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Debt
 12 Months Ended
Sep. 30, 2021
Debt Disclosure [Abstract]  
Debt

9. Debt

 

Debt consisted of the following (in thousands):

 

      September 30, 
      2021   2020 
    $   $ 
Notes payable at 5.5%, matures January 2023  (d)(1)  $785   $886 
Non-interest-bearing debts to State of Texas, mature March 2022 and May 2022, interest imputed at 9.6%  (d)(2)   813    2,177 
Note payable at 5.75%, matures December 2027, as amended  *(a)(6ii)(7)   -    9,715 
Note payable at 5.95%, matures December 2027, as amended  *(a)(6iii)(7)   -    5,787 
Note payable at 12%, matures February 2030, as amended   (d)(3)(25)   -    5,031 
Notes payable at 12%, mature November 2021, as amended   (d)(4)(26)   -    1,940 
Note payable at 8%, matures October 2027, as amended  (b)(5)(23)   3,025    3,025 
Note payable at 8%, matures May 2029  (b)(5)   11,549    12,599 
Note payable at 5.75%, matures December 2027, as amended  *(a)(6i)(7)(8)(9)   -    49,830 
Note payable at 5.99%, matures September 2033, as amended  (c) (10)   6,089    6,395 
Note payable at 5%, matures August 2029  *(a)(12)   -    2,165 
Note payable at prime plus 0.5% with a 5.5% floor, matures September 2035, as amended  *(a)(13)   -    2,099 
Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030  *(a)(13)   -    2,861 
Note payable at 8%, matures May 2021  (a)(14)   -    582 
Note payable at 5.95%, matures August 2039, as amended  *(a)(11)   -    6,979 
Note payable at 12%, matures February 2030, as amended   (d)(15)(24)   -    3,875 
Note payable at 9%, matures September 2028  (a)(17)   1,063    1,167 
Note payable at 5.95%, matures September 2028, as amended  *(a)(16)   -    1,489 
Note payable at 6%, matures February 2040, as amended  *(a)(22)   -    4,066 
Note payable at 5.49%, matures March 2039, as amended  (c)(21)   2,075    2,125 
Note payable at 7%, matures November 2024  (b)(19)   -    3,319 
Note payable at 7%, matures February 2021, as amended  (b)(20)   -    2,000 
Notes payable at 12%, mature November 2021  (d)(18)   -    2,350 
Note payable at 8%, matures November 2028  (b)(20)   -    4,790 
Note payable at 3.99%, matures January 2041  *(a)(28)   2,127    - 
Note payable at 5.25%, matures September 2031  *(a)(29)   99,146    - 
Paycheck Protection Program loans at 1%, matures May 2022  (d)(27)   124    5,422 
Total debt      126,796    142,674 
Less unamortized debt discount and issuance costs      (1,628)   (1,239)
Less current portion      (6,434)   (16,304)
Total long-term portion of debt, net     $118,734   $125,131 

 

* These commercial bank debts are guaranteed by the Company’s CEO. See Note 18.

 

 

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

9. Debt - continued

 

Following is a summary of long-term debt at September 30 (in thousands):

 

 

   2021   2020 
(a) Secured by real estate  $102,336   $86,740 
(b) Secured by stock in subsidiary   14,574    25,733 
(c) Secured by other assets   8,164    8,520 
(d) Unsecured   1,722    21,681 
   $126,796   $142,674 

 

(1) In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $1.5 million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate of 5.5%. The rate adjusts to prime plus 2.5% in the 61st month, not to exceed 9%. In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $6.5 million, which have been paid off in relation to the December 2017 Refinancing Loan, as discussed below. The notes are also payable over eleven years at $53,110 per month including interest and have the same adjustable interest rate of 5.5%.

 

(2) In 2015, the Company reached a settlement with the State of Texas over payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two nonsettled locations. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. The Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest. In March 2017, the present value of the second note was approximately $390,000 after discounting using an imputed interest rate of 9.6%. Going forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5 per customer.

 

(3) On October 5, 2016, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million. The new unsecured debt is payable $118,817 per month, including interest at 12%, and matures in five years with a balloon payment for the remaining balance at maturity. This note was partially paid in relation to the first note of the December 2017 Refinancing Loan, as discussed below. Also refer to the February 20, 2020 loan restructuring below. This note was paid off entirely on September 30, 2021.

 

(4) On May 1, 2017, the Company raised $5.4 million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on May 1, 2020. The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity. On August 15, 2018 and September 26, 2018, the Company refinanced $2.0 million and $500,000 of the notes, respectively. The $2.0 million note was exchanged for a $4.0 million 12% note maturing in three years with interest-only payments until maturity, where the full principal is to be paid. The $500,000 note was exchanged for a $1.35 million 9% note maturing in 10 years with monthly payments of $17,101, including interest. On November 1, 2018, the Company refinanced two notes with a total principal of $400,000 with certain investors. See succeeding paragraph related to November 1, 2018 financing below. Included in the balance of long-term debt as of September 30, 2020 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer employee in which the terms of the note are the same as the rest of the lender group. Refer to May 1, 2020 extension below. These notes were paid off on September 30, 2021.

 

(5) On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 15), the Company executed two promissory notes with the sellers: (i) a 5% short-term note for $5.0 million payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million. The 12-year note is payable $168,343 per month, including interest. The Company has amended the $5.0 million short-term note payable several times, which has a remaining balance of $3.0 million, extending the maturity date and increasing the interest rate. Presently, the maturity date is October 1, 2027 and the interest rate is 8% for its remaining term. Refer to December 2019 amendment below.

 

 

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

9. Debt - continued

 

(6) On December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank for $81.2 million. The December 2017 Refinancing Loan fully refinanced 20 of the Company’s notes payable and partially paid down 1 note payable (collectively, “Repaid Notes”) with interest rates ranging from 5% to 12% covering 43 parcels of real properties the Company previously acquired (“Properties”). The December 2017 Refinancing Loan consisted of three promissory notes:

 

  i) The first note amounted to $62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five years, then repriced one time at the then current U.S. Treasury rate plus 3.5%, with a floor rate of 5.75%, and payable in monthly installments of $442,058, based upon a 20-year amortization period, with the balance payable at maturity;
     
  ii) The second note amounted to $10.6 million with a term of 10 years at a 5.45% fixed interest rate until July 2020, after which to be repriced at a fixed interest rate of 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest rate of the first note. This note was payable $78,098 monthly for principal and interest until July 2020, based upon a 20-year amortization period, after which the monthly payment for principal and interest was adjusted accordingly based on the repricing, with the balance payable at maturity; and
     
  iii) The third note amounted to $8.1 million with a term of 10 years at a 5.95% fixed interest rate until August 2021, after which to be repriced at 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest of the first note. This note was payable $100,062 monthly for principal and interest until August 2021, based upon a 20-year amortization period, after which the monthly payment for principal and interest is adjusted accordingly based on the repricing, with the balance payable at maturity.

 

(7) In addition to the monthly principal and interest payments as provided above, the Company paid monthly installments of principal of $250,000, applied to the first note, until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017 Refinancing Loan and the then current value of the Properties, is not greater than 65%. The loan-to-value ratio of the Properties fell below 65% in October 2019, hence, we stopped paying the additional $250,000 monthly. The December 2017 Refinancing Loan eliminated balloon payments of the Repaid Notes worth $2.9 million originally scheduled in fiscal 2018, $19.4 million originally scheduled in fiscal 2020 and $5.3 million originally scheduled in fiscal 2021. There were certain financial covenants with which the Company must be in compliance related to this financing. All three notes in the preceding paragraph were refinanced as part of the September 2021 Refinancing Note (see below).

 

 

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

9. Debt - continued

 

(8) In connection with the Repaid Notes, we wrote off $279,000 of unamortized debt issuance costs to interest expense. Prior to September 30, 2017, the Company paid a portion of debt issuance costs amounting to $612,500, which was included in other assets until the closing of the transaction. At closing, the Company paid an additional $764,000 in debt issuance costs, which together with the $612,500 prepayment will be amortized for the term of the loan using the effective interest rate method. We also paid prepayment penalties amounting to $543,000 on the Repaid Notes, which was included in interest expense in our consolidated statement of operations for the year ended September 30, 2018.

 

(9) Included in the $62.5 million first note of the December 2017 Refinancing Loan was $4.6 million that was escrowed at closing due to the bank lender of one of the Repaid Notes. The amount was released from escrow in June 2018 when the construction, for which the original note was borrowed, was completed. In March and August 2020, certain principal and interest payments for the three notes of the December 2017 Refinancing Loan were deferred to their maturity dates.

 

(10) On December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the old aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with monthly payments of $59,869, which includes interest. In March 2020, this loan was extended to September 2033.

 

(11) On February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million with the difference paid by the Company in cash. The bank note bore interest at 5.25% adjusted after 36 months to prime plus 1% with a floor of 5.2% and matures on February 15, 2038. The bank note was payable interest-only during the first 18 months, after which monthly payments of principal and interest were to be made based on a 20-year amortization with the remaining balance to be paid at maturity. On August 28, 2018, this note was refinanced for an additional construction loan having a maximum availability of $7.4 million. The new note had an initial interest rate of 5.95%, subject to a repricing after 72 months to prime plus 1% with a 5.9% floor. The note was payable $53,084 per month, including interest, for 72 months, then adjusted based on repriced interest rate until its August 2039 maturity. In May 2020, certain principal and interest payments for this note were deferred to its maturity date. This note was paid off in relation to the September 2021 Refinancing Note.

 

(12) On February 20, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over prime with a 5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million. The construction loan agreement bore an interest rate of prime plus 0.5% with a floor of 5.0% and was to mature on August 20, 2029. During the first 18 months of the construction loan, the Company made monthly interest-only payments, and after such, monthly payments of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity. There are certain financial covenants with which the Company was to be in compliance related to this financing. This note was paid off in relation to the September 2021 Refinancing Note.

 

(13) On April 24, 2018, the Company acquired certain land for future development of a Bombshells in Houston, Texas for $5.5 million, financed with a bank note for $4.0 million, payable interest only at prime plus 0.5% with a floor of 5% per annum. The note was to mature in 24 months, by which date the principal was to be payable in full. In March and July 2020, in view of the pandemic, the bank lender and the Company agreed to defer the maturity of this note to October 2020. In September 2020, they further negotiated to refinance the note with a deferral of maturity to September 2035 with monthly amortization payments of $16,396, including interest. On September 17, 2018, the Company and the bank lender agreed to carve out a portion of the loan that relates to the land where the Bombshells location is to be built amounting to $960,000, and added a construction loan with a maximum availability of $2.9 million. The new $2.9 million construction loan had an interest rate of prime plus 0.5%, with a 5.5% floor, and payable in 12 years. The first 24 months were to be interest-only payments, after which monthly payments of principal and interest were to be made based on a 20-year amortization. There were certain financial covenants with which the Company was to be in compliance related to this financing. These notes were paid off in relation to the September 2021 Refinancing Note.

 

(14) On May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest at 8%. The note was to mature in three years and was payable in monthly installments of $20,276, including interest, based on a five-year amortization with the remaining balance to be paid at maturity. This note was fully paid in May 2021.

 

 

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

9. Debt - continued

 

(15) On August 15, 2018, the Company refinanced a $2.0 million note payable for $4.0 million from a private lender by executing a 12% 3-year note payable $40,000 monthly starting September 15, 2018, with the remaining principal and interest balance payable at maturity. See February 20, 2020 extension below. This note was paid off on September 30, 2021.

 

(16) On September 6, 2018, the Company borrowed $1.55 million from a bank lender to finance the acquisition of the remaining not-owned interest in a joint venture. The 10-year note payable had an initial interest rate of 5.95% until after five years when the interest rate is adjusted to the U.S. Treasury rate plus 3.5%, with a 5.95% floor. Monthly payments of $11,138, including interest, were due for five years until an adjustment in monthly payments based on the interest rate repricing. The Company paid approximately $40,000 in debt issuance costs at closing. In March and August 2020, certain principal and interest payments for this note were deferred to its maturity date. There were certain financial covenants with which the Company was to be in compliance related to this note. This note was paid off in relation to the September 2021 Refinancing Note.

 

(17) On September 26, 2018, the Company refinanced a $500,000 12% note payable for $1.35 million from a private lender by executing a 9% 10-year note payable $17,101 monthly, including interest, until maturity.

 

(18) On November 1, 2018, the Company raised $2.35 million through the issuance of 12% unsecured promissory notes to certain investors, which notes were to mature on November 1, 2021. The notes paid interest-only in equal monthly installments, with a lump sum principal payment at maturity. Among the promissory notes were two notes with a principal of $450,000 and $200,000. The $450,000 note was in exchange for a $300,000 12% note and the $200,000 note was in exchange for a $100,000 note, both of which were included in the May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami. Also included in the $2.35 million borrowing are two notes for $500,000 and $100,000 borrowed from related parties (see Note 18) and one note for $300,000 borrowed from a non-officer employee in which the terms of the notes are the same as the rest of the lender group. These notes were paid off in relation to the September 2021 Refinancing Note.

 

(19) On November 1, 2018, we acquired a club in Chicago that was partially financed by a $4.5 million 6-year 7% seller note. See additional details related to the acquisition in Note 15. This note was paid off in relation to the September 2021 Refinancing Note.

 

(20) On November 5, 2018, we acquired a club in Pittsburgh that was partially financed by two seller notes payable. The first note is a 2-year 7% note for $2.0 million and the second is a 10-year 8% note for $5.5 million. See additional details related to the acquisition in Note 15. On September 30, 2020, the maturity date for the first note was extended to and fully paid off in February 2021. The second note was paid off in relation to the September 2021 Refinancing Note.

 

(21) On December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed for the remaining $2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest. Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity date.

 

(22) On February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%, with a construction loan with another bank, which had an interest rate of 6.0% adjusted after five years to prime plus 0.5% with a 6.0% floor per annum. The new construction loan, which had a maximum availability of $4.1 million, was to mature in 252 months from closing date and was payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized debt issuance costs of the old bank note to interest expense. There were certain financial covenants with which the Company was to be in compliance related to this financing. In March 2020, certain principal and interest payments for this note were deferred to its maturity date. This note was paid off in relation to the September 2021 Refinancing Note.

 

(23) In December 2019, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2022. The amendment did not have an impact in the Company’s results of operations and cash flows.

 

(24) On February 20, 2020, in relation to a $4.0 million 12% note payable earlier refinanced on August 15, 2018, the Company restructured the note with a private lender by executing a 12% 10-year note payable $57,388 monthly, including interest, starting March 2020. The restructured note eliminated a scheduled balloon principal payment of $4.0 million in August 2021. The refinancing did not have an impact on the Company’s results of operations and cash flows. This note was paid off in relation to the September 2021 Refinancing Note.

 

(25) On February 20, 2020, in relation to a $9.9 million 12% note payable that was partially paid during the December 2017 Refinancing Loan, the Company restructured the note, which had a balance of $5.2 million as of the amendment date, by executing a 12% 10-year note payable $74,515 monthly, including interest, starting March 2020. The restructured note eliminated a scheduled balloon principal payment of $3.8 million in October 2021. As a result of the refinancing, the Company wrote off approximately $25,400 in unamortized debt issuance cost as interest expense in our consolidated statement of operations for the year ended September 30, 2020. This note was paid off in relation to the September 2021 Refinancing Note.

 

(26) On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000 of $2,040,000 of notes to individuals that were due on May 1, 2020. The Company paid $300,000 to certain lenders and received $200,000 in new debt from existing lenders and their affiliates. The aggregate amount of debt due on these notes was then $1,940,000. On October 31, 2020, the Company negotiated extensions to November 1, 2021 on $1,690,000 of the $1,940,000 that were due on November 1, 2020. The Company paid $250,000 to a certain lender who only extended a portion of his original note. The remaining balance of these notes were paid off in relation to the September 2021 Refinancing Note.

 

(27) On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge amounting to $5.4 million. If not forgiven, under the terms of the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1% per annum. As of September 30, 2021, we have received eleven Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of those notices received forgave 100% of each of the eleven PPP loans totaling the amount of $5.3 million in principal and interest. 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. See Notes 3 and 10.

 

 

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

9. Debt – continued

 

(28) On January 25, 2021, the Company borrowed $2.175 million from a bank lender by executing a 20-year promissory note with an initial interest rate of 3.99% per annum. The note is payable $13,232 per month for the first five years after which the interest rate will be repriced at the then-current prime rate plus 1.0% per annum, with a floor rate of 3.99%. The Company paid approximately $25,000 in debt issuance costs at closing. See Note 15.

 

(29) On September 30, 2021, we entered into a $99.1 million term loan refinancing $85.7 million of existing bank and seller-financed real estate debt and to provide $12.3 million in cash that will be used to pay off existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing for the acquisition of 11 clubs and related real estate (see Note 15). The $99.1 million note has a term of 10 years with an initial interest rate of 5.25% per annum for the first five years, then adjusted to a rate equal to the then weekly average yield of U.S. Treasury Securities plus 350 basis points, with a floor rate of 5.25%. The note is payable in monthly payments of principal and interest of $668,051, based on a 20-year amortization period, with the balance paid at maturity. In connection with the transaction, we wrote off to interest expense approximately $103,000 of unamortized debt issuance costs related to the paid-off debts. We also paid approximately $1.0 million in loan costs, approximately $567,000 of which is capitalized and will be amortized together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using the effective interest method.

 

Future maturities of debt obligations as of September 30, 2021 consist of the following (in thousands):

 

   Regular Amortization    Balloon Payments    Total Payments 
2022  $6,625   $-   $6,625 
2023   4,825    3,676    8,501 
2024   5,094    -    5,094 
2025   5,409    -    5,409 
2026   5,745    -    5,745 
Thereafter   33,145    62,277    95,422 
 Total maturities of long-term debt, net of debt discount  $60,843   $65,953   $126,796 

 

(30) On October 12, 2021, we closed a debt financing transaction with 28 investors for unsecured promissory notes with a total principal amount of $17.0 million, all of which bear interest at a rate of 12% per annum. Of this amount, $9.5 million are promissory notes, payable interest only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2024. The remaining amount of the financing is $7.5 million in promissory notes, payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on October 12, 2024. Included in the $17.0 million borrowing are two notes for $500,000 and $150,000 borrowed from related parties (see Note 18) and two notes for $500,000 and $300,000 borrowed from two non-officer employees in which the terms of the notes are the same as the rest of the lender group.

 

(31) On October 18, 2021, in relation to an acquisition (see Note 15), the Company executed four seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% note payable in 120 equal monthly payments of $122,123 in principal and interest. The second promissory note was a 20-year $8.0 million 6% note payable in 240 equal monthly payments of $57,314 in principal and interest. The third promissory note was a 10-year $1.2 million 5.25% note payable in monthly payments of $8,086 in principal and interest based on a 20-year amortization period, with the balance payable at maturity date. The fourth note was a 20-year $1.0 million 6% note payable in 240 equal monthly payments of $7,215 in principal and interest.

 

(32) On November 8, 2021, in relation to an acquisition (see Note 15), the Company executed a $1.0 million 7-year promissory note with an interest rate of 4.0% per annum. The note is payable $13,669 per month, including principal and interest.