RCI HOSPITALITY HOLDINGS, INC. 10-K

Item 8. Financial Statements and Supplementary Data. The information required by this Item begins on page 49. 48 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS Table of Contents Report s of Independent Registered Public Accounting Fir ms ( Marcum LLP , Firm ID: 688 ; Friedman LLP , Firm ID: 711 ) 50 Consolidated Financial Statements: Consolidated Balance Sheets at September 30, 202 3 and 20 2 2 54 Consolidated Statements of Income for the years ended September 30, 202 3 , 202 2 , and 202 1 55 Consolidated Statements of Changes in Equity for the years ended September 30, 202 3 , 202 2 , and 202 1 56 Consolidated Statements of Cash Flows for the years ended September 30, 202 3 , 202 2 , and 202 1 57 Notes to Consolidated Financial Statements 59 49 Table of Contents 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, 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 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 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 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 The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Impairment of Goodwill, Indefinite-lived Intangible Assets, and Long-lived Assets As discussed in Note 2 to the consolidated financial statements, the Company reviews goodwill and indefinite-lived intangible assets on an annual basis for impairment, or when events and circumstances indicate that the asset might be impaired. Additionally, the Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. 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 asset groups to the future undiscounted cash flows expected to be generated by the asset groups. If these assets are 50 Table of Contents 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. As of September 30, 2023, the Company had goodwill of approximately $70.8 million, and indefinite-lived intangible assets of approximately $155.5 million. Long-lived assets consisted of property and equipment, right of use assets, and intangible assets subject to amortization totaling approximately $341.2 million. During the year ended September 30, 2023 the Company recorded an impairment of these assets of approximately $12.6 million. We identified the evaluation of the impairment analysis of goodwill, indefinite-lived intangible assets, and long-lived assets as a critical audit matter. There was a high degree of subjective auditor judgment in evaluating the estimated undiscounted future cash flows used to test operating locations for recoverability and the determination of fair value of the relevant assets when required. Specifically, a high degree of subjective auditor judgment was required to evaluate future revenues, operating cash flows and the discount rate. The following are the primary procedures we performed to address this critical audit matter. 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; (2) evaluating the appropriateness of the underlying discounted and undiscounted cash flow models; (3) testing the completeness and accuracy of underlying data used in the models; 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, 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; and (3) sensitivities over significant inputs and assumptions, including the development of a point estimate. Fair Value Measurement of Consideration and, Tangible and Intangible Assets Acquired in Business Acquisitions 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 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 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; (2) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of assets acquired; (3) the significant audit effort in evaluating the reasonableness of the significant assumptions relating to the rate of future revenue growth and profitability of the acquired business and the discount rate; and (4) the audit effort involved the use of professionals with specialized skill and knowledge. 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 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 51 Table of Contents 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. The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors.; (3) Developing an independent point estimate 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 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 52 Table of Contents 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. 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. 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. /s/ Friedman LLP Friedman LLP We have served as the Company’s auditor from 2019 to 2023 . Marlton, New Jersey December 14, 2022 53 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) September 30, 2023 2022 ASSETS Current assets Cash and cash equivalents $ 21,023 $ 35,980 Accounts receivable, net 9,846 8,510 Current portion of notes receivable 249 230 Inventories 4,412 3,893 Prepaid expenses and other current assets 1,943 1,499 Assets held for sale — 1,049 Total current assets 37,473 51,161 Property and equipment, net 282,705 224,615 Operating lease right-of-use assets, net 34,931 37,048 Notes receivable, net of current portion 4,443 4,691 Goodwill 70,772 67,767 Intangibles, net 179,145 144,049 Other assets 1,415 1,407 Total assets $ 610,884 $ 530,738 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 6,111 $ 5,482 Accrued liabilities 16,051 11,328 Current portion of debt obligations, net 22,843 11,896 Current portion of operating lease liabilities 2,977 2,795 Total current liabilities 47,982 31,501 Deferred tax liability, net 29,143 30,562 Debt, net of current portion and debt discount and issuance costs 216,908 190,567 Operating lease liabilities, net of current portion 35,175 36,001 Other long-term liabilities 352 349 Total liabilities 329,560 288,980 Commitments and contingencies ( Note 1 0 ) Equity Preferred stock, $ 0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding — — Common stock, $ 0.01 par value per share; 20,000,000 shares authorized; 9,397,639 shares and 9,231,725 shares issued and outstanding as of September 30, 2023 and 2022, respectively 94 92 Additional paid-in capital 80,437 67,227 Retained earnings 201,050 173,950 Total RCIHH stockholders’ equity 281,581 241,269 Noncontrolling interests ( 257 ) 489 Total equity 281,324 241,758 Total liabilities and equity $ 610,884 $ 530,738 See accompanying notes to consolidated financial statements. 54 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and number of shares data) Years Ended September 30, 2023 2022 2021 Revenues Sales of alcoholic beverages $ 127,262 $ 113,316 $ 86,685 Sales of food and merchandise 43,906 44,294 41,111 Service revenues 103,577 93,888 55,461 Other 19,045 16,122 12,001 Total revenues 293,790 267,620 195,258 Operating expenses Cost of goods sold Alcoholic beverages sold 23,291 20,155 15,883 Food and merchandise sold 15,429 15,537 13,794 Service and other 282 317 374 Total cost of goods sold (exclusive of items shown separately below) 39,002 36,009 30,051 Salaries and wages 79,500 68,447 50,627 Selling, general and administrative 93,024 78,847 54,608 Depreciation and amortization 15,151 12,391 8,238 Other charges, net 15,629 467 13,186 Total operating expenses 242,306 196,161 156,710 Income from operations 51,484 71,459 38,548 Other income (expenses) Interest expense ( 15,926 ) ( 11,950 ) ( 9,992 ) Interest income 388 411 253 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 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 shares used in computing earnings per share Basic and diluted 9,335,983 9,383,445 9,004,744 Dividends per share $ 0.23 $ 0.19 $ 0.16 See accompanying notes to consolidated financial statements. 