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Item 8. Financial Statements and Supplementary Data

2024-12-16 compared with 2023-12-14 · 372 added, 341 removed, 1295 unchanged (36% of the section changed)

3 unchanged sentences

CONSOLIDATED FINANCIAL STATEMENTS

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

Reports of Independent Registered Public Accounting Firms ( Marcum LLP , Firm ID:

Friedman LLP , Firm ID:

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

(the “Company”) as of September 30, 2024 and 2023, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2024, 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, 2024, 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 16, 2024, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.

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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.

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 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.

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 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.

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.

Critical Audit Matters

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

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

If these assets are

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

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

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the

asset groups to the future undiscounted cash flows expected to be generated by the asset groups.

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

Fair value is generally determined using forecasted cash flows discounted by an estimated weighted average cost of capital or using a market approach that utilizes market multiples derived from a set of comparable assets.

As of September 30, 2024, the Company had goodwill of approximately $61.9 million, and indefinite-lived intangible assets of approximately $143.6 million.

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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

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

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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.

We have audited the accompanying consolidated statements of income, changes in equity and cash flows of RCI Hospitality Holdings, Inc.

(the "Company") for the year ended September 30, 2022, and the related notes and schedule as of and for the year ended September 30, 2022 (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company's operations and its cash flows for the year 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.

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 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.

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

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

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

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

/s/ Friedman LLP

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Cash and cash equivalents $ 32,350 $ 21,023

Accounts receivable, net 9,846 8,510

Receivables, net 5,563 9,846

Current portion of notes receivable 269 249

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Prepaid expenses and other current assets 4,427 1,943

Assets held for sale — 1,049

Total current assets 47,285 37,473

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Depreciation and amortization 15,395 15,151 12,391

Other charges, net 15,629 467 13,186

Impairments and other charges, net 36,570 15,629 467

Total operating expenses 276,799 242,306 196,161

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Income before income taxes 2,608 35,946 60,131

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

Income tax expense (benefit) ( 410 ) 6,846 14,071

Net income 3,018 29,100 46,060

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Basic and diluted 9,250,245 9,335,983 9,383,445

Dividends per share $ 0.23 $ 0.19 $ 0.16

See accompanying notes to consolidated financial statements.

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Years Ended September 30, 2024, 2023, and 2022

(in thousands, except number of shares)

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

Common Stock Additional

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

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

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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

Payment of dividends ($ 0.19 per share)

— — — ( 1,784 ) — — — ( 1,784 )

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

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

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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

Payment of dividends ($ 0.23 per share)

— — — ( 2,146 ) — — — ( 2,146 )

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

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

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

Purchase of treasury shares — — — — ( 442,639 ) ( 20,606 ) — ( 20,606 )

Canceled treasury shares ( 442,639 ) ( 4 ) ( 20,602 ) — 442,639 20,606 — —

Excise tax on stock repurchases — — ( 206 ) — — — — ( 206 )

Payment of dividends ($ 0.25 per share)

— — — ( 2,302 ) — — — ( 2,302 )

Stock-based compensation — — 1,882 — — — — 1,882

Net income — — — 3,011 — — 7 3,018

Balance at September 30, 2024 8,955,000 $ 90 $ 61,511 $ 201,759 — $ — $ ( 250 ) $ 263,110

See accompanying notes to consolidated financial statements.

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Amortization and writeoff of debt discount and issuance costs 608 615 314

Doubtful accounts expense (reversal) on notes receivable — 753 ( 80 )

Unrealized loss on equity securities — — 84

Doubtful accounts expense on notes receivable — — 753

Gain on insurance ( 522 ) ( 77 ) ( 463 )

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Changes in operating assets and liabilities, net of business acquisitions:

Accounts receivable ( 2,383 ) ( 175 ) ( 769 )

Receivables 4,283 ( 2,383 ) ( 175 )

Inventories ( 309 ) 177 ( 554 )

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CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,350 $ 21,023 $ 35,980

Years Ended September 30,

2024 2023 2022

CASH PAID DURING THE YEAR FOR:

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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

Debt exchanged in connection with the sale of a restaurant location $ 1,471 $ — $ —

Notes receivable received as proceeds from sale of assets $ — $ — $ 2,700

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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 $ 760 $ 1,864 $ 21,424

Adjustment to operating lease liabilities related to new and renewed leases $ 760 $ 2,163 $ 21,424

Unpaid excise tax on stock repurchases $ 206 $ — $ —

Unpaid liabilities on capital expenditures $ 1,474 $ 1,967 $ 1,503

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

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

Minneapolis, Minnesota;

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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.

