RCI HOSPITALITY HOLDINGS, INC. [RICK] Filings

10-Q 1 rick-20230630.htm 10-Q rick-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-13992

RCI HOSPITALITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Texas						76-0458229
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

10737 Cutten Road

Houston, Texas 77066

(Address of principal executive offices) (Zip Code)

(281) 397-6730

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

RICK

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 4, 2023, 9,419,785 shares of the registrant’s common stock were outstanding.

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where we operate, (iii) the success or lack thereof in launching and building our businesses, (iv) cyber security, (v) conditions relevant to real estate transactions, (vi) the impact of the COVID-19 pandemic, and (vii) numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, the “Company,” “we,” “our,” and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

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RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

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		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of June 30 , 2023 (unaudited) and September 30, 2022	4

	Condensed Consolidated Statements of Income (unaudited) for the three and nine months ended June 30 , 2023 and 2022	5

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and nine months ended June 30 , 2023 and 2022	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30 , 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	41

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	43

	Signatures	44

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and number of shares)


	June 30, 2023		September 30, 2022
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	23,584	$	35,980
Accounts receivable, net	7,433		8,510
Current portion of notes receivable	244		230
Inventories	4,571		3,893
Prepaid expenses and other current assets	5,028		1,499
Assets held for sale	—		1,049
Total current assets	40,860		51,161
Property and equipment, net	277,530		224,615
Operating lease right-of-use assets, net	35,683		37,048
Notes receivable, net of current portion	4,507		4,691
Goodwill	78,684		67,767
Intangibles, net	181,262		144,049
Other assets	1,581		1,407
Total assets	$	620,107	$	530,738

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	7,762	$	5,482
Accrued liabilities	17,732		11,328
Current portion of debt obligations, net	23,824		11,896
Current portion of operating lease liabilities	2,923		2,795
Total current liabilities	52,241		31,501
Deferred tax liability, net	30,146		30,562
Debt, net of current portion and debt discount and issuance costs	219,999		190,567
Operating lease liabilities, net of current portion	35,941		36,001
Other long-term liabilities	355		349
Total liabilities	338,682		288,980

Commitments and contingencies (Note 10)

Equity
Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,430,225 and 9,231,725 shares issued and outstanding as of June 30, 2023 and September 30, 2022, respectively	94		92
Additional paid-in capital	82,091		67,227
Retained earnings	199,425		173,950
Total RCIHH stockholders’ equity	281,610		241,269
Noncontrolling interests	(185)		489
Total equity	281,425		241,758
Total liabilities and equity	$	620,107	$	530,738

See accompanying notes to unaudited condensed consolidated financial statements.

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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 June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Revenues
Sales of alcoholic beverages	$	34,151	$	29,738	$	93,937	$	83,504
Sales of food and merchandise	11,405		11,574		32,757		33,628
Service revenues	26,663		25,444		77,916		67,821
Other	4,836		3,958		13,930		11,289
Total revenues	77,055		70,714		218,540		196,242
Operating expenses
Cost of goods sold
Alcoholic beverages sold	6,397		5,177		17,136		14,907
Food and merchandise sold	4,106		3,959		11,429		11,756
Service and other	26		46		91		170
Total cost of goods sold (exclusive of items shown separately below)	10,529		9,182		28,656		26,833
Salaries and wages	20,578		17,387		58,682		50,422
Selling, general and administrative	23,803		19,572		68,561		56,495
Depreciation and amortization	4,041		2,565		11,108		7,636
Other charges, net	2,589		1,501		5,693		1,357
Total operating expenses	61,540		50,207		172,700		142,743
Income from operations	15,515		20,507		45,840		53,499
Other income (expenses)
Interest expense	(4,316)		(3,028)		(11,680)		(8,496)
Interest income	87		103		268		321
Non-operating gains, net	—		127		—		211
Income before income taxes	11,286		17,709		34,428		45,535
Income tax expense	2,269		3,767		7,447		10,056
Net income	9,017		13,942		26,981		35,479
Net loss (income) attributable to noncontrolling interests	68		(40)		74		(50)
Net income attributable to RCIHH common stockholders	$	9,085	$	13,902	$	27,055	$	35,429

Earnings per share
Basic and diluted	$	0.96	$	1.48	$	2.91	$	3.76

Weighted average shares used in computing earnings per share
Basic and diluted	9,430,225		9,389,675		9,308,624		9,428,461

Dividends per share	$	0.06	$	0.05	$	0.17	$	0.14

See accompanying notes to unaudited condensed consolidated financial statements.

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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, 2022	9,231,725	$	92	$	67,227	$	173,950	—	$	—	$	489	$	241,758
Purchase of treasury shares	—	—		—		—		(1,500)	(98)		—		(98)
Canceled treasury shares	(1,500)	—		(98)		—		1,500	98		—		—
Payment of dividends	—	—		—		(462)		—	—		—		(462)
Stock-based compensation	—	—		941		—		—	—		—		941
Share in return of investment by noncontrolling partner	—	—		—		—		—	—		(600)		(600)
Net income	—	—		—		10,238		—	—		33		10,271
Balance at December 31, 2022	9,230,225	92		68,070		183,726		—	—		(78)		251,810
Issuance of common shares for business combination	200,000	2		16,306		—		—	—		—		16,308
Payment of dividends	—	—		—		(553)		—	—		—		(553)
Stock-based compensation	—	—		706		—		—	—		—		706
Net income (loss)	—	—		—		7,732		—	—		(39)		7,693
Balance at March 31, 2023	9,430,225	94		85,082		190,905		—	—		(117)		275,964
Adjustment in fair value of common shares issued for business combination	—	—		(3,461)		—		—	—		—		(3,461)
Payment of dividends	—	—		—		(565)		—	—		—		(565)
Stock-based compensation	—	—		470		—		—	—		—		470
Net income (loss)	—	—		—		9,085		—	—		(68)		9,017
Balance at June 30, 2023	9,430,225	$	94	$	82,091	$	199,425	—	$	—	$	(185)	$	281,425

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		30,357		—		—	—		—		30,362
Payment of dividends	—	—		—		(380)		—	—		—		(380)
Net income (loss)	—	—		—		10,575		—	—		(11)		10,564
Balance at December 31, 2021	9,499,910	95		80,397		139,888		—	—		(611)		219,769
Purchase of treasury shares	—	—		—		—		(45,643)	(2,845)		—		(2,845)
Canceled treasury shares	(45,643)	(1)		(2,844)		—		45,643	2,845		—		—
Payment of dividends	—	—		—		(474)		—	—		—		(474)
Net income	—	—		—		10,952		—	—		21		10,973
Balance at March 31, 2022	9,454,267	94		77,553		150,366		—	—		(590)		227,423
Purchase of treasury shares	—	—		—		—		(168,069)	(9,212)		—		(9,212)
Canceled treasury shares	(168,069)	(1)		(9,211)		—		168,069	9,212		—		—
Payment of dividends	—	—		—		(468)		—	—		—		(468)
Net income	—	—		—		13,902		—	—		40		13,942
Balance at June 30, 2022	9,286,198	$	93	$	68,342	$	163,800	—	$	—	$	(550)	$	231,685

See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except number of shares)

(unaudited)


	For the Nine Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	26,981	$	35,479
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,108		7,636
Impairment of assets	3,293		1,722
Deferred income tax benefit	(790)		(409)
Stock-based compensation	2,117		—
Gain on sale of businesses and assets	(872)		(1,282)
Unrealized loss on equity securities	—		1
Amortization of debt discount and issuance costs	453		199
Gain on debt extinguishment	—		(83)
Noncash lease expense	2,226		1,725
Gain on insurance	(91)		(408)
Doubtful accounts expense on notes receivable	—		753
Changes in operating assets and liabilities:
Accounts receivable	1,480		3,411
Inventories	79		(492)
Prepaid expenses, other current and other assets	(3,602)		(3,271)
Accounts payable, accrued and other liabilities	4,622		1,773
Net cash provided by operating activities	47,004		46,754
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets	2,811		4,611
Proceeds from insurance	91		515
Proceeds from notes receivable	170		127
Payments for property and equipment and intangible assets	(29,919)		(17,173)
Acquisition of businesses, net of cash acquired	(30,200)		(44,302)
Net cash used in investing activities	(57,047)		(56,222)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations, including related party proceeds of $0 and $650, respectively	11,595		35,820
Payments on debt obligations	(11,431)		(10,714)
Purchase of treasury stock	(98)		(12,057)
Payment of dividends	(1,580)		(1,322)
Payment of loan origination costs	(239)		(445)
Share in return of investment by noncontrolling partner	(600)		—
Net cash provided by (used in) financing activities	(2,353)		11,282
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(12,396)		1,814
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,980		35,686
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	23,584	$	37,500