55 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Years Ended September 30, 2023, 2022, and 2021 (in thousands, except number of shares) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Noncontrolling Interests Total Equity Number of Shares Amount Number of Shares Amount Balance at September 30, 2020 9,074,569 $ 91 $ 51,833 $ 100,797 — $ — $ ( 414 ) $ 152,307 Purchase of treasury shares — — — — ( 74,569 ) ( 1,794 ) — ( 1,794 ) Canceled treasury shares ( 74,659 ) ( 1 ) ( 1,793 ) — 74,569 1,794 — — Payment of dividends — — — ( 1,440 ) — — — ( 1,440 ) 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 ) Canceled treasury shares ( 268,185 ) ( 3 ) ( 15,094 ) — 268,185 15,097 — — Payment of dividends — — — ( 1,784 ) — — — ( 1,784 ) 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 Issuance of common shares for business combination 200,000 2 12,845 — — — — 12,847 Purchase of treasury shares — — — — ( 34,086 ) ( 2,223 ) — ( 2,223 ) Canceled treasury shares ( 34,086 ) — ( 2,223 ) — 34,086 2,223 — — Payment of dividends — — — ( 2,146 ) — — — ( 2,146 ) Stock-based compensation expense — — 2,588 — — — — 2,588 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 See accompanying notes to consolidated financial statements. 56 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended September 30, 2023 2022 2021 CASH FLOWS FROM 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 Deferred tax expense (benefit) ( 1,781 ) 3,080 ( 1,253 ) Gain on sale of businesses and assets ( 870 ) ( 2,970 ) ( 714 ) Impairment of assets 12,629 1,888 13,612 Amortization and writeoff of debt discount and issuance costs 615 314 311 Doubtful accounts expense (reversal) on notes receivable — 753 ( 80 ) Unrealized loss on equity securities — — 84 Gain on insurance ( 77 ) ( 463 ) ( 1,337 ) Noncash lease expense 2,978 2,607 1,729 Stock-based compensation expense 2,588 2,353 — Gain on debt extinguishment — ( 83 ) ( 5,298 ) Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable ( 2,383 ) ( 175 ) ( 769 ) Inventories 177 ( 554 ) ( 287 ) 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 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of businesses and assets 4,245 10,669 5,415 Proceeds from notes receivable 229 182 130 Proceeds from insurance 86 648 1,152 Payments for property and equipment and intangible assets ( 40,384 ) ( 24,003 ) ( 13,511 ) Acquisition of businesses, net of cash acquired ( 29,000 ) ( 55,293 ) — Net cash used in investing activities ( 64,824 ) ( 67,797 ) ( 6,814 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt obligations, including related party proceeds of $ 0 , $ 650 , and $ 0 , respectively 11,595 35,820 38,490 Payments on debt obligations ( 15,650 ) ( 14,894 ) ( 49,178 ) Purchase of treasury stock ( 2,223 ) ( 15,097 ) ( 1,794 ) Payment of dividends ( 2,146 ) ( 1,784 ) ( 1,440 ) Payment of loan origination costs ( 239 ) ( 463 ) ( 1,174 ) 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 (DECREASE) IN CASH AND CASH EQUIVALENTS ( 14,957 ) 294 20,081 57 Table of Contents 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 THE YEAR FOR: Interest paid, net of amounts capitalized $ 15,156 $ 11,227 $ 10,362 Income taxes paid (net of refunds of $ 1,656 , $ 2,256 , and $ 2,201 , in 2023, 2022, and 2021, respectively) $ 8,636 $ 9,500 $ 5,389 Non-cash investing and financing transactions: Years Ended September 30, 2023 2022 2021 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 $ — Notes receivable received as proceeds from sale of assets $ — $ 2,700 $ — Investment from noncontrolling partner in connection with purchase of property $ — $ 1,070 $ — Issuance of shares of common stock for acquisition of business: Number of shares 200,000 500,000 — Fair value at acquisition date $ 12,847 $ 29,933 $ — Refinanced long-term debt $ — $ — $ 62,832 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 Receivable on eminent domain disposition $ — $ 1,047 $ — See accompanying notes to consolidated financial statements. 58 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 1. Nature of Business RCI Hospitality Holdings, Inc. (the “Company,” “we,” “us,” or “our”) is a holding company incorporated in Texas in 1994. 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, Dickinson, Odessa, Lubbock, Longview, Tye, Round Rock, Edinburg, El Paso, Harlingen, Arlington, and Beaumont, Texas, as well as Denver, Colorado; Minneapolis, Minnesota; Pittsburgh, Pennsylvania; Charlotte and Raleigh, North Carolina; New York and Newburgh, New York; Miami, Pembroke Park and Miami Gardens, Florida; Phoenix, Arizona; Sulphur, Louisiana; Portland, Maine; Louisville, Kentucky; Indianapolis, Indiana; and Chicago, Washington Park, Sauget, and Kappa, Illinois. The Company also owns and operates media businesses for the adult industry. The Company’s corporate offices are located in Houston, Texas. 2. Summary of Significant Accounting Policies Basis of Accounting The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is owned. Intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year Our fiscal year ends on September 30. References to years 2023, 2022, and 2021 are for fiscal years ended September 30, 2023, 2022, and 2021, respectively. Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and assumptions may vary under different circumstances and conditions. We evaluate our estimates and assumptions on an ongoing basis. Cash and Cash Equivalents The Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits. 59 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies - continued Accounts and Notes Receivable Accounts receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made. The media division’s accounts receivable are primarily comprised of receivables for advertising sales and Expo registration. Accounts receivable also include employee advances, construction advances, and other miscellaneous receivables. 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. 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. Allowance for doubtful accounts balance related to accounts receivable was $ 62,000 and $ 30,000 as of September 30, 2023 and 2022, respectively (see Note 4 ). Allowance for doubtful accounts balance related to notes receivable was $ 0 and $ 0 as of September 30, 2023 and 2022, respectively. Inventories Inventories include alcoholic beverages, energy drinks, food, and Company merchandise. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value. Property and Equipment Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements. Buildings have estimated useful lives ranging from 29 to 40 years. Furniture and equipment have estimated useful lives of 5 to 7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life. Expenditures for major renewals and betterments that extend the useful lives are capitalized. 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 income of the respective period. 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 Goodwill and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for impairment. Definite-lived intangible assets are amortized on a straight-line basis over their estimated lives. The costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets. The costs of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred. Annual license renewal fees are expensed over their renewal term. Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. 60 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. 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. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values. 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 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 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 $ 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 The Company reviews long-lived assets , such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. For assets held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or inactive markets (level 2) developed using observable data. 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 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 . Fair Value of Financial Instruments The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of notes receivable and short and long-term debt also approximates fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes. 61 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. 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 income. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer. Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases . 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. Refer to Notes 3 and 18 for additional disclosures on revenues and leases, respectively. Advertising and Marketing 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 income. See Note 4 . Income Taxes The Company and its subsidiaries are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions where we operate our businesses. Deferred income taxes are determined using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized. U.S. GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. 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. Investments Investments in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses. Investments in companies in which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for at cost and reviewed for any impairment. Cost and equity method investments are included in other assets in the Company’s consolidated balance sheets. 62 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies - continued Paycheck Protection Program The Company’s policy is to account for the Paycheck Protection Program (“PPP”) loans as debt (see Note 8 ). 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 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 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 The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values. The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to acquired entities are included prospectively beginning with the date of acquisition. Acquisition-related costs are expensed as incurred. Share Repurchases The Company accounts for treasury stock transactions using the cost method. 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 The Company recognizes all employee stock-based compensation in selling, general and administrative expenses in our consolidated statements of operations. Equity-classified awards are measured at the grant date fair value of the award and recognized as expense over their requisite service period. The Company estimates grant date fair value of stock options using the Black-Scholes option-pricing model. The following table provides the significant assumptions used in determining the estimated grant date fair value of the stock options granted in fiscal 2022. No grants were awarded in fiscal 2023 and 2021. Expected term (in years) 4.45 Expected volatility 64.42 % Expected dividend yield 0.20 % Risk-free rate 3.23 % 63 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. 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. The expected volatility was based on historical volatility of the Company's stock price for a period equal to the award's expected term. The expected dividend yield is based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged). The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We recognize forfeitures when they occur. Legal and Other Contingencies The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. The Company recognizes legal fees and expenses, including those related to legal contingencies, as incurred. Generally, the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved. The Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims for workers’ compensation, general liability, property, auto, and business interruption coverage. The Company carries substantial insurance to cover such risks with large deductibles and/or self-insured retention. 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. Fair Value Measurement The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: • Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 – Include other inputs that are directly or indirectly observable in the marketplace. • Level 3 – Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company classifies its marketable securities as available-for-sale, which are reported at fair value. 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. 64 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies - continued In accordance with U.S. GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, the Company writes down the cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss. No losses or other-than-temporary impairments in our marketable securities portfolio were recognized during the years ended September 30, 2023, 2022, and 2021. Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance sheets. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment. 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. Assets and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands): Fair Value at Reporting Date Using Description September 30, 2023 Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Property and equipment* $ 21,454 $ — $ — $ 21,454 Indefinite-lived intangibles* 43,948 — — 43,948 Indefinite-lived intangibles** 2,996 — — 2,996 Definite-lived intangibles** 8,220 — — 8,220 Goodwill* 6,881 — — 6,881 Goodwill** 1,084 — — 1,084 Current assets* 696 — — 696 Fair Value at Reporting Date Using Description September 30, 2022 Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 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 Goodwill** 663 — — 663 Current assets* 681 — — 681 * Certain assets and liabilities measured at the acquisition dates. ** Measured at year-end impairment testing. 65 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies - continued Unrealized Gain (Loss/Impairments) Recognized Years Ended September 30, Description 2023 2022 2021 Goodwill $ ( 4,239 ) $ ( 566 ) $ ( 6,307 ) Property and equipment, net (including held for sale) ( 58 ) ( 1,029 ) ( 2,202 ) 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 ) The significant unobservable inputs used in our level 3 fair value measurements are as follows: Range (Weighted Average) Areas Valuation Techniques Unobservable Input 2023 2022 2021 Property and equipment Discounted cash flow EBITDA multiple 1 x - 12 x ( 11 x) 9 x - 10 x ( 10 x) 8 x ( 8 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) 8 x ( 8 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 %) SOB licenses Multiperiod excess earnings EBITDA multiple 12 x ( 12 x) 9 x - 10 x ( 10 x) 8 x ( 8 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 %) 0 % - 2.5 % ( 2.5 %) Terminal multiple 12 x ( 12 x) 9 x - 10 x ( 9 x) 8 x ( 8 x) Royalty rate 3 % - 6 % ( 4.7 %) 3.5 % - 4.5 % ( 4 %) None Weighted average cost of capital 11 % ( 11 %) 12.5 % ( 12.5 %) 15 % ( 15 %) 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 %) None Weighted average cost of capital 16.5 % - 18.0 % ( 17.8 %) 15 % - 19.5 % ( 18.1 %) None Internal rate of return 16.5 % - 30.0 % ( 22.4 %) 15 % - 21.5 % ( 19.4 %) None Contributory asset charges rate 15.6 % - 21.5 % ( 16.3 %) 8.5 % - 10.2 % ( 9.3 %) None * 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 . 66 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies - continued 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") 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. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on our consolidated financial statements. In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . The amendments in this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction. The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. We have not yet evaluated the impact of this ASU on our consolidated financial statements. In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which amends certain provisions of ASC 842 that apply to arrangements between related parties under common control. The ASU requires all companies to amortize leasehold improvements associated with common control leases over the asset's useful life to the common control group regardless of the lease term. It also allows private and certain not-for-profit entities to use the written terms and conditions of an agreement to account for common control leases without further assessing the legal enforceability of those terms. The guidance is effective for all entities in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. We are still evaluating the impact of this ASU on our consolidated financial statements. 