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.
OUR BUSINESS
The following are our operating segments:
Nightclubs
Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs. These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Round Rock, El Paso and Odessa, Texas; Central City and Denver, Colorado; Charlotte and Raleigh, North Carolina; Minneapolis, Minnesota; New York and Newburgh, New York; Miami Gardens, Pembroke Park and Miami, Florida; Pittsburgh and Allentown, Pennsylvania; Phoenix, Arizona; Louisville, Kentucky; Portland, Maine; Indianapolis, Indiana; Washington Park, Kappa, Sauget and Chicago, Illinois; Inkster, Michigan; and West Columbia, South Carolina. 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, Pearland, Tomball, Katy, Arlington, Stafford, and Lubbock, Texas, and Denver, Colorado, under the brand name Bombshells Restaurant & Bar.
Other
Our wholly-owned subsidiaries own a media division (“Media Group”), 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.
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.
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Upon initial adoption of ASU 2023-07 for the annual reporting period ended September 30, 2025 (see Note 2 to our consolidated financial statements), certain previously reported segment information have changed. There were no changes in consolidated amounts. Segment-related discussions and analyses in the MD&A relate to amounts exclusive of intersegment items.
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.
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. Fair value is determined using the market, income, or cost approaches. If fair value is used to determine using the income approach, 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 fourth quarter of 2025, we impaired one property for $1.6 million in property and equipment.
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During the third quarter of 2024, we impaired six properties for $4.8 million in property and equipment and $5.7 million in operating lease right-of-use assets. During the fourth quarter of 2024, we impaired ten properties for $5.8 million in property and equipment and $747,000 in operating lease right-of-use assets. These properties are predominantly comprised of leased Bombshells locations.
During the third quarter of 2023, we impaired one property for $58,000 for its property and equipment and $1.0 million for its operating lease right-of-use asset before the club's permanent closure. During the fourth quarter of 2023, we also recognized software impairments amounting to $814,000 related to two venture projects.
Key assumptions and estimates used in long-lived asset impairment testing, the most significant of which is our estimated future cash flows, may produce materially different amounts of fair value, which could significantly impact our results of operations.
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, 2025, we did not impair goodwill. For the year ended September 30, 2024, we identified four reporting units that were and recognized a total goodwill of $8.9 million. For the year ended September 30, 2023, we identified four reporting units that were and recognized a total goodwill of $4.2 million.
For indefinite- and definite-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. We recorded impairment charges for SOB licenses amounting to $3.8 million in 2025 related to six clubs, $11.8 million in 2024 related to seven clubs, and $6.5 million in 2023 related to eight clubs. 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 exceeds the fair value of the asset. We recorded impairment charges for tradenames amounting to $0 in 2025, $693,000 in 2024 related to one club, and $0 in 2023.
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. These fair values are a result of valuation techniques that use significant assumptions that are subject to a high degree of judgment. 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.
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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 income 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 affected. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur in connection with these in excess of our insurance coverage.
In fiscal 2025, the Company self-insured a significant portion of expected losses under its general liability and liquor insurance programs due to increasingly prohibitive costs of such coverage from third-party insurers. The Company continues to purchase insurance for workers' compensation, property, auto, and business interruption, as well as the minimum insurance coverage where it is required by law for licensing requirements. We record a liability for unresolved claims and for an estimate of incurred but not reported claims including legal costs based on historical experience. The estimated liability is based on a number of assumptions and factors regarding economic conditions, the frequency and severity of claims development history, and settlement practices. Our assumptions are reviewed, monitored, and adjusted when warranted by changing circumstances.
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OPERATIONS REVIEW
Highlights of operations from fiscal 2025, 2024, and 2023 are as follows (in thousands, except percentages and per share amounts):
Inc (Dec)
Inc (Dec)
Revenues
Consolidated
Nightclubs
Bombshells
Same-store sales
Consolidated
Nightclubs
Bombshells
Income (loss) from operations
Consolidated
Nightclubs
Bombshells
Diluted earnings per share
Non-GAAP diluted earnings per share*
Net cash provided by operating activities
Free cash flow*
* 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 income statements present a comparison of our consolidated results of operations as a percentage of total revenues for the three most recently completed fiscal years:
Revenues
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Operating expenses
Cost of goods sold
Alcoholic beverages sold
Food and merchandise sold
Service and other
Total cost of goods sold (exclusive of items shown separately below)
Salaries and wages
Selling, general, and administrative
Depreciation and amortization
Impairments and other charges, net
Total operating expenses
Income from operations
Other income (expenses)
Interest expense
Interest income
Non-operating gains, net
Income before income taxes
Income tax expense (benefit)
Net income
† Percentages may not foot due to rounding in this and in all of the succeeding tables presenting percentages in this report. They represent their corresponding dollar values divided by the base. 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):
Better (Worse)
Amount
Amount
Revenues
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
Total revenues
Operating expenses
Cost of goods sold
Alcoholic beverages sold
Food and merchandise sold
Service and other
Total cost of goods sold (exclusive of items shown separately below)
Salaries and wages
Selling, general, and administrative
Depreciation and amortization
Impairments and other charges, net
Total operating expenses
Income from operations
Other income/expenses
Interest expense
Interest income
Non-operating gains/losses, net
Income/loss before income taxes
Income tax expense/benefit
Net income
* Not meaningful.
Revenues
Consolidated revenues decreased by $16.2 million, or 5.5%, from 2024 to 2025 due mainly from closed units and the decrease in same-store sales, partially offset by sales from new units. From 2023 to 2024, consolidated revenues increased by $1.8 million, or 0.6%, due mainly from recently acquired clubs and a newly opened Bombshells, partially offset by a decrease in same-store sales and a sales decrease from locations that were closed or rebranded in 2024.
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Segment contribution to total revenues was as follows (dollar amounts in thousands):
Inc (Dec)
Inc (Dec)
Nightclubs
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Bombshells
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Other
Other revenues
Nightclubs segment revenues. Nightclubs revenues decreased by 0.6% from 2024 to 2025 and increased by 3.0% from 2023 to 2024, as detailed below.
Impact of 2.1% and 2.1% decrease in same-store sales, respectively, to total revenues
New units
Closed units
Other
Net Nightclubs revenue increase (decrease)
Nightclubs segment sales mix for the three fiscal years, below:
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other
The 2025 new units include three clubs, one of which was acquired in January 2025 and the other two in April 2025 (with one of the two transactions that did not close until June 2025 due to permitting delay). There were no new club acquisitions in 2024. The 2023 new units include six clubs, one of which was acquired in October 2022 and five acquired in March 2023. See Note 16 to our consolidated financial statements for more information on our club acquisitions.
Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.7 million in 2025, $1.7 million in 2024, and $1.8 million in 2023.
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Bombshells segment revenues. Bombshells revenues decreased by 29.2% from 2024 to 2025 and decreased by 9.2% from 2023 to 2024, as detailed below.
Impact of 13.6% and 18.4% decrease in same-store sales, respectively, to total revenues
New units
Closed units
Other
Net Bombshells revenue decrease
With underperforming Bombshells closed or sold, we expect same-store sales to improve going forward.
Bombshells segment sales mix for the three fiscal years is as follows:
Sales of alcoholic beverages
Sales of food and merchandise
Service and other revenues
Bombshells San Antonio was acquired from our franchisee in the second quarter of 2023. We also acquired a food hall in Greenwood Village, Colorado, during the first quarter of 2023. We opened Bombshells Stafford in the first quarter of 2024 and sold Bombshells San Antonio in the fourth quarter of 2024. During the first quarter of 2025, we closed two Bombshells locations in Houston, Texas, sold one Bombshells location in Austin, Texas, and also closed the food hall in Greenwood Village, Colorado. We opened one Bombshells location in Denver, Colorado, during the second quarter of 2025 and opened one Bombshells location in Lubbock, Texas, during the fourth quarter of 2025.
