RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 1. Financial Statements. RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) March 31, 2024 September 30, 2023 (unaudited) ASSETS Current assets Cash and cash equivalents $ 19,973 $ 21,023 Accounts receivable, net 8,779 9,846 Current portion of notes receivable 265 249 Inventories 4,554 4,412 Prepaid expenses and other current assets 8,387 1,943 Assets held for sale 74 — Total current assets 42,032 37,473 Property and equipment, net 288,224 282,705 Operating lease right-of-use assets, net 33,396 34,931 Notes receivable, net of current portion 4,289 4,443 Goodwill 67,862 70,772 Intangibles, net 172,728 179,145 Other assets 1,362 1,415 Total assets $ 609,893 $ 610,884 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 5,632 $ 6,111 Accrued liabilities 22,597 16,051 Current portion of debt obligations, net 25,072 22,843 Current portion of operating lease liabilities 3,098 2,977 Total current liabilities 56,399 47,982 Deferred tax liability, net 27,232 29,143 Debt, net of current portion and debt discount and issuance costs 206,853 216,908 Operating lease liabilities, net of current portion 33,593 35,175 Other long-term liabilities 317 352 Total liabilities 324,394 329,560 Commitments and contingencies ( Note 9 ) 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; 9,332,420 and 9,397,639 shares issued and outstanding as of March 31, 2024 and September 30, 2023, respectively 93 94 Additional paid-in capital 77,742 80,437 Retained earnings 207,928 201,050 Total RCIHH stockholders’ equity 285,763 281,581 Noncontrolling interests ( 264 ) ( 257 ) Total equity 285,499 281,324 Total liabilities and equity $ 609,893 $ 610,884 See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and number of share data) (unaudited) For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Revenues Sales of alcoholic beverages $ 32,907 $ 30,136 $ 66,223 $ 59,786 Sales of food and merchandise 11,068 11,005 21,870 21,352 Service revenues 23,564 25,690 48,683 51,253 Other 4,744 4,686 9,414 9,094 Total revenues 72,283 71,517 146,190 141,485 Operating expenses Cost of goods sold Alcoholic beverages sold 5,891 5,365 12,172 10,739 Food and merchandise sold 3,993 3,737 8,031 7,323 Service and other 35 16 75 65 Total cost of goods sold (exclusive of items shown separately below) 9,919 9,118 20,278 18,127 Salaries and wages 20,975 19,428 42,307 38,104 Selling, general and administrative 24,653 22,026 49,854 44,758 Depreciation and amortization 3,884 3,760 7,737 7,067 Other charges, net 8,195 3,758 8,192 3,104 Total operating expenses 67,626 58,090 128,368 111,160 Income from operations 4,657 13,427 17,822 30,325 Other income (expenses) Interest expense ( 3,999 ) ( 3,677 ) ( 8,215 ) ( 7,364 ) Interest income 96 90 190 181 Income before income taxes 754 9,840 9,797 23,142 Income tax expense 5 2,147 1,804 5,178 Net income 749 7,693 7,993 17,964 Net loss attributable to noncontrolling interests 25 39 7 6 Net income attributable to RCIHH common stockholders $ 774 $ 7,732 $ 8,000 $ 17,970 Earnings per share Basic and diluted $ 0.08 $ 0.83 $ 0.85 $ 1.94 Weighted average shares used in computing earnings per share Basic and diluted 9,350,292 9,265,781 9,358,768 9,247,824 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except number of shares) (unaudited) 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, 2023 9,397,639 $ 94 $ 80,437 $ 201,050 — $ — $ ( 257 ) $ 281,324 Purchase of treasury shares — — — — ( 37,954 ) ( 2,072 ) — ( 2,072 ) Canceled treasury shares ( 37,954 ) — ( 2,072 ) — 37,954 2,072 — — Excise tax on stock repurchases — — ( 20 ) — — — — ( 20 ) Payment of dividends ($ 0.06 per share) — — — ( 562 ) — — — ( 562 ) Stock-based compensation — — 470 — — — — 470 Net income — — — 7,226 — — 18 7,244 Balance at December 31, 2023 9,359,685 94 78,815 207,714 — — ( 239 ) 286,384 Purchase of treasury shares — — — — ( 27,265 ) ( 1,530 ) — ( 1,530 ) Canceled treasury shares ( 27,265 ) ( 1 ) ( 1,529 ) — 27,265 1,530 — — Excise tax on stock repurchases — — ( 15 ) — — — — ( 15 ) Payment of dividends ($ 0.06 per share) — — — ( 560 ) — — — ( 560 ) Stock-based compensation — — 471 — — — — 471 Net income (loss) — — — 774 — — ( 25 ) 749 Balance at March 31, 2024 9,332,420 $ 93 $ 77,742 $ 207,928 — $ — $ ( 264 ) $ 285,499 Balance at September 30, 2022 9,231,725 $ 92 $ 67,227 $ 173,950 — $ — $ 489 $ 241,758 Purchase of treasury shares — — — — ( 1,500 ) ( 98 ) — ( 98 ) Canceled treasury shares ( 1,500 ) — ( 98 ) — 1,500 98 — — Payment of dividends ($ 0.05 per share) — — — ( 462 ) — — — ( 462 ) Stock-based compensation — — 941 — — — — 941 Share in return of investment by noncontrolling partner — — — — — — ( 600 ) ( 600 ) Net income — — — 10,238 — — 33 10,271 Balance at December 31, 2022 9,230,225 92 68,070 183,726 — — ( 78 ) 251,810 Issuance of common shares for business combination 200,000 2 16,306 — — — — 16,308 Payment of dividends ($ 0.06 per share) — — — ( 553 ) — — — ( 553 ) Stock-based compensation — — 706 — — — — 706 Net income (loss) — — — 7,732 — — ( 39 ) 7,693 Balance at March 31, 2023 9,430,225 $ 94 $ 85,082 $ 190,905 — $ — $ ( 117 ) $ 275,964 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except number of shares) (unaudited) For the Six Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,993 $ 17,964 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,737 7,067 Impairment of assets 8,033 662 Deferred income tax benefit ( 1,911 ) — Stock-based compensation 941 1,647 Loss (gain) on sale of businesses and assets 37 ( 689 ) Amortization of debt discount and issuance costs 312 291 Noncash lease expense 1,535 1,463 Gain on insurance — ( 91 ) Doubtful accounts expense on notes receivable 22 — Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable 1,067 708 Inventories ( 142 ) 79 Prepaid expenses, other current and other assets ( 6,420 ) ( 5,705 ) Accounts payable, accrued and other liabilities 5,265 8,288 Net cash provided by operating activities 24,469 31,684 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of businesses and assets — 2,810 Proceeds from insurance — 91 Proceeds from notes receivable 116 113 Payments for property and equipment and intangible assets ( 12,802 ) ( 22,090 ) Acquisition of businesses, net of cash acquired — ( 29,000 ) Net cash used in investing activities ( 12,686 ) ( 48,076 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt obligations 2,657 11,595 Payments on debt obligations ( 10,630 ) ( 6,481 ) Purchase of treasury stock ( 3,602 ) ( 98 ) Payment of dividends ( 1,122 ) ( 1,015 ) Payment of loan origination costs ( 136 ) ( 205 ) Share in return of investment by noncontrolling partner — ( 600 ) Net cash provided by (used in) financing activities ( 12,833 ) 3,196 NET DECREASE IN CASH AND CASH EQUIVALENTS ( 1,050 ) ( 13,196 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,023 35,980 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,973 $ 22,784 7 Table of Contents For the Six Months Ended March 31, 2024 2023 CASH PAID DURING PERIOD FOR: Interest $ 7,877 $ 6,874 Income taxes $ 2,510 $ 5,605 Noncash investing and financing transactions: Debt incurred in connection with acquisition of businesses $ — $ 30,405 Debt incurred in connection with purchase of property and equipment $ — $ 7,584 Issuance of shares of common stock for acquisition of businesses: Number of shares — 200,000 Fair value $ — $ 16,308 Adjustment to operating lease right-of-use assets related to new and renewed leases $ — $ 1,659 Adjustment to operating lease liabilities related to new and renewed leases $ — $ 1,958 Unpaid excise tax on stock repurchases $ 35 $ — Unpaid liabilities on capital expenditures $ 1,244 $ 3,045 See accompanying notes to unaudited condensed consolidated financial statements. 8 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2023 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2023. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending September 30, 2024. 2. Recent Accounting Standards and Pronouncements 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 adopted ASU 2021-08 on October 1, 2023. Our adoption of this ASU did not have a significant 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 are evaluating the impact of this ASU and we believe that the adoption of this guidance will not have a significant impact 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 but we believe that the adoption of this guidance will not have a significant impact on our consolidated financial statements. 9 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Recent Accounting Standards and Pronouncements - continued 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. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . Under the ASU, public business entities must annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The amendments of the ASU are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard for annual financial statements that have not been issued or made available for issuance. We are enhancing our income tax reporting system to be able to capture the required disclosures of this ASU. 10 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Revenues Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 4 ), are shown below (in thousands): Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 25,946 $ 6,961 $ — $ 32,907 $ 22,191 $ 7,945 $ — $ 30,136 Sales of food and merchandise 5,346 5,722 — 11,068 4,823 6,182 — 11,005 Service revenues 23,562 2 — 23,564 25,686 4 — 25,690 Other revenues 4,518 86 140 4,744 4,331 184 171 4,686 $ 59,372 $ 12,771 $ 140 $ 72,283 $ 57,031 $ 14,315 $ 171 $ 71,517 Recognized at a point in time $ 58,949 $ 12,770 $ 140 $ 71,859 $ 56,577 $ 14,274 $ 127 $ 70,978 Recognized over time 423 * 1 — 424 454 * 41 44 539 $ 59,372 $ 12,771 $ 140 $ 72,283 $ 57,031 $ 14,315 $ 171 $ 71,517 Six Months Ended March 31, 2024 Six Months Ended March 31, 2023 Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 52,182 $ 14,041 $ — $ 66,223 $ 44,289 $ 15,497 $ — $ 59,786 Sales of food and merchandise 10,586 11,284 — 21,870 9,417 11,935 — 21,352 Service revenues 48,681 2 — 48,683 51,219 34 — 51,253 Other revenues 8,956 175 283 9,414 8,431 280 383 9,094 $ 120,405 $ 25,502 $ 283 $ 146,190 $ 113,356 $ 27,746 $ 383 $ 141,485 Recognized at a point in time $ 119,549 $ 25,500 $ 283 $ 145,332 $ 112,495 $ 27,702 $ 338 $ 140,535 Recognized over time 856 * 2 — 858 861 * 44 45 950 $ 120,405 $ 25,502 $ 283 $ 146,190 $ 113,356 $ 27,746 $ 383 $ 141,485 * Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606. 11 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented below (in thousands): Balance at September 30, 2023 Net Consideration Received (Refunded) Recognized in Revenue Balance at March 31, 2024 Ad revenue $ 49 $ 244 $ ( 207 ) $ 86 Expo revenue 1 422 — 423 Franchise fees and other 46 — ( 3 ) 43 $ 96 $ 666 $ ( 210 ) $ 552 Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5 ), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income. 4. 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 unaudited condensed consolidated financial statements. Below is the financial information related to the Company’s segments (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Revenues (from external customers) Nightclubs $ 59,372 $ 57,031 $ 120,405 $ 113,356 Bombshells 12,771 14,315 25,502 27,746 Other 140 171 283 383 $ 72,283 $ 71,517 $ 146,190 $ 141,485 Income (loss) from operations Nightclubs $ 11,021 $ 17,995 $ 31,390 $ 40,735 Bombshells 699 1,775 785 3,622 Other ( 277 ) ( 168 ) ( 473 ) ( 353 ) Corporate ( 6,786 ) ( 6,175 ) ( 13,880 ) ( 13,679 ) $ 4,657 $ 13,427 $ 17,822 $ 30,325 12 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Segment Information - continued For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Depreciation and amortization Nightclubs $ 2,927 $ 2,464 $ 5,832 $ 4,949 Bombshells 650 931 1,293 1,389 Other 2 63 4 126 Corporate 305 302 608 603 $ 3,884 $ 3,760 $ 7,737 $ 7,067 Capital expenditures Nightclubs $ 2,699 $ 1,214 $ 4,231 $ 5,358 Bombshells 1,535 6,708 3,443 15,027 Other 2,205 41 3,703 78 Corporate 1,228 1,574 1,425 1,627 $ 7,667 $ 9,537 $ 12,802 $ 22,090 March 31, 2024 September 30, 2023 Total assets Nightclubs $ 472,743 $ 483,563 Bombshells 89,679 85,215 Other 11,945 6,936 Corporate 35,526 35,170 $ 609,893 $ 610,884 Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2024, amounting to $ 4.6 million and $ 21,000 , respectively, and for the six months ended March 31, 2024, amounting to $ 9.1 million and $ 248,000 , respectively; and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2024 amounting to $ 89,000 and $ 128,000 , respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2023, amounting to $ 3.9 million and $ 31,000 , respectively, and for the six months ended March 31, 2023, amounting to $ 7.6 million and $ 262,000 , respectively; and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2023 amounting to $ 78,000 and $ 115,000 , respectively. These intercompany revenue amounts are eliminated upon consolidation. General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation 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. 13 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Selected Account Information The components of accounts receivable, net are as follows (in thousands): March 31, 2024 September 30, 2023 Credit card receivables $ 4,154 $ 4,141 Income tax refundable 1,756 2,989 ATM in-transit 1,753 1,675 Other (net of allowance for doubtful accounts of $ 21 and $ 62 , respectively) 1,116 1,041 Total accounts receivable, net $ 8,779 $ 9,846 Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6 % to 9 % per annum and having original terms ranging from 1 to 20 years. The components of prepaid expenses and other current assets are as follows (in thousands): March 31, 2024 September 30, 2023 Prepaid insurance $ 6,203 $ 375 Prepaid legal 61 184 Prepaid taxes and licenses 801 486 Prepaid rent 513 346 Other 809 552 Total prepaid expenses and other current assets $ 8,387 $ 1,943 The components of accrued liabilities are as follows (in thousands): March 31, 2024 September 30, 2023 Insurance $ 6,017 $ 9 Sales and liquor taxes 2,646 2,468 Payroll and related costs 4,654 4,412 Property taxes 2,103 3,086 Interest 680 654 Patron tax 1,229 914 Unearned revenues 552 96 Lawsuit settlement 2,153 2,448 Other 2,563 1,964 Total accrued liabilities $ 22,597 $ 16,051 14 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Selected Account Information - continued The components of selling, general and administrative expenses are as follows (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Taxes and permits $ 3,967 $ 2,739 $ 8,009 $ 5,423 Advertising and marketing 2,993 2,731 6,467 5,401 Supplies and services 2,736 2,657 5,431 5,081 Insurance 3,265 2,238 6,580 4,820 Legal 1,116 1,296 1,849 2,281 Lease 1,785 1,765 3,609 3,527 Charge card fees 1,682 1,683 3,414 3,580 Utilities 1,462 1,353 2,947 2,624 Security 1,287 1,308 2,698 2,472 Stock-based compensation 471 706 941 1,647 Accounting and professional fees 1,136 657 2,322 2,175 Repairs and maintenance 1,114 1,207 2,213 2,371 Other 1,639 1,686 3,374 3,356 Total selling, general and administrative expenses $ 24,653 $ 22,026 $ 49,854 $ 44,758 The components of other charges, net are as follows (in thousands): For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Impairment of assets $ 8,033 $ 662 $ 8,033 $ 662 Settlement of lawsuits 167 3,120 167 3,120 Loss (gain) on disposal of businesses and assets ( 5 ) 3 ( 8 ) ( 587 ) Gain on insurance — ( 27 ) — ( 91 ) Total other charges, net $ 8,195 $ 3,758 $ 8,192 $ 3,104 During the quarter ended March 31, 2024, we recorded $ 4.4 million in SOB license impairment related to four clubs, $ 2.9 million in goodwill impairment related to two clubs, and $ 693,000 in tradename impairment related to one club, whereas during the quarter ended March 31, 2023, we recorded $ 662,000 in goodwill impairment related to one club. During the quarter ended March 31, 2023, we recognized lawsuit settlements of $ 3.1 million, of which $ 2.8 million related to a settlement with the New York Department of Labor related to the assessment by the New York Department of Labor for state unemployment insurance. See Note 9 . 15 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. 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 were 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 the amended 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. The loan is secured by the real estate property under construction. There are certain financial covenants with which the Company is to be in compliance related to this loan. Future maturities of long-term debt as of March 31, 2024 are as follows: $ 25.6 million, $ 17.9 million, $ 23.1 million, $ 25.6 million, $ 17.7 million and $ 124.9 million for the twelve months ending March 31, 2025, 2026, 2027, 2028, 2029, and thereafter, respectively. Of the maturity schedule mentioned above, $ 12.0 million, $ 4.8 million, $ 9.1 million, $ 7.9 million, $ 2.7 million and $ 73.6 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $ 2.8 million and $ 2.9 million as of March 31, 2024 and September 30, 2023, respectively. 16 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. 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 to each of six members of management subject to the approval of the 2022 Plan. Stock-based compensation, which is included in corporate segment selling, general and administrative expenses amounted to $ 471,000 and $ 941,000 during the three and six months ended March 31, 2024, respectively, and $ 706,000 and $ 1.6 million during the three and six months ended March 31, 2023, respectively. As of March 31, 2024, we had unrecognized compensation cost amounting to $ 3.5 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 1.9 years. The February 9, 2022 stock options vest over four years with the first 20 % having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20 % vesting on February 9 of each year thereafter, 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 exercised, at the end of five years . The weighted average grant-date fair value of the stock options was $ 31.37 per share. No stock options were exercised during the three and six months ended March 31, 2024. As of March 31, 2024, 180,000 stock options were vested and exercisable. For the three and six months ended March 31, 2024 and 2023, we excluded 300,000 stock options from the calculation of diluted earnings per share because their effect was anti-dilutive. Aside from the outstanding stock options, there were no other potentially dilutive securities for inclusion in the calculation of diluted earnings per share. 8. Income Taxes Income tax expense was $ 5,000 and $ 1.8 million during the three and six months ended March 31, 2024, respectively, compared to $ 2.1 million and $ 5.2 million during the three and six months ended and March 31, 2023, respectively. The effective income tax rate was 0.7 % and 18.4 % for the three and six months ended March 31, 2024 compared to 21.8 % and 22.4 % for the three and six months ended March 31, 2023, respectively. The disproportionate tax rates during the three months ended March 31, 2024 were caused by the small amount of pre-tax income during the quarter and the reduction of the expected annual effective tax rate. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below. For the Three Months Ended March 31, For the Six Months Ended March 31, 2024 2023 2024 2023 Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 5.2 % 4.0 % 3.6 % 4.0 % Permanent differences 4.8 % 0.6 % 0.8 % 0.5 % Tax credits ( 30.2 ) % ( 3.8 ) % ( 6.9 ) % ( 3.2 ) % Other — % — % — % 0.1 % Total income tax expense 0.7 % 21.8 % 18.4 % 22.4 % The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year ended September 30, 2020 and subsequent years remain open to federal tax examination. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. 17 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. 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. 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 had 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 March 31, 2024, we have 1 remaining unresolved claim out of the original 71 claims. 18 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Commitments and Contingencies - continued 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 $ 4.0 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. A new trial has been set for June 2025. 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. 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 (see Note 5 ). 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. 19 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Commitments and Contingencies - continued 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. The Company recorded lawsuit settlements incurred amounting to $ 167,000 and $ 167,000 for the three and six months ended March 31, 2024, respectively, and $ 3.1 million and $ 3.1 million for the three and six months ended March 31, 2023, respectively. As of March 31, 2024, and September 30, 2023, the Company has accrued $ 2.2 million and $ 2.4 million, respectively, related to settlement of lawsuit, which is included in accrued liabilities in our unaudited condensed consolidated balance sheets. 10. 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 March 31, 2024 and September 30, 2023, was $ 117.6 million and $ 119.2 million, respectively. Included in the October 2023 debt transaction (see Note 6 ) are notes borrowed from related parties—one note for $ 500,000 (Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay) in which the terms of the notes are the same as the rest of the lender group. We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $ 202,700 and $ 344,798 during the three and six months ended March 31, 2024, respectively, and $ 188,285 and $ 188,285 during the three and six months ended March 31, 2023, respectively. As of March 31, 2024 and September 30, 2023, we owed Nottingham Creations and Sherwood Forest $ 84,163 and $ 10,700 , respectively, in unpaid billings. TW Mechanical LLC provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2024 and 2023. A son-in-law of Eric Langan owns a 50 % interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $ 0 and $ 0 for the three and six months ended March 31, 2024, respectively, and $ 18,000 and $ 64,000 for the three and six months ended March 31, 2023, respectively. Amounts billed directly to the Company were $ 228 and $ 3,160 for the three and six months ended March 31, 2024, respectively, and $ 379 and $ 379 for the three and six months ended March 31, 2023, respectively. As of March 31, 2024 and September 30, 2023, the Company owed TW Mechanical $ 0 and $ 0 , respectively, in unpaid direct billings. 20 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. Leases Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and six months ended March 31, 2024 and 2023 is as follows (in thousands): Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Operating lease expense – fixed payments $ 1,292 $ 1,288 $ 2,584 $ 2,547 Variable lease expense 411 359 861 786 Short-term and other lease expense (includes $ 118 and $ 63 recorded in advertising and marketing for the three months ended March 31, 2024 and 2023, respectively, and $ 225 and $ 127 for the six months ended March 31, 2024 and 2023, respectively; and $ 147 and $ 138 recorded in repairs and maintenance for the three months ended March 31, 2024 and 2023, respectively, and $ 288 and $ 265 for the six months ended March 31, 2024 and 2023, respectively; see Note 5 ) 347 319 677 586 Sublease income — — — — Total lease expense, net $ 2,050 $ 1,966 $ 4,122 $ 3,919 Other information: Operating cash outflows from operating leases $ 2,016 $ 1,920 $ 4,049 $ 3,830 Weighted average remaining lease term – operating leases 10.1 years 10.9 years Weighted average discount rate – operating leases 5.8 % 5.7 % Future maturities of operating lease liabilities as of March 31, 2024 are as follows (in thousands): Principal Payments Interest Payments Total Payments April 2024 - March 2025 $ 3,098 $ 1,970 $ 5,068 April 2025 - March 2026 3,370 1,788 5,158 April 2026 - March 2027 3,588 1,589 5,177 April 2027 - March 2028 3,218 1,390 4,608 April 2028 - March 2029 3,038 1,213 4,251 Thereafter 20,379 4,046 24,425 $ 36,691 $ 11,996 $ 48,687 21 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. Supplemental Pro Forma Information on Prior Year Business Acquisition In relation to the acquisition of the Baby Dolls-Chicas Locas clubs in March 2023, below are certain unaudited pro forma combined results of operations of the Company and the five acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2022 (in thousands, except per share amounts and number of shares): Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Pro forma revenues $ 72,283 $ 77,292 $ 146,190 $ 154,424 Pro forma net income attributable to RCIHH common stockholders $ 774 $ 8,303 $ 8,000 $ 17,213 Pro forma earnings per share - basic and diluted $ 0.08 $ 0.88 $ 0.85 $ 1.83 Pro forma weighted average shares used in computing earnings per share - basic and diluted 9,350,292 9,430,225 9,358,768 9,430,241 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. We incurred approximately $ 280,000 and $ 292,000 in acquisition-related expenses during the three and six months ended March 31, 2023, respectively, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to a $ 10.0 million line-of-credit facility 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 shares used in computing earnings per share include the impact of 200,000 shares of our common stock issued as partial consideration for the acquisition. Since the results of operations during the three and six months ended March 31, 2024 were in a fiscal year subsequent to the fiscal year of acquisition and that the periods fully include the results of operations of the five acquired clubs, the amounts presented do not reflect any pro forma adjustments. 13. Subsequent Events On April 30, 2024, the Company entered into a term loan with a bank lender for $ 20.0 million for additional working capital. The loan has a 10 -year term and an interest rate of 8.25 % per annum for the first five years , after which the interest rate is to be adjusted to a rate equal to the then weekly average yield on U.S. Treasury Securities plus 362 basis points, with a 6.5 % floor. The promissory note is payable in equal monthly installments of $ 170,408 for principal and interest, based on a 20 -year amortization period, during the first five years , after which the monthly payments shall adjust based on the new interest rate to continue until April 30, 2034, at which time the remaining principal amount and accrued interest shall be paid. The Company paid $ 356,000 in debt issuance costs at the time of closing. There are certain financial covenants with which the Company is to be in compliance with related to this loan, including a minimum tangible net worth requirement of $ 25.0 million. Subsequent to the balance sheet date through May 6, 2024, we repurchased 7,303 shares of our common stock at an average price of $ 51.29 . 22 Table of Contents