# RCI Hospitality Holdings, Inc.: Form 10-Q for the period ended Dec 31, 2023

- Company: [RCI Hospitality Holdings, Inc.](/companies/rick.md) (CIK 935419)
- Form: 10-Q
- Filed: 2024-02-08
- Accepted by EDGAR: Feb 8, 2024, 21:10 ET
- Period: 2023-12-31
- Accession: 0001628280-24-003873
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/935419/000162828024003873/rick-20231231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/935419/000162828024003873/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-10-01 to 2023-12-31 | $73.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-10-01 to 2023-12-31 | $25.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-10-01 to 2023-12-31 | $13.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-10-01 to 2023-12-31 | $4.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-10-01 to 2023-12-31 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-10-01 to 2023-12-31 | $7.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-10-01 to 2023-12-31 | $0.77 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-10-01 to 2023-12-31 | $0.77 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-10-01 to 2023-12-31 | 9,367,151 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-10-01 to 2023-12-31 | $13.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-10-01 to 2023-12-31 | $5.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2023-10-01 to 2023-12-31 | $562.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2023-10-01 to 2023-12-31 | $2.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-12-31 | $21.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-12-31 | $45.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-12-31 | $619.2m | us-gaap:Assets |
| Current liabilities | at 2023-12-31 | $54.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-12-31 | $332.8m | us-gaap:Liabilities |
| Long-term debt | at 2023-12-31 | $214.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-12-31 | $19.8m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2023-12-31 | $286.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,430 characters.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2023.

### Overview

RCI Hospitality Holdings, Inc. is a holding company that, through its subsidiaries, engages in businesses that offer live adult entertainment and/or high-quality dining experiences to its guests. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc.

Through our subsidiaries, as of December 31, 2023, we operated a total of 69 establishments that offer live adult entertainment, including one food hall. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

### Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 filed with the SEC on December 14, 2023.

During the three months ended December 31, 2023, there were no significant changes in our accounting policies and estimates.

### Results of Operations

Highlights of the Company's operating results during the quarter ended December 31, 2023 are as follows:

- Total revenues were $73.9 million compared to $70.0 million during the comparable prior-year quarter, a 5.6% increase (Nightclubs revenue of $61.0 million compared to $56.3 million, an 8.4% increase; and Bombshells revenue of $12.7 million compared to $13.4 million, a 5.2% decrease)
- Consolidated same-store sales decreased by 9.8% (Nightclubs decreased by 7.2% while Bombshells decreased by 20.3%) (refer to the definition of same-store sales in the discussion of revenues below)
- Basic and diluted earnings per share (“EPS”) of $0.77 compared to $1.11 (non-GAAP diluted EPS\* of $0.87 compared to $1.19) during the comparable prior-year quarter
- Net cash provided by operating activities of $13.6 million compared to $14.9 million during the comparable prior-year quarter, an 8.5% decrease (free cash flow\* of $12.7 million compared to $13.0 million, a 2.9% decrease)

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

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

| Revenues | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Sales of alcoholic beverages | 45.1% | 42.4% |
| Sales of food and merchandise | 14.6% | 14.8% |
| Service revenues | 34.0% | 36.5% |
| Other | 6.3% | 6.3% |
| Total revenues | 100.0% | 100.0% |
| Operating expenses |  |  |
| Cost of goods sold |  |  |
| Alcoholic beverages sold | 18.9% | 18.1% |
| Food and merchandise sold | 37.4% | 34.7% |
| Service and other | 0.1% | 0.2% |
| Total cost of goods sold (exclusive of items shown separately below) | 14.0% | 12.9% |
| Salaries and wages | 28.9% | 26.7% |
| Selling, general and administrative | 34.1% | 32.5% |
| Depreciation and amortization | 5.2% | 4.7% |
| Other charges, net | —% | (0.9)% |
| Total operating expenses | 82.2% | 75.8% |
| Income from operations | 17.8% | 24.2% |
| Other income (expenses) |  |  |
| Interest expense | (5.7)% | (5.3)% |
| Interest income | 0.1% | 0.1% |
| Income before income taxes | 12.2% | 19.0% |
| Income tax expense | 2.4% | 4.3% |
| Net income | 9.8% | 14.7% |

\* Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

#### Revenues

Consolidated revenues for the first quarter increased by $3.9 million, or 5.6%, versus the comparable prior-year quarter due primarily to a 15.0%, or $10.5 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $6.7 million impact of the decrease in consolidated same-stores sales.

