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, 2024. 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. 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. 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, 2024, filed with the SEC on December 16, 2024. 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. 20 Table of Contents Results of Operations 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 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. Revenues 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 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. Segment contribution to total revenues was as follows (in thousands, except percentages): Three Months Ended December 31, 2024 Mix Three Months Ended December 31, 2023 Mix Inc (Dec) $ Inc (Dec) % Nightclubs Sales of alcoholic beverages $ 27,035 43.8 % $ 26,236 43.0 % $ 799 3.0 % Sales of food and merchandise 5,736 9.3 % 5,240 8.6 % 496 9.5 % Service revenues 24,178 39.2 % 25,119 41.2 % (941) (3.7) % Other revenues 4,775 7.7 % 4,438 7.3 % 337 7.6 % 61,724 100.0 % 61,033 100.0 % 691 1.1 % Bombshells Sales of alcoholic beverages 5,153 53.7 % 7,080 55.6 % (1,927) (27.2) % Sales of food and merchandise 4,370 45.6 % 5,562 43.7 % (1,192) (21.4) % Service revenues 3 — % — — % 3 100.0 % Other revenues 61 0.6 % 89 0.7 % (28) (31.5) % 9,587 100.0 % 12,731 100.0 % (3,144) (24.7) % Other Other revenues 172 100.0 % 143 100.0 % 29 20.3 % $ 71,483 $ 73,907 $ (2,424) (3.3) % 21 Table of Contents 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%. 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, 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 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 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 . 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 December 31, 2024 For the Three Months Ended December 31, 2023 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 3,828 5.4 % $ 4,042 5.5 % $ 214 5.3 % Advertising and marketing 2,962 4.1 % 3,474 4.7 % 512 14.7 % Supplies and services 2,488 3.5 % 2,695 3.6 % 207 7.7 % Insurance 5,283 7.4 % 3,315 4.5 % (1,968) (59.4) % Legal 1,386 1.9 % 733 1.0 % (653) (89.1) % Lease 1,602 2.2 % 1,824 2.5 % 222 12.2 % Charge card fees 1,748 2.4 % 1,732 2.3 % (16) (0.9) % Utilities 1,371 1.9 % 1,485 2.0 % 114 7.7 % Security 1,084 1.5 % 1,411 1.9 % 327 23.2 % Stock-based compensation 470 0.7 % 470 0.6 % — — % Accounting and professional fees 1,134 1.6 % 1,186 1.6 % 52 4.4 % Repairs and maintenance 1,203 1.7 % 1,099 1.5 % (104) (9.5) % Other 1,648 2.3 % 1,735 2.3 % 87 5.0 % Total selling, general and administrative expenses $ 26,207 36.7 % $ 25,201 34.1 % $ (1,006) (4.0) % 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 $284,000, or 7.4%, during the quarter primarily due to closed locations. 22 Table of Contents 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 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 December 31, 2024 2023 Nightclubs $ 20,882 $ 20,369 Bombshells 1,971 86 Other (171) (196) Corporate (8,776) (7,094) $ 13,906 $ 13,165 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 December 31, 2024 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 20,882 $ 1,971 $ (171) $ (8,776) $ 13,906 Amortization of intangibles 574 1 — 5 580 Settlement of lawsuits 179 — — — 179 Stock-based compensation — — — 470 470 Loss (gain) on sale of businesses and assets 16 (1,330) — (92) (1,406) Non-GAAP operating income (loss) $ 20,634 $ 642 $ (171) $ (8,393) $ 12,712 GAAP operating margin 33.8 % 20.6 % (99.4) % (12.3) % 19.5 % Non-GAAP operating margin 33.4 % 6.7 % (99.4) % (11.7) % 17.8 % For the Three Months Ended December 31, 2023 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 20,369 $ 86 $ (196) $ (7,094) $ 13,165 Amortization of intangibles 591 63 — 5 659 Stock-based compensation — — — 470 470 Gain on sale of businesses and assets (1) — — (2) (3) Non-GAAP operating income (loss) $ 20,959 $ 149 $ (196) $ (6,621) $ 14,291 GAAP operating margin 33.4 % 0.7 % (137.1) % (9.6) % 17.8 % Non-GAAP operating margin 34.3 % 1.2 % (137.1) % (9.0) % 19.3 % Other Income/Expenses 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. 23 Table of Contents Income Taxes 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 % State income taxes, net of federal benefit 300 2.7 % 310 3.4 % Permanent differences 107 1.0 % 42 0.5 % Tax credit (770) (7.1) % (452) (5.0) % Other (82) (0.8) % — — % Total income tax expense $ 1,847 16.9 % $ 1,799 19.9 % 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 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) 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. 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) 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. 24 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) 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. 