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. 67 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 3. Revenues Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 16 ), are shown below (in thousands). Fiscal 2023 Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 96,325 $ 30,937 $ — $ 127,262 Sales of food and merchandise 19,995 23,911 — 43,906 Service revenues 103,217 360 — 103,577 Other revenues 17,211 515 1,319 19,045 $ 236,748 $ 55,723 $ 1,319 $ 293,790 Recognized at a point in time $ 234,981 $ 55,677 $ 1,274 $ 291,932 Recognized over time 1,767 46 45 1,858 $ 236,748 $ 55,723 $ 1,319 $ 293,790 Fiscal 2022 Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 80,001 $ 33,315 $ — $ 113,316 Sales of food and merchandise 18,289 26,005 — 44,294 Service revenues 93,481 407 — 93,888 Other revenues 14,480 198 1,444 16,122 $ 206,251 $ 59,925 $ 1,444 $ 267,620 Recognized at a point in time $ 204,644 $ 59,918 $ 1,443 $ 266,005 Recognized over time 1,607 7 1 1,615 $ 206,251 $ 59,925 $ 1,444 $ 267,620 Fiscal 2021 Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 54,305 $ 32,380 $ — $ 86,685 Sales of food and merchandise 17,221 23,890 — 41,111 Service revenues 55,146 315 — 55,461 Other revenues 10,676 36 1,289 12,001 $ 137,348 $ 56,621 $ 1,289 $ 195,258 Recognized at a point in time $ 135,799 $ 56,617 $ 1,284 $ 193,700 Recognized over time 1,549 4 5 1,558 $ 137,348 $ 56,621 $ 1,289 $ 195,258 68 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 3. Revenues - continued 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 Expo revenue 151 426 ( 569 ) 8 574 ( 581 ) 1 Other (including franchise fees, see below) 119 33 ( 8 ) 144 ( 51 ) ( 47 ) 46 $ 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 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. Upon execution of the agreement, the Company collected $ 75,000 in development fees representing 100 % of the initial franchise fee of the first restaurant and 50 % of the initial franchise fee of the second restaurant. The first Bombshells franchised location opened in June 2022. On May 2, 2022, the Company signed a franchise development agreement with a private investor to open three Bombshells locations in the state of Alabama over a period of five years . Upon execution of the agreement, the Company received $ 50,000 in development fees representing 100 % of the initial franchise fee of the first restaurant. In February 2023, the Company purchased the franchised Bombshells unit in San Antonio, Texas. 4. Selected Account Information The components of accounts receivable, net are as follows (in thousands): September 30, 2023 2022 Credit card receivables $ 4,141 $ 2,687 Income tax refundable 2,989 2,979 ATM-in-transit 1,675 819 Other (net of allowance for doubtful accounts of $ 62 and $ 30 , respectively) 1,041 2,025 Total accounts receivable, net $ 9,846 $ 8,510 Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6 % to 9 % per annum and having original terms ranging from 1 to 20 years. 69 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 4. Selected Account Information - continued The components of prepaid expenses and other current assets are as follows (in thousands): September 30, 2023 2022 Prepaid insurance $ 375 $ 191 Prepaid legal 184 61 Prepaid taxes and licenses 486 391 Prepaid rent 346 296 Other 552 560 Total prepaid expenses and other current assets $ 1,943 $ 1,499 The components of accrued liabilities are as follows (in thousands): September 30, 2023 2022 Payroll and related costs $ 4,412 $ 3,186 Property taxes 3,086 2,618 Sales and liquor taxes 2,468 2,227 Insurance 9 30 Interest 654 499 Patron tax 914 467 Lawsuit settlement 2,448 246 Unearned revenues 96 234 Other 1,964 1,821 Total accrued liabilities $ 16,051 $ 11,328 The components of selling, general and administrative expenses are as follows (in thousands): 2023 2022 2021 Taxes and permits $ 11,966 $ 9,468 $ 8,701 Advertising and marketing 11,928 9,860 6,676 Supplies and services 10,724 8,614 6,190 Insurance 10,268 10,152 5,676 Lease 7,206 6,706 3,942 Legal 3,742 1,995 3,997 Utilities 5,760 4,585 3,366 Charge cards fees 7,090 6,292 3,376 Security 5,618 4,404 3,892 Accounting and professional fees 4,286 3,909 2,031 Repairs and maintenance 4,924 3,754 2,767 Stock-based compensation 2,588 2,353 — Other 6,924 6,755 3,994 Total selling, general and administrative expenses $ 93,024 $ 78,847 $ 54,608 70 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 4. Selected Account Information - continued The components of other charges, net are as follows (in thousands): 2023 2022 2021 Impairment of assets $ 12,629 $ 1,888 $ 13,612 Settlement of lawsuits 3,759 1,417 1,349 Gain on sale of businesses and assets ( 682 ) ( 2,375 ) ( 522 ) Gain on insurance ( 77 ) ( 463 ) ( 1,253 ) Total other charges, net $ 15,629 $ 467 $ 13,186 5. Property and Equipment Property and equipment consisted of the following (in thousands): September 30, 2023 2022 Land $ 95,018 $ 78,116 Buildings and improvements 204,947 159,037 Equipment 49,632 45,648 Furniture 13,959 12,391 Total property and equipment 363,556 295,192 Less accumulated depreciation ( 80,851 ) ( 70,577 ) Property and equipment, net $ 282,705 $ 224,615 Included in buildings and leasehold improvements above are construction-in-progress amounting to $ 7.7 million and $ 1.5 million as of September 30, 2023 and 2022, respectively, which are mostly related to Bombshells development projects. 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 $ 58,000 , $ 1.0 million, and $ 2.0 million for fiscal 2023, 2022, and 2021, respectively. 6. Assets Held for Sale 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. 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. 71 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 7. Goodwill and Other Intangible Assets Goodwill and other intangible assets consisted of the following (in thousands): September 30, 2023 2022 Indefinite useful lives: Goodwill $ 70,772 $ 67,767 Licenses 135,735 103,972 Tradename and domain name 19,811 13,142 226,318 184,881 Amortization Period Definite useful lives: Discounted leases Lease term 811 78 Non-compete agreements 5 years 3 55 Software 5 years 55 723 Licenses Lease term 22,597 25,962 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. 2023 2022 Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill Beginning balance $ 26,935 $ 117,114 $ 67,767 $ 400 $ 67,424 $ 39,379 Acquisitions 2,005 43,948 7,244 28,653 50,453 28,954 Impairment ( 1,813 ) ( 5,516 ) ( 4,239 ) — ( 293 ) ( 566 ) Dispositions — — — — ( 470 ) — Amortization ( 3,528 ) — — ( 2,118 ) — — Ending balance $ 23,599 $ 155,546 $ 70,772 $ 26,935 $ 117,114 $ 67,767 72 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 7. Goodwill and Other Intangible Assets - continued Definite-lived intangible assets consist of the following (in thousands): September 30, 2023 2022 Licenses $ 27,725 $ 27,725 Software 2,332 1,671 Leases acquired in-place 826 261 Discounted leases 1,076 297 Non-compete agreements 1,100 1,100 Distribution agreements 317 317 Total definite-lived intangibles 33,376 31,371 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: 2024 - $ 2.5 million; 2025 - $ 2.4 million; 2026 - $ 2.4 million; 2027 - $ 2.3 million; 2028 - $ 1.5 million; and thereafter - $ 12.5 million. 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. We considered certain licenses that are associated with leased locations as definite-lived. 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. 73 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 8. Debt Debt consisted of the following (in thousands): September 30, 2023 2022 Notes payable at 5.5 %, fully paid in January 2023 (d)(1) $ — $ 678 Note payable at 8 %, matures October 2027, as amended (b)(2)(6) 3,025 3,025 Note payable at 8 %, matures May 2029 (b)(2) 9,180 10,412 Note payable at 5.99 %, matures September 2033, as amended (c) (3) 5,351 5,731 Note payable at 5.49 %, matures March 2039, as amended (c)(4) 1,937 2,008 Note payable at 5.25 %, matures September 2031 *(a)(5) 87,937 92,062 Notes payable at 12 %, matures October 2024 (d)(7) 9,500 9,500 Notes payable at 12 %, matures October 2024 (d)(7) 3,331 3,561 Notes payable at 12 %, matures October 2024 (d)(7) 3,331 3,561 Note payable at 5.25 % matures October 2031 (a)(8) 1,136 1,172 Note payable at 6 % matures October 2031 (b)(8) 9,459 10,321 Note payable at 6 % matures October 2041 (b)(8) 7,611 7,828 Note payable at 6 % matures October 2041 (b)(8) 950 978 Note payable at 4 % matures November 2028 (b)(9) 764 895 Note payable at 5.25 % matures January 2032 *(a)(10) 16,622 18,391 Note payable at 4.25 % matures February 2043 *(a)(11) 2,583 2,625 Note payable at 10 % matures May 2025 (b)(12) 5,501 5,881 Note payable at 10 % matures May 2032 (b)(12) 5,000 5,000 Note payable at 5 % matures November 2023 *(a)(13) 2,195 2,195 Note payable at 6 % matures July 2029 (b)(14) 690 785 Note payable at 6 % matures July 2032 (b)(15) 9,119 9,880 Note payable at 6 % matures August 2032 (a)(15) 4,592 4,970 Note payable at 5.25 % matures February 2024 *(a)(16) 1,575 1,575 Note payable at 4.79 % matures October 2042 (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 Less unamortized debt discount and issuance costs ( 2,916 ) ( 3,377 ) Less current portion ( 22,843 ) ( 11,896 ) Total long-term portion of debt, net $ 216,908 $ 190,567 * These commercial bank debts are guaranteed by the Company’s CEO. See Note 1 7 . 74 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 8. Debt - continued Following is a summary of long-term debt at September 30 (in thousands): 2023 2022 (a) Secured by real estate $ 136,107 $ 122,990 (b) Secured by stock in subsidiary 72,879 55,005 (c) Secured by other assets 10,019 10,545 (d) Unsecured 23,662 17,300 $ 242,667 $ 205,840 (1) In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $ 1.5 million. The notes are payable over eleven years at $ 12,256 per month including interest and have an adjustable interest rate of 5.5 %. 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 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 %. 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: (i) a 5 % short-term note for $ 5.0 million payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8 % note for $ 15.6 million. The 12-year note is payable $ 168,343 per month, including interest. The Company has amended the $ 5.0 million short-term note payable several times, which has a remaining balance of $ 3.0 million, extending the maturity date and increasing the interest rate. Presently, the maturity date is October 1, 2027 and the interest rate is 8 % for its remaining term. (3) On December 7, 2017, the Company borrowed $ 7.1 million from a lender to purchase an aircraft at 5.99 % interest. The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $ 3.4 million, with an assumption of the old aircraft’s note payable liability of $ 2.0 million. The aircraft note is payable in 15 years with monthly payments of $ 59,869 , which includes interest. In March 2020, this loan was extended to September 2033. (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. (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 ). The $ 99.1 million note has a term of 10 years with an initial interest rate of 5.25 % per annum for the first five years , then adjusted to a rate equal to the then weekly average yield of U.S. Treasury Securities plus 350 basis points, with a floor rate of 5.25 %. The note is payable in monthly payments of principal and interest of $ 668,051 , based on a 20-year amortization period, with the balance paid at maturity. In connection with the transaction, we wrote off to interest expense approximately $ 103,000 of unamortized debt issuance costs related to the paid-off debts. We also paid approximately $ 1.0 million in loan costs, approximately $ 567,000 of which is capitalized and will be amortized together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using the effective interest method. There are certain financial covenants with which the Company is to be in compliance related to this loan. (6) On October 12, 2021, the Company amended the $ 5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $ 3.0 million as of the amendment date, extending the maturity date to October 1, 2027. The amendment did not have an impact in the Company’s results of operations and cash flows. (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 75 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 8. 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. The first promissory note was a 10-year $ 11.0 million 6 % note payable in 120 equal monthly payments of $ 122,123 in principal and interest. The second promissory note was a 20-year $ 8.0 million 6 % note payable in 240 equal monthly payments of $ 57,314 in principal and interest. The third promissory note was a 10-year $ 1.2 million 5.25 % note payable in monthly payments of $ 8,086 in principal and interest based on a 20-year amortization period, with the balance payable at maturity date. The fourth note was a 20-year $ 1.0 million 6 % note payable in 240 equal monthly payments of $ 7,215 in principal and interest. (9) On November 8, 2021, in relation to an acquisition (see Note 1 4 ), the Company executed a $ 1.0 million 7-year promissory note with an interest rate of 4.0 % per annum. The note is payable $ 13,669 per month, including principal and interest. (10) On January 25, 2022, the Company borrowed $ 18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25 % per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98 % with a floor of 5.25 %. The note is payable in monthly payments of $ 126,265 in principal and interest to be adjusted after five years . The promissory note is secured by eleven real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 1 7 ). After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan. (11) On March 1, 2022, the Company borrowed $ 2.6 million from a bank lender in relation to a purchase of real estate (see Note 1 4 ). The 21-year promissory note has an initial interest rate of 4.25 % per annum, repriced after five years and then again annually to prime plus 1 % with a floor rate of 4.25 %. The note is payable interest only during the first 12 months; then the next 48 months with $ 16,338 equal monthly payments of principal and interest; then the next 191 months at an equal monthly payment based on a 20-year amortization; with the balance of principal and interest payable at the 252nd month. (12) On May 2, 2022, in relation to a club acquisition (see Note 1 4 ), the Company executed two seller-financed notes totaling $ 11.0 million, comprised of (1) $ 6.0 million under a 10 % three-year promissory note payable in 35 equal monthly payments of $ 79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity and (2) $ 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. (13) On May 23, 2022, the Company borrowed $ 2.2 million from a bank lender in relation to a purchase of real estate (see Note 14 ). The 18-month promissory note has an initial interest rate of 4.5 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1 % with a floor of 4.5 %. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid loan costs amounting to $ 25,000 for this note. (14) On July 21, 2022, the Company executed an $ 800,000 6 % seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 1 4 ). The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest. 76 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 8. 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: (1) $ 10.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest. (16) On August 18, 2022, in relation to a purchase of real estate for a future Bombshells location amounting to $ 2.1 million (see Note 1 4 ), the Company borrowed $ 1.6 million from a bank lender. 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. 77 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 8. 