Other segment revenues. Other revenues included revenues from Drink Robust in all three fiscal years presented. Drink Robust sales were $129,000, $131,000, and $145,000 in fiscal 2025, 2024, and 2023, respectively, which exclude intercompany sales to Nightclubs and Bombshells units amounting to $260,000, $270,000, and $254,000 in fiscal 2025, 2024, and 2023, respectively. Media business revenues were $991,000, $1.0 million, and $1.1 million in fiscal 2025, 2024, and 2023, respectively.
Operating Expenses
Total operating expenses, as a percent of consolidated revenues, were 89.2%, 93.6%, and 82.5% for the fiscal year 2025, 2024, and 2023, 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 13.1%, 13.9%, and 13.3% for fiscal 2025, 2024, and 2023, respectively. See page 36 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 11.4%, 11.7%, and 11.1% for fiscal 2025, 2024, and 2023, respectively, which was primarily caused by shifts in sales mix among the three fiscal years. Bombshells cost of goods sold was 23.9%, 24.1%, and 22.4% for fiscal 2025, 2024, and 2023, respectively, which was mainly driven by food cost inflation.
Salaries and wages . Consolidated salaries and wages decreased by $512,000, or 0.6%, from 2024 to 2025 and increased by $4.7 million, or 5.9%, from 2023 to 2024. The dollar changes are mostly from newly acquired or constructed and closed locations. As a percentage of revenues, consolidated salaries and wages were 29.9%, 28.5%, and 27.1% in 2025, 2024, and 2023, respectively, mainly due to sales trend and the impact of fixed salaries on change in sales.
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By reportable segment, salaries and wages are broken down as follows (dollar amounts in thousands):
Inc (Dec)
Inc (Dec)
Nightclubs
Bombshells
Other
Corporate
Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in Corporate.
Salaries and wages as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):
Nightclubs
Bombshells
Other
Corporate
Bombshells segment salaries and wages decreased in 2025 and 2024 but as a percentage of revenue it increased due to decrease in revenue.
Selling, general and administrative expenses . The components of consolidated selling, general and administrative expenses are in the tables below (dollar amounts in thousands):
Amount
Amount
Amount
Taxes and permits
Advertising and marketing
Supplies and services
Insurance
Lease
Legal
Utilities
Charge card fees
Security
Accounting and professional fees
Repairs and maintenance
Stock-based compensation
Other
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By reportable segment, selling, general and administrative expenses are broken down as follows (dollar amounts in thousands):
Inc (Dec)
Inc (Dec)
Nightclubs
Bombshells
Other
Corporate
Selling, general and administrative expenses as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):
Nightclubs
Bombshells
Other
Corporate
The significant variances in selling, general and administrative expenses are as follows:
As a percentage of revenues, relatively fixed expenses tend to be higher in rate due to lower sales, while more variable expenses tend to keep their rates even if dollar amounts are increasing. Nightclubs expenses increased as a percentage of segment revenue due to newly acquired clubs. Bombshells expenses increased as a percentage of segment revenue due to lower sales.
Taxes and permits increased from 2023 to 2024 mainly due to the increase in the Texas patron tax but decreased from 2024 to 2025 due to closed locations.
Insurance expense increased due to the estimated self-insurance for general liability and liquor liability. Any unallocated self-insurance reserve remains in Corporate segment.
Legal expenses increased due mainly to the increase in ongoing cases, particularly the New York indictment.
Depreciation and amortization . Depreciation and amortization decreased by $317,000, or 2.1%, from 2024 to 2025 and increased by $244,000, or 1.6%, from 2023 to 2024. The increase from 2023 to 2024 was mainly caused by a decrease in the amortization of intangibles due to previous impairment, while the decrease from 2024 to 2025 was mainly caused by closed locations.
