What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-12-14 compared with 2022-12-14 · 467 added, 402 removed, 1169 unchanged (43% of the section changed)

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CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( Friedman LLP , Marlton, NJ , Auditor Firm ID:

Report s of Independent Registered Public Accounting Fir ms ( Marcum LLP , Firm ID:

Friedman LLP , Firm ID:

Consolidated Financial Statements:

Consolidated Balance Sheets at September 30, 202 3 and 20 2 2

Consolidated Statements of Operations for the years ended September 30, 2022, 2021, and 2020

Consolidated Statements of Income for the years ended September 30, 202 3 , 202 2 , and 202 1

Consolidated Statements of Changes in Equity for the years ended September 30, 202 3 , 202 2 , and 202 1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

To the Stockholders and Board of Directors of

RCI Hospitality Holdings, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of RCI Hospitality Holdings, Inc.

(the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended September 30, 2022, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 14, 2022 expressed an adverse opinion.

We have audited the accompanying consolidated balance sheet of RCI Hospitality Holdings, Inc.

(the “Company”) as of September 30, 2023, the related consolidated statements of income, changes in equity, and cash flows for the year ended September 30, 2023, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its operations and its cash flows for the year ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of September 30, 2023, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated December 14, 2023, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

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The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value, and impairment of indefinite-lived intangible assets is recognized in the amount by which the carrying value of the assets exceed their fair value.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets.

If these assets are determined to be

impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset groups to the future undiscounted cash flows expected to be generated by the asset groups.

If these assets are

determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value.

Fair value is generally determined using forecasted cash flows discounted using an estimated weighted average cost of capital.

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The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill, indefinite-lived intangible asset, and long-lived asset impairment process, including controls over the identification of relevant assets at risk of impairment, the determination of estimated undiscounted future cash flows and the fair value of individual reporting unit or asset, as necessary, and controls over the key assumptions as noted above.

We evaluated the design of certain internal controls related to the Company’s goodwill, indefinite-lived intangible asset, and long-lived asset impairment process, including controls over the identification of relevant assets at risk of impairment, the determination of estimated undiscounted future cash flows and the fair value of individual reporting unit or asset, as necessary, and controls over the key assumptions as noted above.

These procedures also included, among others, (1) testing management’s process for developing the fair value estimates of the reporting units or assets;

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and (4) evaluating the reasonableness of the significant assumptions used by management, including the future cash flows, growth rates and discount rates.

Evaluating management’s significant assumptions related to future cash flows, growth rates and the discount rates involved, with the assistance of valuation specialists employed by us, evaluating whether the assumptions used by management were reasonable considering (1) the historical performance of the reporting units or operating location;

Evaluating management’s significant assumptions related to future cash flows, growth rates and the discount rates involved, with the assistance of valuation specialists, evaluating whether the assumptions used by management were reasonable considering (1) the historical performance of the reporting unit or asset group;

(2) the consistency with external market data;

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Fair Value Measurement of Consideration and, Tangible and Intangible Assets Acquired in Business Acquisitions

As described in Note 16 to the consolidated financial statements, the Company completed five business acquisitions with an aggregate acquisition price totaling approximately $132.6 million during the year ended September 30, 2022.

As described in Note 14 to the consolidated financial statements, the Company completed two business acquisitions with an aggregate acquisition price totaling approximately $72.3 million during the year ended September 30, 2023.

The Company accounts for business combinations using the acquisition method, which requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition.

The fair value of the tangible assets acquired were measured using adjusted market prices or costs to construct.

The fair value of the tangible assets acquired were measured using adjusted market prices and/or cost models.

The fair values of intangible assets acquired are typically estimated using an income approach, which is based on the present value of future discounted cash flows.

Management applied significant judgment in estimating the fair value of the consideration and, tangible and intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors.

In addition, the discount for lack of marketability applied to the consideration is estimated using a market approach, which is based on a Black-Scholes option pricing model.

In addition, the discount for lack of marketability applied to the common stock consideration was estimated based on an analysis of restricted stock studies, empirical data for discounts, and quantitative models.

The principal considerations for our determination that performing procedures relating to the fair value measurement of the consideration and assets acquired related to the acquisitions is a critical audit matter are (1) the significant judgment by management, including the use of specialists, when estimating the fair values of assets acquired;

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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included identifying and evaluating the design of controls relating to the acquisition accounting, including controls over management’s valuation of the assets acquired and consideration, and controls over the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and the costs to construct an asset.

These procedures also included, among others, (1) reading the purchase agreement;

and (2) testing management’s process for estimating the fair values of the assets acquired.

These procedures included identifying and evaluating the design and testing the operating effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the assets acquired and consideration, and controls over the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth, profitability of the acquired business, and the discount rate.

These procedures also included, among others:

(1) Reading the purchase agreement.;

(2) Testing management’s process for estimating the fair values of the net assets acquired.

Testing management’s process included evaluating the appropriateness of the valuation method, testing the completeness and accuracy of data provided by

management, and evaluating the reasonableness of significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and costs to construct an asset.

management, and evaluating the reasonableness of significant assumptions related to the rate of future revenue growth, profitability of the acquired business, and the discount rate.

Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired business involved considering the historical performance of the acquired businesses and market comparable information, as well as economic and industry forecasts.

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(3) Developing an independent point estimate for the consideration.;

(4) Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow models, the reasonableness of the discount rate, and evaluating the market and cost assumptions for the fair value of the assets;

and in developing a model and independent assumptions for the consideration.

and (4) Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow models, the reasonableness of the discount rate, and evaluating the assumptions for the fair value of the assets.

They also assisted us in developing an independent model and assumptions for the consideration.

/s/ Marcum LLP

We have served as the Company’s auditor since 2019 (such date takes into account the acquisition of Friedman LLP by Marcum LLP effective September 1, 2022).

Marlton, New Jersey

December 14, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

RCI Hospitality Holdings, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of RCI Hospitality Holdings, Inc.

(the “Company”) as of September 30, 2022, the related consolidated statements of income, changes in equity and cash flows for each of the years in the two-year period ended September 30, 2022 and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2022 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Friedman LLP

We have served as the Company’s auditor since 2019.

We have served as the Company’s auditor from 2019 to 2023 .

Marlton, New Jersey

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Accrued liabilities 16,051 11,328

Current portion of long-term debt 11,896 6,434

Current portion of debt obligations, net 22,843 11,896

Current portion of operating lease liabilities 2,977 2,795

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RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share and number of shares data)

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Interest income 388 411 253

Non-operating gain (loss), net 211 5,330 ( 64 )

Income (loss) before income taxes 60,131 34,139 ( 6,805 )

Income tax expense (benefit) 14,071 3,989 ( 493 )

Net income (loss) 46,060 30,150 ( 6,312 )

Non-operating gains, net — 211 5,330

Income before income taxes 35,946 60,131 34,139

Income tax expense 6,846 14,071 3,989

Net income 29,100 46,060 30,150

Net loss (income) attributable to noncontrolling interests 146 ( 19 ) 186

Net income (loss) attributable to RCIHH common stockholders $ 46,041 $ 30,336 $ ( 6,085 )

Earnings (loss) per share

Net income attributable to RCIHH common stockholders $ 29,246 $ 46,041 $ 30,336

Earnings per share

Basic and diluted $ 3.13 $ 4.91 $ 3.37

Weighted average number of common shares outstanding

Weighted average shares used in computing earnings per share

Basic and diluted 9,335,983 9,383,445 9,004,744

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Payment of dividends — — — ( 1,440 ) — — — ( 1,440 )

Payments to noncontrolling interests — — — — — — ( 31 ) ( 31 )

Net loss — — — ( 6,085 ) — — ( 227 ) ( 6,312 )

Net income (loss) — — — 30,336 — — ( 186 ) 30,150

Balance at September 30, 2021 8,999,910 90 50,040 129,693 — — ( 600 ) 179,223

Issuance of common shares for business combination 500,000 5 29,928 — — — — 29,933

