RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 1. Financial Statements. RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) March 31, 2022 September 30, 2021 (unaudited) ASSETS Current assets Cash and cash equivalents $ 38,067 $ 35,686 Accounts receivable, net 6,262 7,570 Current portion of notes receivable 292 220 Inventories 3,361 2,659 Prepaid expenses and other current assets 6,880 1,928 Assets held for sale 6,126 4,887 Total current assets 60,988 52,950 Property and equipment, net 203,434 175,952 Operating lease right-of-use assets, net 36,180 24,308 Notes receivable, net of current portion 5,411 2,839 Goodwill 54,484 39,379 Intangibles, net 125,284 67,824 Other assets 1,771 1,367 Total assets $ 487,552 $ 364,619 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 6,255 $ 4,408 Accrued liabilities 15,576 10,403 Current portion of debt obligations, net 11,177 6,434 Current portion of operating lease liabilities 2,306 1,780 Total current liabilities 35,314 23,025 Deferred tax liability, net 22,040 19,137 Debt, net of current portion and debt discount and issuance costs 166,903 118,734 Operating lease liabilities, net of current portion 35,517 24,150 Other long-term liabilities 355 350 Total liabilities 260,129 185,396 Commitments and contingencies (Note 10) Equity Preferred stock, $ 0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding — — Common stock, $ 0.01 par value per share; 20,000,000 shares authorized; 9,454,267 and 8,999,910 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively 94 90 Additional paid-in capital 77,553 50,040 Retained earnings 150,366 129,693 Total RCIHH stockholders’ equity 228,013 179,823 Noncontrolling interests ( 590 ) ( 600 ) Total equity 227,423 179,223 Total liabilities and equity $ 487,552 $ 364,619 See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents 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 March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Revenues Sales of alcoholic beverages $ 27,335 $ 20,273 $ 53,766 $ 37,633 Sales of food and merchandise 11,160 9,538 22,054 18,147 Service revenues 21,501 11,502 42,377 21,562 Other 3,696 2,746 7,331 5,115 Total revenues 63,692 44,059 125,528 82,457 Operating expenses Cost of goods sold Alcoholic beverages sold 4,896 3,730 9,730 6,992 Food and merchandise sold 3,840 3,029 7,797 5,918 Service and other 24 43 124 96 Total cost of goods sold (exclusive of items shown separately below) 8,760 6,802 17,651 13,006 Salaries and wages 16,530 11,200 33,035 22,686 Selling, general and administrative 18,437 12,618 36,923 24,770 Depreciation and amortization 2,877 2,117 5,071 4,140 Other charges (gains), net 7 1,481 ( 144 ) 1,431 Total operating expenses 46,611 34,218 92,536 66,033 Income from operations 17,081 9,841 32,992 16,424 Other income (expenses) Interest expense ( 2,864 ) ( 2,364 ) ( 5,468 ) ( 4,798 ) Interest income 112 62 218 122 Non-operating gains, net — 431 84 5,347 Income before income taxes 14,329 7,970 27,826 17,095 Income tax expense 3,356 1,938 6,289 1,554 Net income 10,973 6,032 21,537 15,541 Net loss (income) attributable to noncontrolling interests ( 21 ) 59 ( 10 ) 193 Net income attributable to RCIHH common shareholders $ 10,952 $ 6,091 $ 21,527 $ 15,734 Earnings per share Basic and diluted $ 1.15 $ 0.68 $ 2.28 $ 1.75 Weighted average number of common shares outstanding Basic and diluted 9,489,085 8,999,910 9,447,854 9,009,604 Dividends per share $ 0.05 $ 0.04 $ 0.09 $ 0.08 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except number of shares) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Noncontrolling Interests Total Equity Number of Shares Amount Number of Shares Amount Balance at September 30, 2021 8,999,910 $ 90 $ 50,040 $ 129,693 — $ — $ ( 600 ) $ 179,223 Issuance of common shares 500,000 5 30,357 — — — — 30,362 Payment of dividends — — — ( 380 ) — — — ( 380 ) Net income (loss) — — — 10,575 — — ( 11 ) 10,564 Balance at December 31, 2021 9,499,910 95 80,397 139,888 — — ( 611 ) 219,769 Purchase of treasury shares — — — — ( 45,643 ) ( 2,845 ) — ( 2,845 ) Canceled treasury shares ( 45,643 ) ( 1 ) ( 2,844 ) — 45,643 2,845 — — Payment of dividends — — — ( 474 ) — — — ( 474 ) Net income — — — 10,952 — — 21 10,973 Balance at March 31, 2022 9,454,267 $ 94 $ 77,553 $ 150,366 — $ — $ ( 590 ) $ 227,423 Balance at September 30, 2020 9,074,569 $ 91 $ 51,833 $ 100,797 — $ — $ ( 414 ) $ 152,307 Purchase of treasury shares — — — — ( 74,659 ) ( 1,794 ) — ( 1,794 ) Canceled treasury shares ( 74,659 ) ( 1 ) ( 1,793 ) — 74,659 1,794 — — Payment of dividends — — — ( 360 ) — — — ( 360 ) Net income (loss) — — — 9,643 — — ( 134 ) 9,509 Balance at