RCI HOSPITALITY HOLDINGS INC

8. Debt

Debt consisted of the following (in thousands):

*These commercial bank debts are guaranteed by the Company’s CEO. See Note 16.

Following is a summary of long-term debt at September 30 (in thousands):

(1)On May 8, 2017, in relation to the Scarlett’s acquisition, the Company executedtwo promissory notes with the sellers: (i) a 5% short-term note for $5.0 million payable in lump sum aftersix months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million. The 12-year note is payable $168,343 per month, including interest. The Company has amended the $5.0 million short-term note payable several times, which has a remaining balance of $3.0 million, extending the maturity date and increasing the interest rate. Presently, the maturity date is October 1, 2027 and the interest rate is 8% for its remaining term.

(2)On December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest. The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the old aircraft’s note payable liability of $2.0 million. The aircraft note is payable in 15 years with monthly payments of $59,869, which includes interest. In March 2020, this loan was extended to September 2033.

(3)On December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed for the remaining $2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest. Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity date. This promissory note was fully paid in June 2024 upon sale of the aircraft (see Note 14).

(4) On September 30, 2021, we entered into a $99.1 million term loan refinancing $85.7 million of existing bank and seller-financed real estate debt and to provide $12.3 million in cash that will be used to pay off existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing for the acquisition of 11 clubs and related real estate (see Note 14). The $99.1 million note has a term of 10 years with an initial interest rate of 5.25% per annum for the first five years, then adjusted to a rate equal to the then weekly average yield of U.S. Treasury Securities plus 350 basis points, with a floor rate of 5.25%. The note is payable in monthly payments of principal and interest of $668,051, based on a 20-year amortization period, with the balance paid at maturity. In connection with the transaction, we wrote off to interest expense approximately $103,000 of unamortized debt issuance costs related to the paid-off debts. We also paid approximately $1.0 million in loan costs, approximately $567,000 of which is capitalized and will be amortized together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using the effective interest method. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(5) On October 12, 2021, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2027. The amendment did not have an impact in the Company’s results of operations and cash flows.

(6) On October 12, 2021, we closed on a debt financing transaction with 28 investors for unsecured promissory notes with a total principal amount of $17.0 million, all of which bear interest at a rate of 12% per annum. Of this amount, $9.5 million are promissory notes, payable interest only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2024. The remaining amount of the financing is $7.5 million in promissory notes, payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on October 12, 2024. Included in the $17.0 million borrowing aretwo notes for $500,000 and $150,000 borrowed from related parties (see Note 16) andtwo notes for $500,000 and $300,000 borrowed fromtwo non-officer employees in which the terms of the notes are the same as the rest of the lender group. See the October 25, 2023 extension of the term of the promissory notes, below.

(7) On October 18, 2021, in relation to an acquisition (see Note 14), the Company executed four seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% note payable in 120 equal monthly payments of $122,123 in principal and interest. The second promissory note was a 20-year $8.0 million 6% note payable in 240 equal monthly payments of $57,314 in principal and interest. The third promissory note was a 10-year $1.2 million 5.25% note payable in monthly payments of $8,086 in principal and interest based on a 20-year amortization period, with the balance payable at maturity date. The fourth note was a 20-year $1.0 million 6% note payable in 240 equal monthly payments of $7,215 in principal and interest.

(8) On November 8, 2021, in relation to an acquisition (see Note 14), the Company executed a $1.0 million 7-year promissory note with an interest rate of 4.0% per annum. The note is payable $13,669 per month, including principal and interest.

(9) On January 25, 2022, the Company borrowed $18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is payable in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured byeleven real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 17). After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(10) On March 1, 2022, the Company borrowed $2.6 million from a bank lender in relation to a purchase of real estate (see Note 14). The 21-year promissory note has an initial interest rate of 4.25% per annum, repriced after five years and then again annually to prime plus 1% with a floor rate of 4.25%. The note is payable interest only during the first 12 months; then the next 48 months with $16,338 equal monthly payments of principal and interest; then the next 191 months at an equal monthly payment based on a 20-year amortization; with the balance of principal and interest payable at the 252nd month.

