# RCI HOSPITALITY HOLDINGS, INC. (RICK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RCI HOSPITALITY HOLDINGS, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/935419/000162828022031907/rick-20220930.htm
Accession: 0001628280-22-031907
Filing date: 2022-12-14
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RICK/
All MD&A years: /company/RICK/mda/
Previous year: /company/RICK/mda/fy2021/ (FY 2021)
Next year: /company/RICK/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of this report. This overview summarizes the MD&A, which includes the following sections:

•Our Business — a general description of our business and the adult nightclub industry, our objective, our strategic priorities, our core capabilities, and challenges and risks of our business.

•Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.

•Operations Review — an analysis of our Company’s consolidated results of operations for the three years presented in our consolidated financial statements.

•Liquidity and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview of financial position.

Current Operating Environment

Our fiscal 2020 was the period hard hit by the COVID-19 pandemic causing a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. In fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased. Stimulus money also flowed to the economy at that time which prompted discretionary spending. In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions. Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S. economy in general, with global inflation and supply chain disruptions impacting our businesses.

Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

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OUR BUSINESS

The following are our operating segments:

[[GREPCENT_TABLE]]
[["Nightclubs","Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving primarily businessmen and professionals. These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Aledo, Round Rock, El Paso and Odessa, Texas; Denver, Colorado; Charlotte and Raleigh, North Carolina; Minneapolis, Minnesota; New York and Newburgh, New York; Miami Gardens, Pembroke Park and Miami, Florida; Pittsburgh, Pennsylvania; Phoenix, Arizona; Louisville, Kentucky; Portland, Maine; Indianapolis, Indiana; and Washington Park, Kappa, Sauget and Chicago, Illinois. No sexual contact is permitted at any of our locations. We also own and operate a Studio 80 dance club in Fort Worth, Texas. We also own and lease to third parties real properties that are adjacent to (or used to be locations of) our clubs."],["Bombshells","Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball, Katy and Arlington, Texas under the brand name Bombshells Restaurant & Bar. We have one franchised unit in San Antonio, Texas."],["Other","Our wholly-owned subsidiaries own a media division (\u201cMedia Group\u201d), including the leading trade magazine serving the multibillion-dollar adult nightclubs industry and the adult retail products industry. We also own an industry trade show, an industry trade publication and more than a dozen industry and social media websites. Included here is Drink Robust, which is licensed to sell Robust Energy Drink in the United States."]]
[[/GREPCENT_TABLE]]

We generate our revenues from the sale of liquor, beer, wine, food, and merchandise; service revenues such as cover charges, membership fees, and facility use fees; and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations. Other revenues include Media Group revenues for the sale of advertising content and revenues from our annual Expo convention, and Drink Robust sales. Our fiscal year-end is September 30.

Same-Store 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 for more than 15 days 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 definitions stated above. Revenues outside of our Nightclubs and Bombshells reportable segments’ core business are excluded from same-store sales calculation.

Our goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our management and employees—to become more competitive and to accelerate growth.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our estimates, and such differences could be material.

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A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included in Item 8 – “Financial Statements and Supplementary Data” of this report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial results. These estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.

Impairment of Long-Lived Assets

We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Key estimates in the undiscounted cash flow model include management’s estimate of the projected revenues and operating margins. If fair value is used to determine an impairment loss, an additional key assumption is the selection of a weighted-average cost of capital to discount cash flows. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. During the third quarter of 2022, we impaired two properties for a total of $1.0 million one due to eminent domain by the state of Texas and the other due to underperformance. During the second quarter of 2021, we impaired one property that was reclassified to assets held for sale for $1.4 million, and during the fourth quarter of 2021, we impaired four clubs for $584,000. During the second quarter of 2020, we impaired one club and one Bombshells unit for a total of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use asset for $104,000.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

Our impairment calculations require management to make assumptions and to apply judgment in order to estimate fair values. If our actual results are not consistent with our estimates and assumptions, we may be exposed to impairments that could be material. We do not believe that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that could cause a material change in our calculated impairment charges.

For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values. Key estimates in the discounted cash flow model include management’s estimate of the projected revenues and operating margins, along with the selection of a weighted-average cost of capital to discount cash flows. We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $566,000. For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $6.3 million. For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.

For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount

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exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $293,000 in 2022 related to one club, $5.3 million in 2021 related to three clubs, and $2.3 million in 2020 related to two clubs.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values. The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to acquired entities are included prospectively beginning with the date of acquisition. Acquisition-related costs are expensed as incurred.

Stock-based Compensation

We recognize expense for stock-based compensation awards, which is equal to the fair value of the awards at grant date, ratably in selling, general and administrative expenses in our consolidated statements of operations over their requisite service period. Calculating the grant date fair value of stock-based compensation awards requires the input of subjective assumptions. We determine the fair value of each stock option grant using the Black-Scholes option-pricing model with assumptions based primarily on historical data. Specific inputs to the model include the expected term of the stock options, stock price volatility, dividend yield, and risk-free interest rate.

We used our historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan which may not be reflective of current stock market environment and current mix of grantees. We estimated expected volatility based on historical volatility of the Company's stock price for a period equal to the award's expected term. We estimated expected dividend yield based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged). The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We recognize forfeitures when they occur.

Income Taxes

We estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases. These estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. When necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be realized.

