What changed in this filing

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Item 1. Financial Statements

2023-02-09 compared with 2022-08-09 · 168 added, 390 removed, 400 unchanged (58% of the section changed)

3 unchanged sentences

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

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Current assets

31 unchanged sentences

20,000,000 shares authorized;

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

9,230,225 and 9,231,725 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

Additional paid-in capital 68,070 67,227

9 unchanged sentences

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Sales of alcoholic beverages $ 29,650 $ 26,431

12 unchanged sentences

Depreciation and amortization 3,307 2,194

Other charges (gains), net 1,501 ( 143 ) 1,357 1,288

Other gains, net ( 654 ) ( 151 )

Total operating expenses 53,070 45,925

26 unchanged sentences

9,231,725 $ 92 $ 67,227 $ 173,950 — $ — $ 489 $ 241,758

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 — — — — ( 1,500 ) ( 98 ) — ( 98 )

1 unchanged sentence

Payment of dividends — — — ( 462 ) — — — ( 462 )

Net income — — — 10,952 — — 21 10,973

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 )

Stock-based compensation — — 941 — — — — 941

Share in return of investment by noncontrolling partner — — — — — — ( 600 ) ( 600 )

Net income — — — 10,238 — — 33 10,271

Balance at June 30, 2022

Balance at December 31, 2022

9,230,225 $ 92 $ 68,070 $ 183,726 — $ — $ ( 78 ) $ 251,810

1 unchanged sentence

8,999,910 $ 90 $ 50,040 $ 129,693 — $ — $ ( 600 ) $ 179,223

Purchase of treasury shares — — — — ( 74,659 ) ( 1,794 ) — ( 1,794 )

Canceled treasury shares ( 74,659 ) ( 1 ) ( 1,793 ) — 74,659 1,794 — —

Issuance of common shares for business combination 500,000 5 30,357 — — — — 30,362

Payment of dividends — — — ( 380 ) — — — ( 380 )

1 unchanged sentence

Balance at December 31, 2021

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

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

Net income — — — 12,302 — — 19 12,321

Balance at June 30, 2021

9,499,910 $ 95 $ 80,397 $ 139,888 — $ — $ ( 611 ) $ 219,769

3 unchanged sentences

(in thousands, except number of shares)

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

2 unchanged sentences

Depreciation and amortization 3,307 2,194

Deferred income tax benefit ( 409 ) ( 430 )

Stock-based compensation 941 —

Gain on sale of businesses and assets ( 686 ) ( 523 )

Impairment of assets 1,722 1,672

Unrealized loss on equity securities — 1

3 unchanged sentences

Gain on insurance ( 64 ) —

Doubtful accounts expense (reversal) on notes receivable 753 ( 22 )

Doubtful accounts expense on notes receivable — 17

Changes in operating assets and liabilities:

17 unchanged sentences

Payment of loan origination costs ( 96 ) —

Share in return of investment by noncontrolling partner ( 600 ) —

Net cash provided by (used in) financing activities ( 3,117 ) 14,134

NET INCREASE IN CASH AND CASH EQUIVALENTS 1,814 13,463

NET DECREASE IN CASH AND CASH EQUIVALENTS ( 1,872 ) ( 17,732 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,980 35,686

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

Operating results for the three months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2023 .

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):

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

2 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 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.

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

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 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).

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .

The amendments of this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction.

The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value.

The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted.

We are still evaluating the impact of this ASU on our consolidated financial statements.

Current Operating Environment

Our fiscal 2020 was the period hardest hit by the COVID-19 pandemic caused by 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.

In fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased.

Stimulus money also flowed to the economy at that time which prompted increased discretionary spending.

In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions.

Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S.

economy in general, with global inflation and supply chain disruption impacting our businesses the most.

Geopolitical and macroeconomic events are still developing.

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

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 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

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:

Current assets $ 386

Property and equipment 19,534

Licenses 50,080

Tradenames 7,460

Deferred tax liability ( 2,903 )

Total net assets acquired 74,557

Goodwill 13,805

Acquisition price fair value $ 88,362

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 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 June 30,

For the Nine Months Ended June 30,

2022 2021 2022 2021

Pro forma revenues $ 70,714 $ 64,407 $ 197,968 $ 155,184

Pro forma net income attributable to RCIHH common stockholders $ 13,931 $ 13,745 $ 34,876 $ 29,252

Pro forma earnings per share – basic and diluted $ 1.48 $ 1.45 $ 3.70 $ 3.08

Pro forma weighted average number of common shares outstanding 9,389,675 9,499,910 9,428,461 9,506,373

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 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

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.

