RCI HOSPITALITY HOLDINGS INC

Previous wording

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

Current wording

During the three and six months ended March 31, 2024, there were no significant changes in our accounting policies and estimates.

Previous wording

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

Current wording

Highlights of the Company's operating results are as follows, with comparisons against the same period of the prior year:

Previous wording

•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)

Current wording

•Total revenues were $72.3 million compared to $71.5 million during the comparable prior-year quarter, a 1.1% increase (Nightclubs revenue of $59.4 million compared to $57.0 million, a 4.1% increase; and Bombshells revenue of $12.8 million compared to $14.3 million, a 10.8% decrease)

Previous wording

•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)

Current wording

•Consolidated same-store sales decreased by 8.6% (Nightclubs decreased by 5.7%, while Bombshells decreased by 20.5%) (refer to the definition of same-store sales in the discussion of revenues below)

Previous wording

•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

Current wording

•Basic and diluted earnings per share (“EPS”) of $0.08 compared to $0.83 (non-GAAP diluted EPS* of $0.90 compared to $1.30) during the comparable prior-year quarter

Previous wording

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.

Current wording

Consolidated revenues for the second quarter increased by $766,000, or 1.1%, versus the comparable prior-year quarter due primarily to a 12.1%, or $8.6 million, increase in sales from newly acquired clubs from last year and new Bombshells openings, partially offset by the $5.6 million impact of the decrease in consolidated same-stores sales and the $2.1 million impact of closed clubs.

Previous wording

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%.

Current wording

Nightclubs revenues increased by 4.1% during the second quarter compared to the same quarter last year primarily due to the $7.5 million contribution of newly acquired clubs, partially offset by the $2.9 million impact of the decline in same-store sales and the $2.1 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 decreased by 5.7%. By type of revenue, alcoholic beverage sales increased by 16.9%, food, merchandise and other revenue increased by 7.8%, while service revenues decreased by 8.3%.

Previous wording

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%.

Current wording

Bombshells second quarter revenues decreased by 10.8%, of which 20.5% was for same-store sales decline with the offsetting increase caused by two new locations and a food hall. By type of revenue, food and merchandise sales decreased by 7.4% while alcoholic beverage sales decreased by 12.4%.

Previous wording

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.

Current wording

Cost of goods sold. Cost of goods sold for the second quarter increased by $801,000, or 8.8%, mainly due to higher sales. As a percent of total revenues, cost of goods sold increased to 13.7% from 12.7% mainly due to the sales mix decrease in service revenue. Nightclubs cost of goods sold during the second quarter increased to 11.6% from 10.4%, while Bombshells cost of goods sold increased to 23.5% from 22.2%.

Previous wording

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%.

Current wording

For the six-month period, salaries and wages increased by $4.2 million, or 11.0%. As a percent of total revenues, salaries and wages increased to 28.9% from 26.9%. Nightclubs increased to 22.3% from 21.1%, Bombshells increased to 30.1% from 26.3%, while corporate increased to 5.1% from 4.7%.

Previous wording

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.

Current wording

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $2.6 million, or 11.9%, for the second quarter and increased by $5.1 million, or 11.4%, for the six-month period. Dollar amounts in the tables below are in thousands, except percentages.

Previous wording

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.

Current wording

Taxes and permits mainly increased due to the increase in the Texas patron tax. Advertising and marketing increased mainly due to higher commissions and promotional expenses. Insurance expense increased due to additional clubs and restaurants, with additional impact from insurance premium refunds received in the second quarter of fiscal 2023.

Previous wording

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

Current wording

Depreciation and amortization. Depreciation and amortization increased by $124,000, or 3.3%, during the second quarter and increased by $670,000, or 9.5%, during the six-month period, primarily due to the higher depreciable base.

Previous wording

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):

Current wording

For the three months ended March 31, 2024 and 2023, our consolidated operating margin was 6.4% and 18.8%, respectively, while for the six months ended March 31, 2024 and 2023, our consolidated operating margin was 12.2% and 21.4%, respectively. Segment contribution to income (loss) from operations is presented in the table below (in thousands):

Previous wording

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.

Current wording

Excluding certain items, the three months ended March 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 31.

Previous wording

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.

Current wording

Interest expense increased by $322,000, or 8.8%, during the second quarter and increased by $851,000, or 11.6%, during the six-month period primarily caused by a higher average debt balance mostly from seller-financed promissory notes from last years' acquisitions.

Previous wording

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.

Current wording

Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $5.8 million and $5.4 million for the quarters ended March 31, 2024 and 2023, respectively. As a percentage of revenue, total occupancy costs were 8.0% and 7.6% during the quarters ended March 31, 2024 and 2023, respectively, primarily due to the interest from higher average debt balance. For the six months ended March 31, 2024 and 2023, total occupancy costs were $11.8 million and $10.9 million, respectively. As a percent of revenue, total occupancy costs were 8.1% and 7.7%, respectively, during the six-month period.

Previous wording

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.

Current wording

Income tax expense was $5,000 and $1.8 million during the three and six months ended March 31, 2024, respectively, compared to $2.1 million and $5.2 million during the three and six months ended and March 31, 2023, respectively. The effective income tax expense rate was 0.7% and 18.4% for the three and six months ended March 31, 2024 compared to 21.8% and 22.4% for the three and six months ended March 31, 2023, respectively. The disproportionate tax rates during the three months ended March 31, 2024 were caused by the small amount of pre-tax income during the quarter and the reduction of the expected annual effective tax rate. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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) impairment of assets, (c) settlement of lawsuits, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) stock-based compensation, and (g) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 18.4% and 22.3% effective tax rate of the pre-tax non-GAAP income before taxes for the six months ended March 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.

Previous wording

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.

Current wording

Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) impairment of assets, (c) income tax expense (benefit), (d) net interest expense, (e) settlement of lawsuits, (f) gains or losses on sale of businesses and assets, (g) gains or losses on insurance, and (h) stock-based compensation. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

Previous wording

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):

Current wording

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

Previous wording

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.

Current wording

At March 31, 2024, our cash and cash equivalents were approximately $20.0 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 March 31, 2024, we had negative working capital of $14.4 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.

Previous wording

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.

Current wording

Net cash provided by operating activities this current six-month period decreased from last year's comparable period primarily due to lower income from operations, higher interest expense paid, and lower income tax refund received, partially offset by lower estimated income taxes paid.

Previous wording

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):

Current wording

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

Previous wording

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.

Current wording

The capital expenditures during the six months ended March 31, 2024 were composed mostly of construction projects in-progress, while those during the six months ended March 31, 2023 were composed primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

Previous wording

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.

Current wording

We purchased 65,219 shares of our common stock at an average price of $55.23 during the six months ended March 31, 2024, while we purchased 1,500 shares of our common stock at an average price of $65.02 during the six months ended March 31, 2023. As of March 31, 2024, we have approximately $13.0 million authorization remaining to purchase additional shares.

Previous wording

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.

Current wording

We paid $0.06 per share in quarterly dividends during the two quarters ended March 31, 2024, while we paid $0.05 per share during the first quarter and $0.06 per share during the second quarter for the two quarters ended March 31, 2023.

Previous wording

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.

Current wording

See Note 6 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations and Note 13 related to the term loan entered into after the balance sheet date. We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the six months ended March 31, 2024 and 2023.

Previous wording

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.

Current wording

Our free cash flow for the six-month period decreased by 22.7% compared to the comparable prior-year period primarily due to lower income from operations, higher interest expense paid, and lower income tax refund received, partially offset lower income taxes paid and lower maintenance capital expenditures paid.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

All thirteen of the existing Bombshells restaurants as of March 31, 2024 were located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.