Legal and Other Contingencies

As mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 11 to our consolidated financial statements, we are involved in various suits and claims in the normal course of business. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

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OPERATIONS REVIEW

Highlights of operations from fiscal 2022, 2021, and 2020 are as follows (in thousands, except percentages and per share amounts):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Revenues"],["Consolidated","$","267,620","","","37.1","%","","$","195,258","","","47.6","%","","$","132,327"],["Nightclubs","$","206,251","","","50.2","%","","$","137,348","","","55.4","%","","$","88,373"],["Bombshells","$","59,925","","","5.8","%","","$","56,621","","","31.0","%","","$","43,215"],["Same-store sales"],["Consolidated","","","+5.6","%","","","","+1.5","%"],["Nightclubs","","","+10.1","%","","","","-2.1","%"],["Bombshells","","","-4.6","%","","","","+7.7","%"],["Income from operations"],["Consolidated","$","71,459","","","85.4","%","","$","38,548","","","1,303.8","%","","$","2,746"],["Nightclubs","$","82,798","","","89.0","%","","$","43,815","","","235.6","%","","$","13,056"],["Bombshells","$","11,504","","","(13.3)","%","","$","13,264","","","43.6","%","","$","9,237"],["Diluted earnings (loss) per share","$","4.91","","","","","$","3.37","","","","","$","(0.66)"],["Net cash provided by operating activities","$","64,509","","","53.6","%","","$","41,991","","","168.6","%","","$","15,632"],["Free cash flow*","$","58,911","","","63.3","%","","$","36,084","","","167.7","%","","$","13,481"]]
[[/GREPCENT_TABLE]]

*Reconciliation and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial Measures” section of this Item. These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.

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The following common size tables present a comparison of our results of operations as a percentage of total revenues for the three most recently completed fiscal years:

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Revenues"],["Sales of alcoholic beverages","42.3","%","","44.4","%","","44.6","%"],["Sales of food and merchandise","16.6","%","","21.1","%","","18.5","%"],["Service revenues","35.1","%","","28.4","%","","31.1","%"],["Other","6.0","%","","6.1","%","","5.8","%"],["Total revenues","100.0","%","","100.0","%","","100.0","%"],["Operating expenses"],["Cost of goods sold"],["Alcoholic beverages sold","17.8","%","","18.3","%","","18.8","%"],["Food and merchandise sold","35.1","%","","33.6","%","","33.0","%"],["Service and other","0.3","%","","0.6","%","","0.5","%"],["Total cost of goods sold (exclusive of items shown separately below)","13.5","%","","15.4","%","","14.7","%"],["Salaries and wages","25.6","%","","25.9","%","","29.5","%"],["Selling, general and administrative","29.5","%","","28.0","%","","39.1","%"],["Depreciation and amortization","4.6","%","","4.2","%","","6.7","%"],["Other charges, net","0.2","%","","6.8","%","","8.0","%"],["Total operating expenses","73.3","%","","80.3","%","","97.9","%"],["Income from operations","26.7","%","","19.7","%","","2.1","%"],["Other income (expenses)"],["Interest expense","(4.5)","%","","(5.1)","%","","(7.4)","%"],["Interest income","0.2","%","","0.1","%","","0.2","%"],["Non-operating gains (losses), net","0.1","%","","2.7","%","","0.0","%"],["Income (loss) before income taxes","22.5","%","","17.5","%","","(5.1)","%"],["Income tax expense (benefit)","5.3","%","","2.0","%","","(0.4)","%"],["Net income (loss)","17.2","%","","15.4","%","","(4.8)","%"]]
[[/GREPCENT_TABLE]]

†Percentages may not foot due to rounding in this and in all of the succeeding tables presenting percentages in this report. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

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Below is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar amounts in thousands)

[[GREPCENT_TABLE]]
[["","Better (Worse)"],["","2022 vs. 2021","","2021 vs. 2020"],["","Amount","","%","","Amount","","%"],["Revenues"],["Sales of alcoholic beverages","$","26,631","","","30.7","%","","$","27,605","","","46.7","%"],["Sales of food and merchandise","3,183","","","7.7","%","","16,651","","","68.1","%"],["Service revenues","38,427","","","69.3","%","","14,299","","","34.7","%"],["Other","4,121","","","34.3","%","","4,376","","","57.4","%"],["Total revenues","72,362","","","37.1","%","","62,931","","","47.6","%"],["Operating expenses"],["Cost of goods sold"],["Alcoholic beverages sold","(4,272)","","","(26.9)","%","","(4,786)","","","(43.1)","%"],["Food and merchandise sold","(1,743)","","","(12.6)","%","","(5,723)","","","(70.9)","%"],["Service and other","57","","","15.2","%","","(107)","","","(40.1)","%"],["Total cost of goods sold (exclusive of items shown separately below)","(5,958)","","","(19.8)","%","","(10,616)","","","(54.6)","%"],["Salaries and wages","(17,820)","","","(35.2)","%","","(11,557)","","","(29.6)","%"],["Selling, general and administrative","(24,239)","","","(44.4)","%","","(2,916)","","","(5.6)","%"],["Depreciation and amortization","(4,153)","","","(50.4)","%","","598","","","6.8","%"],["Other charges, net","12,719","","","96.5","%","","(2,638)","","","(25.0)","%"],["Total operating expenses","(39,451)","","","(25.2)","%","","(27,129)","","","(20.9)","%"],["Income from operations","32,911","","","85.4","%","","35,802","","","1,303.8","%"],["Other income/expenses"],["Interest expense","(1,958)","","","(19.6)","%","","(181)","","","(1.8)","%"],["Interest income","158","","","62.5","%","","(71)","","","(21.9)","%"],["Non-operating gains/losses, net","(5,119)","","","(96.0)","%","","5,394","","","*"],["Income/loss before income taxes","25,992","","","76.1","%","","40,944","","","601.7","%"],["Income tax expense/benefit","(10,082)","","","(252.7)","%","","(4,482)","","","*"],["Net income/loss","$","15,910","","","52.8","%","","$","36,462","","","*"]]
[[/GREPCENT_TABLE]]

*Not meaningful.

Revenues

Our consolidated revenues continued their upward trend from 2020 to 2021 (with an increase of 47.6%) rebounding from the heavily COVID-19 affected 2020 to a more stable increase from 2021 to 2022 (with an increase of 37.1%) aided by acquisitions. Consolidated same-store sales increased by 5.6% from 2021 to 2022 and by 1.5% from 2020 to 2021. New units contributed $47.6 million, or 24.4% of total prior-year revenue, to the total revenue increase from 2021 to 2022 (mostly from club acquisitions) and $4.2 million, or 3.1% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021 (all from new Bombshells). Closed units in the comparable prior year contributed $13.9 million, or 7.1% of total prior-year revenue, to the total revenue increase from 2021 to 2022 and $56.8 million, or 42.9% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021.

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Segment contribution to total revenues was as follows (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Nightclubs"],["Sales of alcoholic beverages","$","80,001","","","47.3","%","","$","54,305","","","70.0","%","","$","31,950"],["Sales of food and merchandise","18,289","","","6.2","%","","17,221","","","101.2","%","","8,561"],["Service revenues","93,481","","","69.5","%","","55,146","","","34.5","%","","41,004"],["Other revenues","14,480","","","35.6","%","","10,676","","","55.7","%","","6,858"],["","206,251","","","50.2","%","","137,348","","","55.4","%","","88,373"],["Bombshells"],["Sales of alcoholic beverages","33,315","","","2.9","%","","32,380","","","19.4","%","","27,130"],["Sales of food and merchandise","26,005","","","8.9","%","","23,890","","","50.3","%","","15,899"],["Service revenues","407","","","29.2","%","","315","","","99.4","%","","158"],["Other revenues","198","","","450.0","%","","36","","","28.6","%","","28"],["","59,925","","","5.8","%","","56,621","","","31.0","%","","43,215"],["Other"],["Other revenues","1,444","","","12.0","%","","1,289","","","74.4","%","","739"],["","$","267,620","","","37.1","%","","$","195,258","","","47.6","%","","$","132,327"]]
[[/GREPCENT_TABLE]]

Nightclubs segment revenues. Nightclubs revenues increased by 50.2% from 2021 to 2022 and by 55.4% from 2020 to 2021. A breakdown of the changes compared to total change in Nightclubs revenues is as follows:

[[GREPCENT_TABLE]]
[["","2022 vs. 2021","","2021 vs. 2020"],["Impact of 10.1% increase and 2.1% decrease in same-store sales, respectively, to total revenues","9.5","%","","(1.2)","%"],["Newly acquired units","30.5","%","","\u2014","%"],["Closed units","10.1","%","","56.4","%"],["Other","0.1","%","","0.2","%"],["","50.2","%","","55.4","%"]]
[[/GREPCENT_TABLE]]

Nightclubs segment sales mix for the three fiscal years, below:

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Sales of alcoholic beverages","38.8","%","","39.5","%","","36.2","%"],["Sales of food and merchandise","8.9","%","","12.5","%","","9.7","%"],["Service revenues","45.3","%","","40.2","%","","46.4","%"],["Other","7.0","%","","7.8","%","","7.7","%"],["","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

The 2022 new units include 15 clubs, of which eleven were acquired in October 2021, one acquired in November 2021, one acquired in May 2022, and two acquired in July 2022. See Note 16 to our consolidated financial statements. In total, these newly acquired clubs contributed $41.9 million in revenues during 2022 since their acquisition dates. No new clubs were acquired in 2020 and 2021.

Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.6 million in 2022, $1.5 million in 2021, and $1.3 million in 2020.

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Bombshells segment revenues. Bombshells revenues increased by 5.8% from 2021 to 2022 and by 31.0% from 2020 to 2021. A breakdown of the changes compared to total changes in Bombshells revenues is as follows:

[[GREPCENT_TABLE]]
[["","2022 vs. 2021","","2021 vs. 2020"],["Impact of 4.6% decrease and 7.7% increase in same-store sales, respectively, to total revenues","(4.6)","%","","5.2","%"],["New units","10.1","%","","9.6","%"],["Closed units","\u2014","%","","16.2","%"],["Other","0.3","%","","\u2014","%"],["","5.8","%","","31.0","%"]]
[[/GREPCENT_TABLE]]

Bombshells segment sales mix for the three fiscal years is as follows:

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Sales of alcoholic beverages","55.6","%","","57.2","%","","62.8","%"],["Sales of food and merchandise","43.4","%","","42.2","%","","36.8","%"],["Service and other revenues","1.0","%","","0.6","%","","0.4","%"],["","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

Bombshells Katy was opened in the first quarter of 2020, while Bombshells 59 was opened in the second quarter of 2020. No new Bombshells location was opened in 2021. Bombshells Arlington was opened in the first quarter of 2022.

Other segment revenues. Other revenues included revenues from Drink Robust in all three fiscal years presented. Drink Robust sales were $201,000, $249,000, and $150,000 in fiscal 2022, 2021, and 2020, respectively, which excludes intercompany sales to Nightclubs and Bombshells units amounting to $261,000, $141,000, and $70,000 in fiscal 2022, 2021, and 2020, respectively. Media business revenues were $1.2 million, $1.0 million, and $589,000 in fiscal 2022, 2021, and 2020, respectively. Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed to be held in August 2020 (fiscal 2020) was canceled. All unearned sponsorship and advertising revenues related to the event were either further deferred or refunded and no revenue was recognized.

Operating Expenses

Total operating expenses, as a percent of consolidated revenues, were 73.3%, 80.3%, and 97.9% for the fiscal year 2022, 2021, and 2020, respectively. Significant contributors to the change in operating expenses as a percent of revenues are explained below.

Cost of goods sold. Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding, and Drink Robust. As a percentage of consolidated revenues, consolidated cost of goods sold was 13.5%, 15.4%, and 14.7% for fiscal 2022, 2021, and 2020, respectively. See page 29 above for the breakdown of percentages for each line item of consolidated cost of goods sold as it relates to the respective consolidated revenue line. For the Nightclubs segment, cost of goods sold was 10.5%, 11.8%, and 10.7% for fiscal 2022, 2021, and 2020, respectively, which was primarily caused by shifts in sales mix. Bombshells cost of goods sold was 23.5%, 23.8%, and 22.6% for fiscal 2022, 2021, and 2020, respectively, which was mainly driven by menu price increases in 2022 in response to inflation, the shift in sales mix to lower-margin food sales in 2021, and to higher-margin alcoholic beverage sales in 2020.

Salaries and wages. Consolidated salaries and wages increased by $17.8 million, or 35.2%, from 2021 to 2022 and increased by $11.6 million, or 29.6%, from 2020 to 2021. The dollar decrease from 2020 to 2021 was mainly from personnel hiring and rehiring after easing restrictions from COVID-19, and the dollar increase from 2021 to 2022 was mainly from new employees caused by the fifteen new club acquisitions and one Bombshells opening. As a percentage of revenues, consolidated salaries and wages were 25.6%, 25.9%, and 29.5% in 2022, 2021, and 2020, respectively, mainly due to sales trend and the impact of fixed salaries on increasing sales. Corporate salary pay cuts made in 2020 during the height of the pandemic restrictions were paid back in 2021.