Receivables 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 receivables are primarily comprised of receivables for advertising sales and Expo registration.

Receivables 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 ).

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

Allowance for doubtful accounts balance related to operating receivables was $ 42,000 and $ 62,000 as of September 30, 2024 and 2023, respectively (see Note 5 ).

Allowance for doubtful accounts balance related to notes receivable was $ 0 and $ 0 as of September 30, 2024 and 2023, respectively.

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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.

Interest expense from related debt incurred during site construction is capitalized, which amounted to $ 155,000 in 2024, $ 0 in 2023, and $ 0 in 2022.

Goodwill and Other Intangible Assets

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For the year ended September 30, 2024, we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $ 8.9 million.

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

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

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

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

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

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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.

We recorded impairment charges for SOB licenses amounting to $ 11.8 million in 2024 related to seven clubs, $ 6.5 million in 2023 related to eight clubs, $ 293,000 in 2022 related to one club, which are included in impairments and other charges, net in the consolidated statements of income.

Impairment of Long-Lived Assets

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

During fiscal 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.

During fiscal 2024, the Company impaired four clubs and nine Bombshells for property and equipment totaling $ 10.6 million and five Bombshells locations for operating lease right-of-use assets totaling $ 6.5 million.

During fiscal 2023, the Company impaired one club for operating lease right-of-use assets amounting to $ 1.0 million and property and equipment amounting to $ 58,000 , and two venture projects for software totaling $ 814,000 .

During fiscal 2022, the Company impaired one club and one Bombshells for property and equipment totaling $ 1.0 million.

See Notes 5 , 6 , and 1 7 .

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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 estimated fair value of receivables, 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.

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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.

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service (which include cover charges, dance dollar surcharges, membership fees, and facility use fees, among others), and other revenues (which include commissions from vending and ATM machines, real estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations, among others) 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.

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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 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.

RCI HOSPITALITY HOLDINGS, INC.

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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.

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.

Earnings Per Share

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During the years ended September 30, 2024, 2023, and 2022, 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.

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

Business Combinations

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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 has historically carried substantial insurance to cover such risks with large deductibles, with such policies being structured to limit our per-occurrence exposure.

As of October 1, 2024, however, we discontinued general liability and liquor insurance coverage in a number of establishments due to increasingly prohibitive costs of such coverage, and we are currently in the process of establishing self-insurance for the claims for which third-party insurance coverage is financially prohibitive.

However, we still carry at least the minimum insurance coverage where it is required by law for licensing requirements.

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

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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.

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 impairments and 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):

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Indefinite-lived intangibles** 16,575 — — 16,575

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

Definite-lived intangibles** 1,682 — — 1,682

Goodwill* 6,881 — — 6,881

Goodwill** 1,084 — — 1,084

Current assets* 696 — — 696

Fair Value at Reporting Date Using

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

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

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

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

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

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Operating lease right-of-use assets ( 6,480 ) ( 1,003 ) —

Other assets (equity securities) — — ( 84 )

Other assets ( 68 ) — —

† Cumulative annual impairments based on interim and year-end testing.

