What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2023-02-09 · 204 added, 103 removed, 465 unchanged (40% of the section changed)

3 unchanged sentences

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

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Current assets

31 unchanged sentences

20,000,000 shares authorized;

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

9,430,225 and 9,231,725 shares issued and outstanding as of March 31, 2023 and September 30, 2022, respectively

Additional paid-in capital 85,082 67,227

9 unchanged sentences

For the Three Months Ended

March 31, For the Six Months Ended

2023 2022 2023 2022

Sales of alcoholic beverages $ 30,136 $ 27,335 $ 59,786 $ 53,766

12 unchanged sentences

Depreciation and amortization 3,760 2,877 7,067 5,071

Other gains, net ( 654 ) ( 151 )

Other charges (gains), net 3,758 7 3,104 ( 144 )

Total operating expenses 58,090 46,611 111,160 92,536

11 unchanged sentences

Basic and diluted $ 0.83 $ 1.15 $ 1.94 $ 2.28

Weighted average number of common shares outstanding

Weighted average shares used in computing earnings per share

Basic and diluted 9,265,781 9,489,085 9,247,824 9,447,854

19 unchanged sentences

Balance at December 31, 2022 9,230,225 92 68,070 183,726 — — ( 78 ) 251,810

Issuance of common shares for business combination 200,000 2 16,306 — — — — 16,308

Payment of dividends — — — ( 553 ) — — — ( 553 )

Stock-based compensation — — 706 — — — — 706

Net income (loss) — — — 7,732 — — ( 39 ) 7,693

Balance at March 31, 2023

9,430,225 $ 94 $ 85,082 $ 190,905 — $ — $ ( 117 ) $ 275,964

5 unchanged sentences

Balance at December 31, 2021 9,499,910 95 80,397 139,888 — — ( 611 ) 219,769

Purchase of treasury shares — — — — ( 45,643 ) ( 2,845 ) — ( 2,845 )

Canceled treasury shares ( 45,643 ) ( 1 ) ( 2,844 ) — 45,643 2,845 — —

Payment of dividends — — — ( 474 ) — — — ( 474 )

Net income — — — 10,952 — — 21 10,973

Balance at March 31, 2022

9,454,267 $ 94 $ 77,553 $ 150,366 — $ — $ ( 590 ) $ 227,423

3 unchanged sentences

(in thousands, except number of shares)

For the Three Months Ended December 31,

For the Six Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES

2 unchanged sentences

Depreciation and amortization 7,067 5,071

Impairment of assets 662 —

Stock-based compensation 1,647 —

21 unchanged sentences

Proceeds from debt obligations, including related party proceeds of $ 0 and $ 650 , respectively

11,595 35,742

Payments on debt obligations ( 6,481 ) ( 7,290 )

3 unchanged sentences

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

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

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

Net cash provided by financing activities 3,196 24,335

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 13,196 ) 2,381

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

10 unchanged sentences

Fair value $ 16,308 $ 30,362

Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases $ — $ 18,243

Adjustment to operating lease right-of-use assets related to new and renewed leases $ 1,659 $ 19,187

Adjustment to operating lease liabilities related to new and renewed leases $ 1,958 $ 19,187

Unpaid liabilities on capital expenditures $ 3,045 $ 1,201

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

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

We made certain reclassification adjustments to segment disclosures related to prepaid insurance and goodwill.

These assets were acquired by the registrant and presented in Corporate segment but mostly benefit subsidiaries belonging to other reportable segments.

Prior year disclosures were also made to conform to current year presentation.

There is no impact in consolidated total assets, results of operations, and cash flows in all periods presented.

Recent Accounting Standards and Pronouncements

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

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842):

Common Control Arrangements, which amends certain provisions of ASC 842 that apply to arrangements between related parties under common control.

The ASU requires all companies to amortize leasehold improvements associated with common control leases over the asset's useful life to the common control group regardless of the lease term.

It also allows private and certain not-for-profit entities to use the written terms and conditions of an agreement to account for common control leases without further assessing the legal enforceability of those terms.

The guidance is effective for all entities in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance.

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

Current Operating Environment

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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.

In fiscal 2022, several coronavirus variants

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Toward the end of fiscal 2022 and continuing to the current fiscal year, geopolitical and macroeconomic events have impacted our operating results and cash flows by causing inflation on wages and other operating expenses.