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By reportable segment, salaries and wages are broken down as follows (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Nightclubs","$","40,859","","","51.4","%","","$","26,986","","","37.8","%","","$","19,590"],["Bombshells","14,585","","","11.8","%","","13,041","","","25.1","%","","10,427"],["Other","601","","","3.3","%","","582","","","18.5","%","","491"],["Corporate","12,402","","","23.8","%","","10,018","","","17.0","%","","8,562"],["","$","68,447","","","35.2","%","","$","50,627","","","29.6","%","","$","39,070"]]
[[/GREPCENT_TABLE]]

Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general corporate.

Salaries and wages as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Nightclubs","19.8","%","","19.6","%","","22.2","%"],["Bombshells","24.3","%","","23.0","%","","24.1","%"],["Other","41.6","%","","45.2","%","","66.4","%"],["Corporate","4.6","%","","5.1","%","","6.5","%"],["","25.6","%","","25.9","%","","29.5","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses. The components of consolidated selling, general and administrative expenses are in the tables below (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["","Amount","","%","","Amount","","%","","Amount","","%"],["Taxes and permits","$","9,468","","","3.5","%","","$","8,701","","","4.5","%","","$","8,071","","","6.1","%"],["Advertising and marketing","9,860","","","3.7","%","","6,676","","","3.4","%","","5,367","","","4.1","%"],["Supplies and services","8,614","","","3.2","%","","6,190","","","3.2","%","","4,711","","","3.6","%"],["Insurance","10,152","","","3.8","%","","5,676","","","2.9","%","","5,777","","","4.4","%"],["Lease","6,706","","","2.5","%","","3,942","","","2.0","%","","4,060","","","3.1","%"],["Legal","1,995","","","0.7","%","","3,997","","","2.0","%","","4,725","","","3.6","%"],["Utilities","4,585","","","1.7","%","","3,366","","","1.7","%","","2,945","","","2.2","%"],["Charge card fees","6,292","","","2.4","%","","3,376","","","1.7","%","","2,382","","","1.8","%"],["Security","4,404","","","1.6","%","","3,892","","","2.0","%","","2,582","","","2.0","%"],["Accounting and professional fees","3,909","","","1.5","%","","2,031","","","1.0","%","","3,463","","","2.6","%"],["Repairs and maintenance","3,754","","","1.4","%","","2,767","","","1.4","%","","2,289","","","1.7","%"],["Stock-based compensation","2,353","","","0.9","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Other","6,755","","","2.5","%","","3,994","","","2.0","%","","5,320","","","4.0","%"],["","$","78,847","","","29.5","%","","$","54,608","","","28.0","%","","$","51,692","","","39.1","%"]]
[[/GREPCENT_TABLE]]

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By reportable segment, selling, general and administrative expenses are broken down as follows (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Nightclubs","$","51,285","","","56.7","%","","$","32,725","","","8.7","%","","$","30,105"],["Bombshells","17,295","","","16.2","%","","14,883","","","26.8","%","","11,735"],["Other","418","","","76.4","%","","237","","","(11.6)","%","","268"],["Corporate","9,849","","","45.6","%","","6,763","","","(29.4)","%","","9,584"],["","$","78,847","","","44.4","%","","$","54,608","","","5.6","%","","$","51,692"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Nightclubs","24.9","%","","23.8","%","","34.1","%"],["Bombshells","28.9","%","","26.3","%","","27.2","%"],["Other","28.9","%","","18.4","%","","36.3","%"],["Corporate","3.7","%","","3.5","%","","7.2","%"],["","29.5","%","","28.0","%","","39.1","%"]]
[[/GREPCENT_TABLE]]

The significant variances in selling, general and administrative expenses are as follows:

As a percentage of revenues, relatively fixed expenses were high in rate due to lower sales in fiscal 2020, while more discretionary/controllable expenses such as advertising and marketing were kept to a minimum. Conversely, due to the increase in revenues in 2021 from 2020, almost all selling, general and administrative expenses consequently increased except accounting and professional fees, insurance, leases, and legal. Accounting and legal fees primarily decreased from prior year’s SEC matters; lease expense decreased due to lease credits we received from certain landlords; while insurance decreased due to credits given by insurers for unused coverage due to COVID-19 closures in 2020. Most of the selling, general and administrative expense increases in 2022 came from the Nightclub acquisitions we made. We also incurred stock-based compensation expense from a new 2022 Stock Option Plan.

Depreciation and amortization. Depreciation and amortization increased by $4.2 million, or 50.4%, from 2021 to 2022 and decreased by $598,000, or 6.8%, from 2020 to 2021. The decrease from 2020 to 2021 was mainly from significantly low capital expenditure in 2020 while the increase from 2021 to 2022 was mainly caused by the growth in our depreciable asset base and amortizable intangibles caused by acquired clubs and a new Bombshells unit.

Other charges, net. The components of other charges, net are in the table below (dollars in thousands):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Impairment of assets","$","1,888","","","(86.1)","%","","$","13,612","","","28.2","%","","$","10,615"],["Settlement of lawsuits","1,417","","","5.0","%","","1,349","","","675.3","%","","174"],["Gain on sale of businesses and assets","(2,375)","","","355.0","%","","(522)","","","(21.0)","%","","(661)"],["Loss (gain) on insurance","(463)","","","(63.0)","%","","(1,253)","","","(398.3)","%","","420"],["","$","467","","","(96.5)","%","","$","13,186","","","25.0","%","","$","10,548"]]
[[/GREPCENT_TABLE]]

The significant variances in other charges, net are discussed below:

During 2022, we recorded aggregate impairment charges amounting to $1.9 million related to goodwill of one club ($566,000), SOB license of one club ($293,000), and property and equipment of one club and one Bombshells unit ($1.0 million). During 2021, we recorded aggregate impairment charges amounting to $13.6 million related to goodwill of seven clubs ($6.3 million), SOB licenses of three clubs ($5.3 million), and property and equipment of five clubs, one of which is held for sale ($2.0 million). During 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one

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club and one Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000). See Notes 2 and 16 to our consolidated financial statements.

In 2021, we settled a case with one of our Bombshells landlords for $1.0 million. See Note 11 to our consolidated financial statements. In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance.

Refer to dispositions in Note 16 to our consolidated financial statement for details on gains or losses on sale of businesses and assets.

In relation to insurance claims and recoveries, we recognized a $463,000 gain in 2022, $1.3 million gain in 2021, and a $420,000 loss in 2020 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that damaged one of our clubs in Sulphur, Louisiana in August 2020. The rest of the claims for the Sulphur club were received in 2022. Gains related to insurance recoveries are recognized when the contingencies related to the insurance claims have been resolved, which may be in a subsequent reporting period. See Note 15 to our consolidated financial statements.

Income from Operations

During fiscal 2022, 2021, and 2020, our consolidated operating margin was 26.7%, 19.7%, and 2.1%, respectively.

Below is a table which reflects segment contribution to income from operations (in thousands):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Nightclubs","$","82,798","","","$","43,815","","","$","13,056"],["Bombshells","11,504","","","13,264","","","9,237"],["Other","57","","","35","","","(614)"],["Corporate","(22,900)","","","(18,566)","","","(18,933)"],["","$","71,459","","","$","38,548","","","$","2,746"]]
[[/GREPCENT_TABLE]]

Nightclubs operating margin was 40.1%, 31.9%, and 14.8% in 2022, 2021, and 2020, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $1.2 million, $13.6 million, and $10.4 million for 2022, 2021, and 2020, respectively. Bombshells operating margin was 19.2%, 23.4%, and 21.4% in 2022, 2021, and 2020, respectively, mainly due to one new unit and same-store sales decrease in 2022, two new units and same-store sales increase in 2021, partially offset by COVID-19 impact in 2020.

Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to discussion of Non-GAAP Financial Measures on page 37.

[[GREPCENT_TABLE]]
[["","2022"],["","Nightclubs","","Bombshells","","Other","","Corporate","","Total"],["Income (loss) from operations","$","82,798","","","$","11,504","","","$","57","","","$","(22,900)","","","$","71,459"],["Amortization of intangibles","2,042","","","6","","","61","","","9","","","2,118"],["Settlement of lawsuits","1,287","","","18","","","\u2014","","","112","","","1,417"],["Impairment of assets","1,238","","","650","","","\u2014","","","\u2014","","","1,888"],["Loss (gain) on sale of businesses and assets","(2,010)","","","17","","","\u2014","","","(382)","","","(2,375)"],["Gain on insurance","(463)","","","\u2014","","","\u2014","","","\u2014","","","(463)"],["Stock-based compensation","\u2014","","","\u2014","","","\u2014","","","2,353","","","2,353"],["Non-GAAP operating income (loss)","$","84,892","","","$","12,195","","","$","118","","","$","(20,808)","","","$","76,397"],["GAAP operating margin","40.1","%","","19.2","%","","3.9","%","","(8.6)","%","","26.7","%"],["Non-GAAP operating margin","41.2","%","","20.4","%","","8.2","%","","(7.8)","%","","28.5","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","2021"],["","Nightclubs","","Bombshells","","Other","","Corporate","","Total"],["Income (loss) from operations","$","43,815","","","$","13,264","","","$","35","","","$","(18,566)","","","$","38,548"],["Amortization of intangibles","187","","","14","","","57","","","\u2014","","","258"],["Settlement of lawsuits","275","","","59","","","5","","","1,010","","","1,349"],["Impairment of assets","13,612","","","\u2014","","","\u2014","","","\u2014","","","13,612"],["Costs and charges related to debt refinancing","17","","","\u2014","","","\u2014","","","40","","","57"],["Loss (gain) on sale of businesses and assets","(580)","","","72","","","\u2014","","","(14)","","","(522)"],["Gain on insurance","(1,209)","","","\u2014","","","\u2014","","","(44)","","","(1,253)"],["Non-GAAP operating income (loss)","$","56,117","","","$","13,409","","","$","97","","","$","(17,574)","","","$","52,049"],["GAAP operating margin","31.9","%","","23.4","%","","2.7","%","","(9.5)","%","","19.7","%"],["Non-GAAP operating margin","40.9","%","","23.7","%","","7.5","%","","(9.0)","%","","26.7","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2020"],["","Nightclubs","","Bombshells","","Other","","Corporate","","Total"],["Income (loss) from operations","$","13,056","","","$","9,237","","","$","(614)","","","$","(18,933)","","","$","2,746"],["Amortization of intangibles","211","","","15","","","383","","","\u2014","","","609"],["Settlement of lawsuits","174","","","\u2014","","","\u2014","","","\u2014","","","174"],["Impairment of assets","10,370","","","245","","","\u2014","","","\u2014","","","10,615"],["Loss (gain) on sale of businesses and assets","(639)","","","16","","","\u2014","","","(38)","","","(661)"],["Loss (gain) on insurance","433","","","\u2014","","","\u2014","","","(13)","","","420"],["Non-GAAP operating income (loss)","$","23,605","","","$","9,513","","","$","(231)","","","$","(18,984)","","","$","13,903"],["GAAP operating margin","14.8","%","","21.4","%","","(83.1)","%","","(14.3)","%","","2.1","%"],["Non-GAAP operating margin","26.7","%","","22.0","%","","(31.3)","%","","(14.3)","%","","10.5","%"]]
[[/GREPCENT_TABLE]]

Other Income/Expenses

Interest expense increased by $2.0 million from 2021 to 2022 and by $181,000 from 2020 to 2021. The increase in interest expense in 2022 was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions. The net increase in interest expense in 2021 was primarily caused by the expensed loan costs and written off unamortized debt issuance costs related to the September 2021 Refinancing Note (see Note 9 to our consolidated financial statements), partially offset by the impact of a lower average debt balance. During 2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments were deferred, but we continued to accrue interest on these debts. At the end of 2021, we refinanced several of our existing bank and seller-financed real estate debt with the issuance of a $99.1 million 5.25% note with a term of 10 years.