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 months ended December 31, 2024, and 2023 (in thousands, except per share, number of shares, and percentages): Three Months Ended December 31, 2024 2023 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 Settlement of lawsuits 179 — Stock-based compensation 470 470 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 December 31, 2024 2023 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 Settlement of lawsuits 179 — Stock-based compensation 470 470 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 25 Table of Contents Three Months Ended December 31, 2024 2023 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 per share $ 1.01 $ 0.77 Amortization of intangibles 0.07 0.07 Settlement of lawsuits 0.02 0.00 Stock-based compensation 0.05 0.05 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 December 31, 2024 2023 Reconciliation of GAAP operating income to non-GAAP operating income Income from operations $ 13,906 $ 13,165 Amortization of intangibles 580 659 Settlement of lawsuits 179 — Stock-based compensation 470 470 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 December 31, 2024 2023 Reconciliation of GAAP operating margin to non-GAAP operating margin Income from operations 19.5 % 17.8 % Amortization of intangibles 0.8 % 0.9 % Settlement of lawsuits 0.3 % 0.0 % Stock-based compensation 0.7 % 0.6 % Gain on sale of businesses and assets (2.0) % 0.0 % Gain on insurance (1.4) % 0.0 % Non-GAAP operating income 17.8 % 19.3 % * 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. 26 Table of Contents Liquidity and Capital Resources 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 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. 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 Three Months Ended December 31, 2024 2023 Operating activities $ 13,344 $ 13,633 Investing activities (4,404) (5,080) Financing activities (6,572) (8,421) 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 Three Months Ended December 31, 2024 2023 Net income $ 9,065 $ 7,244 Depreciation and amortization 3,569 3,853 Deferred income tax benefit (389) — Stock-based compensation 470 470 Net change in operating assets and liabilities 2,521 1,122 Other (1,892) 944 Net cash provided by operating activities $ 13,344 $ 13,633 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. 27 Table of Contents Cash Flows from Investing Activities Following are our cash flows from investing activities (in thousands): For the Three Months Ended December 31, 2024 2023 Payments for property and equipment and intangible assets $ (5,754) $ (5,135) Proceeds from sale of businesses and assets 129 — Proceeds from insurance 1,150 — Proceeds from notes receivable 71 55 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 three months ended December 31, 2024, and 2023 (in thousands): For the Three Months Ended December 31, 2024 2023 New facilities, equipment, and intangible assets $ 4,478 $ 4,152 Maintenance capital expenditures 1,276 983 Total capital expenditures $ 5,754 $ 5,135 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. 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 Three Months Ended December 31, 2024 2023 Proceeds from debt obligations $ 2,963 $ 701 Payments on debt obligations (5,694) (6,352) Purchase of treasury stock (3,218) (2,072) Payment of dividends (623) (562) Payment of loan origination costs — (136) Net cash used in financing activities $ (6,572) $ (8,421) 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. 28 Table of Contents 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 Three Months Ended December 31, 2024 2023 Net cash provided by operating activities $ 13,344 $ 13,633 Less: Maintenance capital expenditures 1,276 983 Free cash flow $ 12,068 $ 12,650 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 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 quarters ended December 31 (in thousands, except percentages): 2024 Increase (Decrease) 2023 Increase (Decrease) 2022 Sales of alcoholic beverages $ 32,188 (3.4) % $ 33,316 12.4 % $ 29,650 Sales of food and merchandise 10,106 (6.4) % 10,802 4.4 % 10,347 Service revenues 24,181 (3.7) % 25,119 (1.7) % 25,563 Other 5,008 7.2 % 4,670 5.9 % 4,408 Total revenues $ 71,483 (3.3) % $ 73,907 5.6 % $ 69,968 Net income attributable to RCIHH common stockholders $ 9,024 24.9 % $ 7,226 (29.4) % $ 10,238 Net cash provided by operating activities $ 13,344 (2.1) % $ 13,633 (8.5) % $ 14,895 Adjusted EBITDA* $ 15,660 (10.3) % $ 17,467 (14.6) % $ 20,459 Free cash flow* $ 12,068 (4.6) % $ 12,650 (2.9) % $ 13,031 Debt (end of period) $ 235,529 0.6 % $ 234,113 10.8 % $ 211,234 * See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. 29 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, 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. 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. 30 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. 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.