CASH PAID DURING PERIOD FOR:
Interest	$	11,070	$	7,915
Income taxes	$	8,931	$	8,990

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Noncash investing and financing transactions:
Debt incurred in connection with acquisition of businesses	$	32,405	$	33,200
Debt incurred in connection with purchase of property and equipment	$	8,476	$	4,820
Note receivable from sale of property	$	—	$	2,700
Issuance of shares of common stock for acquisition of businesses:
Number of shares	200,000		500,000
Fair value	$	12,847	$	30,362
Adjustment to operating lease right-of-use assets related to new and renewed leases	$	1,864	$	21,247
Adjustment to operating lease liabilities related to new and renewed leases	$	2,163	$	21,247
Unpaid liabilities on capital expenditures	$	2,758	$	1,325

See accompanying notes to unaudited condensed consolidated financial statements.

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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, 2022 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, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2022. 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 nine months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending September 30, 2023.

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 11.

2. Recent Accounting Standards and Pronouncements

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on our consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments of this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction. The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. We are still evaluating the impact of this ASU on our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which amends certain provisions of ASC 842 that apply to arrangements between related parties under common control. The ASU requires all companies to amortize leasehold improvements associated with common control leases over the asset's useful life to the common control group regardless of the lease term. It also allows private and certain not-for-profit entities to use the written terms and conditions of an agreement to account for common control leases without further assessing the legal enforceability of those terms. The guidance is effective for all entities in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. We are still evaluating the impact of this ASU on our consolidated financial statements.

3. Current Operating Environment

Our fiscal 2020 was the period hardest hit by the COVID-19 pandemic caused by significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. In fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased. Stimulus money also flowed to the economy at that time which prompted increased discretionary spending. In fiscal 2022, several coronavirus variants

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

threatened to bring back tight restrictions. Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S. economy in general, with global inflation and supply chain disruption impacting our businesses the most.

Toward the end of fiscal 2022 and continuing to the current fiscal year, geopolitical and macroeconomic events have impacted our operating results and cash flows by causing inflation on wages and other operating expenses. In the event global inflation leads to a major economic downturn, our business operations and cash flows could be significantly affected.

4. Acquisitions and Dispositions

Lubbock Property

On October 10, 2022, the Company purchased real estate in Lubbock, Texas amounting to $3.4 million for a future Bombshells location. The Company paid $1.2 million in cash at closing and obtained bank financing for the $2.3 million remainder (see Note 7). The site includes extra land that will be listed for sale once the Bombshells unit is completed.

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 a total consideration preliminary fair value of $8.9 million based on certain legal contingencies that existed pre-acquisition). The acquisition included (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note (see Note 7). In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business. The acquisition gives the Company its first adult club in the Galveston, Texas area market.

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 26, 2022:


Current assets	$	64
Property and equipment	4,884
Licenses	1,170
Tradename	340
Accrued liability	(95)
Deferred tax liability	(374)
Total net assets acquired	5,989
Goodwill	2,916
Acquisition price fair value	$	8,905

We believe that in this acquisition goodwill represents the existing customer base of the club in the area and the added synergy profitability expansion when we implement the Company's processes into the club. Goodwill, licenses, and tradename will not be amortized but will be tested at least annually for impairment. Approximately $1.5 million of the recognized goodwill will be deductible for tax purposes.

