What changed in this filing

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Item 1. Financial Statements

2022-08-09 compared with 2022-05-09 · 191 added, 128 removed, 599 unchanged (35% of the section changed)

3 unchanged sentences

(in thousands, except par value and number of shares)

March 31, 2022 September 30, 2021

June 30, 2022 September 30, 2021

Current assets

31 unchanged sentences

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

9,286,198 and 8,999,910 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively

Additional paid-in capital 68,342 50,040

9 unchanged sentences

For the Three Months Ended

March 31, For the Six Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

51 unchanged sentences

Balance at March 31, 2022 9,454,267 94 77,553 150,366 — — ( 590 ) 227,423

Purchase of treasury shares — — — — ( 168,069 ) ( 9,212 ) — ( 9,212 )

Canceled treasury shares ( 168,069 ) ( 1 ) ( 9,211 ) — 168,069 9,212 — —

Payment of dividends — — — ( 468 ) — — — ( 468 )

Net income — — — 13,902 — — 40 13,942

Balance at June 30, 2022

9,286,198 $ 93 $ 68,342 $ 163,800 — $ — $ ( 550 ) $ 231,685

9 unchanged sentences

Balance at March 31, 2021 8,999,910 90 50,040 115,811 — — ( 607 ) 165,334

Payment of dividends — — — ( 360 ) — — — ( 360 )

Net income — — — 12,302 — — 19 12,321

Balance at June 30, 2021

8,999,910 $ 90 $ 50,040 $ 127,753 — $ — $ ( 588 ) $ 177,295

3 unchanged sentences

(in thousands, except number of shares)

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

2 unchanged sentences

Depreciation and amortization 7,636 6,197

Loss (gain) on sale of businesses and assets ( 708 ) 86

Deferred income tax benefit ( 409 ) ( 430 )

Gain on sale of businesses and assets ( 1,282 ) ( 626 )

Impairment of assets 1,722 1,672

52 unchanged sentences

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.

Operating results for the three and nine months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022 .

Recent Accounting Standards and Pronouncements

19 unchanged sentences

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.

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.

Ongoing Impact of COVID-19 Pandemic and Potential Economic Slowdown

Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March 2020.

We had a major disruption in our business operations that affected 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.

In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic.

There have been several variants to the coronavirus since then that threatened our operations throughout the period of recovery.

We continue to adhere to state and local government mandates regarding the pandemic.

Since early 2021, there has been a worldwide increase in inflation.

In the event this global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

We evaluated forecasted cash flows considering a probable economic slowdown on sales and, to a lesser extent, the future assumed impact of the COVID-19 pandemic.

Based on the evaluation we conducted during the interim period ended June 30, 2022, we determined that our assets are impaired in a total amount of $ 1.7 million comprised of $ 400,000 in goodwill (for one club), $ 1.0 million in property and equipment ($ 379,000 for one club and $ 650,000 for one Bombshells), and $ 293,000 in SOB license (for one club).

Acquisitions and Dispositions

15 unchanged sentences

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

adjustments, the amount of goodwill is estimated to be $ 13.8 million.

Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital 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.

Approximately $ 9.3 million of the recognized goodwill will be deductible for tax

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 18, 2021:

2 unchanged sentences

Licenses 50,080

Trademarks 7,460

Tradenames 7,460

Deferred tax liability ( 2,903 )

2 unchanged sentences

Acquisition price fair value $ 88,362

Licenses and trademarks will not be amortized but will be tested at least annually for impairment.

Licenses and tradenames 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.

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.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 403,000 ($ 162,000 recognized in fiscal 2021 and $ 241,000 recognized in fiscal 2022), of which $ 30,000 and $ 42,000 were expensed during the three and nine months ended June 30, 2021 and $ 7,000 and $ 241,000 were expensed during the three and nine months ended June 30, 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 June 30, 2022, the eleven acquired clubs contributed revenues of $ 10.3 million and $ 24.7 million and income from operations of $ 3.6 million and $ 7.3 million during the three and nine months ended June 30, 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,

For the Three Months Ended June 30,

For the Nine Months Ended June 30,

2022 2021 2022 2021

6 unchanged sentences

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

Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021.

Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

1 unchanged sentence

The note is payable $ 13,669 per month, including principal and interest.

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 incurred approximately $ 21,000 of acquisition-related costs for this acquisition, of which $ 11,000 was incurred in fiscal 2021 and $ 10,000 was incurred in the first quarter of fiscal 2022, both of which were included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $ 433,000 and $ 1,146,000 and loss from operations of $ 5,000 and $ 29,000 during the three and nine months ended June 30, 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.

