69
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
10. Debt – continued
Future maturities of debt obligations as of September 30, 2020 consist of the following (in thousands):
2021
2022
2023
2024
2025
Thereafter
11. Income Taxes
Regular
Amortization
12,098
11,032
8,090
8,642
8,479
41,911
90,252
$
$
Balloon Payments
4,405
$
2,350
3,676
-
-
41,991
52,422
$
$
$
Total Payments
16,503
13,382
11,766
8,642
8,479
83,902
142,674
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%
and represents a blended income tax rate for that fiscal year. For fiscal 2020 and 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 operations 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 (benefit)
Deferred
Federal
State and local
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
2020
Years Ended September 30,
2019
(As Revised)
2018
$
$
$
215
560
775
$
1,886
1,037
2,923
(1,248)
(20)
(1,268)
913
(92)
821
(493)
$
3,744
$
2,438
1,219
3,657
(8,096)
1,321
(6,775)
(3,118)
The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.
70
11. Income Taxes - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 (benefit)
State income taxes, net of federal benefit
Deferred taxes on subsidiaries acquired/sold
Permanent differences
Change in deferred tax liability rate
Change in valuation allowance
Tax credits
Other
Total income tax expense (benefit)
2020
Years Ended September 30,
2019
2018
$
$
(1,429)
253
-
395
-
1,273
(945)
(40)
(493)
$
$
5,080
672
-
45
-
-
(900)
(1,153)
3,744
$
$
4,371
804
709
85
(8,832)
-
(808)
553
(3,118)
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
Other
Valuation allowance
Deferred tax liabilities:
Intangibles
Property and equipment
Other
September 30,
2020
2019
$
$
349
1,263
2,046
(1,273)
2,385
(14,106)
(8,669)
-
(22,775)
(20,390)
$
$
621
420
-
-
1,041
(14,491)
(8,024)
(184)
(22,699)
(21,658)
Included in the Company’s deferred tax liabilities at September 30, 2020 and 2019 is the tax effect of indefinite-lived intangible assets
from club acquisitions amounting to approximately $14.9 million and $19.3 million, respectively, which are not deductible for tax
purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or
impaired.
The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax
benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component of selling,
general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense. 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.
71
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
11. 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
2020
Years Ended September 30,
2019
2018
-
-
-
-
-
$
$
165
-
-
(165)
-
$
$
865
-
(700)
-
165
$
$
The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax
benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve
months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s
federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service
with only immaterial changes. Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax examination. The
Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.
On March 27, 2020, President Trump signed the CARES Act into law. As a result of this, additional avenues of relief may be available
to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered
by the Small Business Administration. The CARES Act includes, among other items, provisions relating to payroll tax credits and
deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for
qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act
also established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent,
and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company has submitted
its application for a PPP loan and on May 8, 2020 has received approval and funding for its restaurants, shared service entity and lounge.
Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our
shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-
core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount for qualifying
expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described
in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. As of the
filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small Business Administration out of the
twelve of our PPP loans granted. All of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9
million. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining two PPP loans in whole or in
part. See Note 3.
12. Commitments and Contingencies
Leases
See Note 22.
Legal Matters
Texas Patron Tax
In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers.
To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without
interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on
a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted the $10.0 million
at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company
recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and
the amount previously accrued for the tax.
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 $2.2 million and $3.4 million as of September 30, 2020 and 2019, 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. On March 6, 2020, the
U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been
applied and enforced by the Comptroller. The State of Texas has filed an appeal. We will continue to vigorously defend the matter
through the appeals process.
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, 2020, 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. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended
Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5
promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director
Nourdean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants
moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. As of December 12, 2020,
briefing on the motion to dismiss is complete, and we are currently waiting for the court to rule on the motion. The Company intends to
continue 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, Nourdean 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.
Since the initiation of the informal inquiry in early 2019 and the investigation conducted by the SEC thereafter, the Company and its
management have fully cooperated with the SEC.
On September 21, 2020, the SEC concluded its investigation and reached a settlement with the Company, Eric Langan, and Phil
Marshall. Separately, the SEC also reached a settlement with a former director. As part of the settlement, the Company, Eric Langan,
and Phil Marshall agreed, without admitting or denying the allegations, to an order instituting cease-and-desist proceedings regarding
certain sections of the Securities Exchange Act of 1934 and certain rules promulgated thereunder.