Purchase of treasury shares — — — — ( 268,185 ) ( 15,097 ) — ( 15,097 )

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Payment of dividends — — — ( 1,784 ) — — — ( 1,784 )

Net income (loss) — — — 30,336 — — ( 186 ) 30,150

Stock-based compensation expense — — 2,353 — — — — 2,353

Investment from noncontrolling partner — — — — — — 1,070 1,070

Net income — — — 46,041 — — 19 46,060

Balance at September 30, 2022 9,231,725 92 67,227 173,950 — — 489 241,758

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Stock-based compensation expense — — 2,588 — — — — 2,588

Investment from noncontrolling partner — — — — — — 1,070 1,070

Net income — — — 46,041 — — 19 46,060

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

Net income (loss) — — — 29,246 — — ( 146 ) 29,100

Balance at September 30, 2023 9,397,639 $ 94 $ 80,437 $ 201,050 — $ — $ ( 257 ) $ 281,324

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss) $ 46,060 $ 30,150 $ ( 6,312 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net income $ 29,100 $ 46,060 $ 30,150

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 15,151 12,391 8,238

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Unrealized loss on equity securities — — 84

Loss (gain) on insurance ( 463 ) ( 1,337 ) 596

Gain on insurance ( 77 ) ( 463 ) ( 1,337 )

Noncash lease expense 2,978 2,607 1,729

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Inventories 177 ( 554 ) ( 287 )

Prepaid expenses, other current assets and other assets 387 4,120 1,633

Accounts payable and accrued liabilities ( 1,079 ) ( 6,515 ) ( 185 )

Prepaid expenses, other current, and other assets ( 366 ) 387 4,120

Accounts payable, accrued, and other liabilities 1,369 ( 1,079 ) ( 6,515 )

Net cash provided by operating activities 59,130 64,509 41,991

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Payment of loan origination costs ( 239 ) ( 463 ) ( 1,174 )

Distribution to noncontrolling interests — — ( 31 )

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

Net cash provided by (used in) financing activities ( 9,263 ) 3,582 ( 15,096 )

NET INCREASE IN CASH AND CASH EQUIVALENTS 294 20,081 1,508

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 14,957 ) 294 20,081

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 35,980 35,686 15,605

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,023 $ 35,980 $ 35,686

CASH PAID DURING YEAR FOR:

CASH PAID DURING THE YEAR FOR:

Interest paid, net of amounts capitalized $ 15,156 $ 11,227 $ 10,362

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2023 2022 2021

Debt incurred with seller in connection with acquisition of businesses $ 49,000 $ — $ —

Debt incurred in connection with acquisition of businesses $ 30,405 $ 49,000 $ —

Debt incurred in connection with purchase of property and equipment $ 10,476 $ 9,201 $ —

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Number of shares 200,000 500,000 —

Fair value $ 29,933 $ — $ —

Accounts receivable converted to notes receivable $ — $ — $ 122

Fair value at acquisition date $ 12,847 $ 29,933 $ —

Refinanced long-term debt $ — $ — $ 62,832

Operating lease right-of-use assets established upon adoption of ASC 842 $ — $ — $ 27,310

Deferred rent liabilities reclassified upon adoption of ASC 842 $ — $ — $ 1,241

Operating lease liabilities established upon adoption of ASC 842 $ — $ — $ 28,551

Adjustment to operating lease right-of-use assets and operating lease liabilities related to new and renewed leases $ 21,424 $ 491 $ —

Adjustment to operating lease right-of-use assets related to new and renewed leases $ 1,864 $ 21,424 $ 491

Adjustment to operating lease liabilities related to new and renewed leases $ 2,163 $ 21,424 $ 491

Unpaid liabilities on capital expenditures $ 1,967 $ 1,503 $ 830

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Through its subsidiaries, the Company currently owns and operates establishments that offer live adult entertainment, restaurant, and/or bar operations.

These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Tomball, Katy, Pearland, Odessa, Lubbock, Longview, Tye, Aledo, Round Rock, Edinburg, El Paso, Harlingen, Arlington, and Beaumont, Texas, as well as Denver, Colorado;

These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Tomball, Katy, Pearland, Dickinson, Odessa, Lubbock, Longview, Tye, Round Rock, Edinburg, El Paso, Harlingen, Arlington, and Beaumont, Texas, as well as Denver, Colorado;

Minneapolis, Minnesota;

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The Company has not experienced any losses related to amounts in excess of FDIC limits.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Accounts and Notes Receivable

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Long-term notes receivable, which have original maturity of more than one year, include consideration from the sale of certain investment interest entities and real estate.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

recognizes interest income on notes receivable based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income will be collected.

The Company recognizes interest income on notes receivable based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income will be collected.

The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances indicate that accounts or notes receivable will not be collected.

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Expenditures for normal maintenance and repairs are expensed as incurred.

The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of operations of the respective period.

Interest expense from related debt incurred during site construction is capitalized, which amounted to $ 0 in fiscal 2022, $ 0 in fiscal 2021, and $ 156,000 in fiscal 2020.

Interest expense from related debt incurred during site construction is capitalized, which amounted to $ 0 in all three fiscal years presented.

Goodwill and Other Intangible Assets

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An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value.

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We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2023, we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $ 4.2 million.

For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $ 566,000 .

For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $ 6.3 million.

For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $ 7.9 million.

For indefinite-lived intangibles, specifically sexually-oriented business ("SOB") licenses, we determine fair value by estimating the multiperiod excess earnings of the asset.

For indefinite-lived tradename, we determine fair value by using

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

the relief from royalty method.

For indefinite-lived tradename, we determine fair value by using the relief from royalty method.

The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $ 293,000 in 2022 related to one club, $ 5.3 million in 2021 related to three clubs, $ 2.3 million in 2020 related to two clubs, which are included in other charges, net in the consolidated statements of operations.

We recorded impairment charges for SOB licenses amounting to $ 6.5 million in 2023 related to eight clubs, $ 293,000 in 2022 related to one club, $ 5.3 million in 2021 related to three clubs, which are included in other charges, net in the consolidated statements of income.

Impairment of Long-Lived Assets

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The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

During fiscal 2022, the Company impaired one club and one Bombshells for a total of $ 1.0 million;

during fiscal 2021, the Company impaired five clubs (including one later reclassified as held for sale) for a total of $ 2.0 million;

and during fiscal 2020, the Company impaired one club and one Bombshells unit for a total of $ 302,000 .

The Company also impaired one club in fiscal of 2020 for operating lease right-of-use assets amounting to $ 104,000 .

During fiscal 2023, the Company impaired one club for $ 58,000 ;

during 2022, the Company impaired one club and one Bombshells for a total of $ 1.0 million;

and during fiscal 2021, the Company impaired five clubs (including one later reclassified as held for sale) for a total of $ 2.0 million.

The Company also impaired one club in fiscal 2023 for operating lease right-of-use assets amounting to $ 1.0 million and software amounting to $ 814,000 related to two venture projects.

See Notes 5 and 18 .

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None of these instruments are held for trading purposes.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Revenue Recognition

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 consolidated statements of operations.

Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying 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.

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Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases .

Lease revenue is generally recognized ratably over the term of the lease.

A substantial portion of our lessor contracts are classified as operating lease and a number of them are month-to-month or short-term contracts.

Revenue from initial franchise and area development fees are recognized as the performance obligations are satisfied over the term of the franchise agreement.

Franchise royalties and advertising contributions, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Refer to Notes 3 and 18 for additional disclosures on revenues and leases, respectively.

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Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional purposes.

Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of income.

The Company and its subsidiaries are subject to U.S.

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Cost and equity method investments are included in other assets in the Company’s consolidated balance sheets.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Paycheck Protection Program

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The Company will continue to record the loans as debt until either (1) the loans are partially or entirely forgiven and the Company has been legally released from the obligation, at which point the amount forgiven will be recorded as income, or (2) the Company pays off the loans.

Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted earnings (loss) per share reflect the potential dilution of securities that could share in the earnings or losses of the Company.

Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted earnings per share reflect the potential dilution of securities that could share in the earnings or losses of the Company.

Potential common stock shares consist of shares that may arise from outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method) and from outstanding convertible debentures (the number of which is computed using the if-converted method).

Diluted earnings (loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).

During the years ended September 30, 2022, 2021, and 2020, the Company did not have any adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted earnings (loss) per share.

For fiscal 2022, we

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

excluded 300,000 stock options from the calculation of diluted earnings per share because the effect was anti-dilutive.

There were no other potentially dilutive securities outstanding during fiscal 2021 and 2020.

Diluted earnings per share considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).

During the years ended September 30, 2023, 2022, and 2021, the Company did not have any adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted earnings per share.

For fiscal 2023 and 2022, we excluded 300,000 stock options from the calculation of diluted earnings per share because the effect was anti-dilutive.

There were no other potentially dilutive securities outstanding during fiscal 2021.

Business Combinations

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When treasury shares are retired, we charge the excess of the repurchase price over the par value of the repurchased shares to additional paid-in capital.

We also charge additional paid-in capital for any excise tax incurred related to share repurchases.

Stock-based Compensation

8 unchanged sentences

Risk-free rate 3.23 %

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

The expected term was estimated using the historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan.

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The Company carries substantial insurance to cover such risks with large deductibles and/or self-insured retention.

These policies have

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

been structured to limit our per-occurrence exposure.

These policies have been structured to limit our per-occurrence exposure.

The Company believes, and the Company’s experience has been, that such insurance policies have been sufficient to cover such risks.

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The Company classifies its marketable securities as available-for-sale, which are reported at fair value.

Unrealized holding gains and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income and were reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018.

Realized gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are included in comprehensive income (loss).

Realized gains and losses (including unrealized holding gains and losses) from securities classified as available-for-sale are included in comprehensive income.

The Company measures the fair value of its marketable securities based on quoted prices for identical securities in active markets, or Level 1 inputs.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

In accordance with U.S.

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If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in other charges, net in the consolidated statements of operations.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Assets and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):

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Property and equipment* $ 21,454 $ — $ — $ 21,454

Property and equipment** 3,432 — — 3,432

Indefinite-lived intangibles* 43,948 — — 43,948

Indefinite-lived intangibles** 2,996 — — 2,996

Definite-lived intangibles** 8,220 — — 8,220

2 unchanged sentences

Current assets* 696 — — 696

* Certain assets and liabilities measured at the acquisition dates.

** Measured at year-end impairment testing.

Fair Value at Reporting Date Using

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Property and equipment* $ 32,904 $ — $ — $ 32,904

Property and equipment** 3,432 — — 3,432

Indefinite-lived intangibles* 50,454 — — 50,454

Definite-lived intangibles* 27,986 — — 27,986

Goodwill* 20,608 — — 20,608

Asset held for sale 3,007 — 3,007 —

Goodwill** 663 — — 663

Current assets* 681 — — 681

* Certain assets and liabilities measured at the acquisition dates.

** Measured at year-end impairment testing.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Unrealized Gain (Loss/Impairments) Recognized

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Indefinite-lived intangibles ( 5,516 ) ( 293 ) ( 5,296 )

Definite-lived intangibles ( 1,813 ) — —

Operating lease right-of-use assets ( 1,003 ) — —

Other assets (equity securities) — — ( 84 )

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

The significant unobservable inputs used in our level 3 fair value measurements are as follows:

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Property and equipment Discounted cash flow EBITDA multiple 1 x - 12 x ( 11 x)

9 x - 10 x ( 10 x)

Revenue/EBITDA growth rate 0 % - 2.5 % ( 1.25 %)

0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

Weighted average cost of capital 11 % ( 11.0 %)

12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Goodwill Discounted cash flow EBITDA multiple 9 x - 12 x ( 12 x)

8 x - 10 x ( 9 x)

Revenue/EBITDA growth rate 0 % - 2.5 % ( 2.5 %)

0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

Weighted average cost of capital 11 % ( 11 %)

12.5 % ( 12.5 %)

SOB licenses Multiperiod excess earnings EBITDA multiple 9 x - 10 x ( 10 x)

13 % - 17 % ( 15 %)

SOB licenses Multiperiod excess earnings EBITDA multiple 12 x ( 12 x)

9 x - 10 x ( 10 x)

Revenue/EBITDA growth rate 0 % - 2.5% ( 2.5 %)

0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

Weighted average cost of capital 11 % ( 11 %)

12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Contributory asset charges rate 10 % - 21.5 % ( 15 %)

0.5 % - 7.4 % ( 2.3 %)

1.4 % - 8.0 % ( 4 %)

Tradename Relief-from-royalty method Revenue growth rate 0 % - 2.5% ( 2.5 %)

0 % - 2.5 % ( 1.5 %)

Terminal multiple 9 x - 10 x ( 9 x)

0 % - 2.5 % ( 2.5 %)

Terminal multiple 12 x ( 12 x)

9 x - 10 x ( 9 x)

Royalty rate 3 % - 6 % ( 4.7 %)

3.5 % - 4.5 % ( 4 %)

Weighted average cost of capital 11 % ( 11 %)

12.5 % ( 12.5 %)

Operating lease right-of-use assets Discounted cash flow EBITDA growth rate 1.5 % - 2.5 % ( 2.3 %)

0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

Weighted average cost of capital 11 % ( 11 %)

12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Business combinations Various* Growth rate 0 % - 11.2 % ( 5.5 %)

2.5 % - 10 % ( 4.8 %)

Weighted average cost of capital 16.5 % - 18.0 % ( 17.8 %)

15 % - 19.5 % ( 18.1 %)

Internal rate of return 16.5 % - 30.0 % ( 22.4 %)

15 % - 21.5 % ( 19.4 %)

Contributory asset charges rate 15.6 % - 21.5 % ( 16.3 %)

* Includes all of the valuation techniques for each of the fair valued assets above.

Impact of Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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.

8.5 % - 10.2 % ( 9.3 %)

* Includes all of the valuation techniques for each of the fair valued assets above as of each acquisition date.

Reclassification

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.

See Note 16 .

RCI HOSPITALITY HOLDINGS, INC.

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Summary of Significant Accounting Policies - continued

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Impact of Recently Issued Accounting Standards

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 .

This ASU amends Accounting Standards Codification ("ASC") 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations.

This ASU amends Accounting Standards Codification ("ASC") Topic 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations.

The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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We have not yet evaluated the impact of this ASU on our consolidated financial statements.

Ongoing Impact of COVID-19 Pandemic

Our fiscal 2020 was the period hard 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 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.

Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets

We considered 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 future assumed impact of COVID-19 pandemic on sales.

Going forward, because of the illness' anticipated permanence, we will no longer consider it as a triggering event for impairment purposes.

Based on the evaluation we conducted during the interim and annual periods since the pandemic emerged, we determined that during the year ended September 30, 2020 our assets were impaired in a total amount of approximately $ 10.6 million comprised of $ 7.9 million in goodwill, $ 2.3 million in SOB licenses , $ 302,000 in property and equipment , and $ 104,000 in operating lease right-of-use assets.

We recognized an additional $ 13.6 million of impairment during the year ended September 30, 2021 comprised of $ 6.3 million in goodwill, $ 5.3 million in SOB licenses , and $ 2.0 million in property and equipment , which included one property later reclassified as held for sale.

During the year ended September 30, 2022, we recorded total impairment charges of $ 1.9 million comprised of $ 566,000 in goodwill, $ 293,000 in SOB license , and $ 1.0 million in property and equipment .

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.

In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60):

Recognition and Initial Measurement , which addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture's separate financial statements.