(11) On May 2, 2022, in relation to a club acquisition (see Note 14), the Company executedtwo seller-financed notes totaling $11.0 million, comprised of (1) $6.0 million under a 10%three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on aten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity and (2) $5.0 million under a 10%ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity.

(12) On May 23, 2022, the Company borrowed $2.2 million from a bank lender in relation to a purchase of real estate (see Note 14). The 18-month promissory note has an initial interest rate of 4.5% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1% with a floor of 4.5%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid loan costs amounting to $25,000 for this note. This promissory note was fully paid in connection with a construction loan entered into in November 2023.

(13) On July 21, 2022, the Company executed an $800,000 6% seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 14). The promissory note matures in July 2029 and is payable in 84 equal monthly installments of $11,687 of principal and interest.

(14) On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 15), the Company executedtwo seller-financed promissory notes: (1) $10.0 million 6%ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million 6%ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest.

(15) On August 18, 2022, in relation to a purchase of real estate for a future Bombshells location amounting to $2.1 million (see Note 15), the Company borrowed $1.6 million from a bank lender. The 5.25% mortgage note is payable interest-only foreleven months and on its August 18, 2023 maturity date payable with the entire principal balance plus accrued interest. This note has been amended in August 2024 to an amortizing 7.79% note with monthly installments of $14,959 of principal and interest and maturing in August 2039. The fixed 7.79% interest for the first five years will then be adjusted annually to Wall Street Journal prime plus 0.25%. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(16) On September 23, 2022, in connection with the purchase of an aircraft worth $3.5 million (see Note 14), the Company entered into a financing transaction for $2.8 million. The financing agreement bears an interest of 4.79% per annum and payable in 240 monthly installments of principal and interest amounting to $18,298.

(17) On October 10, 2022, in relation to a real estate purchase (see Note 15), 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.

(18) On October 26, 2022, in relation to a club acquisition (see Note 14), 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.

(19) On November 18, 2022, in relation to a real estate purchase on September 12, 2022 (see Note 14), 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. This note has been amended in August 2024 to an amortizing 7.79% note with monthly installments of $14,248 of principal and interest and maturing in August 2039. The fixed 7.79% interest for the first five years will then be adjusted annually to Wall Street Journal prime plus 0.25%. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(20) 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 14). 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.

(21) On February 7, 2023, in relation to the acquisition of a franchised Bombshells location in San Antonio, Texas (see Note 14), the Company entered intosix 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. These promissory notes were forgiven as part of the sale of Bombshells San Antonio (see Note 14).

(22) On March 9, 2023, the Company closed a $10.0 million line-of-credit facility with a lender bank evidenced by a revolving promissory note, with an initial draw of $10.0 million at closing. 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.

(23) On March 16, 2023, in relation to the acquisition offive clubs with associated real estate, automated teller machines, and intellectual property (see Note 14), the Company executed nine secured promissory notes with a total principal amount of $25.5 million. Each of thenine 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.

(24) On June 18, 2023, in relation to a purchase of a retail parcel in a condominium property (see Note 14), 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. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(25) On October 25, 2023, the Company entered into a debt modification transaction under which 26 investors holding a total principal amount of $15.7 million in unsecured promissory notes agreed to extend the maturity dates of such notes, with no other changes to the terms and conditions of the original promissory notes, which original promissory notes were issued in October 2021 and had original maturity dates in October 2024. The transaction was effected by the 26 investors returning for cancellation their original promissory notes, with us issuing new amended and restated promissory notes to such investors. The original promissory notes will be deemed cancelled as of the end of the day on October 31, 2023, and the new amended promissory notes will have an original issue date, and be deemed effective, as of November 1, 2023.

Other than the extension of the maturity dates, there were no other changes to the terms and conditions of the original promissory notes (except for the reduction in principal, as described below, and the corresponding reduction in monthly installments of principal and interest). The new amended notes will continue to bear interest at the rate of 12% per annum. Of the new amended promissory notes, $9.1 million are payable interest-only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2026. The remaining $6.6 million in promissory notes are payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on November 1, 2027. The original promissory notes that were returned and cancelled as consideration for the issuance of the $6.6 million in new amended promissory notes had an original principal amount of $7.5 million in October 2021.