The SEC’s order as to the Company, Eric Langan, and Phil Marshall found that, from fiscal 2014 through 2019, the Company failed to
disclose a total of $615,000 in executive compensation in the form of perquisites. According to the order, these undisclosed perquisites
included the cost of the personal use of the Company’s aircraft and Company-provided vehicles, reimbursements for personal airline
flights, charitable corporate contributions to the school two of Mr. Langan’s children attended, and housing costs and meal allowance
for Mr. Marshall. In addition, the order found that the Company failed to disclose related party transactions involving Mr. Langan’s
father and brother and a director’s brother. The order further found that the Company failed to keep books and records that allowed it to
report, and lacked sufficient internal controls concerning, these executive perquisites and related party transactions.
The SEC’s order as to the Company, Mr. Langan, and Mr. Marshall found that the Company and Mr. Langan violated, and Mr. Langan
and Mr. Marshall caused the Company to violate, the proxy solicitation provisions of Section 14(a) of the Securities Exchange Act of
1934 and Rules 14a-3 and 14a-9 thereunder. The order further found that the Company violated, and Mr. Langan and Mr. Marshall
caused the Company to violate, the reporting provisions of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder,
the books and records provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and the disclosure controls provision of
Rule 13a-15(a) under the Exchange Act. The Company, Mr. Langan, and Mr. Marshall have agreed, without admitting or denying the
SEC’s findings, to a cease-and-desist order and to pay civil penalties in the amounts of $400,000, $200,000, and $35,000, respectively.
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 both
consolidated balance sheets as of September 30, 2020 and 2019. Management believes that the case has no merit and is vigorously
defending itself in the appeal.
74
Legal Matters – continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining
Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno
injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that
JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial
proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI
Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017,
JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in
August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of
Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is
anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.
As set forth in the risk factors as disclosed in this report, the adult entertainment industry standard is to classify adult entertainers as
independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors,
from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both
federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are
treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that
these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.
Due to several COVID-19 regulations and restrictions imposed on some of our businesses by local municipalities and/or States, certain
of our subsidiaries are plaintiffs to lawsuits that have been filed on behalf of the affected entities to have the restrictions eased or
removed entirely. The lawsuits may increase or decrease based on the spread of the disease and new or additional restrictions placed on
our businesses.
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, 2020, 2019, and 2018 total $174,000, $225,000, and $1.7 million, respectively.
As of September 30, 2020 and 2019, the Company has accrued $100,000 and $115,000 in accrued liabilities, respectively, related to
settlement of lawsuits.
75
13. Common Stock
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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.
During the year ended September 30, 2020, the following common stock transactions occurred:
● The Company acquired 516,102 shares of its own common stock at a cost of $9.5 million. These shares were subsequently
retired.
● The Company paid quarterly dividends of $0.03 per share, except for the second and fourth quarters when $0.04 per share was
paid, for an aggregate amount of $1.3 million.
Subsequent to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common stock
for a total of $1.8 million.
14. Employee Retirement Plan
The Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The Plan allows
corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up
to 3% of the employee’s salary. Expenses related to matching contributions to the Plan approximated $171,000, $164,000, and $160,000
for the years ended September 30, 2020, 2019, and 2018, respectively.
15. Insurance Recoveries
One of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club in
Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2018. During the fourth quarter of 2020, one club in
Sulphur, Louisiana incurred damage from a hurricane. We wrote off the net carrying value of the assets destroyed in the said events and
recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the
insurance claims have been resolved.
In relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):
Included in
For the Year Ended September 30,
2019
2018
2020
Consolidated balance sheets (period end)
Insurance receivable
Account receivable, net
Consolidated statements of operations – loss
(gain)
Business interruption
Property
Other charges, net
Other charges, net
Consolidated statements of cash flows
Proceeds from business interruption insurance
claims
Proceeds from property insurance claims
Operating activity
Investing activity
$
$
$
$
$
191
$
1,197
$
-
(176)
596
384
945
$
$
$
$
(484)
(284)
100
100
$
$
$
$
-
(20)
-
20
The net property insurance gain/loss amount in fiscal 2020, 2019, and 2018 was net of assets written off and expenses amounting to
$728,000, $629,000, and $0, respectively.