The objectives of the ASU are to (1)) provide decision-useful information to investors and other allocators of capital in a joint venture's financial statements and (2) reduce diversity in practice.

The FASB decided to require a joint venture to apply a new basis of accounting upon formation that will recognize and initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance).

The amendments of this ASU are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025.

Additionally, a joint venture that was formed before January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information.

early adoptions is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively.

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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , which aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

In addition, the amendments in the ASU enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements.

The purpose of the amendments is to enable investors to better understand an entity's overall performance and assess potential future cash flows.

The ASU applies to all public entities that are required to report segment information in accordance with ASC 280, and is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

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

RCI HOSPITALITY HOLDINGS, INC.

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$ 137,348 $ 56,621 $ 1,289 $ 195,258

The Company does not have contract assets with customers.

The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our consolidated balance sheet.

RCI HOSPITALITY HOLDINGS, INC.

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Revenues - continued

reconciliation of contract liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below (in thousands):

Balance at September 30, 2020 Consideration Received Recognized in Revenue Balance at September 30, 2021 Consideration Received Recognized in Revenue Balance at September 30, 2022

The Company does not have contract assets with customers.

The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our consolidated balance sheet.

A reconciliation of contract liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below (in thousands):

Balance at September 30, 2021 Consideration Received Recognized in Revenue Balance at September 30, 2022 Consideration Received (Refunded) Recognized in Revenue Balance at September 30, 2023

Ad revenue $ 84 $ 611 $ ( 613 ) $ 82 $ 451 $ ( 484 ) $ 49

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$ 354 $ 1,070 $ ( 1,190 ) $ 234 $ 974 $ ( 1,112 ) $ 96

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our consolidated statements of operations.

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note 4 ), while the revenues associated with these contract liabilities are included in other revenues in our consolidated statements of income.

On December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells locations in San Antonio, Texas over a period of five years , and the right of first refusal for three more locations in Corpus Christi, New Braunfels, and San Marcos, all in Texas.

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Upon execution of the agreement, the Company received $ 50,000 in development fees representing 100 % of the initial franchise fee of the first restaurant.

In February 2023, the Company purchased the franchised Bombshells unit in San Antonio, Texas.

Selected Account Information

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Income tax refundable 2,989 2,979

Insurance receivable — 185

ATM-in-transit 1,675 819

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Gain on sale of businesses and assets ( 682 ) ( 2,375 ) ( 522 )

Loss (gain) on insurance ( 463 ) ( 1,253 ) 420

Gain on insurance ( 77 ) ( 463 ) ( 1,253 )

Total other charges, net $ 15,629 $ 467 $ 13,186

2 unchanged sentences

September 30,

Buildings and land $ 206,424 $ 162,217

Land $ 95,018 $ 78,116

Buildings and improvements 204,947 159,037

Equipment 49,632 45,648

Leasehold improvements 30,729 28,681

Furniture 13,959 12,391

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Depreciation expense was approximately $ 11.6 million, $ 10.3 million, and $ 8.0 million for fiscal years 2023, 2022, and 2021, respectively.

Impairment loss for property and equipment, including those later reclassified to assets held for sale, was $ 1.0 million, $ 2.0 million, and $ 0.3 million for fiscal 2022, 2021, and 2020, respectively.

Impairment loss for property and equipment, including those later reclassified to assets held for sale, was $ 58,000 , $ 1.0 million, and $ 2.0 million for fiscal 2023, 2022, and 2021, respectively.

Assets Held for Sale

As of September 30, 2021, the Company had two properties classified as held for sale with an aggregate net realizable value less cost to sell of $ 4.9 million with associated liabilities amounting to $ 1.1 million.

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.

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

As of September 30, 2022, the Company had one property classified as held for sale with an aggregate net realizable value less cost to sell of $ 1.0 million, and with no associated liabilities.

On December 28, 2022, the Company sold the property classified as held-for-sale with a carrying value of $ 1.049 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.

The Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers.

Gains or losses on the sale of properties held for sale are included in other charges, net within the consolidated statements of income (see Note 4 ).

As of September 30, 2023, there were no assets held-for-sale.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Assets Held for Sale - continued

As of September 30, 2022, there were no liabilities associated with held-for-sale assets amounting to $ 1.0 million.

Gains or losses on the sale of properties held for sale are included in other charges, net within the consolidated statements of operations (see Note 5).

Goodwill and Other Intangible Assets

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Definite useful lives:

Discounted leases 18 & 6 years

Discounted leases Lease term 811 78

Non-compete agreements 5 years 3 55

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Leases acquired in-place Lease term 133 117

23,599 26,935

Total goodwill and other intangible assets $ 249,917 $ 211,816

Substantially all of our goodwill and other intangible assets belong to our Nightclubs segment.

Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill

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Ending balance $ 23,599 $ 155,546 $ 70,772 $ 26,935 $ 117,114 $ 67,767

Definite-lived intangible assets consist of the following (in thousands):

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Goodwill and Other Intangible Assets - continued

Definite-lived intangible assets consist of the following (in thousands):

September 30,

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Total definite-lived intangibles 33,376 31,371

Less accumulated amortization ( 4,436 ) ( 2,318 )

Less accumulated amortization and impairment ( 9,777 ) ( 4,436 )

Definite-lived intangibles, net $ 23,599 $ 26,935

As of September 30, 2023 and 2022, the accumulated impairment balance of indefinite-lived intangibles was $ 16.9 million and $ 11.4 million, respectively, while the accumulated impairment balance of goodwill was $ 25.4 million and $ 21.2 million, respectively.

As of September 30, 2023 and 2022, the gross amount of goodwill amounted to $ 96.2 million and $ 88.9 million, respectively.

Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2023 is:

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and thereafter - $ 12.5 million.

Indefinite-lived intangible assets consist of SOB licenses and tradenames, which were obtained as part of acquisitions.

Indefinite-lived intangible assets consist of SOB licenses, liquor licenses, and tradenames, which were obtained as part of acquisitions.

These licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which are done at minimal costs to the Company.

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The discounted cash flow of the income approach method was used in calculating the value of these licenses in a business combination, while the relief-from-royalty method was used in calculating the value of tradenames.

During the fiscal year ended September 30, 2023, the Company recognized a $ 6.5 million impairment related to the SOB licenses of eight clubs and a $ 4.2 million impairment related to goodwill of four reporting units.

During the fiscal year ended September 30, 2022, the Company recognized a $ 293,000 impairment related to the SOB license of one club and a $ 566,000 impairment related to goodwill of one reporting unit.

During the fiscal year ended September 30, 2021, the Company recognized a $ 5.3 million impairment related to three clubs’ SOB licenses and a $ 6.3 million impairment related to the goodwill of seven reporting units (see Note 3).

During the fiscal year ended September 30, 2020, the Company recognized a $ 2.3 million impairment related to two clubs’ SOB licenses and a $ 7.9 million impairment related to the goodwill of seven reporting units.

RCI HOSPITALITY HOLDINGS, INC.

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September 30,

Notes payable at 5.5 %, matures January 2023

Notes payable at 5.5 %, fully paid in January 2023

(d)(1) $ — $ 678

Non-interest-bearing debts to State of Texas, paid in April 2022, interest imputed at 9.6 %

Note payable at 8 %, matures October 2027, as amended

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Note payable at 9 %, paid in March 2022

(a)(5) — 1,063

Note payable at 5.49 %, matures March 2039, as amended

(c)(4) 1,937 2,008

Paycheck Protection Program loans at 1 %, paid in May 2022

Note payable at 3.99 %, paid in January 2022

*(a)(8) — 2,127

Note payable at 5.25 %, matures September 2031

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(a)(15) 4,592 4,970

Note payable at 5.25 % matures August 2023

Note payable at 5.25 % matures February 2024

*(a)(16) 1,575 1,575

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(c)(17) 2,731 2,806

Note payable initially at 6 % matures April 2024

*(a)(18) 2,259 —

Note payable at 6 % matures October 2037

(a)(19) 4,708 —

Note payable initially at 6 % matures May 2024

*(a)(20) 1,500 —

Note payable at 6.67 % matures January 2028

*(a)(21) 3,302 —

Notes payable at 7 % matures February 2025

(b)(22) 1,801 —

Notes payable at 7 % matures March 2033

(a)(b)(24) 24,603 —

Note payable initially at 8.75 % matures March 2025

(d)(23) 7,500 —

Note payable initially at 7.12 % matures June 2028

*(a)(25) 2,874 —

Total debt 242,667 205,840

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* These commercial bank debts are guaranteed by the Company’s CEO.