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

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Areas Valuation Techniques Unobservable Input 2024 2023 2022

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

9 x - 10 x ( 10 x)

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

Property and equipment Discounted cash flow Long-term revenue/EBITDA growth rate

- 2.3 % - 1.6 % ( 0.9 %)

0 % - 2.5 % ( 1.25 %)

Weighted average cost of capital 11 % ( 11.0 %)

0 % - 2.5 % ( 1.5 %)

Weighted average cost of capital 9.6 % ( 9.6 %)

12.5 % ( 12.5 %)

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9 x - 12 x ( 12 x)

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

8 x - 10 x ( 9 x)

Long-term revenue/EBITDA growth rate - 2.3 % - 1.6 % ( 0.9 %)

0 % - 2.5 % ( 2.5 %)

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12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

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

9 x - 10 x ( 10 x)

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

SOB licenses Multiperiod excess earnings Long-term revenue/EBITDA growth rate 1.6 % ( 1.6 %)

0 % - 2.5 % ( 2.5 %)

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12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Contributory asset charges rate 5.1 % - 16.2 % ( 15.1 %)

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0.5 % - 7.4 % ( 2.3 %)

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

Tradename Relief-from-royalty method Long-term revenue growth rate 1.6 % ( 1.6 %)

0 % - 2.5 % ( 2.5 %)

0 % - 2.5 % ( 1.5 %)

Terminal multiple 12 x ( 12 x)

9 x - 10 x ( 9 x)

Royalty rate 3 % - 6 % ( 4.4 %)

3.0 % - 6.0 % ( 4.7 %)

3.5 % - 4.5 % ( 4 %)

Weighted average cost of capital 9.6 % ( 9.6 %)

12.5 % ( 12.5 %)

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

Operating lease right-of-use assets Discounted cash flow Long-term EBITDA growth rate - 2.3 % - 1.6 % ( 0.9 %)

1.5 % - 2.5 % ( 2.3 %)

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12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

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

Business combinations Various* Growth rate None 0 % - 11 % ( 5.5 %)

2.5 % - 10 % ( 4.8 %)

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

Weighted average cost of capital None 16.5 % - 18 % ( 17.8 %)

15 % - 19.5 % ( 18.1 %)

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

Internal rate of return None 16.5 % - 30 % ( 22.4 %)

15 % - 21.5 % ( 19.4 %)

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

Contributory asset charges rate None 15.6 % - 21.5 % ( 16.3 %)

8.5 % - 10.2 % ( 9.3 %)

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

Reclassification

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

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

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

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

See Note 16 .

RCI HOSPITALITY HOLDINGS, INC.

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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.

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):

4 unchanged sentences

Early adoption is permitted.

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

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):

4 unchanged sentences

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.

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.

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

6 unchanged sentences

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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

5 unchanged sentences

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to 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.

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 4 ), are shown below (in thousands).

17 unchanged sentences

$ 236,748 $ 55,723 $ 1,319 $ 293,790

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Revenues - continued

Nightclubs Bombshells Other Total

7 unchanged sentences

$ 206,251 $ 59,925 $ 1,444 $ 267,620

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

The Company’s unconditional right to consideration for goods and services transferred to the customer is included in receivables, 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

Balance at September 30, 2022 Consideration Received (Refunded) Recognized in Revenue Balance at September 30, 2023 Consideration Received Recognized in Revenue Balance at September 30, 2024

Ad revenue $ 82 $ 451 $ ( 484 ) $ 49 $ 422 $ ( 440 ) $ 31

8 unchanged sentences

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.

In February 2023, the Company purchased the franchised Bombshells unit in San Antonio, Texas, and in September 2024, was sold back to members of the former franchisee group.

See Note 14 .

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Segment Information – continued

Below is the financial information related to the Company’s reportable segments (in thousands):

2024 2023 2022

Revenues (from external customers)

Nightclubs $ 243,864 $ 236,748 $ 206,251

Bombshells 50,578 55,723 59,925

Other 1,162 1,319 1,444

$ 295,604 $ 293,790 $ 267,620

Income (loss) from operations

Nightclubs $ 58,094 $ 73,187 $ 82,798

Bombshells ( 10,646 ) 6,502 11,504

Other ( 523 ) ( 1,446 ) 57

Corporate ( 28,120 ) ( 26,759 ) ( 22,900 )