76
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. Acquisitions and Dispositions
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 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 operations 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 operations.
In fiscal 2019, 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.
77
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
16. 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 operations. 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 operations 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.
78
16. Acquisitions and Dispositions - continued
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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, we announced that our subsidiaries had 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. The agreements terminated prior to
closing. We provided the sellers notice of the termination in April 2020.
2020 Dispositions
On April 1, 2020, the Company sold a corporate housing property to an employee for $375,000 in cash with an approximate gain of
$20,000.
On May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $1.5 million in cash. Net gain on
the transaction was $583,000 after closing costs. The net proceeds of $1.4 million were used to pay down related debt.
On August 6, 2020, the Company sold another corporate housing property for $176,000 in cash with an approximate gain of $26,000.
The net proceeds of $160,500 were used to pay down related debt.
79
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
17. Quarterly Results of Operations (Unaudited)
The following tables summarize unaudited quarterly data for fiscal 2020, 2019, and 2018 (in thousands, except per share data):
December 31, 2019
March 31, 2020
June 30, 2020
September 30, 2020
For the Three Months Ended
Revenues(1)
Income (loss) from operations(1)
Net income (loss) attributable to
RCIHH stockholders(1)
Earnings (loss) per share(1)
Basic and diluted
Weighted average number of
common shares outstanding
Basic and diluted
Revenues
Income from operations(2)
Net income attributable to RCIHH
stockholders(2)
Earnings 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 stockholders(3)
Earnings (loss) per share(3)
Basic and diluted
Weighted average number of
common shares outstanding
Basic and diluted
$
$
$
$
$
$
$
$
$
$
$
$
48,394
9,686
5,634
0.60
9,322
December 31, 2018
44,023
11,132
7,463
0.77
9,713
December 31, 2017
41,212
9,140
14,311
1.47
9,719
$
$
$
$
$
$
$
$
$
$
$
$
40,426
$
(2,475) $
14,721
$
(4,657) $
(3,452) $
(5,474) $
(0.37) $
(0.60) $
28,786
192
(2,793)
(0.31)
9,225
9,125
9,124
For the Three Months Ended
March 31, 2019
June 30, 2019
September 30, 2019
$
$
$
$
44,826
11,166
6,735
0.70
9,679
47,027
9,974
5,638
0.59
9,620
For the Three Months Ended
March 31, 2018
June 30, 2018
$
$
$
$
41,226
8,231
4,685
0.48
9,719
42,634
9,492
5,389
0.55
9,719
80
$
$
$
$
$
$
$
$
45,183
2,429
458
0.05
9,616
September 30, 2018
40,676
699
(3,506)
(0.36)
9,719
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Fiscal year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic.
Income (loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included the
impact of a $10.6 million in asset impairments ($8.2 million in the second quarter, $982,000 in the third quarter, and $1.4
million in the fourth quarter). Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter was also
affected by the $1.3 million valuation allowance on our deferred tax assets. Quarterly effective income tax expense (benefit)
rate was 22.0%, (28.9)%, (20.5)%, and 36.3% from first to fourth quarter, respectively.
(2) Fiscal year 2019 income from operations, net income attributable to RCIHH stockholders, 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 8.4%, 22.3%, 24.1%, and (371.7)% from first to
fourth quarter, respectively. See Note 4 related to revision of prior year immaterial misstatement.
(3) Fiscal year 2018 income from operations, net income attributable to RCIHH stockholders, 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.
Our nightclub operations are normally affected by seasonal factors. Historically, we have experienced reduced revenues from April
through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March
(our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth
quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in
sales from year to year.
81
18. Impairment of Assets
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
During the year ended September 30, 2018, we recorded aggregate impairment charges of $5.6 million comprised of $1.6 million for
property and equipment of one club and one Bombshells, $834,000 for goodwill impairment of two club reporting units, 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 reporting units, $4.2 million for property and equipment of two clubs, and $178,000 for SOB license of one club.
During the year ended September 30, 2020, we recorded aggregate impairment charges of $10.6 million comprised of $7.9 million for
goodwill of seven club reporting units, $2.3 million for SOB licenses of two clubs, $406,000 for long-lived assets of one club and one
Bombshells unit ($302,000 for property and equipment and $104,000 for operating lease right-of-use assets). The impairment charges
for fiscal 2020 were mainly due to lower cash flow projections and uncertainty risk caused by the pandemic.