In connection with this acquisition, we incurred approximately $0 and $23,000 in acquisition-related expenses during the three and nine months ended June 30, 2023, respectively, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until June 30, 2023, the club contributed revenues of $580,000 and $1.5 million and income from operations of $93,000 and $253,000 during the three and nine months ended June 30, 2023, respectively, which are included in our unaudited condensed consolidated statements of income. The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore, we could not provide supplemental pro forma information of the combined entities.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The property has two buildings, one of which the Company is leasing out to an existing tenant and the other building the Company is remodeling for future adult club operations.

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. The purchase price was paid $1.9 million in cash at closing and $3.3 million under a 6.67% five-year promissory note (see Note 7). The Company allocated $2.1 million to land, $2.6 million to building improvements, $98,000 to furniture, fixtures and equipment, and $565,000 to in-place leases based on their relative fair values.

Tomball Parkway Property Sale

On December 28, 2022, the Company sold a property classified as held-for-sale with a carrying value of $1.0 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.

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. The transaction was effected through a membership interest purchase agreement under which a subsidiary of the Company purchased 100% of the issued and outstanding membership interests of the target limited liability company that owns and operates the Bombshells location from the six previous owners of the entity (the "Sellers"). At acquisition date, the Sellers were paid $1.2 million in cash and were issued six seller-financed promissory notes totaling $2.0 million (see Note 7). 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, 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. The five clubs, which are all located in Texas, were purchased through four different asset purchase agreements and one stock purchase agreement, under each of which a newly formed wholly-owned subsidiary of the Company acquired from each club-owning entity all of the tangible and intangible assets and personal property used in the business of that club, except for certain excluded assets. The fair value of the common stock consideration was

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discounted due to lack of marketability during the lock-up period. The cash consideration at closing was partially funded by the $10.0 million line of credit secured by the Company on March 9, 2023 (see Note 7).

The preliminary fair value of the consideration transferred is as follows:


Cash	$	25,000
Notes payable	25,500
Common stock	12,847
Total consideration fair value	$	63,347

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclub reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets are provisional pending completion of the final valuations for those assets. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill is estimated at $9.9 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. This acquisition also gives the Company a bigger market share in the Hispanic demographic in the Texas metropolitan areas. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $9.9 million of the recognized goodwill will be deductible for tax purposes.

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


Current assets	$	632
Property and equipment	16,570
Licenses	27,440
Tradename	9,484
Accounts payable	(632)
Total net assets acquired	53,494
Goodwill	9,853
Acquisition price fair value	$	63,347

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

In connection with this acquisition, we incurred approximately $0 and $292,000 in acquisition-related expenses during the three and nine months ended June 30, 2023, respectively, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until June 30, 2023, the clubs contributed revenues of $7.0 million and $8.2 million and income from operations of $2.0 million and $2.4 million during the three and nine months ended June 30, 2023, respectively, which are included in our unaudited condensed consolidated statements of income.

The following table presents the unaudited pro forma combined results of operations of the Company and the five acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2022 (in thousands, except per share amount and number of shares):

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	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Pro forma revenues	$	77,055	$	76,733	$	231,479	$	213,762
Pro forma net income attributable to RCIHH common stockholders	$	9,085	$	15,824	$	26,129	$	40,503
Pro forma earnings per share - basic and diluted	$	0.96	$	1.65	$	2.77	$	4.21

Pro forma weighted average shares used in computing earnings per share - basic and diluted	9,430,225		9,589,675		9,430,236		9,628,461

The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since the acquired clubs have been integrated with the Company for the entire three months ended June 30, 2023, the results presented for the said period are historical and not pro forma. Since we do not yet have a final valuation of the assets that we acquired and the liabilities that we assumed, 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 $10.0 million line-of-credit facility (see Note 7) and the nine seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2022. Pro forma weighted average number of common shares outstanding includes the impact of 200,000 shares of our common stock issued as partial consideration for the acquisition.

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 7).

Pearland Property Sale

On June 29, 2023, the Company sold a property with a carrying value of $1.1 million for $1.5 million in cash. The Company used $904,000 of the proceeds to pay off a loan related to the property.

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.

