What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-02-10 compared with 2024-08-08 · 102 added, 196 removed, 244 unchanged (55% of the section changed)

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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.

All services and management operations are conducted by subsidiaries of RCIHH.

Through our subsidiaries, as of December 31, 2024, we operated a total of 64 establishments that offer live adult entertainment.

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, 2024, filed with the SEC on December 16, 2024.

During the three and nine months ended June 30, 2024, there were no significant changes in our accounting policies and estimates.

In fiscal 2025, the Company started self-insuring a significant portion of expected losses under its general liability and liquor insurance programs due to increasingly prohibitive costs of such coverage from third-party insurers.

The Company continues to purchase insurance for workers' compensation, property, auto, and business interruption, as well as the minimum insurance coverage where it is required by law for licensing requirements.

We record a liability for unresolved claims and for an estimate of incurred but not reported claims based on historical experience.

The estimated liability is based on a number of assumptions and factors regarding economic conditions, the frequency and severity of claims development history, and settlement practices.

Our assumptions are reviewed, monitored, and adjusted when warranted by changing circumstances.

During the three months ended December 31, 2024, except as mentioned above, 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

Highlights of the Company's operating results for the quarter ended December 31, 2024, are as follows, with comparisons against the same period of the prior year:

• Total revenues were $71.5 million compared to $73.9 million during the comparable prior-year quarter, a 3.3% decrease (Nightclubs revenue of $61.7 million compared to $61.0 million, a 1.1% increase;

and Bombshells revenue of $9.6 million compared to $12.7 million, an 24.7% 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)

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)

• Consolidated same-store sales increased by 2.3% (Nightclubs increased by 3.7%, while Bombshells decreased by 7.5%) (refer to the definition of same-store sales in the discussion of revenues below)

• Basic and diluted earnings per share (“EPS”) this quarter of $1.01 compared to $0.77 during the comparable prior-year quarter (non-GAAP diluted EPS* of $0.80 compared to $0.87)

• Net cash provided by operating activities of $13.3 million compared to $13.6 million during the comparable prior-year quarter, a 2.1% decrease (free cash flow* of $12.1 million compared to $12.7 million, a 4.6% decrease)

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

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.

Consolidated revenues for the first quarter decreased by $2.4 million, or 3.3%, versus the comparable prior-year quarter due primarily to the $4.4 million impact of closed locations, partially offset by a $487,000 increase in sales from new locations and the $1.5 million impact of the increase 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.

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 consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are 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.

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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) %

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 %

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 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) %

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

Sales of alcoholic beverages $ 27,035 43.8 % $ 26,236 43.0 % $ 799 3.0 %

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$ 71,483 $ 73,907 $ (2,424) (3.3) %

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.

Nightclubs revenues increased by 1.1% during the first quarter compared to the same quarter last year primarily due to the $436,000 contribution of newly acquired clubs and the $2.1 million impact of the increase in same-store sales, partially offset by the $1.8 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 3.7%.

By type of revenue, alcoholic beverage sales increased by 3.0%, food, merchandise and other revenue increased by 8.6%, while service revenues decreased by 3.7%.

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%.

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.

Bombshells first quarter revenues decreased by 24.7%, of which 7.5% was for same-store sales decline and $2.6 million from recently closed or sold locations, with the offsetting increase caused by sales from a new location.

By type of revenue, food and merchandise sales decreased by 21.4% while alcoholic beverage sales decreased by 27.2%.

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.

Total operating expenses, as a percent of revenues, decreased to 80.5% from 82.2% from last year’s first quarter.

Year-over-year change was a $3.2 million decrease, or 5.2%.

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%.

Cost of goods sold for the first quarter decreased by $878,000, or 8.5%, mainly due to lower sales.

As a percent of total revenues, cost of goods sold decreased to 13.3% from 14.0%.

Nightclubs cost of goods sold during the quarter decreased to 11.5% from 12.0%, while Bombshells cost of goods sold slightly increased to 23.9% from 23.7%.

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.

Salaries and wages decreased by $768,000, or 3.6%, for the quarter mainly due to closed locations.

As a percent of total revenues, salaries and wages decreased to 28.8% from 28.9%.

Nightclubs increased to 22.6% from 22.0%, Bombshells decreased to 29.3% from 31.1%, while corporate slightly increased to 5.2% from 5.1%.

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.

Total selling, general and administrative expenses increased by $1.0 million, or 4.0%, for the quarter.

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

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)

December 31, 2024 For the Three Months Ended

December 31, 2023 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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Total selling, general and administrative expenses $ 26,207 36.7 % $ 25,201 34.1 % $ (1,006) (4.0) %

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.

Advertising and marketing decreased mainly due to closed locations.

Insurance expense increased due to the estimated self-insurance for general liability and liquor liability that was set up during the current quarter.

Legal expenses increased due mainly to the increase in ongoing cases.

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.

Depreciation and amortization decreased by $284,000, or 7.4%, during the quarter primarily due to closed locations.

Other gains, net .

Other gains, net for the quarter changed mainly due the sale of our Bombshells location in Austin, Texas, which was significantly impaired in a prior period, and the insurance recovery for a club razed by fire in a prior period.

See Note 5 to our unaudited condensed consolidated financial statements.

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.

For the three months ended December 31, 2024, and 2023, our consolidated operating margin was 19.5% and 17.8%, 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

2024 2023 2024 2023

Nightclubs $ 20,882 $ 20,369

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$ 13,906 $ 13,165

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).

Excluding certain items, the three months ended December 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 24 .

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 %

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

For the Three Months Ended December 31, 2024

Nightclubs Bombshells Other Corporate Total

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Amortization of intangibles 574 1 — 5 580

Impairment of assets 15,652 10,312 — — 25,964

Settlement of lawsuits 179 — — — 179

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Non-GAAP operating margin 33.4 % 6.7 % (99.4) % (11.7) % 17.8 %

For the Nine 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

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

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

Stock-based compensation — — — 470 470

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

Gain on insurance (48) — — (43) (91)

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

Non-GAAP operating income (loss) $ 20,959 $ 149 $ (196) $ (6,621) $ 14,291

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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.

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

2024 2023 2024 2023

Interest expense decreased by $64,000, or 1.5%, while interest income increased by $85,000, or 90.4%, during the quarter.

Gain on lease termination was from a settlement of lease obligation related to a closed Bombshells unit in a prior period.

Our total occupancy costs, which we define as the sum of operating lease expense and interest expense, were $5.8 million and $6.0 million for the quarters ended December 31, 2024, and 2023, respectively.

As a percentage of revenue, total occupancy costs were 8.0% and 8.2% during the quarters ended December 31, 2024, and 2023, respectively.

Income tax expense was $1.8 million and $1.8 million during the three months ended December 31, 2024, and 2023, respectively.

The effective income tax rate was 16.9% and 19.9% for the three months ended December 31, 2024, and 2023, 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 December 31, 2024 For the Three Months Ended December 31, 2023

Amount % Amount %

Federal statutory income tax expense $ 2,292 21.0 % $ 1,899 21.0 %

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Total income tax expense $ 1,847 16.9 % $ 1,799 19.9 %

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.

Income taxes increased in dollar amount due to a higher pretax income in the current quarter.

Effective income tax rate decreased due to higher tax credits.

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

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

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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).

(a) amortization of intangibles, (b) settlement of lawsuits, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) stock-based compensation, (f) gains or losses on lease termination, 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 17.7% and 19.9% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 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.

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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.

(a) depreciation and amortization, (b) income tax expense, (c) net interest expense, (d) settlement of lawsuits, (e) gains or losses on sale of businesses and assets, (f) gains or losses on insurance, (g) stock-based compensation, and (h) gains or losses on lease termination.

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, 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

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

Three Months Ended December 31,

Reconciliation of GAAP net income to Adjusted EBITDA

Net income attributable to RCIHH common stockholders $ 9,024 $ 7,226

Income tax expense 1,847 1,799

Interest expense, net 3,973 4,122

Depreciation and amortization 3,569 3,853

Impairment of assets 17,931 2,631 25,964 3,293

Settlement of lawsuits 179 —

Stock-based compensation 470 470

Loss (gain) on sale of businesses and assets 188 (105) 180 (692)

Gain on sale of businesses and assets (1,406) (3)

Gain on insurance (1,017) —

Gain on lease termination (979) —

Adjusted EBITDA $ 15,660 $ 17,467

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

Three Months Ended December 31,

Reconciliation of GAAP net income to non-GAAP net income

Net income attributable to RCIHH common stockholders $ 9,024 $ 7,226

Amortization of intangibles 580 659

Impairment of assets 17,931 2,631 25,964 3,293

Settlement of lawsuits 179 —

Stock-based compensation 470 470

Loss (gain) on sale of businesses and assets 188 (105) 180 (692)

Gain on sale of businesses and assets (1,406) (3)

Gain on insurance (1,017) —

Gain on lease termination (979) —

Net income tax effect 310 (220)

Non-GAAP net income $ 7,161 $ 8,132

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

Three Months Ended December 31,

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

Diluted shares 8,920,774 9,367,151

GAAP diluted earnings (loss) per share $ (0.56) $ 0.96 $ 0.30 $ 2.91

GAAP diluted earnings per share $ 1.01 $ 0.77

Amortization of intangibles 0.07 0.07

Impairment of assets 1.93 0.28 2.78 0.35

Settlement of lawsuits 0.02 0.00

Stock-based compensation 0.05 0.05

Loss (gain) on sale of businesses and assets 0.02 (0.01) 0.02 (0.07)

Gain on sale of businesses and assets (0.16) 0.00

Gain on insurance (0.11) 0.00

Gain on lease termination (0.11) 0.00

Net income tax effect 0.03 (0.02)

Non-GAAP diluted earnings per share $ 0.80 $ 0.87

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

Three Months Ended December 31,

Reconciliation of GAAP operating income to non-GAAP operating income

Income from operations $ 13,906 $ 13,165

Amortization of intangibles 580 659

Impairment of assets 17,931 2,631 25,964 3,293

Settlement of lawsuits 179 —

Stock-based compensation 470 470

Loss (gain) on sale of businesses and assets 188 (105) 180 (692)

Gain on sale of businesses and assets (1,406) (3)

Gain on insurance (1,017) —

Non-GAAP operating income $ 12,712 $ 14,291

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

2024 2023 2024 2023

Three Months Ended December 31,

Reconciliation of GAAP operating margin to non-GAAP operating margin

Income (loss) from operations

(3.3) % 20.1 % 6.9 % 21.0 %

Income from operations 19.5 % 17.8 %

Amortization of intangibles 0.8 % 0.9 %

Impairment of assets 23.5 % 3.4 % 11.7 % 1.5 %

Settlement of lawsuits 0.3 % 0.0 %

Stock-based compensation 0.7 % 0.6 %

Loss (gain) on sale of businesses and assets 0.2 % (0.1) % 0.1 % (0.3) %

Gain on sale of businesses and assets (2.0) % 0.0 %

Gain on insurance (1.4) % 0.0 %

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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.

At December 31, 2024, our cash and cash equivalents were approximately $34.7 million compared to $32.4 million at September 30, 2024.

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.

As of December 31, 2024, we had working capital of $0.8 million compared to a negative working capital of $793,000 as of September 30, 2024.

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 Nine Months Ended June 30,

For the Three Months Ended December 31,

Operating activities $ 13,344 $ 13,633

1 unchanged sentence

Financing activities (6,572) (8,421)

Net increase (decrease) in cash and cash equivalents

$ 13,924 $ (12,396)

Net increase in cash and cash equivalents $ 2,368 $ 132

Cash Flows from Operating Activities

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

For the Nine Months Ended June 30,

Net income (loss)

$ 2,773 $ 26,981

For the Three Months Ended December 31,

Net income $ 9,065 $ 7,244

Depreciation and amortization 3,569 3,853

Impairment of assets 25,964 3,293

Deferred income tax benefit

(6,419) (790)

Stock-based compensation 470 470

2 unchanged sentences

Net cash provided by operating activities $ 13,344 $ 13,633

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.

Although income from operations in the current quarter was higher than the same-quarter last year, net cash provided by operating activities during the current quarter slightly decreased due to lower conversion to cash of revenues earned partially offset by lower payments of operating liabilities in the current quarter as compared to last year.

In view of self-insuring most of our general liability and liquor insurance programs, we expect our payments for expected losses for those programs to be volatile in the near future until we have fully established a trust to fund our estimated self-insurance liability.

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 $ (5,754) $ (5,135)

Acquisition of businesses — (29,000)

Proceeds from sale of businesses and assets 129 —

2 unchanged sentences

Net cash used in investing activities $ (4,404) $ (5,080)

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,

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

For the Three Months Ended December 31,

New facilities, equipment, and intangible assets $ 4,478 $ 4,152

1 unchanged sentence

Total capital expenditures $ 5,754 $ 5,135

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.

The capital expenditures during the quarter ended December 31, 2024, and 2023 were composed mostly of construction projects in-progress.

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 $ 2,963 $ 701

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Payment of loan origination costs — (136)

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

Net cash used in financing activities $ (6,572) $ (8,421)

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.

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.

We purchased 66,000 shares of our common stock at an average price of $48.76 during the quarter ended December 31, 2024, while we purchased 37,954 shares of our common stock at an average price of $54.59 during the quarter ended December 31, 2023.

As of December 31, 2024, we have approximately $17.8 million authorization remaining to purchase additional shares.

We paid $0.07 per share in quarterly dividends during the quarter ended December 31, 2024, while we paid $0.06 per share during the quarter ended December 31, 2023.

We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the quarters ended December 31, 2024, and 2023.

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 $ 13,344 $ 13,633

1 unchanged sentence

Free cash flow $ 12,068 $ 12,650

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.

Our free cash flow for the quarter decreased by 4.6% compared to the comparable prior-year period primarily due to higher maintenance capital expenditures and lower conversion to cash of revenues earned, partially offset by lower payments of operating liabilities in the current quarter as compared to last year.

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.

Other than the impact of uncertainties caused by near-term macro environment, including commodity and labor inflation, 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 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):

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

2024 Increase

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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 includes acquiring existing units, opening new units after market analysis, and developing new club concepts that are consistent with our management and marketing skills as our capital and manpower allow.

All nine of the existing Bombshells restaurants as of December 31, 2024 were located in Texas, and we opened a new Bombshells location in Denver, Colorado, in January 2025.

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, 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.

As of December 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, 2024.

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