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.

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 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 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

Lubbock Property

On October 10, 2022, the Company purchased real estate in Lubbock, Texas amounting to $ 3.4 million for a future Bombshells location.

The Company paid $ 1.1 million in cash at closing and entered into a bank financing for the $ 2.3 million remainder (see Note 7).

The site includes extra land that will be listed for sale once the Bombshells unit is completed.

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.

Non-Income-Producing Properties

• On October 11, 2022, the Company purchased a hangar in Arcola, Texas amounting to $ 754,000 in cash.

• On February 6, 2023, in view of the increasing business presence of the Company in the Denver, Colorado area, the Company acquired a non-income-producing corporate property for $ 458,000 in cash.

Heartbreakers Gentlemen's Club

On October 26, 2022, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $ 9.0 million.

The acquisition includes (1) $ 2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $ 6.5 million for the real estate property covered in a real estate purchase agreement paid $ 1.5 million in cash at closing and $ 5.0 million under a 6 % 15-year promissory note (see Note 7).

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

The acquisition gives the Company its first adult club in the Galveston, Texas area market.

As of the filing 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, but we have preliminarily allocated the acquisition price $ 64,000 to current assets, $ 6.5 million to property and equipment, and $ 2.4 million to goodwill based on the negotiated purchase price.

We believe that in this acquisition goodwill represents the existing customer base of the club in the area and the added synergy profitability expansion when we implement the Company's processes into the club.

Since we do not have yet the fair value for the assets for the taxable portion of the business combination, we have not yet determined the amount of tax-deductible goodwill.

In connection with the acquisition, we incurred approximately $ 23,000 in acquisition-related expenses, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statement of income.

From the date of acquisition until December 31, 2022, the club contributed revenue of $ 347,000 and income from operations of $ 57,000 , which are included in our unaudited condensed consolidated statement 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.

Aurora CO Property

On November 8, 2022, the Company purchased real estate in Aurora, Colorado amounting to $ 850,000 in cash for a future Bombshells location.

Central City CO Casino Property 1

On December 5, 2022, the Company purchased real estate in Central City, Colorado amounting to $ 2.4 million in cash for the development of a Rick's Cabaret Steakhouse and Casino business.

Baby Dolls-Chicas Locas

On December 12, 2022, the Company and certain of its subsidiaries entered into definitive agreements to acquire five gentlemen's clubs, five related real estate properties, associated intellectual properties, and certain automated teller machines for a total purchase price of $ 66.5 million, payable with a total of $ 25.0 million in cash, a total of $ 25.5 million in seller financing, and 200,000 restricted shares of common stock based on an $ 80 per share price, subject to lock-up, leak out restrictions.

The five clubs, which are all located in Texas, are being purchased through four different asset purchase agreements and one stock purchase agreement, under which a newly formed wholly-owned subsidiary of the Company will acquire from each club-owning entity all of the tangible and intangible assets and personal property used in the business of that club, except for certain excluded assets.

The transactions contemplated by these agreements have not yet closed as of the filing of this report.

Closing is subject to certain closing conditions.

Mark IV Property

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.

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 .

On December 16, 2022, the Company purchased real estate in Fort Worth, Texas amounting to $ 2.4 million in cash.

The property has two buildings, one of which the Company is leasing out to an existing tenant and the other building the Company is remodeling for future adult club operations.

Grange Food Hall

On December 20, 2022, the Company purchased a food hall property in Greenwood Village, Colorado for $ 5.3 million, including direct transaction costs and net of certain accrued taxes amounting to $ 102,000 .

The purchase price was paid $ 1.9 million in cash at closing and $ 3.325 million under a 6.67 % five-year promissory note (see Note 7).

The Company allocated $ 2.1 million to land, $ 2.6 million to building improvements, $ 98,000 to furniture, fixtures and equipment, and $ 565,000 to in-place leases based on their relative fair values.

Tomball Parkway Property Sale

On December 28, 2022, the Company sold a property classified as held-for-sale with a carrying value of $ 1.0 million for $ 1.7 million in cash.

The Company used $ 1.2 million of the proceeds to pay off a loan related to the property.