December 31, 2020 8,999,910 90 50,040 110,080 — — ( 548 ) 159,662 Payment of dividends — — — ( 360 ) — — — ( 360 ) Net income (loss) — — — 6,091 — — ( 59 ) 6,032 Balance at March 31, 2021 8,999,910 $ 90 $ 50,040 $ 115,811 — $ — $ ( 607 ) $ 165,334 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except number of shares) (unaudited) For the Six Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,537 $ 15,541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,071 4,140 Loss (gain) on sale of businesses and assets ( 708 ) 86 Impairment of assets — 1,401 Unrealized loss on equity securities 1 67 Amortization of debt discount and issuance costs 136 101 Gain on debt extinguishment ( 83 ) ( 5,298 ) Noncash lease expense 1,238 848 Gain on insurance ( 321 ) ( 294 ) Doubtful accounts expense (reversal) on notes receivable 53 ( 58 ) Changes in operating assets and liabilities: Accounts receivable 1,065 3,137 Inventories ( 276 ) ( 31 ) Prepaid expenses, other current and other assets ( 5,360 ) 1,494 Accounts payable, accrued and other liabilities 5,508 ( 3,888 ) Net cash provided by operating activities 27,861 17,246 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of businesses and assets 2,910 8 Proceeds from insurance 485 294 Proceeds from notes receivable 82 61 Payments for property and equipment and intangible assets ( 13,990 ) ( 6,718 ) Acquisition of businesses, net of cash acquired ( 39,302 ) — Net cash used in investing activities ( 49,815 ) ( 6,355 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt obligations, including related party proceeds of $ 650 and $ 0 , respectively 35,742 2,176 Payments on debt obligations ( 7,290 ) ( 5,977 ) Purchase of treasury stock ( 2,845 ) ( 1,794 ) Payment of dividends ( 854 ) ( 720 ) Payment of loan origination costs ( 418 ) ( 25 ) Net cash provided by (used in) financing activities 24,335 ( 6,340 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,381 4,551 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,686 15,605 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,067 $ 20,156 CASH PAID DURING PERIOD FOR: Interest $ 5,064 $ 5,512 Income taxes $ 4,008 $ 29 7 Table of Contents Noncash investing and financing transactions: Debt incurred in connection with acquisition of businesses $ 22,200 $ — Debt incurred in connection with purchase of property and equipment $ 2,625 $ — Note receivable from sale of property $ 2,700 $ — Issuance of shares of common stock for acquisition of businesses: Number of shares 500,000 — Fair value $ 30,362 $ — Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases $ 19,187 $ — Unpaid liabilities on capital expenditures $ 1,201 $ 98 See accompanying notes to unaudited condensed consolidated financial statements. 8 Table of Contents 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 and six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022. 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. 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 presented operational challenges. Our strategy was 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. 9 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See 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. As of the date of this report, all COVID-related restrictions affecting our businesses have been lifted. 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 March 31, 2022, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of March 31, 2022. 4. Acquisitions and Dispositions On October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $ 3.0 million for $ 3.2 million, of which $ 2.7 million was in the form of a secured promissory note. This 7 % note receivable has a term of eight years and is collectible in equal monthly installments of $ 21,544 in principal and interest with the remaining balance to be paid at maturity. On October 8, 2021, the Company sold one of its clubs in South Houston for $ 300,000 . 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, with interest rates on promissory notes reflective of market yields). The acquisition was structured by entering into nine asset purchase agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in that business except certain excluded assets, and two stock purchase agreements, where a newly formed subsidiary purchased 100 % of the capital stock of two club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into a real estate purchase and sale agreement for six real estate properties and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the sellers. The acquisition gives the Company presence in four additional states. We paid for the acquisition with $ 36.8 million in cash, $ 21.2 million in four seller-financed notes (see Note 7), and 500,000 shares of our common stock. The preliminary fair value of the consideration transferred is as follows (in thousands): Cash $ 36,800 Notes payable 21,200 Common stock 30,362 Total consideration fair value $ 88,362 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, measurement period adjustments and subject to any working capital 10 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) adjustments, the amount of goodwill is estimated to be $ 13.