$ 18,805 $ 51,484 $ 71,459

Capital expenditures

Nightclubs $ 9,106 $ 11,840 $ 17,477

Bombshells 7,760 16,578 3,586

Other 6,250 8,400 841

Corporate 1,484 3,566 2,099

$ 24,600 $ 40,384 $ 24,003

Depreciation and amortization

Nightclubs $ 11,823 $ 10,871 $ 9,604

Bombshells 2,365 2,574 1,783

Other 43 495 85

Corporate 1,164 1,211 919

$ 15,395 $ 15,151 $ 12,391

September 30, 2024 September 30, 2023

Nightclubs $ 454,892 $ 483,563

Bombshells 79,091 85,215

Other 14,197 6,936

Corporate 36,184 35,170

$ 584,364 $ 610,884

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $ 18.8 million, $ 16.6 million, and $ 14.0 million for 2024, 2023, and 2022, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to $ 270,000 , $ 254,000 , and $ 261,000 for the same respective years.

These intercompany revenue amounts are eliminated upon consolidation.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

Selected Account Information

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

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

September 30,

3 unchanged sentences

Other (net of allowance for doubtful accounts of $ 42 and $ 62 , respectively)

Total accounts receivable, net $ 9,846 $ 8,510

Total receivables, net $ 5,563 $ 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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Selected Account Information - continued

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

6 unchanged sentences

Total prepaid expenses and other current assets $ 4,427 $ 1,943

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Selected Account Information - continued

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

7 unchanged sentences

Lawsuit settlement 1,985 2,448

Construction in progress 1,012 —

Unearned revenues 99 96

17 unchanged sentences

Total selling, general and administrative expenses $ 99,672 $ 93,024 $ 78,847

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Selected Account Information - continued

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

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

2024 2023 2022

3 unchanged sentences

Gain on insurance ( 327 ) ( 77 ) ( 463 )

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

Total impairments and other charges, net $ 36,570 $ 15,629 $ 467

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Property and Equipment

6 unchanged sentences

Total property and equipment 386,338 369,188

Less accumulated depreciation ( 80,851 ) ( 70,577 )

Less accumulated depreciation and impairment ( 106,263 ) ( 86,483 )

Property and equipment, net $ 280,075 $ 282,705

2 unchanged sentences

Impairment loss for property and equipment, including those later reclassified to assets held for sale, was $ 10.6 million, $ 58,000 , and $ 1.0 million for fiscal 2024, 2023, and 2022, respectively.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Goodwill and Other Intangible Assets

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Total goodwill and other intangible assets $ 225,372 $ 249,917

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Goodwill and Other Intangible Assets - continued

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

6 unchanged sentences

Ending balance $ 19,851 $ 143,610 $ 61,911 $ 23,599 $ 155,546 $ 70,772

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Goodwill and Other Intangible Assets - continued

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

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

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

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

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

During the fiscal year ended September 30, 2024, the Company recognized a $ 11.8 million impairment related to the SOB licenses of seven clubs, a $ 8.9 million impairment related to goodwill of four reporting units, and a $ 693,000 impairment related to tradename of one club.