Central City CO Casino Property 2

On February 6, 2023, the Company purchased real estate in Central City, Colorado amounting to $ 2.2 million in cash for the development of another casino and restaurant business.

BMB San Antonio

On February 7, 2023, the Company completed the acquisition of a previously franchised Bombshells location in San Antonio, Texas for a total acquisition price of $ 3.2 million.

The transaction was effected through a membership interest purchase agreement under which a subsidiary of the Company purchased 100 % of the issued and outstanding membership interests of the target limited liability company that owns and operates the Bombshells location from the six previous owners of the entity (the "Sellers").

At acquisition date, the Sellers were paid $ 1.2 million in cash and were issued six seller-financed promissory notes totaling $ 2.0 million (see Note 7).

Due to the proximity of the acquisition date to the filing date of this report, we have not completed our valuation analysis and related calculations to arrive at the fair values of the net assets acquired, any liabilities assumed, 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.

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):

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

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 21,061 $ 8,677 $ — $ 29,738 $ 16,130 $ 8,962 $ — $ 25,092

Sales of food and merchandise 4,639 6,935 — 11,574 5,062 6,996 — 12,058

Service revenues 25,287 157 — 25,444 16,772 108 — 16,880

Other revenues 3,697 20 241 3,958 3,067 11 752 3,830

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

Recognized at a point in time $ 54,320 $ 15,777 $ 241 $ 70,338 $ 40,599 $ 16,075 $ 751 $ 57,425

Recognized over time 364 * 12 — 376 432 * 2 1 435

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

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

Three Months Ended December 31, 2022 Three Months Ended December 31, 2021

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

16 unchanged sentences

Revenue Balance at

June 30, 2022

December 31, 2022

Ad revenue $ 82 $ 161 $ ( 126 ) $ 117

Expo revenue 8 321 — 329

Other (including franchise fees) 119 16 ( 5 ) 130

Franchise fees 115 — ( 3 ) 112

Other 29 4 ( 29 ) 4

$ 234 $ 486 $ ( 158 ) $ 562

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.

RCI HOSPITALITY HOLDINGS, INC.

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):

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Credit card receivables $ 3,229 $ 2,687

Income tax refundable — 2,979

Insurance receivable 78 185

ATM in-transit 1,310 819

1 unchanged sentence

Total accounts receivable, net $ 6,016 $ 8,510

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of prepaid expenses and other current assets are as follows (in thousands):

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Prepaid insurance $ 7,301 $ 191

4 unchanged sentences

Total prepaid expenses and other current assets $ 8,611 $ 1,499

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

A reconciliation of goodwill as of December 31, 2022 and September 30, 2022, which is substantially all in Nightclubs segment, is as follows (in thousands):

Gross Accumulated Impairment Net

2 unchanged sentences

Acquisitions (see Note 4) 2,422 — 2,422

Impairment (see Note 3) — 400 ( 400 )

Balance at June 30, 2022

Balance at December 31, 2022

$ 91,343 $ 21,154 $ 70,189

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Indefinite-lived:

3 unchanged sentences

Definite-lived:

Licenses 25,371 25,962

Leases acquired in-place 664 117

Noncompete agreements 40 55

2 unchanged sentences

Total intangible assets, net $ 143,949 $ 144,049

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Insurance $ 7,050 $ 30

5 unchanged sentences

Unearned revenues 562 234

Income taxes 99 —

Lawsuit settlement 115 246

1 unchanged sentence

Total accrued liabilities $ 18,864 $ 11,328

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of selling, general and administrative expenses are as follows (in thousands):

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Taxes and permits $ 2,684 $ 2,236

7 unchanged sentences

Security 1,164 1,087

Stock-based compensation 941 —

Accounting and professional fees 1,518 1,346

2 unchanged sentences

Total selling, general and administrative expenses $ 22,732 $ 18,486

The components of other charges (gains), net are as follows (in thousands):

The components of other gains, net are as follows (in thousands):

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Impairment of assets $ 1,722 $ 271 $ 1,722 $ 1,672

Settlement of lawsuits 132 127 709 280

Gain on disposal of businesses and assets ( 590 ) ( 342 )

Settlement of lawsuits — 192

Gain on insurance ( 64 ) ( 1 )

Other charges (gains), net $ 1,501 $ ( 143 ) $ 1,357 $ 1,288

The components of non-operating gains (losses), net are as follows (in thousands):

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

Other 74 — 74 85

Non-operating gains, net $ 127 $ 9 $ 211 $ 5,356

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

Other gains, net $ ( 654 ) $ ( 151 )

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

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 %.

On October 10, 2022, in relation to a real estate purchase (see Note 4), the Company borrowed $ 2.3 million from a bank lender.

The 18-month promissory note bears an initial interest rate of 6 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5 % with a floor of 6 %.

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 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.

The Company paid approximately $ 26,000 in debt issuance cost at closing.

This promissory note is secured by the purchased real estate property.

On October 26, 2022, in relation to a club acquisition (see Note 4), the Company executed a promissory note for $ 5.0 million with the seller.

The 6 % 15-year promissory note is payable in 180 equal monthly payments of $ 42,193 in principal and interest.

This promissory note is secured by the purchased real estate property.

On November 18, 2022, in relation to a real estate purchase on September 12, 2022, the Company borrowed $ 1.5 million from a bank lender.

The 18-month promissory note bears an initial interest rate of 6 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5 % with a floor of 6 %.

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

This promissory note is secured by the purchased real estate property.

On December 20, 2022, the Company executed a promissory note for $ 3.325 million with a bank lender in relation to a purchase of a food hall property (see Note 4).

The 6.67 % five-year promissory note is payable in 59 equal monthly installments of $ 22,805 in principal and interest, with the balance of principal and accrued interest payable at maturity.

There are certain financial covenants with which the Company is to be in compliance related to this loan.

Future maturities of long-term debt as of December 31, 2022 are as follows:

$ 13.9 million, $ 29.4 million, $ 14.7 million, $ 10.3 million, $ 13.9 million and $ 132.5 million for the twelve months ending December 31, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively.

Of the maturity schedule mentioned above, $ 4.4 million, $ 19.4 million, $ 4.8 million, $ 0 , $ 3.0 million and $ 75.0 million, respectively, relate to scheduled balloon payments.

Unamortized debt discount and issuance costs amounted to $ 3.3 million and $ 3.4 million as of December 31, 2022 and September 30, 2022, respectively.

On February 7, 2023, in relation to the acquisition of a franchised Bombshells location in San Antonio, Texas (see Note 4), the Company entered into six separate seller-financing promissory notes totaling $ 2.0 million.

Each of the promissory notes has an interest rate of 7 % per annum, has a term of 24 months, and is payable in monthly installments totaling $ 39,602 of principal and interest for the first 23 months based on a 60-month amortization schedule with the remaining unpaid principal and interest paid at maturity.

Stock-based Compensation

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 board’s adoption of the 2022 Plan was approved by the shareholders during the annual stockholders' meeting on August 23, 2022.

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 .

3 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.

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.

Stock-based compensation for the three months ended December 31, 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $ 941,000 .

As of December 31, 2022, we had unrecognized compensation cost amounting to $ 6.1 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 3.1 years.

The February 9, 2022 stock options vest over four years with the first 20 % having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20 % vesting on February 9 of each year thereafter,

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

provided however that the options will be subject to earlier vesting under certain events set forth in the Plan, including without limitation a change in control.

All of the options will expire, if not vested, at the end of five years .

The weighted average grant-date fair value of the stock options was $ 31.37 .

No stock options were exercised during the three months ended December 31, 2022.

As of December 31, 2022, 60,000 stock options were vested and exercisable.

For the three months ended December 31, 2022, we excluded 60,000 stock options from the calculation of diluted earnings per share because their effect was anti-dilutive.

There were no stock options outstanding during the three months ended December 31, 2021.

Aside from the outstanding stock options, there were no other potentially dilutive securities for inclusion in the calculation of diluted earnings per share.

Income tax expense was $ 3.0 million and $ 2.9 million during the three months ended December 31, 2022 and 2021, respectively.

The effective income tax expense rate was 22.8 % and 21.7 % for the three months ended December 31, 2022 and 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, as presented below.

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Federal statutory income tax expense 21.0 % 21.0 %

1 unchanged sentence

Permanent differences 0.5 % 0.4 %

Change in valuation allowance — % — % — % ( 3.8 ) %

Tax credits ( 2.8 ) % ( 2.0 ) %

5 unchanged sentences

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

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.

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 has been repaid as debt plus accrued interest.

Commitments and Contingencies

1 unchanged sentence

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.

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.

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 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.

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 Fee is unconstitutional as it has been applied and enforced by the Comptroller.

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

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

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);

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 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.

As of December 31, 2022, we have 1 remaining unresolved claim out of the original 71 claims.

Shareholder Derivative Action

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.

4 unchanged sentences

The action, styled Stein v.

Anakar, et al.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Anakar, et al., No.

4:22-mc-00149 (S.D.

5 unchanged sentences

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.

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.

13 unchanged sentences

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.

As set forth in the risk factors as disclosed in this report, 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.

2 unchanged sentences

Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

3 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 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.

Settlements of lawsuits for the three months ended December 31, 2022 and 2021 amount to approximately $ 0 and $ 192,000 , respectively.

As of December 31, 2022 and September 30, 2022, the Company has accrued $ 115,000 and $ 246,000 in accrued liabilities, respectively, related to settlement of lawsuits.

RCI HOSPITALITY HOLDINGS, INC.

9 unchanged sentences

For the Three Months Ended

June 30, For the Nine Months Ended

2022 2021 2022 2021

Revenues (from external customers)

7 unchanged sentences

Other ( 185 ) ( 43 )

General corporate ( 4,935 ) ( 4,568 ) ( 15,998 ) ( 12,752 )

Corporate ( 7,504 ) ( 5,584 )

$ 16,898 $ 15,911

2 unchanged sentences

Bombshells 458 429

Other 6 8 19 80

General corporate 230 210 652 623

Corporate 301 212

$ 3,307 $ 2,194

2 unchanged sentences

Bombshells 8,319 304

Other 145 — 693 1

General corporate 172 262 519 393

Corporate 53 129

$ 12,553 $ 9,850

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

Nightclubs $ 444,362 $ 428,104

1 unchanged sentence

Other 2,758 2,635

General corporate 32,823 30,412

Corporate 43,454 37,978

$ 556,158 $ 530,738

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.

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended December 31, 2022 amounting to $ 3.7 million and $ 231,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment amounting to $ 37,000 .

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended December 31, 2021 amounting to $ 3.2 million and $ 168,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment amounting to $ 69,000 .

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 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.

The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of December 31, 2022 and September 30, 2022, was $ 120.1 million and $ 115.1 million, respectively.

Included in the $ 17.0 million borrowing on October 12, 2021 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 $ 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.

Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $ 0 and $ 24,037 during the three months ended December 31, 2022 and 2021, respectively.

As of December 31, 2022 and September 30, 2022, we owed Nottingham Creations and Sherwood Forest $ 13,174 and $ 92,808 , 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 2023 and 2022.

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 $ 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

Amounts billed by TW Mechanical to the third-party general contractor were $ 0 and $ 0 for the three months ended December 31, 2022 and 2021, respectively.

Amounts billed directly to the Company were $ 0 and $ 80,996 for the three months ended December 31, 2022 and 2021, respectively.

As of December 31, 2022 and September 30, 2022, the Company owed TW Mechanical $ 0 and $ 9,338 , respectively, in unpaid direct billings.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 nine months ended June 30, 2022 and 2021 is as follows (in thousands):

Three Months Ended

June 30, 2022 Three Months Ended

June 30, 2021 Nine Months Ended

June 30, 2022 Nine Months Ended

June 30, 2021

Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three months ended December 31, 2022 and 2021 is as follows (in thousands):

Three Months Ended December 31,

Operating lease expense – fixed payments $ 1,259 $ 1,131

Variable lease expense 427 334

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

Short-term and other lease expense (includes $ 64 and $ 72 recorded in advertising and marketing, and $ 127 and $ 83 recorded in repairs and maintenance for the three months ended December 31, 2022 and 2021, respectively;

Sublease income — ( 2 )

4 unchanged sentences

Weighted average discount rate – operating leases 5.6 % 5.7 %

Future maturities of operating lease liabilities as of June 30, 2022 are as follows (in thousands):

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

Principal Payments Interest Payments Total Payments

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

January - December 2023 $ 2,850 $ 2,060 $ 4,910

January - December 2024 3,068 1,895 4,963

January - December 2025 3,331 1,717 5,048

January - December 2026 3,583 1,523 5,106

January - December 2027 3,345 1,325 4,670

Thereafter 21,943 4,933 26,876

1 unchanged sentence

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