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $ 9.3 million of the recognized goodwill will be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 18, 2021: Current assets $ 386 Property and equipment 19,534 Licenses 50,080 Trademarks 7,460 Deferred tax liability ( 2,903 ) Total net assets acquired 74,557 Goodwill 13,805 Acquisition price fair value $ 88,362 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 was not part of the acquisition. See Note 13. In connection with the acquisition, we incurred acquisition-related expenses of approximately $ 417,000 ($ 173,000 recognized in fiscal 2021 and $ 244,000 recognized in fiscal 2022), of which $ 12,000 and $ 12,000 were expensed during the three and six months ended March 31, 2021 and $ 0 and $ 244,000 were expensed during the three and six months ended March 31, 2022, and in those periods included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until March 31, 2022, the eleven acquired clubs contributed revenues of $ 8.4 million and $ 14.4 million and income from operations of $ 2.0 million and $ 3.7 million during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statements of income. The following table presents the unaudited pro forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amounts and number of shares): For the Three Months Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Pro forma revenues $ 63,692 $ 47,393 $ 127,254 $ 90,777 Pro forma net income attributable to RCIHH common stockholders $ 10,953 $ 5,615 $ 20,945 $ 15,507 Pro forma earnings per share – basic and diluted $ 1.15 $ 0.59 $ 2.22 $ 1.63 Pro forma weighted average number of common shares outstanding 9,489,085 9,499,910 9,447,854 9,509,604 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 11 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 500,000 shares of our common stock issued as partial consideration for the acquisition. On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary purchase price of $ 3.5 million, by which $ 2.5 million was paid in cash at closing and $ 1.0 million through a seller-financed 7-year promissory note with an interest rate of 4.0 % per annum. The $ 3.5 million acquisition price is preliminarily allocated $ 2.0 million to real estate, $ 200,000 to tangible assets, and $ 1.3 million to goodwill, which is deductible for tax purposes. The note is payable $ 13,669 per month, including principal and interest. See Note 7. From the date of acquisition until March 31, 2022, the acquired club contributed revenues of $ 424,000 and $ 713,000 and loss from operations of $ 28,000 and $ 24,000 during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statement of income. The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company. On December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased, for $ 7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating lease liability related to the discontinued lease. On March 1, 2022, the Company acquired real estate in Stafford, Texas worth $ 3.5 million for a future Bombshells location. The Company secured a $ 2.6 million loan in relation to the purchase (see Note 7). On March 1, 2022, the Company acquired real estate in Lubbock, Texas worth $ 400,000 to transfer one of our existing clubs due to eminent domain. On March 23, 2022, the Company sold a property classified as held-for-sale with a carrying value of $ 1.9 million for $ 2.1 million in cash. The Company used $ 816,000 of the proceeds to pay off a loan related to the property. 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. 12 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands): Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 18,673 $ 8,662 $ — $ 27,335 $ 12,634 $ 7,639 $ — $ 20,273 Sales of food and merchandise 4,498 6,662 — 11,160 4,082 5,456 — 9,538 Service revenues 21,501 — — 21,501 11,446 56 — 11,502 Other revenues 3,502 9 185 3,696 2,625 ( 16 ) 137 2,746 $ 48,174 $ 15,333 $ 185 $ 63,692 $ 30,787 $ 13,135 $ 137 $ 44,059 Recognized at a point in time $ 47,722 $ 15,332 $ 185 $ 63,239 $ 30,382 $ 13,134 $ 136 $ 43,652 Recognized over time 452 * 1 — 453 405 * 1 1 407 $ 48,174 $ 15,333 $ 185 $ 63,692 $ 30,787 $ 13,135 $ 137 $ 44,059 Six Months Ended March 31, 2022 Six Months Ended March 31, 2021 Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 36,840 $ 16,926 $ — $ 53,766 $ 22,268 $ 15,365 $ — $ 37,633 Sales of food and merchandise 9,087 12,967 — 22,054 7,505 10,642 — 18,147 Service revenues 42,185 192 — 42,377 21,444 118 — 21,562 Other revenues 6,843 19 469 7,331 4,767 16 332 5,115 $ 94,955 $ 30,104 $ 469 $ 125,528 $ 55,984 $ 26,141 $ 332 $ 82,457 Recognized at a point in time $ 94,066 $ 30,102 $ 468 $ 124,636 $ 55,217 $ 26,140 $ 329 $ 81,686 Recognized over time 889 * 2 1 892 767 * 1 3 771 $ 94,955 $ 30,104 $ 469 $ 125,528 $ 55,984 $ 26,141 $ 332 $ 82,457 * Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606. 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): Balance at September 30, 2021 Consideration Received Recognized in Revenue Balance at March 31, 2022 Ad revenue $ 84 $ 450 $ ( 330 ) $ 204 Expo revenue 151 178 — 329 Other (including franchise fees) 119 9 ( 20 ) 108 $ 354 $ 637 $ ( 350 ) $ 641 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. 13 Table of Contents 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): March 31, 2022 September 30, 2021 Credit card receivables $ 2,152 $ 1,447 Income tax refundable 2,148 4,472 Insurance receivable 21 185 ATM in-transit 443 277 Other (net of allowance for doubtful accounts of $ 517 and $ 382 , respectively) 1,498 1,189 Total accounts receivable, net $ 6,262 $ 7,570 Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6 % to 9 % per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to $ 154,000 and $ 102,000 as of March 31, 2022 and September 30, 2021, respectively. The components of prepaid expenses and other current assets are as follows (in thousands): March 31, 2022 September 30, 2021 Prepaid insurance $ 4,712 $ 277 Prepaid legal 25 112 Prepaid taxes and licenses 565 380 Prepaid rent 471 309 Other 1,107 850 Total prepaid expenses and other current assets $ 6,880 $ 1,928 A reconciliation of goodwill as of March 31, 2022 and September 30, 2021 is as follows (in thousands): Gross Accumulated Impairment Net Balance at September 30, 2021 $ 59,967 $ 20,588 $ 39,379 Acquisitions (see Note 4) 15,105 — 15,105 Balance at March 31, 2022 $ 75,072 $ 20,588 $ 54,484 14 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The components of intangible assets, net are as follows (in thousands): March 31, 2022 September 30, 2021 Indefinite-lived: Licenses $ 115,266 $ 65,186 Trademarks 9,675 2,215 Domain names 23 23 Definite-lived: Noncompete agreements 92 182 Discounted leases 82 86 Software 146 132 Total intangible assets, net $ 125,284 $ 67,824 The components of accrued liabilities are as follows (in thousands): March 31, 2022 September 30, 2021 Insurance $ 4,558 $ 54 Sales and liquor taxes 2,270 2,261 Payroll and related costs 4,470 3,220 Property taxes 1,063 2,178 Interest 411 145 Patron tax 399 452 Unearned revenues 641 354 Lawsuit settlement 301 378 Other 1,463 1,361 Total accrued liabilities $ 15,576 $ 10,403 15 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The components of selling, general and administrative expenses are as follows (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Taxes and permits $ 2,361 $ 2,084 $ 4,597 $ 4,112 Advertising and marketing 2,248 1,384 4,631 2,573 Supplies and services 2,175 1,488 4,155 2,716 Insurance 2,481 1,427 4,876 2,884 Legal 898 812 1,958 1,673 Lease 1,572 972 3,212 1,949 Charge card fees 1,466 695 2,797 1,259 Utilities 1,108 858 2,043 1,571 Security 1,050 830 2,137 1,690 Accounting and professional fees 622 297 1,968 1,012 Repairs and maintenance 903 677 1,628 1,250 Other 1,553 1,094 2,921 2,081 Total selling, general and administrative expenses $ 18,437 $ 12,618 $ 36,923 $ 24,770 The components of other charges (gains), net are as follows (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Impairment of assets $ — $ 1,401 $ — $ 1,401 Settlement of lawsuits 385 1 577 153 Loss (gain) on disposal of businesses and assets ( 58 ) 91 ( 400 ) 86 Gain on insurance ( 320 ) ( 12 ) ( 321 ) ( 209 ) Other charges (gains), net $ 7 $ 1,481 $ ( 144 ) $ 1,431 The components of non-operating gains (losses), net are as follows (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Gain on debt extinguishment $ — $ 380 $ 85 $ 5,329 Unrealized loss on equity securities — ( 34 ) ( 1 ) ( 67 ) Other — 85 — 85 Non-operating gains, net $ — $ 431 $ 84 $ 5,347 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 $ 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 16 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12) 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. 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 10 -year $ 11.0 million 6 % secured 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 % secured 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. On November 8, 2021, in relation to an acquisition (see Note 4), 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. 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 and is personally guaranteed by the Company CEO, Eric Langan (see Note 12). 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 is to maintain a debt service coverage of not less than 1.4 times, reviewed annually. On March 1, 2022, the Company borrowed $ 2.6 million from a bank lender in relation to a purchase of real estate (see Note 4). The 21 -year promissory note has an initial interest rate of 4.25 % per annum, repriced after five years and then again annually to prime plus 1 % with a floor rate of 4.25 %. The note is payable interest only during the first 12 months; then the next 48 months with $ 16,338 equal monthly payments of principal and interest; then the next 191 months at an equal monthly payment based on a 20 -year amortization; with the balance of principal and interest payable at the 252nd month. Future maturities of long-term debt as of March 31, 2022 are as follows: $ 11.4 million, $ 7.5 million, $ 23.4 million, $ 7.9 million, $ 8.4 million and $ 121.4 million for the twelve months ending March 31, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively. Of the maturity schedule mentioned above, $ 651,000 , $ 0 , $ 15.6 million, $ 0 , $ 0 and $ 71.9 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $ 1.9 million and $ 1.6 million as of March 31, 2022 and September 30, 2021, respectively. 8. Equity On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock with a fair value of $ 30.4 million at issuance. See Note 4. 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 300,000 . 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. On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to six members of management subject to the approval of the 2022 Plan. 17 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Income Taxes Income tax expense was $ 3.4 million and $ 6.3 million during the three and six months ended March 31, 2022, respectively, compared to $ 1.9 million and $ 1.6 million during the three and six months ended March 31, 2021, respectively. The effective income tax expense rate was 23.4 % and 22.6 % for the three and six months ended March 31, 2022, respectively, compared to 24.3 % and 9.1 % for the three and six months ended March 31, 2021, respectively. Our effective income 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 March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 2.9 % 7.0 % 2.9 % 5.0 % Permanent differences 0.5 % ( 5.9 ) % 0.4 % ( 7.1 ) % Change in valuation allowance — % — % — % ( 7.4 ) % Tax credits ( 3.1 ) % 2.2 % ( 2.6 ) % ( 2.3 ) % Other 2.1 % — % 0.8 % — % Total income tax expense 23.4 % 24.3 % 22.6 % 9.1 % 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 became 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 included, 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 were 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 $ 271,000 to $ 579,000 for an aggregate amount of $ 4.2 million; our shared-services subsidiary received $ 1.1 million; and one of our lounges received $ 124,000 . None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During fiscal 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 and were included in non-operating gains (losses), net in our consolidated statement of operations for the fiscal year ended September 30, 2021. 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 Note 3. 18 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 $ 10.0 million in equal monthly installments of $ 119,000 , without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $ 5 per customer. For accounting purposes, the Company discounted the $ 10.0 million at an imputed interest rate of 9.6 %, establishing a net present value for the settlement of $ 7.2 million. As a consequence, the Company recorded an $ 8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $ 7.2 million and the amount previously accrued for the tax. In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $ 687,815 with $ 195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $ 8,200 without interest. The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to $ 130,000 and $ 813,000 as of March 31, 2022 and September 30, 2021, respectively. See Note 14. A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $ 5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas has filed an appeal. We will continue to vigorously defend the matter through the appeals process. Indemnity Insurance Corporation As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date. On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014. On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100 % of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of March 31, 2022, we have 1 remaining unresolved claim out of the original 71 claims. 