(26) On November 17, 2023, the Company closed on a construction loan agreement with a bank lender for a total amount of $7.2 million bearing an interest rate of 8.5% per annum for the construction of a Bombshells restaurant in Rowlett, Texas. The promissory note is payable in 120 monthly payments, the first 18 months of which will be interest-only. The succeeding 101 monthly payments will be payable in equal installments of $63,022 in principal and interest, and the remaining balance in principal and accrued interest payable on the 120th month. There are certain financial covenants with which the Company is to be in compliance related to this loan.

(27) On April 30, 2024, the Company entered into a term loan with a bank lender for $20.0 million for additional working capital. The loan has a 10-year term and an interest rate of 8.25% per annum for the first five years, after which the interest rate is to be adjusted to a rate equal to the then weekly average yield on U.S. Treasury Securities plus 362 basis points, with a 6.5% floor. The promissory note is payable in equal monthly installments of $170,408 for principal and interest, based on a 20-year amortization period, during the first five years, after which the monthly payments shall adjust based on the new interest rate to continue until April 30, 2034, at which time the remaining principal amount and accrued interest shall be paid. The Company paid $356,000 in debt issuance costs at the time of closing. There are certain financial covenants with which the Company is to be in compliance with related to this loan, including a minimum tangible net worth requirement of $25.0 million.

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

9. Income Taxes

Income tax expense consisted of the following (in thousands):

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

Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

9. Income Taxes - continued

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, changes in the deferred tax asset valuation allowance, and tax credits that are mostly FICA tip credits. The effective income tax rate for fiscal 2024 was also affected by the low pretax income that caused a high offsetting rate for tax credits, whose dollar value does not change based on pretax income.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense.

The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax benefits. As of September 30, 2024, and 2023, the Company does not have any uncertain tax position. The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve months.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. Fiscal year ended September 30, 2021 and subsequent years remain open to federal tax examination.

9. Income Taxes - continued

On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act included, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program ("PPP"), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During fiscal 2022, we received 11 Notices of PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $5.3 million in principal and interest and were included in non-operating gains (losses), net in our consolidated statement of income for the fiscal year ended September 30, 2022. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal was fully paid as debt plus accrued interest in fiscal 2022.

10. Commitments and Contingencies

Legal Matters

Texas Patron Tax

A declaratory judgment action was brought byfive operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas appealed to the Fifth Circuit Court of Appeals, who affirmed that the Texas Patron Fee is unconstitutional as applied. The State of Texas next sought review from the Supreme Court, but the high court declined to take the case and in doing so exhausted the State's rights to appeal the judgment. The lawsuit was sent back to the trial court for post-trial proceedings, which resulted in the award of attorneys' fees to the operating subsidiaries. Pursuant to the rulings, the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

Indemnity Insurance Corporation

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

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

10. Commitments and Contingencies - continued

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015, and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As of September 30, 2024, we had 1 remaining unresolved claim out of the original 71 claims.

Shareholder Derivative Action

On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information and failure to maintain internal controls. These allegations are substantively similar to claims asserted in a prior securities class action that was settled in August of 2022 and a prior derivative action that was dismissed in June of 2021. On July 24, 2023, the parties reached an agreement in principle to resolve the action. On October 10, 2023, the parties submitted an agreement to settle the action to the Court for the Court's preliminary approval. On July 19 2024, the Court approved the settlement. On July 30, 2024, the final order of settlement was entered by the Court. The case is now closed.

Other

On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. A new trial has been set for June 2025. JAI Phoenix will continue to vigorously defend itself.

As set forth in the risk factors as disclosed in this report, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

In March 2023, the New York State Department of Labor assessed a final judgment against one of our subsidiaries in a state unemployment tax matter for the years 2009-2022. The assessment of $2.8 million, which was recorded by the Company during the quarter ended March 31, 2023, was issued in final notice by the NY DOL after several appeals were denied by the Supreme Court of the State of New York, Appellate Division, Third Department (see Note 5). In September 2023, the NY DOL assessed another of our subsidiaries for approximately $280,000 on the same matter for the period January 2015 through June 2022. We recorded this latter assessment during the quarter ended September 30, 2023.