See Note 1 7 .

RCI HOSPITALITY HOLDINGS, INC.

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The rate adjusts to prime plus 2.5 % in the 61st month, not to exceed 9 %.

In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $ 6.5 million, which have been paid off in relation to the December 2017 Refinancing Loan, as discussed below.

In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $ 6.5 million, which have been paid off in December 2017.

The notes were also payable over eleven years at $ 53,110 per month including interest and have the same adjustable interest rate of 5.5 %.

(2) In 2015, the Company reached a settlement with the State of Texas over 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 nonsettled locations.

For accounting purposes, the Company has 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.

In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations.

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.

In March 2017, the present value of the second note was approximately $ 390,000 after discounting using an imputed interest rate of 9.6 %.

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

Going forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $ 5 per customer.

These notes were fully paid in January 2023.

(2) On May 8, 2017, in relation to the Scarlett’s acquisition, the Company executed two promissory notes with the sellers:

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Presently, the maturity date is October 1, 2027 and the interest rate is 8 % for its remaining term.

Refer to December 2019 amendment below.

(3) On December 7, 2017, the Company borrowed $ 7.1 million from a lender to purchase an aircraft at 5.99 % interest.

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In March 2020, this loan was extended to September 2033.

(5) On September 26, 2018, the Company refinanced a $ 500,000 12 % note payable for $ 1.35 million from a private lender by executing a 9 % 10-year note payable $ 17,101 monthly, including interest, until maturity.

In relation to a sale of a held-for-sale property (see Note 7), this note was fully paid in March 2022.

(4) On December 11, 2018, the Company purchased an aircraft for $ 2.8 million with a $ 554,000 down payment and financed for the remaining $ 2.2 million with a 5.49 % promissory note payable in 20 years with monthly payments of $ 15,118 , including interest.

Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity date.

(7) On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge amounting to $ 5.4 million.

Under the terms of the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1 % per annum.

As of September 30, 2022, we have received eleven

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted.

All of those notices received forgave 100 % of each of the eleven PPP loans totaling the amount of $ 5.3 million in principal and interest.

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 was fully paid in May 2022 as debt plus accrued interest.

(8) On January 25, 2021, the Company borrowed $ 2.175 million from a bank lender by executing a 20-year promissory note with an initial interest rate of 3.99 % per annum.

The note is payable $ 13,232 per month for the first five years after which the interest rate will be repriced at the then-current prime rate plus 1.0 % per annum, with a floor rate of 3.99 %.

The Company paid approximately $ 25,000 in debt issuance costs at closing.

This note was fully paid with proceeds from the January 25, 2022 borrowing.

(5) On September 30, 2021, we entered into a $ 99.1 million term loan refinancing $ 85.7 million of existing bank and seller-financed real estate debt and to provide $ 12.3 million in cash that will be used to pay off existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing for the acquisition of 11 clubs and related real estate (see Note 14 ).

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(7) On October 12, 2021, we closed on 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.

Of this amount, $ 9.5

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

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 1 7 ) 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.

See the October 25, 2023 extension of the term of the promissory notes, below.

(8) On October 18, 2021, in relation to an acquisition (see Note 1 4 ), the Company executed four seller-financed promissory notes.

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Treasury securities plus 3.98 % with a floor of 5.25 %.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

payable in monthly payments of $ 126,265 in principal and interest to be adjusted after five years .

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 1 7 ).

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

(15) On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 1 4 ), the Company executed two seller-financed promissory notes:

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The 5.25 % mortgage note is payable interest-only for eleven months and on its August 18, 2023 maturity date payable with the entire principal balance plus accrued interest.

The maturity date of this mortgage note was extended to February 18, 2024.

(17) On September 23, 2022, in connection with the purchase of an aircraft worth $ 3.5 million (see Note 14 ), the Company entered into a financing transaction for $ 2.8 million.

The financing agreement bears an interest of 4.79 % per annum and payable in 240 monthly installments of principal and interest amounting to $ 18,298 .

(18) On October 10, 2022, in relation to a real estate purchase (see Note 14 ), the Company borrowed $ 2.3 million from a bank lender.

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.

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

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

(19) On October 26, 2022, in relation to a club acquisition (see Note 1 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.

(20) On November 18, 2022, in relation to a real estate purchase on September 12, 2022 (see Note 1 4 ), 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.

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

(21) On December 20, 2022, the Company executed a promissory note for $ 3.3 million with a bank lender in relation to a purchase of a food hall property (see Note 1 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.

(22) On February 7, 2023, in relation to the acquisition of a franchised Bombshells location in San Antonio, Texas (see Note 1 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.

(23) 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.

The compensating balance requirement does not contractually or legally restrict the withdrawal or use of cash.

RCI HOSPITALITY HOLDINGS, INC.

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Debt - continued

(24) On March 16, 2023, in relation to the acquisition of five clubs with associated real estate, automated teller machines, and intellectual property (see Note 1 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.

(25) On June 18, 2023, in relation to a purchase of a retail parcel in a condominium property (see Note 1 4 ), the Company executed a promissory note for $ 2.9 million with a bank lender.

The 7.12 % five-year promissory note is payable in monthly installments of $ 20,654 in principal and interest, with the balance of principal and accrued interest payable at maturity.

Future maturities of debt obligations as of September 30, 2023 consist of the following (in thousands):

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$ 129,094 $ 113,573 $ 242,667

(22)On October 10, 2022, in relation to a real estate purchase (see Note 16), 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 approximately $ 26,000 in debt issuance cost at closing.

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

(23)On October 26, 2022, in relation to a club acquisition, 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.

(23)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.

Income tax expense (benefit) consisted of the following (in thousands):

Years Ended September 30,

Income tax expense consisted of the following (in thousands):

2023 2022 2021

5 unchanged sentences

Total deferred income tax expense (benefit) ( 1,781 ) 3,080 ( 1,253 )

Total income tax expense (benefit) $ 14,071 $ 3,989 $ ( 493 )

Total income tax expense $ 6,846 $ 14,071 $ 3,989

The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.

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Income Taxes - continued

Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S.

Income tax expense differs from the “expected” income tax expense computed by applying the U.S.

federal statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

2023 2022 2021

Federal statutory income tax expense (benefit) $ 12,628 $ 7,169 $ ( 1,429 )

Federal statutory income tax expense $ 7,549 $ 12,628 $ 7,169

State income taxes, net of federal benefit 1,620 1,801 716

Permanent differences 605 96 ( 434 )

Change in state tax rate 896 ( 804 ) —

Change in tax rates ( 255 ) 896 ( 804 )

Change in valuation allowance ( 176 ) 343 ( 632 )

1 unchanged sentence

Other ( 366 ) 103 ( 819 )

Total income tax expense (benefit) $ 14,071 $ 3,989 $ ( 493 )

Total income tax expense $ 6,846 $ 14,071 $ 3,989

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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$ ( 29,143 ) $ ( 30,562 )

Included in the Company’s deferred tax liabilities at September 30, 2022 and 2021 is the tax effect of indefinite-lived intangible assets from club acquisitions amounting to approximately $ 32.9 million and $ 17.1 million, respectively, which are not deductible for tax purposes.

These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

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We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities.

We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued

We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense.

RCI HOSPITALITY HOLDINGS, INC.

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Income Taxes - continued

related to unrecognized tax benefits in interest expense.

In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.

The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax benefits.

As of September 30, 2023 and 2022, the Company does not have any uncertain tax position.

The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve months.

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federal jurisdiction, and various states.

The Company’s federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service (“IRS”) with no changes.

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

Fiscal year ended September 30, 2020 and subsequent years remain open to federal tax examination.

The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.

On March 27, 2020, former President Trump signed the CARES Act into law.

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During fiscal 2022, 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.

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 income for the fiscal year ended September 30, 2022.

In November 2021, we received a partial forgiveness of the remaining $ 124,000 PPP loan for $ 85,000 in principal and interest.

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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.

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 has 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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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 debt.

A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $ 5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses.

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

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

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

The State of Texas next sought review from the Supreme Court, but the high court declined to take the case and in doing so exhausted the State's rights to appeal the judgment.

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.

Indemnity Insurance Corporation

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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”).

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As of September 30, 2023, we had 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 and directors 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 cases were consolidated as In re RCI Hospitality Holdings, Inc., No.

4:19-cv-01841.

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 28, 2022, the Court preliminarily approved the settlement and form of class

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

On August 12, 2022, the Court issued an order finally approving the settlement, which was funded by insurance carrier.

No appeal was filed and hence the litigation has concluded.

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.

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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.

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 included alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories.

The Company contended that there was insurance coverage under an applicable insurance policy.

The insurer raised several issues regarding coverage under the policy.

This matter was settled at mediation in August 2022.

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.

On July 24, 2023, the parties reached an agreement in principle to resolve the action.

On October 10, 2023, the parties submitted an agreement to settle the action to the Court for the Court's preliminary approval.

The Company believes that payments under the settlement agreement will be covered by insurance.

On June 23, 2014, Mark H.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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 September 2023, the NY DOL assessed another of our subsidiaries for approximately $ 280,000 on the same matter for the period January 2015 through June 2022.

We recorded this latter assessment during the quarter ended September 30, 2023.

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.

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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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

Settlement of lawsuits for the years ended September 30, 2022, 2021, and 2020 total $ 1.4 million, $ 1.3 million, and $ 174,000 , respectively.

As of September 30, 2022 and 2021, the Company has accrued $ 246,000 and $ 378,000 in accrued liabilities, respectively, related to settlement of lawsuits

During the year ended September 30, 2020, the following common stock transactions occurred:

• The Company acquired 516,102 shares of its own common stock at a cost of $ 9.5 million.

These shares were subsequently retired.

• The Company paid quarterly dividends of $ 0.03 per share, except for the second and fourth quarters when $ 0.04 per share was paid, for an aggregate amount of $ 1.3 million.

During the year ended September 30, 2021, the following common stock transactions occurred:

• The Company acquired 74,659 shares of its own common stock at a cost of $ 1.8 million.

These shares were subsequently retired.

• The Company paid quarterly dividends of $ 0.04 per share for an aggregate amount of $ 1.4 million.

During the year ended September 30, 2022, the following common stock transactions occurred:

• The Company acquired 268,185 shares of its own common stock at a cost of $ 15.1 million.

These shares were subsequently retired.

• The Company paid quarterly dividends of $ 0.05 per share, except for the first quarter when $ 0.04 per share was paid, for an aggregate amount of $ 1.8 million.

• On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock.

Settlement of lawsuits for the years ended September 30, 2023, 2022, and 2021 total $ 3.8 million, $ 1.4 million, and $ 1.3 million, respectively.

As of September 30, 2023 and 2022, the Company has accrued $ 2.4 million and $ 246,000 in accrued liabilities, respectively, related to settlement of lawsuits.

See Note 18 for lease commitments.

Stock-based Compensation

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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 expense for fiscal 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $ 2.4 million with related tax benefit amounting to $ 569,000 .

No stock-based compensation was recognized during fiscal 2021 and 2020.

Stock-based compensation expense for fiscal 2023, 2022, and 2021, which is included in corporate segment selling, general and administrative expenses, amounted to $ 2.6 million, $ 2.4 million, and $ 0 , respectively, with related tax benefit amounting to $ 616,000 , $ 569,000 , and $ 0 , respectively.

No stock-based compensation was recognized during fiscal 2021.

As of September 30, 2023, we had unrecognized compensation cost amounting to $ 4.5 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.4 years.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Stock-based Compensation - continued

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, 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.

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The following table summarizes information about stock option activity under the 2022 Plan:

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Stock-based Compensation - continued

Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands)

Outstanding at September 30, 2022 300,000 $ 100.00

Granted 300,000 $ 100.00

Outstanding at September 30, 2023 300,000 $ 100.00 3.4 $ —

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Insurance receivable Account receivable, net $ — $ — $ 186

Consolidated statements of operations – loss (gain)

Business interruption Other charges, net $ — $ — $ ( 176 )

Consolidated statements of income – gain

Property Other charges, net $ ( 77 ) $ ( 463 ) $ ( 1,337 )

2 unchanged sentences

Proceeds from property insurance claims Investing activity $ 86 $ 648 $ 1,152

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Insurance Recoveries – continued

The net property insurance gain/loss amount in fiscal 2023, 2022, and 2021 was net of assets written off and expenses amounting to $ 9,000 , $ 0 , and $ 88,000 , respectively.

Acquisitions and Dispositions

2020 Dispositions

On April 1, 2020, the Company sold a corporate housing property to an employee for $ 375,000 in cash with an approximate gain of $ 20,000 .

On May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $ 1.5 million in cash.

Net gain on the transaction was $ 583,000 after closing costs.

The net proceeds of $ 1.4 million were used to pay down related debt.

On August 6, 2020, the Company sold another corporate housing property for $ 176,000 in cash with an approximate gain of $ 26,000 .

The net proceeds of $ 160,500 were used to pay down related debt.

2021 Acquisitions

On December 28, 2020, the Company acquired the real estate and other business assets of a club in Centreville, Illinois for $ 500,000 in cash.

The Company is leasing out this property to a club operator for $ 48,000 annually.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

On January 26, 2021, the Company acquired land for a future Bombshells location in Arlington, Texas for $ 2.9 million.

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2022 Acquisitions

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 $ 87.9 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).

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 fair value of $ 87.9 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).

We used the Finnerty Model to estimate the discount on stock marketability.

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,

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment business owned and operated by the sellers.

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 business 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 8 ), and 500,000 shares of our common stock.

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

The fair value of the consideration transferred is as follows (in thousands):

Cash $ 36,800

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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 at $ 15.4 million.

Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill was estimated at $ 15.4 million.

Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible 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 $ 7.1 million of the recognized goodwill will be deductible for tax purposes.

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

Approximately $ 7.1 million of the recognized goodwill for this transaction will be deductible for tax purposes.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

Current assets $ 386

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The Company entered into leases with third parties for certain acquired clubs where the real estate was not part of the acquisition.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 414,000 , of which $ 173,000 was recognized in fiscal 2021 and $ 241,000 was recognized in fiscal 2022, and in both periods included in selling, general and administrative expenses in our consolidated statements of operations.

We recorded $ 1.8 million in measurement period adjustments related to amortization of definite-lived intangibles and debt discount during fiscal 2022.

From the date of acquisition until September 30, 2022, the eleven acquired clubs contributed revenues of $ 35.4 million and income from operations of $ 12.5 million, which are included in our consolidated statement of operations for the year ended September 30, 2022.

The following table presents the unaudited pro forma combined results of operations of the Company

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amount and number of shares):

Pro forma revenues $ 269,347 $ 217,996

Pro forma net income attributable to RCIHH common stockholders $ 45,623 $ 25,290

Pro forma earnings per share - basic and diluted $ 4.86 $ 2.66

Pro forma weighted average number of common shares outstanding - basic and diluted 9,383,445 9,504,744

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.