19 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. On January 24, 2022, a Joint Notice of Settlement was filed. On April 15, 2022, counsel for Plaintiffs filed an Unopposed Motion for (I) Preliminary Approval of Class Action Settlement; (II) Certification of the Settlement Class; and (III) Approval of the Notice of Settlement. On April 28, 2022, the Court entered an Order preliminarily approving the Class Action Settlement and Notice. The Court set the final approval hearing for June 24, 2022. Plaintiffs have sought to extend the hearing until August to comply with certain potential notice and related obligations to the purported class, and Defendants concur with the request. 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. On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed their Motions to Dismiss. Briefing should be concluded within the next 30 days and the Motions will be ripe for consideration. 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. 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 20 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $ 1.4 million and its share of punitive damages is $ 4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself. As set forth in the risk factors as disclosed in 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 three and six months ended March 31, 2022 amount to approximately $ 385,000 and $ 577,000 , respectively, and for the three and six months ended March 31, 2021 amount to approximately $ 1,000 and $ 153,000 , respectively. As of March 31, 2022 and September 30, 2021, the Company has accrued $ 301,000 and $ 378,000 in accrued liabilities, respectively, related to settlement of lawsuits. 21 Table of Contents 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 unaudited condensed consolidated financial statements. Below is the financial information related to the Company’s segments (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Revenues (from external customers) Nightclubs $ 48,174 $ 30,787 $ 94,955 $ 55,984 Bombshells 15,333 13,135 30,104 26,141 Other 185 137 469 332 $ 63,692 $ 44,059 $ 125,528 $ 82,457 Income (loss) from operations Nightclubs $ 19,126 $ 10,468 $ 37,862 $ 18,963 Bombshells 3,468 3,142 6,270 5,859 Other ( 34 ) ( 139 ) ( 77 ) ( 214 ) General corporate ( 5,479 ) ( 3,630 ) ( 11,063 ) ( 8,184 ) $ 17,081 $ 9,841 $ 32,992 $ 16,424 Depreciation and amortization Nightclubs $ 2,206 $ 1,413 $ 3,753 $ 2,737 Bombshells 454 461 883 918 Other 7 36 13 72 General corporate 210 207 422 413 $ 2,877 $ 2,117 $ 5,071 $ 4,140 Capital expenditures Nightclubs $ 1,662 $ 2,201 $ 10,890 $ 3,331 Bombshells 1,901 3,104 2,205 3,255 Other 359 ( 2 ) 548 1 General corporate 218 126 347 131 $ 4,140 $ 5,429 $ 13,990 $ 6,718 22 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2022 September 30, 2021 Total assets Nightclubs $ 396,560 $ 280,561 Bombshells 55,382 52,073 Other 2,418 1,573 General corporate 33,192 30,412 $ 487,552 $ 364,619 Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2022 amounting to $ 3.2 million and $ 31,000 , respectively, and for the six months ended March 31, 2022 amounting to $ 6.5 million and $ 199,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2022 amounting to $ 53,000 and $ 122,000 , respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2021 amounting to $ 2.8 million and $ 31,000 , respectively, and for the six months ended March 31, 2021 amounting to $ 5.6 million and $ 141,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2021 amounting to $ 49,000 and $ 75,000 , respectively. These intercompany revenue amounts are eliminated upon consolidation. General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes. Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment. 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 March 31, 2022 and September 30, 2021, was $ 116.7 million and $ 99.7 million, respectively. Included in the $ 17.0 million borrowing on October 12, 2021 (see Note 7) are notes borrowed from related parties—one note for $ 500,000 (Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay) in which the terms of the notes are the same as the rest of the lender group. 