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 June 30, 2025, we operated a total of 70 establishments that offer live adult entertainment and restaurants and sports bars. 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 and nine months ended June 30, 2025, except as mentioned above, there were no significant changes in our accounting policies and estimates. 25 Table of Contents Results of Operations Highlights of the Company's operating results and cash flows are as follows, with comparisons against the same period of the prior year: Third Quarter Ended June 30, 2025 • Total revenues were $71.1 million compared to $76.2 million during the comparable prior-year quarter, a 6.6% decrease (Nightclubs revenue of $62.3 million compared to $62.8 million, a 0.8% decrease; and Bombshells revenue of $8.6 million compared to $13.1 million, a 34.5% decrease) • Consolidated same-store sales decreased by 4.9% (Nightclubs decreased by 3.7%, while Bombshells decreased by 13.5%) (refer to the definition of same-store sales in the discussion of revenues below) • Basic and diluted earnings per share (“EPS”) this quarter of $0.46 compared to loss per share of $0.56 during the comparable prior-year quarter (non-GAAP diluted EPS* of $0.77 compared to $1.35) • Net cash provided by operating activities was $13.8 million compared to $15.8 million during the comparable prior-year quarter, a 12.5% decrease (free cash flow* of $13.3 million compared to $13.8 million, a 3.2% decrease) Year-to-Date Period Ended June 30, 2025 • Total revenues $208.5 million compared to $222.4 million during the comparable prior-year nine-month period, a 6.2% decrease (Nightclubs revenue of $181.6 million compared to $183.2 million, a 0.9% decrease; and Bombshells revenue of $26.4 million compared to $38.6 million, a 31.6% decrease) • Consolidated same-store sales decreased by 2.5% (Nightclubs same-store sales decreased by 1.3%, while Bombshells decreased by 11.5%) • Basic and diluted EPS for the current nine months was $1.84 compared to $0.30 during the comparable prior-year period (non-GAAP diluted EPS* of $2.23 compared to $3.11) • Net cash provided by operating activities was $35.7 million compared to $40.2 million during the comparable prior-year period, a 11.3% decrease (free cash flow* of $32.3 million compared to $35.3 million, a 8.3% 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 $5.0 million, or 6.6%, versus the comparable prior-year quarter due primarily to the $4.7 million impact of closed locations and the $3.4 million impact of the 4.9% decline in consolidated same-store sales, partially offset by a $2.7 million increase in sales from new locations and the $326,000 impact of reopened clubs that were rebranded. Consolidated revenues for the nine-month period decreased by $13.8 million, or 6.2%, versus the comparable prior-year nine-month period primarily due to $13.2 million impact of closed locations and the $5.0 million impact of the 2.5% decline in consolidated same-store sales, partially offset by a $3.6 million increase in sales from new locations and the $708,000 impact of reopened clubs that were rebranded. 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. 26 Table of Contents Segment contribution to total revenues was as follows (in thousands, except percentages): Three Months Ended June 30, 2025 Mix Three Months Ended June 30, 2024 Mix Inc (Dec) $ Inc (Dec) % Nightclubs Sales of alcoholic beverages $ 26,338 42.3 % $ 27,413 43.6 % $ (1,075) (3.9) % Sales of food and merchandise 5,914 9.5 % 5,904 9.4 % 10 0.2 % Service revenues 25,166 40.4 % 25,103 40.0 % 63 0.3 % Other revenues 4,918 7.9 % 4,403 7.0 % 515 11.7 % 62,336 100.0 % 62,823 100.0 % (487) (0.8) % Bombshells Sales of alcoholic beverages 4,442 51.6 % 7,029 53.5 % (2,587) (36.8) % Sales of food and merchandise 4,123 47.9 % 5,832 44.4 % (1,709) (29.3) % Service revenues 3 — % 165 1.3 % (162) (98.2) % Other revenues 41 0.5 % 113 0.9 % (72) (63.7) % 8,609 100.0 % 13,139 100.0 % (4,530) (34.5) % Other