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

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

RCI HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

September 30,

Notes payable at 5.5 %, fully paid in January 2023

(d)(1) $ — $ 678

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

4 unchanged sentences

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

Note payable at 5.49 %, paid in June 2024

(c)(3) — 1,937

1 unchanged sentence

*(a)(4) 84,506 87,937

Notes payable at 12 %, matures October 2024

Notes payable at 12 %, matures October 2026, as amended

(d)(6)(25) 9,100 9,500

Notes payable at 12 %, matures October 2024

Notes payable at 12 %, matures November 2027, as amended

(d)(6)(25) 3,160 3,331

Notes payable at 12 %, matures October 2024

Notes payable at 12 %, matures November 2027, as amended

(d)(6)(25) 3,160 3,331

13 unchanged sentences

*(a)(10) 2,493 2,583

Note payable at 10 % matures May 2025

Note payable at 10 % matures September 2026

(b)(11) 3,534 5,501

1 unchanged sentence

(b)(11) 5,000 5,000

Note payable at 5 % matures November 2023

Note payable at 5 %, paid in November 2023

*(a)(12) — 2,195

5 unchanged sentences

(a)(14) 4,191 4,592

Note payable at 5.25 % matures February 2024

Note payable at 7.79 % matures August 2039, as amended

*(a)(15) 1,571 1,575

1 unchanged sentence

(c)(16) 2,644 2,731

Note payable initially at 6 % matures April 2024

Note payable initially at 6 % matures October 2024

*(a)(17) 2,247 2,259

1 unchanged sentence

(a)(18) 4,478 4,708

Note payable initially at 6 % matures May 2024

Note payable initially at 7.79 % matures August 2039, as amended

*(a)(19) 1,495 1,500

1 unchanged sentence

*(a)(20) 3,250 3,302

Notes payable at 7 % matures February 2025

Notes payable at 7 %, forgiven in September 2024

(b)(21) — 1,801

5 unchanged sentences

*(a)(24) 2,833 2,874

Note payable at 8.50 % matures November 2033

(a)(26) 2,657 —

Note payable at 8.25 % matures April 2034

(a)(27) 19,847 —

Total debt 241,054 242,667

13 unchanged sentences

$ 241,054 $ 242,667

(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.

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

9 unchanged sentences

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

This promissory note was fully paid in June 2024 upon sale of the aircraft (see Note 14 ).

(4) 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 1 4 ).

8 unchanged sentences

(6) 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

Of this amount, $ 9.5 million are promissory notes, payable interest only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2024.

The remaining amount of the financing is $ 7.5 million in promissory notes, payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on October 12, 2024.

Included in the $ 17.0 million borrowing are two notes for $ 500,000 and $ 150,000 borrowed from related parties (see Note 1 6 ) and two notes for $ 500,000 and $ 300,000 borrowed from two non-officer employees

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

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.

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.

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.

23 unchanged sentences

The Company paid loan costs amounting to $ 25,000 for this note.

This promissory note was fully paid in connection with a construction loan entered into in November 2023.

(13) 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.

The promissory note matures in July 2029 and is payable in 84 equal monthly installments of $ 11,687 of principal and interest.

(14) On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 1 5 ), the Company executed two seller-financed promissory notes:

(1) $ 10.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest.

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

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:

(15) 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 5 ), 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.

This note has been amended in August 2024 to an amortizing 7.79 % note with monthly installments of $ 14,959 of principal and interest and maturing in August 2039.

The fixed 7.79 % interest for the first five years will then be adjusted annually to Wall Street Journal prime plus 0.25 %.

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

(16) On September 23, 2022, in connection with the purchase of an aircraft worth $ 3.5 million (see Note 1 4 ), the Company entered into a financing transaction for $ 2.8 million.

12 unchanged sentences

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

This note has been amended in August 2024 to an amortizing 7.79 % note with monthly installments of $ 14,248 of principal and interest and maturing in August 2039.

The fixed 7.79 % interest for the first five years will then be adjusted annually to Wall Street Journal prime plus 0.25 %.

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

4 unchanged sentences

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.

These promissory notes were forgiven as part of the sale of Bombshells San Antonio (see Note 14 ).

(22) 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.

3 unchanged sentences

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.

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

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Debt - continued

tangible net worth requirement of $ 20.0 million.

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

(23) 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.

3 unchanged sentences

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.

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

(25) 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.

(26) 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.

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

(27) 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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

Future maturities of debt obligations as of September 30, 2024, consist of the following (in thousands):

15 unchanged sentences

Total deferred income tax expense (benefit) ( 6,450 ) ( 1,781 ) 3,080

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

Total income tax expense (benefit) $ ( 410 ) $ 6,846 $ 14,071

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Income Taxes - continued

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

Income tax expense (benefit) 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):

2024 2023 2022

Amount % Amount % Amount %

Federal statutory income tax expense $ 547 21.0 % $ 7,549 21.0 % $ 12,628 21.0 %

5 unchanged sentences

Other 590 22.6 % ( 366 ) ( 1.0 ) % 103 0.2 %

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

Total income tax expense (benefit) $ ( 410 ) ( 15.7 ) % $ 6,846 19.0 % $ 14,071 23.4 %

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Income Taxes - continued

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, changes in the deferred tax asset valuation allowance, and tax credits that are mostly FICA tip credits.

The effective income tax rate for fiscal 2024 was also affected by the low pretax income that caused a high offsetting rate for tax credits, whose dollar value does not change based on pretax income.