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

2 unchanged sentences

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 Company paid $ 1.1 million in cash at closing and obtained 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

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.

• 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, to be used for office space and employee housing.

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).

On October 26, 2022, the Company completed the acquisition of a club in Dickinson, Texas for a total agreed acquisition price of $ 9.0 million (with a total consideration preliminary fair value of $ 8.9 million based on certain legal contingencies that existed pre-acquisition).

The acquisition included (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.

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 26, 2022:

Current assets $ 64

Property and equipment 4,884

Licenses 1,170

Tradename 340

Accrued liability ( 95 )

Deferred tax liability ( 374 )

Total net assets acquired 5,989

Goodwill 2,916

Acquisition price fair value $ 8,905

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.

Goodwill, licenses, and tradename will not be amortized but will be tested at least annually for impairment.

Approximately $ 1.5 million of the recognized goodwill will be deductible for tax purposes.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with this acquisition, we incurred approximately $ 0 and $ 23,000 in acquisition-related expenses during the three and six months ended March 31, 2023, respectively, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until March 31, 2023, the club contributed revenues of $ 554,000 and $ 901,000 and income from operations of $ 103,000 and $ 160,000 during the three and six months ended March 31, 2023, respectively, which are included in our unaudited condensed consolidated statements of income.

The seller has not maintained historical U.S.

4 unchanged sentences

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

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

8 unchanged sentences

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

Bombshells 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.

1 unchanged sentence

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.

The Company allocated the acquisition price $ 61,000 to inventory, $ 2.7 million to property and equipment, and $ 480,000 to favorable lease intangible and right-of-use assets, net of lease liability.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Baby Dolls-Chicas Locas

On March 16, 2023, the Company and certain of its subsidiaries completed the acquisition of 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 10-year 7 % seller financing promissory notes, and 200,000 restricted shares of common stock based on an $ 80 per share price, subject to lock-up, leak out restrictions.

The cash consideration at closing was partially funded by the $ 10.0 million line of credit secured by the Company on March 9, 2023 (see Note 7).

The five clubs, which are all located in Texas, were purchased through four different asset purchase agreements and one stock purchase agreement, under each of which a newly formed wholly-owned subsidiary of the Company acquired 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.

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 and stock consideration, but we have preliminarily allocated the acquisition price as follows based on negotiated purchase price:

$ 632,000 to current assets, $ 41.6 million to property and equipment, $ 11.2 million to identifiable intangibles, $ 632,000 to accounts payable, and $ 14.0 million to goodwill.

In connection with this acquisition, we incurred approximately $ 280,000 and $ 292,000 in acquisition-related expenses during the three and six months ended March 31, 2023, respectively, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until March 31, 2023, the clubs contributed revenues of $ 1.2 million and $ 1.2 million and loss from operations of $ 154,000 and $ 154,000 during the three and six months ended March 31, 2023, 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 five acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2022 (in thousands, except per share amount and number of shares):

For the Three Months Ended

March 31, For the Six Months Ended

2023 2022 2023 2022

Pro forma revenues $ 77,292 $ 69,256 $ 154,424 $ 137,029

Pro forma net income attributable to RCIHH common stockholders $ 8,303 $ 12,444 $ 17,213 $ 24,849

Pro forma earnings per share - basic and diluted $ 0.88 $ 1.28 $ 1.83 $ 2.58

Pro forma weighted average shares used in computing earnings per share - basic and diluted 9,430,225 9,689,085 9,430,241 9,647,854

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 2022.

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 yet have a final valuation of the assets that we acquired and the liabilities that we assumed, the unaudited pro forma financial information does not include 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 $ 10.0 million line-of-credit facility (see Note 7) and the nine seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2022.

Pro forma weighted average number of common shares outstanding includes the impact of 200,000 shares of our common stock issued as partial consideration for the acquisition.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

7 unchanged sentences

$ 57,031 $ 14,315 $ 171 $ 71,517 $ 48,174 $ 15,333 $ 185 $ 63,692

Six Months Ended March 31, 2023 Six Months Ended March 31, 2022

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 44,289 $ 15,497 $ — $ 59,786 $ 36,840 $ 16,926 $ — $ 53,766

Sales of food and merchandise 9,417 11,935 — 21,352 9,087 12,967 — 22,054

Service revenues 51,219 34 — 51,253 42,185 192 — 42,377

Other revenues 8,431 280 383 9,094 6,843 19 469 7,331

$ 113,356 $ 27,746 $ 383 $ 141,485 $ 94,955 $ 30,104 $ 469 $ 125,528

Recognized at a point in time $ 112,495 $ 27,702 $ 338 $ 140,535 $ 94,066 $ 30,102 $ 468 $ 124,636

Recognized over time 861 * 44 45 950 889 * 2 1 892

$ 113,356 $ 27,746 $ 383 $ 141,485 $ 94,955 $ 30,104 $ 469 $ 125,528

* Lease revenue (included in Other Revenues) as covered by ASC 842.

