Rci Hospitality Holdings, Inc 10-Q for FY2022 Q1
Rci Hospitality Holdings, Inc. (RICK)
About this 10-Q
Rci Hospitality Holdings, Inc filed this 10-Q on February 9, 2022, covering the quarter ended December 31, 2021 (FY2022 Q1).
Headline figures
Quarter ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $61.84M
- up 61.0% from $38.4M a year earlier
- Net income
- $10.58M
- up 9.7% from net income of $9.64M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
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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.
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).
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of February 7, 2022, shares of the registrant’s common stock were outstanding.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack thereof in launching and building the company’s businesses, (iv) cyber security, (v) conditions relevant to real estate transactions, (vi) the impact of the COVID-19 pandemic, and (vii) numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, the “Company,” “we,” “our,” and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
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RCI HOSPITALITY HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
| December 31, 2021 | September 30, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Current portion of notes receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and 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 debt obligations, net | ||||||||
| 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 10) | ||||||||
| Equity | ||||||||
| Preferred stock, $ par value per share; shares authorized; issued and outstanding | - | - | ||||||
| Common stock, $ par value per share; shares authorized; and shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total RCIHH stockholders’ equity | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share and number of share data)
(unaudited)
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 gains, net | ( | ) | ( | ) | ||||
| Total operating expenses | ||||||||
| Income from operations | ||||||||
| Other income (expenses) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Non-operating gains, net | ||||||||
| Income before income taxes | ||||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net income | ||||||||
| Net loss attributable to noncontrolling interests | ||||||||
| Net income attributable to RCIHH common shareholders | $ | $ | ||||||
| Earnings per share | ||||||||
| Basic and diluted | $ | $ | ||||||
| Weighted average number of common shares outstanding | ||||||||
| Basic and diluted | ||||||||
| Dividends per share | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except number of shares)
(unaudited)
| Common Stock | Additional | Treasury Stock | ||||||||||||||||||||||||||||||
| Number | Paid-In | Retained | Number | Noncontrolling | Total | |||||||||||||||||||||||||||
| of Shares | Amount | Capital | Earnings | of Shares | Amount | Interests | Equity | |||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
| Purchase of treasury shares | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares, shares | ||||||||||||||||||||||||||||||||
| Canceled treasury shares | ||||||||||||||||||||||||||||||||
| Canceled treasury shares, shares | ||||||||||||||||||||||||||||||||
| Issuance of common shares | - | |||||||||||||||||||||||||||||||
| Payment of dividends | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Purchase of treasury shares | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Canceled treasury shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Payment of dividends | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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RCI HOSPITALITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except number of shares)
(unaudited)
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on sale of businesses and assets | ( | ) | ( | ) | ||||
| Unrealized loss on equity securities | ||||||||
| Amortization of debt discount and issuance costs | ||||||||
| Gain on debt extinguishment | ( | ) | ( | ) | ||||
| Noncash lease expense | ||||||||
| Gain on insurance | ( | ) | ||||||
| Doubtful accounts expense (reversal) on notes receivable | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses, other current and other assets | ( | ) | ||||||
| Accounts payable, accrued and other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of businesses and assets | ||||||||
| Proceeds from insurance | ||||||||
| Proceeds from 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 debt obligations, including related party proceeds of $ | ||||||||
| Payments on debt obligations | ( | ) | ( | ) | ||||
| Purchase of treasury stock | ( | ) | ||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| CASH PAID DURING PERIOD FOR: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Noncash investing and financing transactions: | ||||||||
| Debt incurred in connection with acquisition of businesses | $ | $ | ||||||
| Note receivable from sale of property | $ | $ | ||||||
| Issuance of shares of common stock for acquisition of businesses: | ||||||||
| Number of shares | ||||||||
| Fair value | $ | $ | ||||||
| Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases | $ | $ | ||||||
| Unpaid liabilities on capital expenditures | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2021 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2021. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.
Certain reclassifications of cost of goods sold components with immaterial amounts have been made to prior period’s financial statements to conform to the current period financial statement presentation. There is no impact in total cost of goods sold, results of operations, and cash flows in all periods presented.
2. Recent Accounting Standards and Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. We adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on our consolidated financial statements.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Ongoing Impact of COVID-19 Pandemic
Since the U.S. declaration of the COVID-19 pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly impact our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. To adapt to the situation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.
The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations and operate in accordance with local and state guidelines. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
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 Note 9.
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. Closures and operating restrictions, 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.
We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable.
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 the future assumed impact of the COVID-19 pandemic on sales. Based on the evaluation we conducted during the interim period ended December 31, 2021, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of December 31, 2021.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Acquisitions and Dispositions
On
October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $
On
October 8, 2021, the Company sold one of its clubs in South Houston for $
On
October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real
estate properties, and associated intellectual property for a total agreed acquisition price of $
Schedule of Preliminary Fair Value of Consideration
| Cash | $ | |||
| Notes payable | ||||
| Common stock | ||||
| Total consideration fair value | $ |
We
recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in
our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired
in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets
are
provisional pending receipt of the final valuations for those assets. Based on the allocation of the preliminary fair
value of the acquisition price and subject to any working capital adjustments, the amount of goodwill is estimated to be $
Schedule of Allocation of Fair Values Assigned to Assets at Acquisition
| Current assets | $ | |||
| Property and equipment | ||||
| Licenses | ||||
| Trademarks | ||||
| Deferred tax liability | ( | ) | ||
| Total net assets acquired | ||||
| Goodwill | ||||
| Acquisition price fair value | $ |
Licenses and trademarks will not be amortized but will be tested at least annually for impairment.
The Company entered into leases with third parties for certain clubs where the real estate were not part of the acquisition. See Note 13.