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.

12 unchanged sentences

Prepaid expenses ( 291 ) ( 262 )

Other — ( 18 )

( 27,723 ) ( 32,815 )

4 unchanged sentences

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

5 unchanged sentences

Fiscal year ended September 30, 2021 and subsequent years remain open to federal tax examination.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Income Taxes - continued

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

1 unchanged sentence

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 CARES Act also established a Paycheck Protection Program ("PPP"), 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.

27 unchanged sentences

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”).

1 unchanged sentence

Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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.

6 unchanged sentences

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, 2024, we had 1 remaining unresolved claim out of the original 71 claims.

12 unchanged sentences

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

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

On July 19 2024, the Court approved the settlement.

On July 30, 2024, the final order of settlement was entered by the Court.

The case is now closed.

On June 23, 2014, Mark H.

11 unchanged sentences

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.

A new trial has been set for June 2025.

JAI Phoenix will continue to vigorously defend itself.

4 unchanged sentences

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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

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

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

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

On or about May 29, 2024, search warrants were executed on the Company’s corporate headquarters in Houston, Texas, three separate clubs in New York, New York, and for the mobile phone of three individuals (including two executive officers and a non-executive corporate employee) by the New York State Attorney General (“NY AG”) and the New York State Department of Taxation and Finance (“NY DTF”).

On June 7, 2024, the Company received a subpoena from the NY AG requesting documents and other information with respect to certain clubs in New York and Florida.

The investigation appears to be related to the Company’s New York State tax filings and possible entertainment benefits provided to NY DTF personnel.

The Company is cooperating with the NY AG and its investigation.

As a result of this investigation, a non-executive corporate employee was placed on administrative leave during the pendency of an internal review process.

It is not possible at this time to determine whether the Company will incur (or to reasonably estimate the amount of) any fines, penalties, or liabilities in connection with the investigation.

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations.

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In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

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.

Settlement of lawsuits for the years ended September 30, 2024, 2023, and 2022 total $ 520,000 , $ 3.8 million, and $ 1.4 million, respectively.

As of September 30, 2024 and 2023, the Company has accrued $ 2.0 million and $ 2.4 million in accrued liabilities, respectively, related to settlement of lawsuits.

See Note 1 7 for lease commitments.

7 unchanged sentences

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

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.

Stock-based compensation expense for fiscal 2024, 2023, and 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $ 1.9 million, $ 2.6 million, and $ 2.4 million, respectively, with related tax benefit amounting to $ 444,000 , $ 616,000 , and $ 569,000 , respectively.

As of September 30, 2024, we had unrecognized compensation cost amounting to $ 2.6 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 1.4 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:

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Stock-based Compensation - continued

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 2024, 2023, and 2022.

The following table summarizes information about stock option activity during fiscal 2024 under the 2022 Plan:

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

10 unchanged sentences

During the fourth quarter of 2022, one club in Sulphur, Louisiana, incurred damage from a hurricane.

We also partially recovered and recognized a $ 327,000 gain related to a fire in one of our clubs in Fort Worth, Texas, during the fourth quarter of 2024.

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.

2 unchanged sentences

Consolidated balance sheets (period end)

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

Insurance receivable Receivables, net $ — $ — $ —

Consolidated statements of income – gain

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

Property Impairments and other charges, net $ ( 327 ) $ ( 77 ) $ ( 463 )

Consolidated statements of cash flows

1 unchanged sentence

Proceeds from property insurance claims Investing activity $ 1,367 $ 86 $ 648

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

Acquisitions and Dispositions

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

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

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.

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.

Insurance Recoveries – continued

The net property insurance gain/loss amount in fiscal 2024, 2023, and 2022 was net of assets written off and expenses amounting to $ 845,000 , $ 9,000 , and $ 0 , respectively.

Acquisitions and Dispositions

2022 Acquisitions

Big Sky Clubs

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).

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

Current assets $ 386

7 unchanged sentences

Acquisition price fair value $ 87,933

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions - continued

Licenses and tradenames, except for those associated with certain leased locations, will not be amortized but will be tested at least annually for impairment.