Other revenues 200 100.0 % 218 100.0 % (18) (8.3) % $ 71,145 $ 76,180 $ (5,035) (6.6) % Nine Months Ended June 30, 2025 Mix Nine Months Ended June 30, 2024 Mix Inc (Dec) $ Inc (Dec) % Nightclubs Sales of alcoholic beverages $ 77,948 42.9 % $ 79,595 43.4 % $ (1,647) (2.1) % Sales of food and merchandise 17,169 9.5 % 16,490 9.0 % 679 4.1 % Service revenues 72,214 39.8 % 73,784 40.3 % (1,570) (2.1) % Other revenues 14,270 7.9 % 13,359 7.3 % 911 6.8 % 181,601 100.0 % 183,228 100.0 % (1,627) (0.9) % Bombshells Sales of alcoholic beverages 13,886 52.5 % 21,070 54.5 % (7,184) (34.1) % Sales of food and merchandise 12,385 46.9 % 17,116 44.3 % (4,731) (27.6) % Service revenues 48 0.2 % 167 0.4 % (119) (71.3) % Other revenues 106 0.4 % 288 0.7 % (182) (63.2) % 26,425 100.0 % 38,641 100.0 % (12,216) (31.6) % Other Other revenues 478 100.0 % 501 100.0 % (23) (4.6) % $ 208,504 $ 222,370 $ (13,866) (6.2) % Nightclubs revenues decreased by 0.8% during the third quarter compared to the same quarter last year primarily due to the $2.3 million impact of the decrease in same-store sales and the $871,000 impact of closed clubs, partially offset by the $2.3 million contribution of a newly acquired club and a $326,000 impact from newly rebranded clubs. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales decreased by 3.7%. By type of revenue, alcoholic beverage sales decreased by 3.9%; food, merchandise and other revenue increased by 5.1%; while service revenues increased by 0.3%. For the nine-month period, Nightclubs revenues decreased by 0.9% primarily due to the $3.1 million impact of closed clubs, partially offset by the $3.0 million contribution of a newly acquired club and a $708,000 impact from newly rebranded clubs. Same-store sales for the nine-month period decreased by 1.3%. By type of revenue, alcoholic beverage sales decreased by 2.1%; food, merchandise and other revenue increased by 5.3%; while service revenues decreased by 2.1%. 27 Table of Contents Bombshells third quarter revenues decreased by 34.5%, which was primarily due to the $3.8 million impact of closed or sold locations and the $1.1 million impact of the decrease in same-store sales, partially offset by the $383,000 increase caused by sales from a new location. By type of revenue, food and merchandise sales decreased by 29.3% while alcoholic beverage sales decreased by 36.8%. For the nine-month period, Bombshells revenues decreased by 31.6%, which was primarily caused by the $10.1 million impact of closed or sold locations and the $2.8 million impact from same-store sales decline. By type of revenue, food and merchandise sales decreased by 27.6% while alcoholic beverage sales decreased by 34.1%. Operating Expenses Total operating expenses, as a percent of revenues, decreased to 87.8% from 103.3% from last year’s third quarter, and decreased to 85.2% from 93.1% for the nine-month period. Year-over-year change was a $16.3 million decrease, or 20.7%, for the third quarter and a $29.4 million decrease, or 14.2%, 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 $1.4 million, or 13.0%, and for the nine-month period decreased by $3.8 million, or 12.2%, mainly due to lower sales. As a percent of total revenues, cost of goods sold decreased to 12.8% from 13.8% for the third quarter and decreased to 13.0% from 13.8% for the nine-month period. Nightclubs cost of goods sold during the quarter decreased to 11.3% from 11.6%, while Bombshells cost of goods sold decreased to 23.7% from 24.1%. For the nine-month period, Nightclubs cost of goods sold decreased to 11.4% from 11.7%, while Bombshells cost of goods sold slightly decreased to 23.5% from 23.8%. Cost of goods sold by segment is as follows (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 7,071 $ 7,315 $ 20,707 $ 21,512 Bombshells 2,037 3,164 6,211 9,187 Other 27 27 109 85 $ 9,135 $ 10,506 $ 27,027 $ 30,784 Salaries and wages . Salaries and wages decreased by $76,000, or 0.4%, for the quarter and decreased by $1.3 million, or 2.1%, for the nine-month period mainly due to closed locations. As a percent of total revenues, salaries and wages increased to 29.4% from 27.6% for the quarter and increased to 29.7% from 28.5% for the nine-month period mainly due to lower sales. Nightclubs increased to 22.9% from 21.7% for the quarter and increased to 23.3% from 22.1% for the nine-month period. Bombshells increased to 33.2% from 26.7% for the quarter and increased to 32.0% from 28.9% for the nine-month period. Corporate slightly decreased to 4.7% from 4.9% for the quarter and decreased to 4.9% from 5.0% for the nine-month period. Salaries and wages by segment are as follows (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 14,276 $ 13,653 $ 42,297 $ 40,486 Bombshells 2,860 3,507 8,458 11,174 Other 468 122 1,023 450 Corporate 3,312 3,710 10,193 11,189 $ 20,916 $ 20,992 $ 61,971 $ 63,299 28 Table of Contents Selling, general and administrative expenses . Total selling, general and administrative expenses decreased by $1.1 million, or 4.3%, for the quarter and decreased by $336,000, or 0.4%, for the nine-month period. Dollar amounts in the tables below are in thousands, except percentages. Three Months Ended June 30, 2025 Three Months Ended June 30, 2024 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 3,418 4.8 % $ 4,575 6.0 % $ 1,157 25.3 % Advertising and marketing 2,974 4.2 % 3,072 4.0 % 98 3.2 % Supplies and services 2,503 3.5 % 2,642 3.5 % 139 5.3 % Insurance 5,389 7.6 % 3,183 4.2 % (2,206) (69.3) % Legal 1,383 1.9 % 1,034 1.4 % (349) (33.8) % Lease 1,607 2.3 % 1,793 2.4 % 186 10.4 % Charge card fees 1,791 2.5 % 1,798 2.4 % 7 0.4 % Utilities 1,320 1.9 % 1,467 1.9 % 147 10.0 % Security 1,019 1.4 % 1,178 1.5 % 159 13.5 % Stock-based compensation 392 0.6 % 471 0.6 % 79 16.8 % Accounting and professional fees 1,259 1.8 % 910 1.2 % (349) (38.4) % Repairs and maintenance 1,221 1.7 % 1,154 1.5 % (67) (5.8) % Other 1,864 2.6 % 1,780 2.3 % (84) (4.7) % Total selling, general and administrative expenses $ 26,140 36.7 % $ 25,057 32.9 % $ (1,083) (4.3) % Nine Months Ended June 30, 2025 Nine Months Ended June 30, 2024 Better (Worse) Amount % of Revenues Amount % of Revenues Amount % Taxes and permits $ 10,664 5.1 % $ 12,584 5.7 % $ 1,920 15.3 % Advertising and marketing 8,537 4.1 % 9,539 4.3 % 1,002 10.5 % Supplies and services 7,459 3.6 % 8,073 3.6 % 614 7.6 % Insurance 13,495 6.5 % 9,763 4.4 % (3,732) (38.2) % Legal 4,138 2.0 % 2,883 1.3 % (1,255) (43.5) % Lease 4,746 2.3 % 5,402 2.4 % 656 12.1 % Charge card fees 5,189 2.5 % 5,212 2.3 % 23 0.4 % Utilities 4,199 2.0 % 4,414 2.0 % 215 4.9 % Security 3,121 1.5 % 3,876 1.7 % 755 19.5 % Stock-based compensation 980 0.5 % 1,412 0.6 % 432 30.6 % Accounting and professional fees 3,570 1.7 % 3,232 1.5 % (338) (10.5) % Repairs and maintenance 3,712 1.8 % 3,367 1.5 % (345) (10.2) % Other 5,437 2.6 % 5,154 2.3 % (283) (5.5) % Total selling, general and administrative expenses $ 75,247 36.1 % $ 74,911 33.7 % $ (336) (0.4) % Most of the decreases in selling, general and administrative expenses come from closed or sold Bombshells locations and from lower variable expenses caused by lower sales. Insurance expense increased due to the estimated self-insurance for general liability and liquor liability. Any unallocated self-insurance reserve remains in Corporate segment. Legal expenses increased due mainly to the increase in ongoing cases. 29 Table of Contents Selling, general and administrative expenses by segment are as follows (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 17,579 $ 17,535 $ 52,425 $ 51,482 Bombshells 3,311 4,449 10,123 14,179 Other 133 174 598 540 Corporate 5,117 2,899 12,101 8,710 $ 26,140 $ 25,057 $ 75,247 $ 74,911 Depreciation and amortization . Depreciation and amortization decreased by $9,000, or 0.2%, during the quarter and decreased by $401,000, or 3.4%, during the nine-month period primarily due to closed locations. Depreciation and amortization expenses by segment are as follows (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 3,311 $ 2,996 $ 9,440 $ 8,828 Bombshells 302 615 961 1,908 Other 13 3 40 7 Corporate 266 287 796 895 $ 3,892 $ 3,901 $ 11,237 $ 11,638 Impairment and other charges, net . Impairment and other charges, net changed mainly due to the sale during the first quarter of our Bombshells location in Austin, Texas, which was significantly impaired in a prior period; the insurance recovery received during the first and third quarters for a club razed by fire in a prior period; the decrease in impairment of assets during the current quarter and the nine-month period compared to last year; and the increase in lawsuit settlements during the current third quarter. See Notes 5 and 9 to our unaudited condensed consolidated financial statements. By segment, impairment and other charges, net are as follows (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 2,338 $ 7,684 $ 3,486 $ 15,890 Bombshells 12 10,318 (1,159) 10,322 Other — — — — Corporate (1) 258 (95) 240 $ 2,349 $ 18,260 $ 2,232 $ 26,452 Income (Loss) from Operations For the three months ended June 30, 2025, and 2024, our consolidated operating margin was 12.2% and (3.3)%, respectively, while for the nine months ended June 30, 2025, and 2024, our consolidated operating margin was 14.8% and 6.9%, respectively. Segment contribution to income (loss) from operations is presented in the table below (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Nightclubs $ 17,761 $ 13,640 $ 53,246 $ 45,030 Bombshells 87 (8,914) 1,831 (8,129) Other (441) (108) (1,292) (581) Corporate (8,694) (7,154) (22,995) (21,034) $ 8,713 $ (2,536) $ 30,790 $ 15,286 30 Table of Contents Excluding certain items, the three months ended June 30, 2025, and 2024 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 33 . Three Months Ended June 30, 2025 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 17,761 $ 87 $ (441) $ (8,694) $ 8,713 Amortization of intangibles 572 1 — 3 576 Settlement of lawsuits 3,281 — — — 3,281 Stock-based compensation — — — 392 392 Loss (gain) on sale of businesses and assets 191 12 — (1) 202 Gain on insurance (1,134) — — — (1,134) Non-GAAP operating income (loss) $ 20,671 $ 100 $ (441) $ (8,300) $ 12,030 GAAP operating margin 28.5 % 1.0 % (220.5) % (12.2) % 12.2 % Non-GAAP operating margin 33.2 % 1.2 % (220.5) % (11.7) % 16.9 % 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 % 31 Table of Contents Excluding certain items, the nine months ended June 30, 2025, and 2024 non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Nine Months Ended June 30, 2025 Nightclubs Bombshells Other Corporate Total Income (loss) from operations $ 53,246 $ 1,831 $ (1,292) $ (22,995) $ 30,790 Amortization of intangibles 1,718 3 — 12 1,733 Impairment of assets 1,780 — — — 1,780 Settlement of lawsuits 3,557 30 — — 3,587 Stock-based compensation — — — 980 980 Loss (gain) on sale of businesses and assets 300 (1,189) — (95) (984) Gain on insurance (2,151) — — — (2,151) Non-GAAP operating income (loss) $ 58,450 $ 675 $ (1,292) $ (22,098) $ 35,735 GAAP operating margin 29.3 % 6.9 % (270.3) % (11.0) % 14.8 % Non-GAAP operating margin 32.2 % 2.6 % (270.3) % (10.6) % 17.1 % 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 % Other Income/Expenses During the third quarter, interest expense decreased by $208,000, or 4.9%, and interest income decreased by $13,000, or 10.0%. During the nine-month period, interest expense decreased by $223,000, or 1.8%, while interest income increased by $115,000, or 35.9%. Gain on lease termination was from a settlement of lease obligation related to a closed Bombshells unit during the quarter ended December 31, 2024. Our total occupancy costs, which we define as the sum of operating lease expense and interest expense, were $5.6 million and $6.0 million for the quarters ended June 30, 2025, and 2024, respectively, and $17.0 million and $17.9 million for the nine months ended June 30, 2025, and 2024, respectively. As a percentage of revenue, total occupancy costs were 7.9% and 7.9% during the quarters ended June 30, 2025, and 2024, respectively, and 8.1% and 8.0% during the nine months ended June 30, 2025, and 2024, respectively. Although total occupancy costs decreased in dollars, percentages based on revenue increased due to lower sales. 32 Table of Contents Income Taxes Income taxes were an expense of $733,000 and $3.6 million during the three and nine months ended June 30, 2025, respectively, and a benefit of $1.4 million and an expense of $378,000 during the three and nine months ended June 30, 2024, respectively. The effective income tax rate was 15.3% and 18.3% for the three and nine months ended June 30, 2025, respectively, and 21.5% and 12.0% for the three and nine months ended June 30, 2024, respectively. The disproportionate tax rates during the nine months ended June 30, 2024, were caused by the decrease in the then-expected annual effective tax rate. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below (dollars in thousands). Three Months Ended June 30, 2025 Three Months Ended June 30, 2024 Amount % Amount % Federal statutory income tax expense $ 1,006 21.0 % $ (1,395) 21.0 % State income taxes, net of federal benefit 145 3.0 % (214) 3.2 % Permanent differences 83 1.7 % 22 (0.3) % Tax credit (509) (10.6) % 152 (2.3) % Other 8 0.2 % 9 (0.1) % Total income tax expense (benefit) $ 733 15.3 % $ (1,426) 21.5 % Nine Months Ended June 30, 2025 Nine Months Ended June 30, 2024 Amount % Amount % Federal statutory income tax expense $ 4,193 21.0 % $ 662 21.0 % State income taxes, net of federal benefit 561 2.8 % 135 4.3 % Permanent differences 210 1.1 % 100 3.2 % Tax credit (1,488) (7.5) % (528) (16.8) % Other 172 0.9 % 9 0.3 % Total income tax expense $ 3,648 18.3 % $ 378 12.0 % Income taxes increased due to a higher pretax income in the current quarter and the nine-month period. 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) 33 Table of Contents stock-based compensation, (g) gains or losses on lease termination, and (h) 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 17.4% and 11.7% effective tax rate of the pre-tax non-GAAP income before taxes for the nine months ended June 30, 2025, and 2024, 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. 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, (d) net interest expense, (e) settlement of lawsuits, (f) gains or losses on sale of businesses and assets, (g) gains or losses on insurance, (h) stock-based compensation, and (i) 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 and nine months ended June 30, 2025, and 2024 (in thousands, except per share, number of shares, and percentages): Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Reconciliation of GAAP net income (loss) to Adjusted EBITDA Net income (loss) attributable to RCIHH common stockholders $ 4,058 $ (5,233) $ 16,313 $ 2,767 Income tax expense (benefit) 733 (1,426) 3,648 378 Interest expense, net 3,915 4,110 11,797 12,135 Depreciation and amortization 3,892 3,901 11,237 11,638 Impairment of assets — 17,931 1,780 25,964 Settlement of lawsuits 3,281 141 3,587 308 Stock-based compensation 392 471 980 1,412 Loss (gain) on sale of businesses and assets 202 188 (984) 180 Gain on insurance (1,134) — (2,151) — Gain on lease termination — — (979) — Adjusted EBITDA $ 15,339 $ 20,083 $ 45,228 $ 54,782 34 Table of Contents Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Reconciliation of GAAP net income (loss) to non-GAAP net income Net income (loss) attributable to RCIHH common stockholders $ 4,058 $ (5,233) $ 16,313 $ 2,767 Amortization of intangibles 576 598 1,733 1,897 Impairment of assets — 17,931 1,780 25,964 Settlement of lawsuits 3,281 141 3,587 308 Stock-based compensation 392 471 980 1,412 Loss (gain) on sale of businesses and assets 202 188 (984) 180 Gain on insurance (1,134) — (2,151) — Gain on lease termination — — (979) — Net income tax effect (562) (1,554) (515) (3,475) Non-GAAP net income $ 6,813 $ 12,542 $ 19,764 $ 29,053 Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share Diluted shares 8,793,809 9,278,921 8,859,028 9,332,249 GAAP diluted earnings (loss) per share $ 0.46 $ (0.56) $ 1.84 $ 0.30 Amortization of intangibles 0.07 0.06 0.20 0.20 Impairment of assets 0.00 1.93 0.20 2.78 Settlement of lawsuits 0.37 0.02 0.40 0.03 Stock-based compensation 0.04 0.05 0.11 0.15 Loss (gain) on sale of businesses and assets 0.02 0.02 (0.11) 0.02 Gain on insurance (0.13) 0.00 (0.24) 0.00 Gain on lease termination 0.00 0.00 (0.11) 0.00 Net income tax effect (0.06) (0.17) (0.06) (0.37) Non-GAAP diluted earnings per share $ 0.77 $ 1.35 $ 2.23 $ 3.11 Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Reconciliation of GAAP operating income (loss) to non-GAAP operating income Income (loss) from operations $ 8,713 $ (2,536) $ 30,790 $ 15,286 Amortization of intangibles 576 598 1,733 1,897 Impairment of assets — 17,931 1,780 25,964 Settlement of lawsuits 3,281 141 3,587 308 Stock-based compensation 392 471 980 1,412 Loss (gain) on sale of businesses and assets 202 188 (984) 180 Gain on insurance (1,134) — (2,151) — Non-GAAP operating income $ 12,030 $ 16,793 $ 35,735 $ 45,047 35 Table of Contents Three Months Ended June 30, Nine Months Ended June 30, 2025 2024 2025 2024 Reconciliation of GAAP operating margin to non-GAAP operating margin Income (loss) from operations 12.2 % (3.3) % 14.8 % 6.9 % Amortization of intangibles 0.8 % 0.8 % 0.8 % 0.9 % Impairment of assets 0.0 % 23.5 % 0.9 % 11.7 % Settlement of lawsuits 4.6 % 0.2 % 1.7 % 0.1 % Stock-based compensation 0.6 % 0.6 % 0.5 % 0.6 % Loss (gain) on sale of businesses and assets 0.3 % 0.2 % (0.5) % 0.1 % Gain on insurance (1.6) % 0.0 % (1.0) % 0.0 % Non-GAAP operating income 16.9 % 22.0 % 17.1 % 20.3 % * 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. 36 Table of Contents Liquidity and Capital Resources At June 30, 2025, our cash and cash equivalents were approximately $29.3 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, 2025, we had negative working capital of $3.7 million compared to 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): Nine Months Ended June 30, 2025 2024 Operating activities $ 35,684 $ 40,233 Investing activities (22,087) (17,090) Financing activities (16,350) (9,219) Net increase (decrease) in cash and cash equivalents $ (2,753) $ 13,924 Cash Flows from Operating Activities Following are our summarized cash flows from operating activities (in thousands): Nine Months Ended June 30, 2025 2024 Net income $ 16,319 $ 2,773 Depreciation and amortization 11,237 11,638 Deferred income tax benefit (2,200) (6,419) Impairment of assets 1,780 25,964 Stock-based compensation 980 1,412 Net change in operating assets and liabilities 8,224 1,947 Other (656) 2,918 Net cash provided by operating activities $ 35,684 $ 40,233 Although income from operations in the current nine-month period was higher than the comparable last year, net cash provided by operating activities during the nine-month period decreased due to lower cash generated from revenues and higher payments of income taxes, partially offset by lower payments of operating liabilities and business interruption insurance received 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. 37 Table of Contents Cash Flows from Investing Activities Following are our cash flows from investing activities (in thousands): Nine Months Ended June 30, 2025 2024 Payments for property and equipment and intangible assets $ (12,289) $ (19,219) Acquisition of businesses (13,000) — Proceeds from sale of businesses and assets 1,086 1,950 Proceeds from insurance 1,893 — Proceeds from notes receivable 223 179 Net cash used in investing activities $ (22,087) $ (17,090) On January 21, 2025, the Company completed the acquisition of a club in the Detroit, Michigan, market for a total agreed acquisition price of $11.0 million, consisting of $3.0 million in cash and $5.0 million in a seller-financed 8.0% promissory note for the club, and $3.0 million in cash for the associated real estate. See Note 13 to our unaudited condensed consolidated financial statements. On April 7, 2025, the Company completed the acquisition of a club in West Columbia, South Carolina, for a total purchase price of $8.0 million, consisting of $3.75 million cash and $2.5 million in a seller-financed 7% promissory note for the club, and $1.75 million cash for the associated real estate. On June 13, 2025, the Company completed the acquisition of a club in Allentown, Pennsylvania, for a total purchase price of $2.0 million, consisting of $1.5 million cash and $500,000 in seller-financed 7% promissory note. See Note 13 to our unaudited condensed consolidated financial statements. Following is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2025, and 2024 (in thousands): Nine Months Ended June 30, 2025 2024 New facilities, equipment, and intangible assets $ 8,948 $ 14,239 Maintenance capital expenditures 3,341 4,980 Total capital expenditures $ 12,289 $ 19,219 The capital expenditures during the nine months ended June 30, 2025, and 2024 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): Nine Months Ended June 30, 2025 2024 Proceeds from debt obligations $ 9,175 $ 22,657 Payments on debt obligations (14,431) (17,137) Purchase of treasury stock (9,158) (12,775) Payment of dividends (1,856) (1,674) Payment of loan origination costs (80) (290) Net cash used in financing activities $ (16,350) $ (9,219) We purchased 198,200 shares of our common stock at an average price of $46.21 during the nine months ended June 30, 2025, while we purchased 267,849 shares of our common stock at an average price of $47.69 during the nine months ended June 30, 2024. As of June 30, 2025, we have approximately $11.9 million authorization remaining to purchase additional shares. 38 Table of Contents We paid $0.07 per share in quarterly dividends during the three quarters ended June 30, 2025, while we paid $0.06 per share during the three quarters ended June 30, 2024. See Note 6 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations as of June 30, 2025. 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, 2025, and 2024. 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): Nine Months Ended June 30, 2025 2024 Net cash provided by operating activities $ 35,684 $ 40,233 Less: Maintenance capital expenditures 3,341 4,980 Free cash flow $ 32,343 $ 35,253 Our free cash flow for the nine-month period decreased by 8.3% compared to the comparable prior-year period primarily due to lower conversion of revenues earned to cash, partially offset by lower payments of operating liabilities and maintenance capital expenditures in the current nine-month period 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. 39 Table of Contents The following table presents a summary of such indicators for the nine months ended June 30 (in thousands, except percentages): 2025 Increase (Decrease) 2024 Increase (Decrease) 2023 Sales of alcoholic beverages $ 91,834 (8.8) % $ 100,665 7.2 % $ 93,937 Sales of food and merchandise 29,554 (12.1) % 33,606 2.6 % 32,757 Service revenues 72,262 (2.3) % 73,951 (5.1) % 77,916 Other 14,854 5.0 % 14,148 1.6 % 13,930 Total revenues $ 208,504 (6.2) % $ 222,370 1.8 % $ 218,540 Net income attributable to RCIHH common stockholders $ 16,313 489.6 % $ 2,767 (89.8) % $ 27,055 Net cash provided by operating activities $ 35,684 (11.3) % $ 40,233 (14.4) % $ 47,004 Adjusted EBITDA* $ 45,228 (17.4) % $ 54,782 (15.5) % $ 64,832 Free cash flow* $ 32,343 (8.3) % $ 35,253 (16.2) % $ 42,055 Debt (end of period) $ 241,261 (1.7) % $ 245,400 0.6 % $ 243,823 * See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. 40 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. As of June 30, 2025, nine of the ten existing Bombshells restaurants were located in Texas, with one location in Denver, Colorado. 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. 41 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. As of June 30, 2025, 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.