What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-08 compared with 2023-08-09 · 81 added, 204 removed, 277 unchanged (51% of the section changed)

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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.

is a holding company that, through its subsidiaries, engages in businesses that offer live adult entertainment and/or high-quality dining experiences to its guests.

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

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.

Through our subsidiaries, as of December 31, 2023, we operated a total of 69 establishments that offer live adult entertainment, including one food hall.

We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry.

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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.

Toward the end of fiscal 2022 and continuing to the current fiscal year, geopolitical and macroeconomic events have impacted our operating results and cash flows by causing inflation on wages and other operating expenses.

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

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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, 2023 filed with the SEC on December 14, 2023.

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

During the three months ended December 31, 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:

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 $14.4 million compared to $15.8 million, an 8.8% decrease)

Highlights of the Company's operating results during the quarter ended December 31, 2023 are as follows:

• Total revenues were $73.9 million compared to $70.0 million during the comparable prior-year quarter, a 5.6% increase (Nightclubs revenue of $61.0 million compared to $56.3 million, an 8.4% increase;

and Bombshells revenue of $12.7 million compared to $13.4 million, a 5.2% decrease)

• Consolidated same-store sales decreased by 9.8% (Nightclubs decreased by 7.2% while Bombshells decreased by 20.3%) (refer to the definition of same-store sales in the discussion of revenues below)

• Basic and diluted earnings per share (“EPS”) of $0.77 compared to $1.11 (non-GAAP diluted EPS* of $0.87 compared to $1.19) during the comparable prior-year quarter

• 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

• Total revenues were approximately $218.5 million compared to $196.2 million during the comparable prior-year year-to-date period, a 11.4% increase (Nightclubs revenue of $175.8 million compared to $149.6 million, a 17.5% increase;

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

• 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 $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)

• Net cash provided by operating activities of $13.6 million compared to $14.9 million during the comparable prior-year quarter, an 8.5% decrease (free cash flow* of $12.7 million compared to $13.0 million, a 2.9% 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

June 30, Nine Months Ended

2023 2022 2023 2022

Sales of alcoholic beverages 45.1 % 42.4 %

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Interest income 0.1 % 0.1 %

Non-operating gains, net — % 0.2 % — % 0.1 %

Income before income taxes 12.2 % 19.0 %

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

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 decreased by 9.6% for the quarter and decreased by 4.3% for the year-to-date period.

Consolidated revenues for the first quarter increased by $3.9 million, or 5.6%, versus the comparable prior-year quarter due primarily to a 15.0%, or $10.5 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $6.7 million impact of the decrease in consolidated same-stores sales.

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 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 %

Sales of food and merchandise 5,288 8.5 % 4,639 8.5 % 649 14.0 %

Service revenues 26,497 42.4 % 25,287 46.2 % 1,210 4.8 %

Other revenues 4,520 7.2 % 3,697 6.8 % 823 22.3 %

62,449 100.0 % 54,684 100.0 % 7,765 14.2 %

Sales of alcoholic beverages 8,007 55.6 % 8,677 55.0 % (670) (7.7) %

Sales of food and merchandise 6,117 42.5 % 6,935 43.9 % (818) (11.8) %

Service revenues 166 1.2 % 157 1.0 % 9 5.7 %

Other revenues 107 0.7 % 20 0.1 % 87 435.0 %

14,397 100.0 % 15,789 100.0 % (1,392) (8.8) %

Other revenues 209 100.0 % 241 100.0 % (32) (13.3) %

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

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

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

Sales of alcoholic beverages $ 26,236 43.0 % $ 22,098 39.2 % $ 4,138 18.7 %

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$ 73,907 $ 69,968 $ 3,939 5.6 %

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.

Nightclubs revenues increased by 8.4% during the first quarter compared to the same quarter last year primarily due to the $8.9 million contribution of newly acquired clubs, partially offset by the $4.0 million impact of the decrease 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 7.2%.

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%.

By type of revenue, alcoholic beverage sales increased by 18.7%, food, merchandise and other revenue increased by 11.3%, while service revenues decreased by 1.6%.

Bombshells revenues decreased by 5.2%, of which 20.3% 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 3.3% while alcoholic beverage sales decreased by 6.3%.

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 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.

Total operating expenses, as a percent of revenues, increased to 82.2% from 75.8% from last year’s first quarter, with a $7.7 million increase, or 14.5%, which was mainly caused by costs and expenses directly related to higher sales in the current-year first quarter, with the impact of fixed expenses on clubs and restaurants having decreases in their same-stores sales.

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

Cost of goods sold .

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

Cost of goods sold for the first quarter increased by $1.4 million, or 15.0%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold increased to 14.0% from 12.9% mainly due to the sales mix decrease in service revenue.

Nightclubs cost of goods sold increased to 12.0% from 10.5%, while Bombshells cost of goods sold increased to 23.7% from 22.9%.

Both increases in percent to segment revenue were caused mainly by shift in sales mix toward lower margin sales type.

Salaries and wages .

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.

Salaries and wages increased by $2.7 million, or 14.2%, for the first 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 28.9% from 26.7% 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 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%.

Nightclubs increased to 21.2% from 19.9%, Bombshells increased to 26.5% from 23.9%, and corporate decreased to 4.5% from 4.7%.

Nightclubs increased to 22.0% from 20.8% and Bombshells increased to 31.1% from 26.5%, while corporate increased to 5.1% from 4.7%.

Selling, general and administrative expenses .

Selling, general and administrative expenses increased by $4.2 million, or 21.6%, primarily due to increased variable expenses related to higher sales during the current-year quarter and stock-based compensation.

On a year-to-date period, selling, general and administrative expenses increased by $12.1 million, or 21.4%, due to the same reasons cited above.

Selling, general and administrative expenses increased by $2.5 million, or 10.9%, primarily due to increased variable expenses related to higher sales during the current-year first quarter.

Dollar amounts in the tables below are in thousands, except percentages.

For the Three Months Ended

June 30, 2023 For the Three Months Ended

June 30, 2022 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

Taxes and permits $ 2,969 3.9 % $ 2,418 3.4 % $ (551) (22.8) %

Advertising and marketing 3,284 4.3 % 2,460 3.5 % (824) (33.5) %

Supplies and services 2,865 3.7 % 2,068 2.9 % (797) (38.5) %

Insurance 2,718 3.5 % 2,481 3.5 % (237) (9.6) %

Legal 754 1.0 % 328 0.5 % (426) (129.9) %

Lease 1,836 2.4 % 1,736 2.5 % (100) (5.8) %

Charge card fees 1,792 2.3 % 1,829 2.6 % 37 2.0 %

Utilities 1,443 1.9 % 1,151 1.6 % (292) (25.4) %

Security 1,523 2.0 % 1,081 1.5 % (442) (40.9) %

Stock-based compensation 470 0.6 % — — % (470) (100.0) %

Accounting and professional fees 1,050 1.4 % 818 1.2 % (232) (28.4) %

Repairs and maintenance 1,367 1.8 % 960 1.4 % (407) (42.4) %

Other 1,732 2.2 % 2,242 3.2 % 510 22.7 %

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

For the Nine Months Ended

June 30, 2023 For the Nine Months Ended

June 30, 2022 Better (Worse)

December 31, 2023 For the Three Months Ended

December 31, 2022 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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Total selling, general and administrative expenses $ 25,201 34.1 % $ 22,732 32.5 % $ (2,469) (10.9) %

Taxes and permits mainly increased due to the increase in the Texas patron tax.

Advertising and marketing increased mainly due to higher commissions and promotional expenses.

Insurance expense increased due to additional clubs and restaurants.

Depreciation and amortization .

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.

Depreciation and amortization increased by $546,000, or 16.5%, during the quarter due to the higher depreciable base.

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.

Other charges, net for the quarter changed due to one sale of real estate property in the prior-year first quarter.

Income (Loss) from Operations

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.

For the quarter ended December 31, 2023 and 2022, our consolidated operating margin was 17.8% and 24.2%, respectively.

Segment contribution to income (loss) from operations is presented in the table below (in thousands):

For the Three Months Ended

June 30, For the Nine Months Ended

2023 2022 2023 2022

Nightclubs $ 20,369 $ 22,740

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$ 13,165 $ 16,898

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

Excluding certain items, the first quarter ended December 31, 2023 and 2022 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 26 .

For the Three Months Ended June 30, 2023

For the Three Months Ended December 31, 2023

Nightclubs Bombshells Other Corporate Total

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Amortization of intangibles 591 63 — 5 659

Settlement of lawsuits 57 6 — — 63

Impairment of assets 2,631 — — — 2,631

Loss (gain) on sale of businesses and assets (153) 50 — (2) (105)

Gain on insurance — — — — —

Gain on sale of businesses and assets (1) — — (2) (3)

Stock-based compensation — — — 470 470

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Non-GAAP operating margin 34.3 % 1.2 % (137.1) % (9.0) % 19.3 %

For the Three Months Ended June 30, 2022

For the Three Months Ended December 31, 2022

Nightclubs Bombshells Other Corporate Total

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Amortization of intangibles 628 2 61 4 695

Settlement of lawsuits 124 8 — — 132

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

Gain on sale of businesses and assets (569) — — (21) (590)

Gain on insurance (48) — — (16) (64)

Non-GAAP operating income (loss) $ 23,327 $ 3,724 $ (82) $ (4,936) $ 22,033

GAAP operating margin 41.1 % 19.4 % (34.0) % (7.0) % 29.0 %

Non-GAAP operating margin 42.7 % 23.6 % (34.0) % (7.0) % 31.2 %

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 Nine Months Ended June 30, 2023

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 61,127 $ 5,323 $ (653) $ (19,957) $ 45,840

Amortization of intangibles 1,880 500 329 13 2,722

Settlement of lawsuits 3,174 9 — — 3,183

Impairment of assets 3,293 — — — 3,293

Loss (gain) on sale of businesses and assets (734) 66 — (24) (692)

Gain on insurance (48) — — (43) (91)

Stock-based compensation — — — 941 941

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Non-GAAP operating margin 40.4 % 13.8 % (58.5) % (9.4) % 25.6 %

For the Nine Months Ended June 30, 2022

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 60,321 $ 9,335 $ (159) $ (15,998) $ 53,499

Amortization of intangibles 117 5 — 2 124

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)

Gain on insurance (408) — — — (408)

Non-GAAP operating income (loss) $ 61,336 $ 10,025 $ (159) $ (16,222) $ 54,980

GAAP operating margin 40.3 % 20.3 % (22.4) % (8.2) % 27.3 %

Non-GAAP operating margin 41.0 % 21.8 % (22.4) % (8.3) % 28.0 %

Other Income/Expenses

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.

Interest expense increased by $529,000, or 14.3%, primarily caused by a higher average debt balance mostly from seller-financed promissory notes from last years' acquisitions.

Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $6.0 million and $5.4 million for the quarters ended December 31, 2023 and 2022, respectively.

As a percentage of revenue, total occupancy costs were 8.2% and 7.8% during the quarters ended December 31, 2023 and 2022, respectively, primarily due to the interest from higher average debt balance.

Income tax expense was $1.8 million and $3.0 million during the three months ended December 31, 2023 and 2022, respectively.

The effective income tax expense rate was 19.9% and 22.8% for the three months ended December 31, 2023 and 2022, 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

June 30, For the Nine Months Ended

2023 2022 2023 2022

Federal statutory income tax expense 21.0 % 21.0 %

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Total income tax expense 19.9 % 22.8 %

Income taxes decreased in dollar amount due to the lower pretax income in the current first quarter.

Effective income tax rate decreased due to the acquisition of Texas-based clubs at the end of last year's second quarter and the additional tax credits from those acquisitions.

Non-GAAP Financial Measures

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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) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) settlement of lawsuits, and (f) stock-based compensation.

(a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, and (d) 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.

2 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 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 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).

(a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) stock-based compensation, and (e) 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 19.9% and 22.7% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 31, 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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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) impairment of assets, (h) settlement of lawsuits, (i) gain on debt extinguishment, and (j) stock-based compensation.

We believe that adjusting for such items helps 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 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

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

Three Months Ended December 31,

Reconciliation of GAAP net income to Adjusted EBITDA

2 unchanged sentences

Interest expense, net 4,122 3,596

Settlement of lawsuits 63 132 3,183 709

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

Depreciation and amortization 3,853 3,307

Stock-based compensation 470 941

Gain on sale of businesses and assets (3) (590)

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

Unrealized loss on equity securities — — — 1

Gain on insurance — (64)

Stock-based compensation 470 — 2,117 —

Depreciation and amortization 4,041 2,565 11,108 7,636

Adjusted EBITDA $ 17,467 $ 20,459

Three Months Ended December 31,

Reconciliation of GAAP net income to non-GAAP net income

1 unchanged sentence

Amortization of intangibles 659 695

Settlement of lawsuits 63 132 3,183 709

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

Stock-based compensation 470 941

Gain on sale of businesses and assets (3) (590)

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

Unrealized loss on equity securities — — — 1

Gain on insurance — (64)

Stock-based compensation 470 — 2,117 —

Net income tax effect (220) (200)

Non-GAAP net income $ 8,132 $ 11,020

Three Months Ended December 31,

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

2 unchanged sentences

Amortization of intangibles 0.07 0.08

Settlement of lawsuits 0.01 0.01 0.34 0.08

Impairment of assets 0.28 0.18 0.35 0.18

Stock-based compensation 0.05 0.10

Gain on sale of businesses and assets 0.00 (0.06)

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

Unrealized loss on equity securities — — — 0.00

Gain on insurance 0.00 (0.01)

Stock-based compensation 0.05 — 0.23 —

Net income tax effect (0.02) (0.02)

Non-GAAP diluted earnings per share $ 1.30 $ 1.60 $ 3.80 $ 3.89

Non-GAAP net income $ 0.87 $ 1.19

Three Months Ended December 31,

Reconciliation of GAAP operating income to non-GAAP operating income

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Amortization of intangibles 659 695

Settlement of lawsuits 63 132 3,183 709

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

Stock-based compensation 470 941

Gain on sale of businesses and assets (3) (590)

Gain on insurance — (64)

Stock-based compensation 470 — 2,117 —

Non-GAAP operating income $ 14,291 $ 17,880

Three Months Ended December 31,

Reconciliation of GAAP operating margin to non-GAAP operating margin

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Amortization of intangibles 0.9 % 1.0 %

Settlement of lawsuits 0.1 % 0.2 % 1.5 % 0.4 %

Impairment of assets 3.4 % 2.4 % 1.5 % 0.9 %

Stock-based compensation 0.6 % 1.3 %

Gain on sale of businesses and assets 0.0 % (0.8) %

Gain on insurance 0.0 % (0.1) %

Stock-based compensation 0.6 % — % 1.0 % — %

Non-GAAP operating margin 25.3 % 31.2 % 25.8 % 28.0 %

Non-GAAP operating income 19.3 % 25.6 %

* Per share amounts and percentages may not foot due to rounding.

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Liquidity and Capital Resources

At June 30, 2023, our cash and cash equivalents were approximately $23.6 million compared to $36.0 million at September 30, 2022.

At December 31, 2023, our cash and cash equivalents were approximately $21.2 million compared to $21.0 million at September 30, 2023.

Because of the large volume of cash we handle, we have very stringent cash controls.

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.

In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

As of December 31, 2023, we had negative working capital of $9.0 million compared to negative working capital of $10.5 million as of September 30, 2023.

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 our acquisitions.

Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity, but we are monitoring our total debt service cost as interest rates continue to increase.

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.

Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity.

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.

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

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Operating activities $ 13,633 $ 14,895

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

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Net income $ 7,244 $ 10,271

Depreciation and amortization 3,853 3,307

Deferred income tax benefit (790) (409)

Impairment of assets 3,293 1,722

Stock-based compensation 470 941

Gain on debt extinguishment — (83)

Net change in operating assets and liabilities 1,122 263

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Net cash provided by operating activities $ 13,633 $ 14,895

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.

Net cash provided by operating activities this current quarter decreased from last year's comparable quarter primarily due to lower income from operations and higher interest expense paid.

Cash Flows from Investing Activities

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

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Payments for property and equipment and intangible assets $ (5,135) $ (12,553)

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Net cash used in investing activities $ (5,080) $ (13,650)

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,

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

For the Three Months Ended December 31,

New facilities, equipment, and intangible assets $ 4,152 $ 10,689

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Total capital expenditures $ 5,135 $ 12,553

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.

The capital expenditures during the quarter ended December 31, 2023 were composed mostly of construction projects in-progress, while those during the quarter ended December 31, 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.

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

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Proceeds from debt obligations $ 701 $ 1,500

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Share in return of investment by noncontrolling partner — (600)

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 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 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.

Net cash used in financing activities $ (8,421) $ (3,117)

We purchased 37,954 shares of our common stock at an average price of $54.59 during the quarter ended December 31, 2023, while we purchased 1,500 shares of our common stock at an average price of $65.02 during the quarter ended December 31, 2022.

As of December 31, 2023, we have approximately $14.6 million authorization remaining to purchase additional shares.

We paid $0.06 per share for dividends during the first quarter ended December 31, 2023, while we paid $0.05 per share during the first quarter ended December 31, 2022.

See Note 6 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 nine months ended June 30, 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 three months ended December 31, 2023 and 2022.

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

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

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Net cash provided by operating activities $ 13,633 $ 14,895

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Free cash flow $ 12,650 $ 13,031

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.

Our free cash flow for the quarter decreased by 2.9% compared to the comparable prior-year quarter primarily due to lower income from operations and higher interest expense paid, partially offset lower maintenance capital expenditures paid.

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.

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 our contractual debt and lease obligations, 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.

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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 nine months ended June 30 (in thousands, except percentages):

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 for the three months ended December 31 (in thousands, except percentages):

2023 Increase

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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 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).

All thirteen of the existing Bombshells as of December 31, 2023 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.

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Quantitative and Qualitative Disclosures About Market Risk.

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.

As of December 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, 2023.

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