RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 1. Financial Statements. RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) December 31, 2024 September 30, 2024 (unaudited) ASSETS Current assets Cash and cash equivalents $ 34,718 $ 32,350 Receivables, net 3,519 5,832 Inventories 4,640 4,676 Prepaid expenses and other current assets 4,226 4,427 Total current assets 47,103 47,285 Property and equipment, net 282,621 280,075 Operating lease right-of-use assets, net 25,573 26,231 Notes receivable, net of current portion 4,103 4,174 Goodwill 61,911 61,911 Intangibles, net 162,881 163,461 Other assets 2,026 1,227 Total assets $ 586,218 $ 584,364 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 5,010 $ 5,637 Accrued liabilities 20,514 20,280 Current portion of debt obligations, net 17,788 18,871 Current portion of operating lease liabilities 3,008 3,290 Total current liabilities 46,320 48,078 Deferred tax liability, net 22,304 22,693 Debt, net of current portion and debt discount and issuance costs 217,741 219,326 Operating lease liabilities, net of current portion 27,471 30,759 Other long-term liabilities 3,611 398 Total liabilities 317,447 321,254 Commitments and contingencies ( Note 7 ) Equity Preferred stock, $ 0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding — — Common stock, $ 0.01 par value per share; 20,000,000 shares authorized; 8,889,000 and 8,955,000 shares issued and outstanding as of December 31, 2024, and September 30, 2024, respectively 89 90 Additional paid-in capital 58,731 61,511 Retained earnings 210,160 201,759 Total RCIHH stockholders’ equity 268,980 263,360 Noncontrolling interests ( 209 ) ( 250 ) Total equity 268,771 263,110 Total liabilities and equity $ 586,218 $ 584,364 See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and number of share data) (unaudited) For the Three Months Ended December 31, 2024 2023 Revenues Sales of alcoholic beverages $ 32,188 $ 33,316 Sales of food and merchandise 10,106 10,802 Service revenues 24,181 25,119 Other 5,008 4,670 Total revenues 71,483 73,907 Operating expenses Cost of goods sold Alcoholic beverages sold 5,846 6,281 Food and merchandise sold 3,563 4,038 Service and other 72 40 Total cost of goods sold (exclusive of items shown separately below) 9,481 10,359 Salaries and wages 20,564 21,332 Selling, general and administrative 26,207 25,201 Depreciation and amortization 3,569 3,853 Other gains, net ( 2,244 ) ( 3 ) Total operating expenses 57,577 60,742 Income from operations 13,906 13,165 Other income (expenses) Interest expense ( 4,152 ) ( 4,216 ) Interest income 179 94 Gain on lease termination 979 — Income before income taxes 10,912 9,043 Income tax expense 1,847 1,799 Net income 9,065 7,244 Net income attributable to noncontrolling interests ( 41 ) ( 18 ) Net income attributable to RCIHH common stockholders $ 9,024 $ 7,226 Earnings per share Basic and diluted $ 1.01 $ 0.77 Weighted average shares used in computing earnings per share Basic and diluted 8,920,774 9,367,151 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except number of shares) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Noncontrolling Interests Total Equity Number of Shares Amount Number of Shares Amount Balance at September 30, 2024 8,955,000 $ 90 $ 61,511 $ 201,759 — $ — $ ( 250 ) $ 263,110 Purchase of treasury shares — — — — ( 66,000 ) ( 3,218 ) — ( 3,218 ) Canceled treasury shares ( 66,000 ) ( 1 ) ( 3,217 ) — 66,000 3,218 — — Excise tax on stock repurchases — — ( 33 ) — — — — ( 33 ) Payment of dividends ($ 0.07 per share) — — — ( 623 ) — — — ( 623 ) Stock-based compensation — — 470 — — — — 470 Net income — — — 9,024 — — 41 9,065 Balance at December 31, 2024 8,889,000 $ 89 $ 58,731 $ 210,160 — $ — $ ( 209 ) $ 268,771 Balance at September 30, 2023 9,397,639 $ 94 $ 80,437 $ 201,050 — $ — $ ( 257 ) $ 281,324 Purchase of treasury shares — — — — ( 37,954 ) ( 2,072 ) — ( 2,072 ) Canceled treasury shares ( 37,954 ) — ( 2,072 ) — 37,954 2,072 — — Excise tax on stock repurchases — — ( 20 ) — — — — ( 20 ) Payment of dividends ($ 0.06 per share) — — — ( 562 ) — — — ( 562 ) Stock-based compensation — — 470 — — — — 470 Net income — — — 7,226 — — 18 7,244 Balance at December 31, 2023 9,359,685 $ 94 $ 78,815 $ 207,714 — $ — $ ( 239 ) $ 286,384 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents RCI HOSPITALITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except number of shares) (unaudited) For the Three Months Ended December 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,065 $ 7,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,569 3,853 Deferred income tax benefit ( 389 ) — Stock-based compensation 470 470 Gain on sale of businesses and assets ( 1,463 ) ( 3 ) Amortization of debt