2 unchanged sentences

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

During fiscal 2024, 2023, and 2022 (from the date of acquisition), the eleven acquired clubs contributed the following, which are included in our consolidated statements of income (in thousands):

2024 2023 2022

Revenues $ 39,383 $ 40,563 $ 35,437

Income from operations $ 8,662 $ 11,372 $ 12,525

The following table presents the unaudited pro forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amounts and number of shares):

2024 2023 2022

Pro forma revenues $ 295,604 $ 293,790 $ 269,347

Pro forma net income attributable to RCIHH common stockholders $ 3,011 $ 29,246 $ 45,623

Pro forma earnings per share - basic and diluted $ 0.33 $ 3.13 $ 4.86

Pro forma weighted average number of common shares outstanding - basic and diluted 9,250,245 9,335,983 9,383,445

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 2021.

The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects.

Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects.

Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021.

Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition.

Since the results of operations during fiscal 2024 and 2023 were subsequent to the fiscal year of acquisition and that those years fully include the results of operations of the eleven acquired clubs and related assets, the amounts presented for fiscal 2024 and 2023 above do not reflect any pro forma adjustments.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions - continued

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.

4 unchanged sentences

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.

Stafford TX Property

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.

Lubbock TX Club Property

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.

Playmates Club

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $ 16.0 million.

4 unchanged sentences

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

The $ 5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

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.

4 unchanged sentences

The recognized goodwill will not be deductible for tax purposes.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions - continued

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

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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.

Rowlett TX Property

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

The Company secured a $ 2.2 million loan in relation to the purchase.

Odessa TX Club

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.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

Cheetah Gentlemen's Club

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.

7 unchanged sentences

The recognized goodwill will not be deductible for tax purposes.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions - continued

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

13 unchanged sentences

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

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

2023 Acquisitions

Lubbock Property

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

1 unchanged sentence

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions - continued

Heartbreakers Gentlemen's Club

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).

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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.

Aurora CO Property

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

Central City CO Casino Properties

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 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.

Mark IV Property

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

3 unchanged sentences

Acquisitions and Dispositions - continued

Grange Food Hall

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

2 unchanged sentences

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.

Bombshells San Antonio

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

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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.

Baby Dolls-Chicas Locas

On March 16, 2023, the Company and certain of its subsidiaries completed the acquisition of five gentlemen's clubs, five related real estate properties, associated intellectual properties, and certain automated teller machines for a total 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.

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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.

During fiscal 2024 and 2023 (from the date of acquisition), the five acquired clubs contributed the following, which are included in our consolidated statements of income (in thousands):

Revenues $ 34,781 $ 16,132

Income from operations $ 8,279 $ 4,827

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):

2024 2023 2022

Pro forma revenues $ 295,604 $ 306,729 $ 291,764

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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.

Since the results of operations during fiscal 2024 were subsequent to the fiscal year of acquisition and that fiscal 2024 fully includes the results of operations of the five acquired clubs, the amounts presented for fiscal 2024 above do not reflect any pro forma adjustments.

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Acquisitions and Dispositions - continued

2023 Disposition

Arapahoe Street, Denver CO Property

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 ).

Non-Income-Producing Properties

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

• On February 6, 2023, in view of the increasing business presence of the Company in the Denver, Colorado area, the Company acquired a non-income-producing corporate property for $ 458,000 in cash, to be used for office space and employee housing.

• 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.

2023 Dispositions

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.

1 unchanged sentence

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.

2024 Acquisitions

Non-Income-Producing Properties

• On October 24, 2023, the Company purchased an administrative building in Central City, Colorado for $ 1.0 million in cash.

• On October 24, 2023, the Company purchased a vacant lot in Central City, Colorado for $ 65,000 in cash.

2024 Dispositions

South Houston Property

On May 31, 2024, the Company sold parking lot properties with a combined carrying value of $ 74,000 related to a previously owned club in South Houston, Texas for $ 160,000 in cash.

The Company paid approximately $ 9,500 in closing costs related to the transaction.