1 unchanged sentence

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.

On March 1, 2022, the Company acquired real estate in Stafford, Texas for $ 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 1, 2022, the Company acquired real estate in Lubbock, Texas for $ 400,000 to move one of our existing clubs due to eminent domain on the current location.

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.

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.

Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.

The preliminary fair value of the consideration transferred is as follows (in thousands) as of May 2, 2022:

Notes payable 11,000

Total consideration fair value $ 16,000

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, including the fair value of the contingent debt consideration.

As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items.

Goodwill will not be amortized but will be tested at least

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

annually for impairment.

The recognized goodwill will not be deductible for tax purposes.

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022:

Current assets $ 172

Property and equipment 5,336

Licenses 4,510

Tradenames 1,110

Deferred tax liability ( 2,443 )

Total net assets acquired 8,685

Goodwill 7,315

Acquisition price fair value $ 16,000

Licenses and tradenames will not be amortized but will be tested at least annually for impairment.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 8,000 and $ 8,000 expensed during the three and nine months ended June 30, 2022, respectively, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $ 1.1 million and $ 1.1 million and income from operations of $ 497,000 and $ 497,000 during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statements of income.

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 17, 2022, the Company sold a property classified as held-for sale with a carrying value of $ 1.1 million for $ 1.7 million in cash.

The Company used $ 1.6 million of the proceeds to pay off a loan related to the property.

On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $ 3.3 million for a future Bombshells location.

The Company secured a $ 2.2 million loan in relation to the purchase (see Note 7).

On July 12, 2022, the Company received $ 6.0 million from the Philadelphia Regional Port Authority for one of the Company's rental properties, with a carrying value of $ 4.9 million, due to eminent domain.

The Company paid the current lessee a lease termination fee of $ 250,000 , which will be included in other charges (gains), net in our consolidated statement of income for the year ending September 30, 2022.

The Company used $ 2.1 million of the proceeds to pay down a loan related to the property.

On July 21, 2022, the Company acquired a club in Odessa, Texas for a total of $ 1.8 million, of which $ 1.0 million was for the real estate and $ 800,000 for the adult entertainment business.

The Company paid $ 1.0 million at closing for the real estate and executed an $ 800,000 6 % seller-financed promissory note for the business.

The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest.

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 and the debt consideration, along with the determination of any goodwill or gain on the transaction.

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 July 27, 2022, the Company completed an acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $ 25.0 million.

The acquisition price includes (1) $ 20.0 million for the adult entertainment business covered in a stock purchase agreement payable $ 10.0 million in cash at closing and $ 10.0 million under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million for the real estate property covered in an asset purchase agreement payable under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest.

In the stock purchase agreement, the Company acquired 100 % of the capital stock of the company which owned the adult entertainment business.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

8 unchanged sentences

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

Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

7 unchanged sentences

$ 54,684 $ 15,789 $ 241 $ 70,714 $ 41,031 $ 16,077 $ 752 $ 57,860

Six Months Ended March 31, 2022 Six Months Ended March 31, 2021

Nine Months Ended June 30, 2022 Nine Months Ended June 30, 2021

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

16 unchanged sentences

Revenue Balance at

March 31, 2022

June 30, 2022

Ad revenue $ 84 $ 530 $ ( 480 ) $ 134

5 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Selected Account Information

The components of accounts receivable, net are as follows (in thousands):

March 31, 2022 September 30, 2021

June 30, 2022 September 30, 2021

Credit card receivables $ 1,800 $ 1,447

4 unchanged sentences

Total accounts receivable, net $ 3,955 $ 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.

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 $ 0 and $ 102,000 as of June 30, 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

June 30, 2022 September 30, 2021

Prepaid insurance $ 2,562 $ 277

4 unchanged sentences

Total prepaid expenses and other current assets $ 4,475 $ 1,928

A reconciliation of goodwill as of March 31, 2022 and September 30, 2021 is as follows (in thousands):

A reconciliation of goodwill as of June 30, 2022 and September 30, 2021 is as follows (in thousands):

Gross Accumulated Impairment Net

2 unchanged sentences

Acquisitions (see Note 4) 22,420 — 22,420

Balance at March 31, 2022

Impairment (see Note 3) — 400 ( 400 )

Balance at June 30, 2022

$ 82,387 $ 20,988 $ 61,399

2 unchanged sentences

The components of intangible assets, net are as follows (in thousands):

March 31, 2022 September 30, 2021

June 30, 2022 September 30, 2021

Indefinite-lived:

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The components of accrued liabilities are as follows (in thousands):

March 31, 2022 September 30, 2021

June 30, 2022 September 30, 2021

Insurance $ 2,193 $ 54

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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,

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

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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,

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

1 unchanged sentence

Settlement of lawsuits 132 127 709 280

Loss (gain) on disposal of businesses and assets ( 58 ) 91 ( 400 ) 86

Gain on disposal of businesses and assets ( 266 ) ( 541 ) ( 666 ) ( 455 )

Gain on insurance ( 87 ) — ( 408 ) ( 209 )

1 unchanged sentence

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,

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Gain on debt extinguishment $ 53 $ — $ 138 $ 5,329

Unrealized loss on equity securities — ( 34 ) ( 1 ) ( 67 )

Unrealized gain (loss) on equity securities — 9 ( 1 ) ( 58 )

Other 74 — 74 85

7 unchanged sentences

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.

The proceeds from this financing transaction was used as part of the cash payment on the October 18, 2021 acquisition (see Note 4) at closing.

On October 18, 2021, in relation to an acquisition (see Note 4), the Company executed four seller-financed promissory notes.

17 unchanged sentences

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.

On May 2, 2022, in relation to a club acquisition (see Note 4), the Company executed two seller-financed notes totaling $ 11.0 million.

On May 23, 2022, the Company borrowed $ 2.2 million from a bank lender in relation to a purchase of real estate (see Note 4).

The 18 -month promissory note has an initial interest rate of 4.5 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1 % with a floor of 4.5 %.

The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity.

The Company paid loan costs amounting to $ 25,000 for this note.

Future maturities of long-term debt as of June 30, 2022 are as follows:

$ 12.6 million, $ 10.4 million, $ 28.7 million, $ 8.2 million, $ 8.7 million and $ 121.3 million for the twelve months ending June 30, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively.

Of the maturity schedule mentioned above, $ 651,000 , $ 2,195,000 , $ 20.5 million, $ 0 , $ 0 and $ 73.4 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.

Unamortized debt discount and issuance costs amounted to $ 1.9 million and $ 1.6 million as of June 30, 2022 and September 30, 2021, respectively.

On July 21, 2022, the Company executed an $ 800,000 6 % seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 4).

The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest.

On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 4), the Company executed two seller-financed promissory notes:

(1) $ 10.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

6 unchanged sentences

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

On May 24, 2022, the Board of Directors approved a $ 25.0 million increase in the Company's share repurchase program.

As of June 30, 2022, we have approximately $ 21.9 million remaining to purchase additional shares.

Subsequent to the reporting date until August 5, 2022, the Company purchased 42,250 shares of its own common stock at a cost of $ 2.3 million.

Income tax expense was $ 3.8 million and $ 10.1 million during the three and nine months ended June 30, 2022, respectively, compared to $ 4.0 million and $ 5.5 million during the three and nine months ended June 30, 2021, respectively.

The effective income tax expense rate was 21.3 % and 22.1 % for the three and nine months ended June 30, 2022, respectively, compared to 24.4 % and 16.6 % for the three and nine months ended June 30, 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,

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

8 unchanged sentences

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, 2019 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.

The Company ordinarily goes through various federal and state reviews and examinations for various tax matters.

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 included, among other

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

11 unchanged sentences

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The remaining unforgiven portion of approximately $ 41,000 in principal has been repaid as debt plus accrued interest.

Commitments and Contingencies

8 unchanged sentences

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.

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.

On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability.

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to $ 0 and $ 813,000 as of June 30, 2022 and September 30, 2021, respectively.

An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment.

2 unchanged sentences

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.

District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Fee is unconstitutional as it has been applied and enforced by the Comptroller.

The State of Texas appealed to the Fifth Circuit Court of Appeals, who affirmed that the Texas Patron Fee is unconstitutional as applied.

The State of Texas next sought review from the Supreme Court, but the high court declined to take the case.

That lawsuit is now back before the trial court for post-trial proceedings but is final for purposes of determining the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

Indemnity Insurance Corporation

1 unchanged sentence

The Company and its subsidiaries changed insurance companies on that date.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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”).

3 unchanged sentences

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.

As a result, the Company and its subsidiaries no longer had insurance coverage under the liability policy with IIC.

The Company has retained counsel to defend against and evaluate these claims and lawsuits.

4 unchanged sentences

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2022, we have 1 remaining unresolved claim out of the original 71 claims.

Shareholder Class and Derivative Actions

30 unchanged sentences

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.