19. 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.
82
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
19. Segment Information - continued
Below is the financial information related to the Company’s reportable segments (in thousands):
2020
2019
2018
Revenues (from external customers)
Nightclubs
Bombshells
Other
Income (loss) from operations
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
$
$
$
$
$
$
$
$
88,373
43,215
739
132,327
13,118
9,245
(684)
(18,933)
2,746
3,477
2,114
-
145
5,736
5,799
1,785
415
837
8,836
$
$
$
$
$
$
$
$
148,606
30,828
1,625
181,059
50,724
2,307
(309)
(18,021)
34,701
6,645
10,457
27
3,579
20,708
6,401
1,374
416
881
9,072
$
$
$
$
$
$
$
$
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, 2020
September 30, 2019
September 30, 2018
$
$
277,960
48,991
1,269
32,713
360,933
$
$
274,071
44,144
1,773
34,768
354,756
$
$
252,335
39,560
1,978
35,859
329,732
(1) See Note 4 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 $11.1 million,
$10.0 million, and $9.0 million for 2020, 2019, and 2018, respectively, and intercompany sales of Robust Energy Drink of Other
segment amounting to $70,000, $140,000, and $26,000 for the same respective years. These intercompany revenue amounts are
eliminated upon consolidation.
General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and
information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such
as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.
Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or
investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.
83
20. Noncontrolling Interests
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 operations.
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.
21. 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, 2020 and 2019 was $83.8 million and $86.8 million,
respectively.
Included in the $2.35 million borrowing on November 1, 2018 (see Note 10) were notes borrowed from related parties—one note for
$500,000 (Ed Anakar, an employee of the Company and brother of our director Nourdean Anakar) and another note for $100,000 (Allen
Chhay, brother of Company CFO, Bradley Chhay) as part of a larger group of private lenders. 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 Nottingham Creations (formerly Sherwood Forest Creations, LLC), a furniture fabrication company that
manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham
Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by
Nottingham Creations and Sherwood Forest were approximately $59,000 in fiscal 2020, $134,000 in fiscal 2019, and $321,000 in fiscal
2018. As of September 30, 2020 and 2019, we owed Nottingham Creations and Sherwood Forest $0 and $6,588, 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 2020 and 2019. A son-in-law of Eric Langan
owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were
approximately $19,000, $452,000, and $120,000 for the fiscal years 2020, 2019, and 2018, respectively. Amounts billed directly to the
Company were approximately $62,000, $47,000, and $7,000 for the fiscal years 2020, 2019, and 2018, respectively. As of September
30, 2020 and 2019, the Company owed TW Mechanical approximately $5,700 and $0, respectively, in unpaid direct billings.
22. Leases
ASC 840 (Related to Fiscal 2019 and 2018)
The Company leases certain facilities and equipment under operating leases. Under ASC 840, lease 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 lease expense is attributed to each period during the term of the lease, regardless of when
actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease
expense less than cash payments in the later years. The difference between lease expense recognized and actual lease payments is
accumulated and included in other long-term liabilities in the consolidated balance sheets.
84
RCI HOSPITALITY HOLDINGS, INC.
Notes to Consolidated Financial Statements
Included in lease expense in our consolidated statements of operations (see Note 6) were lease payments for a house that the Company’s
CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense
totaled $19,500, $78,000, and $55,250 for the years ended September 30, 2020, 2019, and 2018, respectively. This lease terminated on
December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.
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 operations. Under
ASC 840, we recorded lease expense amounting to $3.9 million and $3.8 million for the years ended September 30, 2019 and 2018,
respectively.
ASC 842 (Related to Fiscal 2020)
The Company adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options
for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain
economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for
insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather,
variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred
and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.
We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That
is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the
lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally
not included within our operating leases.
Our adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 5.