In
connection with the acquisition, we incurred acquisition-related expenses of approximately $
From
the date of acquisition until December 31, 2021, the eleven acquired clubs contributed revenues
of $
Schedule of Unaudited Pro Forma Combined Results of Operations
| 2021 | 2020 | |||||||
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Pro forma revenues | $ | $ | ||||||
| Pro forma net income attributable to RCIHH common stockholders | $ | $ | ||||||
| Pro forma earnings per share – basic and diluted | $ | $ | ||||||
| Pro forma weighted average number of common shares outstanding |
| |||||||
The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021. Pro forma weighted average number of common shares outstanding includes the impact of shares of our common stock issued as partial consideration for the acquisition.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary purchase
price of $
On
December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased,
for $
5. Revenues
The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of income. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.
Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.
Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):
Schedule of Disaggregation of Segment Revenues
| Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||
| Nightclubs | Bombshells | Other | Total | Nightclubs | Bombshells | Other | Total | |||||||||||||||||||||||||
| Sales of alcoholic beverages | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Sales of food and merchandise | ||||||||||||||||||||||||||||||||
| Service revenues | ||||||||||||||||||||||||||||||||
| Other revenues | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Recognized at a point in time | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Recognized over time | * | * | ||||||||||||||||||||||||||||||
| $ | $ | $ | $ | | $ | $ | $ | $ | | |||||||||||||||||||||||
| * |
The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented below (in thousands):
Schedule of Reconciliation of Contract Liabilities with Customers
Balance at September 30, 2021 | Consideration Received | Recognized in Revenue | Balance at December 31, 2021 | |||||||||||||
| Ad revenue | $ | | $ | | $ | ( | ) | $ | ||||||||
| Expo revenue | ||||||||||||||||
| Other (including franchise fees) | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Selected Account Information
The components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
| December 31, 2021 | September 30, 2021 | |||||||
| Credit card receivables | $ | $ | ||||||
| Income tax refundable | ||||||||
| Insurance receivable | - | |||||||
| ATM in-transit | ||||||||
| Other
(net of allowance for doubtful accounts of $ | ||||||||
| Total accounts receivable, net | $ | $ | ||||||
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
The components of prepaid expenses and other current assets are as follows (in thousands):
Schedule of Components of Prepaid Expenses and Other Current Assets
| December 31, 2021 | September 30, 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid legal | ||||||||
| Prepaid taxes and licenses | ||||||||
| Prepaid rent | ||||||||
| Other | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
A reconciliation of goodwill as of December 31, 2021 and September 30, 2021 is as follows (in thousands):
Schedule of Reconciliation of Goodwill
| Gross | Accumulated Impairment | Net | ||||||||||
| Balance at September 30, 2021 | $ | $ | $ | |||||||||
| Acquisitions | ||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | |||||||||
The components of intangible assets, net are as follows (in thousands):
Schedule of Components of Intangible Assets
| December 31, 2021 | September 30, 2021 | |||||||
| Indefinite-lived: | ||||||||
| Licenses | $ | $ | ||||||
| Trademarks | ||||||||
| Domain names | ||||||||
| Definite-lived: | ||||||||
| Noncompete agreements | ||||||||
| Discounted leases | ||||||||
| Software | ||||||||
| Total intangible assets, net | $ | $ | ||||||
The components of accrued liabilities are as follows (in thousands):
Schedule of Accrued Liabilities
| December 31, 2021 | September 30, 2021 | |||||||
| Insurance | $ | $ | ||||||
| Sales and liquor taxes | ||||||||
| Payroll and related costs | ||||||||
| Property taxes | ||||||||
| Interest | ||||||||
| Patron tax | ||||||||
| Unearned revenues | ||||||||
| Lawsuit settlement | ||||||||
| Other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
The components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
| 2021 | 2020 | |||||||
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Taxes and permits | $ | $ | ||||||
| Advertising and marketing | ||||||||
| Supplies and services | ||||||||
| Insurance | ||||||||
| Legal | ||||||||
| Lease | ||||||||
| Charge card fees | ||||||||
| Utilities | ||||||||
| Security | ||||||||
| Accounting and professional fees | ||||||||
| Repairs and maintenance | ||||||||
| Other | ||||||||
| Total selling, general and administrative expenses | $ | $ | ||||||
The components of non-operating gains (losses), net are as follows:
Components of Non-Operating Gains (Losses), Net
| 2021 | 2020 | |||||||
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Gain on debt extinguishment | $ | $ | ||||||
| Unrealized loss on equity securities | ( | ) | ( | ) | ||||
| Non-operating gains, net | $ | $ | ||||||
| 12 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Debt
On
October 12, 2021, we closed a debt financing transaction with 28 investors for unsecured promissory notes with a total principal amount
of $
On
October 18, 2021, in relation to an acquisition (see Note 4), the Company executed four seller-financed promissory notes. The first promissory
note was a
On
November 8, 2021, in relation to an acquisition (see Note 4), the Company executed a $
Future
maturities of long-term debt as of December 31, 2021 are as follows: $
On
January 25, 2022, the Company borrowed $
8. Equity
During
the quarters ended December 31, 2021 and 2020, the Company purchased and retired and common shares at a cost of approximately $
On
October 18, 2021, we partially paid for an acquisition using shares of our common stock with a fair value
of $
On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan is subject to approval of shareholders, and in the event that the 2022 Plan is not approved by the shareholders within one year of the date of adoption of the 2022 Plan by the board, or less than the required amount of votes of shareholders are received in favor of approval of the 2022 Plan at a duly held meeting of shareholders within one year of the board’s adoption of the 2022 Plan, then we will unwind and terminate the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled. The 2022 Plan provides that the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is . The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan.