Impairments and other charges, net . The components of impairments and other charges, net are in the table below (dollars in thousands):
Inc (Dec)
Inc (Dec)
Impairment of assets
Settlement of lawsuits
Gain on sale of businesses and assets
Gain on insurance
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The significant variances in impairments and other charges, net are discussed below:
During 2025, we recorded aggregate impairment charges amounting to $5.3 million related to SOB licenses of six clubs ($3.8 million) and property and equipment of one food hall ($1.6 million). During 2024, we recorded aggregate impairment charges amounting to $38.5 million related to goodwill of four clubs ($8.9 million), SOB licenses of seven clubs ($11.8 million), operating lease right-of-use assets of five Bombshells locations ($6.5 million), tradename of one club ($693,000), property and equipment of four clubs and nine Bombshells locations ($10.6 million). During 2023, we recorded aggregate impairment charges amounting to $12.6 million related to goodwill of four clubs ($4.2 million), SOB licenses of eight clubs ($6.5 million), operating lease right-of-use asset and property and equipment of a closed club ($1.1 million), and software of two investment projects ($814,000).
In 2025, we settled a consolidated class action lawsuit in Illinois for the alleged collection of customer fingerprints for $2.95 million, consisting of $1.25 million in cash and $1.7 million in VIP cards. In 2023, we recognized settlements with the New York Department of Labor amounting to $3.1 million related to the assessment by the New York Department of Labor for state unemployment insurance. See Note 11 to our consolidated financial statements.
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 $77,000 gain in 2023. 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. We also partially recovered and recognized a $327,000 gain related to a fire in one of our clubs in Fort Worth, Texas, during 2024 and $2.3 million in 2025. See Note 15 to our consolidated financial statements.
Income from Operations
During fiscal 2025, 2024, and 2023, our consolidated operating margin was 10.8%, 6.4%, and 17.5%, respectively.
Below is a table which reflects segment contribution to income from operations (in thousands):
Nightclubs
Bombshells
Other
Corporate
Nightclubs operating margin was 28.7%, 23.7%, and 30.9% in 2025, 2024, and 2023. Bombshells operating margin was 0.5%, (21.3)%, and 11.7% in 2025, 2024, and 2023, respectively.
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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 45.
Nightclubs
Bombshells
Other
Corporate
Total
Income (loss) from operations
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Gain on insurance
Stock-based compensation
Non-GAAP operating income (loss)
GAAP operating margin
Non-GAAP operating margin
Nightclubs
Bombshells
Other
Corporate
Total
Income (loss) from operations
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Gain on insurance
Stock-based compensation
Non-GAAP operating income (loss)
GAAP operating margin
Non-GAAP operating margin
Nightclubs
Bombshells
Other
Corporate
Total
Income (loss) from operations
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Loss (gain) on sale of businesses and assets
Gain on insurance
Stock-based compensation
Non-GAAP operating income (loss)
GAAP operating margin
Non-GAAP operating margin
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Other Income/Expenses
Interest expense decreased by approximately $327,000 from 2024 to 2025 and increased by approximately $753,000 from 2023 to 2024. The decrease in interest expense in 2025 was primarily caused by a lower average year-over-year debt balance. The increase in interest expense was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions in 2023 and the additional interest expense from construction loans in 2024 related to build-out projects.
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) is shown in the table below.
Lease
Interest
Total occupancy cost
Income Taxes
Income tax was approximately a $4.6 million expense in 2025, $410,000 benefit in 2024, and a $6.8 million expense in 2023. Our effective income tax rate was 29.8% in 2025, (15.7)% in 2024, and 19.0% in 2023. The components of our annual effective income tax rate are the following:
Federal statutory income tax expense/benefit
State income taxes, net of federal benefit
Nontaxable or nondeductible items
Goodwill impairment
Section 162(m) excess compensation
Meals and entertainment
Loss (gain) on sale of subsidiary stock
Other nontaxable or nondeductible items
Change in valuation allowance
Tax credits
FICA tip credit
Work Opportunity Tax credits
Expiration of capital loss carryforwards
Stock-based compensation forfeiture
Return-to-provision and prior-period adjustments
Other
Total effective income tax rate
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, changes in the deferred tax asset valuation allowance, and tax credits that are mostly FICA tip credits. The effective income tax rate for fiscal 2024 was also affected by the low pretax income that caused a high offsetting rate for tax credits, whose dollar value does not change based on pretax income.
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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, and (f) stock-based compensation. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share . We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (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) gain on lease termination, (g) stock-based compensation, (h) the income tax effect of the above-described adjustments, and (i) 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 22.7%, 0.0%, and 20.6% effective tax rate of the non-GAAP income before taxes for 2025, 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.
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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) impairment of assets, (g) settlement of lawsuits, (h) gain on lease termination, and (i) 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.
The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and percentages):
Reconciliation of GAAP net income to Adjusted EBITDA
Net income attributable to RCIHH common stockholders
Income tax expense (benefit)
Interest expense, net
Settlement of lawsuits
Impairment of assets
Gain on sale of businesses and assets
Depreciation and amortization
Gain on insurance
Gain on lease termination
Stock-based compensation
Adjusted EBITDA
Reconciliation of GAAP net income to non-GAAP net income
Net income attributable to RCIHH common stockholders
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Gain on sale of businesses and assets
Gain on insurance
Gain on lease termination
Stock-based compensation
Change in deferred tax asset valuation allowance
Net income tax effect
Non-GAAP net income
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Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share
Diluted shares
GAAP diluted earnings per share
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Gain on sale of businesses and assets
Gain on insurance
Gain on lease termination
Stock-based compensation
Change in deferred tax asset valuation allowance
Net income tax effect
Non-GAAP diluted earnings per share
Reconciliation of GAAP operating income to non-GAAP operating income
Income from operations
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Gain on sale of businesses and assets
Gain on insurance
Stock-based compensation
Non-GAAP operating income
Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin
Amortization of intangibles
Settlement of lawsuits
Impairment of assets
Gain on sale of businesses and assets
Gain on insurance
Stock-based compensation
Non-GAAP operating margin
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.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2025, our cash and cash equivalents were $33.7 million as compared to $32.4 million at September 30, 2024. Due to the large volume of cash that we handle, we have very stringent cash controls. As of September 30, 2025, and 2024, we had negative working capital balances. We believe that we can borrow capital if needed but there can be no guarantee that additional liquidity will be readily available or available on favorable terms although we have unused credit facilities as of September 30, 2025.
We have not recently raised capital through the issuance of equity securities although we have used equity recently in our acquisitions. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable. There can be no assurance though that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.
During 2023, we acquired six clubs at an aggregate acquisition date fair value of $72.3 million, of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and $16.0 million in equity (200,000 shares of our common stock with an acquisition date fair value of $12.8 million, discounted for lack of marketability due to the lock-up period).
We did not have any business acquisition in 2024.
During 2025, we acquired three clubs at an aggregate acquisition date fair value of $21.0 million, of which $13.0 million was in cash and $8.0 million in debt (with the same acquisition date fair value).
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):
Operating
Investing
Financing
Net increase (decrease) in cash and cash equivalents
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.
Cash Flows from Operating Activities
Following are our summarized cash flows from operating activities (in thousands):
Net income
Depreciation and amortization
Deferred tax benefit
Stock-based compensation expense
Impairment of assets
Net change in operating assets and liabilities
Other
Net cash provided by operating activities
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Net cash flows from operating activities decreased from 2023 to 2024 and from 2024 to 2025 mainly due to the lower same-store sales, partially offset by the lower income taxes paid.
In the next five years, we expect interest payments on our debts to range from $15.0 million in the early years to $8.0 million annually in the latter years for debts we owe as of September 30, 2025.
See Note 12 for our operating lease payment schedule for the next five years and thereafter.
Cash Flows from Investing Activities
Following are our summarized cash flows from investing activities (in thousands):
Proceeds from sale of businesses and assets
Proceeds from notes receivable
Proceeds from insurance
Payments for property and equipment and intangible assets
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
In 2025, we acquired three clubs for a combined sum of $21.0 million (with an aggregate acquisition date fair value of the same amount), of which $13.0 million was in cash and $8.0 million in debt (with an acquisition date fair value of the same amount).
In 2023, we acquired six clubs for a combined sum of $75.5 million (with an aggregate acquisition date fair value of $72.3 million), of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and 200,000 shares of our common stock in equity (with an acquisition date fair value of $12.8 million). We also acquired several real estate properties for club and Bombshells sites totaling $19.7 million, and invested $7.5 million for future casino locations.
