RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2023. Overview RCI Hospitality Holdings, Inc. 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, 2024, we operated a total of 70 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. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas. Critical Accounting Policies and Estimates The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 filed with the SEC on December 14, 2023. During the three and nine months ended June 30, 2024, there were no significant changes in our accounting policies and estimates. Results of Operations Highlights of the Company's operating results are as follows, with comparisons against the same period of the prior year: Third Quarter Ended June 30, 2024 • Total revenues were $76.2 million compared to $77.1 million during the comparable prior-year quarter, a 1.1% decrease (Nightclubs revenue of $62.8 million compared to $62.4 million, a 0.6% increase; and Bombshells revenue of $13.1 million compared to $14.4 million, an 8.7% decrease) • Consolidated same-store sales decreased by 1.5% (Nightclubs increased by 1.7%, while Bombshells decreased by 16.2%) (refer to the definition of same-store sales in the discussion of revenues below) • Basic and diluted earnings per share (“EPS”) this quarter of $0.56 loss compared to $0.96 income during the comparable prior-year quarter (non-GAAP diluted EPS* of $1.35 compared to $1.30) • Net cash provided by operating activities of $15.8 million compared to $15.3 million during the comparable prior-year quarter, a 2.9% increase (free cash flow* of $13.8 million compared to $14.3 million, a 3.4% decrease) 23 Table of Contents Year-to Date Period Ended June 30, 2024 • Total revenues were $222.4 million compared to $218.5 million during the comparable prior-year nine-month period, a 1.8% increase (Nightclubs revenue of 183.2 million compared to 175.8 million, a 4.2% increase; and Bombshells revenue of $38.6 million compared to $42.1 million, an 8.3% decrease) • Consolidated same-store sales decreased by 6.5% (Nightclubs decreased by 3.6%, while Bombshells decreased by 19.0%) (refer to the definition of same-store sales in the discussion of revenues below) • Basic and diluted EPS this period of $0.30 compared to $2.91 (non-GAAP diluted EPS* of $3.11 compared to $3.80) during the comparable prior-year nine-month period • Net cash provided by operating activities of $40.2 million compared to $47.0 million during the comparable prior-year nine-month period, a 14.4% decrease (free cash flow* of $35.3 million compared to $42.1 million, a 16.2% decrease) * Reconciliation and discussion of non-GAAP financial measures are included in the “ Non-GAAP Financial Measures ” section below. Revenues Consolidated revenues for the third quarter decreased by $875,000, or 1.1%, versus the comparable prior-year quarter due primarily to a 2.0%, or $1.5 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $1.0 million impact of the decrease in consolidated same-stores sales and the $1.4 million impact of closed clubs. Consolidated revenues for the nine-month period increased by $3.8 million, or 1.8%, versus the comparable prior-year nine-month period mainly due to a 9.7%, or $21.1 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $13.3 million impact of the decrease in consolidated same-store sales and the $3.7 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. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily until its next full quarter of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation. 24 Table of Contents Segment contribution to total revenues was as follows (in thousands, except percentages): Three Months Ended June 30, 2024 Mix Three Months Ended June 30, 2023 Mix Inc (Dec) $ Inc (Dec) % Nightclubs Sales of alcoholic beverages $ 27,413 43.6 % $ 26,144 41.9 % $ 1,269 4.9 % Sales of food and merchandise 5,904 9.4 % 5,288 8.5 % 616 11.6 % Service revenues 25,103 40.0 % 26,497 42.4 % (1,394) (5.3) % Other revenues 4,403 7.0 % 4,520 7.2 % (117) (2.6) % 62,823 100.0 % 62,449 100.0 % 374 0.6 % Bombshells Sales of alcoholic beverages 7,029 53.5 % 8,007 55.6 % (978) (12.2) % Sales of food and merchandise 5,832 44.4 % 6,117 42.5 % (285) (4.7) % Service revenues 165 1.3 % 166 1.2 % (1) (0.6) % Other revenues 113 0.9 % 107 0.7 % 6 5.6 % 13,139 100.0 % 14,397 100.0 % (1,258) (8.7) % Other Other revenues 218 100.0 % 209 100.0 % 9 4.3 % $ 76,180 $ 77,055 $ (875) (1.1) % Nine Months Ended June 30, 2024 Mix Nine Months Ended June 30, 2023 Mix Inc (Dec) $ Inc (Dec) % Nightclubs Sales of alcoholic beverages $ 79,595 43.4 % $ 70,433 40.1 % $ 9,162 13.0 % Sales of food and merchandise 16,490 9.0 % 14,705 8.4 % 1,785 12.1 % Service revenues 73,784 40.3 % 77,716 44.2 % (3,932) (5.1) % Other revenues 13,359 7.3 % 12,951 7.4 % 408 3.2 % 183,228 100.0 % 175,805 100.0 % 7,423 4.2 % Bombshells Sales of alcoholic beverages 21,070 54.5 % 23,504 55.8 % (2,434) (10.4) % Sales of food and merchandise 17,116 44.3 % 18,052 42.8 % (936) (5.2) % Service revenues 167 0.4 % 200 0.5 % (33) (16.5) % Other revenues 288 0.7 % 387 0.9 % (99) (25.6) % 38,641 100.0 % 42,143 100.0 % (3,502) (8.3) % Other Other revenues 501 100.0 % 592 100.0 % (91) (15.4) % $ 222,370 $ 218,540 $ 3,830 1.8 % Nightclubs revenues increased by 0.6% during the third quarter compared to the same quarter last year primarily due to the $778,000 contribution of newly acquired clubs and the $1.0 million impact of the increase in same-store sales, partially offset by the $1.4 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 increased by 1.7%. By type of revenue, alcoholic beverage sales increased by 4.9%, food, merchandise and other revenue increased by 5.1%, while service revenues decreased by 5.3%. For the nine-month period, Nightclubs revenues increased by 4.2%, mainly due to the $17.1 million contribution of newly acquired clubs, partially offset by the $5.9 million impact of the decline in same-store sales and the $3.7 million impact of closed clubs. Nightclubs same-store sales for the nine-month period declined by 3.6%. By type of revenue, alcoholic beverage sales increased by 13.0%, food, merchandise and other revenue increased by 7.9%, while service revenues decreased by 5.1%. 25 Table of Contents Bombshells third quarter revenues decreased by 8.7%, of which 16.2% 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 4.7% while alcoholic beverage sales decreased by 12.2%. For the nine-month period, Bombshells revenues decreased by 8.3%, caused primarily by the 19.0% same-store sales decline offset by the increase from new locations. By type of revenue, food and merchandise sales decreased by 5.2% while alcoholic beverage sales decreased by 10.4%. Operating Expenses Total operating expenses, as a percent of revenues, increased to 103.3% from 79.9% from last year’s third quarter, and increased to 93.1% from 79.0% for the nine-month period. Year-over-year change was a $17.2 million increase, or 27.9%, for the third quarter and a $34.4 million increase, or 19.9%, for the nine-month period. Significant contributors to the changes in operating expenses are explained below. Cost of goods sold . Cost of goods sold for the third quarter decreased by $23,000, or 0.2%, mainly due to lower sales. As a percent of total revenues, cost of goods sold increased to 13.8% from 13.7% mainly from a shift in sales mix. Nightclubs cost of goods sold during the third quarter decreased to 11.6% from 11.7%, while Bombshells cost of goods sold increased to 24.1% from 22.3%. For the nine-month period, cost of goods sold increased by $2.1 million, or 7.4%, mainly due to higher sales. As a percent of total revenues, cost of goods sold increased to 13.8% from 13.1% mainly due to a shift in sales mix. Nightclubs cost of goods sold during the nine-month period increased to 11.7% from 10.9%, while Bombshells cost of goods sold increased to 23.8% from 22.5%. Salaries and wages . Salaries and wages increased by $414,000, or 2.0%, for the third quarter. As a percent of total revenues, salaries and wages increased to 27.6% from 26.7%. Nightclubs increased to 21.7% from 21.4%, Bombshells decreased to 26.7% from 27.0%, while corporate increased to 4.9% from 4.1%. For the nine-month period, salaries and wages increased by $4.6 million, or 7.9%. As a percent of total revenues, salaries and wages increased to 28.5% from 26.9%. Nightclubs increased to 22.1% from 21.2%, Bombshells increased to 28.9% from 26.5%, while corporate increased to 5.0% from 4.5%. 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 $1.3 million, or 5.3%, for the third quarter and increased by $6.4 million, or 9.3%, for the nine-month period. Dollar amounts in the tables below are in thousands, except percentages. 26 Table of Contents For the Three Months Ended June 30, 2024 For the Three Months Ended June 30, 2023 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 4,575 6.0 % $ 2,969 3.9 % $ (1,606) (54.1) % Advertising and marketing 3,072 4.0 % 3,284 4.3 % 212 6.5 % Supplies and services 2,642 3.5 % 2,865 3.7 % 223 7.8 % Insurance 3,183 4.2 % 2,718 3.5 % (465) (17.1) % Legal 1,034 1.4 % 754 1.0 % (280) (37.1) % Lease 1,793 2.4 % 1,836 2.4 % 43 2.3 % Charge card fees 1,798 2.4 % 1,792 2.3 % (6) (0.3) % Utilities 1,467 1.9 % 1,443 1.9 % (24) (1.7) % Security 1,178 1.5 % 1,523 2.0 % 345 22.7 % Stock-based compensation 471 0.6 % 470 0.6 % (1) (0.2) % Accounting and professional fees 910 1.2 % 1,050 1.4 % 140 13.3 % Repairs and maintenance 1,154 1.5 % 1,367 1.8 % 213 15.6 % Other 1,780 2.3 % 1,732 2.2 % (48) (2.8) % Total selling, general and administrative expenses $ 25,057 32.9 % $ 23,803 30.9 % $ (1,254) (5.3) % For the Nine Months Ended June 30, 2024 For the Nine Months Ended June 30, 2023 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 12,584 5.7 % $ 8,392 3.8 % $ (4,192) (50.0) % Advertising and marketing 9,539 4.3 % 8,685 4.0 % (854) (9.8) % Supplies and services 8,073 3.6 % 7,946 3.6 % (127) (1.6) % Insurance 9,763 4.4 % 7,538 3.4 % (2,225) (29.5) % Legal 2,883 1.3 % 3,035 1.4 % 152 5.0 % Lease 5,402 2.4 % 5,363 2.5 % (39) (0.7) % Charge card fees 5,212 2.3 % 5,372 2.5 % 160 3.0 % Utilities 4,414 2.0 % 4,067 1.9 % (347) (8.5) % Security 3,876 1.7 % 3,995 1.8 % 119 3.0 % Stock-based compensation 1,412 0.6 % 2,117 1.0 % 705 33.3 % Accounting and professional fees 3,232 1.5 % 3,225 1.5 % (7) (0.2) % Repairs and maintenance 3,367 1.5 % 3,738 1.7 % 371 9.9 % Other 5,154 2.3 % 5,088 2.3 % (66) (1.3) % Total selling, general and administrative expenses $ 74,911 33.7 % $ 68,561 31.4 % $ (6,350) (9.3) % 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, with additional impact from insurance premium refunds received in the second quarter of fiscal 2023. Depreciation and amortization . Depreciation and amortization decreased by $140,000, or 3.5%, during the third quarter and increased by $530,000, or 4.8%, during the nine-month period, primarily due to lower intangible amortization caused by recent impairments partially offset by a higher depreciable base. Other charges, net . Other charges, net for the third quarter and the nine-month period changed mainly due to this year's impairment charges and last year's lawsuit settlements. See Note 5 to our unaudited condensed consolidated financial statements. 27 Table of Contents Income (Loss) from Operations For the three months ended June 30, 2024 and 2023, our consolidated operating margin was (3.3)% and 20.1%, respectively, while for the nine months ended June 30, 2024 and 2023, our consolidated operating margin was 6.9% and 21.0%, 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 June 30, 2024 2023 2024 2023 Nightclubs $ 13,640 $ 20,392 $ 45,030 $ 61,127 Bombshells (8,914) 1,701 (8,129) 5,323 Other (108) (300) (581) (653) Corporate (7,154) (6,278) (21,034) (19,957) $ (2,536) $ 15,515 $ 15,286 $ 45,840 Excluding certain items, the three months ended June 30, 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 30 . For the Three Months Ended June 30, 2024 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 13,640 $ (8,914) $ (108) $ (7,154) $ (2,536) Amortization of intangibles 578 16 — 4 598 Impairment of assets 7,619 10,312 — — 17,931 Settlement of lawsuits 141 — — — 141 Stock-based compensation — — — 471 471 Loss (gain) on sale of businesses and assets (76) 6 — 258 188 Non-GAAP operating income (loss) $ 21,902 $ 1,420 $ (108) $ (6,421) $ 16,793 GAAP operating margin 21.7 % (67.8) % (49.5) % (9.4) % (3.3) % Non-GAAP operating margin 34.9 % 10.8 % (49.5) % (8.4) % 22.0 % For the Three Months Ended June 30, 2023 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 20,392 $ 1,701 $ (300) $ (6,278) $ 15,515 Amortization of intangibles 624 81 208 5 918 Impairment of assets 2,631 — — — 2,631 Settlement of lawsuits 57 6 — — 63 Stock-based compensation — — — 470 470 Loss (gain) on sale of businesses and assets (153) 50 — (2) (105) Non-GAAP operating income (loss) $ 23,551 $ 1,838 $ (92) $ (5,805) $ 19,492 GAAP operating margin 32.7 % 11.8 % (143.5) % (8.1) % 20.1 % Non-GAAP operating margin 37.7 % 12.8 % (44.0) % (7.5) % 25.3 % 28 Table of Contents Excluding certain items, the nine months ended June 30, 2024 and 2023 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, 2024 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 45,030 $ (8,129) $ (581) $ (21,034) $ 15,286 Amortization of intangibles 1,758 126 — 13 1,897 Impairment of assets 15,652 10,312 — — 25,964 Settlement of lawsuits 308 — — — 308 Stock-based compensation — — — 1,412 1,412 Loss (gain) on sale of businesses and assets (70) 10 — 240 180 Non-GAAP operating income (loss) $ 62,678 $ 2,319 $ (581) $ (19,369) $ 45,047 GAAP operating margin 24.6 % (21.0) % (116.0) % (9.5) % 6.9 % Non-GAAP operating margin 34.2 % 6.0 % (116.0) % (8.7) % 20.3 % 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 Impairment of assets 3,293 — — — 3,293 Settlement of lawsuits 3,174 9 — — 3,183 Stock-based compensation — — — 2,117 2,117 Loss (gain) on sale of businesses and assets (734) 66 — (24) (692) Gain on insurance (48) — — (43) (91) Non-GAAP operating income (loss) $ 68,692 $ 5,898 $ (324) $ (17,894) $ 56,372 GAAP operating margin 34.8 % 12.6 % (110.3) % (9.1) % 21.0 % Non-GAAP operating margin 39.1 % 14.0 % (54.7) % (8.2) % 25.8 % Other Income/Expenses Interest expense decreased by $76,000, or 1.8%, during the third quarter and increased by $775,000, or 6.6%, during the nine-month period primarily caused by a higher average debt balance mostly from seller-financed promissory notes from last years' acquisitions. Our total occupancy costs, which we define as the sum of operating lease expense and interest expense, were $6.0 million and $6.2 million for the quarters ended June 30, 2024 and 2023, respectively. As a percentage of revenue, total occupancy costs were 7.9% and 8.0% during the quarters ended June 30, 2024 and 2023, respectively. For the nine months ended June 30, 2024 and 2023, total occupancy costs were $17.9 million and $17.0 million, respectively. As a percent of revenue, total occupancy costs were 8.0% and 7.8%, respectively, during the nine-month period. 29 Table of Contents Income Taxes Income taxes were a benefit of $1.4 million and an expense of $378,000 during the three and nine months ended June 30, 2024, respectively, compared to $2.3 million and $7.4 million during the three and nine months ended and June 30, 2023, respectively. The effective income tax expense rate was 21.5% and 12.0% for the three and nine months ended June 30, 2024 compared to 20.1% and 21.6% for the three and nine months ended June 30, 2023, respectively.The disproportionate tax rates during the nine months ended June 30, 2024, were caused by the decrease in 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, and the pretax loss in the three months ended June 30, 2024, as presented below. For the Three Months Ended June 30, For the Nine Months Ended June 30, 2024 2023 2024 2023 Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 3.2 % 2.1 % 4.3 % 3.4 % Permanent differences (0.3) % 0.5 % 3.2 % 0.5 % Tax credit (2.3) % (3.7) % (16.8) % (3.4) % Other (0.1) % 0.1 % 0.3 % 0.1 % Total income tax expense 21.5 % 20.1 % 12.0 % 21.6 % Income taxes decreased in dollar amount due to a pretax loss in the current quarter and a lower pretax income in the current nine-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. Non-GAAP Financial Measures In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows: Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) 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. Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share . We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income or loss attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (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 11.7% and 21.6% effective tax rate of the pre-tax non-GAAP income before taxes for the nine months ended June 30, 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. 30 Table of Contents Adjusted EBITDA . We calculate adjusted EBITDA by excluding the following items from net income or loss attributable to RCIHH common stockholders: (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. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs. We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion. The following tables present our non-GAAP performance measures for the three and nine months ended June 30, 2024 and 2023 (in thousands, except per share, number of shares, and percentages): Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Reconciliation of GAAP net income (loss) to Adjusted EBITDA Net income (loss) attributable to RCIHH common stockholders $ (5,233) $ 9,085 $ 2,767 $ 27,055 Income tax expense (benefit) (1,426) 2,269 378 7,447 Interest expense, net 4,110 4,229 12,135 11,412 Depreciation and amortization 3,901 4,041 11,638 11,108 Impairment of assets 17,931 2,631 25,964 3,293 Settlement of lawsuits 141 63 308 3,183 Stock-based compensation 471 470 1,412 2,117 Loss (gain) on sale of businesses and assets 188 (105) 180 (692) Gain on insurance — — — (91) Adjusted EBITDA $ 20,083 $ 22,683 $ 54,782 $ 64,832 Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Reconciliation of GAAP net income (loss) to non-GAAP net income Net income (loss) attributable to RCIHH common stockholders $ (5,233) $ 9,085 $ 2,767 $ 27,055 Amortization of intangibles 598 918 1,897 2,722 Impairment of assets 17,931 2,631 25,964 3,293 Settlement of lawsuits 141 63 308 3,183 Stock-based compensation 471 470 1,412 2,117 Loss (gain) on sale of businesses and assets 188 (105) 180 (692) Gain on insurance — — — (91) Net income tax effect (1,554) (812) (3,475) (2,258) Non-GAAP net income $ 12,542 $ 12,250 $ 29,053 $ 35,329 31 Table of Contents Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share Diluted shares 9,278,921 9,430,225 9,332,249 9,308,624 GAAP diluted earnings (loss) per share $ (0.56) $ 0.96 $ 0.30 $ 2.91 Amortization of intangibles 0.06 0.10 0.20 0.29 Impairment of assets 1.93 0.28 2.78 0.35 Settlement of lawsuits 0.02 0.01 0.03 0.34 Stock-based compensation 0.05 0.05 0.15 0.23 Loss (gain) on sale of businesses and assets 0.02 (0.01) 0.02 (0.07) Gain on insurance 0.00 0.00 0.00 (0.01) Net income tax effect (0.17) (0.09) (0.37) (0.24) Non-GAAP diluted earnings per share $ 1.35 $ 1.30 $ 3.11 $ 3.80 Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Reconciliation of GAAP operating income (loss) to non-GAAP operating income Income (loss) from operations $ (2,536) $ 15,515 $ 15,286 $ 45,840 Amortization of intangibles 598 918 1,897 2,722 Impairment of assets 17,931 2,631 25,964 3,293 Settlement of lawsuits 141 63 308 3,183 Stock-based compensation 471 470 1,412 2,117 Loss (gain) on sale of businesses and assets 188 (105) 180 (692) Gain on insurance — — — (91) Non-GAAP operating income $ 16,793 $ 19,492 $ 45,047 $ 56,372 Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Reconciliation of GAAP operating margin to non-GAAP operating margin Income (loss) from operations (3.3) % 20.1 % 6.9 % 21.0 % Amortization of intangibles 0.8 % 1.2 % 0.9 % 1.2 % Impairment of assets 23.5 % 3.4 % 11.7 % 1.5 % Settlement of lawsuits 0.2 % 0.1 % 0.1 % 1.5 % Stock-based compensation 0.6 % 0.6 % 0.6 % 1.0 % Loss (gain) on sale of businesses and assets 0.2 % (0.1) % 0.1 % (0.3) % Gain on insurance 0.0 % 0.0 % 0.0 % 0.0 % Non-GAAP operating income 22.0 % 25.3 % 20.3 % 25.8 % * Per share amounts and percentages may not foot due to rounding. ** The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial. 32 Table of Contents Liquidity and Capital Resources At June 30, 2024, our cash and cash equivalents were approximately $34.9 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, 2024, we had negative working capital of $5.6 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. 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. 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. We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report. The following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands): For the Nine Months Ended June 30, 2024 2023 Operating activities $ 40,233 $ 47,004 Investing activities (17,090) (57,047) Financing activities (9,219) (2,353) Net increase (decrease) in cash and cash equivalents $ 13,924 $ (12,396) Cash Flows from Operating Activities Following are our summarized cash flows from operating activities (in thousands): For the Nine Months Ended June 30, 2024 2023 Net income (loss) $ 2,773 $ 26,981 Depreciation and amortization 11,638 11,108 Impairment of assets 25,964 3,293 Deferred income tax benefit (6,419) (790) Stock-based compensation 1,412 2,117 Net change in operating assets and liabilities 1,947 2,579 Other 2,918 1,716 Net cash provided by operating activities $ 40,233 $ 47,004 Net cash provided by operating activities this current nine-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. 33 Table of Contents Cash Flows from Investing Activities Following are our cash flows from investing activities (in thousands): For the Nine Months Ended June 30, 2024 2023 Payments for property and equipment and intangible assets $ (19,219) $ (31,119) Acquisition of businesses — (29,000) Proceeds from sale of businesses and assets 1,950 2,811 Proceeds from insurance — 91 Proceeds from notes receivable 179 170 Net cash used in investing activities $ (17,090) $ (57,047) Following is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2024 and 2023 (in thousands): For the Nine Months Ended June 30, 2024 2023 New facilities, equipment, and intangible assets $ 14,239 $ 24,970 Maintenance capital expenditures 4,980 4,949 Total capital expenditures $ 19,219 $ 29,919 The capital expenditures during the nine months ended June 30, 2024 were composed mostly of construction projects in-progress, while those during the nine months ended June 30, 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. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction. Cash Flows from Financing Activities Following are our cash flows from financing activities (in thousands): For the Nine Months Ended June 30, 2024 2023 Proceeds from debt obligations $ 22,657 $ 11,595 Payments on debt obligations (17,137) (11,431) Purchase of treasury stock (12,775) (98) Payment of dividends (1,674) (1,580) Payment of loan origination costs (290) (239) Share in return of investment by noncontrolling partner — (600) Net cash used in financing activities $ (9,219) $ (2,353) We purchased 267,849 shares of our common stock at an average price of $47.69 during the nine months ended June 30, 2024, while we purchased 1,500 shares of our common stock at an average price of $65.02 during the nine months ended June 30, 2023. As of June 30, 2024, we have approximately $3.9 million authorization remaining to purchase additional shares. On July 11, 2024, our Board of Directors approved a $25.0 million increase in the Company's share repurchase program. We paid $0.06 per share in quarterly dividends during the three quarters ended June 30, 2024, while we paid $0.05 per share during the first quarter and $0.06 per share during the second and third quarters for the three quarters ended June 30, 2023. 34 Table of Contents See Note 6 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations and Note 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 nine months ended June 30, 2024 and 2023. Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy. Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands): For the Nine Months Ended June 30, 2024 2023 Net cash provided by operating activities $ 40,233 $ 47,004 Less: Maintenance capital expenditures 4,980 4,949 Free cash flow $ 35,253 $ 42,055 Our free cash flow for the nine-month period decreased by 16.2% compared to the comparable prior-year period primarily due to lower income from operations, higher interest expense paid, lower income tax refund received, and higher maintenance capital expenditures paid, partially offset by lower estimated income taxes 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 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. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt. 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 nine months ended June 30 (in thousands, except percentages): 2024 Increase (Decrease) 2023 Increase (Decrease) 2022 Sales of alcoholic beverages $ 100,665 7.2 % $ 93,937 12.5 % $ 83,504 Sales of food and merchandise 33,606 2.6 % 32,757 (2.6) % 33,628 Service revenues 73,951 (5.1) % 77,916 14.9 % 67,821 Other 14,148 1.6 % 13,930 23.4 % 11,289 Total revenues $ 222,370 1.8 % $ 218,540 11.4 % $ 196,242 Net income attributable to RCIHH common stockholders $ 2,767 (89.8) % $ 27,055 (23.6) % $ 35,429 Net cash provided by operating activities $ 40,233 (14.4) % $ 47,004 0.5 % $ 46,754 Adjusted EBITDA* $ 54,782 (15.5) % $ 64,832 3.7 % $ 62,516 Free cash flow* $ 35,253 (16.2) % $ 42,055 (5.2) % $ 44,369 Debt (end of period) $ 245,400 0.6 % $ 243,823 29.7 % $ 187,965 * See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. 35 Table of Contents Impact of Inflation To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future. Seasonality Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year. Capital Allocation Strategy Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions. Based on our current capital allocation strategy: • We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale; • We consider disposing of underperforming units to free up capital for more productive use; • We consider buying back our own stock if the after-tax yield on free cash flow is above 10%; • We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale. Growth Strategy We believe that we can continue to grow organically and through careful entry into markets with high growth potential. Our growth strategy includes acquiring existing units, opening new units after market analysis, developing new club concepts that are consistent with our management and marketing skills, franchising our Bombshells brand, and developing and opening our Bombshells concept as our capital and manpower allow. All thirteen of the existing Bombshells restaurants as of June 30, 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. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets. We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy. 36 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. As of June 30, 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.