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5. Revenues

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):


	Three Months Ended June 30, 2023									Three Months Ended June 30, 2022
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	26,144		$	8,007	$	—	$	34,151	$	21,061		$	8,677	$	—	$	29,738
Sales of food and merchandise	5,288			6,117		—		11,405		4,639			6,935		—		11,574
Service revenues	26,497			166		—		26,663		25,287			157		—		25,444
Other revenues	4,520			107		209		4,836		3,697			20		241		3,958
	$	62,449		$	14,397	$	209	$	77,055	$	54,684		$	15,789	$	241	$	70,714

Recognized at a point in time	$	61,986		$	14,396	$	209	$	76,591	$	54,320		$	15,777	$	241	$	70,338
Recognized over time	463		*	1		—		464		364		*	12		—		376
	$	62,449		$	14,397	$	209	$	77,055	$	54,684		$	15,789	$	241	$	70,714

	Nine Months Ended June 30, 2023									Nine Months Ended June 30, 2022
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	70,433		$	23,504	$	—	$	93,937	$	57,901		$	25,603	$	—	$	83,504
Sales of food and merchandise	14,705			18,052		—		32,757		13,726			19,902		—		33,628
Service revenues	77,716			200		—		77,916		67,472			349		—		67,821
Other revenues	12,951			387		592		13,930		10,540			39		710		11,289
	$	175,805		$	42,143	$	592	$	218,540	$	149,639		$	45,893	$	710	$	196,242

Recognized at a point in time	$	174,481		$	42,098	$	547	$	217,126	$	148,386		$	45,879	$	709	$	194,974
Recognized over time	1,324		*	45		45		1,414		1,253		*	14		1		1,268
	$	175,805		$	42,143	$	592	$	218,540	$	149,639		$	45,893	$	710	$	196,242

* 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, 2022		Net Consideration Received (Refunded)		Recognized in Revenue		Balance at June 30, 2023
Ad revenue	$	82	$	375	$	(370)	$	87
Expo revenue	8		456		—		464
Franchise fees and other	144		(25)		(46)		73
	$	234	$	806	$	(416)	$	624

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Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income.

6. Selected Account Information

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


	June 30, 2023		September 30, 2022
Credit card receivables	$	2,342	$	2,687
Income tax refundable	2,040		2,979
ATM in-transit	891		819
Other (net of allowance for doubtful accounts of $55 and $30, respectively)	2,160		2,025
Total accounts receivable, net	$	7,433	$	8,510

Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6% to 9% per annum and having original terms ranging from 1 to 20 years.

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


	June 30, 2023		September 30, 2022
Prepaid insurance	$	2,746	$	191
Prepaid legal	231		61
Prepaid taxes and licenses	727		391
Prepaid rent	401		296
Other	923		560
Total prepaid expenses and other current assets	$	5,028	$	1,499

A reconciliation of goodwill as of June 30, 2023 and September 30, 2022, which is substantially all in Nightclubs segment, is as follows (in thousands):


	Gross		Accumulated Impairment		Net
Balance at September 30, 2022	$	88,921	$	21,154	$	67,767
Acquisitions (see Note 4)	12,769		—		12,769
Impairment	—		1,852		(1,852)
Balance at June 30, 2023	$	101,690	$	23,006	$	78,684

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


	June 30, 2023		September 30, 2022
Indefinite-lived:
Licenses	$	132,202	$	103,972
Trademarks	22,943		13,119
Domain names	23		23

Definite-lived:
Licenses	24,187		25,962
Leases acquired in-place	157		117
Noncompete agreements	13		55
Favorable leases	828		78
Software	909		723
Total intangible assets, net	$	181,262	$	144,049

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


	June 30, 2023		September 30, 2022
Insurance	$	2,394	$	30
Sales and liquor taxes	2,305		2,227
Payroll and related costs	4,032		3,186
Property taxes	2,081		2,618
Interest	656		499
Patron tax	600		467
Unearned revenues	624		234
Lawsuit settlement	1,903		246
Other	3,137		1,821
Total accrued liabilities	$	17,732	$	11,328

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The components of selling, general and administrative expenses are as follows (in thousands):