Future maturities of ASC 842 lease liabilities as of September 30, 2020 are as follows (in thousands):
October 2020 - September 2021
October 2021 - September 2022
October 2022 - September 2023
October 2023 - September 2024
October 2024 - September 2025
Thereafter
Principal
Payments
Interest
Payments
Total
Payments
1,628
1,742
1,678
1,775
1,953
18,291
27,067
$
$
1,593
1,491
1,387
1,283
1,171
5,421
12,346
$
$
3,221
3,233
3,065
3,058
3,124
23,712
39,413
$
$
Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our consolidated statement of
operations, except for sublease income which was included in other revenue, for the year ended September 30, 2020 as follows (in
thousands):
Operating lease expense – fixed payments
Variable lease expense
Short-term equipment and other lease expense (includes $315 recorded in
advertising and marketing, and $372 recorded in repairs and maintenance; see
Note 6)
Sublease income
Total lease expense, net
Other information:
Operating cash outflows from operating leases
Weighted average remaining lease term
Weighted average discount rate
$
$
$
Year Ended
September 30, 2020
3,244
381
1,122
(9)
4,738
4,562
13 years
6.1%
In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for
those rent concessions as deferral of payments as if the lease is unchanged. Any reduction in total lease expense during the period
caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment
adjustments.
85
RCI HOSPITALITY HOLDINGS, INC.
Schedule of Valuation and Qualifying Accounts
(Amounts in Thousands)
Allowance for doubtful accounts receivable
Fiscal 2018
Fiscal 2019
Fiscal 2020
Allowance for doubtful notes receivable
Fiscal 2018
Fiscal 2019
Fiscal 2020
Deferred tax asset valuation allowance(3)
Fiscal 2018
Fiscal 2019
Fiscal 2020
Balance at
beginning of
year
Charged to
costs and
expenses(1)
Deductions(2)
Balance at end
of year
$
$
$
$
$
$
$
$
$
-
-
101
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
106
241
347
-
-
602
-
-
1,273
$
$
$
$
$
$
$
$
$
(106)
(140)
(187)
-
-
(420)
-
-
-
$
$
$
$
$
$
$
$
$
-
101
261
-
-
182
-
-
1,273
(1) Charged to bad debts expense (under other selling, general and administrative expenses) in the consolidated statements of
operations.
(2) Written off against gross receivable and allowance.
(3) Included in deferred tax liability, net in the consolidated balance sheets.
86
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, 2020. 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, 2020. 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, 2020, 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 the proper design and implementation of controls over our income tax
provision, specifically over management’s review of the income tax provision. Based on our evaluation and as a result of the material
weakness identified, our management, with the participation of our chief executive officer and chief financial officer, concluded that our
internal control over financial reporting was not effective as of September 30, 2020.
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, 2020 in the audit report that appears at the end of Part II of this Annual Report on Form
10-K.
87
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.
Management will enhance our risk assessment process over the design and implementation of internal controls over the income tax
provision, including enhanced review controls to be performed by senior accounting management.
It is our belief that these added controls will effectively remediate the existing material weakness.
Previously Reported Material Weakness in Internal Control Over Financial Reporting
As disclosed in Item 9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, 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.
Remediation Efforts to Address Material Weakness
In response to the previously reported material weakness, management has made the following changes:
● developed policies and procedures to enhance the precision of management review of financial statement information;
● implemented policies and procedures to enhance independent review of journal entries;
● developed and implemented procedures to ensure the completeness of related party disclosures; and
● developed and implemented procedures related to the identification and accounting for loss contingencies.
During the fourth quarter of 2020, we completed our testing of the operating effectiveness of the implemented controls and, with the
exception of the new material weakness related to the income tax provision described above, management has concluded that the
previously reported material weakness has been remediated.
88
Changes in Internal Control Over Financial Reporting
Except for the changes 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 2020 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our
employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation
on our internal controls to minimize the impact on their design and operating effectiveness.
Item 9B. Other Information.
None
89
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, 2020,
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, 2020, 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 controls related to management’s review of the income tax provision.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020
consolidated financial statements, and this report does not affect our report dated December 14, 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 operations, comprehensive income (loss),
changes in equity, and cash flows of the Company, and our report dated December 14, 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
December 14, 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 as of December 8,
2020:
Name
Eric S. Langan
Bradley Chhay
Travis Reese
Luke Lirot
Nourdean Anakar
Yura Barabash
Elain J. Martin
Arthur Allan Priaulx
Age
52
37
51
64
63
45
63
80
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.
Involvement in certain legal proceedings: On September 21, 2020, as part of the settlement of a civil administrative proceeding with the
SEC, Mr. Langan agreed, without admitting or denying the findings, to a cease-and-desist order regarding certain sections of the
Securities Exchange Act of 1934 and certain rules promulgated thereunder. See the subsection “SEC Matter and Internal Review” under
the “Legal Matters” section within Note 12 to our consolidated financial statements within this Annual Report on Form 10-K for a
description of the settlement and order, which description is incorporated herein by reference.