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): Regular Amortization Balloon Payments Total Payments 2024 $ 15,837 $ 7,529 $ 23,366 2025 12,149 26,772 38,921 2026 12,498 — 12,498 2027 13,287 — 13,287 2028 14,050 8,731 22,781 Thereafter 61,273 70,541 131,814 $ 129,094 $ 113,573 $ 242,667 9. Income Taxes Income tax expense consisted of the following (in thousands): 2023 2022 2021 Current Federal $ 6,506 $ 8,335 $ 4,598 State and local 2,121 2,656 644 Total current income tax expense 8,627 10,991 5,242 Deferred Federal ( 1,294 ) 2,080 ( 161 ) State and local ( 487 ) 1,000 ( 1,092 ) Total deferred income tax expense (benefit) ( 1,781 ) 3,080 ( 1,253 ) 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. 78 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 9. Income Taxes - continued 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 $ 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 tax rates ( 255 ) 896 ( 804 ) Change in valuation allowance ( 176 ) 343 ( 632 ) Tax credits ( 2,131 ) ( 1,796 ) ( 1,207 ) Other ( 366 ) 103 ( 819 ) 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. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): September 30, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 827 $ 1,022 Capital loss carryforwards 651 234 Right-of-use assets 946 626 Accrued expenses 748 240 Stock-based compensation 1,185 569 Other 123 — Valuation allowance ( 808 ) ( 984 ) 3,672 1,707 Deferred tax liabilities: Intangibles ( 21,468 ) ( 21,927 ) Property and equipment ( 11,085 ) ( 10,119 ) Prepaid expenses ( 262 ) ( 205 ) Other — ( 18 ) ( 32,815 ) ( 32,269 ) $ ( 29,143 ) $ ( 30,562 ) 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. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. 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 related to unrecognized tax benefits in interest expense. 79 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 9. Income Taxes - continued 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. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. 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. On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act included, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $ 271,000 to $ 579,000 for an aggregate amount of $ 4.2 million; our shared-services subsidiary received $ 1.1 million; and one of our lounges received $ 124,000 . None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During fiscal 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 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. The remaining unforgiven portion of approximately $ 41,000 in principal was fully paid as debt plus accrued interest in fiscal 2022. 10. Commitments and Contingencies Legal Matters Texas Patron Tax A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $ 5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas 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 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 As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date. 80 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 10. 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”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014. On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015, and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100 % of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of September 30, 2023, we had 1 remaining unresolved claim out of the original 71 claims. Shareholder Derivative Action On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information 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. Other On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $ 1.4 million and its share of punitive damages is $ 4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself. As set forth in the risk factors as disclosed in this report, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously. 81 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 10. 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. General In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage. 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. Leases See Note 18 for lease commitments. 11. Stock-based Compensation On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan was approved by the shareholders during the annual stockholders' meeting on August 23, 2022. The 2022 Plan provides that the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000 . The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to six members of management subject to the approval of the 2022 Plan. 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. 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. All of the options will expire, if not vested, at the end of five years . The weighted average grant-date fair value of the stock options was $ 31.37 . No stock options were exercised in fiscal 2023. The following table summarizes information about stock option activity under the 2022 Plan: 82 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 11. 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 — Outstanding at September 30, 2023 300,000 $ 100.00 3.4 $ — Exercisable at September 30, 2023 60,000 $ 100.00 3.4 $ — 12. Employee Retirement Plan The Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3 % of the employee’s salary. Expenses related to matching contributions to the Plan approximated $ 287,000 , $ 258,000 , and $ 209,000 for the years ended September 30, 2023, 2022, and 2021, respectively. 13. Insurance Recoveries One of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2019. Both of these casualties received insurance recoveries in subsequent fiscal years. During the fourth quarter of 2021, one club in Sulphur, Louisiana incurred damage from a hurricane. We wrote off the net carrying value of the assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the insurance claims have been resolved. In relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands): Included in 2023 2022 2021 Consolidated balance sheets (period end) Insurance receivable Account receivable, net $ — $ — $ 186 Consolidated statements of income – gain Property Other charges, net $ ( 77 ) $ ( 463 ) $ ( 1,337 ) Consolidated statements of cash flows Proceeds from business interruption insurance claims Operating activity $ — $ — $ 106 Proceeds from property insurance claims Investing activity $ 86 $ 648 $ 1,152 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. 14. Acquisitions and Dispositions 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. 83 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. Acquisitions and Dispositions – continued On January 26, 2021, the Company acquired land for a future Bombshells location in Arlington, Texas for $ 2.9 million. The Company paid approximately $ 754,000 in cash including closing costs and financed $ 2.175 million with a bank lender for a 20-year promissory note with an initial interest rate of 3.99 % per annum. See Note 8 . On March 10, 2021, the Company acquired approximately 57,000 -square foot of land across the street from our corporate office for $ 475,000 in cash. The Company plans to build a warehouse on that land. On March 22, 2021, the Company acquired land adjacent to a Bombshells location in Houston, Texas for $ 1.04 million in cash. On April 7, 2021, the Company acquired land near our Bombshells location in Pearland, Texas for $ 1.275 million in cash. 2021 Dispositions On May 7, 2021, the Company sold one of the properties held for sale for $ 3.1 million. The property had a carrying value of $ 2.3 million. We recorded a net gain of approximately $ 657,000 after closing costs and we paid related debt amounting to $ 2.0 million from the proceeds of the sale. On September 21, 2021, the Company sold land where a club used to be operated for $ 2.25 million with a net gain of approximately $ 54,000 after closing costs. We paid $ 1.2 million of related debt with the proceeds of the sale. 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 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, 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 fair value of the consideration transferred is as follows (in thousands): Cash $ 36,800 Notes payable 21,200 Common stock 29,933 Total consideration fair value $ 87,933 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. 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 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: 84 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. Acquisitions and Dispositions – continued Current assets $ 386 Property and equipment 19,273 Licenses 47,390 Tradenames 6,934 Leases acquired in-place 261 Deferred tax liability ( 1,741 ) Total net assets acquired 72,503 Goodwill 15,430 Acquisition price fair value $ 87,933 Licenses and tradenames, except for those associated with certain leased locations, will not be amortized but will be tested at least annually for impairment. 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 income. We recorded $ 1.8 million in measurement period adjustments related to amortization of definite-lived intangibles and debt discount during fiscal 2022. 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. See Note 8 . 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 income. On December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased, for $ 7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use assets and corresponding operating lease liability related to the discontinued lease, both of which amounted to $ 5.9 million. On March 1, 2022, the Company acquired real estate in Stafford, Texas for $ 3.5 million for a future Bombshells location. The Company secured a $ 2.6 million loan in relation to the purchase. See Note 8 . On March 1, 2022, the Company acquired real estate in Lubbock, Texas for $ 400,000 to move one of our existing clubs due to eminent domain on the current location. See 2023 Disposition below. On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $ 16.0 million. The acquisition price includes $ 3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $ 13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $ 2.0 million in cash at closing; (2) $ 6.0 million under a 10 % three-year promissory note payable in 35 equal monthly payments of $ 79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $ 5.0 million under a 10 % ten-year interest-only promissory note payable in 119 equal monthly payments of $ 41,667 in interest, with a balloon payment of the total $ 5.0 million in principal plus accrued interest due at maturity. The Company acquired 100 % of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $ 5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase 85 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. Acquisitions and Dispositions – continued agreement. Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt. 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. 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 to be $ 6.8 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. The recognized goodwill will not be deductible for tax purposes. The following is our allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022: Current assets $ 172 Property and equipment 5,336 Licenses 4,900 Tradenames 1,460 Deferred tax liability ( 2,627 ) Total net assets acquired 9,241 Goodwill 6,759 Acquisition price fair value $ 16,000 Licenses and tradenames will not be amortized but will be tested at least annually for impairment. In connection with 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 income for the year ended September 30, 2022. On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $ 3.3 million for a future Bombshells location. The Company secured a $ 2.2 million loan in relation to the purchase. See Note 8 . On July 21, 2022, the Company acquired a club in Odessa, Texas for a total acquisition price of $ 1.8 million, of which $ 1.0 million was for the real estate and $ 800,000 for the adult entertainment business. The Company paid $ 1.0 million in cash at closing for the real estate and executed an $ 800,000 6 % seller-financed promissory note for the business. The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest. See Note 8 . 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. 86 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. Acquisitions and Dispositions – continued On July 27, 2022, the Company completed the acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $ 25.0 million. The acquisition includes (1) $ 20.0 million for the adult entertainment business covered in a stock purchase agreement paid $ 10.0 million in cash at closing and $ 10.0 million under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million for the real estate property covered in an asset purchase agreement payable under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest. In the stock purchase agreement, the Company acquired 100 % of the capital stock of the company which owned the adult entertainment business. 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. 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 to be $ 5.6 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. The recognized goodwill will not be deductible for tax purposes. The following is our allocation of the fair value of the acquisition price (in thousands) as of July 27, 2022: Current assets $ 71 Property and equipment 4,921 Licenses 16,810 Deferred tax liability ( 3,979 ) Total net assets acquired 17,823 Goodwill 5,577 Acquisition price fair value $ 23,400 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 ). On September 12, 2022, the Company entered into a joint venture with a private investment company to acquire real estate in Austin, Texas amounting to $ 2.2 million for a future Bombshells location. The Company has a 51 % interest in the joint venture and paid its $ 1.1 million share for the real estate purchase while the investment of the private investment company was recorded as noncontrolling interest in our consolidated balance sheet. 2022 Dispositions On October 8, 2021, the Company sold one of its clubs in South Houston for $ 300,000 . On July 12, 2022, the Company received $ 6.0 million from the Philadelphia Regional Port Authority for one of the Company's rental properties, with a carrying value of $ 4.9 million, due to eminent domain. The Company paid the current lessee a 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. 87 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. Acquisitions and Dispositions – continued 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 $ 1.2 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 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. 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 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. 88 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. 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. 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. 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. 89 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. 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): 2023 2022 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 above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. 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. 90 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 14. 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. 15. Quarterly Results of Operations (Unaudited) The following tables summarize unaudited quarterly data for fiscal 2023, 2022, and 2021 (in thousands, except share and per share data): For the Three Months Ended December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023 Revenues (1) $ 69,968 $ 71,517 $ 77,055 $ 75,250 Income from operations (1) $ 16,898 $ 13,427 $ 15,515 $ 5,644 Net income attributable to RCIHH stockholders (1) $ 10,238 $ 7,732 $ 9,085 $ 2,191 Earnings per share (1) Basic and diluted $ 1.11 $ 0.83 $ 0.96 $ 0.23 Weighted average number of common shares outstanding 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 December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 Revenues (2) $ 61,836 $ 63,692 $ 70,714 $ 71,378 Income from operations (2) $ 15,911 $ 17,081 $ 20,507 $ 17,960 Net income attributable to RCIHH stockholders (2) $ 10,575 $ 10,952 $ 13,902 $ 10,612 Earnings per share (2) Basic and diluted $ 1.12 $ 1.15 $ 1.48 $ 1.15 Weighted average number of common shares outstanding 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 91 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 15. Quarterly Results of Operations (Unaudited) – continued For the Three Months Ended December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 Revenues $ 38,398 $ 44,059 $ 57,860 $ 54,941 Income from operations (3) $ 6,583 $ 9,841 $ 18,507 $ 3,617 Net income attributable to RCIHH stockholders (3) $ 9,643 $ 6,091 $ 12,302 $ 2,300 Earnings per share (3) Basic and diluted $ 1.07 $ 0.68 $ 1.37 $ 0.26 Weighted average number of common shares outstanding 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. Net income attributable to RCIHH stockholders and earnings per share were impacted by $ 1.9 million in asset impairments ($ 1.7 million in the third quarter and $ 166,000 in the fourth quarter) and $ 2.4 million gain on sale or disposition of businesses and assets ($ 342,000 in the first quarter, $ 58,000 in the second quarter, $ 266,000 in the third quarter, and $ 1.7 million in the fourth quarter). Quarterly effective income tax expense rate was 21.7 %, 23.4 %, 21.3 %, and 27.1 % from first to fourth quarter, respectively, including the impact of the $ 343,000 deferred tax asset valuation allowance in the fourth quarter. (3) Fiscal year 2021 revenues were significantly higher compared to prior year, except for the first quarter, which was still affected by the lockdowns and social restrictions of the COVID-19 pandemic. Net income attributable to RCIHH stockholders and earnings per share were heavily impacted by the gain on debt extinguishment ($ 4.9 million in the first quarter and $ 380,000 in the second quarter), asset impairments totaling $ 13.6 million ($ 1.4 million in the second quarter, $ 271,000 in the third quarter, and $ 11.9 million in the fourth quarter), and gain on insurance totaling $ 1.3 million ($ 197,000 in the first quarter, $ 12,000 in the second quarter, and $ 1.0 million in the fourth quarter). 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. 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). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year. 16. Segment Information The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management responsibility and the nature of the Company’s products, services and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements. 92 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 16. Segment Information – continued Below is the financial information related to the Company’s reportable segments (in thousands): 2023 2022 2021 Revenues (from external customers) Nightclubs $ 236,748 $ 206,251 $ 137,348 Bombshells 55,723 59,925 56,621 Other 1,319 1,444 1,289 $ 293,790 $ 267,620 $ 195,258 Income (loss) from operations Nightclubs $ 73,187 $ 82,798 $ 43,815 Bombshells 6,502 11,504 13,264 Other ( 1,446 ) 57 35 General corporate ( 26,759 ) ( 22,900 ) ( 18,566 ) $ 51,484 $ 71,459 $ 38,548 Capital expenditures Nightclubs $ 11,840 $ 17,477 $ 6,890 Bombshells 16,578 3,586 5,895 Other 8,400 841 157 General corporate 3,566 2,099 569 $ 40,384 $ 24,003 $ 13,511 Depreciation and amortization Nightclubs $ 10,871 $ 9,604 $ 5,494 Bombshells 2,574 1,783 1,824 Other 495 85 87 General corporate 1,211 919 833 $ 15,151 $ 12,391 $ 8,238 September 30, 2023 September 30, 2022 Total assets Nightclubs $ 483,563 $ 437,096 Bombshells 85,215 62,021 Other 6,936 2,635 General corporate 35,170 28,986 $ 610,884 $ 530,738 Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $ 16.6 million, $ 14.0 million, and $ 11.5 million for 2023, 2022, and 2021, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to $ 254,000 , $ 261,000 , and $ 141,000 for the same respective years. These intercompany revenue amounts are eliminated upon consolidation. 93 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 16. Segment Information – continued General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes. Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment. As of September 30, 2022, we reclassified $ 9.0 million of goodwill from Corporate to Nightclubs to conform to current year presentation. See Note 2 . 17. Related Party Transactions Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of 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 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. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were approximately $ 195,000 in fiscal 2023, $ 207,000 in fiscal 2022, and $ 118,000 in fiscal 2021. As of September 30, 2023 and 2022, we owed Nottingham Creations and Sherwood Forest $ 10,700 and $ 92,808 , respectively, in unpaid billings. TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2023, 2022, and 2021. A son-in-law of Eric Langan owns a 50 % interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were approximately $ 443,295 , $ 3,809 , and $ 0 for the fiscal years 2023, 2022, and 2021, respectively. Amounts billed directly to the Company were approximately $ 9,430 , $ 133,000 , and $ 425,000 for the fiscal years 2023, 2022, and 2021, respectively. As of September 30, 2023 and 2022, the Company owed TW Mechanical approximately $ 0 and $ 9,338 , respectively, in unpaid direct billings. 18. Leases 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. Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments and additional lease payments contingent on sales. 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 income. 94 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 18. 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): Principal Portion Interest Portion Total Payments October 2023 - September 2024 $ 2,977 $ 2,056 $ 5,033 October 2024 - September 2025 3,227 1,881 5,108 October 2025 - September 2026 3,516 1,691 5,207 October 2026 - September 2027 3,532 1,487 5,019 October 2027 - September 2028 2,982 1,300 4,282 Thereafter 21,918 4,630 26,548 $ 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 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 Operating lease expense – fixed payments $ 5,166 $ 4,738 $ 3,325 Variable lease expense 1,629 1,397 349 Short-term equipment and other lease expense (includes $ 357 , $ 258 and $ 298 recorded in advertising and marketing for fiscal 2023, 2022, and 2021, respectively, and $ 557 , $ 435 and $ 397 recorded in repairs and maintenance, respectively; see Note 4 ) 1,325 1,264 955 Sublease income — ( 4 ) ( 6 ) Total lease expense, net $ 8,120 $ 7,395 $ 4,623 Other information: Operating cash outflows from operating leases $ 7,949 $ 7,200 $ 4,522 Weighted average remaining lease term 10.5 years 11 years 12 years Weighted average discount rate 5.8 % 5.6 % 6.0 % In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral of payments as if the lease is unchanged. 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 $ 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. 95 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Notes to Consolidated Financial Statements 19. Subsequent Events Debt 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. 96 Table of Contents RCI HOSPITALITY HOLDINGS, INC. Schedule of Valuation and Qualifying Accounts (Amounts in Thousands) Balance at beginning of year Charged to costs and expenses (1) Deductions (2) Balance at end of year Allowance for doubtful accounts receivable Fiscal 2021 $ 261 $ 215 $ ( 94 ) $ 382 Fiscal 2022 $ 382 $ 191 $ ( 543 ) $ 30 Fiscal 2023 $ 30 $ 47 $ ( 15 ) $ 62 Allowance for doubtful notes receivable Fiscal 2021 $ 182 $ ( 80 ) $ — $ 102 Fiscal 2022 $ 102 $ 753 $ ( 855 ) $ — Fiscal 2023 $ — $ — $ — $ — Deferred tax asset valuation allowance (3) Fiscal 2021 $ 1,273 $ — $ ( 632 ) $ 641 Fiscal 2022 $ 641 $ 343 $ — $ 984 Fiscal 2023 $ 984 $ — $ ( 176 ) $ 808 (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) Included in deferred tax liability, net in the consolidated balance sheets. 97 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no disagreements with accountants on accounting and financial disclosure.