RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2022. Overview RCI Hospitality Holdings, Inc. (“RCIHH”) is a holding company. Through our subsidiaries, we engage in a number of activities in the hospitality and related businesses. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc. Through our subsidiaries, as of December 31, 2022, we operated a total of 64 establishments that offer live adult entertainment and/or restaurant and bar operations, including one food hall. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas. Current Operating Environment Our fiscal 2020 was the period hardest hit by the COVID-19 pandemic causing a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. In fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased. Stimulus money also flowed to the economy at that time which prompted increased discretionary spending. In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions. Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S. economy in general, with global inflation and supply chain disruptions impacting our businesses. Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected. Critical Accounting Policies and Estimates The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed with the SEC on December 14, 2022. During the three months ended December 31, 2022, there were no significant changes in our accounting policies and estimates. Results of Operations Highlights of the Company's first quarter 2023 operating results are as follows: • Total revenues were approximately $70.0 million compared to $61.8 million during the comparable prior-year period, a 13.2% increase (Nightclubs revenue of $56.3 million compared to $46.8 million, a 20.4% increase; and Bombshells revenue of $13.4 million compared to $14.8 million, a 9.1% decrease) • Consolidated same-store sales decreased by 2.7% (Nightclubs increased by 1.2% while Bombshells decreased by 13.9%) (refer to the definition of same-store sales in the discussion of revenues below) 23 Table of Contents • Basic and diluted earnings per share (“EPS”) of $1.11 compared to $1.12 (non-GAAP diluted EPS* of $1.19 compared to $1.10) during the comparable prior-year period • Net cash provided by operating activities of $14.9 million compared to $16.3 million during the comparable prior-year period, a 8.4% decrease (free cash flow* of $13.0 million compared to $15.3 million, a 14.6% decrease) * Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below. The following table summarizes our results of operations for the three months ended December 31, 2022 and 2021 (dollars in thousands): For the Three Months Ended December 31, 2022 For the Three Months Ended December 31, 2021 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Revenues Sales of alcoholic beverages $ 29,650 42.4 % $ 26,431 42.7 % $ 3,219 12.2 % Sales of food and merchandise 10,347 14.8 % 10,894 17.6 % (547) (5.0) % Service revenues 25,563 36.5 % 20,876 33.8 % 4,687 22.5 % Other 4,408 6.3 % 3,635 5.9 % 773 21.3 % Total revenues 69,968 100.0 % 61,836 100.0 % 8,132 13.2 % Operating expenses Cost of goods sold Alcoholic beverages sold 5,374 18.1 % 4,834 18.3 % (540) (11.2) % Food and merchandise sold 3,586 34.7 % 3,957 36.3 % 371 9.4 % Service and other 49 0.2 % 100 0.4 % 51 51.0 % Total cost of goods sold (exclusive of items shown separately below) 9,009 12.9 % 8,891 14.4 % (118) (1.3) % Salaries and wages 18,676 26.7 % 16,505 26.7 % (2,171) (13.2) % Selling, general and administrative 22,732 32.5 % 18,486 29.9 % (4,246) (23.0) % Depreciation and amortization 3,307 4.7 % 2,194 3.5 % (1,113) (50.7) % Other gains, net (654) (0.9) % (151) (0.2) % 503 333.1 % Total operating expenses 53,070 75.8 % 45,925 74.3 % (7,145) (15.6) % Income from operations 16,898 24.2 % 15,911 25.7 % 987 6.2 % Other income (expenses) Interest expense (3,687) (5.3) % (2,604) (4.2) % (1,083) (41.6) % Interest income 91 0.1 % 106 0.2 % (15) (14.2) % Non-operating gains, net — — % 84 0.1 % (84) (100.0) % Income before income taxes 13,302 19.0 % 13,497 21.8 % (195) (1.4) % Income tax expense 3,031 4.3 % 2,933 4.7 % (98) (3.3) % Net income $ 10,271 14.7 % $ 10,564 17.1 % $ (293) (2.8) % * Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line. Revenues Consolidated revenues for the first quarter increased by approximately $8.1 million, or 13.2%, versus the comparable prior-year quarter due primarily to a 15.4% increase in sales from newly acquired clubs and a new Bombshells opening partially offset by a 2.3% decrease, which is the impact of consolidated same-store sales on total consolidated revenue change. Consolidated same-store sales decreased by 2.7%. We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. 24 Table of Contents We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily until its next full quarter of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation. Segment contribution to total revenues was as follows (in thousands): For the Three Months Ended December 31, 2022 2021 Nightclubs $ 56,325 $ 46,781 Bombshells 13,431 14,771 Other 212 284 $ 69,968 $ 61,836 Nightclubs revenues increased by 20.4% for the quarter ended December 31, 2022 compared to the prior-year quarter primarily due to the contribution of newly acquired clubs and the impact of the increase in same-store sales. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 1.2%. Newly acquired clubs contributed a sales increase of $9.0 million to the total Nightclubs revenue increase of $9.5 million. By type of revenue, service revenue increased by 23.4%, alcoholic beverage sales increased by 21.6%, and food, merchandise and other revenue increased by 9.6%. Bombshells revenues decreased by 9.1%, of which 13.9% was for same-store sales decrease with the offsetting increase caused by one new location and revenue from franchising operations. By type of revenue, food and merchandise sales decreased by 8.8% while alcoholic beverage sales decreased by 8.6%. Management believes that the decrease in total Bombshells revenue was mainly from higher customer spending in the prior year caused by government stimulus money. Operating Expenses Total operating expenses, as a percent of revenues, increased to 75.8% from 74.3% from last year’s first quarter, with a $7.1 million increase, or 15.6%, which was mainly caused by costs and expenses directly related to higher sales in the current-year quarter and stock-based compensation in the current quarter. Significant contributors to the changes in operating expenses are explained below. Cost of goods sold . Cost of goods sold increased by $118,000, or 1.3%, mainly due to higher sales. As a percent of total revenues, cost of goods sold decreased to 12.9% from 14.4% mainly due to the sales mix increases in service and alcohol sales and a decrease in food and merchandise sales. Service revenue has the highest margin while food and merchandise have the lowest. Nightclubs cost of goods sold decreased to 10.5% from 11.1%, while Bombshells cost of goods sold decreased to 22.9% from 24.4%. Salaries and wages . Salaries and wages increased by $2.2 million, or 13.2%, due to increase in personnel from newly acquired clubs and new Bombshells opened in the prior year and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were almost flat at 26.7% from 26.7%. Nightclubs increased to 20.8% from 20.5% and Bombshells increased to 26.5% from 24.8%, while corporate decreased to 4.7% from 5.0%. Selling, general and administrative expenses . Selling, general and administrative expenses increased by $4.2 million, or 23.0%, primarily due to increased variable expenses related to higher sales during the current-year quarter and stock-based compensation. 25 Table of Contents For the Three Months Ended December 31, 2022 For the Three Months Ended December 31, 2021 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 2,684 3.8 % $ 2,236 3.6 % $ (448) (20.0) % Advertising and marketing 2,670 3.8 % 2,383 3.9 % (287) (12.0) % Supplies and services 2,424 3.5 % 1,980 3.2 % (444) (22.4) % Insurance 2,582 3.7 % 2,395 3.9 % (187) (7.8) % Legal 985 1.4 % 1,060 1.7 % 75 7.1 % Lease 1,762 2.5 % 1,640 2.7 % (122) (7.4) % Charge card fees 1,897 2.7 % 1,331 2.2 % (566) (42.5) % Utilities 1,271 1.8 % 935 1.5 % (336) (35.9) % Security 1,164 1.7 % 1,087 1.8 % (77) (7.1) % Stock-based compensation 941 1.3 % — — % (941) (100.0) % Accounting and professional fees 1,518 2.2 % 1,346 2.2 % (172) (12.8) % Repairs and maintenance 1,164 1.7 % 725 1.2 % (439) (60.6) % Other 1,670 2.4 % 1,368 2.2 % (302) (22.1) % Total selling, general and administrative expenses $ 22,732 32.5 % $ 18,486 29.9 % $ (4,246) (23.0) % Depreciation and amortization . Depreciation and amortization increased by $1.1 million, or 50.7%, due to new depreciable assets from newly acquired and constructed units and amortization of SOB licenses from leased clubs. Other gains, net . Other gains, net increased due to a higher gain from disposal of assets and businesses and the settlement of lawsuits in the prior-year quarter. Income (Loss) from Operations For the three months ended December 31, 2022 and 2021, our consolidated operating margin was 24.2% and 25.7%, respectively. The main drivers for the decrease in operating margin are the stock-based compensation and amortization of SOB licenses which are both only present in the current-year quarter partially offset by fixed expenses leveraged from higher sales. Segment contribution to income (loss) from operations is presented in the table below (in thousands): For the Three Months Ended December 31, 2022 2021 Nightclubs $ 22,740 $ 18,736 Bombshells 1,847 2,802 Other (185) (43) Corporate (7,504) (5,584) $ 16,898 $ 15,911 Nightclubs operating margin was 40.4% and 40.1% for the three months ended December 31, 2022 and 2021, respectively, while operating margin for Bombshells was 13.8% and 19.0%, respectively. Nightclubs operating margin increased due to fixed expenses leveraged from higher sales, partially offset by amortization of SOB licenses. The decrease in Bombshells operating margin was mainly due to fixed expenses deleveraged from lower sales. 26 Table of Contents Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 28 . For the Three Months Ended December 31, 2022 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 22,740 $ 1,847 $ (185) $ (7,504) $ 16,898 Amortization of intangibles 628 2 61 4 695 Gain on sale of businesses and assets (569) — — (21) (590) Gain on insurance (48) — — (16) (64) Stock-based compensation — — — 941 941 Non-GAAP operating income (loss) $ 22,751 $ 1,849 $ (124) $ (6,596) $ 17,880 GAAP operating margin 40.4 % 13.8 % (87.3) % (10.7) % 24.2 % Non-GAAP operating margin 40.4 % 13.8 % (58.5) % (9.4) % 25.6 % For the Three Months Ended December 31, 2021 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 18,736 $ 2,802 $ (43) $ (5,584) $ 15,911 Amortization of intangibles 47 3 — — 50 Settlement of lawsuits 177 10 — 5 192 Loss (gain) on sale of businesses and assets 45 13 — (400) (342) Gain on insurance (1) — — — (1) Non-GAAP operating income (loss) $ 19,004 $ 2,828 $ (43) $ (5,979) $ 15,810 GAAP operating margin 40.1 % 19.0 % (15.1) % (9.0) % 25.7 % Non-GAAP operating margin 40.6 % 19.1 % (15.1) % (9.7) % 25.6 % Other Income/Expenses Interest expense increased by $1.1 million, or 41.6%, primarily caused by a higher average debt balance mostly from seller-financed promissory notes from last year's acquisitions. Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $5.4 million and $4.2 million for the quarters ended December 31, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs were 7.8% and 6.9% during the quarters ended December 31, 2022 and 2021, respectively, primarily due to the interest from higher average debt balance. Income Taxes Income tax expense was $3.0 million and $2.9 million during the three months ended December 31, 2022 and 2021, respectively. The effective income tax expense rate was 22.8% and 21.7% for the three months ended December 31, 2022 27 Table of Contents and 2021, respectively. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below. For the Three Months Ended December 31, 2022 2021 Federal statutory income tax expense 21.0 % 21.0 % State income taxes, net of federal benefit 4.0 % 2.9 % Permanent differences 0.5 % 0.4 % Tax credit (2.8) % (2.0) % Other 0.1 % (0.6) % Total income tax expense 22.8 % 21.7 % Non-GAAP Financial Measures In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows: Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) settlement of lawsuits, and (e) stock-based compensation. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations. Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share . We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) unrealized gains or losses on equity securities, (e) settlement of lawsuits, (f) gain on debt extinguishment, (g) stock-based compensation, and (h) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.7% and 22.3% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 31, 2022 and 2021, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities. Adjusted EBITDA . We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity securities, (g) settlement of lawsuits, (h) gain on debt extinguishment, and (i) stock-based compensation. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs. We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion. 28 Table of Contents The following tables present our non-GAAP performance measures for the three months ended December 31, 2022 and 2021 (in thousands, except per share, number of shares and percentages): Three Months Ended December 31, 2022 2021 Reconciliation of GAAP net income to Adjusted EBITDA Net income attributable to RCIHH common stockholders $ 10,238 $ 10,575 Income tax expense 3,031 2,933 Interest expense, net 3,596 2,498 Settlement of lawsuits — 192 Gain on sale of businesses and assets (590) (342) Gain on debt extinguishment — (85) Unrealized loss on equity securities — 1 Gain on insurance (64) (1) Stock-based compensation 941 — Depreciation and amortization 3,307 2,194 Adjusted EBITDA $ 20,459 $ 17,965 Reconciliation of GAAP net income to non-GAAP net income Net income attributable to RCIHH common stockholders $ 10,238 $ 10,575 Amortization of intangibles 695 50 Settlement of lawsuits — 192 Gain on sale of businesses and assets (590) (342) Gain on debt extinguishment — (85) Unrealized loss on equity securities — 1 Gain on insurance (64) (1) Stock-based compensation 941 — Net income tax effect (200) (38) 29 Table of Contents Non-GAAP net income $ 11,020 $ 10,352 Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share Diluted shares 9,230,258 9,407,519 GAAP diluted earnings per share $ 1.11 $ 1.12 Amortization of intangibles 0.08 0.01 Settlement of lawsuits 0.00 0.02 Gain on sale of businesses and assets (0.06) (0.04) Gain on debt extinguishment 0.00 (0.01) Unrealized loss on equity securities 0.00 0.00 Gain on insurance (0.01) 0.00 Stock-based compensation 0.10 0.00 Net income tax effect (0.02) 0.00 Non-GAAP diluted earnings per share $ 1.19 $ 1.10 Reconciliation of GAAP operating income to non-GAAP operating income Income from operations $ 16,898 $ 15,911 Amortization of intangibles 695 50 Settlement of lawsuits — 192 Gain on sale of businesses and assets (590) (342) Gain on insurance (64) (1) Stock-based compensation 941 — Non-GAAP operating income $ 17,880 $ 15,810 Reconciliation of GAAP operating margin to non-GAAP operating margin Income from operations 24.2 % 25.7 % Amortization of intangibles 1.0 % 0.1 % Settlement of lawsuits 0.0 % 0.3 % Gain on sale of businesses and assets (0.8) % (0.6) % Gain on insurance (0.1) % 0.0 % Stock-based compensation 1.3 % 0.0 % Non-GAAP operating margin 25.6 % 25.6 % * Per share amounts and percentages may not foot due to rounding. ** The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial. Liquidity and Capital Resources At December 31, 2022, our cash and cash equivalents were approximately $34.1 million compared to $36.0 million at September 30, 2022. Because of the large volume of cash we handle, we have very stringent cash controls. As of December 31, 2022, we had working capital of $12.8 million compared to working capital of $18.6 million as of September 30, 2022, excluding net assets held for sale amounting to $0 and $1.0 million as of December 31, 2022 and September 30, 2022, respectively. Since the pandemic hard hit fiscal 2020, we have since recovered and have seen a more normal stream of operations in 2021 and 2022. Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms. 30 Table of Contents We have not recently raised capital through the issuance of equity securities although we have used equity recently in one of our acquisitions. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars. We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report. The following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands): For the Three Months Ended December 31, 2022 2021 Operating activities $ 14,895 $ 16,264 Investing activities (13,650) (48,130) Financing activities (3,117) 14,134 Net decrease in cash and cash equivalents $ (1,872) $ (17,732) Cash Flows from Operating Activities Following are our summarized cash flows from operating activities (in thousands): For the Three Months Ended December 31, 2022 2021 Net income $ 10,271 $ 10,564 Depreciation and amortization 3,307 2,194 Stock-based compensation 941 — Gain on debt extinguishment — (83) Net change in operating assets and liabilities 263 3,414 Other 113 175 Net cash provided by operating activities $ 14,895 $ 16,264 Net cash provided by operating activities decreased from year to year primarily due to higher interest expense. Cash Flows from Investing Activities Following are our cash flows from investing activities (in thousands): For the Three Months Ended December 31, 2022 2021 Payments for property and equipment and intangible assets $ (12,553) $ (9,850) Acquisition of businesses (4,000) (39,302) Proceeds from sale of businesses and assets 2,784 803 Proceeds from insurance 64 185 Proceeds from notes receivable 55 34 Net cash used in investing activities $ (13,650) $ (48,130) 31 Table of Contents Following is a breakdown of our payments for property and equipment and intangible assets for the three months ended December 31, 2022 and 2021 (in thousands): For the Three Months Ended December 31, 2022 2021 New facilities, equipment, and intangible assets $ 10,689 $ 8,852 Maintenance capital expenditures 1,864 998 Total capital expenditures $ 12,553 $ 9,850 The capital expenditures during the three months ended December 31, 2022 and 2021 were composed primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction. Cash Flows from Financing Activities Following are our cash flows from financing activities (in thousands): For the Three Months Ended December 31, 2022 2021 Proceeds from debt obligations $ 1,500 $ 17,002 Payments on debt obligations (3,361) (2,488) Purchase of treasury stock (98) — Payment of dividends (462) (380) Payment of loan origination costs (96) — Share in return of investment by noncontrolling partner (600) — Net cash provided by (used in) financing activities $ (3,117) $ 14,134 We purchased 1,500 shares of our common stock at an average price of $65.02 during the three months ended December 31, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2021. As of December 31, 2022, we have approximately $18.8 million authorization remaining to purchase additional shares. We paid quarterly dividends of $0.05 per share in the current, while we paid $0.04 per share in the prior-year quarter. See Note 7 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations. Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy. Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands): For the Three Months Ended December 31, 2022 2021 Net cash provided by operating activities $ 14,895 $ 16,264 Less: Maintenance capital expenditures 1,864 998 Free cash flow $ 13,031 $ 15,266 Our free cash flow for the current quarter decreased by 14.6% compared to the comparable prior-year period primarily due to higher interest expense payments and higher maintenance capital expenditures from renovations of several of our clubs. 32 Table of Contents We do not include capital expenditures related to new facilities construction, equipment and intangibles assets as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow. Other than the ongoing impact of the COVID-19 pandemic, the current geopolitical and macroeconomic events happening globally, and the notes payable financing described above, we are not aware of any event or trend that would adversely impact our liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt. The following table presents a summary of such indicators for the three months ended December 31 (in thousands, except percentages): 2022 Increase (Decrease) 2021 Increase (Decrease) 2020 Sales of alcoholic beverages $ 29,650 12.2 % $ 26,431 52.3 % $ 17,360 Sales of food and merchandise 10,347 (5.0) % 10,894 26.5 % 8,609 Service revenues 25,563 22.5 % 20,876 107.5 % 10,060 Other 4,408 21.3 % 3,635 53.4 % 2,369 Total revenues $ 69,968 13.2 % $ 61,836 61.0 % $ 38,398 Net income attributable to RCIHH common stockholders $ 10,238 (3.2) % $ 10,575 9.7 % $ 9,643 Net cash provided by operating activities $ 14,895 (8.4) % $ 16,264 159.2 % $ 6,274 Adjusted EBITDA* $ 20,459 13.9 % $ 17,965 106.7 % $ 8,690 Free cash flow* $ 13,031 (14.6) % $ 15,266 169.3 % $ 5,669 Debt (end of period) $ 211,234 30.5 % $ 161,850 20.0 % $ 134,821 * See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. Impact of Inflation To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future. Seasonality Our nightclub operations are 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. Capital Allocation Strategy Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions. Based on our current capital allocation strategy: • We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale; 33 Table of Contents • We consider disposing of underperforming units to free up capital for more productive use; • We consider buying back our own stock if the after-tax yield on free cash flow is above 10%; • We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale. Growth Strategy We believe that we can continue to grow organically and through careful entry into markets with high growth potential. Our growth strategy includes acquiring existing units, opening new units after market analysis, developing new club concepts that are consistent with our management and marketing skills, franchising our Bombshells brand, and developing and opening our Bombshells concept as our capital and manpower allow. All eleven of the existing Bombshells as of December 31, 2022 were located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets. We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As of December 31, 2022, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2022.