10. Commitments and Contingencies - continued

On or about May 29, 2024, search warrants were executed on the Company’s corporate headquarters in Houston, Texas, three separate clubs in New York, New York, and for the mobile phone ofthree individuals (includingtwo 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.

General

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

Settlement of lawsuits for the years ended September 30, 2024, 2023, and 2022 total $520,000, $3.8 million, and $1.4 million, respectively. As of September 30, 2024 and 2023, the Company has accrued $2.0 million and $2.4 million in accrued liabilities, respectively, related to settlement of lawsuits.

Leases

See Note 17 for lease commitments.

11. Stock-based Compensation

On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan was approved by the shareholders during the annual stockholders' meeting on August 23, 2022. The 2022 Plan provides that the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000. The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of directors approved a grant of 50,000 stock options each tosix members of management subject to the approval of the 2022 Plan.

Stock-based compensation expense for fiscal 2024, 2023, and 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $1.9 million, $2.6 million, and $2.4 million, respectively, with related tax benefit amounting to $444,000, $616,000, and $569,000, respectively. As of September 30, 2024, we had unrecognized compensation cost amounting to $2.6 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 1.4 years.

11. Stock-based Compensation - continued

The February 9, 2022 stock options vest over four years with the first 20% having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20% vesting on February 9 of each year thereafter, provided however that the options will be subject to earlier vesting under certain events set forth in the Plan, including without limitation a change in control. All of the options will expire, if not vested, at the end offive years. The weighted average grant-date fair value of the stock options was $31.37. No stock options were exercised in fiscal 2024, 2023, and 2022.

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

12. Employee Retirement Plan

The Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees. The Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3% of the employee’s salary. Expenses related to matching contributions to the Plan approximated $280,000, $287,000, and $258,000 for the years ended September 30, 2024, 2023, and 2022, respectively.

13. Insurance Recoveries

One of our clubs in Washington Park, Illinois, was temporarily closed due to a fire during the third quarter of 2019, and another club in Fort Worth, Texas, sustained weather-related damage toward the end of fiscal 2019. Both of these casualties received insurance recoveries in subsequent fiscal years. During the fourth quarter of 2022, one club in Sulphur, Louisiana, incurred damage from a hurricane. We also partially recovered and recognized a $327,000 gain related to a fire in one of our clubs in Fort Worth, Texas, during the fourth quarter of 2024. We wrote off the net carrying value of the assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the insurance claims have been resolved.

In relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):

13. Insurance Recoveries – continued

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

14. Acquisitions and Dispositions

2022 Acquisitions

Big Sky Clubs

On October 18, 2021, we and certain of our subsidiaries completed our acquisition ofeleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration fair value of $87.9 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period, with interest rates on promissory notes reflective of market yields). We used the Finnerty Model to estimate the discount on stock marketability. The acquisition was structured by entering into nine asset purchase agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in that business except certain excluded assets, andtwo stock purchase agreements, where a newly formed subsidiary purchased 100% of the capital stock oftwo club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into a real estate purchase and sale agreement forsix real estate properties, and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment business owned and operated by the sellers. The acquisition gives the Company presence infour additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million infour seller-financed notes (see Note 8), and 500,000 shares of our common stock.

The fair value of the consideration transferred is as follows (in thousands):

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill was estimated at $15.4 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $7.1 million of the recognized goodwill for this transaction will be deductible for tax purposes.

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

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

The Company entered into leases with third parties for certain acquired clubs where the real estate was not part of the acquisition.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $414,000, of which $173,000 was recognized in fiscal 2021 and $241,000 was recognized in fiscal 2022, and in both periods included in selling, general and administrative expenses in our consolidated statements of income. We recorded $1.8 million in measurement period adjustments related to amortization of definite-lived intangibles and debt discount during fiscal 2022.

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

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

The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021. Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition. Since the results of operations during fiscal 2024 and 2023 were subsequent to the fiscal year of acquisition and that those years fully include the results of operations of theeleven acquired clubs and related assets, the amounts presented for fiscal 2024 and 2023 above do not reflect any pro forma adjustments.

The Mansion

On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total acquisition price of $3.5 million, of which $2.5 million was paid in cash at closing and $1.0 million through a seller-financed 7-year promissory note with an interest rate of 4.0% per annum. The $3.5 million acquisition price was allocated $2.1 million to real estate, $200,000 to tangible assets, and $1.2 million to goodwill, which is deductible for tax purposes. The note is payable $13,669 per month, including principal and interest. See Note 8. The Company incurred approximately $21,000 of acquisition-related costs for this acquisition, of which $11,000 was incurred in fiscal 2021 and $10,000 was incurred in fiscal 2022, both of which were included in selling, general and administrative expenses in our consolidated statements of income.

J.W. Lee Property

On December 30, 2021, the Company acquired the real estate ofone of its clubs in South Florida, which the Company previously leased, for $7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use assets and corresponding operating lease liability related to the discontinued lease, both of which amounted to $5.9 million.

Stafford TX Property

On March 1, 2022, the Company acquired real estate in Stafford, Texas for $3.5 million for a future Bombshells location. The Company secured a $2.6 million loan in relation to the purchase. See Note 8.

Lubbock TX Club Property

On March 1, 2022, the Company acquired real estate in Lubbock, Texas for $400,000 to move one of our existing clubs due to eminent domain on the current location. See 2023 Disposition below.

Playmates Club

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10%three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on aten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $5.0 million under a 10%ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity. The Company acquired 100% of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment withinten years of the closing date of the stock purchase agreement. Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill was estimated to be $6.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. The recognized goodwill will not be deductible for tax purposes.

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

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

In connection with the acquisition, we incurred acquisition-related expenses of approximately $28,000, which is included in selling, general and administrative expenses in our consolidated statement of income for the year ended September 30, 2022.

Rowlett TX Property

On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $3.3 million for a future Bombshells location. The Company secured a $2.2 million loan in relation to the purchase. See Note 8.

Odessa TX Club

On July 21, 2022, the Company acquired a club in Odessa, Texas for a total acquisition price of $1.8 million, of which $1.0 million was for the real estate and $800,000 for the adult entertainment business. The Company paid $1.0 million in cash at closing for the real estate and executed an $800,000 6% seller-financed promissory note for the business. The promissory note matures inseven years and is payable in 84 equal monthly installments of $11,687 of principal and interest. See Note 8. The $1.8 million acquisition price was allocated $11,000 to current assets, $1.1 million to property and equipment, and $684,000 to licenses.

Cheetah Gentlemen's Club

On July 27, 2022, the Company completed the acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $25.0 million. The acquisition includes (1) $20.0 million for the adult entertainment business covered in a stock purchase agreement paid $10.0 million in cash at closing and $10.0 million under a 6%ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million for the real estate property covered in an asset purchase agreement payable under a 6%ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest. In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business. The total fair value of the consideration transferred is $23.4 million, which includes a discount on the $10.0 million promissory note to reflect market participant yield expectations.

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill was estimated to be $5.6 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. The recognized goodwill will not be deductible for tax purposes.

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

On August 18, 2022, the Company purchased real estate in Huntsville, Alabama amounting to $2.1 million for a future Bombshells location. The Company paid $525,000 in cash at closing and entered into a bank financing for the $1.6 million remainder (see Note 8).

On September 12, 2022, the Company entered into a joint venture with a private investment company to acquire real estate in Austin, Texas amounting to $2.2 million for a future Bombshells location. The Company has a 51% interest in the joint venture and paid its $1.1 million share for the real estate purchase while the investment of the private investment company was recorded as noncontrolling interest in our consolidated balance sheet.

2022 Dispositions

On October 8, 2021, the Company soldone of its clubs in South Houston for $300,000.

On July 12, 2022, the Company received $6.0 million from the Philadelphia Regional Port Authority forone of the Company's rental properties, with a carrying value of $4.9 million, due to eminent domain. The Company paid the current lessee a termination fee of $250,000, which is included in impairments and other charges, net in our consolidated statement of income. The Company used $2.1 million of the proceeds to pay down a loan related to the property.

2023 Acquisitions

Lubbock Property

On October 10, 2022, the Company purchased real estate in Lubbock, Texas amounting to $3.4 million for a future Bombshells location. The Company paid $1.2 million in cash at closing and obtained bank financing for the $2.3 million remainder (see Note 8). The site includes extra land that will be listed for sale once the Bombshells unit is completed.

Heartbreakers Gentlemen's Club

On October 26, 2022, the Company completed the acquisition of a club in Dickinson, Texas for a total agreed acquisition price of $9.0 million (with an acquisition date fair value of $8.9 million based on certain legal contingencies that existed pre-acquisition). The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6%15-year promissory note (see Note 8). In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business. The acquisition gives the Company its first adult club in the Galveston, Texas area market.

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

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

In connection with this acquisition, we incurred approximately $23,000 in acquisition-related expenses during 2023, which is included in selling, general and administrative expenses in our consolidated statement of income. From the date of acquisition until September 30, 2023, the club contributed revenues $2.0 million and loss from operations of $3.1 million, which are included in our consolidated statement of income. The Company is not providing supplemental pro forma disclosures for this acquisition as it does not materially contribute to the consolidated operations of the Company.

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 hastwo 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 8). The Company allocated $2.1 million to land, $2.6 million to building improvements, $98,000 to furniture, fixtures and equipment, and $565,000 to in-place leases based on their relative fair values. The in-place lease intangible has a weighted average amortization period of 1.7 years.

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 thesix previous owners of the entity (the "Sellers"). At acquisition date, the Sellers were paid $1.2 million in cash and were issuedsix seller-financed promissory notes totaling $2.0 million (see Note 8). The Company allocated the acquisition price $61,000 to inventory, $2.7 million to property and equipment, and $480,000 to favorable lease intangible and right-of-use assets (which both have amortizable life of 13.4 years), net of lease liability.

Baby Dolls-Chicas Locas

On March 16, 2023, the Company and certain of its subsidiaries completed the acquisition offive 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. Thefive clubs, which are all located in Texas, were purchased through four different asset purchase agreements andone stock purchase agreement, under each of which a newly formed wholly-owned subsidiary of the Company acquired from each club-owning entity all of the tangible and intangible assets and personal property used in the business of that club, except for certain excluded assets. The fair value of the common stock consideration was discounted due to lack of marketability during the lock-up period. The cash consideration at closing was partially funded by the $10.0 million line of credit secured by the Company on March 9, 2023 (see Note 8).

The fair value of the consideration transferred is as follows:

We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclub reportable segment. Upon finalization of our valuation of the assets acquired in this transaction, we reallocated certain amounts from goodwill to indefinite-lived intangible assets. Based on the allocation of the fair value of the acquisition price, measurement period adjustments, and subject to any working capital adjustments, the amount of goodwill is estimated at $4.3 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. This acquisition also gives the Company a bigger market share in the Hispanic demographic in the Texas metropolitan areas. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $4.3 million of the recognized goodwill will be deductible for tax purposes.

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

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

In connection with this acquisition, we incurred approximately $304,000 in acquisition-related expenses during 2023, which is included in selling, general and administrative expenses in our consolidated statement of income. During fiscal 2024 and 2023 (from the date of acquisition), thefive acquired clubs contributed the following, which are included in our consolidated statements of income (in thousands):

The following table presents the unaudited pro forma combined results of operations of the Company and thefive acquired clubs and related assets in the March 16, 2023 acquisition transaction above as though the acquisition occurred at the beginning of fiscal 2022 (in thousands, except per share amount and number of shares):

The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. The unaudited pro forma financial information includes adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of acquisition-related expenses and interest expense related to the $10.0 million line-of-credit facility (see Note 8) and thenine 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. Since the results of operations during fiscal 2024 were subsequent to the fiscal year of acquisition and that fiscal 2024 fully includes the results of operations of thefive acquired clubs, the amounts presented for fiscal 2024 above do not reflect any pro forma adjustments.

Arapahoe Street, Denver CO Property

On June 20, 2023, the Company purchased a restaurant parcel located in a condominium building in Denver, Colorado amounting to $4.6 million for a future Bombshells location. The purchase price was paid $1.7 million in cash and $2.9 million under a 7.12%five-year promissory note (see Note 8).

Non-Income-Producing Properties

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

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

•On August 3, 2023, the Company purchased real estate and office space in Central City, Colorado amounting to $2.9 million in cash to house administrative operations in the region.