On June 6, 2024, the Company sold an aircraft with a carrying value of approximately $ 2.0 million for $ 1.8 million in cash.

The Company paid approximately $ 53,000 in closing costs related to the transaction.

The proceeds of the sale were used to pay off related debt.

Bombshells San Antonio

Effective September 1, 2024, the Company sold Bombshells San Antonio to members of its former franchisee group for a noncash exchange of the Company's membership interest in the owner-subsidiary for the forgiveness of notes payable to the former franchisee group members.

The transaction resulted in a $ 2.3 million gain, which is included in impairments and other charges, net in our consolidated statements of income.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Quarterly Results of Operations (Unaudited)

4 unchanged sentences

2024 September 30, 2024

$ 69,968 $ 71,517 $ 77,055 $ 75,250

Income from operations (1)

Revenues $ 73,907 $ 72,283 $ 76,180 $ 73,234

Income (loss) from operations (1)

$ 13,165 $ 4,657 $ ( 2,536 ) $ 3,519

Net income attributable to RCIHH stockholders (1)

Net income (loss) attributable to RCIHH stockholders (1)

$ 7,226 $ 774 $ ( 5,233 ) $ 244

Earnings per share (1)

Earnings (loss) per share (1)

Basic and diluted $ 0.77 $ 0.08 $ ( 0.56 ) $ 0.03

23 unchanged sentences

2022 September 30, 2022

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

$ 61,836 $ 63,692 $ 70,714 $ 71,378

Income from operations (3)

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

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

(1) Fiscal year 2024 results of operations were mainly impacted by $ 38.5 million in asset impairments ($ 8.0 million in the second quarter, $ 17.9 million in the third quarter, and $ 12.6 million in the fourth quarter).

Quarterly effective income tax rate was 19.9 %, 0.7 %, 21.5 %, and 145.1 % from first to fourth quarter, respectively.

(2) Fiscal year 2023 results of operations were 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).

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Quarterly effective income tax expense rate was 21.7 %, 23.4 %, 21.3 %, and 27.5 % 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.

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

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Segment Information – continued

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.

Related Party Transactions

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Related Party Transactions – continued

We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance.

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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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Leases – continued

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

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$ 34,049 $ 9,975 $ 44,024

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):

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Leases – continued

Total lease expense under ASC 842 is included in selling, general and administrative expenses in our consolidated statement of income, except for sublease income which is included in other revenue, for the years ended September 30, 2024, 2023, and 2022 as follows (in thousands):

2024 2023 2022

11 unchanged sentences

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

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

We recorded impairment charges of operating lease right-of-use assets amounting to $ 6.5 million, $ 1.0 million, and $ 0 during fiscal years 2024, 2023, and 2022, respectively.

We recorded third-party operating lease revenue under ASC 842 amounting to $ 1.7 million, $ 1.8 million, and $ 1.6 million for fiscal 2024, 2023, and 2022, 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.

$ 2.4 million for 2025, $ 1.6 million for 2026, $ 1.5 million for 2027, $ 1.4 million for 2028, $ 1.3 million for 2029, and $ 5.1 million thereafter.

RCI HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Subsequent Events

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

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

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

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.

Share Repurchase

1 unchanged sentence

These shares were subsequently retired.

Closure/ Disposition of Bombshells Locations

In November 2024, the Company closed two underperforming Bombshells location in Spring, Texas, and in South Houston, Texas.

The assets of these Bombshells locations were fully impaired as of September 30, 2024.

On November 14, 2024, the Company sold a Bombshells location in Austin, Texas, for $ 130,000 , of which $ 70,000 was in cash at signing and $ 60,000 in a 6 % promissory note maturing in a year.

The Company assigned the lease on the property to the buyer at the date of closing.

RCI HOSPITALITY HOLDINGS, INC.

4 unchanged sentences

Balance at end of year

Allowance for doubtful accounts receivable

Allowance for doubtful operating receivables

Fiscal 2022 $ 382 $ 191 $ ( 543 ) $ 30

10 unchanged sentences

(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.

(2) Write off of gross amount against allowance.

(3) Included in deferred tax liability, net in the consolidated balance sheets.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data