discount and issuance costs 63 163 Noncash lease expense 658 762 Gain on insurance ( 1,150 ) — Doubtful accounts expense on notes receivable — 22 Changes in operating assets and liabilities, net of business acquisitions: Receivables 2,373 1,229 Inventories ( 4 ) ( 218 ) Prepaid expenses, other current and other assets ( 598 ) ( 9,029 ) Accounts payable, accrued and other liabilities 750 9,140 Net cash provided by operating activities 13,344 13,633 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of businesses and assets 129 — Proceeds from insurance 1,150 — Proceeds from notes receivable 71 55 Payments for property and equipment and intangible assets ( 5,754 ) ( 5,135 ) Net cash used in investing activities ( 4,404 ) ( 5,080 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt obligations 2,963 701 Payments on debt obligations ( 5,694 ) ( 6,352 ) Purchase of treasury stock ( 3,218 ) ( 2,072 ) Payment of dividends ( 623 ) ( 562 ) Payment of loan origination costs — ( 136 ) Net cash used in financing activities ( 6,572 ) ( 8,421 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,368 132 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,350 21,023 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,718 $ 21,155 CASH PAID DURING PERIOD FOR: Interest $ 4,080 $ 4,017 Income taxes $ 3 $ — Noncash investing and financing transactions: Unpaid excise tax on stock repurchases $ 33 $ 20 Unpaid liabilities on capital expenditures $ 2,451 $ 1,719 See accompanying notes to unaudited condensed consolidated financial statements. 7 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, 2024 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, 2024 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 16, 2024. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended December 31, 2024 are not necessarily indicative of the results that may be expected for the year ending September 30, 2025. 2. Recent Accounting Standards and Pronouncements In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . The amendments in this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction. The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2022-03 on October 1, 2024. Our adoption of this ASU did not have a significant impact on our consolidated financial statements. In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which amends certain provisions of ASC 842 that apply to arrangements between related parties under common control. The ASU requires all companies to amortize leasehold improvements associated with common control leases over the asset's useful life to the common control group regardless of the lease term. It also allows private and certain not-for-profit entities to use the written terms and conditions of an agreement to account for common control leases without further assessing the legal enforceability of those terms. The guidance is effective for all entities in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. We adopted ASU 2023-01 on October 1, 2024. Our adoption of this ASU did 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): Recognition and Initial Measurement , which addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture's separate financial statements. The objectives of the ASU are to (1) provide decision-useful information to investors and other allocators of capital in a joint venture's financial statements and (2) reduce diversity in practice. The FASB decided to require a joint venture to apply a new basis of accounting upon formation that will recognize and initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). The amendments of this ASU are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information. early adoptions is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively. We adopted the provisions of ASU 2023-05 on October 1, 2024, and will apply them on future joint ventures. 8 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Recent Accounting Standards and Pronouncements — continued In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments in the ASU enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity's overall performance and assess potential future cash flows. The ASU applies to all public entities that are required to report segment information in accordance with ASC 280, and is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are evaluating the impact of this ASU on our consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . Under the ASU, public business entities must annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate. The amendments of the ASU are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard for annual financial statements that have not been issued or made available for issuance. We are enhancing our income tax reporting system to be able to capture the required disclosures of this ASU. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses , which expands disclosures about income statement expenses. The guidance requires disaggregation of certain costs and expenses included in each relevant expense caption on our consolidated statements of income in a separate note to the financial statements at each interim and annual reporting period, including amounts of purchases of inventory, employee compensation, depreciation, and intangible asset amortization. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The amendments in this ASU should be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of the ASU or (2) retrospectively to any or all prior periods presented in the financial statements. We are currently evaluating the impact of this guidance on our financial statement disclosures. 9 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Revenues Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 4 ), are shown below (in thousands): Three Months Ended December 31, 2024 Three Months Ended December 31, 2023 Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Sales of alcoholic beverages $ 27,035 $ 5,153 $ — $ 32,188 $ 26,236 $ 7,080 $ — $ 33,316 Sales of food and merchandise 5,736 4,370 — 10,106 5,240 5,562 — 10,802 Service revenues 24,178 3 — 24,181 25,119 — — 25,119 Other revenues 4,775 61 172 5,008 4,438 89 143 4,670 $ 61,724 $ 9,587 $ 172 $ 71,483 $ 61,033 $ 12,731 $ 143 $ 73,907 Recognized at a point in time $ 61,311 $ 9,586 $ 172 $ 71,069 $ 60,600 $ 12,730 $ 143 $ 73,473 Recognized over time 413 * 1 — 414 433 * 1 — 434 $ 61,724 $ 9,587 $ 172 $ 71,483 $ 61,033 $ 12,731 $ 143 $ 73,907 * Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606. The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented below (in thousands): Balance at September 30, 2024 Net Consideration Received Recognized in Revenue Balance at December 31, 2024 Ad revenue $ 31 $ 102 $ ( 109 ) $ 24 Expo revenue 1 99 — 100 Franchise fees and other 67 4 ( 1 ) 70 $ 99 $ 205 $ ( 110 ) $ 194 Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5 ), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income. 10 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Segment Information The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management responsibility and the nature of the Company’s products, services, and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the unaudited condensed consolidated financial statements. Below is the financial information related to the Company’s segments (in thousands): For the Three Months Ended December 31, 2024 2023 Revenues (from external customers) Nightclubs $ 61,724 $ 61,033 Bombshells 9,587 12,731 Other 172 143 $ 71,483 $ 73,907 Income (loss) from operations Nightclubs $ 20,882 $ 20,369 Bombshells 1,971 86 Other ( 171 ) ( 196 ) Corporate ( 8,776 ) ( 7,094 ) $ 13,906 $ 13,165 Depreciation and amortization Nightclubs $ 2,971 $ 2,905 Bombshells 320 643 Other 13 2 Corporate 265 303 $ 3,569 $ 3,853 Capital expenditures Nightclubs $ 1,554 $ 1,532 Bombshells 3,919 1,908 Other 85 1,498 Corporate 196 197 $ 5,754 $ 5,135 11 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Segment Information — continued December 31, 2024 September 30, 2024 Total assets Nightclubs $ 458,354 $ 454,892 Bombshells 75,966 79,091 Other 14,191 14,197 Corporate 37,707 36,184 $ 586,218 $ 584,364 Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended December 31, 2024, amounting to $ 4.7 million and $ 385,000 , respectively, and for the three months ended December 31, 2023, amounting to $ 4.5 million and $ 227,000 , respectively; and intercompany sales of Robust Energy Drink included in Other segment for the three months ended December 31, 2024, and 2023 amounting to $ 72,000 and $ 39,000 , respectively. These intercompany revenue amounts are eliminated upon consolidation. General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes. Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment. 5. Selected Account Information The components of receivables, net are as follows (in thousands): December 31, 2024 September 30, 2024 Credit card receivables $ 1,647 $ 2,056 Income tax refundable — 2,017 ATM in-transit 594 877 Current portion of notes receivable 329 269 Other (net of allowance for doubtful accounts of $ 57 and $ 42 , respectively) 949 613 Total receivables, net $ 3,519 $ 5,832 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. 