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Taxes and permits	$	2,969	$	2,418	$	8,392	$	7,015
Advertising and marketing	3,284		2,460		8,685		7,091
Supplies and services	2,865		2,068		7,946		6,223
Insurance	2,718		2,481		7,538		7,357
Legal	754		328		3,035		2,286
Lease	1,836		1,736		5,363		4,948
Charge card fees	1,792		1,829		5,372		4,626
Utilities	1,443		1,151		4,067		3,194
Security	1,523		1,081		3,995		3,218
Stock-based compensation	470		—		2,117		—
Accounting and professional fees	1,050		818		3,225		2,786
Repairs and maintenance	1,367		960		3,738		2,588
Other	1,732		2,242		5,088		5,163
Total selling, general and administrative expenses	$	23,803	$	19,572	$	68,561	$	56,495

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


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Impairment of assets	$	2,631	$	1,722	$	3,293	$	1,722
Settlement of lawsuits	63		132		3,183		709
Gain on disposal of businesses and assets	(105)		(266)		(692)		(666)
Gain on insurance	—		(87)		(91)		(408)
Other charges, net	$	2,589	$	1,501	$	5,693	$	1,357

During the second quarter ended March 31, 2023, the Company recorded $662,000 in goodwill impairment related to one club, and during the third quarter ended June 30, 2023, the Company recorded $1.2 million in goodwill impairment related to one club and $380,000 in SOB license impairment, $58,000 in property and equipment impairment and $1.0 million in operating lease right-of-use asset impairment related to one club that was closed. During the third quarter ended June 2022, the Company recorded $293,000 in SOB license impairment, $400,000 in goodwill impairment, and $1.0 million in property and equipment impairment related to two clubs and one Bombshells unit.

7. Debt

On October 10, 2022, in relation to a real estate purchase (see Note 4), the Company borrowed $2.3 million from a bank lender. The 18-month promissory note bears an initial interest rate of 6% per annum adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5% with a floor of 6%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid approximately $26,000 in debt issuance cost at closing. This promissory note is secured by the purchased real estate property.

On October 26, 2022, in relation to a club acquisition (see Note 4), the Company executed a promissory note for $5.0 million with the seller. The 6% 15-year promissory note is payable in 180 equal monthly payments of $42,193 in principal and interest. This promissory note is secured by the purchased real estate property.

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On November 18, 2022, in relation to a real estate purchase on September 12, 2022, the Company borrowed $1.5 million from a bank lender. The 18-month promissory note bears an initial interest rate of 6% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5% with a floor of 6%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. This promissory note is secured by the purchased real estate property.

On December 20, 2022, the Company executed a promissory note for $3.3 million with a bank lender in relation to a purchase of a food hall property (see Note 4). The 6.67% five-year promissory note is payable in 59 equal monthly installments of $22,805 in principal and interest, with the balance of principal and accrued interest payable at maturity. There are certain financial covenants with which the Company is to be in compliance related to this loan.

On February 7, 2023, in relation to the acquisition of a franchised Bombshells location in San Antonio, Texas (see Note 4), the Company entered into six separate seller-financing promissory notes totaling $2.0 million. Each of the promissory notes has an interest rate of 7% per annum, has a term of 24 months, and is payable in monthly installments totaling $39,602 of principal and interest for the first 23 months based on a 60-month amortization schedule with the remaining unpaid principal and interest paid at maturity.

On March 9, 2023, the Company closed a $10.0 million line-of-credit facility with a lender bank evidenced by a revolving promissory note, with an initial draw of $10.0 million at closing. The facility has an initial term of 24 months with a variable interest rate equal to the Wall Street Journal prime rate plus 1%. On such date that the principal balance is repaid to an amount less than $5.0 million, the facility's revolver feature is activated where the Company may draw from the remaining availability up to a maximum of $5.0 million. The Company shall also pay a non-usage fee of 0.5% based on the amount by which the average outstanding balance for the prior twelve months was less than $3.0 million or the amount by which the total aggregate advances during the prior twelve months totaled less than $3.0 million. The Company paid $115,000 in debt issuance costs, which is recorded as deferred charges to be amortized on a straight-line basis over 24 months. There are certain financial covenants with which the Company is to be in compliance related to this loan, including a compensating balance requirement of $3.0 million and a minimum tangible net worth requirement of $20.0 million. The compensating balance requirement does not contractually or legally restrict the withdrawal or use of cash.

On March 16, 2023, in relation to the acquisition of five clubs with associated real estate, automated teller machines, and intellectual property (see Note 4), the Company executed nine secured promissory notes with a total principal amount of $25.5 million. Each of the nine promissory notes have an interest rate of 7% per annum with a term of 10 years, payable in arrears in 120 equal monthly payments of principal and interest amounting to $296,077 per month in the aggregate. The holder of the $5.0 million promissory note related to the real estate properties may call due from the Company a principal payment of $1.0 million once in every calendar year.

On June 18, 2023, in relation to a purchase of a retail parcel in a condominium property (see Note 4), the Company executed a promissory note for $2.9 million with a bank lender. The 7.12% five-year promissory note is payable in monthly installments of $20,654 in principal and interest, with the balance of principal and accrued interest payable at maturity.

Future maturities of long-term debt as of June 30, 2023 are as follows: $24.4 million, $39.1 million, $12.3 million, $13.1 million, $22.6 million and $135.5 million for the twelve months ending June 30, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively. Of the maturity schedule mentioned above, $7.5 million, $26.8 million, $0.0 million, $0, $8.7 million and $70.6 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $3.1 million and $3.4 million as of June 30, 2023 and September 30, 2022, respectively.

8. Stock-based Compensation

On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan was approved by the shareholders during the annual stockholders' meeting on August 23, 2022. The 2022 Plan provides that the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000. The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the

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fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of directors approved a grant of 50,000 stock options to each of six members of management subject to the approval of the 2022 Plan.

Stock-based compensation for the three and nine months ended June 30, 2023, which is included in corporate segment selling, general and administrative expenses, amounted to $470,000 and $2.1 million, respectively. No stock-based compensation expense was recognized during the three and nine months ended June 30, 2022. As of June 30, 2023, we had unrecognized compensation cost amounting to $4.9 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.6 years.

The February 9, 2022 stock options vest over four years with the first 20% having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20% vesting on February 9 of each year thereafter, provided however that the options will be subject to earlier vesting under certain events set forth in the Plan, including without limitation a change in control. All of the options will expire, if not exercised, at the end of five years. The weighted average grant-date fair value of the stock options was $31.37 per share. No stock options were exercised during the three and nine months ended June 30, 2023. As of June 30, 2023, 120,000 stock options were vested and exercisable.

For the three and nine months ended June 30, 2023, we excluded 300,000 stock options from the calculation of diluted earnings per share because their effect was anti-dilutive. There were no stock options outstanding during the three and nine months ended June 30, 2022. Aside from the outstanding stock options, there were no other potentially dilutive securities for inclusion in the calculation of diluted earnings per share.

9. Income Taxes

Income tax expense was $2.3 million and $7.4 million during the three and nine months ended June 30, 2023, respectively, compared to $3.8 million and $10.1 million during the three and nine months ended June 30, 2022, respectively. The effective income tax expense rate was 20.1% and 21.6% for the three and nine months ended June 30, 2023, respectively, compared to 21.3% and 22.1% for the three and nine months ended June 30, 2022, 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 June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Federal statutory income tax expense	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	2.1	%	2.9	%	3.4	%	2.9	%
Permanent differences	0.5	%	0.4	%	0.5	%	0.4	%
Tax credits	(3.7)	%	(3.2)	%	(3.4)	%	(2.8)	%
Other	0.1	%	0.1	%	0.1	%	0.5	%
Total income tax expense	20.1	%	21.3	%	21.6	%	22.1	%

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, 2019 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.

10. Commitments and Contingencies

Legal Matters

Texas Patron Tax

A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well

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(Unaudited)

as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas appealed to the Fifth Circuit Court of Appeals, who affirmed that the Texas Patron Fee is unconstitutional as applied. The State of Texas next sought review from the Supreme Court, but the high court declined to take the case and in doing so exhausted the State's rights to appeal the judgment. The lawsuit was sent back to the trial court for post-trial proceedings, which resulted in the award of attorneys' fees to the operating subsidiaries. Pursuant to the rulings, the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

Indemnity Insurance Corporation

As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer had insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of June 30, 2023, we have 1 remaining unresolved claim out of the original 71 claims.

Shareholder Derivative Action

On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurat