What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-12-14 compared with 2022-12-14 · 110 added, 144 removed, 542 unchanged (32% of the section changed)

7 unchanged sentences

• Liquidity and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview of financial position.

Current Operating Environment

Our fiscal 2020 was the period hard 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 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.

The following are our operating segments:

Nightclubs Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving primarily businessmen and professionals.

These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Aledo, Round Rock, El Paso and Odessa, Texas;

These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Round Rock, El Paso and Odessa, Texas;

Denver, Colorado;

12 unchanged sentences

We also own and lease to third parties real properties that are adjacent to (or used to be locations of) our clubs.

Bombshells Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball, Katy and Arlington, Texas under the brand name Bombshells Restaurant & Bar.

We have one franchised unit in San Antonio, Texas.

Bombshells Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball, Katy, Arlington, and San Antonio, Texas under the brand name Bombshells Restaurant & Bar.

Bombshells also operates a food hall in Denver, Colorado.

Other Our wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the multibillion-dollar adult nightclubs industry and the adult retail products industry.

33 unchanged sentences

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

During the third quarter of 2023, we impaired one property for $58,000 for its property and equipment and $1.0 million for its operating lease right-of-use asset before the club's permanent closure.

During the third quarter of 2022, we impaired two properties for a total of $1.0 million one due to eminent domain by the state of Texas and the other due to underperformance.

During the second quarter of 2021, we impaired one property that was reclassified to assets held for sale for $1.4 million, and during the fourth quarter of 2021, we impaired four clubs for $584,000.

During the second quarter of 2020, we impaired one club and one Bombshells unit for a total of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use asset for $104,000.

During the fourth quarter of 2023, we also recognized software impairments amounting to $814,000 related to two venture projects.

Goodwill and Other Intangible Assets

9 unchanged sentences

We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2023, we identified four reporting units that were impaired and recognized a total goodwill impairment of $4.2 million.

For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $566,000.

For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $6.3 million.

For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.

For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model.

For indefinite- and definite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model.

For indefinite-lived tradename, we determine fair value by using the relief from royalty method.

The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount

exceeds the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $293,000 in 2022 related to one club, $5.3 million in 2021 related to three clubs, and $2.3 million in 2020 related to two clubs.

The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $6.5 million in 2023 related to eight clubs, $293,000 in 2022 related to one club, and $5.3 million in 2021 related to three clubs.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values.

These fair values are a result of valuation techniques that use significant assumptions that are subject to a high degree of judgment.

The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill.

2 unchanged sentences

Stock-based Compensation

We recognize expense for stock-based compensation awards, which is equal to the fair value of the awards at grant date, ratably in selling, general and administrative expenses in our consolidated statements of operations over their requisite service period.

Calculating the grant date fair value of stock-based compensation awards requires the input of subjective assumptions.

33 unchanged sentences

Bombshells $ 6,502 (43.5) % $ 11,504 (13.3) % $ 13,264

Diluted earnings (loss) per share $ 4.91 $ 3.37 $ (0.66)

Diluted earnings per share $ 3.13 $ 4.91 $ 3.37

Net cash provided by operating activities $ 59,130 (8.3) % $ 64,509 53.6 % $ 41,991

25 unchanged sentences

Interest income 0.1 % 0.2 % 0.1 %

Non-operating gains (losses), net 0.1 % 2.7 % 0.0 %

Income (loss) before income taxes 22.5 % 17.5 % (5.1) %

Income tax expense (benefit) 5.3 % 2.0 % (0.4) %

Net income (loss) 17.2 % 15.4 % (4.8) %

Non-operating gains, net — % 0.1 % 2.7 %

Income before income taxes 12.2 % 22.5 % 17.5 %

Income tax expense 2.3 % 5.3 % 2.0 %

Net income 9.9 % 17.2 % 15.4 %

† Percentages may not foot due to rounding in this and in all of the succeeding tables presenting percentages in this report.

29 unchanged sentences

* Not meaningful.

Our consolidated revenues continued their upward trend from 2020 to 2021 (with an increase of 47.6%) rebounding from the heavily COVID-19 affected 2020 to a more stable increase from 2021 to 2022 (with an increase of 37.1%) aided by acquisitions.

Consolidated same-store sales increased by 5.6% from 2021 to 2022 and by 1.5% from 2020 to 2021.

New units contributed $47.6 million, or 24.4% of total prior-year revenue, to the total revenue increase from 2021 to 2022 (mostly from club acquisitions) and $4.2 million, or 3.1% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021 (all from new Bombshells).

Closed units in the comparable prior year contributed $13.9 million, or 7.1% of total prior-year revenue, to the total revenue increase from 2021 to 2022 and $56.8 million, or 42.9% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021.

Consolidated revenues increased by $26.2 million, or 9.8%, from 2022 to 2023 due mainly from newly acquired locations partially offset by a decrease in same-store sales and a sales decrease from locations closed in 2023.

From 2021 to 2022, consolidated revenues increased by $72.4 million, or 37.1%, due to increases in same-store sales, newly acquired and constructed locations, and from locations closed in 2021 and reopened in 2022.

Segment contribution to total revenues was as follows (dollar amounts in thousands):

13 unchanged sentences

Nightclubs segment revenues.

Nightclubs revenues increased by 50.2% from 2021 to 2022 and by 55.4% from 2020 to 2021.

A breakdown of the changes compared to total change in Nightclubs revenues is as follows:

Nightclubs revenues increased by 14.8% from 2022 to 2023 and by 50.2% from 2021 to 2022, as explained below.

2022 2022 vs.

Impact of 10.1% increase and 2.1% decrease in same-store sales, respectively, to total revenues 9.5 % (1.2) %

Impact of 3.5% decrease and 10.1% increase in same-store sales, respectively, to total revenues

(3.2) % 9.5 %

Newly acquired units 18.4 % 30.5 %

9 unchanged sentences

100.0 % 100.0 % 100.0 %

The 2022 new units include 15 clubs, of which eleven were acquired in October 2021, one acquired in November 2021, one acquired in May 2022, and two acquired in July 2022.

See Note 16 to our consolidated financial statements.

In total, these newly acquired clubs contributed $41.9 million in revenues during 2022 since their acquisition dates.

No new clubs were acquired in 2020 and 2021.

The 2023 new units include six clubs, one of which was acquired in October 2022 and five acquired in March 2023.

The 2022 new units include fifteen clubs, of which eleven were acquired in October 2021, one acquired in November 2021, one acquired in May 2022, and two acquired in July 2022.

See Note 1 4 to our consolidated financial statements for more information on our club acquisitions.

In total, these 2023 and 2022 newly acquired clubs contributed $18.2 million and $41.9 million in revenues, respectively, during their year of acquisition.

No new clubs were acquired in 2021.

Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.8 million in 2023, $1.6 million in 2022, and $1.5 million in 2021.

Bombshells segment revenues.

Bombshells revenues increased by 5.8% from 2021 to 2022 and by 31.0% from 2020 to 2021.

A breakdown of the changes compared to total changes in Bombshells revenues is as follows:

Bombshells revenues decreased by 7.0% from 2022 to 2023 and increased by 5.8% from 2021 to 2022, as explained below.

2022 2022 vs.

Impact of 4.6% decrease and 7.7% increase in same-store sales, respectively, to total revenues (4.6) % 5.2 %

Impact of 14.6% and 4.6% decrease in same-store sales, respectively, to total revenues

(13.5) % (4.6) %

New units 6.5 % 10.1 %

1 unchanged sentence

Other — % 0.3 %

(7.0) % 5.8 %

Bombshells segment sales mix for the three fiscal years is as follows:

4 unchanged sentences

100.0 % 100.0 % 100.0 %

Bombshells Katy was opened in the first quarter of 2020, while Bombshells 59 was opened in the second quarter of 2020.

No new Bombshells location was opened in 2021.

Bombshells Arlington was opened in the first quarter of 2022.

Bombshells San Antonio was acquired from our franchisee in the second quarter of 2023.

We also acquired a food hall in Greenwood Village, Colorado during the first quarter of 2023.

Other segment revenues.

Other revenues included revenues from Drink Robust in all three fiscal years presented.

Drink Robust sales were $201,000, $249,000, and $150,000 in fiscal 2022, 2021, and 2020, respectively, which excludes intercompany sales to Nightclubs and Bombshells units amounting to $261,000, $141,000, and $70,000 in fiscal 2022, 2021, and 2020, respectively.

Media business revenues were $1.2 million, $1.0 million, and $589,000 in fiscal 2022, 2021, and 2020, respectively.

Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed to be held in August 2020 (fiscal 2020) was canceled.

All unearned sponsorship and advertising revenues related to the event were either further deferred or refunded and no revenue was recognized.

Drink Robust sales were $145,000, $201,000, and $249,000 in fiscal 2023, 2022, and 2021, respectively, which exclude intercompany sales to Nightclubs and Bombshells units amounting to $254,000, $261,000, and $141,000 in fiscal 2023, 2022, and 2021, respectively.

Media business revenues were $1.1 million, $1.2 million, and $1.0 million in fiscal 2023, 2022, and 2021, respectively.

Operating Expenses

5 unchanged sentences

See page 31 above for the breakdown of percentages for each line item of consolidated cost of goods sold as it relates to the respective consolidated revenue line.

For the Nightclubs segment, cost of goods sold was 10.5%, 11.8%, and 10.7% for fiscal 2022, 2021, and 2020, respectively, which was primarily caused by shifts in sales mix.

Bombshells cost of goods sold was 23.5%, 23.8%, and 22.6% for fiscal 2022, 2021, and 2020, respectively, which was mainly driven by menu price increases in 2022 in response to inflation, the shift in sales mix to lower-margin food sales in 2021, and to higher-margin alcoholic beverage sales in 2020.

For the Nightclubs segment, cost of goods sold was 11.1%, 10.5%, and 11.8% for fiscal 2023, 2022, and 2021, respectively, which was primarily caused by shifts in sales mix among the three fiscal years.

Bombshells cost of goods sold was 22.4%, 23.5%, and 23.8% for fiscal 2022, 2021, and 2020, respectively, which was mainly driven by menu price increases in 2023 and 2022 in response to inflation, and the shift in sales mix to lower-margin food sales in 2021.

Salaries and wages .

Consolidated salaries and wages increased by $11.1 million, or 16.1%, from 2022 to 2023 and increased by $17.8 million, or 35.2%, from 2021 to 2022.

The dollar decrease from 2020 to 2021 was mainly from personnel hiring and rehiring after easing restrictions from COVID-19, and the dollar increase from 2021 to 2022 was mainly from new employees caused by the fifteen new club acquisitions and one Bombshells opening.

As a percentage of revenues, consolidated salaries and wages were 25.6%, 25.9%, and 29.5% in 2022, 2021, and 2020, respectively, mainly due to sales trend and the impact of fixed salaries on increasing sales.

Corporate salary pay cuts made in 2020 during the height of the pandemic restrictions were paid back in 2021.

The dollar increases are mostly from newly acquired or constructed locations.

As a percentage of revenues, consolidated salaries and wages were 27.1%, 25.6%, and 25.9% in 2023, 2022, and 2021, respectively, mainly due to sales trend and the impact of fixed salaries on change in sales.

By reportable segment, salaries and wages are broken down as follows (dollar amounts in thousands):

5 unchanged sentences

$ 79,500 16.1 % $ 68,447 35.2 % $ 50,627

Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general corporate.

Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in Corporate.

Salaries and wages as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):

38 unchanged sentences

The significant variances in selling, general and administrative expenses are as follows:

As a percentage of revenues, relatively fixed expenses were high in rate due to lower sales in fiscal 2020, while more discretionary/controllable expenses such as advertising and marketing were kept to a minimum.

Conversely, due to the increase in revenues in 2021 from 2020, almost all selling, general and administrative expenses consequently increased except accounting and professional fees, insurance, leases, and legal.

Accounting and legal fees primarily decreased from prior year’s SEC matters;

lease expense decreased due to lease credits we received from certain landlords;

while insurance decreased due to credits given by insurers for unused coverage due to COVID-19 closures in 2020.

Most of the selling, general and administrative expense increases in 2022 came from the Nightclub acquisitions we made.

We also incurred stock-based compensation expense from a new 2022 Stock Option Plan.

As a percentage of revenues, relatively fixed expenses tend to be higher in rate due to lower sales, while more variable expenses tend to keep their rates even if dollar amounts are increasing.

Nightclubs expenses increased as a percentage of segment revenue due to newly acquired clubs.

Bombshells expenses increased as a percentage of segment revenue due to lower sales.

Depreciation and amortization .

Depreciation and amortization increased by $4.2 million, or 50.4%, from 2021 to 2022 and decreased by $598,000, or 6.8%, from 2020 to 2021.

The decrease from 2020 to 2021 was mainly from significantly low capital expenditure in 2020 while the increase from 2021 to 2022 was mainly caused by the growth in our depreciable asset base and amortizable intangibles caused by acquired clubs and a new Bombshells unit.

Depreciation and amortization increased by $2.8 million, or 22.3%, from 2022 to 2023 and increased by $4.2 million, or 50.4%, from 2021 to 2022.

The increase from 2021 to 2022 was mainly caused by the growth in our depreciable asset base and amortizable intangibles caused by acquired clubs and a new Bombshells unit, while the increase from 2022 to 2023 was mainly from newly acquired clubs.

Other charges, net .

4 unchanged sentences

Gain on sale of businesses and assets (682) (71.3) % (2,375) 355.0 % (522)

Loss (gain) on insurance (463) (63.0) % (1,253) (398.3) % 420

Gain on insurance (77) (83.4) % (463) (63.0) % (1,253)

$ 15,629 3,246.7 % $ 467 (96.5) % $ 13,186

The significant variances in other charges, net are discussed below:

During 2023, we recorded aggregate impairment charges amounting to $12.6 million related to goodwill of four clubs ($4.2 million), SOB licenses of eight clubs ($6.5 million), operating lease right-of-use asset and property and equipment of a closed club ($1.1 million), and software of two investment projects ($814,000).

During 2022, we recorded aggregate impairment charges amounting to $1.9 million related to goodwill of one club ($566,000), SOB license of one club ($293,000), and property and equipment of one club and one Bombshells unit ($1.0 million).

During 2021, we recorded aggregate impairment charges amounting to $13.6 million related to goodwill of seven clubs ($6.3 million), SOB licenses of three clubs ($5.3 million), and property and equipment of five clubs, one of which is held for sale ($2.0 million).

During 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one

club and one Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000).

See Notes 2 and 16 to our consolidated financial statements.

In 2023, we recognized settlements with the New York Department of Labor amounting to $3.1 million related to the assessment by the New York Department of Labor for state unemployment insurance.

In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance.

In 2021, we settled a case with one of our Bombshells landlords for $1.0 million.

See Note 1 0 to our consolidated financial statements.

In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance.

Refer to dispositions in Note 1 4 to our consolidated financial statement for details on gains or losses on sale of businesses and assets.

In relation to insurance claims and recoveries, we recognized a $463,000 gain in 2022, $1.3 million gain in 2021, and a $420,000 loss in 2020 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that damaged one of our clubs in Sulphur, Louisiana in August 2020.

In relation to insurance claims and recoveries, we recognized a $77,000 gain in 2023, $463,000 gain in 2022, and $1.3 million gain in 2021 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that damaged one of our clubs in Sulphur, Louisiana in August 2020.

The rest of the claims for the Sulphur club were received in 2022.

10 unchanged sentences

$ 51,484 $ 71,459 $ 38,548

Nightclubs operating margin was 40.1%, 31.9%, and 14.8% in 2022, 2021, and 2020, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $1.2 million, $13.6 million, and $10.4 million for 2022, 2021, and 2020, respectively.

Bombshells operating margin was 19.2%, 23.4%, and 21.4% in 2022, 2021, and 2020, respectively, mainly due to one new unit and same-store sales decrease in 2022, two new units and same-store sales increase in 2021, partially offset by COVID-19 impact in 2020.

Nightclubs operating margin was 30.9%, 40.1%, and 31.9% in 2023, 2022, and 2021.

Bombshells operating margin was 11.7%, 19.2%, and 23.4% in 2023, 2022, and 2021, respectively.

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

16 unchanged sentences

Impairment of assets 1,238 650 — — 1,888

Costs and charges related to debt refinancing 17 — — 40 57

Loss (gain) on sale of businesses and assets (2,010) 17 — (382) (2,375)

Gain on insurance (463) — — — (463)

Stock-based compensation — — — 2,353 2,353

Non-GAAP operating income (loss) $ 84,892 $ 12,195 $ 118 $ (20,808) $ 76,397

6 unchanged sentences

Impairment of assets 13,612 — — — 13,612

Costs and charges related to debt refinancing 17 — — 40 57

Loss (gain) on sale of businesses and assets (580) 72 — (14) (522)

Loss (gain) on insurance 433 — — (13) 420

Gain on insurance (1,209) — — (44) (1,253)

Non-GAAP operating income (loss) $ 56,117 $ 13,409 $ 97 $ (17,574) $ 52,049

2 unchanged sentences

Other Income/Expenses

Interest expense increased by $2.0 million from 2021 to 2022 and by $181,000 from 2020 to 2021.

The increase in interest expense in 2022 was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions.

The net increase in interest expense in 2021 was primarily caused by the expensed loan costs and written off unamortized debt issuance costs related to the September 2021 Refinancing Note (see Note 9 to our consolidated financial statements), partially offset by the impact of a lower average debt balance.

During 2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments were deferred, but we continued to accrue interest on these debts.

At the end of 2021, we refinanced several of our existing bank and seller-financed real estate debt with the issuance of a $99.1 million 5.25% note with a term of 10 years.

Interest expense increased by approximately $4.0 million from 2022 to 2023 and by approximately $2.0 million from 2021 to 2022.

The increase in interest expense was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions.

We consider lease plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and restaurants are located.

For occupancy cost purposes, we exclude non-real-estate-related interest expense.

Total occupancy cost rate (total occupancy cost as a percentage of revenues) was high in 2020 due to lower sales activity caused by the pandemic, as shown below.

Total occupancy cost rate (total occupancy cost as a percentage of revenues) is shown in the table below.

2023 2022 2021

7 unchanged sentences

See Note 8 to our consolidated financial statements.

Income taxes were an expense of approximately $14.1 million in 2022, $4.0 million in 2021, and a benefit of $493,000 in 2020.

Our effective income tax rate was a 23.4% expense in 2022, 11.7% expense in 2021, and 7.2% benefit in 2020.

Income tax expense was approximately $6.8 million in 2023, $14.1 million in 2022, and $4.0 million in 2021.

Our effective income tax rate was 19.0% in 2023, 23.4% expense in 2022, and 11.7% expense in 2021.

The components of our annual effective income tax rate are the following:

3 unchanged sentences

Permanent differences 1.7 % 0.2 % (1.3) %

Change in state tax rate 1.5 % (2.4) % — %

Change in tax rates (0.7) % 1.5 % (2.4) %

Change in valuation allowance (0.5) % 0.6 % (1.9) %

2 unchanged sentences

Total effective income tax rate 19.0 % 23.4 % 11.7 %

* Positive or negative percentages are in relation to income or loss before income taxes of the respective fiscal year.

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, and tax credits that are mostly FICA tip credits.

The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the pandemic and the changes in the deferred tax asset valuation allowance in all three fiscal years presented.

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, changes in the deferred tax asset valuation allowance, and tax credits that are mostly FICA tip credits.

Non-GAAP Financial Measures

10 unchanged sentences

Adjustment items are:

(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 loss on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) costs and charges related to debt refinancing, (i) stock-based compensation, (j) the income tax effect of the above-described adjustments, and (k) change in deferred tax asset valuation allowance.

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.8%, 13.5%, and 26.0% effective tax rate of the pre-tax non-GAAP income before taxes for the 2022, 2021, and 2020, respectively, and the GAAP income tax expense (benefit).

(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 loss on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) costs and charges related to debt refinancing, (i) stock-based compensation, (j) the income tax effect of the above-described adjustments, and (k) change in deferred tax asset valuation allowance.

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 20.6%, 22.8%, and 13.5% effective tax rate of the pre-tax non-GAAP income before taxes for the 2023, 2022, and 2021, respectively, and the GAAP income tax expense.

We believe that excluding and including such items help management and investors better understand our operating activities.

11 unchanged sentences

2023 2022 2021

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

Net income (loss) attributable to RCIHH common stockholders $ 46,041 $ 30,336 $ (6,085)

Income tax expense (benefit) 14,071 3,989 (493)

Reconciliation of GAAP net income to Adjusted EBITDA

Net income attributable to RCIHH common stockholders $ 29,246 $ 46,041 $ 30,336

Income tax expense 6,846 14,071 3,989

Interest expense, net 15,538 11,539 9,739

5 unchanged sentences

Gain on debt extinguishment — (138) (5,329)

Loss (gain) on insurance (463) (1,253) 420

Gain on insurance (77) (463) (1,253)

Stock-based compensation 2,588 2,353 —

Adjusted EBITDA $ 84,998 $ 86,724 $ 60,243

Reconciliation of GAAP net income (loss) to non-GAAP net income

Net income (loss) attributable to RCIHH common stockholders $ 46,041 $ 30,336 $ (6,085)

Reconciliation of GAAP net income to non-GAAP net income

Net income attributable to RCIHH common stockholders $ 29,246 $ 46,041 $ 30,336

Amortization of intangibles 3,528 2,118 258

5 unchanged sentences

Gain on debt extinguishment — (138) (5,329)

Loss (gain) on insurance (463) (1,253) 420

Gain on insurance (77) (463) (1,253)

Stock-based compensation 2,588 2,353 —

3 unchanged sentences

2023 2022 2021

Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share

Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share

Diluted shares 9,335,983 9,383,445 9,004,744

GAAP diluted earnings (loss) per share $ 4.91 $ 3.37 $ (0.66)

GAAP diluted earnings per share $ 3.13 $ 4.91 $ 3.37

Amortization of intangibles 0.38 0.23 0.03

5 unchanged sentences

Gain on debt extinguishment — (0.01) (0.59)

Loss (gain) on insurance (0.05) (0.14) 0.05

Gain on insurance (0.01) (0.05) (0.14)

Stock-based compensation 0.28 0.25 —

9 unchanged sentences

Gain on sale of businesses and assets (682) (2,375) (522)

Loss (gain) on insurance (463) (1,253) 420

Gain on insurance (77) (463) (1,253)

Stock-based compensation 2,588 2,353 —

8 unchanged sentences

Gain on sale of businesses and assets (0.2) % (0.9) % (0.3) %

Loss (gain) on insurance (0.2) % (0.6) % 0.3 %

Gain on insurance — % (0.2) % (0.6) %

Stock-based compensation 0.9 % 0.9 % — %

4 unchanged sentences

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2022, our cash and cash equivalents were approximately $36.0 million as compared to $35.7 million at September 30, 2021.

At September 30, 2023, our cash and cash equivalents were $21.0 million as 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 September 30, 2022, we had working capital of $18.6 million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated liabilities of $0 and $1.1 million, respectively) amounting to $1.0 million and $3.8 million as of September 30, 2022 and 2021, 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.

As of September 30, 2023, we had negative working capital of $10.5 million compared to a 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 September 30, 2023 and 2022, respectively.

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.

We have not recently raised capital through the issuance of equity securities although we have used equity recently in one of our acquisitions.

We have not recently raised capital through the issuance of equity securities although we have used equity recently in 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.

There can be no assurance though 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.

During 2022, we acquired fifteen clubs at an aggregate acquisition price of $132.6 million, of which $55.3 million was in cash, $49.0 million in debt, and $30.0 million in equity (500,000 shares of our common stock with an acquisition date fair value of $29.9 million, discounted for lack of marketability due to the lock-up period).

During 2023, we acquired six clubs at an aggregate acquisition date fair value of $72.3 million, of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and $16.0 million in equity (200,000 shares of our common stock with an acquisition date fair value of $12.8 million, discounted for lack of marketability due to the lock-up period).

During 2022, we acquired fifteen clubs at an aggregate acquisition date fair value of $132.6 million, of which $55.3 million was in cash, $49.0 million in debt (with an acquisition date fair value of $47.4 million) and $30.0 million in equity (500,000 shares of our common stock with an acquisition date fair value of $29.9 million, discounted for lack of marketability due to the lock-up period).

We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.

4 unchanged sentences

Financing (9,263) 3,582 (15,096)

Net increase in cash and cash equivalents $ 294 $ 20,081 $ 1,508

Net increase (decrease) in cash and cash equivalents $ (14,957) $ 294 $ 20,081

We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments in technology.

3 unchanged sentences

2023 2022 2021

Net income (loss) $ 46,060 $ 30,150 $ (6,312)

Net income $ 29,100 $ 46,060 $ 30,150

Depreciation and amortization 15,151 12,391 8,238

6 unchanged sentences

Net cash provided by operating activities $ 59,130 $ 64,509 $ 41,991

Net cash flows from operating activities decreased from 2022 to 2023 mainly due to the lower same-store sales and the higher interest expense paid, partially offset by the lower income taxes paid.

Net cash flows from operating activities increased from 2021 to 2022 mainly due to the operating results of the fifteen acquired clubs and one Bombshells opened.

Net cash flows from operating activities increased from 2020 to 2021 mainly due to significantly higher income from operations partially offset by higher interest payments, which included deferred debt interest payments from 2020, and higher income taxes paid.

In the next five years, we expect interest payments on our debts to range from $15.0 million in the early years to $8.0 million annually in the latter years for debts we owe as of September 30, 2023.

See Note 18 for our operating lease payment schedule for the next five years and thereafter.

Cash Flows from Investing Activities

7 unchanged sentences

Net cash used in investing activities $ (64,824) $ (67,797) $ (6,814)

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity.

In 2023, we acquired six clubs for a combined sum of $75.5 million (with an aggregate acquisition date fair value of $72.3 million), of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and 200,000 shares of our common stock in equity (with an acquisition date fair value of $12.8 million).

We also acquired several real estate properties for club and Bombshells sites totaling $19.7 million, and invested $7.5 million for future casino locations.

In 2022, we acquired fifteen clubs for a combined sum of $134.2 million (with an aggregate acquisition date fair value of $132.6 million), of which $55.3 million was in cash, $49.0 million in debt (with an acquisition date fair value of $47.4 million), and 500,000 shares of our common stock in equity (with an acquisition date fair value of $29.9 million).

We also purchased an aircraft and six real estate properties, of which, four are for future Bombshells locations, one for a club that we were leasing, and another to replace a club location which was taken by eminent domain.

7 unchanged sentences

Highway 59 in Houston, Texas) and sold three real estate properties.

As of September 30, 2022, 2021, and 2020, we had $1.5 million, $3.4 million, and $20,000 in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year.

See Note 16 to our consolidated financial statements.

As of September 30, 2023, 2022, and 2021, we had $7.7 million, $1.5 million, and $3.4 million in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal years.

See Note 1 4 to our consolidated financial statements for details of our acquisition and disposition activities.

Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2023, 2022, and 2021 (in thousands):

4 unchanged sentences

* Includes real estate except those acquired through business acquisitions.

See discussion of acquisitions and dispositions subsequent to September 30, 2022 in Note 16 to our consolidated financial statements.

We expect capital expenditure payments in the range of $35.0 million to $40.0 million in 2024, $6.0 million to $8.0 million of which relate to maintenance capital expenditures to support our existing clubs and restaurants and our corporate office.

Cash Flows from Financing Activities

8 unchanged sentences

Net cash provided by (used in) financing activities $ (9,263) $ 3,582 $ (15,096)

See Note 9 to our consolidated financial statements for a detailed discussion of our debt obligations.

See Note 8 to our consolidated financial statements for a detailed discussion of our debt obligations, including the future maturities of our debt obligations in the next five years and thereafter.

We purchased shares of our common stock representing 34,086 shares, 268,185 shares, and 74,659 shares in 2023, 2022, and 2021, respectively.

We paid quarterly dividends of $0.03 per share in fiscal 2020, except in the second and fourth quarter of 2020 where we paid $0.04 per share.

We paid quarterly dividends of $0.04 per share in fiscal 2021 through the first quarter of 2022.

In the second quarter of 2022 through the first quarter of 2023, we increased our quarterly dividends to $0.05 per share.

Then starting in the second quarter of 2023, we increased our quarterly dividends to $0.06 per share.

We expect annual dividend payments of $2.2 million in 2024 based on our current quarterly dividend rate.

Non-GAAP Cash Flow Measure

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

We also use certain non-GAAP cash flow measures, such as free cash flow.

We define free cash flow as net cash provided by operating activities less maintenance capital expenditures.

5 unchanged sentences

Free cash flow $ 53,176 $ 58,911 $ 36,084

As a % of revenue 18.1 % 22.0 % 18.5 %

We do not include total capital expenditures 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.

Debt Financing

See Note 9 to our consolidated financial statements for more details regarding our debt activity.

Contractual Obligations and Commitments

We have long-term contractual obligations primarily in the form of debt obligations and operating leases.

The following table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments.

Future interest payments related to debt were estimated using the interest rate in effect as of September 30, 2022.

Payments Due by Period

Total 2023 2024 2025 2026 2027 Thereafter

Debt obligations - regular (a)

$ 106,102 $ 10,216 $ 9,663 $ 9,527 $ 9,825 $ 10,424 $ 56,447

Debt obligations - balloon (a)

99,738 2,226 2,195 20,457 — — 74,860

Interest payments on debt 78,616 12,792 11,987 9,468 8,418 7,820 28,131

Operating leases (b)

52,789 4,895 4,944 5,024 5,089 4,895 27,942

(a) See Note 9 to our consolidated financial statements.

(b) See Note 20 to our consolidated financial statements.

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.

Other than the impact of uncertainties caused by near-term macro environment, including commodity and labor inflation and the lingering effect of the COVID-19 pandemic, and the contractual obligations 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.

2 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.

We continue to monitor the macro environment and will adjust our overall approach to capital allocation as events and trends unfold.

The following table presents a summary of such indicators (dollars in thousands):

5 unchanged sentences

Total revenues $ 293,790 9.8 % $ 267,620 37.1 % $ 195,258

Net income (loss) attributable to RCIHH common stockholders $ 46,041 51.8 % $ 30,336 (598.5) % $ (6,085)

Net income attributable to RCIHH common stockholders $ 29,246 (36.5) % $ 46,041 51.8 % $ 30,336

Net cash provided by operating activities $ 59,130 (8.3) % $ 64,509 53.6 % $ 41,991

15 unchanged sentences

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), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced.

Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

1 unchanged sentence

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 September 30, 2022 are located in Texas.

Our growth strategy includes acquiring existing clubs, opening new clubs 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.

We also strive to enter into businesses that complement our own, such as gaming, if they can enhance shareholder value.

All twelve of the existing Bombshells as of September 30, 2023 are located in Texas.

Our food hall, which is currently being operated under our Bombshells segment, is located in Colorado.

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 opened two new Bombshells units in fiscal 2020.

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity.

See Note 16 to our consolidated financial statements.

Recovering from the COVID-19 pandemic, we did not acquire any clubs nor open any new Bombshells units in 2021.

In 2022, we acquired fifteen clubs with an aggregate acquisition date fair value of $132.6 million, of which $55.3 million in cash, $49.0 million in debt (with an acquisition date fair value of $47.4 million), and 500,000 shares of our common stock in equity.

We also opened a new Bombshells location in Arlington, Texas in December 2021 and our first franchised location in San Antonio, Texas opened in June 2022.

On October 26, 2022, subsequent to the current reporting date, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $9.0 million.

The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note payable in 180 equal monthly payments of $42,193 in principal and interest.

In 2023, we acquired six clubs with an aggregate acquisition date fair value of $72.3 million, of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and 200,000 shares of our common stock in equity.

See Note 14 to our consolidated financial statements.

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.

2 unchanged sentences

An inability to obtain such additional financing could have an adverse effect on our growth strategy.

Quantitative and Qualitative Disclosures About Market Risk

The items in our financial statements subject to market risk are potential debt instruments with variable interest rates.

We do not carry any debt with a variable interest rate in effect as of September 30, 2022.

Certain of our debt have variable interest rates but will only be effective in future years.

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-K

Item 7. Management’s Discussion and Analysis