We consider lease plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and restaurants are located. For occupancy cost purposes, we exclude non-real-estate-related interest expense. Total occupancy cost rate (total occupancy cost as a percentage of revenues) was high in 2020 due to lower sales activity caused by the pandemic, as shown below.

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Lease","2.5","%","","2.0","%","","3.1","%"],["Interest","4.5","%","","4.8","%","","7.4","%"],["Total occupancy cost","7.0","%","","6.8","%","","10.5","%"]]
[[/GREPCENT_TABLE]]

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The 2021 interest expense rate above excludes certain costs and charges related to the September 2021 Refinancing Note amounting to approximately $637,000, or 0.3% of consolidated revenues. The $637,000 interest expense includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed new loan costs.

In fiscal 2021, we received 11 notices of forgiveness for our PPP loans approving the forgiveness of 100% of each of the 11 PPP loans amounting to $5.3 million in principal and interest, which were included in non-operating gains (losses), net. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. See Note 9 to our consolidated financial statements.

Income Taxes

Income taxes were an expense of approximately $14.1 million in 2022, $4.0 million in 2021, and a benefit of $493,000 in 2020. Our effective income tax rate was a 23.4% expense in 2022, 11.7% expense in 2021, and 7.2% benefit in 2020. The components of our annual effective income tax rate are the following:

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Federal statutory income tax expense/benefit","21.0","%","","21.0","%","","21.0","%"],["State income taxes, net of federal benefit","3.0","%","","2.1","%","","(3.7)","%"],["Permanent differences","0.2","%","","(1.3)","%","","(5.8)","%"],["Change in state tax rate","1.5","%","","(2.4)","%","","\u2014","%"],["Change in valuation allowance","0.6","%","","(1.9)","%","","(18.7)","%"],["Tax credits","(3.0)","%","","(3.5)","%","","13.9","%"],["Other","0.2","%","","(2.4)","%","","0.6","%"],["Total effective income tax rate","23.4","%","","11.7","%","","7.2","%"]]
[[/GREPCENT_TABLE]]

*Positive or negative percentages are in relation to income or loss before income taxes of the respective fiscal year.

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, and tax credits that are mostly FICA tip credits. The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the pandemic and the changes in the deferred tax asset valuation allowance in all three fiscal years presented.

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) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) settlement of lawsuits, (f) costs and charges related to debt refinancing, and (g) 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) impairment of assets,

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(c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) unrealized loss on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) costs and charges related to debt refinancing, (i) stock-based compensation, (j) the income tax effect of the above-described adjustments, and (k) change in deferred tax asset valuation allowance. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.8%, 13.5%, and 26.0% effective tax rate of the pre-tax non-GAAP income before taxes for the 2022, 2021, and 2020, 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 (f) unrealized gains or losses on equity securities, (g) impairment of assets, (h) settlement of lawsuits, (i) gain on debt extinguishment, and (j) 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 the unleveraged performance return on our investments. Adjusted EBITDA multiple is also used as a 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.

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The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and percentages):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Reconciliation of GAAP net income (loss) to Adjusted EBITDA"],["Net income (loss) attributable to RCIHH common stockholders","$","46,041","","","$","30,336","","","$","(6,085)"],["Income tax expense (benefit)","14,071","","","3,989","","","(493)"],["Interest expense, net","11,539","","","9,739","","","9,487"],["Settlement of lawsuits","1,417","","","1,349","","","174"],["Impairment of assets","1,888","","","13,612","","","10,615"],["Gain on sale of businesses and assets","(2,375)","","","(522)","","","(661)"],["Depreciation and amortization","12,391","","","8,238","","","8,836"],["Unrealized loss on equity securities","\u2014","","","84","","","64"],["Gain on debt extinguishment","(138)","","","(5,329)","","","\u2014"],["Loss (gain) on insurance","(463)","","","(1,253)","","","420"],["Stock-based compensation","2,353","","","\u2014","","","\u2014"],["Adjusted EBITDA","$","86,724","","","$","60,243","","","$","22,357"],["Reconciliation of GAAP net income (loss) to non-GAAP net income"],["Net income (loss) attributable to RCIHH common stockholders","$","46,041","","","$","30,336","","","$","(6,085)"],["Amortization of intangibles","2,118","","","258","","","609"],["Settlement of lawsuits","1,417","","","1,349","","","174"],["Impairment of assets","1,888","","","13,612","","","10,615"],["Gain on sale of businesses and assets","(2,375)","","","(522)","","","(661)"],["Costs and charges related to debt refinancing*","\u2014","","","694","","","\u2014"],["Unrealized loss on equity securities","\u2014","","","84","","","64"],["Gain on debt extinguishment","(138)","","","(5,329)","","","\u2014"],["Loss (gain) on insurance","(463)","","","(1,253)","","","420"],["Stock-based compensation","2,353","","","\u2014","","","\u2014"],["Change in deferred tax asset valuation allowance","343","","","(632)","","","1,273"],["Net income tax effect","(729)","","","(1,845)","","","(1,700)"],["Non-GAAP net income","$","50,455","","","$","36,752","","","$","4,709"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share"],["Diluted shares","9,383,445","","9,004,744","","9,199,225"],["GAAP diluted earnings (loss) per share","$","4.91","","","$","3.37","","","$","(0.66)"],["Amortization of intangibles","0.23","","","0.03","","","0.07"],["Settlement of lawsuits","0.15","","","0.15","","","0.02"],["Impairment of assets","0.20","","","1.51","","","1.15"],["Gain on sale of businesses and assets","(0.25)","","","(0.06)","","","(0.07)"],["Costs and charges related to debt refinancing*","\u2014","","","0.08","","","\u2014"],["Unrealized loss on equity securities","\u2014","","","0.01","","","0.01"],["Gain on debt extinguishment","(0.01)","","","(0.59)","","","\u2014"],["Loss (gain) on insurance","(0.05)","","","(0.14)","","","0.05"],["Stock-based compensation","0.25","","","\u2014","","","\u2014"],["Change in deferred tax asset valuation allowance","0.04","","","(0.07)","","","0.14"],["Net income tax effect","(0.08)","","","(0.20)","","","(0.18)"],["Non-GAAP diluted earnings per share","$","5.38","","","$","4.08","","","$","0.51"],["Reconciliation of GAAP operating income to non-GAAP operating income"],["Income from operations","$","71,459","","","$","38,548","","","$","2,746"],["Amortization of intangibles","2,118","","","258","","","609"],["Settlement of lawsuits","1,417","","","1,349","","","174"],["Impairment of assets","1,888","","","13,612","","","10,615"],["Costs and charges related to debt refinancing*","\u2014","","","57","","","\u2014"],["Gain on sale of businesses and assets","(2,375)","","","(522)","","","(661)"],["Loss (gain) on insurance","(463)","","","(1,253)","","","420"],["Stock-based compensation","2,353","","","\u2014","","","\u2014"],["Non-GAAP operating income","$","76,397","","","$","52,049","","","$","13,903"],["","2022","","2021","","2020"],["Reconciliation of GAAP operating margin to non-GAAP operating margin"],["GAAP operating margin","26.7","%","","19.7","%","","2.1","%"],["Amortization of intangibles","0.8","%","","0.1","%","","0.5","%"],["Settlement of lawsuits","0.5","%","","0.7","%","","0.1","%"],["Impairment of assets","0.7","%","","7.0","%","","8.0","%"],["Costs and charges related to debt refinancing*","\u2014","%","","0.0","%","","\u2014","%"],["Gain on sale of businesses and assets","(0.9)","%","","(0.3)","%","","(0.5)","%"],["Loss (gain) on insurance","(0.2)","%","","(0.6)","%","","0.3","%"],["Stock-based compensation","0.9","%","","\u2014","%","","\u2014","%"],["Non-GAAP operating margin","28.5","%","","26.7","%","","10.5","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["*","Costs and charges related to debt refinancing in 2021 consist of $637,000 in interest expense and $57,000 in legal and professional fees. The $637,000 interest expense portion above includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed new loan costs."]]
[[/GREPCENT_TABLE]]

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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 September 30, 2022, our cash and cash equivalents were approximately $36.0 million as compared to $35.7 million at September 30, 2021. Because of the large volume of cash we handle, we have very stringent cash controls. As of September 30, 2022, we had working capital of $18.6 million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated liabilities of $0 and $1.1 million, respectively) amounting to $1.0 million and $3.8 million as of September 30, 2022 and 2021, respectively. Since the pandemic hard hit fiscal 2020, we have since recovered and have seen a more normal stream of operations in 2021 and 2022. Geopolitical and macroeconomic events are still developing. In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected. 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 one of 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, but there can be no assurance 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.

During 2022, we acquired fifteen clubs at an aggregate acquisition price of $132.6 million, of which $55.3 million was in cash, $49.0 million in debt, and $30.0 million in equity (500,000 shares of our common stock with an acquisition date fair value of $29.9 million, discounted for lack of marketability due to the lock-up period).

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 net cash flows from operating, investing, and financing activities (in thousands):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Operating","$","64,509","","","$","41,991","","","$","15,632"],["Investing","(67,797)","","","(6,814)","","","(994)"],["Financing","3,582","","","(15,096)","","","(13,130)"],["Net increase in cash and cash equivalents","$","294","","","$","20,081","","","$","1,508"]]
[[/GREPCENT_TABLE]]

We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments in technology. We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital allocation strategy guidelines, and to pay our quarterly dividends.

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Cash Flows from Operating Activities

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

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Net income (loss)","$","46,060","","","$","30,150","","","$","(6,312)"],["Depreciation and amortization","12,391","","","8,238","","","8,836"],["Deferred tax expense (benefit)","3,080","","","(1,253)","","","(1,268)"],["Stock-based compensation expense","2,353","","","\u2014","","","\u2014"],["Impairment of assets","1,888","","","13,612","","","10,615"],["Gain on debt extinguishment","(83)","","","(5,298)","","","\u2014"],["Net change in operating assets and liabilities","(1,421)","","","(3,451)","","","1,380"],["Other","241","","","(7)","","","2,381"],["Net cash provided by operating activities","$","64,509","","","$","41,991","","","$","15,632"]]
[[/GREPCENT_TABLE]]

Net cash flows from operating activities increased from 2021 to 2022 mainly due to the operating results of the fifteen acquired clubs and one Bombshells opened. Net cash flows from operating activities increased from 2020 to 2021 mainly due to significantly higher income from operations partially offset by higher interest payments, which included deferred debt interest payments from 2020, and higher income taxes paid.

Cash Flows from Investing Activities

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

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Proceeds from sale of businesses and assets","$","10,669","","","$","5,415","","","$","2,221"],["Proceeds from notes receivable","182","","","130","","","1,576"],["Proceeds from insurance","648","","","1,152","","","945"],["Payments for property and equipment and intangible assets","(24,003)","","","(13,511)","","","(5,736)"],["Acquisition of businesses, net of cash acquired","(55,293)","","","\u2014","","","\u2014"],["Net cash used in investing activities","$","(67,797)","","","$","(6,814)","","","$","(994)"]]
[[/GREPCENT_TABLE]]

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity. We also purchased an aircraft and six real estate properties, of which, four are for future Bombshells locations, one for a club that we were leasing, and another to replace a club location which was taken by eminent domain. Also in 2022, we received payment for four real estate properties. We did not receive payment for the eminent domain property mentioned above until November 2022. In 2021, we acquired four real estate properties either for future club or restaurant locations or for corporate use. On one of the real properties purchased, we opened a Bombshells restaurant on December 6, 2021 in Arlington, Texas. There were no new Bombshells units opened in 2021. We also sold two real estate properties in 2021. We opened two new Bombshells units in 2020 (one in Katy, Texas and another on U.S. Highway 59 in Houston, Texas) and sold three real estate properties. As of September 30, 2022, 2021, and 2020, we had $1.5 million, $3.4 million, and $20,000 in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year. See Note 16 to our consolidated financial statements.