Bradley Chhay was appointed as our CFO on September 14, 2020. He is a Certified Public Accountant (CPA), Certified Fraud Examiner
(CFE), and Certified Information Systems Auditor (CISA). He joined us in November 2015 as Controller in charge of migrating the
company to an upgraded ERP system and enhancing internal and external audit and SEC reporting functions. From 2007 through 2009,
he was an auditor for Deloitte & Touche LLP. From 2009 through 2013, he served as Internal Audit Senior, IT Auditor, and Senior
Fraud Auditor for Live Nation Entertainment, Inc. of Beverly Hills, a publicly-traded company that markets tickets for live
entertainment worldwide, owns and operates entertainment venues, and manages music artists. From 2013 through 2015, Mr. Chhay
was an Audit Supervisor and Global ERP Project Lead for RigNet, Inc. of Houston, a publicly-traded digital technology company
serving the oil and gas, maritime and government markets. After RigNet, he briefly served as CFO for a smaller, privately-held, multi-
unit restaurant chain.
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.
91
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 Chief Operating Officer of Gingko Online Learning
LLC, private online learning company in Florida since July 2020 and a consultant to Chengdu Gingko Education Management,
educational management company in Chengdu, China since August 2019. 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.
92
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.
93
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.
DELINQUENT SECTION 16(A) REPORTS
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, 2020, 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, 2020, except for (i) two untimely Form 4s filed on March 19, 2020 and July 24,
2020 by Elaine Martin, our director, with respect to a total of seven transactions occurring on March 13, 16, and 19, 2020, and (ii) an
untimely Form 4 filed on February 12, 2020 by each of Eric Langan, our Chief Executive Officer; Phillip Marshall, our former Chief
Financial Officer; and Travis Reese, our Director and Executive Vice President, with respect to the same transaction involving an
investment club.
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.
94
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 2020, 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.
95
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 September 14, 2020, approximately 96.6% 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.
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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. 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, and housing and living expenses for our former CFO. 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 other executive officers.
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation for services to us for the fiscal years ended September 30, 2020, 2019, and 2018
of our named executive officers.
Name and
Principal Position
Eric S. Langan
President and Chief Executive Officer
Bradley Chhay(2)
Chief Financial Officer
Travis Reese
Executive Vice President
Phillip K. Marshall(2)
Former Chief Financial Officer
Salary
($)
1,073,077
1,200,000
1,015,384
Bonus
($)
-
-
-
All Other
Compensation(1)
($)
95,975
81,355
119,904
Total
($)
1,169,052
1,281,355
1,135,288
269,231
25,000
50,333
344,564
348,750
390,000
346,854
290,625
325,000
294,231
-
-
-
25,000
-
-
66,418
76,622
73,722
58,837
34,067
32,580
415,168
466,622
420,576
374,462
359,067
326,811
Year
2020
2019
2018
2020
2020
2019
2018
2020
2019
2018
(1) All Other Compensation consists of SIMPLE IRA matching contributions, automobile expenses, personal use of aircraft, and
housing and living expenses. 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, and major periodic 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 (until fiscal 2019), plus cost of insurance, registration, repairs, maintenance, tolls, fuel, and
starting fiscal 2020, tax reimbursement on automobile fringe benefits.
A table of All Other Compensation for fiscal 2020 for our named executive officers is presented below:
Name
Eric S. Langan
Bradley Chhay
Travis Reese
Phillip K. Marshall
SIMPLE IRA
Matching
Contribution
($)
16,880
Automobile
Expenses
($)
33,006
Personal Use
of Aircraft
($)
46,089
8,394
6,750
8,906
38,840
59,668
33,059
3,099
-
-
Housing and
Living
Expenses
($)
-
-
-
Total All
Other
Compensation
($)
95,975
50,333
66,418
16,872
58,837
(2) Mr. Chhay assumed the role of Chief Financial Officer when Mr. Marshall retired as the Company’s Chief Financial Officer on
September 14, 2020.
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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, 2020.
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.
During the fiscal year ended September 30, 2020, the employment of the median employee that was identified in our Form 10-K for the
fiscal year ended September 30, 2019 and 2018 was terminated. We recalculated and identified a new median employee using the same
methodology as mentioned above.
The compensation for our CEO in fiscal 2020 of $1,169,052 was approximately 17 times the compensation of our fiscal 2020 median
employee of $67,654.
GRANTS OF PLAN-BASED AWARDS
There were no grants of plan-based awards for fiscal 2020.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
There were no outstanding equity awards as of September 30, 2020.
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, 2020.
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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, 2020, and we paid our independent directors $30,000 in cash for the fiscal year. Following is a schedule of all
compensation paid to our directors in the year ended September 30, 2020:
Name
Nourdean Anakar
Luke C. Lirot
Yura Barabash
Elaine Martin
Arthur Allan Priaulx
Eric S. Langan
Travis Reese
EMPLOYMENT AGREEMENTS
Fees earned
or paid in
cash
($)
30,000
30,000
30,000
30,000
30,000
-
-
On January 31, 2020, the employment agreements with Eric S. Langan, our Chief Executive Officer and President, and Travis Reese,
our Executive Vice President, expired. We are presently in the process of negotiating new employment agreements with 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 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.
We are also in the process of negotiating an employment agreement with Bradley Chhay who was appointed Chief Financial Officer on
September 14, 2020. During this process, the Compensation Committee has determined to pay him an annual salary of $400,000.
Currently, our executive officers do not have long-term incentive plans or defined benefit or actuarial plans outstanding.
EMPLOYEE STOCK OPTION PLANS
The Company’s 2010 Stock Option Plan, as amended, contractually expired on September 30, 2020.
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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.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information at December 8, 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 8,999,910 shares of common stock outstanding at December 8, 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 December 8, 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 December 8, 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
Number of shares
Title of class
Percent of Class (1)
701,870(2)
Common stock
7.80%
Eric S. Langan
Bradley Chhay
Yura Barabash
Travis Reese
Nourdean Anakar
Luke Lirot
Elaine Martin
Arthur Allan Priaulx
All of our Directors and Officers as a
Group of eight persons
Other > 5% Security Holders
3,370(3)
Common stock
-0-
Common stock
14,141(4)
Common stock
-0-
518
7,221
2,000
Common stock
Common stock
Common stock
Common stock
725,380
Common stock
Cooper Capital Securities, L.P. (5)
547,170
Common stock
BlackRock, Inc. (6)
ADW Capital Partners, L.P.(7)
Greenhaven Road Investment
Management, L.P. (8)
596,667
Common stock
457,000
Common stock
500,010
Common stock
*
*
*
*
*
*
*
8.06%
6.08%
6.63%
5.08%
5.56%
(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 less than 0.1% of the investment club.
(3) Includes 1,870 shares held in an investment club over which Mr. Chhay has shared voting and investment power. As of the date
of this report, Mr. Chhay owns approximately 3.8% 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 1.6% of the investment club.
(5) 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.
(6) 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.
(7) Based on the most recently available Schedule 13G filed with the SEC on May 21, 2020 by ADW Capital Partners, L.P., ADW
Capital Management, LLC and Adam D. Wyden. ADW Capital Management, LLC is the general partner and investment
manager of ADW Capital Partners, L.P. Mr. Wyden is the sole manager of ADW Capital Management, LLC. ADW Capital
Partners, L.P is the record and direct beneficial owner of 457,000 shares, with sole voting power and sole dispositive power
over all such shares. The address of each of these reporting persons is 1133 Broadway, Suite 719, New York, New York 10010.
(8) Based on the most recently available Schedule 13G filed with the SEC on September 4, 2020 by Scott Stewart Miller,
Greenhaven Road Investment Management, LP (the “Investment Manager”), MVM Funds, LLC (the “General Partner”),
Greenhaven Road Capital Fund 1, L.P. (“Fund 1”), and Greenhaven Road Capital Fund 2, L.P. (“Fund 2”, and together with
Fund 1, the “Funds”). Each Fund is a private investment vehicle. The Funds directly beneficially own the common stock. The
Investment Manager is the investment manager of the Funds. The General Partner is the general partner of the Funds and the
Investment Manager. Mr. Miller is the controlling person of the General Partner. Mr. Miller, the Investment Manager and the
General Partner may be deemed to beneficially own the common stock directly beneficially owned by the Funds, with sole
voting power and sole dispositive power over all such shares. The address of each of these reporting persons is c/o Royce &
Associates LLC, 8 Sound Shore Drive, Suite 190, Greenwich, CT 06830.
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.
101
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.
In November 2018, we borrowed $500,000 from Ed Anakar and $100,000 from Allen Chhay as part of a larger group of private lenders.
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. Ed Anakar is the brother of Nourdean Anakar, a
director of the Company. We paid Ed Anakar, our director of operations – club division, employment compensation of $502,404,
$550,000, and $488,462 during the fiscal years ended September 30, 2020, 2019, and 2018, respectively. Allen Chhay is the brother of
Bradley Chhay, our CFO, and is not employed by the Company or any of its subsidiaries.
We used the services of Nottingham Creations (formerly Sherwood Forest Creations, LLC), a furniture fabrication company that
manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham
Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by
Nottingham Creations and Sherwood Forest were approximately $59,000 in fiscal 2020, $134,000 in fiscal 2019, and $321,000 in fiscal
2018. As of September 30, 2020 and 2019, we owed Nottingham Creations and Sherwood Forest $0 and $6,588, 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 2020 and 2019. A son-in-law of Eric Langan
owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were
approximately $19,000, $452,000, and $120,000 for the fiscal years 2020, 2019, and 2018, respectively. Amounts billed directly to the
Company were approximately $62,000, $47,000, and $7,000 for the fiscal years 2020, 2019, and 2018, respectively. As of September
30, 2020 and 2019, the Company owed TW Mechanical approximately $5,700 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 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.
102
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 Friedman LLP for the fiscal year 2020 and partial 2019, and by BDO USA, LLP
for partial fiscal 2019 (in thousands).
Audit fees
Audit-related fees
Tax fees
All other fees
Total
Friedman 2020
Friedman 2019
BDO 2019
$
$
$
1,945
-
-
-
$
401
-
-
-
670
-
208
237
1,945
$
401
$
1,115
“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 2020 or 2019.
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.
103
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
4.4
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) *
The description of our common stock
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
104
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.
105
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 December 14, 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/ Bradley Chhay
Bradley Chhay
/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
December 14, 2020
Chief Financial Officer and Principal Accounting Officer
December 14, 2020
Director and Executive Vice President
December 14, 2020
Director
Director
Director
Director
Director
106
December 14, 2020
December 14, 2020
December 14, 2020
December 14, 2020
December 14, 2020
Exhibit 4.4
Description of Common Stock of RCI Hospitality Holdings, Inc.
The holders of Common Stock are entitled to one vote per share with respect to all matters required by law to be submitted to
stockholders of RCI Hospitality Holdings, Inc. (the “Company”). The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company’s Articles of Incorporation, including provisions governing any Preferred Stock. The
Common Stock does not have any cumulative voting, preemptive, subscription or conversion rights. General stockholder action requires
the affirmative vote of a majority of shares represented at a meeting in which a quorum is represented; provided, however, that directors
are elected by a plurality of the votes cast by stockholders entitled to vote at a meeting in which a quorum is represented. The
outstanding shares of Common Stock are validly issued, fully paid and non-assessable.
Subject to the rights of any outstanding shares of Preferred Stock, the holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up
of the affairs of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution
to them after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Stock then outstanding.
Subsidiaries of the Registrant
Exhibit 21.1
Name
10557 Wireway, Inc.
12291 CBW LLC
2151 Manana, Inc.
BGC 135 9th Street, Inc.
BMB Dining Services (249), Inc.
BMB Dining Services (290), Inc.
BMB Dining Services (360), 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 (Lewisville), Inc.
BMB Dining Services (Pearland), Inc.
BMB Dining Services (Pembroke Pines), 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
State of
Organization
Texas
Texas
Texas
Pennsylvania
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Florida
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
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.
State of
Organization
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)
of RCI Hospitality Holdings, Inc. (the “Company”) of our reports dated December 14, 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, 2020.
Exhibit 23.1
/s/ Friedman LLP
Marlton, New Jersey
December 14, 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: December 14, 2020
By: /s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Bradley Chhay, 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: December 14, 2020
By: /s/ Bradley Chhay
Bradley Chhay
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, 2020 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
December 14, 2020
/s/ Bradley Chhay
Bradley Chhay
Chief Financial Officer
December 14, 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.