Plaintiffs sought to extend the hearing until August to comply with certain potential notice and related obligations to the purported class, and Defendants concurred with the request.

On July 8, 2022, plaintiffs moved for final approval of the settlement and a hearing has been set for August 12, 2022.

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.

5 unchanged sentences

Anakar, et al.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

mc-00149 (S.D.

3 unchanged sentences

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.

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 and the derivative plaintiffs have responded.

The Motions now have been fully briefed for the Court's consideration.

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.

8 unchanged sentences

(“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

alleged that Mr.

The suit alleged that Mr.

Panameno injured Mr.

19 unchanged sentences

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.

Settlements of lawsuits for the three and nine months ended June 30, 2022 amount to approximately $ 132,000 and $ 709,000 , respectively, and for the three and nine months ended June 30, 2021 amount to approximately $ 127,000 and $ 280,000 , respectively.

As of June 30, 2022 and September 30, 2021, the Company has accrued $ 181,000 and $ 378,000 in accrued liabilities, respectively, related to settlement of lawsuits.

RCI HOSPITALITY HOLDINGS, INC.

8 unchanged sentences

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,

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

24 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 September 30, 2021

June 30, 2022 September 30, 2021

Nightclubs $ 409,251 $ 280,561

3 unchanged sentences

$ 502,179 $ 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.

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended June 30, 2022 amounting to $ 3.4 million and $ 31,000 , respectively, and for the nine months ended June 30, 2022 amounting to $ 9.9 million and $ 231,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2022 amounting to $ 42,000 and $ 164,000 , respectively.

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended June 30, 2021 amounting to $ 2.8 million and $ 32,000 , respectively, and for the nine months ended June 30, 2021 amounting to $ 8.4 million and $ 173,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2021 amounting to $ 20,000 and $ 95,000 , respectively.

These intercompany revenue amounts are eliminated upon consolidation.

6 unchanged sentences

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.

The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of June 30, 2022 and September 30, 2021, was $ 116.5 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.

1 unchanged sentence

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.

Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $ 42,093 and $ 69,242 during the three and nine months ended June 30, 2022, respectively, and $ 3,182 and $ 118,092 during the three and nine months ended June 30, 2021, respectively.

As of June 30, 2022 and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $ 12,093 and $ 12,205 , respectively, in unpaid billings.

TW Mechanical LLC 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

Amounts billed by TW Mechanical to the third-party general contractor were $ 0 and $ 3,809 for the three and nine months ended June 30, 2022, respectively, and $ 0 and $ 0 for the three and nine months ended June 30, 2021, respectively.

Amounts billed directly to the Company were $ 16,500 and $ 101,200 for the three and nine months ended June 30, 2022, respectively, and $ 325,425 and $ 388,176 for the three and nine months

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

ended June 30, 2021, respectively.

As of June 30, 2022 and September 30, 2021, the Company owed TW Mechanical $ 6,037 and $ 7,500 , respectively, in unpaid direct billings.

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):

Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and nine months ended June 30, 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

June 30, 2022 Three Months Ended

June 30, 2021 Nine Months Ended

June 30, 2022 Nine Months Ended

June 30, 2021

Operating lease expense – fixed payments $ 1,215 $ 828 $ 3,482 $ 2,485

Variable lease expense 404 47 971 155

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;

Short-term and other lease expense (includes $ 53 and $ 73 recorded in advertising and marketing for the three months ended June 30, 2022 and 2021, respectively, and $ 183 and $ 232 for the nine months ended June 30, 2022 and 2021, respectively;

and $ 120 and $ 106 recorded in repairs and maintenance for the three months ended June 30, 2022 and 2021, respectively, and $ 310 and $ 310 for the nine months ended June 30, 2022 and 2021, respectively;

290 296 988 843

5 unchanged sentences

Weighted average discount rate – operating leases 5.6 % 6.0 %

Future maturities of operating lease liabilities as of March 31, 2022 are as follows (in thousands):

Future maturities of operating lease liabilities as of June 30, 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

July 2022 - June 2023 $ 2,730 $ 2,141 $ 4,871

July 2023 - June 2024 2,952 1,979 4,931

July 2024 - June 2025 3,194 1,808 5,002

July 2025 - June 2026 3,457 1,622 5,079

July 2026 - June 2027 3,569 1,423 4,992

Thereafter 23,547 5,571 29,118

$ 39,449 $ 14,544 $ 53,993

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events

On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability.

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $ 16.0 million.

(1) $ 2.0 million in cash at closing;

The Company acquired 100 % of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements