What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 91 added, 83 removed, 390 unchanged (31% of the section changed)

5 unchanged sentences

All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc.

Through our subsidiaries, as of March 31, 2023, we operated a total of 71 establishments that offer live adult entertainment, including two that are under renovation/remodeling, and/or restaurant and bar operations, including one food hall.

Through our subsidiaries, as of June 30, 2023, we operated a total of 70 establishments that offer live adult entertainment, including two that are under renovation/remodeling, 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.

19 unchanged sentences

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 and six months ended March 31, 2023, there were no significant changes in our accounting policies and estimates.

During the three and nine months ended June 30, 2023, there were no significant changes in our accounting policies and estimates.

Results of Operations

Highlights of the Company's operating results are as follows:

Second Quarter 2023

Third Quarter 2023

• Total revenues were $77.1 million compared to $70.7 million during the comparable prior-year quarter, a 9.0% increase (Nightclubs revenue of $62.4 million compared to $54.7 million, a 14.2% increase;

and Bombshells revenue of $14.3 million compared to $15.3 million, a 6.6% decrease)

• Consolidated same-store sales increased by 0.2% (Nightclubs increased by 3.7% while Bombshells decreased by 12.1%) (refer to the definition of same-store sales in the discussion of revenues below)

and Bombshells revenue of $14.4 million compared to $15.8 million, an 8.8% decrease)

• Consolidated same-store sales decreased by 9.6% (Nightclubs decreased by 7.3% while Bombshells decreased by 18.2%) (refer to the definition of same-store sales in the discussion of revenues below)

• Basic and diluted earnings per share (“EPS”) of $0.96 compared to $1.48 (non-GAAP diluted EPS* of $1.30 compared to $1.60) during the comparable prior-year quarter

• Net cash provided by operating activities of $16.8 million compared to $11.6 million during the comparable prior-year quarter, a 44.8% increase (free cash flow* of $14.8 million compared to $11.1 million, a 33.3% increase)

• Net cash provided by operating activities of $15.3 million compared to $18.9 million during the comparable prior-year quarter, a 18.9% decrease (free cash flow* of $14.3 million compared to $18.0 million, a 20.9% decrease)

Year-to-Date 2023

1 unchanged sentence

and Bombshells revenue of $42.1 million compared to $45.9 million, an 8.2% decrease)

• Consolidated same-store sales decreased by 1.2% (Nightclubs increased by 2.6% while Bombshells decreased by 13.0%) (refer to the definition of same-store sales in the discussion of revenues below)

• Consolidated same-store sales decreased by 4.3% (Nightclubs decreased by 1.1% while Bombshells decreased by 14.8%) (refer to the definition of same-store sales in the discussion of revenues below)

• Basic and diluted EPS of $2.91 compared to $3.76 (non-GAAP diluted EPS of $3.80 compared to $3.89) during the comparable prior-year year-to-date period

• Net cash provided by operating activities of $31.7 million compared to $27.9 million during the comparable prior-year year-to-date period, a 13.7% increase (free cash flow* of $27.8 million compared to $26.3 million, a 5.5% increase)

• Net cash provided by operating activities of $47.0 million compared to $46.8 million during the comparable prior-year year-to-date period, a 0.5% increase (free cash flow* of $42.1 million compared to $44.4 million, a 5.2% decrease)

* Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below.

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Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2023 2022 2023 2022

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Depreciation and amortization 5.2 % 3.6 % 5.1 % 3.9 %

Other charges (gains), net 5.3 % 0.0 % 2.2 % (0.1) %

Other charges, net 3.4 % 2.1 % 2.6 % 0.7 %

Total operating expenses 79.9 % 71.0 % 79.0 % 72.7 %

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Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

Consolidated revenues for the second quarter increased by $7.8 million, or 12.3%, versus the comparable prior-year quarter due primarily to an 11.6% increase in sales from newly acquired clubs and new Bombshells openings.

Consolidated revenues for the third quarter increased by $6.3 million, or 9.0%, versus the comparable prior-year quarter due primarily to an 18.5% increase in sales from newly acquired clubs and new Bombshells openings.

Consolidated revenues for the year-to-date period increased by $22.3 million, or 11.4%, compared to the prior-year year-to-date period mainly due to an increase in sales from newly acquired clubs and new Bombshells openings partially offset by the impact of consolidated same-store sales decline.

Consolidated same-store sales increased by 0.2% for the quarter and decreased by 1.2% for the year-to-date period.

Consolidated same-store sales decreased by 9.6% for the quarter and decreased by 4.3% for the year-to-date period.

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.

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Segment contribution to total revenues was as follows (in thousands, except percentages):

Three Months Ended March 31, 2023 Mix Three Months Ended March 31, 2022 Mix Inc (Dec) $ Inc (Dec) %

Three Months Ended June 30, 2023 Mix Three Months Ended June 30, 2022 Mix Inc (Dec) $ Inc (Dec) %

Sales of alcoholic beverages $ 26,144 41.9 % $ 21,061 38.5 % $ 5,083 24.1 %

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$ 77,055 $ 70,714 $ 6,341 9.0 %

Six Months Ended March 31, 2023 Mix Six Months Ended March 31, 2022 Mix Inc (Dec) $ Inc (Dec) %

Nine Months Ended June 30, 2023 Mix Nine Months Ended June 30, 2022 Mix Inc (Dec) $ Inc (Dec) %

Sales of alcoholic beverages $ 70,433 40.1 % $ 57,901 38.7 % $ 12,532 21.6 %

10 unchanged sentences

$ 218,540 $ 196,242 $ 22,298 11.4 %

Nightclubs revenues increased by 18.4% for the quarter ended March 31, 2023 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 3.7%.

Nightclubs revenues increased by 14.2% for the quarter ended June 30, 2023 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 decreased by 7.3%.

Newly acquired and remodeled clubs contributed a sales increase of $11.9 million to the total Nightclubs revenue increase of $7.8 million.

By type of revenue, service revenue increased by 4.8%, alcoholic beverage sales increased by 24.1%, and food, merchandise and other revenue increased by 17.7%.

Bombshells revenues decreased by 6.6%, of which 12.1% was for same-store sales decrease with the offsetting increase caused by one new location and revenue from franchising operations.

Bombshells revenues decreased by 8.8%, of which 18.2% was for same-store sales decrease with the offsetting increase caused by two new locations and a food hall.

By type of revenue, food and merchandise sales decreased by 11.8% while alcoholic beverage sales decreased by 7.7%.

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Operating Expenses

Total operating expenses, as a percent of revenues, increased to 81.2% from 73.2% from last year’s second quarter, with a $11.5 million increase, or 24.6%, which was mainly caused by costs and expenses directly related to higher sales in the current-year quarter, and stock-based compensation, amortization of SOB licenses, settlement of lawsuits and impairment of goodwill in the current quarter.

Compared to last year's six-month period, the current six-month period total operating expenses as a percent of revenues increased to 78.6% from 73.7%, with a $18.6 million increase, or 20.1%, due to the same reasons cited above.

Total operating expenses, as a percent of revenues, increased to 79.9% from 71.0% from last year’s third quarter, with a $11.3 million increase, or 22.6%, which was mainly caused by costs and expenses directly related to higher sales in the current-year quarter, and stock-based compensation, amortization of SOB licenses, settlement of lawsuits and impairment of goodwill in the current quarter.

Compared to last year's nine-month period, the current nine-month period total operating expenses as a percent of revenues increased to 79.0% from 72.7%, with a $30.0 million increase, or 21.0%, due to the same reasons cited above.

Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold .

Cost of goods sold for the second quarter increased by $358,000, or 4.1%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold decreased to 12.7% from 13.8% mainly due to the sales mix increase in service revenue.

Cost of goods sold for the third quarter increased by $1.3 million, or 14.7%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold increased to 13.7% from 13.0% mainly due to the sales mix increase in service revenue.

Service revenue has the highest margin while food and merchandise have the lowest.

Nightclubs cost of goods sold increased to 11.7% from 10.0%, while Bombshells cost of goods sold decreased to 22.3% from 23.3%.

Cost of goods sold for the six months increased by $476,000, or 2.7%, mainly due to higher sales.

Cost of goods sold for the nine months increased by $1.8, or 6.8%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold decreased to 13.1% from 13.7% mainly due to the sales mix increase in service revenue.

Service revenue has the highest margin while food and merchandise have the lowest.

Nightclubs cost of goods sold decreased to 10.4% from 11.0%, while Bombshells cost of goods sold decreased to 22.6% from 23.7%.

Nightclubs cost of goods sold increased to 10.9% from 10.6%, while Bombshells cost of goods sold decreased to 22.5% from 23.5%.

Salaries and wages .

Salaries and wages increased by $2.9 million, or 17.5%, for the second quarter due to increase in personnel from newly acquired clubs and new Bombshells openings, work shifts to accommodate the increase in sales, and the impact of minimum wage increases in certain states and cities.

Salaries and wages increased by $3.2 million, or 18.4%, for the third quarter due to increase in personnel from newly acquired clubs and new Bombshells openings, work shifts to accommodate the increase in sales, and the impact of minimum wage increases in certain states and cities.

As a percent of total revenues, salaries and wages increased to 26.7% from 24.6% due to wage inflation.

Nightclubs increased to 21.4% from 19.0% and Bombshells increased to 27.0% from 23.6%, while corporate was flat at 4.1%.

For the six-month period, salaries and wages increased by $5.1 million, or 15.3%.

For the nine-month period, salaries and wages increased by $8.3 million, or 16.4%.

As a percent of total revenues, consolidated salaries and wages increased to 26.9% from 25.7%.

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For the Three Months Ended

March 31, 2023 For the Three Months Ended

March 31, 2022 Better (Worse)

June 30, 2023 For the Three Months Ended

June 30, 2022 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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Total selling, general and administrative expenses $ 23,803 30.9 % $ 19,572 27.7 % $ (4,231) (21.6) %

For the Six Months Ended

March 31, 2023 For the Six Months Ended

March 31, 2022 Better (Worse)

For the Nine Months Ended

June 30, 2023 For the Nine Months Ended

June 30, 2022 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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Depreciation and amortization .

Depreciation and amortization increased by $883,000, or 30.7%, during the second quarter and increased by $2.0 million, or 39.4%, during the year-to-date period due to the amortization of SOB licenses from leased clubs.

Other charges (gains), net .

Other gains, net for both the second quarter and the year-to-date period increased due to settlement of lawsuits and impairment of goodwill recognized in the current second quarter.

Depreciation and amortization increased by $1.5 million, or 57.5%, during the third quarter and increased by $3.5 million, or 45.5%, during the year-to-date period due to the amortization of SOB licenses from leased clubs.

Other charges, net .

Other charges, net for both the third quarter and the year-to-date period increased by $1.1 million and $4.3 million, respectively, due mainly to settlement of lawsuits and impairment charges.

We recorded a $2.8 million assessment by the New York State Department of Labor in the second quarter of 2023 and we recorded impairment charges of $662,000 in the second quarter of 2023 and $2.1 million in the third quarter of 2023 versus impairment charges of $1.7 million in the third quarter of 2022.

The current year third quarter impairment charge included $2.6 million related to two clubs, one of which has been permanently closed.

Income (Loss) from Operations

For the three months ended March 31, 2023 and 2022, our consolidated operating margin was 18.8% and 26.8%, respectively, while for the six months ended March 31, 2023 and 2022, our consolidated operating margin was 21.4% and 26.3%, respectively.

For the three months ended June 30, 2023 and 2022, our consolidated operating margin was 20.1% and 29.0%, respectively, while for the nine months ended June 30, 2023 and 2022, our consolidated operating margin was 21.0% and 27.3%, respectively.

The main drivers for the decreases in operating margin are stock-based compensation, amortization of SOB licenses, settlement of lawsuits, and impairment of goodwill, which are only present in the current year partially offset by fixed expenses leveraged from higher sales.

1 unchanged sentence

For the Three Months Ended

March 31, For the Six Months Ended

June 30, For the Nine Months Ended

2023 2022 2023 2022

4 unchanged sentences

$ 15,515 $ 20,507 $ 45,840 $ 53,499

Nightclubs operating margin was 31.6% and 39.7% for the three months ended March 31, 2023 and 2022, respectively, while operating margin for Bombshells was 12.4% and 22.6%, respectively.

Nightclubs operating margin was 35.9% and 39.9% for the six months ended March 31, 2023 and 2022, respectively, while operating margin for Bombshells was 13.1% and 20.8%, respectively.

Nightclubs operating margin decreased due to settlement of lawsuits, amortization of SOB licenses, and impairment of goodwill partially offset by fixed expenses leveraged from higher sales.

Nightclubs operating margin was 32.7% and 41.1% for the three months ended June 30, 2023 and 2022, respectively, while operating margin for Bombshells was 11.8% and 19.4%, respectively.

Nightclubs operating margin was 34.8% and 40.3% for the nine months ended June 30, 2023 and 2022, respectively, while operating margin for Bombshells was 12.6% and 20.3%, respectively.

Nightclubs operating margin decreased due to settlement of lawsuits, amortization of SOB licenses,

and impairment of goodwill partially offset by fixed expenses leveraged from higher sales.

The decrease in Bombshells operating margin was mainly due to fixed expenses deleveraged from lower sales.

Excluding certain items, second quarter non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands).

Excluding certain items, third quarter 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 3 2 .

For the Three Months Ended March 31, 2023

For the Three Months Ended June 30, 2023

Nightclubs Bombshells Other Corporate Total

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Non-GAAP operating margin 37.7 % 12.8 % (44.0) % (7.5) % 25.3 %

For the Three Months Ended March 31, 2022

For the Three Months Ended June 30, 2022

Nightclubs Bombshells Other Corporate Total

2 unchanged sentences

Settlement of lawsuits 124 8 — — 132

Loss (gain) on sale of businesses and assets (125) 4 — 63 (58)

Impairment of assets 1,072 650 — — 1,722

Gain on sale of businesses and assets (264) — — (2) (266)

Gain on insurance (87) — — — (87)

3 unchanged sentences

Excluding certain items, year-to-date period non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands).

For the Six Months Ended March 31, 2023

For the Nine Months Ended June 30, 2023

Nightclubs Bombshells Other Corporate Total

9 unchanged sentences

Non-GAAP operating margin 39.1 % 14.0 % (54.7) % (8.2) % 25.8 %

For the Six Months Ended March 31, 2022

For the Nine Months Ended June 30, 2022

Nightclubs Bombshells Other Corporate Total

2 unchanged sentences

Settlement of lawsuits 578 18 — 113 709

Impairment of assets 1,072 650 — — 1,722

Loss (gain) on sale of businesses and assets (344) 17 — (339) (666)

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Other Income/Expenses

Interest expense for the second quarter increased by $813,000, or 28.4%, primarily caused by a higher average debt balance mostly from seller-financed promissory notes from this and last years' acquisitions.

For the six-month period, interest expense increased by $1.9 million, or 34.7%.

Our total occupancy costs for the second quarter, defined as the sum of operating lease expense and interest expense, were $5.4 million and $4.4 million for the quarters ended March 31, 2023 and 2022, respectively.

As a percentage of revenue, total occupancy costs were 7.6% and 7.0% during the quarters ended March 31, 2023 and 2022, respectively, primarily due to the interest from higher average debt balance.

For the year-to-date period, total occupancy costs amounted to $10.9 million and $8.7 million, respectively, with a percent of revenue of 7.7% and 6.9%, respectively.

Income tax expense was $2.1 million and $3.4 million during the three months ended March 31, 2023 and 2022, respectively, and $5.2 million and $6.3 million during the six months ended March 31, 2023 and 2022, respectively.

The effective income tax expense rate was 21.8% and 23.4% for the three months ended March 31, 2023 and 2022, respectively, while for the six months ended March 2023 and 2023, 22.4% and 22.6%, 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.

Interest expense for the third quarter increased by $1.3 million, or 42.5%, primarily caused by a higher average debt balance mostly from seller-financed promissory notes from this and last years' acquisitions.

For the nine-month period, interest expense increased by $3.2 million, or 37.5%.

Our total occupancy costs for the third quarter, defined as the sum of operating lease expense and interest expense, were $6.2 million and $4.8 million for the quarters ended June 30, 2023 and 2022, respectively.

As a percentage of revenue, total occupancy costs were 8.0% and 6.7% during the quarters ended June 30, 2023 and 2022, respectively, primarily due to the interest from higher average debt balance.

For the year-to-date period, total occupancy costs amounted to $17.0 million and $13.4 million, respectively, with a percent of revenue of 7.8% and 6.9%, respectively, primarily due to interest from higher average debt balance.

These additional debt are mainly related to acquisitions.

Income tax expense was $2.3 million and $3.8 million during the three months ended June 30, 2023 and 2022, respectively, and $7.4 million and $10.1 million during the nine months ended June 30, 2023 and 2022, respectively.

The effective income tax expense rate was 20.1% and 21.3% for the three months ended June 30, 2023 and 2022, respectively, while for

the nine months ended June 30, 2023 and 2022, 21.6% and 22.1%, 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

March 31, For the Six Months Ended

June 30, For the Nine Months Ended

2023 2022 2023 2022

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(a) amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) unrealized gains or losses on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) stock-based compensation, and (i) 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 22.3% and 21.8% effective tax rate of the pre-tax non-GAAP income before taxes for the six months ended March 31, 2023 and 2022, respectively, and the GAAP income tax expense (benefit).

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 21.6% and 21.6% effective tax rate of the pre-tax non-GAAP income before taxes for the nine months ended June 30, 2023 and 2022, 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.

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See “Liquidity and Capital Resources” section for further discussion.

The following tables present our non-GAAP performance measures for the three and six months ended March 31, 2023 and 2022 (in thousands, except per share, number of shares and percentages):

Three Months Ended March 31, Six Months Ended March 31,

The following tables present our non-GAAP performance measures for the three and nine months ended June 30, 2023 and 2022 (in thousands, except per share, number of shares and percentages):

Three Months Ended June 30, Nine Months Ended June 30,

2023 2022 2023 2022

5 unchanged sentences

Impairment of assets 2,631 1,722 3,293 1,722

Loss (gain) on sale of businesses and assets 3 (58) (587) (400)

Gain on sale of businesses and assets (105) (266) (692) (666)

Gain on debt extinguishment — (53) — (138)

9 unchanged sentences

Impairment of assets 2,631 1,722 3,293 1,722

Loss (gain) on sale of businesses and assets 3 (58) (587) (400)

Gain on sale of businesses and assets (105) (266) (692) (666)

Gain on debt extinguishment — (53) — (138)

10 unchanged sentences

Impairment of assets 0.28 0.18 0.35 0.18

Loss (gain) on sale of businesses and assets 0.00 (0.01) (0.06) (0.04)

Gain on sale of businesses and assets (0.01) (0.03) (0.07) (0.07)

Gain on debt extinguishment — (0.01) — (0.01)

9 unchanged sentences

Impairment of assets 2,631 1,722 3,293 1,722

Loss (gain) on sale of businesses and assets 3 (58) (587) (400)

Gain on sale of businesses and assets (105) (266) (692) (666)

Gain on insurance — (87) (91) (408)

6 unchanged sentences

Impairment of assets 3.4 % 2.4 % 1.5 % 0.9 %

Loss (gain) on sale of businesses and assets 0.0 % (0.1) % (0.4) % (0.3) %

Gain on sale of businesses and assets (0.1) % (0.4) % (0.3) % (0.3) %

Gain on insurance 0.0 % (0.1) % 0.0 % (0.2) %

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Liquidity and Capital Resources

At March 31, 2023, our cash and cash equivalents were approximately $22.8 million compared to $36.0 million at September 30, 2022.

At June 30, 2023, our cash and cash equivalents were approximately $23.6 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 March 31, 2023, we had negative working capital of $11.4 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 March 31, 2023 and September 30, 2022, respectively.

The negative working capital at March 31, 2023 was caused by borrowings, of which a large portion have current maturities, and which were used to fund business acquisitions.

As of June 30, 2023, we had negative working capital of $11.4 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 June 30, 2023 and September 30, 2022, respectively.

The negative working capital at June 30, 2023 was caused by borrowings, of which a large portion have current maturities, and which were used to fund business acquisitions.

Since the pandemic hard hit fiscal 2020, we have since recovered and have seen a more normal stream of operations in 2021 and 2022.

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The following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands):

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Operating activities $ 47,004 $ 46,754

4 unchanged sentences

Following are our summarized cash flows from operating activities (in thousands):

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Net income $ 26,981 $ 35,479

Depreciation and amortization 11,108 7,636

Deferred income tax benefit (790) (409)

Impairment of assets 3,293 1,722

4 unchanged sentences

Net cash provided by operating activities $ 47,004 $ 46,754

Net cash provided by operating activities increased from year to year primarily due to higher sales and higher income tax refund, partially offset by higher interest expense and income taxes paid.

Net cash provided by operating activities increased from year to year primarily due to higher sales, partially offset by higher interest expense and lower income tax refund.

Cash Flows from Investing Activities

Following are our cash flows from investing activities (in thousands):

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Payments for property and equipment and intangible assets $ (29,919) $ (17,173)

4 unchanged sentences

Net cash used in investing activities $ (57,047) $ (56,222)

Following is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 2023 and 2022 (in thousands):

For the Six Months Ended March 31,

Following is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2023 and 2022 (in thousands):

For the Nine Months Ended June 30,

New facilities, equipment, and intangible assets $ 24,970 $ 14,788

1 unchanged sentence

Total capital expenditures $ 29,919 $ 17,173

The capital expenditures during the six months ended March 31, 2023 and 2022 were composed primarily of real estate and new equipment and furniture purchases for the newly acquired clubs.

The capital expenditures during the nine months ended June 30, 2023 and 2022 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.

2 unchanged sentences

Following are our cash flows from financing activities (in thousands):

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Proceeds from debt obligations $ 11,595 $ 35,820

5 unchanged sentences

Net cash provided by financing activities $ (2,353) $ 11,282

We purchased 1,500 shares of our common stock at an average price of $65.02 during the six months ended March 31, 2023, while we purchased 45,643 shares of our common stock at an average price of $62.33 during the six months ended March 31, 2022.

As of March 31, 2023, we have approximately $18.8 million authorization remaining to purchase additional shares.

We purchased 1,500 shares of our common stock at an average price of $65.02 during the nine months ended June 30, 2023, while we purchased 213,712 shares of our common stock at an average price of $56.42 during the nine months ended June 30, 2022.

As of June 30, 2023, we have approximately $18.8 million authorization remaining to purchase additional shares.

Subsequent to the balance sheet date through August 4, 2023, we repurchased 10,440 shares of our common stock at an average price of $69.48.

Prior to the second quarter of fiscal 2022, we have been paying $0.04 per share in quarterly dividends.

From the second quarter of fiscal 2022 until the current quarter, we have paid $0.05 per share, and in the second quarter of fiscal 2023 we paid $0.06 per share in quarterly dividends.

From the second quarter of fiscal 2022 until the first quarter of fiscal 2023, we have paid $0.05 per share, and starting in the second quarter of fiscal 2023, we have paid $0.06 per share in quarterly dividends.

See Note 7 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations.

We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the six months ended March 31, 2023 and 2022.

We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the nine months ended June 30, 2023 and 2022.

Management also uses certain non-GAAP cash flow measures such as free cash flow.

2 unchanged sentences

Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands):

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Net cash provided by operating activities $ 47,004 $ 46,754

1 unchanged sentence

Free cash flow $ 42,055 $ 44,369

Our free cash flow for the six-month period increased by 5.5% compared to the comparable prior-year period primarily due to higher sales and higher income tax refund, partially offset by higher interest expense, income taxes paid and higher maintenance capital expenditures from renovations and remodeling of several of our clubs.

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.

Our free cash flow for the nine-month period decreased by 5.2% compared to the comparable prior-year period primarily due to higher interest expense, lower income tax refund, and higher maintenance capital expenditures from renovations and remodeling of several of our clubs, partially offset by higher sales.

We do not include capital expenditures related to new facilities construction, equipment and intangible 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.

4 unchanged sentences

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 six months ended March 31 (in thousands, except percentages):

The following table presents a summary of such indicators for the nine months ended June 30 (in thousands, except percentages):

2023 Increase

31 unchanged sentences

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 twelve of the existing Bombshells as of March 31, 2023 were located in Texas, including the former franchisee location that we acquired in February 2023 (see Note 4 to our unaudited condensed consolidated financial statements).

All twelve of the existing Bombshells as of June 30, 2023 were located in Texas, including the former franchisee location that we acquired in February 2023 (see Note 4 to our unaudited condensed consolidated financial statements).

Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain.

5 unchanged sentences

Quantitative and Qualitative Disclosures About Market Risk.

As of March 31, 2023, 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.

As of June 30, 2023, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis