What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2024-02-08 · 175 added, 98 removed, 260 unchanged (51% of the section changed)

4 unchanged sentences

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

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

Through our subsidiaries, as of March 31, 2024, 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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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 months ended December 31, 2023, there were no significant changes in our accounting policies and estimates.

During the three and six months ended March 31, 2024, there were no significant changes in our accounting policies and estimates.

Results of Operations

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;

Highlights of the Company's operating results are as follows, with comparisons against the same period of the prior year:

Second Quarter Ended March 31, 2024

• Total revenues were $72.3 million compared to $71.5 million during the comparable prior-year quarter, a 1.1% increase (Nightclubs revenue of $59.4 million compared to $57.0 million, a 4.1% increase;

and Bombshells revenue of $12.8 million compared to $14.3 million, a 10.8% decrease)

1 unchanged sentence

• Basic and diluted earnings per share (“EPS”) of $0.08 compared to $0.83 (non-GAAP diluted EPS* of $0.90 compared to $1.30) during the comparable prior-year quarter

• 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)

• Net cash provided by operating activities of $10.8 million compared to $16.8 million during the comparable prior-year quarter, a 35.5% decrease (free cash flow* of $8.8 million compared to $14.8 million, a 40.2% decrease)

Year-to Date Period Ended March 31, 2024

• Total revenues were $146.2 million compared to $141.5 million during the comparable prior-year six-month period, a 3.3% increase (Nightclubs revenue of $120.4 million compared to $113.4 million, a 6.2% increase;

and Bombshells revenue of $25.5 million compared to $27.7 million, an 8.1% decrease)

• Consolidated same-store sales decreased by 9.2% (Nightclubs decreased by 6.5%, while Bombshells decreased by 20.4%) (refer to the definition of same-store sales in the discussion of revenues below)

• Basic and diluted EPS of $0.85 compared to $1.94 (non-GAAP diluted EPS* of $1.76 compared to $2.50) during the comparable prior-year six-month period

• Net cash provided by operating activities of $24.5 million compared to $31.7 million during the comparable prior-year six-month period, a 22.8% decrease (free cash flow* of $21.5 million compared to $27.8 million, a 22.7% decrease)

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

The following table summarizes our results of operations as a percentage of revenue:

Three Months Ended

Sales of alcoholic beverages 45.1 % 42.4 %

Sales of food and merchandise 14.6 % 14.8 %

Service revenues 34.0 % 36.5 %

Other 6.3 % 6.3 %

Total revenues 100.0 % 100.0 %

Operating expenses

Cost of goods sold

Alcoholic beverages sold 18.9 % 18.1 %

Food and merchandise sold 37.4 % 34.7 %

Service and other 0.1 % 0.2 %

Total cost of goods sold (exclusive of items shown separately below) 14.0 % 12.9 %

Salaries and wages 28.9 % 26.7 %

Selling, general and administrative 34.1 % 32.5 %

Depreciation and amortization 5.2 % 4.7 %

Other charges, net — % (0.9) %

Total operating expenses 82.2 % 75.8 %

Income from operations 17.8 % 24.2 %

Other income (expenses)

Interest expense (5.7) % (5.3) %

Interest income 0.1 % 0.1 %

Income before income taxes 12.2 % 19.0 %

Income tax expense 2.4 % 4.3 %

Net income 9.8 % 14.7 %

* Percentages may not foot due to rounding.

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

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.

Consolidated revenues for the second quarter increased by $766,000, or 1.1%, versus the comparable prior-year quarter due primarily to a 12.1%, or $8.6 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $5.6 million impact of the decrease in consolidated same-stores sales and the $2.1 million impact of closed clubs.

Consolidated revenues for the six-month period increased by $4.7 million, or 3.3%, versus the comparable prior-year six-month period mainly due to a 13.8%, or $19.6 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $12.3 million impact of the decrease in consolidated same-store sales and the $2.4 million impact of closed clubs.

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

Three Months Ended March 31, 2024 Mix Three Months Ended March 31, 2023 Mix Inc (Dec) $ Inc (Dec) %

Sales of alcoholic beverages $ 25,946 43.7 % $ 22,191 38.9 % $ 3,755 16.9 %

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$ 72,283 $ 71,517 $ 766 1.1 %

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.

Six Months Ended March 31, 2024 Mix Six Months Ended March 31, 2023 Mix Inc (Dec) $ Inc (Dec) %

Sales of alcoholic beverages $ 52,182 43.3 % $ 44,289 39.1 % $ 7,893 17.8 %

Sales of food and merchandise 10,586 8.8 % 9,417 8.3 % 1,169 12.4 %

Service revenues 48,681 40.4 % 51,219 45.2 % (2,538) (5.0) %

Other revenues 8,956 7.4 % 8,431 7.4 % 525 6.2 %

120,405 100.0 % 113,356 100.0 % 7,049 6.2 %

Sales of alcoholic beverages 14,041 55.1 % 15,497 55.9 % (1,456) (9.4) %

Sales of food and merchandise 11,284 44.2 % 11,935 43.0 % (651) (5.5) %

Service revenues 2 — % 34 0.1 % (32) (94.1) %

Other revenues 175 0.7 % 280 1.0 % (105) (37.5) %

25,502 100.0 % 27,746 100.0 % (2,244) (8.1) %

Other revenues 283 100.0 % 383 100.0 % (100) (26.1) %

$ 146,190 $ 141,485 $ 4,705 3.3 %

Nightclubs revenues increased by 4.1% during the second quarter compared to the same quarter last year primarily due to the $7.5 million contribution of newly acquired clubs, partially offset by the $2.9 million impact of the decline in same-store sales and the $2.1 million impact of closed clubs.

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 5.7%.

By type of revenue, alcoholic beverage sales increased by 16.9%, food, merchandise and other revenue increased by 7.8%, while service revenues decreased by 8.3%.

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.

For the six-month period, Nightclubs revenues increased by 6.2%, mainly due to the $16.3 million contribution of newly acquired clubs, partially offset by the $6.9 million impact of the decline in same-store sales and the $2.4 million impact of closed clubs.

Nightclubs same-store sales for the six-month period declined by 6.5%.

By type of revenue, alcoholic beverage sales increased by 17.8%, food, merchandise and other revenue increased by 9.5%, while service revenues decreased by 5.0%.

Bombshells second quarter revenues decreased by 10.8%, of which 20.5% was for same-store sales decline with the offsetting increase caused by two new locations and a food hall.

By type of revenue, food and merchandise sales decreased by 7.4% while alcoholic beverage sales decreased by 12.4%.

For the six-month period, Bombshells revenues decreased by 8.1%, caused primarily by the 20.4% same-store sales decline offset by the increase from new locations.

By type of revenue, food and merchandise sales decreased by 5.5% while alcoholic beverage sales decreased by 9.4%.

Operating Expenses

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.

Total operating expenses, as a percent of revenues, increased to 93.6% from 81.2% from last year’s second quarter, and increased to 87.8% from 78.6% for the six-month period.

Year-over-year change was a $9.5 million increase, or 16.4%, for the second quarter and a $17.2 million increase, or 15.5%, for the six-month period.

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

Cost of goods sold .

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

Cost of goods sold for the second quarter increased by $801,000, or 8.8%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold increased to 13.7% from 12.7% 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.

Nightclubs cost of goods sold during the second quarter increased to 11.6% from 10.4%, while Bombshells cost of goods sold increased to 23.5% from 22.2%.

For the six-month period, cost of goods sold increased by $2.2 million, or 11.9%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold increased to 13.9% from 12.8% mainly due to a shift in sales mix.

Nightclubs cost of goods sold during the six-month period increased to 11.8% from 10.4%, while Bombshells cost of goods sold increased to 23.6% from 22.6%.

Salaries and wages .

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

Salaries and wages increased by $1.5 million, or 8.0%, for the second quarter.

As a percent of total revenues, salaries and wages increased to 29.0% from 27.2%.

Nightclubs increased to 22.5% from 21.4%, Bombshells increased to 29.0% from 26.0%, while corporate increased to 5.2% from 4.7%.

For the six-month period, salaries and wages increased by $4.2 million, or 11.0%.

As a percent of total revenues, salaries and wages increased to 28.9% from 26.9%.

Nightclubs increased to 22.3% from 21.1%, Bombshells increased to 30.1% from 26.3%, while corporate increased to 5.1% from 4.7%.

The dollar increases were primarily caused by an 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.

The increases in percent of revenue amounts were due to wage inflation.

Selling, general and administrative expenses .

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.

Selling, general and administrative expenses increased by $2.6 million, or 11.9%, for the second quarter and increased by $5.1 million, or 11.4%, for the six-month period.

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

For the Three Months Ended

December 31, 2023 For the Three Months Ended

December 31, 2022 Better (Worse)

March 31, 2024 For the Three Months Ended

March 31, 2023 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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Total selling, general and administrative expenses $ 24,653 34.1 % $ 22,026 30.8 % $ (2,627) (11.9) %

For the Six Months Ended

March 31, 2024 For the Six Months Ended

March 31, 2023 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

Taxes and permits $ 8,009 5.5 % $ 5,423 3.8 % $ (2,586) (47.7) %

Advertising and marketing 6,467 4.4 % 5,401 3.8 % (1,066) (19.7) %

Supplies and services 5,431 3.7 % 5,081 3.6 % (350) (6.9) %

Insurance 6,580 4.5 % 4,820 3.4 % (1,760) (36.5) %

Legal 1,849 1.3 % 2,281 1.6 % 432 18.9 %

Lease 3,609 2.5 % 3,527 2.5 % (82) (2.3) %

Charge card fees 3,414 2.3 % 3,580 2.5 % 166 4.6 %

Utilities 2,947 2.0 % 2,624 1.9 % (323) (12.3) %

Security 2,698 1.8 % 2,472 1.7 % (226) (9.1) %

Stock-based compensation 941 0.6 % 1,647 1.2 % 706 42.9 %

Accounting and professional fees 2,322 1.6 % 2,175 1.5 % (147) (6.8) %

Repairs and maintenance 2,213 1.5 % 2,371 1.7 % 158 6.7 %

Other 3,374 2.3 % 3,356 2.4 % (18) (0.5) %

Total selling, general and administrative expenses $ 49,854 34.1 % $ 44,758 31.6 % $ (5,096) (11.4) %

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.

Insurance expense increased due to additional clubs and restaurants, with additional impact from insurance premium refunds received in the second quarter of fiscal 2023.

Depreciation and amortization .

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

Depreciation and amortization increased by $124,000, or 3.3%, during the second quarter and increased by $670,000, or 9.5%, during the six-month period, primarily due to the higher depreciable base.

Other charges, net .

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

Other charges, net for the second quarter and the six-month period changed mainly due to this year's impairment charges and last year's lawsuit settlements.

Income (Loss) from Operations

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

For the three months ended March 31, 2024 and 2023, our consolidated operating margin was 6.4% and 18.8%, respectively, while for the six months ended March 31, 2024 and 2023, our consolidated operating margin was 12.2% and 21.4%, respectively.

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

For the Three Months Ended

March 31, For the Six Months Ended

2024 2023 2024 2023

Nightclubs $ 11,021 $ 17,995 $ 31,390 $ 40,735

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$ 4,657 $ 13,427 $ 17,822 $ 30,325

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).

Excluding certain items, the three months ended March 31, 2024 and 2023 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 1 .

For the Three Months Ended December 31, 2023

For the Three Months Ended March 31, 2024

Nightclubs Bombshells Other Corporate Total

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Amortization of intangibles 589 47 — 4 640

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

Impairment of assets 8,033 — — — 8,033

Settlement of lawsuits 167 — — — 167

Loss (gain) on sale of businesses and assets 7 4 — (16) (5)

Stock-based compensation — — — 471 471

2 unchanged sentences

Non-GAAP operating margin 33.4 % 5.9 % (197.9) % (8.8) % 19.3 %

For the Three Months Ended December 31, 2022

For the Three Months Ended March 31, 2023

Nightclubs Bombshells Other Corporate Total

1 unchanged sentence

Amortization of intangibles 628 417 60 4 1,109

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

Impairment of assets 662 — — — 662

Settlement of lawsuits 3,117 3 — — 3,120

Loss (gain) on sale of businesses and assets (12) 16 — (1) 3

Gain on insurance — — — (27) (27)

3 unchanged sentences

Non-GAAP operating margin 39.3 % 15.4 % (63.2) % (7.7) % 26.6 %

Excluding certain items, the six months ended March 31, 2024 and 2023 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, 2024

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 31,390 $ 785 $ (473) $ (13,880) $ 17,822

Amortization of intangibles 1,180 110 — 9 1,299

Impairment of assets 8,033 — — — 8,033

Settlement of lawsuits 167 — — — 167

Stock-based compensation — — — 941 941

Loss (gain) on sale of businesses and assets 6 4 — (18) (8)

Non-GAAP operating income (loss) $ 40,776 $ 899 $ (473) $ (12,948) $ 28,254

GAAP operating margin 26.1 % 3.1 % (167.1) % (9.5) % 12.2 %

Non-GAAP operating margin 33.9 % 3.5 % (167.1) % (8.9) % 19.3 %

For the Six Months Ended March 31, 2023

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 40,735 $ 3,622 $ (353) $ (13,679) $ 30,325

Amortization of intangibles 1,256 419 121 8 1,804

Impairment of assets 662 — — — 662

Settlement of lawsuits 3,117 3 — — 3,120

Stock-based compensation — — — 1,647 1,647

Loss (gain) on sale of businesses and assets (581) 16 — (22) (587)

Gain on insurance (48) — — (43) (91)

Non-GAAP operating income (loss) $ 45,141 $ 4,060 $ (232) $ (12,089) $ 36,880

GAAP operating margin 35.9 % 13.1 % (92.2) % (9.7) % 21.4 %

Non-GAAP operating margin 39.8 % 14.6 % (60.6) % (8.5) % 26.1 %

Other Income/Expenses

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.

Interest expense increased by $322,000, or 8.8%, during the second quarter and increased by $851,000, or 11.6%, during the six-month period 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 $5.8 million and $5.4 million for the quarters ended March 31, 2024 and 2023, respectively.

As a percentage of revenue, total occupancy costs were 8.0% and 7.6% during the quarters ended March 31, 2024 and 2023, respectively, primarily due to the interest from higher average debt balance.

For the six months ended March 31, 2024 and 2023, total occupancy costs were $11.8 million and $10.9 million, respectively.

As a percent of revenue, total occupancy costs were 8.1% and 7.7%, respectively, during the six-month period.

Income tax expense was $5,000 and $1.8 million during the three and six months ended March 31, 2024, respectively, compared to $2.1 million and $5.2 million during the three and six months ended and March 31, 2023, respectively.

The effective income tax expense rate was 0.7% and 18.4% for the three and six months ended March 31, 2024 compared to 21.8% and 22.4% for the three and six months ended March 31, 2023, respectively.

The disproportionate tax rates during the three months ended March 31, 2024 were caused by the small amount of pre-tax income during the quarter and the reduction of the expected annual effective tax rate.

Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below.

For the Three Months Ended

March 31, For the Six Months Ended

2024 2023 2024 2023

Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 %

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Total income tax expense 0.7 % 21.8 % 18.4 % 22.4 %

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

Income taxes decreased in dollar amount due to the lower pretax income in the current quarter and six-month period.

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.

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

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

(a) amortization of intangibles, (b) impairment of assets, (c) settlement of lawsuits, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) stock-based compensation, and (g) 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 18.4% and 22.3% effective tax rate of the pre-tax non-GAAP income before taxes for the six months ended March 31, 2024 and 2023, 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.

1 unchanged sentence

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, and (f) stock-based compensation.

(a) depreciation and amortization, (b) impairment of assets, (c) income tax expense (benefit), (d) net interest expense, (e) settlement of lawsuits, (f) gains or losses on sale of businesses and assets, (g) gains or losses on insurance, and (h) 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 months ended December 31, 2023 and 2022 (in thousands, except per share, number of shares and percentages):

Three Months Ended December 31,

The following tables present our non-GAAP performance measures for the three and six months ended March 31, 2024 and 2023 (in thousands, except per share, number of shares, and percentages):

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

2024 2023 2024 2023

Reconciliation of GAAP net income to Adjusted EBITDA

3 unchanged sentences

Depreciation and amortization 3,884 3,760 7,737 7,067

Impairment of assets 8,033 662 8,033 662

Settlement of lawsuits 167 3,120 167 3,120

Stock-based compensation 471 706 941 1,647

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

Loss (gain) on sale of businesses and assets (5) 3 (8) (587)

Gain on insurance — (27) — (91)

Adjusted EBITDA $ 17,232 $ 21,690 $ 34,699 $ 42,149

Three Months Ended December 31,

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

2024 2023 2024 2023

Reconciliation of GAAP net income to non-GAAP net income

1 unchanged sentence

Amortization of intangibles 640 1,109 1,299 1,804

Impairment of assets 8,033 662 8,033 662

Settlement of lawsuits 167 3,120 167 3,120

Stock-based compensation 471 706 941 1,647

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

Loss (gain) on sale of businesses and assets (5) 3 (8) (587)

Gain on insurance — (27) — (91)

1 unchanged sentence

Non-GAAP net income $ 8,379 $ 12,059 $ 16,511 $ 23,079

Three Months Ended December 31,

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

2024 2023 2024 2023

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

2 unchanged sentences

Amortization of intangibles 0.07 0.12 0.14 0.20

Impairment of assets 0.86 0.07 0.86 0.07

Settlement of lawsuits 0.02 0.34 0.02 0.34

Stock-based compensation 0.05 0.08 0.10 0.18

Gain on sale of businesses and assets 0.00 (0.06)

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

Gain on insurance 0.00 0.00 0.00 (0.01)

Net income tax effect (0.18) (0.13) (0.21) (0.16)

Non-GAAP net income $ 0.87 $ 1.19

Three Months Ended December 31,

Non-GAAP diluted earnings per share $ 0.90 $ 1.30 $ 1.76 $ 2.50

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

2024 2023 2024 2023

Reconciliation of GAAP operating income to non-GAAP operating income

1 unchanged sentence

Amortization of intangibles 640 1,109 1,299 1,804

Impairment of assets 8,033 662 8,033 662

Settlement of lawsuits 167 3,120 167 3,120

Stock-based compensation 471 706 941 1,647

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

Loss (gain) on sale of businesses and assets (5) 3 (8) (587)

Gain on insurance — (27) — (91)

Non-GAAP operating income $ 13,963 $ 19,000 $ 28,254 $ 36,880

Three Months Ended December 31,

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

2024 2023 2024 2023

Reconciliation of GAAP operating margin to non-GAAP operating margin

1 unchanged sentence

Amortization of intangibles 0.9 % 1.6 % 0.9 % 1.3 %

Impairment of assets 11.1 % 0.9 % 5.5 % 0.5 %

Settlement of lawsuits 0.2 % 4.4 % 0.1 % 2.2 %

Stock-based compensation 0.7 % 1.0 % 0.6 % 1.2 %

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

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

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

3 unchanged sentences

Liquidity and Capital Resources

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

At March 31, 2024, our cash and cash equivalents were approximately $20.0 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 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.

As of March 31, 2024, we had negative working capital of $14.4 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.

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

For the Three Months Ended December 31,

For the Six Months Ended March 31,

Operating activities $ 24,469 $ 31,684

1 unchanged sentence

Financing activities (12,833) 3,196

Net increase (decrease) in cash and cash equivalents $ 132 $ (1,872)

Net decrease in cash and cash equivalents $ (1,050) $ (13,196)

Cash Flows from Operating Activities

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

For the Three Months Ended December 31,

For the Six Months Ended March 31,

Net income $ 7,993 $ 17,964

Depreciation and amortization 7,737 7,067

Impairment of assets 8,033 662

Deferred income tax benefit

Stock-based compensation 941 1,647

2 unchanged sentences

Net cash provided by operating activities $ 24,469 $ 31,684

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.

Net cash provided by operating activities this current six-month period decreased from last year's comparable period primarily due to lower income from operations, higher interest expense paid, and lower income tax refund received, partially offset by lower estimated income taxes paid.

Cash Flows from Investing Activities

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

For the Three Months Ended December 31,

For the Six Months Ended March 31,

Payments for property and equipment and intangible assets $ (12,802) $ (22,090)

4 unchanged sentences

Net cash used in investing activities $ (12,686) $ (48,076)

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,

Following is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 2024 and 2023 (in thousands):

For the Six Months Ended March 31,

New facilities, equipment, and intangible assets $ 9,808 $ 18,205

1 unchanged sentence

Total capital expenditures $ 12,802 $ 22,090

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.

The capital expenditures during the six months ended March 31, 2024 were composed mostly of construction projects in-progress, while those during the six months ended March 31, 2023 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 Three Months Ended December 31,

For the Six Months Ended March 31,

Proceeds from debt obligations $ 2,657 $ 11,595

5 unchanged sentences

Net cash used in financing activities $ (12,833) $ 3,196

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 three months ended December 31, 2023 and 2022.

We purchased 65,219 shares of our common stock at an average price of $55.23 during the six months ended March 31, 2024, while we purchased 1,500 shares of our common stock at an average price of $65.02 during the six months ended March 31, 2023.

As of March 31, 2024, we have approximately $13.0 million authorization remaining to purchase additional shares.

We paid $0.06 per share in quarterly dividends during the two quarters ended March 31, 2024, while we paid $0.05 per share during the first quarter and $0.06 per share during the second quarter for the two quarters ended March 31, 2023.

See Note 6 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations and No te 13 related to the term loan entered into after the balance sheet date.

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, 2024 and 2023.

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 Three Months Ended December 31,

For the Six Months Ended March 31,

Net cash provided by operating activities $ 24,469 $ 31,684

1 unchanged sentence

Free cash flow $ 21,475 $ 27,799

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.

Our free cash flow for the six-month period decreased by 22.7% compared to the comparable prior-year period primarily due to lower income from operations, higher interest expense paid, and lower income tax refund received, partially offset lower income taxes paid and 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.

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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):

The following table presents a summary of such indicators for the six months ended March 31 (in thousands, except percentages):

2024 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 thirteen of the existing Bombshells as of December 31, 2023 were located in Texas.

All thirteen of the existing Bombshells restaurants as of March 31, 2024 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.

5 unchanged sentences

Quantitative and Qualitative Disclosures About Market Risk.

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.

As of March 31, 2024, 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