RCI HOSPITALITY HOLDINGS, INC.

4. Segment Information

The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such segments based on management responsibility and the nature of the Company’s products, services, and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the unaudited condensed consolidated financial statements.

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

4. Segment Information—continued

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs, Other, and Corporate segments for the three months ended June 30, 2025, amounting to $4.9 million, $45,000, and $0, respectively, and for the nine months ended June 30, 2025, amounting to $14.5 million, $90,000, and $385,000, respectively; and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2025, amounting to $58,000 and $195,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs, Other, and Corporate segments for the three months ended June 30, 2024, amounting to $4.7 million, $0, and $21,000, respectively, and for the nine months ended June 30, 2024, amounting to $13.8 million, $0, and $269,000, respectively; and intercompany sales of Robust Energy Drink included in Other segment for the three and nine months ended June 30, 2024, amounting to $66,000 and $194,000, respectively. These intercompany revenue amounts are eliminated upon consolidation.

Corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, unallocated self-insurance reserve, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.

Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.

5. Selected Account Information

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

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.

5. Selected Account Information—continued

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

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

The components of other long-term liabilities are as follows (in thousands):

In fiscal 2025, the Company started self-insuring a significant portion of expected losses under its general liability and liquor insurance programs due to increasingly prohibitive costs of such coverage from third-party insurers. The Company continues to purchase insurance for workers' compensation, property, auto, and business interruption, as well as the minimum insurance coverage where it is required by law for licensing requirements. See also tables of accrued liabilities (above) and selling, general and administrative expenses (below).

5. Selected Account Information—continued

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

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

During the second quarter ended March 31, 2025, we recorded $1.8 million in SOB license impairment related tofour clubs. During the second quarter ended March 31, 2024, we recorded $4.4 million in SOB license impairment related tofour clubs, $2.9 million in goodwill impairment related totwo clubs, and $693,000 in tradename impairment related toone club. During the third quarter ended June 30, 2024, we recorded $6.0 million in goodwill impairment related tofour clubs, $5.7 million in operating lease right-of-use asset impairment related tofive Bombshells restaurants, $1.4 million in SOB license impairment related totwo clubs, and $4.8 million in property and equipment impairment related toone club andfive restaurants.

During the third quarter ended June 30, 2025, we recorded $2.95 million for a class action settlement agreement to resolve claims under the Illinois Biometric Information Privacy Act. See Note 9.

During the first quarter ended December 31, 2024, we sold Bombshells Austin for a gain of $1.3 million. See Note 13.

During the first quarter ended December 31, 2024, we received insurance recovery amounting to $1.15 million for a club razed by fire in a prior period.

6. Debt

On November 26, 2024, the Company converted a bank loan secured on October 10, 2022 to purchase real property into a construction loan with the same bank lender. The old loan had a remaining principal balance of $2.4 million. The new construction loan has maximum principal limit of $6.3 million and has a term of 204 months. The loan bears an interest rate of 6.99% per annum for the first five years after which it will adjust annually to a new rate equal to the then-current Wall Street Journal Prime Rate plus 0.25% per annum, with a floor of 6.99% per annum. The loan is payable interest-only during the first 24 months, then payable for the next 36 months in equal installments of $60,162 in principal and interest, after which will be payable based on the adjusted interest rate for the next 143 months, with the remaining 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 January 21, 2025, in relation to a club acquisition (see Note 13), the Company executed a promissory note for $5.0 million with the seller. The 8% promissory note is payable in 59 monthly installments of $67,718 in principal and interest, with the balance of principal and accrued interest payable at maturity.

On February 26, 2025, the Company extended its line-of-credit facility with a lender bank for a maximum availability of $5.0 million to mature on March 9, 2027. All other terms and conditions in the original line-of-credit remain unchanged.

On April 7, 2025, in relation to a club acquisition (see Note 13), the Company executed a seller-financed promissory note for $2.5 million bearing an interest of 7% per annum. The promissory note matures infive years and is payable in equal monthly installments of $49,503 in principal and interest.

On June 7, 2025, in relation to a club acquisition (see Note 13), the Company executed a seller-financed promissory note for $500,000 bearing an interest of 7% per annum. The promissory note matures infive years and is payable in equal monthly installments of $9,901 in principal and interest.

Future maturities of debt obligations as of June 30, 2025, are as follows (in thousands):

7. Stock-based Compensation

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

7. Stock-based Compensation—continued

Stock-based compensation, which is included in corporate segment selling, general and administrative expenses amounted to $392,000 and $980,000 during the three and nine months ended June 30, 2025, respectively, and $471,000 and $1.4 million during the three and nine months ended June 30, 2024, respectively. As of June 30, 2025, we had unrecognized compensation cost amounting to $981,000 related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 0.6 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 offive years. The weighted average grant-date fair value of the stock options was $31.37.

The following table summarizes information about stock option activity during the nine months ended June 30, 2025, under the 2022 Plan:

For the three and nine months ended June 30, 2025, and 2024, we excluded the impact of 300,000 stock options from the calculation of diluted earnings per share because their effect was anti-dilutive. Aside from the outstanding stock options, there were no other potentially dilutive securities for inclusion in the calculation of diluted earnings per share.

8. Income Taxes

Income taxes were an expense of $733,000 and $3.6 million during the three and nine months ended June 30, 2025, respectively, and a benefit of $1.4 million and an expense of $378,000 during the three and nine months ended June 30, 2024, respectively. The effective income tax rate was 15.3% and 18.3% for the three and nine months ended June 30, 2025, respectively, and 21.5% and 12.0% for the three and nine months ended June 30, 2024, respectively. The disproportionate tax rates during the nine months ended June 30, 2024, were caused by the decrease in the then-expected annual effective tax rate. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below (dollars in thousands).

8. Income Taxes—continued

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year ended September 30, 2022, 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.

On July 4, 2025, President Trump signed into law the legislation formally titled "An Act to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14" (the "Act") and commonly referred to as the One Big Beautiful Bill Act. Among other things, the Act extends certain expiring, and in some cases expired, provisions of the 2017 Tax Cuts and Jobs Act. The Act also adjusted a number of provisions affecting businesses that were subject to sunsets, phase-outs, or phase-ins that would have taken effect in the absence of action by Congress or that have already taken effect. The Company has reviewed the changes from the Act and determined that any impact would be immaterial.

9. Commitments and Contingencies

Legal Matters

Indemnity Insurance Corporation

As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. On that date, the Company transitioned to a new insurance provider and has since obtained general liability coverage from other insurers to cover claims arising from actions occurring after October 25, 2013.

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (the “Rehabilitation Order”) declaring IIC impaired, insolvent, and in an unsafe financial condition. The Court placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (the “Commissioner”), as receiver. The Rehabilitation Order authorized the Commissioner to rehabilitate IIC by, among other things, gathering and marshaling assets. The order also stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

On April 10, 2014, the Court entered a Liquidation and Injunction Order With Bar Date (the “Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies issued by IIC. The Liquidation Order established a claims bar date of January 16, 2015, and further stayed or abated pending lawsuits involving IIC through October 7, 2014. As a result of this order, the Company no longer had insurance coverage under the IIC policy for any claims. The Company retained counsel to defend and evaluate affected claims and lawsuits and has funded 100% of the associated litigation costs. The Company timely filed claims with the Receiver and has continued to provide information and updates as requested; however, there is no assurance that any recovery will be received from the IIC estate. The ultimate financial impact of this uncertainty remains unknown.

9. Commitments and Contingencies—continued

As of June 30, 2025, only 1 claim remains unresolved out of the original 71 claims associated with IIC. The sole remaining matter is the Dupray case, as described below, involving a traffic accident allegedly caused by a third party after being served alcohol at a JAI Phoenix location. The Company continues to vigorously defend this matter and pursue all available rights to potential reimbursement through the IIC liquidation process.

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 complaint alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix and asserted claims against JAI Phoenix under theories of common law dram shop negligence and dram shop negligence per se. Following a jury trial, in April 2017 the court entered judgment in favor of the plaintiffs and awarded compensatory and punitive damages, allocating approximately $1.4 million in compensatory damages and $4.0 million in punitive damages to JAI Phoenix. JAI Phoenix filed post-trial motions, which were denied in August 2017, and subsequently filed a notice of appeal in September 2017. In June 2018, the Arizona Court of Appeals heard the matter and, on November 15, 2018, issued a decision vacating the jury’s verdict and remanding the case for a new trial.

The retrial was held in June 2025. The jury found Mr. Panameno 94% responsible and JAI Phoenix 6% responsible. The jury awarded total damages of $5.1 million and punitive damages of $125,000. Based on the jury’s allocation of fault, JAI Phoenix is responsible for $332,884 of the total award. Under applicable law, plaintiffs retain the right to appeal; however, it is not known at this time whether an appeal will be filed, but if an appeal is filed, the Company will vigorously defend.

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

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

On or about May 29, 2024, search warrants were executed on the Company’s corporate headquarters in Houston, Texas, three separate clubs in New York, New York, and for the mobile phone 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, audits thereof, and entertainment benefits provided to a former NY DTF employee. On or about July 2, 2025, the Company received a second subpoena from the NY AG requesting additional documents and information related to the same issues. 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.

9. Commitments and Contingencies—continued

On or about May 20, 2025, the Company received a subpoena from the U.S. Securities and Exchange Commission ("SEC") seeking certain documents and information related to the NY AG investigation and NY DTF issues. The Company is cooperating with the SEC and its investigation. 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 SEC investigation.

On April 14, 2025, the Company's subsidiaries, RCI Management Services, Inc., Pooh Bah Enterprises, Inc., and RCI Dining Services (Harvey), Inc. (collectively, "Defendants") entered into a class action settlement agreement to resolve claims under the Illinois Biometric Information Privacy Act ("BIPA"), 740 ILCS 14/1 et seg., arising from the alleged collection of customer fingerprints at Rick's Cabaret in Chicago and Scarlett's Cabaret in Washington Park, Illinois. The settlement resolvestwo consolidated cases: Rapp et al. v. RCI Management Services, Inc. et al., Case No. 22LA0884 (St, Clair County, Illinois) and Loera v. Pooh Bah Enterprises, Inc., Case No. 2021CH04759 (Cook County, Illinois).

Under the terms of the agreement, and without admitting any liability, Defendants will provide a settlement fund valued at approximately $2.95 million, consisting of $1.25 million in cash and $1.7 million in VIP cards. The settlement includes payments to class members submitting valid claims, attorneys' fees of up to 40% of the fund, incentive awards to named plaintiffs, and administrative costs. Any unclaimed funds remaining after payment of valid claims, fees, and costs will revert to the Defendants. The Company denies all allegations of wrongdoing. The settlement remains subject to final court approval.

General

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

The Company recorded lawsuit settlements incurred amounting to $3.3 million and $3.6 million for the three and nine months ended June 30, 2025, respectively, and $141,000 and $308,000 for the three and nine months ended June 30, 2024, respectively. As of June 30, 2025, and September 30, 2024, the Company has accrued $5.2 million and $2.0 million, respectively, related to settlement of lawsuits, which is included in accrued liabilities in our unaudited condensed consolidated balance sheets.

Self-insurance Liability

In fiscal 2025, the Company started self-insuring a significant portion of expected losses under its general liability and liquor insurance programs due to increasingly prohibitive costs of such coverage from third-party insurers. The Company continues to purchase insurance for workers' compensation, property, auto, and business interruption, as well as the minimum insurance coverage where it is required by law for licensing requirements.

We record a liability for unresolved claims and for an estimate of incurred but not reported claims based on historical experience. The estimated liability is based on a number of assumptions and factors regarding economic conditions, the frequency and severity of claims development history, and settlement practices. Our assumptions are reviewed, monitored, and adjusted when warranted by changing circumstances. We recorded estimated self-insurance expense amounting to $4.0 million and $9.4 million during the three and nine months ended June 30, 2025. As of June 30, 2025, the Company has self-insurance liability amounting to $9.4 million.

10. Related Party Transactions

Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of June 30, 2025, and September 30, 2024, was $136.9 million and $135.3 million, respectively.

Included in the debt balance as of June 30, 2025, and September 30, 2024, are notes borrowed from related parties—one note for $500,000 (from Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay) in which the terms of the notes are the same as the rest of the lender group.

We used the services of Tall Oak Custom Furniture, and previously Nottingham Creations, both furniture fabrication companies that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Tall Oak Custom Furniture is owned by a brother of Eric Langan (as was Nottingham Creations). Amounts billed to us for goods and services provided by Tall Oak Custom Furniture and Nottingham Creations were $12,344 and $19,098 during the three and nine months ended June 30, 2025, respectively, and $0 and $344,798 during the three and nine months ended June 30, 2024, respectively. As of June 30, 2025, and September 30, 2024, we owed Tall Oak Custom Furniture and Nottingham Creations $3,312 and $18,700, respectively, in unpaid billings.

TW Mechanical LLC provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2025 and 2024. A son-in-law of Eric Langan owns a 50% interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0 and $0 for the three and nine months ended June 30, 2025, respectively, and $0 and $0 for the three and nine months ended June 30, 2024, respectively. Amounts billed directly to the Company were $455 and $1,856 for the three and nine months ended June 30, 2025, respectively, and $0 and $3,160 for the three and nine months ended June 30, 2024, respectively. As of June 30, 2025, and September 30, 2024, the Company owed TW Mechanical $0 and $0, respectively, in unpaid direct billings.

11. Leases

Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and nine months ended June 30, 2025, and 2024 is as follows (dollars in thousands):