We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily until its next full quarter of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.

Segment contribution to total revenues was as follows (in thousands, except percentages):

| Nightclubs | Three Months Ended December 31, 2023 | Mix | Three Months Ended December 31, 2022 | Mix | Inc (Dec) $ | Inc (Dec) % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales of alcoholic beverages | $26,236 | 43.0% | $22,098 | 39.2% | $4,138 | 18.7% |
| Sales of food and merchandise | 5,240 | 8.6% | 4,594 | 8.2% | 646 | 14.1% |
| Service revenues | 25,119 | 41.2% | 25,533 | 45.3% | (414) | (1.6)% |
| Other revenues | 4,438 | 7.3% | 4,100 | 7.3% | 338 | 8.2% |
|  | 61,033 | 100.0% | 56,325 | 100.0% | 4,708 | 8.4% |
| Bombshells |  |  |  |  |  |  |
| Sales of alcoholic beverages | 7,080 | 55.6% | 7,552 | 56.2% | (472) | (6.3)% |
| Sales of food and merchandise | 5,562 | 43.7% | 5,753 | 42.8% | (191) | (3.3)% |
| Service revenues | — | 0.0% | 30 | 0.2% | (30) | (100.0)% |
| Other revenues | 89 | 0.7% | 96 | 0.7% | (7) | (7.3)% |
|  | 12,731 | 100.0% | 13,431 | 100.0% | (700) | (5.2)% |
| Other |  |  |  |  |  |  |
| Other revenues | 143 | 100.0% | 212 | 100.0% | (69) | (32.5)% |
|  | $73,907 |  | $69,968 |  | $3,939 | 5.6% |

Nightclubs revenues increased by 8.4% during the first quarter compared to the same quarter last year primarily due to the $8.9 million contribution of newly acquired clubs, partially offset by the $4.0 million impact of the decrease in same-store sales. 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 7.2%. By type of revenue, alcoholic beverage sales increased by 18.7%, food, merchandise and other revenue increased by 11.3%, while service revenues decreased by 1.6%.

Bombshells revenues decreased by 5.2%, of which 20.3% was for same-store sales decrease with the offsetting increase caused by two new locations and a food hall. By type of revenue, food and merchandise sales decreased by 3.3% while alcoholic beverage sales decreased by 6.3%.

#### Operating Expenses

Total operating expenses, as a percent of revenues, increased to 82.2% from 75.8% from last year’s first quarter, with a $7.7 million increase, or 14.5%, which was mainly caused by costs and expenses directly related to higher sales in the current-year first quarter, with the impact of fixed expenses on clubs and restaurants having decreases in their same-stores sales. Significant contributors to the changes in operating expenses are explained below.

*Cost of goods sold*. Cost of goods sold for the first quarter increased by $1.4 million, or 15.0%, mainly due to higher sales. As a percent of total revenues, cost of goods sold increased to 14.0% from 12.9% mainly due to the sales mix decrease in service revenue. Nightclubs cost of goods sold increased to 12.0% from 10.5%, while Bombshells cost of goods sold increased to 23.7% from 22.9%. Both increases in percent to segment revenue were caused mainly by shift in sales mix toward lower margin sales type.

*Salaries and wages*. Salaries and wages increased by $2.7 million, or 14.2%, for the first quarter due to increase in personnel from newly acquired clubs and new Bombshells openings, work shifts to accommodate the increase in sales, and the impact of minimum wage increases in certain states and cities. As a percent of total revenues, salaries and wages increased to 28.9% from 26.7% due to wage inflation. Nightclubs increased to 22.0% from 20.8% and Bombshells increased to 31.1% from 26.5%, while corporate increased to 5.1% from 4.7%.