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Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2022, 2021, and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["New capital expenditures in new clubs and Bombshells units and equipment*","$","18,405","","","$","7,604","","","$","3,585"],["Maintenance capital expenditures","5,598","","","5,907","","","2,151"],["Total capital expenditures, excluding business acquisitions","$","24,003","","","$","13,511","","","$","5,736"]]
[[/GREPCENT_TABLE]]

*Includes real estate except those acquired through business acquisitions.

See discussion of acquisitions and dispositions subsequent to September 30, 2022 in Note 16 to our consolidated financial statements.

Cash Flows from Financing Activities

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

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Proceeds from debt obligations","$","35,820","","","$","38,490","","","$","6,503"],["Payments on debt obligations","(14,894)","","","(49,178)","","","(8,832)"],["Purchase of treasury stock","(15,097)","","","(1,794)","","","(9,484)"],["Payment of dividends","(1,784)","","","(1,440)","","","(1,286)"],["Payment of loan origination costs","(463)","","","(1,174)","","","\u2014"],["Distribution to noncontrolling interests","\u2014","","","\u2014","","","(31)"],["Net cash provided by (used in) financing activities","$","3,582","","","$","(15,096)","","","$","(13,130)"]]
[[/GREPCENT_TABLE]]

See Note 9 to our consolidated financial statements for a detailed discussion of our debt obligations.

We purchased shares of our common stock representing 268,185 shares, 74,659 shares, and 516,102 shares in 2022, 2021, and 2020, respectively. We paid quarterly dividends of $0.03 per share in fiscal 2020, except in the second and fourth quarter of 2020 where we paid $0.04 per share. We paid quarterly dividends of $0.04 per share in fiscal 2021 through the first quarter of 2022. Then starting in the second quarter of 2022, we increased our quarterly dividends to $0.05 per share.

Non-GAAP Cash Flow Measure

Management also uses certain non-GAAP cash flow measures such as free cash flow. We define 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. See table below (in thousands):

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["Net cash provided by operating activities","$","64,509","","","$","41,991","","","$","15,632"],["Less: Maintenance capital expenditures","5,598","","","5,907","","","2,151"],["Free cash flow","$","58,911","","","$","36,084","","","$","13,481"]]
[[/GREPCENT_TABLE]]

We do not include total capital expenditures 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.

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Debt Financing

See Note 9 to our consolidated financial statements for more details regarding our debt activity.

Contractual Obligations and Commitments

We have long-term contractual obligations primarily in the form of debt obligations and operating leases. The following table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments. Future interest payments related to debt were estimated using the interest rate in effect as of September 30, 2022.

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["","Total","","2023","","2024","","2025","","2026","","2027","","Thereafter"],["Debt obligations - regular(a)","$","106,102","","","$","10,216","","","$","9,663","","","$","9,527","","","$","9,825","","","$","10,424","","","$","56,447"],["Debt obligations - balloon(a)","99,738","","","2,226","","","2,195","","","20,457","","","\u2014","","","\u2014","","","74,860"],["Interest payments on debt","78,616","","","12,792","","","11,987","","","9,468","","","8,418","","","7,820","","","28,131"],["Operating leases(b)","52,789","","","4,895","","","4,944","","","5,024","","","5,089","","","4,895","","","27,942"]]
[[/GREPCENT_TABLE]]

(a)See Note 9 to our consolidated financial statements.

(b)See Note 20 to our consolidated financial statements.

Other than the ongoing impact of the COVID-19 pandemic, the current geopolitical and macroeconomic events happening globally, and the notes payable financing described above, 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.

The following table presents a summary of such indicators (dollars in thousands):

[[GREPCENT_TABLE]]
[["","2022","","Inc (Dec)","","2021","","Inc (Dec)","","2020"],["Sales of alcoholic beverages","$","113,316","","","30.7","%","","$","86,685","","","46.7","%","","$","59,080"],["Sales of food and merchandise","44,294","","","7.7","%","","41,111","","","68.1","%","","24,460"],["Service revenues","93,888","","","69.3","%","","55,461","","","34.7","%","","41,162"],["Other revenues","16,122","","","34.3","%","","12,001","","","57.4","%","","7,625"],["Total revenues","$","267,620","","","37.1","%","","$","195,258","","","47.6","%","","$","132,327"],["Net income (loss) attributable to RCIHH common stockholders","$","46,041","","","51.8","%","","$","30,336","","","(598.5)","%","","$","(6,085)"],["Net cash provided by operating activities","$","64,509","","","53.6","%","","$","41,991","","","168.6","%","","$","15,632"],["Adjusted EBITDA*","$","86,724","","","44.0","%","","$","60,243","","","169.5","%","","$","22,357"],["Free cash flow*","$","58,911","","","63.3","%","","$","36,084","","","167.7","%","","$","13,481"],["Debt (end of period)","$","202,463","","","61.8","%","","$","125,168","","","(11.5)","%","","$","141,435"]]
[[/GREPCENT_TABLE]]

*See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and Capital Resources above.

We have not established financing other than the notes payable discussed in Note 9 to the consolidated financial statements. 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.

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Share Repurchase

As part of our capital allocation strategy, we buy back shares in the open market or through negotiated purchases, as authorized by our Board of Directors. During fiscal years 2022, 2021, and 2020, we paid for treasury stock amounting to $15.1 million, $1.8 million, and $9.5 million representing 268,185 shares, 74,659 shares, and 516,102 shares, respectively. On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. We have approximately $18.9 million remaining to purchase additional shares as of September 30, 2022.

For additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

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 eleven of the existing Bombshells as of September 30, 2022 are 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 opened two new Bombshells units in fiscal 2020.

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity. See Note 16 to our consolidated financial statements. We also opened a new Bombshells location in Arlington, Texas in December 2021 and our first franchised location in San Antonio, Texas opened in June 2022.

On October 26, 2022, subsequent to the current reporting date, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $9.0 million. The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note payable in 180 equal monthly payments of $42,193 in principal and interest.

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.

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