4 unchanged sentences

September 30, 2022

Consideration

Received Recognized in

Net Consideration

Received (Refunded) Recognized in

Revenue Balance at

December 31, 2022

March 31, 2023

Ad revenue $ 82 $ 284 $ ( 239 ) $ 127

Expo revenue 8 405 — 413

Franchise fees 115 — ( 3 ) 112

Other 29 4 ( 29 ) 4

Franchise fees and other 144 ( 12 ) ( 44 ) 88

$ 234 $ 677 $ ( 283 ) $ 628

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

1 unchanged sentence

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

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Credit card receivables $ 2,768 $ 2,687

3 unchanged sentences

Total accounts receivable, net $ 6,755 $ 8,510

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 original terms ranging from 1 to 20 years.

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

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Prepaid insurance $ 4,960 $ 191

4 unchanged sentences

Total prepaid expenses and other current assets $ 6,870 $ 1,499

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):

A reconciliation of goodwill as of March 31, 2023 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) 16,946 — 16,946

Balance at December 31, 2022

Impairment — 662 ( 662 )

Balance at March 31, 2023

$ 105,867 $ 21,816 $ 84,051

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Indefinite-lived:

6 unchanged sentences

Noncompete agreements 25 55

Discounted leases 76 78

Favorable leases 853 78

Software 618 723

Total intangible assets, net $ 156,331 $ 144,049

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Insurance $ 4,694 $ 30

5 unchanged sentences

Unearned revenues 628 234

Income taxes 99 —

Lawsuit settlement 3,109 246

1 unchanged sentence

Total accrued liabilities $ 20,958 $ 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

March 31, For the Six Months Ended

2023 2022 2023 2022

Taxes and permits $ 2,739 $ 2,361 $ 5,423 $ 4,597

12 unchanged sentences

Total selling, general and administrative expenses $ 22,026 $ 18,437 $ 44,758 $ 36,923

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

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

For the Three Months Ended

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

March 31, For the Six Months Ended

2023 2022 2023 2022

Impairment of assets $ 662 $ — $ 662 $ —

Settlement of lawsuits 3,120 385 3,120 577

Loss (gain) on disposal of businesses and assets 3 ( 58 ) ( 587 ) ( 400 )

Gain on insurance ( 27 ) ( 320 ) ( 91 ) ( 321 )

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other charges (gains), net $ 3,758 $ 7 $ 3,104 $ ( 144 )

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 18-month promissory note bears an initial interest rate of 6 % per annum 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.

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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).

1 unchanged sentence

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.

On March 9, 2023, the Company closed a $ 10.0 million line-of-credit facility with a lender bank evidenced by a revolving promissory note, with an initial draw of $ 10.0 million at closing.

The facility has an initial term of 24 months with a variable interest rate equal to the Wall Street Journal prime rate plus 1 %.

On such date that the principal balance is repaid to an amount less than $ 5.0 million, the facility's revolver feature is activated where the Company may draw from the remaining availability up to a maximum of $ 5.0 million.

The Company shall also pay a non-usage fee of 0.5 % based on the amount by which the average outstanding balance for the prior twelve months was less than $ 3.0 million or the amount by which the total aggregate advances during the prior twelve months totaled less than $ 3.0 million.

The Company paid $ 115,000 in debt issuance costs, which is recorded as deferred charges to be amortized on a straight-line basis over 24 months.

There are certain financial covenants with which the Company is to be in compliance related to this loan, including a compensating balance requirement of $ 3.0 million and a minimum tangible net worth requirement of $ 20.0 million.

On March 16, 2023, in relation to the acquisition of five clubs with associated real estate, automated teller machines, and intellectual property (see Note 4), the Company executed nine secured promissory notes with a total principal amount of $ 25.5 million.