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, of 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 $ 2.1 million to real estate, $ 200,000 to tangible assets, and $ 1.2 million to goodwill, which is deductible for tax purposes.

On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total acquisition price of $ 3.5 million, of 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 was allocated $ 2.1 million to real estate, $ 200,000 to tangible assets, and $ 1.2 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 fiscal 2022, both of which were included in selling, general and administrative expenses in our consolidated statements of operations.

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 1.6 million and income from operations of $ 276,000 , which are included in our consolidated statement of operations for the year ended September 30, 2022.

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.

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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

RCI HOSPITALITY HOLDINGS, INC.

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Acquisitions and Dispositions – continued

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

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.

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 and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items.

1 unchanged sentence

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:

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

Current assets $ 172

7 unchanged sentences

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

In connection with the acquisition, we incurred acquisition-related expenses of approximately $ 28,000 , which is included in selling, general and administrative expenses in our consolidated statement of operations for the year ended September 30, 2022.

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 2.8 million and income from operations of $ 1.4 million, which are included in our consolidated statement of operations for the year ended September 30, 2022.

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

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

The $ 1.8 million acquisition price is preliminarily allocated $ 11,000 to current assets, $ 1.1 million to property and equipment, and $ 684,000 to licenses.

From the date of acquisition until September 30, 2022, the acquired club contributed very minimal revenues and income from operations.

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 $ 1.8 million acquisition price was allocated $ 11,000 to current assets, $ 1.1 million to property and equipment, and $ 684,000 to licenses.

RCI HOSPITALITY HOLDINGS, INC.

4 unchanged sentences

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

The total preliminary fair value of the consideration transferred is $ 23.4 million, which includes a discount on the $ 10.0 million promissory note to reflect market participant yield expectations.

The total fair value of the consideration transferred is $ 23.4 million, which includes a discount on the $ 10.0 million promissory note to reflect market participant yield expectations.

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.

1 unchanged sentence

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 July 27, 2022:

The following is our allocation of the fair value of the acquisition price (in thousands) as of July 27, 2022:

Current assets $ 71

5 unchanged sentences

Acquisition price fair value $ 23,400

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 2.0 million and income from operations of $ 802,000 , which are included in our consolidated statement of operations for the year ended September 30, 2022.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 161,000 , which was included in selling, general and administrative expenses in our consolidated statements of operations of fiscal 2022.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 August 18, 2022, the Company purchased real estate in Hunstville, Alabama amounting to $ 2.1 million for a future Bombshells location.

On August 18, 2022, the Company purchased real estate in Huntsville, Alabama amounting to $ 2.1 million for a future Bombshells location.

The Company paid $ 525,000 in cash at closing and entered into a bank financing for the $ 1.6 million remainder (see Note 8 ).

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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

The Company paid the current lessee a termination fee of $ 250,000 , which is included in other charges, net in our consolidated statement of income.

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

RCI HOSPITALITY HOLDINGS, INC.

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Acquisitions and Dispositions – continued

lessee a termination fee of $ 250,000 , which is included in other charges/gains, net in our consolidated statement of operations.

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

See also Note 7 for dispositions of real estate properties that had been classified as held-for-sale.

2023 Acquisitions

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 9).

The Company paid $ 1.2 million in cash at closing and obtained bank financing for the $ 2.3 million remainder (see Note 8 ).

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

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

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

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 an acquisition date fair value of $ 8.9 million based on certain legal contingencies that existed pre-acquisition).

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 8 ).

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

Due to the proximity of the closing date to 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, along with the determination of any goodwill or gain on the transaction.

The seller has not maintained historical U.S.

GAAP financial data and it is impracticable to prepare them, therefore, we could not provide supplemental pro forma information of the combined entities.

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

The following is our 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 ( 363 )

Total net assets acquired 6,000

Goodwill 2,905

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.

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.

In connection with this acquisition, we incurred approximately $ 23,000 in acquisition-related expenses during 2023, which is included in selling, general and administrative expenses in our consolidated statement of income.

From the date of acquisition until September 30, 2023, the club contributed revenues $ 2.0 million and loss from operations of $ 3.1 million, which are included in our consolidated statement of income.

The Company is not providing supplemental pro forma disclosures for this acquisition as it does not materially contribute to the consolidated operations of the Company.

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

On December 5, 2022, the Company purchased real estate in Central City, Colorado amounting to $ 2.5 million in cash for the development of a Rick's Cabaret Steakhouse and Casino business.

On December 12, 2022, we and certain 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 five different asset purchase agreements, 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.

2023 Disposition

On November 4, 2022, the Company received $ 1.0 million from the Texas Department of Transportation for one of the Company's club properties in Lubbock, Texas due to eminent domain.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

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 $ 3.3 million under a 6.67 % five-year promissory note (see Note 8 ).

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.

The in-place lease intangible has a weighted average amortization period of 1.7 years.

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.

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.

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 8 ).

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 (which both have amortizable life of 13.4 years), net of lease liability.

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 agreed acquisition 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 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.

The fair value of the common stock consideration was discounted due to lack of marketability during the lock-up period.

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 8 ).

The fair value of the consideration transferred is as follows:

Cash $ 25,000

Notes payable 25,500

Common stock 12,847

Total consideration fair value $ 63,347

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclub reportable segment.

Upon finalization of our valuation of the assets acquired in this transaction, we reallocated certain amounts from goodwill to indefinite-lived intangible assets.

Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill is estimated at $ 4.3 million.

This acquisition also gives the Company a bigger market share in the Hispanic demographic in the Texas metropolitan areas.

Goodwill will not be amortized but will be tested at least annually for impairment.

Approximately $ 4.3 million of the recognized goodwill will be deductible for tax purposes.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

The following is our allocation of the fair value of the acquisition price (in thousands) as of March 16, 2023:

Current assets $ 632

Property and equipment 16,570

Licenses 36,110

Tradename 6,328

Accounts payable ( 632 )

Total net assets acquired 59,008

Goodwill 4,339

Acquisition price fair value $ 63,347

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

In connection with this acquisition, we incurred approximately $ 304,000 in acquisition-related expenses during 2023, which is included in selling, general and administrative expenses in our consolidated statement of income.

From the date of acquisition until September 30, 2023, the clubs contributed revenues of $ 16.1 million and income from operations of $ 4.8 million, which are included in our consolidated statement 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 in the March 16, 2023 acquisition transaction above as though the acquisition occurred at the beginning of fiscal 2022 (in thousands, except per share amount and number of shares):

Pro forma revenues $ 306,729 $ 291,764

Pro forma net income attributable to RCIHH common stockholders $ 28,329 $ 51,198

Pro forma earnings per share - basic and diluted $ 3.01 $ 5.34

Pro forma weighted average number of common shares outstanding - basic and diluted 9,426,942 9,583,445

The unaudited pro forma financial information includes 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 8 ) 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.

On June 20, 2023, the Company purchased a restaurant parcel located in a condominium building in Denver, Colorado amounting to $ 4.6 million for a future Bombshells location.

The purchase price was paid $ 1.7 million in cash and $ 2.9 million under a 7.12 % five-year promissory note (see Note 8 ).

On August 3, 2023, the Company purchased real estate and office space in Central City, Colorado amounting to $ 2.9 million in cash to house administrative operations in the region.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

2023 Disposition

On November 4, 2022, the Company received $ 1.0 million from the Texas Department of Transportation for one of the Company's club properties in Lubbock, Texas due to eminent domain.

On June 29, 2023, the Company sold a property with a carrying value of $ 1.1 million for $ 1.5 million in cash.

The Company used $ 904,000 of the proceeds to pay off a loan related to the property.

See also Note 6 for dispositions of real estate properties that had been classified as held-for-sale.

Quarterly Results of Operations (Unaudited)

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Basic and diluted 9,230,258 9,265,781 9,430,225 9,417,166

Dividends per share declared and paid $ 0.05 $ 0.06 $ 0.06 $ 0.06

For the Three Months Ended

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Basic and diluted 9,407,519 9,489,085 9,389,675 9,249,864

Dividends per share declared and paid $ 0.04 $ 0.05 $ 0.05 $ 0.05

RCI HOSPITALITY HOLDINGS, INC.