| 13 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Income Taxes
Income
taxes were an expense of $
Schedule of Effective Income Tax Rate Reconciliation
| 2021 | 2020 | |||||||
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Federal statutory income tax expense/benefit | % | % | ||||||
| State income taxes, net of federal benefit | % | % | ||||||
| Permanent differences | % | ( | )% | |||||
| Change in valuation allowance | - | ( | )% | |||||
| Tax credits | ( | )% | ( | )% | ||||
| Other | ( | )% | - | |||||
| Total income tax expense (benefit) | % | ( | )% | |||||
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 no changes. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. 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, former 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 CARES Act also established a Paycheck Protection Program, whereby certain small businesses are eligible for
a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified
expenses. The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants,
shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $
10. Commitments and Contingencies
Legal Matters
Texas Patron Tax
In
2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers.
To resolve the issue of taxes owed, the Company agreed to pay $
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 $
The
aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets, amounted
to $
A
declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative
rule related to the $
| 14 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
Shareholder Class and Derivative Actions
In May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District of Texas, Houston Division. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management. The complaints sought unspecified damages, costs, and attorneys’ fees. These lawsuits were Hoffman v. RCI Hospitality Holdings, Inc., et al. (filed May 21, 2019, naming the Company and Eric Langan); Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall (who is no longer an officer of the Company)); and Grossman v. RCI Hospitality Holdings, Inc., et al. (filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also added former directors Nourdean Anakar and Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims. On June 14, 2021, a scheduling order was entered in the case, setting January 9, 2023 as the trial date. On December 22, 2021, an amended scheduling order was entered, extending the trial date to April 7, 2023 and extending all other case deadlines. The Company vigorously defended against this action. In January 2022, the parties engaged in settlement discussions beginning with a formal mediation on January 13, 2022, which resulted in an agreement-in-principle to resolve the matter. The parties are in the process of negotiating a long-form settlement agreement, subject to preliminary and final court approval. On January 24, 2022, a Joint Notice of Settlement was filed, informing the District Court of the agreement-in-principle and the anticipation of executing a formal stipulation of settlement within 30 calendar days.
| 15 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information, alleged failure to maintain internal controls, and alleged failure to properly manage company property. This action is in its preliminary phase, and a potential loss cannot yet be estimated. These allegations are substantively similar to claims asserted in the class action and a prior derivative action that was dismissed in June of 2021. RCI intends to vigorously defend against the action.
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.
| 16 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $
As set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.
General
In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.
Settlements
of lawsuits for the quarters ended December 31, 2021 and 2020 amount to approximately $
| 17 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Segment Information
The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements.
Below is the financial information related to the Company’s segments (in thousands):
Schedule of Segment Reporting Information
| 2021 | 2020 | |||||||
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues (from external customers) | ||||||||
| Nightclubs | $ | $ | ||||||
| Bombshells | ||||||||
| Other | ||||||||
| Total Revenues | $ | $ | ||||||
| Income (loss) from operations | ||||||||
| Nightclubs | $ | $ | ||||||
| Bombshells | ||||||||
| Other | ( | ) | ( | ) | ||||
| General corporate | ( | ) | ( | ) | ||||
| Total Income (loss) from operations | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Nightclubs | $ | $ | ||||||
| Bombshells | ||||||||
| Other | ||||||||
| General corporate | ||||||||
| Total Depreciation and amortization | $ | $ | ||||||
| Capital expenditures | ||||||||
| Nightclubs | $ | $ | ||||||
| Bombshells | ||||||||
| Other | ||||||||
| General corporate | ||||||||
| Total Capital expenditures | $ | $ | ||||||
| December 31, 2021 | September 30, 2021 | |||||||
| Total assets | ||||||||
| Nightclubs | $ | $ | ||||||
| Bombshells | ||||||||
| Other | ||||||||
| General corporate | ||||||||
| Total assets | $ | $ | ||||||
| 18 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Excluded
from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the quarter ended December
31, 2021 amounting to $
General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.
Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.
12. Related Party Transactions
Presently,
our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives
no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of
debt discount and issuance costs, as of December 31, 2021 and September 30, 2021, was $
Included
in the $
We
used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture
tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is
owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations
and Sherwood Forest were $
TW
Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction
services to the Company, as well as directly to the Company during fiscal 2022 and 2021. A son-in-law of Eric Langan owns a
| 19 |
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Leases
The Company leases certain facilities and equipment under operating leases. In relation to an acquisition that was completed on October 18, 2021 (see Note 4), the Company entered into leases with third parties for certain clubs where the real estate locations were not part of the acquisition.
Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three months ended December 31, 2021 and 2020 is as follows (in thousands):
Schedule of Lease Expense
Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | |||||||
| Operating lease expense – fixed payments | $ | $ | ||||||
| Variable lease expense | ||||||||
| Short-term
equipment and other lease expense (includes $ | ||||||||
| Sublease income | ( | ) | ( | ) | ||||
| Total lease expense, net | $ | $ | ||||||
| Other information: | ||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||
| Weighted average remaining lease term – operating leases | ||||||||
| Weighted average discount rate – operating leases | % | % | ||||||
Future maturities of operating lease liabilities as of December 31, 2021 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
| Principal Payments | Interest Payments | Total Payments | ||||||||||
| January - December 2022 | $ | $ | | $ | ||||||||
| January - December 2023 | ||||||||||||
| January - December 2024 | ||||||||||||
| January - December 2025 | ||||||||||||
| January - December 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Future maturities of lease liabilities | $ | $ | $ | |||||||||
| 20 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2021.
Overview
RCI Hospitality Holdings, Inc. (“RCIHH”) is a holding company. Through our subsidiaries, we engage in a number of activities in the hospitality and related businesses. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc.
Through our subsidiaries, as of December 31, 2021, we operated a total of 58 establishments that offer live adult entertainment and/or restaurant and bar operations. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.
Ongoing Impact of COVID-19 Pandemic
Since the U.S. declaration of the COVID-19 pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly impact our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures, and other restrictions that were mandated or encouraged by federal, state, and local governments. To adapt to the situation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.
The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy is to open locations and operate in accordance with local and state guidelines. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
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. Closures and operating restrictions, 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. Currently, all Bombshells and club locations are operating at normal business hours. New York is currently mandating vaccines for entry into restaurants, bars, and nightclubs.
| 21 |
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 filed with the SEC on December 14, 2021.
During the three months ended December 31, 2021, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.
Results of Operations
Highlights of the operating results of the Company during the three months ended December 31, 2021 are as follows:
| ● | Total revenues were $61.8 million compared to $38.4 million during the comparable prior-year period, a 61.0% increase (Nightclubs revenue of $46.8 million compared to $25.2 million, an 85.7% increase; and Bombshells revenue of $14.8 million compared to $13.0 million, a 13.6% increase) | |
| ● | Consolidated same-store sales increased by 21.8% (Nightclubs increased by 30.6% while Bombshells increased by 7.6%) (refer to the definition of same-store sales in the discussion of revenues below) | |
| ● | Twelve newly acquired clubs contributed $6.3 million to revenues, while a newly constructed Bombshells contributed $796,000 | |
| ● | Basic and diluted earnings per share (“EPS”) of $1.12 compared to $1.07 (non-GAAP diluted EPS* of $1.10 compared to $0.39) during the comparable prior-year period | |
| ● | Net cash provided by operating activities of $16.3 million compared to $6.3 million during the comparable prior-year period, a 159.2% increase (free cash flow* of $15.3 million compared to $5.7 million, a 169.3% increase) |
| * | Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below. |
| 22 |
The following table summarizes our results of operations for the three months ended December 31, 2021 and 2020 (dollars in thousands):
| For the Three Months Ended | ||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | Better (Worse) | ||||||||||||||||||||||
| Amount |
% of Revenues |
Amount |
% of Revenues |
Amount | % | |||||||||||||||||||
| Revenues | ||||||||||||||||||||||||
| Sales of alcoholic beverages | $ | 26,431 | 42.7 | % | $ | 17,360 | 45.2 | % | $ | 9,071 | 52.3 | % | ||||||||||||
| Sales of food and merchandise | 10,894 | 17.6 | % | 8,609 | 22.4 | % | 2,285 | 26.5 | % | |||||||||||||||
| Service revenues | 20,876 | 33.8 | % | 10,060 | 26.2 | % | 10,816 | 107.5 | % | |||||||||||||||
| Other | 3,635 | 5.9 | % | 2,369 | 6.2 | % | 1,266 | 53.4 | % | |||||||||||||||
| Total revenues | 61,836 | 100.0 | % | 38,398 | 100.0 | % | 23,438 | 61.0 | % | |||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||
| Alcoholic beverages sold | 4,834 | 18.3 | % | 3,262 | 18.8 | % | (1,572 | ) | (48.2 | )% | ||||||||||||||
| Food and merchandise sold | 3,957 | 36.3 | % | 2,889 | 33.6 | % | (1,068 | ) | (37.0 | )% | ||||||||||||||
| Service and other | 100 | 0.4 | % | 53 | 0.4 | % | (47 | ) | (88.7 | )% | ||||||||||||||
| Total cost of goods sold (exclusive of items shown separately below) | 8,891 | 14.4 | % | 6,204 | 16.2 | % | (2,687 | ) | (43.3 | )% | ||||||||||||||
| Salaries and wages | 16,505 | 26.7 | % | 11,486 | 29.9 | % | (5,019 | ) | (43.7 | )% | ||||||||||||||
| Selling, general and administrative | 18,486 | 29.9 | % | 12,152 | 31.6 | % | (6,334 | ) | (52.1 | )% | ||||||||||||||
| Depreciation and amortization | 2,194 | 3.5 | % | 2,023 | 5.3 | % | (171 | ) | (8.5 | )% | ||||||||||||||
| Other gains, net | (151 | ) | (0.2 | )% | (50 | ) | (0.1 | )% | 101 | 202.0 | % | |||||||||||||
| Total operating expenses | 45,925 | 74.3 | % | 31,815 | 82.9 | % | (14,110 | ) | (44.4 | )% | ||||||||||||||
| Income from operations | 15,911 | 25.7 | % | 6,583 | 17.1 | % | 9,328 | 141.7 | % | |||||||||||||||
| Other income (expenses) | ||||||||||||||||||||||||
| Interest expense | (2,604 | ) | (4.2 | )% | (2,434 | ) | (6.3 | )% | (170 | ) | (7.0 | )% | ||||||||||||
| Interest income | 106 | 0.2 | % | 60 | 0.2 | % | 46 | 76.7 | % | |||||||||||||||
| Non-operating gains, net | 84 | 0.1 | % | 4,916 | 12.8 | % | (4,832 | ) | (98.3 | )% | ||||||||||||||
| Income before income taxes | 13,497 | 21.8 | % | 9,125 | 23.8 | % | 4,372 | 47.9 | % | |||||||||||||||
| Income tax expense (benefit) | 2,933 | 4.7 | % | (384 | ) | (1.0 | )% | (3,317 | ) | (863.8 | )% | |||||||||||||
| Net income | $ | 10,564 | 17.1 | % | $ | 9,509 | 24.8 | % | $ | 1,055 | 11.1 | % | ||||||||||||
* Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.
| 23 |
Revenues
Consolidated revenues increased by approximately $23.4 million, or 61.0%, compared to the prior-year quarter due primarily to partial recovery from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales increased by 21.8%. The 61.0% increase in consolidated revenues was primarily from a 22.9% increase from last year’s COVID-19 closures, a 19.2% increase from the impact of same-store sales growth, an 18.6% increase from new units, with a 0.4% increase from non-core operations.
We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full month of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.
Segment contribution to total revenues was as follows (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Nightclubs | $ | 46,781 | $ | 25,197 | ||||
| Bombshells | 14,771 | 13,006 | ||||||
| Other | 284 | 195 | ||||||
| $ | 61,836 | $ | 38,398 | |||||
Nightclubs revenues increased by 85.7% for the quarter ended December 31, 2021 compared to the prior-year quarter, where the prior-year first quarter was still heavily impacted by government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 30.6%. Newly acquired clubs contributed $6.3 million to the total Nightclubs revenue increase of $21.6 million.
Bombshells revenues increased by 13.6%, of which 7.6% was for same-store sales increase with the remaining increase caused by one new location.
Operating Expenses
Total operating expenses, as a percent of revenues, decreased to 74.3% from 82.9% from last year’s first quarter, although there was a $14.1 million increase, or 44.4%, which was mainly caused by significantly higher sales in the current-year quarter. Significant contributors to the changes in operating expenses are explained below.
Cost of goods sold increased by $2.7 million, or 43.3%, mainly due to higher sales. As a percent of total revenues, cost of goods sold decreased to 14.4% from 16.2% mainly due to the sales mix of higher-margin service revenues increasing.
Salaries and wages increased by $5.0 million, or 43.7%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were 26.7% from 29.9% mainly due to fixed salaries paid on higher sales.
Selling, general and administrative expenses increased by $6.3 million, or 52.1%, primarily due to increased variable expenses related to sales activity during the current-year quarter.
Depreciation and amortization increased by $171,000, or 8.5% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.
Other gains, net increased by $101,000 mainly due to an increase in gain from properties sold, partially offset by a lower gain on insurance.
| 24 |
Income (Loss) from Operations
For the three months ended December 31, 2021 and 2020, our consolidated operating margin was 25.7% and 17.1%, respectively. The main driver for the increase in operating margin is the leveraging of fixed expenses on higher sales.
Segment contribution to income (loss) from operations is presented in the table below (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Nightclubs | $ | 18,736 | $ | 8,495 | ||||
| Bombshells | 2,802 | 2,717 | ||||||
| Other | (43 | ) | (75 | ) | ||||
| General corporate | (5,584 | ) | (4,554 | ) | ||||
| $ | 15,911 | $ | 6,583 | |||||
Nightclubs operating margin was 40.1% and 33.7% for the three months ended December 31, 2021 and 2020, respectively, while operating margin for Bombshells was 19.0% and 20.9%, respectively. The increase in Nightclubs operating margin was mainly due to the increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The decrease in Bombshells operating margin was mainly from pre-opening expenses for the new Bombshells unit.
Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 26.
| For the Three Months Ended December 31, 2021 | ||||||||||||||||||||
| Nightclubs | Bombshells | Other | Corporate | Total | ||||||||||||||||
| Income (loss) from operations | $ | 18,736 | $ | 2,802 | $ | (43 | ) | $ | (5,584 | ) | $ | 15,911 | ||||||||
| Amortization of intangibles | 47 | 3 | - | - | 50 | |||||||||||||||
| Settlement of lawsuits | 177 | 10 | - | 5 | 192 | |||||||||||||||
| Loss (gain) on sale of businesses and assets | 45 | 13 | - | (400 | ) | (342 | ) | |||||||||||||
| Gain on insurance | (1 | ) | - | - | - | (1 | ) | |||||||||||||
| Non-GAAP operating income (loss) | $ | 19,004 | $ | 2,828 | $ | (43 | ) | $ | (5,979 | ) | $ | 15,810 | ||||||||
| GAAP operating margin | 40.1 | % | 19.0 | % | (15.1 | )% | (9.0 | )% | 25.7 | % | ||||||||||
| Non-GAAP operating margin | 40.6 | % | 19.1 | % | (15.1 | )% | (9.7 | )% | 25.6 | % | ||||||||||
| For the Three Months Ended December 31, 2020 | ||||||||||||||||||||
| Nightclubs | Bombshells | Other | Corporate | Total | ||||||||||||||||
| Income (loss) from operations | $ | 8,495 | $ | 2,717 | $ | (75 | ) | $ | (4,554 | ) | $ | 6,583 | ||||||||
| Amortization of intangibles | 47 | 4 | 28 | - | 79 | |||||||||||||||
| Settlement of lawsuits | 118 | 34 | - | - | 152 | |||||||||||||||
| Gain on sale of businesses and assets | - | - | - | (5 | ) | (5 | ) | |||||||||||||
| Gain on insurance | (197 | ) | - | - | - | (197 | ) | |||||||||||||
| Non-GAAP operating income (loss) | $ | 8,463 | $ | 2,755 | $ | (47 | ) | $ | (4,559 | ) | $ | 6,612 | ||||||||
| GAAP operating margin | 33.7 | % | 20.9 | % | (38.5 | )% | (11.9 | )% | 17.1 | % | ||||||||||
| Non-GAAP operating margin | 33.6 | % | 21.2 | % | (24.1 | )% | (11.9 | )% | 17.2 | % | ||||||||||
Other Income/Expenses
During the quarter ended December 31, 2020, we received notices of forgiveness for the first ten forgiven loans out of twelve of our PPP loans. During the quarter ended December 31, 2021, we received a notice of forgiveness for the last remaining forgiven loan out of twelve of our PPP loans. We recognized gains on debt extinguishment amounting to $85,000 and $4.9 million during the quarters ended December 31, 2021 and 2020, respectively.
Interest expense increased by $170,000, or 7.0%, which was mainly caused by higher average debt balance and partially offset by a lower average interest rate.
Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $4.2 million and $3.4 million for the quarters ended December 31, 2021 and 2020, respectively. As a percentage of revenue, total occupancy costs were 6.9% and 8.9% during the quarters ended December 31, 2021 and 2020, respectively, primarily due to the increase in sales base.
Income Taxes
Income taxes were an expense of $2.9 million during the quarter ended December 31, 2021 compared to a benefit of $384,000 during the quarter ended December 31, 2020. The effective income tax rate was an expense of 21.7% and a benefit of 4.2% for the quarters ended December 31, 2021 and 2020, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the prior period, as presented below.
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Computed expected income tax expense/benefit | 21.0 | % | 21.0 | % | ||||
| State income taxes, net of federal benefit | 2.9 | % | 3.3 | % | ||||
| Permanent differences | 0.4 | % | (8.2 | )% | ||||
| Change in valuation allowance | - | (14.0 | )% | |||||
| Tax credit | (2.0 | )% | (6.3 | )% | ||||
| Other | (0.6 | )% | 0.0 | % | ||||
| Total income tax expense (benefit) | 21.7 | % | (4.2 | )% | ||||
| 25 |
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:
Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, and (d) 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) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) unrealized gains or losses on equity securities, (e) settlement of lawsuits, (f) gain on debt extinguishment, and (g) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.3% and 19.1% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 31, 2021 and 2020, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities.
Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity securities, (g) settlement of lawsuits, and (h) gain on debt extinguishment. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.
We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion.
| 26 |
The following tables present our non-GAAP performance measures for the three months ended December 31, 2021 and 2020 (in thousands, except per share, number of shares and percentages):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Reconciliation of GAAP net income to Adjusted EBITDA | ||||||||
| Net income attributable to RCIHH common stockholders | $ | 10,575 | $ | 9,643 | ||||
| Income tax expense (benefit) | 2,933 | (384 | ) | |||||
| Interest expense, net | 2,498 | 2,374 | ||||||
| Settlement of lawsuits | 192 | 152 | ||||||
| Gain on sale of businesses and assets | (342 | ) | (5 | ) | ||||
| Gain on debt extinguishment | (85 | ) | (4,949 | ) | ||||
| Unrealized loss on equity securities | 1 | 33 | ||||||
| Gain on insurance | (1 | ) | (197 | ) | ||||
| Depreciation and amortization | 2,194 | 2,023 | ||||||
| Adjusted EBITDA | $ | 17,965 | $ | 8,690 | ||||
| Reconciliation of GAAP net income to non-GAAP net income | ||||||||
| Net income attributable to RCIHH common stockholders | $ | 10,575 | $ | 9,643 | ||||
| Amortization of intangibles | 50 | 79 | ||||||
| Settlement of lawsuits | 192 | 152 | ||||||
| Gain on sale of businesses and assets | (342 | ) | (5 | ) | ||||
| Gain on debt extinguishment | (85 | ) | (4,949 | ) | ||||
| Unrealized loss on equity securities | 1 | 33 | ||||||
| Gain on insurance | (1 | ) | (197 | ) | ||||
| Net income tax effect | (38 | ) | (1,219 | ) | ||||
| Non-GAAP net income | $ | 10,352 | $ | 3,537 | ||||
| Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share | ||||||||
| Diluted shares | 9,407,519 | 9,019,088 | ||||||
| GAAP diluted earnings per share | $ | 1.12 | $ | 1.07 | ||||
| Amortization of intangibles | 0.01 | 0.01 | ||||||
| Settlement of lawsuits | 0.02 | 0.02 | ||||||
| Gain on sale of businesses and assets | (0.04 | ) | (0.00 | ) | ||||
| Gain on debt extinguishment | (0.01 | ) | (0.55 | ) | ||||
| Unrealized loss on equity securities | 0.00 | 0.00 | ||||||
| Gain on insurance | (0.00 | ) | (0.02 | ) | ||||
| Net income tax effect | (0.00 | ) | (0.14 | ) | ||||
| Non-GAAP diluted earnings per share | $ | 1.10 | $ | 0.39 | ||||
| Reconciliation of GAAP operating income to non-GAAP operating income | ||||||||
| Income from operations | $ | 15,911 | $ | 6,583 | ||||
| Amortization of intangibles | 50 | 79 | ||||||
| Settlement of lawsuits | 192 | 152 | ||||||
| Gain on sale of businesses and assets | (342 | ) | (5 | ) | ||||
| Gain on insurance | (1 | ) | (197 | ) | ||||
| Non-GAAP operating income | $ | 15,810 | $ | 6,612 | ||||
| Reconciliation of GAAP operating margin to non-GAAP operating margin | ||||||||
| Income from operations | 25.7 | % | 17.1 | % | ||||
| Amortization of intangibles | 0.01 | % | 0.2 | % | ||||
| Settlement of lawsuits | 0.3 | % | 0.4 | % | ||||
| Gain on sale of businesses and assets | (0.06 | )% | (0.0 | )% | ||||
| Gain on insurance | (0.00 | )% | (0.5 | )% | ||||
| Non-GAAP operating margin | 25.6 | % | 17.2 | % | ||||
* 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.
| 27 |
Liquidity and Capital Resources
At December 31, 2021, our cash and cash equivalents were approximately $18.0 million compared to $35.7 million at September 30, 2021. Because of the large volume of cash we handle, we have very stringent cash controls. As of December 31, 2021, we had working capital of $1.3 million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated liabilities of $800,000 and $1.1 million, respectively) amounting to $2.3 million and $3.8 million as of December 31, 2021 and September 30, 2021, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. Revenues seem favorable now that all our locations are not under pandemic-related closure mandates. However, some locations do have certain restrictions still in place. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms.