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 $ 3,112 and $ 27,149 during the three and six months ended March 31, 2022, respectively, and $ 114,910 and $ 114,910 during the three and six months ended March 31, 2021, respectively. As of March 31, 2022 and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $ 1,299 and $ 12,205 , respectively, in unpaid billings. TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2022 and 2021. A son-in-law of Eric Langan owns a 50 % interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $ 3,809 and $ 3,809 for the three and six months ended March 31, 2022, respectively, and $ 0 and $ 0 for the three and six months ended March 31, 2021, respectively. Amounts billed directly to the Company were $ 3,704 and $ 84,700 for the three and six months ended March 31, 2022, respectively, and $ 55,621 and $ 62,751 for the three and six 23 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) months ended March 31, 2021, respectively. As of March 31, 2022 and September 30, 2021, the Company owed TW Mechanical $ 0 and $ 7,500 , respectively, in unpaid direct billings. 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 and six months ended March 31, 2022 and 2021 is as follows (in thousands): Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 Six Months Ended March 31, 2022 Six Months Ended March 31, 2021 Operating lease expense – fixed payments $ 1,136 $ 828 $ 2,267 $ 1,657 Variable lease expense 233 44 567 108 Short-term equipment and other lease expense (includes $ 58 and $ 102 recorded in advertising and marketing for the three months ended March 31, 2022 and 2021, respectively, and $ 130 and $ 159 for the six months ended March 31, 2022 and 2021, respectively; and $ 107 and $ 116 recorded in repairs and maintenance for the three months ended March 31, 2022 and 2021, respectively, and $ 190 and $ 204 for the six months ended March 31, 2022 and 2021, respectively; see Note 6) 368 318 698 547 Sublease income ( 1 ) ( 1 ) ( 3 ) ( 3 ) Total lease expense, net $ 1,736 $ 1,189 $ 3,529 $ 2,309 Other information: Operating cash outflows from operating leases $ 1,690 $ 1,162 $ 3,439 $ 2,253 Weighted average remaining lease term – operating leases 12 years 12 years Weighted average discount rate – operating leases 5.6 % 6.1 % Future maturities of operating lease liabilities as of March 31, 2022 are as follows (in thousands): Principal Payments Interest Payments Total Payments April 2022 - March 2023 $ 2,306 $ 2,080 $ 4,386 April 2023 - March 2024 2,503 1,938 4,441 April 2024 - March 2025 2,712 1,789 4,501 April 2025 - March 2026 2,957 1,627 4,584 April 2026 - March 2027 3,118 1,452 4,570 Thereafter 24,227 5,906 30,133 $ 37,823 $ 14,792 $ 52,615 The above table of maturities of operating lease liabilities does not include future payments of an assigned lease executed in April 2022 related to the October 18, 2021 acquisition, which has a total of approximately $ 2.6 million of future lease payments until August 2027. 24 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 14. Subsequent Events On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability. See Note 10. On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $ 16.0 million. The acquisition price includes $ 3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $ 13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $ 2.0 million in cash at closing; (2) $ 6.0 million under a 10 % three-year promissory note payable in 35 equal monthly payments of $ 79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $ 5.0 million under a 10 % ten-year interest-only promissory note payable in 119 equal monthly payments of $ 41,667 in interest, with a balloon payment of the total $ 5.0 million in principal plus accrued interest due at maturity. The Company acquired 100 % of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $ 5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement. Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired, along with the determination of any goodwill or gain on the transaction. The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities. On May 2, 2022, the Company signed a franchise development agreement with a private investor to open three Bombshells locations in the state of Alabama over a period of five years . Upon execution of the agreement, the Company received $ 50,000 in development fees representing 100 % of the initial franchise fee of the first restaurant. Subsequent to the reporting date until May 6, 2022, the Company purchased 37,700 shares of its own common stock at a cost of $ 2.4 million. 25 Table of Contents