6 unchanged sentences

Revenues $ 38,398 $ 44,059 $ 57,860 $ 54,941

Income (loss) from operations (3)

Income from operations (3)

$ 6,583 $ 9,841 $ 18,507 $ 3,617

Net income (loss) attributable to RCIHH stockholders (3)

Net income attributable to RCIHH stockholders (3)

$ 9,643 $ 6,091 $ 12,302 $ 2,300

Earnings (loss) per share (3)

Earnings per share (3)

Basic and diluted $ 1.07 $ 0.68 $ 1.37 $ 0.26

1 unchanged sentence

Basic and diluted 9,019,088 8,999,910 8,999,910 8,999,910

Dividends per share declared and paid $ 0.04 $ 0.04 $ 0.04 $ 0.04

(1) Fiscal year 2023 results of operations mainly impacted by the six newly acquired clubs and the lower same-store sales.

Net income attributable to RCIHH stockholders and earnings per share were impacted by $ 12.6 million in asset impairments ($ 662,000 in the second quarter, $ 2.6 million in the third quarter, and $ 9.3 million in the fourth quarter) and $ 3.8 million in lawsuit settlements ($ 3.1 million in the second quarter, $ 63,000 in the third quarter, and $ 576,000 in the fourth quarter).

Quarterly effective income tax expense (benefit) rate was 22.8 %, 21.8 %, 20.1 %, and ( 39.6 )% from first to fourth quarter, respectively, including the impact of the release of a $ 176,000 deferred tax asset valuation allowance and the pretax loss in the fourth quarter.

(2) Fiscal year 2022 results of operations were significantly higher than prior year due to the fifteen acquired clubs and one new Bombshells.

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Quarterly effective income tax expense (benefit) rate was ( 4.2 )%, 24.3 %, 24.4 %, and ( 210.4 )% from first to fourth quarter, respectively, including the impact of the release of a $ 462,000 deferred tax asset valuation allowance in the fourth quarter.

(3) Fiscal year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic.

Income (loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included the impact of a $ 10.6 million in asset impairments ($ 8.2 million in the second quarter, $ 982,000 in the third quarter, and $ 1.4 million in the fourth quarter).

Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter was also affected by the $ 1.3 million valuation allowance on our deferred tax assets.

Quarterly effective income tax expense (benefit) rate was 22.0 %, ( 28.9 )%, ( 20.5 )%, and 36.3 % from first to fourth quarter, respectively.

Our nightclub operations are normally affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced.

Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

42 unchanged sentences

These intercompany revenue amounts are eliminated upon consolidation.

General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Segment Information – continued

and other corporate costs such as automobile and travel costs.

Management considers these to be non-allocable costs for segment purposes.

1 unchanged sentence

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

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

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The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of September 30, 2023 and 2022 was $ 119.2 million and $ 115.1 million, respectively.

Included in the $ 17.0 million borrowing on October 12, 2021 (see Note 9) are notes borrowed from related parties—one note for $ 500,000 (Ed Anakar, see above) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the notes are the same as the rest of the lender group.

Included in the $ 17.0 million borrowing on October 12, 2021 (see Note 8 ) are notes borrowed from related parties—one note for $ 500,000 (Ed Anakar, President of RCI Management Services, Inc.

and our Director of Operations) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the notes are the same as the rest of the lender group.

Refer to Note 8 for October 2023 extension of term of promissory notes.

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.

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

The Company leases certain facilities and equipment under operating leases per ASC 842, which the Company adopted on October 1, 2019.

The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise.

The Company leases certain facilities and equipment under operating leases per ASC 842.

These leases include renewal or termination options for varying periods which we deemed reasonably certain to exercise.

This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

1 unchanged sentence

The variable portion of lease payments is not included in our right-of-use assets or lease liabilities.

Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases.

That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term.

We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Included in lease expense in our consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $ 19,500 for the year ended September 30, 2020.

This lease terminated on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Leases – continued

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases.

That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term.

We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Future maturities of operating lease liabilities as of September 30, 2023 are as follows (in thousands):

8 unchanged sentences

$ 38,152 $ 13,045 $ 51,197

Total lease expense under ASC 842 was included in selling, general and administrative expenses in our consolidated statement of operations, except for sublease income which was included in other revenue, for the years ended September 30, 2022, 2021, and 2020 as follows (in thousands):

Total lease expense under ASC 842 was included in selling, general and administrative expenses in our consolidated statement of income, except for sublease income which was included in other revenue, for the years ended September 30, 2023, 2022, and 2021 as follows (in thousands):

2023 2022 2021

11 unchanged sentences

Any reduction in total lease expense during the period caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

We recorded impairment charges of operating lease right-of-use assets amounting to $ 0 , $ 0 , and $ 104,000 during fiscal years 2022, 2021, and 2020, respectively.

We recorded impairment charges of operating lease right-of-use assets amounting to $ 1.0 million, $ 0 , and $ 0 during fiscal years 2023, 2022, and 2021, respectively.

We recorded third-party operating lease revenue under ASC 842 amounting to $ 1.8 million, $ 1.6 million, and $ 1.5 million for fiscal 2023, 2022, and 2021, respectively.

Minimum future base rentals are as follows:

$ 1.7 million for 2024, $ 1.4 million for 2025, $ 380,000 for 2026, $ 320,000 for 2027, $ 292,000 for 2028, and $ 802,000 thereafter.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Subsequent Events

On October 25, 2023, the Company entered into a debt modification transaction under which 26 investors holding a total principal amount of $ 15.7 million in unsecured promissory notes agreed to extend the maturity dates of such notes, with no other changes to the terms and conditions of the original promissory notes, which original promissory notes were issued in October 2021 and had original maturity dates in October 2024.

The transaction was effected by the 26 investors returning for cancellation their original promissory notes, with us issuing new amended and restated promissory notes to such investors.

The original promissory notes will be deemed cancelled as of the end of the day on October 31, 2023, and the new amended promissory notes will have an original issue date, and be deemed effective, as of November 1, 2023.

Other than the extension of the maturity dates, there were no other changes to the terms and conditions of the original promissory notes (except for the reduction in principal, as described below, and the corresponding reduction in monthly installments of principal and interest).

The new amended notes will continue to bear interest at the rate of 12 % per annum.

Of the new amended promissory notes, $ 9.1 million are 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, 2026.

The remaining $ 6.6 million in promissory notes are 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 November 1, 2027.

The original promissory notes that were returned and cancelled as consideration for the issuance of the $ 6.6 million in new amended promissory notes had an original principal amount of $ 7.5 million in October 2021.

On November 17, 2023, the Company closed on a construction loan agreement with a bank lender for a total amount of $ 7.2 million bearing an interest rate of 8.5 % per annum for the construction of a Bombshells restaurant in Rowlett, Texas.

The promissory note is payable in 120 monthly payments, the first 18 months of which will be interest-only.

The succeeding 101 monthly payments will be payable in equal installments of $ 63,022 in principal and interest, and the remaining balance in principal and accrued interest payable on the 120th month.

Share Repurchase

Subsequent to September 30, 2023 through the filing date of this report, we purchased 37,954 shares of the Company's common stock at a cost of $ 2.1 million.

These shares were subsequently retired.

RCI HOSPITALITY HOLDINGS, INC.

Schedule of Valuation and Qualifying Accounts

15 unchanged sentences

Fiscal 2023 $ 984 $ — $ ( 176 ) $ 808

(1) Charged to bad debts expense (under other selling, general and administrative expenses) in the consolidated statements of operations.

(1) Charged to bad debts expense (under other selling, general and administrative expenses) in the consolidated statements of income.

(2) Written off against gross receivable and allowance.

3 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data