2023 Dispositions

On November 4, 2022, the Company received $1.0 million from the Texas Department of Transportation forone of the Company's club properties in Lubbock, Texas due to eminent domain.

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

2024 Acquisitions

Non-Income-Producing Properties

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

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

2024 Dispositions

South Houston Property

On May 31, 2024, the Company sold parking lot properties with a combined carrying value of $74,000 related to a previously owned club in South Houston, Texas for $160,000 in cash. The Company paid approximately $9,500 in closing costs related to the transaction.

Airplane

On June 6, 2024, the Company sold an aircraft with a carrying value of approximately $2.0 million for $1.8 million in cash. The Company paid approximately $53,000 in closing costs related to the transaction. The proceeds of the sale were used to pay off related debt.

Bombshells San Antonio

Effective September 1, 2024, the Company sold Bombshells San Antonio to members of its former franchisee group for a noncash exchange of the Company's membership interest in the owner-subsidiary for the forgiveness of notes payable to the former franchisee group members. The transaction resulted in a $2.3 million gain, which is included in impairments and other charges, net in our consolidated statements of income.

15. Quarterly Results of Operations (Unaudited)

The following tables summarize unaudited quarterly data for fiscal 2024, 2023, and 2022 (in thousands, except share and per share data):

15. Quarterly Results of Operations (Unaudited) – continued

Our nightclub operations are normally affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

16. Related Party Transactions

Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of September 30, 2024 and 2023 was $135.3 million and $119.2 million, respectively.

Included in the $17.0 million borrowing on October 12, 2021 (see Note 8) are notes borrowed from related parties—one note for $500,000 (Ed Anakar, President of RCI Management Services, Inc. and our Director of Operations) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the notes are the same as the rest of the lender group. Refer to Note 8 for October 2023 extension of term of promissory notes.

16. Related Party Transactions – continued

We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were approximately $350,000 in fiscal 2024, $195,000 in fiscal 2023, and $207,000 in fiscal 2022. As of September 30, 2024 and 2023, we owed Nottingham Creations and Sherwood Forest $18,700 and $10,700, respectively, in unpaid billings.

TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2024, 2023, and 2022. A son-in-law of Eric Langan owns a 50% interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were approximately $16,491, $443,295, and $3,809 for the fiscal years 2024, 2023, and 2022, respectively. Amounts billed directly to the Company were approximately $3,160, $9,430, and $133,000 for the fiscal years 2024, 2023, and 2022, respectively. As of September 30, 2024 and 2023, the Company owed TW Mechanical approximately $0 and $0, respectively, in unpaid direct billings.

17. Leases

The Company leases certain facilities and equipment under operating leases per ASC 842. These leases include renewal or termination options for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments and additional lease payments contingent on sales. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of income.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Future maturities of operating lease liabilities as of September 30, 2024 are as follows (in thousands):

17. Leases – continued

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

In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral of payments as if the lease is unchanged. Any reduction in total lease expense during the period caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

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

We recorded third-party operating lease revenue under ASC 842 amounting to $1.7 million, $1.8 million, and $1.6 million for fiscal 2024, 2023, and 2022, respectively. Minimum future base rentals are as follows: $2.4 million for 2025, $1.6 million for 2026, $1.5 million for 2027, $1.4 million for 2028, $1.3 million for 2029, and $5.1 million thereafter.

18. Subsequent Events

Share Repurchase

Subsequent to September 30, 2023 through the filing date of this report, we purchased 55,000 shares of the Company's common stock at a cost of $2.6 million. These shares were subsequently retired.

Closure/Disposition of Bombshells Locations

In November 2024, the Company closed two underperforming Bombshells location in Spring, Texas, and in South Houston, Texas. The assets of these Bombshells locations were fully impaired as of September 30, 2024.

On November 14, 2024, the Company sold a Bombshells location in Austin, Texas, for $130,000, of which $70,000 was in cash at signing and $60,000 in a 6% promissory note maturing in a year. The Company assigned the lease on the property to the buyer at the date of closing.

Schedule of Valuation and Qualifying Accounts

(Amounts in Thousands)