Acquisitions and Dispositions

12 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Acquisitions and Dispositions

14. Acquisitions and Dispositions

2015 Acquisitions

On October 30, 2014, a 51% owned subsidiary of the Company acquired certain assets and liabilities of Robust Energy LLC for $200,000 in cash and 200,000 shares of its restricted common stock for a total purchase price of $3.6 million. The Company also agreed to issue 50,000 shares of RCIHH common stock each to the two principals of Robust Energy LLC if Robust has net income of at least $1 million during the 2015 calendar year. The principals entered into a Lock-Up Agreement with the Company in connection with the issuance by the Company of its shares of common stock as explained above, which will provide that none of the shares will be sold for a period of one year after the date of issuance and, thereafter, neither principal will sell more than 1/6th of their respective shares per month that they receive in connection herewith. Robust is an energy drink distributor, targeting the on-premises bar and mixer market.

The following information summarizes the allocation of fair values assigned to the assets and liabilities at the purchase date (in thousands).

Inventory and accounts receivable	$	500
Equipment, furniture and fixtures		356
Definite-lived intangibles		4,931
Goodwill		5,326
Accounts payable		(1,482	)
Notes payable		(963	)
Deferred tax liability		(1,726	)
Noncontrolling interest		(3,392	)
Net assets	$	3,550

In accordance with U.S. GAAP, the Company recorded a gain of approximately $229,000 on the value of its earlier 15% ($750,000) investment in this company.

Goodwill from this transaction is deductible for tax purposes.

On January 13, 2015, a Company subsidiary purchased Down in Texas Saloon gentlemen’s club in an Austin, Texas suburb. As part of the transaction, another subsidiary also purchased the club’s real estate. Total consideration of $6.8 million consisted of $3.5 million for the club business and $3.3 million for its 3.5 acres of real estate. Payment was in the form of $1 million in cash and $1.4 million in seller financing at 6% annual interest, with the balance provided by commercial bank financing at a variable interest rate equal to the prime rate plus 2%, but in no event less than 6.5%. See Note 8.

The following information summarizes the allocation of fair values assigned to the assets at the purchase date (in thousands).

Buildings and land	$	3,130
Furniture and fixtures		20
Inventory		4
SOB license		3,546
Noncompete		100
Net assets	$	6,800

On May 4, 2015, a Company subsidiary purchased The Seville gentlemen’s club in Minneapolis, Minnesota. As part of the transaction, another subsidiary also purchased the club’s real estate. Total consideration of $8.5 million consisted of $4.5 million for the assets of the club business and $4.0 million for the real estate. Payment was made through bank financing of $5.7 million at 5.5% interest, seller financing of $1.8 million at 6%, and cash of $1.1 million. See Note 8.

The following information summarizes the allocation of fair values assigned to the assets at the purchase date (in thousands).

Buildings and land	$	4,050
Furniture and fixtures		200
Inventory		109
Goodwill		3,941
Noncompete		200
Net assets	$	8,500

Goodwill from this transaction is deductible for tax purposes.

2016 Dispositions

In September 2016, we sold a 31% interest in Robust for a $2.0 million note back to its former owner, retaining a 20% interest in the business. The sale of the 31% interest resulted in a loss in control of Robust and we recognized a loss of $184,000 at the date of deconsolidation. The loss was measured as the excess of the carrying amount of the assets and liabilities over the aggregate of 1) the fair value of the $2 million note received, 2) the fair value of retained non-controlling interest measured at $1.2 million, and 3) the carrying amount of the noncontrolling interest. At the date of deconsolidation, we no longer held a significant influence in Robust and have accounted for our 20% remaining interest as a cost method investment. The fair value of the remaining investment was $0 and $1.2 million as of September 30, 2017 and 2016. See Note 16 for further discussion of the other-than-temporary impairment recognized in 2017.

In September 2016, the Company sold two adult clubs and closed a Bombshells location. Following are the aggregate details of the sales:

● Sales price — $6.3 million

● Cash received — $3.5 million

● Notes receivable — $2.8 million

● Gain on sale — $1.1 million of adult club

● Loss on closure of Bombshells — $550,000

● Deferred gain on sale of adult club (gain recognized as note collected) — $399,000

The notes receivable are payable as follows:

● $1.8 million payable at 6% over 240 months.

● $1.0 million payable at 9% over 120 months.

The gain/loss on sale transactions above includes a tax benefit of the deferred tax liabilities amounting to $2.5 million, which were released upon the sale of the entities.

2017 Acquisitions

On April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St. Louis area, as well as the club’s building and land, adjacent land, and a nearby building and land that can be used for another gentlemen’s club. The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at closing.

The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

Land and building	$	2,320
Furniture and equipment		141
Noncompete		200
Other assets		74
Goodwill		1,539
Accrued liability		(75	)
Net assets	$	4,199

Management believes that the recorded goodwill represents the Company’s expansion into the Greater St. Louis area. Goodwill will not be amortized, but will be tested at least annually for impairment. The goodwill balance of $1.5 million, which was recognized in the Nightclubs segment, is deductible for tax purposes.

On May 8, 2017, a subsidiary of the Company acquired the company that owns Scarlett’s Cabaret Miami in Pembroke Park, Florida along with certain related intellectual property for a total consideration of $26.0 million, payable $5.4 million at closing, $5.0 million after six months through a short-term 5% note, and $15.6 million through a 12-year amortizing 8% note. See Note 8.

The following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

Inventory	$	109
Leasehold improvements		1,222
Furniture and equipment		633
Noncompete		400
SOB license		20,196
Tradename		2,215
Goodwill		1,177
Net assets	$	25,952

Management believes that the recorded goodwill represents the Company’s strong market positioning in the South Florida area and with its different clientele from Tootsie’s Cabaret, which is five miles away, the two are complementary to each other including management synergies. Goodwill for this acquisition will not be amortized, but will be tested at least annually for impairment. The goodwill amount of $1.2 million, which was recognized in the Nightclubs segment, is deductible for tax purposes.

In conjunction with the acquisition, the Company made an election under IRS Code 338(h)10 to treat the acquisition as an asset purchase for tax purposes. As a result, no deferred taxes were recorded upon acquisition.

The Company’s pro forma results of operations for the acquisitions have not been presented because the effect of the acquisitions was not material to our consolidated financial statements. Since the acquisition dates, the two acquisitions generated combined revenues of $5.6 million that are included in the Company’s consolidated statements of income for the year ended September 30, 2017.

2017 Dispositions

On January 13, 2017, we closed the sale on one of our non-income producing properties, included in assets held for sale on our condensed consolidated balance sheet as of September 30, 2016, for $2.2 million in cash, recognizing approximately $116,000 loss on the sale. Proceeds were used to pay off the remaining $1.5 million of a related 11% balloon note, which was due in 2018. The Company paid a $75,000 prepayment penalty to pay off the debt.

On June 6, 2017, the Company closed on the sale of another non-income producing property, included in assets held for sale on the Company’s condensed consolidated balance sheet as of September 30, 2016, for $1.5 million, recognizing approximately $0.9 million gain on the sale. The buyer owned one of the Company’s notes payable, hence, the Company exchanged the property for a $1.5 million reduction in its note payable.