Each of the nine promissory notes have an interest rate of 7 % per annum with a term of 10 years, payable in arrears in 120 equal monthly payments of principal and interest amounting to $ 296,077 per month in the aggregate.

The holder of the $ 5.0 million promissory note related to the real estate properties may call due from the Company a principal payment of $ 1.0 million once in every calendar year.

Future maturities of long-term debt as of March 31, 2023 are as follows:

$ 21.6 million, $ 38.0 million, $ 16.8 million, $ 12.7 million, $ 19.6 million and $ 140.3 million for the twelve months ending March 31, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively.

Of the maturity schedule mentioned above, $ 3.8 million, $ 25.7 million, $ 4.8 million, $ 0 , $ 6.1 million and $ 71.8 million, respectively, relate to scheduled balloon payments.

Unamortized debt discount and issuance costs amounted to $ 3.2 million and $ 3.4 million as of March 31, 2023 and September 30, 2022, respectively.

Stock-based Compensation

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The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan.

On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to six members of management subject to the approval of the 2022 Plan.

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.

On February 9, 2022, the board of directors approved a grant of 50,000 stock options to each of six members of management subject to the approval of the 2022 Plan.

Stock-based compensation for the three and six months ended March 31, 2023, which is included in corporate segment selling, general and administrative expenses, amounted to $ 706,000 and $ 1.6 million, respectively.

No stock-based compensation expense was recognized during the three and six months ended March 31, 2022.

As of March 31, 2023, we had unrecognized compensation cost amounting to $ 5.4 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.9 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,

2 unchanged sentences

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.

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

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

No stock options were exercised during the three and six months ended March 31, 2023.

As of March 31, 2023, 120,000 stock options were vested and exercisable.

For the three and six months ended March 31, 2023, we excluded 300,000 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 and six months ended March 31, 2022.

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.

Income tax expense was $ 2.1 million and $ 5.2 million during the three and six months ended March 31, 2023, respectively, compared to $ 3.4 million and $ 6.3 million during the three and six months ended March 31, 2022, respectively.

The effective income tax expense rate was 21.8 % and 22.4 % for the three and six months ended March 31, 2023, respectively, compared to 23.4 % and 22.6 % for the three and six months ended March 31, 2022, 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

March 31, For the Six Months Ended

2023 2022 2023 2022

Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 %

19 unchanged sentences

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.

The lawsuit was sent back to the trial court for post-trial proceedings, which resulted in the award of attorneys' fees to the operating subsidiaries.

Pursuant to the rulings, the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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”).

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

As of March 31, 2023, we have 1 remaining unresolved claim out of the original 71 claims.

Shareholder Derivative Action

7 unchanged sentences

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

Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information, alleged failure to maintain internal controls, and alleged failure to properly manage company property.

This action is in its preliminary phase, and a potential loss cannot yet be estimated.

These allegations are substantively similar to claims asserted in the class action and a prior derivative action that was dismissed in June of 2021.

RCI intends to vigorously defend against the action.

On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed their Motions to Dismiss and the derivative plaintiffs have responded.

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

Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information and failure to maintain internal controls.

These allegations are substantively similar to claims asserted in a prior securities class action that was settled in August of 2022 and a prior derivative action that was dismissed in June of 2021.

Plaintiffs do not demand any specific amount of damages, which if awarded would be paid by the individual defendants to the Company.

Plaintiffs also seek unspecified changes to the Company’s internal controls.

On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed Motions to Dismiss.

On March 31, 2023, the Court denied the Company’s motion, which was based on its rejections of the shareholders’ pre-litigation demands that the Company sue the individual defendants;

granted the motion of two current individuals who were not members of the Company’s Board of Directors at the time of the alleged events at issue, Ms.

Martin and Mr.

and denied the motions of the remaining defendants.

RCI intends to vigorously defend its position.

On June 23, 2014, Mark H.

13 unchanged sentences

JAI Phoenix will continue to vigorously defend itself.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

3 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 March 2023, the New York State Department of Labor assessed a final judgment against one of our subsidiaries in a state unemployment tax matter for the years 2009-2022.

The assessment of $ 2.8 million, which was recorded by the Company during the quarter ended March 31, 2023, was issued in final notice by the NY DOL after several appeals were denied by the Supreme Court of the State of New York, Appellate Division, Third Department.

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 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.

Settlements of lawsuits for the three and six months ended March 31, 2023 amount to $ 3.1 million and $ 3.1 million, respectively, and for the three and six months ended March 31, 2022 amount to approximately $ 385,000 and $ 577,000 , respectively.

As of March 31, 2023 and September 30, 2022, the Company has accrued $ 3.1 million and $ 246,000 in accrued liabilities, respectively, related to settlement of lawsuits.

RCI HOSPITALITY HOLDINGS, INC.

9 unchanged sentences

For the Three Months Ended

March 31, For the Six Months Ended

2023 2022 2023 2022

Revenues (from external customers)

12 unchanged sentences

Bombshells 931 454 1,389 883

Other 63 7 126 13

Corporate 302 210 603 422

3 unchanged sentences

Bombshells 5,508 1,901 13,827 2,205

Other 41 359 78 548

Corporate 1,574 218 1,627 347

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

Nightclubs $ 503,697 $ 437,096

3 unchanged sentences

$ 621,131 $ 530,738

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 .

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2023 amounting to $ 3.9 million and $ 31,000 , respectively, and for the six months ended March 31, 2023 amounting to $ 7.6 million and $ 262,000 , respectively;

and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2023 amounting to $ 78,000 and $ 115,000 , 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, 2022 amounting to $ 3.3 million and $ 31,000 , 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.

These intercompany revenue amounts are eliminated upon consolidation.

3 unchanged sentences

Accordingly, those asset costs have been transferred out of the Bombshells segment.

As of March 31, 2023, we reclassified $ 9.4 million of goodwill from Corporate to Nightclubs and $ 4.7 million of prepaid insurance to $ 3.7 million in Nightclubs, $ 961,000 in Bombshells, and $ 29,000 in Other.

As of September 30, 2022, we reclassified $ 9.0 million of goodwill from Corporate to Nightclubs to conform to current year presentation.

Related Party Transactions

1 unchanged sentence

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 December 31, 2022 and September 30, 2022, was $ 120.1 million and $ 115.1 million, respectively.

The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of March 31, 2023 and September 30, 2022, was $ 119.1 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.

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 $ 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.

Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $ 188,285 and $ 188,285 during the three and six months ended March 31, 2023, respectively, and $ 3,112 and $ 27,149 during the three and six months ended March 31, 2022, respectively.

As of March 31, 2023 and September 30, 2022, we owed Nottingham Creations and Sherwood Forest $ 110,809 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 $ 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.

Amounts billed by TW Mechanical to the third-party general

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,

contractor were $ 18,000 and $ 64,000 for the three and six months ended March 31, 2023, respectively, and $ 3,809 and $ 3,809 for the three and six months ended March 31, 2022, respectively.

Amounts billed directly to the Company were $ 379 and $ 379 for the three and six months ended March 31, 2023, respectively, and $ 3,704 and $ 84,700 for the three and six months ended March 31, 2022, respectively.

As of March 31, 2023 and September 30, 2022, the Company owed TW Mechanical $ 0 and $ 9,338 , respectively, in unpaid direct billings.

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, 2023 and 2022 is as follows (in thousands):

Three Months Ended March 31, Six Months Ended March 31,

2023 2022 2023 2022

Operating lease expense – fixed payments $ 1,288 $ 1,136 $ 2,547 $ 2,267

Variable lease expense 359 233 786 567

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;

Short-term and other lease expense (includes $ 63 and $ 58 recorded in advertising and marketing for the three months ended March 31, 2023 and 2022, respectively, and $ 127 and $ 130 for the six months ended March 31, 2023 and 2022, respectively;

and $ 138 and $ 107 recorded in repairs and maintenance for the three months ended March 31, 2023 and 2022, respectively, and $ 265 and $ 190 for the six months ended March 31, 2023 and 2022, respectively;

319 368 586 698

Sublease income — ( 1 ) — ( 3 )

4 unchanged sentences

Weighted average discount rate – operating leases 5.7 % 5.6 %

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

Future maturities of operating lease liabilities as of March 31, 2023 are as follows (in thousands):

Principal Payments Interest Payments Total Payments

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

April 2023 - March 2024 $ 2,951 $ 2,189 $ 5,140

April 2024 - March 2025 3,185 2,016 5,201

April 2025 - March 2026 3,460 1,829 5,289

April 2026 - March 2027 3,665 1,626 5,291

April 2027 - March 2028 3,303 1,423 4,726

Thereafter 22,816 5,313 28,129

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