In fiscal 2020, to adapt to the situation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, 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 used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the year ended September 30, 2021, we received 11 Notices of PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $5.3 million in principal and interest during the period and were included in non-operating gains (losses), net in our consolidated statement of operations. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal will be repaid as debt plus accrued interest.
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. Closures and operating restrictions, 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.
We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable. Currently, all of our locations are open except two clubs that are being renovated and/or remodeled.
We have not recently raised capital through the issuance of equity securities although we have recently issued shares of our common stock to partly pay for an acquisition (see next paragraph). Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.
On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period). The acquisition gives the Company presence in six additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in four seller-financed notes, and 500,000 shares of our common stock with a fair value of $30.4 million at issuance.
On January 25, 2022, the Company borrowed $18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is payable in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured by eleven real estate properties. After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan, among which to maintain a debt service coverage of not less than 1.4 times, reviewed annually.
We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.
The following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | $ | 16,264 | $ | 6,274 | ||||
| Investing activities | (48,130 | ) | (1,013 | ) | ||||
| Financing activities | 14,134 | (3,899 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | $ | (17,732 | ) | $ | 1,362 | |||
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | 10,564 | $ | 9,509 | ||||
| Depreciation and amortization | 2,194 | 2,023 | ||||||
| Gain on debt extinguishment | (83 | ) | (4,920 | ) | ||||
| Net change in operating assets and liabilities | 3,414 | (495 | ) | |||||
| Other | 175 | 157 | ||||||
| Net cash provided by operating activities | $ | 16,264 | $ | 6,274 | ||||
Net cash provided by operating activities increased from year to year primarily driven by the impact of higher sales and lower interest expense paid partially offset by lower income tax refund in the current quarter.
| 28 |
Cash Flows from Investing Activities
Following are our cash flows from investing activities (in thousands):
For the Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Payments for property and equipment and intangible assets | $ | (9,850 | ) | $ | (1,289 | ) | ||
| Acquisition for businesses | (39,302 | ) | - | |||||
| Proceeds from sale of businesses and assets | 803 | - | ||||||
| Proceeds from insurance | 185 | 250 | ||||||
| Proceeds from note receivable | 34 | 26 | ||||||
| Net cash used in investing activities | $ | (48,130 | ) | $ | (1,013 | ) | ||
Following is a breakdown of our payments for property and equipment and intangible assets for the three months ended December 31, 2021 and 2020 (in thousands):
| For
the Three Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| New facilities, equipment and intangible assets | $ | 8,852 | $ | 684 | ||||
| Maintenance capital expenditures | 998 | 605 | ||||||
| Total capital expenditures | $ | 9,850 | $ | 1,289 | ||||
The capital expenditures during the three months ended December 31, 2021 were composed of primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. The capital expenditures during the three months ended December 31, 2020 were composed of primarily of real estate and liquor license purchases. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.
Cash Flows from Financing Activities
Following are our cash flows from financing activities (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Proceeds from debt obligations | $ | 17,002 | $ | - | ||||
| Payments on debt obligations | (2,488 | ) | (1,745 | ) | ||||
| Purchase of treasury stock | - | (1,794 | ) | |||||
| Payment of dividends | (380 | ) | (360 | ) | ||||
| Net cash provided by (used in) financing activities | $ | 14,134 | $ | (3,899 | ) | |||
We purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while we did not purchase shares of our common stock during the three months ended December 31, 2021. We paid quarterly dividends of $0.04 per share in both the current- and prior-year first quarter.
See Note 7 to our consolidated financial statements for future maturities of our debt obligations.
Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy.
Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands):
| For the Three Months | ||||||||
| Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 16,264 | $ | 6,274 | ||||
| Less: Maintenance capital expenditures | 998 | 605 | ||||||
| Free cash flow | $ | 15,266 | $ | 5,669 | ||||
Our free cash flow for the current quarter increased by 169.3% compared to the comparable prior-year period primarily due to higher sales, net of related expense payments, and lower interest expense payments, partially offset by income tax refunds in the prior year and higher maintenance capital expenditures.
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.
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 potentially significantly affect liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business down turns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.
| 29 |
The following table presents a summary of such indicators for the three months ended December 31 (in thousands, except percentages):
| Increase | Increase | |||||||||||||||||||
| 2021 | (Decrease) | 2020 | (Decrease) | 2019 | ||||||||||||||||
| Sales of alcoholic beverages | $ | 26,431 | 52.3 | % | $ | 17,360 | (16.3 | )% | $ | 20,743 | ||||||||||
| Sales of food and merchandise | 10,894 | 26.5 | % | 8,609 | 15.6 | % | 7,447 | |||||||||||||
| Service revenues | 20,876 | 107.5 | % | 10,060 | (41.5 | )% | 17,193 | |||||||||||||
| Other | 3,635 | 53.4 | % | 2,369 | (21.3 | )% | 3,011 | |||||||||||||
| Total revenues | 61,836 | 61.0 | % | 38,398 | (20.7 | )% | 48,394 | |||||||||||||
| Net cash provided by operating activities | $ | 16,264 | 159.2 | % | $ | 6,274 | (38.9 | )% | $ | 10,273 | ||||||||||
| Adjusted EBITDA* | $ | 17,965 | 106.7 | % | $ | 8,690 | (26.8 | )% | $ | 11,864 | ||||||||||
| Free cash flow* | $ | 15,266 | 169.3 | % | $ | 5,669 | (38.7 | )% | $ | 9,252 | ||||||||||
| Debt (end of period) | $ | 161,850 | 20.0 | % | $ | 134,821 | (4.9 | )% | $ | 141,826 | ||||||||||
| * | See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. |
Share Repurchase
We purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while we did not purchase shares of our common stock during the three months ended December 31, 2021. As of December 31, 2021, we have approximately $9.0 million remaining to purchase additional shares.