As of September 30, 2025, 2024, and 2023, we had $7.9 million, $15.0 million, and $7.7 million in construction-in-progress related mostly to Bombshells units that open in subsequent periods.
See Note 16 to our consolidated financial statements for details of our acquisition and disposition activities.
Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2025, 2024, and 2023 (in thousands):
New capital expenditures in new clubs and Bombshells units and equipment*
Maintenance capital expenditures
Total capital expenditures, excluding business acquisitions
* Includes real estate, except those acquired through business acquisitions.
We expect capital expenditure payments in the range of $11.0 million to $16.0 million in 2026, $6.0 million to $8.0 million of which relate to maintenance capital expenditures to support our existing clubs and restaurants and our corporate office.
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Cash Flows from Financing Activities
Following are our summarized cash flows from financing activities (in thousands):
Proceeds from debt obligations
Payments on debt obligations
Purchase of treasury stock
Payment of dividends
Payment of loan origination costs
Distribution to noncontrolling interests
Net cash used in financing activities
See Note 9 to our consolidated financial statements for a detailed discussion of our debt obligations, including the future maturities of our debt obligations in the next five years and thereafter.
We purchased shares of our common stock representing 270,939 shares, 442,639 shares, and 34,086 shares in 2025, 2024, and 2023, respectively. We paid quarterly dividends of $0.05 per share in the first quarter of 2023. In the second quarter of 2023 through the third quarter of 2024, we increased our quarterly dividends to $0.06 per share. Then starting in the fourth quarter of 2024 through the first quarter of 2026, we increased our quarterly dividends to $0.07 per share. In the second quarter of 2026, we increased our quarterly dividends to $0.08 per share. We expect annual dividend payments of $2.5 million in 2026 based on our current quarterly dividend rate.
Non-GAAP Cash Flow Measure
We also use 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):
Net cash provided by operating activities
Less: Maintenance capital expenditures
Free cash flow
As a % of revenue
We only include maintenance 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.
Other than the impact of uncertainties caused by near-term macro environment, including supply chain challenges, and commodity and labor inflation, and the contractual obligations 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. We continue to monitor the macro environment and will adjust our overall approach to capital allocation as events and trends unfold.
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The following table presents a summary of such indicators (dollars in thousands):
Inc (Dec)
Inc (Dec)
Sales of alcoholic beverages
Sales of food and merchandise
Service revenues
Other revenues
Total revenues
Net income attributable to RCIHH common stockholders
Net cash provided by operating activities
Adjusted EBITDA*
Free cash flow*
Debt (end of period)
* 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.
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 2025, 2024, and 2023, we paid for treasury stock amounting to $11.9 million, $20.6 million, and $2.2 million, representing 270,939 shares, 442,639 shares, and 34,086 shares, respectively. On July 9, 2024, the board of directors approved a $25.0 million increase in the Company's share repurchase program. We have approximately $9.2 million remaining authorization to purchase additional shares as of September 30, 2025.
On November 21, 2025, the Company repurchased 821,000 shares of its own common stock from a single stockholder for $30.0 million, paid $8.0 million in cash and $22.0 million under a two-year unsecured promissory note.
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). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.
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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 clubs, opening new clubs after market analysis and developing new club concepts that are consistent with our management and marketing skills as our capital and manpower allow. We also strive to enter into businesses that complement our own, such as gaming, if they can enhance shareholder value.
In fiscal 2023, we acquired six clubs with an aggregate acquisition date fair value of $72.3 million, of which $29.0 million was in cash, $30.5 million in debt (with an acquisition date fair value of $30.4 million), and 200,000 shares of our common stock in equity.
In fiscal 2024, we did not have any club business acquisitions but opened a new Bombshells location in Stafford, Texas in November 2023.
In fiscal 2025, we acquired three clubs with an aggregate acquisition date fair value of $21.0 million, of which $13.0 million was in cash and $8.0 million in debt.
See Note 16 to our consolidated financial statements.
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.