12 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Selected Account Information — continued The components of prepaid expenses and other current assets are as follows (in thousands): December 31, 2024 September 30, 2024 Prepaid insurance $ 2,657 $ 2,792 Prepaid legal 138 177 Prepaid taxes and licenses 315 522 Prepaid rent 224 322 Other 892 614 Total prepaid expenses and other current assets $ 4,226 $ 4,427 The components of accrued liabilities are as follows (in thousands): December 31, 2024 September 30, 2024 Insurance $ 1,751 $ 2,390 Sales and liquor taxes 2,341 2,440 Payroll and related costs 3,826 4,676 Property taxes 3,736 3,347 Interest 577 568 Patron tax 1,078 1,024 Unearned revenues 194 99 Income taxes 216 — Lawsuit settlement 2,027 1,985 Construction in progress 2,091 1,012 Estimated self-insurance liability 896 — Other 1,781 2,739 Total accrued liabilities $ 20,514 $ 20,280 The components of other long-term liabilities are as follows (in thousands): December 31, 2024 September 30, 2024 Estimated self-insurance liability $ 3,216 $ — Other 395 398 Total other long-term liabilities $ 3,611 $ 398 13 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Selected Account Information — continued The components of selling, general and administrative expenses are as follows (in thousands): For the Three Months Ended December 31, 2024 2023 Taxes and permits $ 3,828 $ 4,042 Advertising and marketing 2,962 3,474 Supplies and services 2,488 2,695 Insurance 5,283 3,315 Legal 1,386 733 Lease 1,602 1,824 Charge card fees 1,748 1,732 Utilities 1,371 1,485 Security 1,084 1,411 Stock-based compensation 470 470 Accounting and professional fees 1,134 1,186 Repairs and maintenance 1,203 1,099 Other 1,648 1,735 Total selling, general and administrative expenses $ 26,207 $ 25,201 The components of other gains, net are as follows (in thousands): For the Three Months Ended December 31, 2024 2023 Settlement of lawsuits $ 179 $ — Gain on sale of businesses and assets ( 1,406 ) ( 3 ) Gain on insurance ( 1,017 ) — Total other gains, net $ ( 2,244 ) $ ( 3 ) 6. Income Taxes Income tax expense was $ 1.8 million and $ 1.8 million during the three months ended December 31, 2024, and 2023, respectively. The effective income tax rate was 16.9 % and 19.9 % for the three months ended December 31, 2024, and 2023, respectively. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below. For the Three Months Ended December 31, 2024 For the Three Months Ended December 31, 2023 Amount % Amount % Federal statutory income tax expense $ 2,292 21.0 % $ 1,899 21.0 % State income taxes, net of federal benefit 300 2.7 % 310 3.4 % Permanent differences 107 1.0 % 42 0.5 % Tax credits ( 770 ) ( 7.1 ) % ( 452 ) ( 5.0 ) % Other ( 82 ) ( 0.8 ) % — — % Total income tax expense $ 1,847 16.9 % $ 1,799 19.9 % 14 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Income Taxes — continued The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year ended September 30, 2021, and subsequent years remain open to federal tax examination. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. 7. Commitments and Contingencies Legal Matters Indemnity Insurance Corporation As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date. On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014. On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer had insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100 % of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of December 31, 2024, we have 1 remaining unresolved claim out of the original 71 claims. 15 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Commitments and Contingencies — continued Other On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $ 1.4 million and its share of punitive damages is $ 4.0 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. A new trial has been set for June 2025. JAI Phoenix will continue to vigorously defend itself. As set forth in the risk factors as disclosed in this report, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously. In March 2023, the New York State Department of Labor assessed a final judgment against one of our subsidiaries in a state unemployment tax matter for the years 2009-2022. The assessment of $ 2.8 million, which was recorded by the Company during the quarter ended March 31, 2023, was issued in final notice by the NY DOL after several appeals were denied by the Supreme Court of the State of New York, Appellate Division, Third Department. 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 fiscal year ended September 30, 2023. 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. 16 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Commitments and Contingencies — continued General In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage. The Company recorded lawsuit settlements incurred amounting to $ 179,000 and $ 0 for the three months ended December 31, 2024, and 2023, respectively. As of December 31, 2024, and September 30, 2024, the Company has accrued $ 2.0 million and $ 2.0 million, respectively, related to settlement of lawsuits, which is included in accrued liabilities in our unaudited condensed consolidated balance sheets. Self-insurance Liability In fiscal 2025, the Company started self-insuring a significant portion of expected losses under its general liability and liquor insurance programs due to increasingly prohibitive costs of such coverage from third-party insurers. The Company continues to purchase insurance for workers' compensation, property, auto, and business interruption, as well as the minimum insurance coverage where it is required by law for licensing requirements. We record a liability for unresolved claims and for an estimate of incurred but not reported claims based on historical experience. The estimated liability is based on a number of assumptions and factors regarding economic conditions, the frequency and severity of claims development history, and settlement practices. Our assumptions are reviewed, monitored, and adjusted when warranted by changing circumstances. Our initial accrual for estimated self-insurance liability during the quarter ended December 31, 2024, amounted to $ 4.1 million (see Note 5 ). 8. Related Party Transactions Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of December 31, 2024 and September 30, 2024, was $ 135.1 million and $ 135.3 million, respectively. Included in the debt balance as of December 31, 2024, and September 30, 2024, are notes borrowed from related parties—one note for $ 500,000 (from Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay) in which the terms of the notes are the same as the rest of the lender group. We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $ 2,780 and $ 142,098 during the three months ended December 31, 2024, and 2023, respectively. As of December 31, 2024, and September 30, 2024, we owed Nottingham Creations and Sherwood Forest $ 3,300 and $ 18,700 , respectively, in unpaid billings. 17 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Related Party Transactions — continued TW Mechanical LLC provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2025 and 2024. A son-in-law of Eric Langan owns a 50 % interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $ 0 and $ 0 for the three months ended December 31, 2024, and 2023, respectively. Amounts billed directly to the Company were $ 720 and $ 2,932 for the three months ended December 31, 2024, and 2023, respectively. As of December 31, 2024 and September 30, 2024, the Company owed TW Mechanical $ 0 and $ 0 , respectively, in unpaid direct billings. 9. Leases Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three months ended December 31, 2024, and 2023 is as follows (in thousands): Three Months Ended December 31, 2024 2023 Operating lease expense – fixed payments $ 1,109 $ 1,292 Variable lease expense 395 450 Short-term and other lease expense (includes $ 102 and $ 107 recorded in advertising and marketing for the three months ended December 31, 2024, and 2023, respectively; and $ 142 and $ 141 recorded in repairs and maintenance for the three months ended December 31, 2024, and 2023, respectively; see Note 5 ) 342 330 Sublease income — — Total lease expense, net $ 1,846 $ 2,072 Other information: Operating cash outflows from operating leases $ 1,958 $ 2,033 Weighted average remaining lease term – operating leases 9.5 years 10.3 years Weighted average discount rate – operating leases 5.7 % 5.8 % Future maturities of operating lease liabilities as of December 31, 2024, are as follows (in thousands): Principal Payments Interest Payments Total Payments January - December 2025 $ 3,008 $ 1,584 $ 4,592 January - December 2026 3,266 1,403 4,669 January - December 2027 3,004 1,218 4,222 January - December 2028 2,621 1,055 3,676 January - December 2029 2,603 895 3,498 Thereafter 15,977 2,698 18,675 $ 30,479 $ 8,853 $ 39,332 18 Table of Contents RCI HOSPITALITY HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. Subsequent Events On January 21, 2025, the Company completed the acquisition of a club in the Detroit, Michigan market for a total purchase price of $ 11.0 million, consisting of $ 3.0 million in cash and $ 5.0 million in a seller-financed 8 % promissory note for the club, and $ 3.0 million in cash for the associated real estate. As of the filing of this report, we have not completed our valuation and do not have estimates of fair value for the acquired assets and any assumed liability, if any. Subsequent to the balance sheet date through February 7, 2025, we repurchased 22,125 shares of our common stock at an average price of $ 55.00 per share. 19 Table of Contents