Impact of Inflation
To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future.
| 30 |
Seasonality
Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.
Capital Allocation Strategy
Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions.
Based on our current capital allocation strategy:
| ● | We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale; | |
| ● | We consider disposing of underperforming units to free up capital for more productive use; | |
| ● | We consider buying back our own stock if the after-tax yield on free cash flow is above 10%; | |
| ● | We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale. |
Growth Strategy
We believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. Our growth strategy involves the following: (i) to acquire existing units in locations that are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed; (ii) to open new units after market analysis; (iii) to franchise our Bombshells brand; (iv) to form joint ventures or partnerships to reduce start-up and operating costs, with us contributing equity in the form of our brand name and management expertise; (v) to develop new club concepts that are consistent with our management and marketing skills; (vi) to develop and open our restaurant concepts as our capital and manpower allow; and (vii) to control the real estate in connection with club operations, although some units may be in leased premises.
We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All eleven of the existing Bombshells as of December 31, 2021 are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.
We are currently in the process of site selection for new Bombshells locations and our first franchisee for Bombshells restaurants in the San Antonio, Texas area is scheduled to open in February 2022.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of December 31, 2021, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that the information required to be filed or submitted with the SEC 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 of the company with the participation of its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, an evaluation was performed under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on their evaluation, they have concluded that our disclosure controls and procedures were not effective as of December 31, 2021. This determination is based on the previously reported material weakness management previously identified in our internal control over financial reporting, as described below. We are in the process of remediating the material weakness in our internal control, as described below. We believe the completion of these processes should remedy our disclosure controls and procedures. We will continue to monitor these issues.
Previously Reported Material Weakness in Internal Control Over Financial Reporting
In our Annual Report for the year ended September 30, 2021, filed with the SEC on December 14, 2021, management concluded that our internal control over financial reporting was not effective as of September 30, 2021. In the evaluation, management identified a material weakness in internal control related to the proper design and implementation of controls over our estimates relating to the impairment of goodwill, indefinite-lived intangibles and long-lived assets, specifically over the precision of management’s review of certain assumptions.
Remediation Efforts to Address 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. As such, we are in the process of adding controls to increase the precision of the review of all assumptions used in the impairment valuation model. We will also conduct senior management reviews of any and all material estimates that are applied in these instances.
It is our belief that these actions will effectively remediate the existing material weakness.
Changes in Internal Control Over Financial Reporting
On October 18, 2021, we completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property (see Note 4 to our unaudited condensed consolidated financial statements). Management has considered this transaction material to the results of operations, cash flows, and financial position from the date of acquisition through December 31, 2021, and believes that the internal controls and procedures of the acquisition have a material effect on internal controls over financial reporting. We are currently in the process of incorporating the internal controls of the acquired group into the internal controls over financial reporting for our assessment of and report on internal controls over financial reporting for September 30, 2023.
Other than as described above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
See the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Item 1A. Risk Factors.
There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, except for such risks and uncertainties that may result from the additional disclosure in the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended December 31, 2021, we did not repurchase any shares of our common stock. As of February 7, 2022, we have approximately $9.0 million remaining to purchase additional shares.
Item 6. Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| RCI HOSPITALITY HOLDINGS, INC. | ||
| Date: February 9, 2022 | By: | /s/ Eric S. Langan |
| Eric S. Langan | ||
| Chief Executive Officer and President | ||
| Date: February 9, 2022 | By: | /s/ Bradley Chhay |
| Bradley Chhay | ||
| Chief Financial Officer and Principal Accounting Officer | ||
| 34 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
| I, Eric S. Langan, Chief Executive Officer and President of RCI Hospitality Holdings, Inc., certify that: | |
| 1. | I have reviewed this quarterly report on Form 10-Q of RCI Hospitality Holdings, Inc.; |
| 2. | 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; |
| 3. | 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; |
| 4. | 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) | 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; | |
| (b) | 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; | |
| (c) | 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 | |
| (d) | 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) | 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 | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 9, 2022 | By: | /s/ Eric S. Langan |
| Eric S. Langan | ||
| Chief Executive Officer and President |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
| I, Bradley Chhay, Chief Financial Officer of RCI Hospitality Holdings, Inc., certify that: | |
| 1. | I have reviewed this quarterly report on Form 10-Q of RCI Hospitality Holdings, Inc.; |
| 2. | 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; |
| 3. | 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; |
| 4. | 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) | 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; | |
| (b) | 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; | |
| (c) | 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 | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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) | 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 | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 9, 2022 | By: | /s/ Bradley Chhay |
| Bradley Chhay | ||
| Chief Financial Officer and Principal Accounting Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RCI Hospitality Holdings, Inc. (the “Company”) on Form 10-Q for the fiscal period ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the Chief Executive Officer and the 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 our knowledge, that:
| (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 result of operations of the Company as of and for the periods covered in the Report. |
| /s/ Eric S. Langan | |
| Eric S. Langan | |
| Chief Executive Officer | |
| February 9, 2022 | |
| /s/ Bradley Chhay | |
| Bradley Chhay | |
| Chief Financial Officer | |
| February 9, 2022 |
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-Q and shall not be considered filed as part of the Form 10-Q.