*Selling, general and administrative expenses*. Selling, general and administrative expenses increased by $2.5 million, or 10.9%, primarily due to increased variable expenses related to higher sales during the current-year first quarter. Dollar amounts in the tables below are in thousands, except percentages.

|  | For the Three Months Ended December 31, 2023 Amount | % of Revenues | For the Three Months Ended December 31, 2022 Amount | % of Revenues | Better (Worse) Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxes and permits | $4,042 | 5.5% | $2,684 | 3.8% | $(1,358) | (50.6)% |
| Advertising and marketing | 3,474 | 4.7% | 2,670 | 3.8% | (804) | (30.1)% |
| Supplies and services | 2,695 | 3.6% | 2,424 | 3.5% | (271) | (11.2)% |
| Insurance | 3,315 | 4.5% | 2,582 | 3.7% | (733) | (28.4)% |
| Legal | 733 | 1.0% | 985 | 1.4% | 252 | 25.6% |
| Lease | 1,824 | 2.5% | 1,762 | 2.5% | (62) | (3.5)% |
| Charge card fees | 1,732 | 2.3% | 1,897 | 2.7% | 165 | 8.7% |
| Utilities | 1,485 | 2.0% | 1,271 | 1.8% | (214) | (16.8)% |
| Security | 1,411 | 1.9% | 1,164 | 1.7% | (247) | (21.2)% |
| Stock-based compensation | 470 | 0.6% | 941 | 1.3% | 471 | 50.1% |
| Accounting and professional fees | 1,186 | 1.6% | 1,518 | 2.2% | 332 | 21.9% |
| Repairs and maintenance | 1,099 | 1.5% | 1,164 | 1.7% | 65 | 5.6% |
| Other | 1,735 | 2.3% | 1,670 | 2.4% | (65) | (3.9)% |
| Total selling, general and administrative expenses | $25,201 | 34.1% | $22,732 | 32.5% | $(2,469) | (10.9)% |

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.

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

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

#### Income (Loss) from Operations

For the quarter ended December 31, 2023 and 2022, our consolidated operating margin was 17.8% and 24.2%, respectively. Segment contribution to income (loss) from operations is presented in the table below (in thousands):

|  | For the Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Nightclubs | $20,369 | $22,740 |
| Bombshells | 86 | 1,847 |
| Other | (196) | (185) |
| Corporate | (7,094) | (7,504) |
|  | $13,165 | $16,898 |

23

Excluding certain items, the first quarter ended December 31, 2023 and 2022 non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 26.

|  | 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 |
| Gain on sale of businesses and assets | (1) | — | — | (2) | (3) |
| Stock-based compensation | — | — | — | 470 | 470 |
| 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% |

|  | For the Three Months Ended December 31, 2022 Nightclubs | Bombshells | Other | Corporate | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Income (loss) from operations | $22,740 | $1,847 | $(185) | $(7,504) | $16,898 |
| Amortization of intangibles | 628 | 2 | 61 | 4 | 695 |
| Gain on sale of businesses and assets | (569) | — | — | (21) | (590) |
| Gain on insurance | (48) | — | — | (16) | (64) |
| Stock-based compensation | — | — | — | 941 | 941 |
| Non-GAAP operating income (loss) | $22,751 | $1,849 | $(124) | $(6,596) | $17,880 |
| GAAP operating margin | 40.4% | 13.8% | (87.3)% | (10.7)% | 24.2% |
| Non-GAAP operating margin | 40.4% | 13.8% | (58.5)% | (9.4)% | 25.6% |

#### Other Income/Expenses

Interest expense increased by $529,000, or 14.3%, primarily caused by a higher average debt balance mostly from seller-financed promissory notes from last years' acquisitions.

Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $6.0 million and $5.4 million for the quarters ended December 31, 2023 and 2022, respectively. As a percentage of revenue, total occupancy costs were 8.2% and 7.8% during the quarters ended December 31, 2023 and 2022, respectively, primarily due to the interest from higher average debt balance.

#### Income Taxes

Income tax expense was $1.8 million and $3.0 million during the three months ended December 31, 2023 and 2022, respectively. The effective income tax expense rate was 19.9% and 22.8% for the three months ended December 31, 2023 and 2022, respectively. 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, 2023 | 2022 |
| --- | ---: | ---: |
| Federal statutory income tax expense | 21.0% | 21.0% |
| State income taxes, net of federal benefit | 3.4% | 4.0% |
| Permanent differences | 0.5% | 0.5% |
| Tax credit | (5.0)% | (2.8)% |
| Other | —% | 0.1% |
| Total income tax expense | 19.9% | 22.8% |

Income taxes decreased in dollar amount due to the lower pretax income in the current first quarter. Effective income tax rate decreased due to the acquisition of Texas-based clubs at the end of last year's second quarter and the additional tax credits from those acquisitions.

### Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:

*Non-GAAP Operating Income and Non-GAAP Operating Margin.* We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, and (d) 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 attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) stock-based compensation, and (e) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 19.9% and 22.7% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 31, 2023 and 2022, respectively, and the GAAP income tax expense (benefit). 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 attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, and (f) stock-based compensation. 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, 2023 and 2022 (in thousands, except per share, number of shares and percentages):

| Reconciliation of GAAP net income to Adjusted EBITDA | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income attributable to RCIHH common stockholders | $7,226 | $10,238 |
| Income tax expense | 1,799 | 3,031 |
| Interest expense, net | 4,122 | 3,596 |
| Depreciation and amortization | 3,853 | 3,307 |
| Stock-based compensation | 470 | 941 |
| Gain on sale of businesses and assets | (3) | (590) |
| Gain on insurance | — | (64) |
| Adjusted EBITDA | $17,467 | $20,459 |

| Reconciliation of GAAP net income to non-GAAP net income | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income attributable to RCIHH common stockholders | $7,226 | $10,238 |
| Amortization of intangibles | 659 | 695 |
| Stock-based compensation | 470 | 941 |
| Gain on sale of businesses and assets | (3) | (590) |
| Gain on insurance | — | (64) |
| Net income tax effect | (220) | (200) |
| Non-GAAP net income | $8,132 | $11,020 |

| Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Diluted shares | 9,367,151 | 9,230,258 |
| GAAP diluted earnings per share | $0.77 | $1.11 |
| Amortization of intangibles | 0.07 | 0.08 |
| Stock-based compensation | 0.05 | 0.10 |
| Gain on sale of businesses and assets | 0.00 | (0.06) |
| Gain on insurance | 0.00 | (0.01) |
| Net income tax effect | (0.02) | (0.02) |
| Non-GAAP net income | $0.87 | $1.19 |

26

| Reconciliation of GAAP operating income to non-GAAP operating income | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Income from operations | $13,165 | $16,898 |
| Amortization of intangibles | 659 | 695 |
| Stock-based compensation | 470 | 941 |
| Gain on sale of businesses and assets | (3) | (590) |
| Gain on insurance | — | (64) |
| Non-GAAP operating income | $14,291 | $17,880 |

| Reconciliation of GAAP operating margin to non-GAAP operating margin | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Income from operations | 17.8% | 24.2% |
| Amortization of intangibles | 0.9% | 1.0% |
| Stock-based compensation | 0.6% | 1.3% |
| Gain on sale of businesses and assets | 0.0% | (0.8)% |
| Gain on insurance | 0.0% | (0.1)% |
| Non-GAAP operating income | 19.3% | 25.6% |

\* 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.

### Liquidity and Capital Resources

At December 31, 2023, our cash and cash equivalents were approximately $21.2 million compared to $21.0 million at September 30, 2023. Because of the large volume of cash we handle, we have very stringent cash controls. As of December 31, 2023, we had negative working capital of $9.0 million compared to negative working capital of $10.5 million as of September 30, 2023. 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, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $13,633 | $14,895 |
| Investing activities | (5,080) | (13,650) |
| Financing activities | (8,421) | (3,117) |
| Net increase (decrease) in cash and cash equivalents | $132 | $(1,872) |

#### Cash Flows from Operating Activities

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

|  | For the Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income | $7,244 | $10,271 |
| Depreciation and amortization | 3,853 | 3,307 |
| Stock-based compensation | 470 | 941 |
| Net change in operating assets and liabilities | 1,122 | 263 |
| Other | 944 | 113 |
| Net cash provided by operating activities | $13,633 | $14,895 |

Net cash provided by operating activities this current quarter decreased from last year's comparable quarter primarily due to lower income from operations and higher interest expense paid.

#### Cash Flows from Investing Activities

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

|  | For the Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Payments for property and equipment and intangible assets | $(5,135) | $(12,553) |
| Acquisition of businesses | — | (4,000) |
| Proceeds from sale of businesses and assets | — | 2,784 |
| Proceeds from insurance | — | 64 |
| Proceeds from notes receivable | 55 | 55 |
| Net cash used in investing activities | $(5,080) | $(13,650) |

Following is a breakdown of our payments for property and equipment and intangible assets for the quarter ended December 31, 2023 and 2022 (in thousands):

|  | For the Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| New facilities, equipment, and intangible assets | $4,152 | $10,689 |
| Maintenance capital expenditures | 983 | 1,864 |
| Total capital expenditures | $5,135 | $12,553 |

The capital expenditures during the quarter ended December 31, 2023 were composed mostly of construction projects in-progress, while those during the quarter ended December 31, 2022 were composed primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. 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, 2023 | 2022 |
| --- | ---: | ---: |
| Proceeds from debt obligations | $701 | $1,500 |
| Payments on debt obligations | (6,352) | (3,361) |
| Purchase of treasury stock | (2,072) | (98) |
| Payment of dividends | (562) | (462) |
| Payment of loan origination costs | (136) | (96) |
| Share in return of investment by noncontrolling partner | — | (600) |
| Net cash used in financing activities | $(8,421) | $(3,117) |

We purchased 37,954 shares of our common stock at an average price of $54.59 during the quarter ended December 31, 2023, while we purchased 1,500 shares of our common stock at an average price of $65.02 during the quarter ended December 31, 2022. As of December 31, 2023, we have approximately $14.6 million authorization remaining to purchase additional shares.

We paid $0.06 per share for dividends during the first quarter ended December 31, 2023, while we paid $0.05 per share during the first quarter ended December 31, 2022.

See Note 6 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations. We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the three months ended December 31, 2023 and 2022.

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, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $13,633 | $14,895 |
| Less: Maintenance capital expenditures | 983 | 1,864 |
| Free cash flow | $12,650 | $13,031 |

Our free cash flow for the quarter decreased by 2.9% compared to the comparable prior-year quarter primarily due to lower income from operations and higher interest expense paid, partially offset lower maintenance capital expenditures paid.

We do not include capital expenditures related to new facilities construction, equipment and intangible assets as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow.

Other than the impact of uncertainties caused by near-term macro environment, including commodity and labor inflation and the lingering effect of the COVID-19 pandemic, and our contractual debt and lease obligations, we are not aware of any event or trend that would adversely impact our liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt. We continue to monitor the macro environment and will adjust our overall approach to capital allocation as events and trends unfold.

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

|  | 2023 | Increase (Decrease) | 2022 | Increase (Decrease) | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Sales of alcoholic beverages | $33,316 | 12.4% | $29,650 | 12.2% | $26,431 |
| Sales of food and merchandise | 10,802 | 4.4% | 10,347 | (5.0)% | 10,894 |
| Service revenues | 25,119 | (1.7)% | 25,563 | 22.5% | 20,876 |
| Other | 4,670 | 5.9% | 4,408 | 21.3% | 3,635 |
| Total revenues | $73,907 | 5.6% | $69,968 | 13.2% | $61,836 |
| Net income attributable to RCIHH common stockholders | $7,226 | (29.4)% | $10,238 | (3.2)% | $10,575 |
| Net cash provided by operating activities | $13,633 | (8.5)% | $14,895 | (8.4)% | $16,264 |
| Adjusted EBITDA\* | $17,467 | (14.6)% | $20,459 | 13.9% | $17,965 |
| Free cash flow\* | $12,650 | (2.9)% | $13,031 | (14.6)% | $15,266 |
| Debt (end of period) | $234,113 | 10.8% | $211,234 | 30.5% | $161,850 |

\* See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations.

### Impact of Inflation

To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future.

### Seasonality

Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

### Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions.

Based on our current capital allocation strategy:

- We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale;
- We consider disposing of underperforming units to free up capital for more productive use;
- We consider buying back our own stock if the after-tax yield on free cash flow is above 10%;
- We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale.

### Growth Strategy

We believe that we can continue to grow organically and through careful entry into markets with high growth potential. Our growth strategy includes acquiring existing units, opening new units after market analysis, developing new club concepts that are consistent with our management and marketing skills, franchising our Bombshells brand, and developing and opening our Bombshells concept as our capital and manpower allow.

All thirteen of the existing Bombshells as of December 31, 2023 were located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.

We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy.

## Market risk

As filed, 180 characters.

As of December 31, 2023, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2023.

## Controls and procedures

As filed, 6,691 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that the information required to be filed or submitted with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management of the company with the participation of its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, an evaluation was performed under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on their evaluation, they have concluded that our disclosure controls and procedures were not effective as of December 31, 2023. This determination is based on the previously reported material weaknesses management previously identified in our internal control over financial reporting, as described below. We are in the process of remediating the material weaknesses in our internal control, as described below. We believe the completion of these processes should remedy our disclosure controls and procedures. We will continue to monitor these issues.

### Previously Reported Material Weakness in Internal Control Over Financial Reporting

In our Annual Report for the year ended September 30, 2023, filed with the SEC on December 14, 2023, management concluded that our internal control over financial reporting was not effective as of September 30, 2023. In the evaluation, management identified material weaknesses in internal control related (1) proper design and implementation of controls over management's review of the Company's accounting for business combinations, specifically related to the identification of and accounting for intangible assets acquired in a business combination, and over the precision of management's review of certain valuation assumptions; (2) the impairment of goodwill, indefinite-lived intangibles, and long-lived assets, specifically over the precision of management's review of certain assumptions; and (3) ineffective information technology general controls ("ITGCs") in the areas of user access and program change-management over certain information technology ("IT") systems that support the Company's financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of inadequate IT controls over the review of user access and imprecise documentation of procedures related to program change management. Additionally, we rely upon a variety of outsourced IT service providers for key elements of the technology infrastructure impacting our financial reporting process. Certain outsourced IT service providers could not provide System and Organization Controls ("SOC") reports for periods that closely align with our fiscal year end. Given that management did not effectively assess the design and operation of these outsourced IT service providers’ internal controls, some of our controls over IT systems and business processes were also deemed ineffective, but only to the extent that we rely upon information that was subject to the outsourced IT service providers’ control environment. These deficiencies may have an impact on our financial statements, account balances, and disclosures. Based on our evaluation, our management, with the participation of our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was not effective as of September 30, 2023.

#### Remediation Efforts to Address Material Weakness

#### Review of Accounting for Business Combinations

Management is committed to the remediation of the material weakness described above. As such, controls will be added to both increase precision of management’s review of each component of business combinations, and if necessary, retain the services of a third-party consultant to assist in the valuation and accounting for intangible assets acquired in a business combination.

#### Review of Accounting for Impairment of Goodwill and Intangible Assets

As most of the assumptions used in the valuation models employed in impairment analyses are subjective in nature, Management will employ additional controls to validate these assumptions, including the engagement of a third-party consultant to assist developing valuation models and establishing sound and reasonable assumptions.

#### Information Technology General Controls

As a result of the material weakness, we have initiated and will continue to implement remediation measures to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) strengthening and enhancing the review and documentation procedures in our controls over user access review; (ii) define and communicate clear and concise program change management policy and procedures; (iii) enhancing the reporting requirements of accounting system audit logs; (vi) continuous improvement over our ITGC controls related to third party applications; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the board of directors.

It is our belief that these added controls will effectively remediate the existing material weaknesses.

We believe that these actions will remediate the material weaknesses. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of fiscal 2024.

### Changes in Internal Control Over Financial Reporting

Other than as described above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 787 characters.

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, except for such risks and uncertainties that may result from the additional disclosure in the “Legal Matters” section within Note 9 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition or results of operations.

Filed Feb 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-003873. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.