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Leases

12 Months Ended

Sep. 30, 2020

22. Leases

ASC 840 (Related to Fiscal 2019 and 2018)

The Company leases certain facilities and equipment under operating leases. Under ASC 840, lease expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded using the straight-line method over the initial lease term whereby an equal amount of lease expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease expense less than cash payments in the later years. The difference between lease expense recognized and actual lease payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Included in lease expense in our consolidated statements of operations (see Note 6) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $19,500, $78,000, and $55,250 for the years ended September 30, 2020, 2019, and 2018, respectively. This lease terminated on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.

Included in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as advertising and marketing expenses, and included in selling, general and administrative expenses in our consolidated statements of operations. Under ASC 840, we recorded lease expense amounting to $3.9 million and $3.8 million for the years ended September 30, 2019 and 2018, respectively.

ASC 842 (Related to Fiscal 2020)

The Company adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Our adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 5.

Future maturities of ASC 842 lease liabilities as of September 30, 2020 are as follows (in thousands):

	Principal Payments		Interest Payments		Total Payments
October 2020 - September 2021	$	1,628	$	1,593	$	3,221
October 2021 - September 2022		1,742		1,491		3,233
October 2022 - September 2023		1,678		1,387		3,065
October 2023 - September 2024		1,775		1,283		3,058
October 2024 - September 2025		1,953		1,171		3,124
Thereafter		18,291		5,421		23,712
	$	27,067	$	12,346	$	39,413

Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our consolidated statement of operations, except for sublease income which was included in other revenue, for the year ended September 30, 2020 as follows (in thousands):

Schedule of Lease Expense

	Year Ended September 30, 2020
Operating lease expense – fixed payments	$	3,244
Variable lease expense		381
Short-term equipment and other lease expense (includes $315 recorded in advertising and marketing, and $372 recorded in repairs and maintenance; see Note 6)		1,122
Sublease income		(9	)
Total lease expense, net	$	4,738

Other information:
Operating cash outflows from operating leases	$	4,562
Weighted average remaining lease term		13 years
Weighted average discount rate		6.1	%

In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral of payments as if the lease is unchanged. Any reduction in total lease expense during the period caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

RCI HOSPITALITY HOLDINGS, INC.