RICK 10-K & 10-Q changes, risk factors and insider trading

Our technology systems contain personal, financial, and other information that is entrusted to us by our guests and employees, as well as financial, proprietary, and other confidential information related to our business, and a significant portion of our sales are by credit or debit cards. If our technology systems, or those of third-party services providers we rely upon, are compromised as a result of a cyber-attack (including whether from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal method, it could result in an adverse and material impact on our reputation, operations, and financial condition. The cyber risks we face range from cyber-attacks common to most industries, to attacks that target us due to the confidential consumer information we obtain through our electronic processing of credit and debit card transactions. Such security breaches could also result in litigation or governmental investigation against us, as well as the imposition of penalties. These impacts could also occur if we are perceived either to have had an attack or to have failed to properly respond to an incident. Like many other customer facing companies we have experienced, and will likely continue to experience, attempts to compromise our information technology systems. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. In addition, the rapid evolution and increased adoption of artificial intelligence technologies may also heighten our cybersecurity risks by making cyber-attacks more difficult to detect, contain, and mitigate. While we continue to make significant investment in physical and technological security measures, employee training, and third-party services designed to anticipate cyber-attacks and prevent breaches, our information technology networks and infrastructure or those of our third-party vendors and other service providers could be vulnerable to damage, disruptions, shutdowns or breaches of confidential information due to criminal conduct, employee error or malfeasance, utility failures, natural disasters, or other catastrophic events. Due to these scenarios we cannot provide assurance that we will be successful in preventing such breaches or data loss.

We are subject to a variety of continually evolving and developing laws and regulations regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. The use and disclosure of such information is regulated and enforced at the federal, state and international levels, and these laws, rules and regulations are subject to change. Additionally, the information, security and privacy requirements imposed by governmental regulation are increasingly demanding. Our systems may not be able to satisfy these changing requirements and guest and employee expectations, or may require significant additional investments or time in order to do so. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our information systems and records and that of our service providers.

As privacy and information security laws and regulations change or cyber risks evolve pertaining to data, we may incur significant additional costs in technology, third-party services, and personnel to maintain systems designed to anticipate and prevent cyber-attacks. As with many public companies, our defenses are under attack regularly. There might be minor intrusions from time to time. We have added certain preventive measures to reduce cyber risks. However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future significant cyber-attacks or data loss. A breach in the security of our information technology systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or access to, guests’ or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our operations, damage our reputation and expose us to claims from guests and employees, any of which could have a material adverse effect on our business, financial condition and results of operations.

Management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2024,2025, and concluded that we did not maintain effective internal control over financial reporting. Management identified material weaknesses related to (1) ineffective design and operation of controls over certain information technology general controls, including change management, user access,management and vendor management controls; (2) ineffective design and operation of controls ,controls, which include management review controls, over the accounting for business combinations and contingent liabilities; and (3) ineffective design and operation of controls, which include management review controls, over the Company'simpairment assessments ofover potentiallong-lived impairment.assets, definite- and indefinite-lived intangible assets, and goodwill. See Item 9A, “Controls and Procedures,” below. While certain actions have been taken to implement a remediation plan to address these material weaknesses and to enhance our internal control over financial reporting, if these material weaknesses are not remediated, it could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which could negatively affect investor confidence in our Company, and, as a result, the value of our common stock could be adversely affected.

Historically, we have maintained insurance in amounts we consider adequate for personal injury and property damage to which the business of the Company may be subject. AsDuring offiscal October 1, 2024,2025, however, we discontinuedself-insured certain general liability and liquor insurance coverage in a number of establishments due to increasingly prohibitive costs of such coverage, and we are currently in the process of establishing self-insurance for the claims for which third-party insurance coverage is financially prohibitive.coverage. However, we still carry at least the minimum insurance coverage where it is required by law for licensing requirements. There can be no assurance that we will not have uninsured liabilities or liabilities in excess of the coverage provided by insurance or self-insurance, which liabilities may be imposed pursuant to the Texas “dram shop” statute or similar “dram shop” statutes or common law theories of liability in other states where we operate or expand. For example, the Texas “dram shop” statute provides a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person if it was apparent to the server that the individual being sold, served or provided with an alcoholic beverage was obviously intoxicated to the extent that he presented a clear danger to himself and others. An employer is not liable for the actions of its employee who over-serves if (i) the employer requires its employees to attend a seller training program approved by the TABC; (ii) the employee has actually attended such a training program; and (iii) the employer has not directly or indirectly encouraged the employee to violate the law. It is our policy to require that all servers of alcohol working at our clubs in Texas be certified as servers under a training program approved by the TABC, which certification gives statutory immunity to the sellers of alcohol from damage caused to third parties by those who have consumed alcoholic beverages at such establishment pursuant to the TABC. There can be no assurance, however, that uninsured liabilities may not arise in the markets in which we operate which could have a material adverse effect on the Company.

Claims brought by government authorities have the potential to be especially disruptive to our business and operations. As described further under “Legal Matters” in Note 1011 to our consolidated financial statements, on September 16, 2025, the Company was indicted in 2024,the Supreme Court of the State of New York, County of New York, along with two executive officers of the Company (Eric Langan, then Chief Executive Officer, and Bradley Chhay, then Chief Financial Officer, who each subsequently stepped down from those positions in November 2025), three employees of subsidiaries, and the Company’s subsidiaries Peregrine Enterprises, Inc. (the operator of Rick’s Cabaret in New York StateCity), RCI Dining Services (37th Street), Inc. (the operator of Vivid Cabaret in New York City) and RCI 33rd Street Ventures, Inc. (the operator of Hoops Cabaret and Sports Bar in New York City). The indictment alleges that the defendants committed conspiracy, bribery, criminal tax fraud, and offering a false instrument for filing. These charges, which resulted from a previously disclosed investigation by the Office of the Attorney General (“NYof AG”)New andYork, allege that a tax auditor with the New York State Department of Taxation and Finance (“NYwas DTF”)provided hascomplimentary executedadmission searchto warrantsclubs, onrestaurant meals, private dances and travel expenses in exchange for the Company’sreduction corporateof headquarterscertain sales tax liabilities in Houston,connection Texas, three separate clubs in New York, New York, and has sentwith the Companyuse aof subpoena“Dance requesting documents and other information with respect to certain clubs in New York and Florida. The investigation appears to be related to the Company’s New York State tax filings and possible entertainment benefits provided to NY DTF personnel.Dollars.” The Company is cooperatingcontinuing withto evaluate the NYcharges AGin the indictment and itsintends investigation.to Asvigorously defend itself against them, while also continuing to seek a resultjust resolution. The charges are merely allegations, and the defendants are presumed innocent unless and until proven guilty in a court of this investigation, a non-executive corporate employee was placed on administrative leave during the pendency of an internal review process.law. It is not possible at this time to determine whether the Company will incur any fines, penalties, or liabilities in connection with the investigation. If, however, a government authority was to allege that illegal conduct was committed by the Company or any of its employees or executives, regardless of whether any such claims are valid, such claims have the potential to affect our business and defending such claims may be expensive and may divert time, attention and money away from our operations and hurt our performance. Further, adverse publicity resulting from these claims may hurtnegatively affect our business.

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 20152015, and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer had insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As of September 30, 2024,2025, we have 1no remaining unresolved claimclaims out of the original 71 claims.

Our future success is dependent, in a large part, on retaining the services of individuals who possess comprehensive knowledge of our industry. Eric Langan, our former President and Chief Executive Officer, and Bradley Chhay, our former Chief Financial Officer.Officer, Mr.have Langanserved possessesthese a unique and comprehensive knowledge of our industry. While Mr. Langan has no present plans to leave or retireroles in the nearpast, future,but hisboth individuals stepped down as executive officers in November 2025. Travis Reese and Albert Molina have stepped in to fill these positions and Messrs. Langan and Chhay have remained with the Company in different roles. Our executive officers have vast experience in the adult nightclub and/or hospitality industries, with Mr. Molina having specialized familiarity with our accounting systems and how they affect our operations. The loss of key personnel could have a negative effect on our operating, marketing and financial performance if we are unable to find an adequate replacement with similar knowledge and experience within our industry. Mr. Chhay possesses thorough familiarity with our accounting system and how it affects our operations. Mr. Chhay is also vital in our due diligence efforts when acquiring clubs. We maintain key-man life insurance with respect to Mr. Langan but not for Mr. Chhay. Although Messrs. Langan and Chhay have signed employment agreements with us (as described herein), thereThere can be no assurance that Mr.any Langanof orour Mr.key Chhaypersonnel will continue to be employed by us.

•weather interference, floods, fires or other casualty losses; and The completion dates of any of our projects could differ significantly from expectations for construction-related or other reasons. Actual costs and construction periods for any of our projects can differ significantly from initial expectations. Our initial project costs and construction periods are based upon budgets, conceptual design documents and construction schedule estimates prepared at inception of the project in consultation with architects and contractors. Many of these costs can increase over time as the project is built to completion.

We are also subject to the general risks of inflation, increases in minimum wage, health care, and other benefits that may have a material adverse effect on our cost structure, and the disruption in our supply chain caused by several factor, including the COVID-19 pandemic.factors.

Our business, financial condition, and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing war between Russia and Ukraineother andgeopolitical the Israel-Hamas war.conflict.

The ongoingOngoing war between Russia and Ukraineother andgeopolitical the more recent Israel-Hamas warconflicts could have adverse effects on global macroeconomic conditions which could negatively impact our business, financial condition, and results of operations. These conflicts are highly unpredictable and have alreadyhistorically resulted in significant volatility in oil and natural gas prices worldwide.

Our nightclubs are often acquired with a purchase price based on historical EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). This results in certain nightclubs carrying a substantial amount of intangible asset value, mostly allocated to licenses and goodwill. Generally accepted accounting principles require periodic impairment review of indefinite-lived intangible assets, long-lived assets, and goodwill to determine if, or when events and circumstances indicate that, the fair value of these assets is not recoverable. As a result of our periodic impairment reviews, we recorded impairment charges of $5.3 million in 2025 (representing $3.8 million of SOB license impairment on six clubs and $1.6 million of property and equipment impairment on one food hall operated under the Bombshells segment); $38.5 million in 2024 (representing $8.9 million of goodwill impairment on four clubs,impairment, $11.8 million of SOB license impairment on seven clubs, $10.6 million of property and equipment impairment on four clubs and nine Bombshells units, $6.5 million of operating lease right-of-use assets impairment on five Bombshells units, $693,000 of tradename impairment on one club, and $68,000 related to other assets); and $12.6 million in 2023 (representing $4.2 million of goodwill impairment on four clubs,impairment, $6.5 million of SOB license impairment on eight clubs, $1.0 million of operating lease right-of-use asset on one club, $814,000 of software impairment on two investment projects, and $58,000 of property and equipment impairment on one club); and $1.9 million in 2022 (representing $566,000 of goodwill impairment on one club, $293,000 of SOB license impairment on one club, and $1.0 million of property and equipment impairment on one club and one Bombshells unit). If difficult market and economic conditions materialize over the next year and/or we experience a decrease in revenue at one or more nightclubs or restaurants, we could incur a decline in fair value of one or more of our nightclubs or restaurants. This could result in future impairment charges of up to the total value of our tangible and intangible assets, including goodwill. We actively monitor our clubs and restaurants for any indication of impairment.

Our securities are currently listed for trading on the NASDAQ Global Market. We must continue to satisfy NASDAQ’s continued listing requirements or risk delisting which would have an adverse effect on our business. If our securities are ever delisted from NASDAQ, they may trade on the over-the-counter market, which may be a less liquid market. In such case, our shareholders’ ability to trade or obtain quotations of the market value of shares of our common stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. Additionally, we are presently not in compliance with NASDAQ Listing Rule 5250(c)(1), which requires timely filing of all required periodic financial reports with the SEC. Although we intend to regain compliance with Listing Rule 5250(c)(1) by filing all such reports as soon as practicable, there is no assurance that we will be able to maintain compliance with Listing Rule 5250(c)(1) or any of the other NASDAQ continued listing requirements.

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 impaired and recognized a total goodwill impairment of $8.9 million. For the year ended September 30, 2023, we identified four reporting units that were impaired and recognized a total goodwill impairment of $4.2 million. 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 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, and $293,000 in 2022 related to one club.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, $0 in 2023, and $0 in 2022.2023.

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

†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.

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):

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%, from 2023 to 2024 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. From 2022 to 2023, consolidated revenues increased by $26.2 million, or 9.8%, due mainly to newly acquired locations, partially offset by a decrease in same-store sales and a sales decrease from locations closed in 2023.

Nightclubs segment revenues. Nightclubs revenues decreased by 0.6% from 2024 to 2025 and increased by 3.0% from 2023 to 2024 and by 14.8% from 2022 to 2023,2024, as explaineddetailed below.

Bombshells segment revenues. Bombshells revenues decreased by 29.2% from 2024 to 2025 and decreased by 9.2% from 2023 to 2024 and decreased by 7.0% from 2022 to 2023,2024, as explaineddetailed below.

Bombshells Arlington was opened in the first quarter of 2022. Bombshells San Antonio was acquired from our franchisee in the second quarter of 2023. We also acquired a food hall in Greenwood Village, ColoradoColorado, 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, $145,000, and $201,000$145,000 in fiscal 2025, 2024, 2023, and 2022,2023, respectively, which exclude intercompany sales to Nightclubs and Bombshells units amounting to $260,000, $270,000, $254,000, and $261,000$254,000 in fiscal 2025, 2024, 2023, and 2022,2023, respectively. Media business revenues were $991,000, $1.0 million, $1.1 million, and $1.2$1.1 million in fiscal 2025, 2024, and 2023, and 2022, respectively.

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 and increased by $11.1 million, or 16.1%, from 2022 to 2023.2024. The dollar increaseschanges are mostly from newly acquired or constructed and closed locations. As a percentage of revenues, consolidated salaries and wages were 29.9%, 28.5%, 27.1%, and 25.6%27.1% in 2025, 2024, 2023, and 2022,2023, respectively, mainly due to sales trend and the impact of fixed salaries on change in sales.

Bombshells and Other segment salaries and wages decreased in 2025 and 2024 but as a percentage of revenue theyit increased due to their decrease in revenue.

Taxes and permits increased from 2023 to 2024 mainly due to the increase in the Texas patron tax.tax Insurancebut expensedecreased increasedfrom 2024 to 2025 due to additionalclosed clubs and restaurants, with additional impact from insurance premium refunds received in 2023.locations.

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 and increased by $2.8 million, or 22.3%, from 2022 to 2023.2024. The increase from 2022 to 2023 was mainly from newly acquired clubs, while the smaller increase from 2023 to 2024 was mainly caused by a decrease in the amortization of intangibles due to previous impairment.impairment, while the decrease from 2024 to 2025 was mainly caused by closed locations.

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). 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).

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. In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance. See Note 1011 to our consolidated financial statements. Going forward, settlements might be more volatile and higher in value due to self-insurance.

In relation to insurance claims and recoveries, we recognized a $77,000 gain in 2023 and $463,000 gain in 2022 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 2022.2023. 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 the2024 fourthand quarter$2.3 ofmillion 2024.in 2025. See Note 1315 to our consolidated financial statements.

Nightclubs operating margin was 23.8%,28.7%, 30.9%,23.7%, and 40.1%30.9% in 2025, 2024, 2023, and 2022.2023. Bombshells operating margin was 0.5%, (21.021.3)%, 11.7%,and 11.7% in 2025, 2024, and 19.2% in 2024, 2023, and 2022, respectively.

Interest expense decreased by approximately $327,000 from 2024 to 2025 and increased by approximately $753,000 from 2023 to 20242024. andThe decrease in interest expense in 2025 was primarily caused by approximatelya $4.0lower millionaverage fromyear-over-year 2022debt to 2023.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.

Income tax was approximately a $4.6 million expense in 2025, $410,000 benefit in 2024, and a $6.8 million expense in 2023, and a $14.1 million expense in 2022.2023. Our effective income tax rate was 29.8% in 2025, (15.7)% in 2024, and 19.0% in 2023, and 23.4% in 2022.2023. The components of our annual effective income tax rate are the following:

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 debtlease extinguishment,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%, 20.6%, and 22.8%20.6% effective tax rate of the pre-tax non-GAAP income before taxes for 2025, 2024, 2023, and 2022,2023, respectively, and the GAAP income tax expense.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,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 debtlease extinguishment,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.

At September 30, 2024,2025, our cash and cash equivalents were $32.4$33.7 million as compared to $21.0$32.4 million at September 30, 2023.2024. BecauseDue ofto 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 of $793,000 compared to a negative working capital of $10.5 million as of September 30, 2023.balances. 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.terms although we have unused credit facilities as of September 30, 2025.

Net cash flows from operating activities decreased from 20222023 to 20232024 and from 20232024 to 20242025 mainly due to the lower same-store sales and the higher interest expense paid,sales, partially offset by the lower income taxes paid.

As of September 30, 2025, 2024, 2023, and 2022,2023, we had $14.0$7.9 million, $7.7$15.0 million, and $1.5$7.7 million in construction-in-progress related mostly to Bombshells units that are openingopen in subsequent fiscal years.periods.

We purchased shares of our common stock representing 442,639270,939 shares, 34,086442,639 shares, and 268,18534,086 shares in 2025, 2024, 2023, and 2022,2023, respectively. We paid quarterly dividends of $0.04$0.05 per share in the first quarter of 2022.2023. In the second quarter of 2022 through the first quarter of 2023, we increased our quarterly dividends to $0.05 per share. Then starting in the second quarter of 2023 through the third quarter of 2024, we increased our quarterly dividends to $0.06 per share. WeThen paid $0.07 per sharestarting in the fourth quarter of 2024.2024 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 20252026 based on our current quarterly dividend rate.

We do notonly include totalmaintenance 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.

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, 2023, and 2022,2023, we paid for treasury stock amounting to $11.9 million, $20.6 million, and $2.2 million, andrepresenting $15.1270,939 million, representingshares, 442,639 shares, 34,086 shares, and 268,18534,086 shares, respectively. On each of May 24, 2022 and July 9, 2024, the board of directors approved a $25.0 million increase in the Company's share repurchase program. We have approximately $21.0$9.2 million remaining authorization to purchase additional shares as of September 30, 2024.2025.

Through our subsidiaries, as of MarchJune 31,30, 2026, we operated a total of 6768 establishments that offer live adult entertainment and sports bars and restaurants. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine operating segments not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

During the three months ended MarchJune 31,30, 2026, there were no significant changes in our accounting policies and estimates.

SecondThree QuarterMonths Ended MarchJune 31,30, 2026

•Consolidated same-store sales decreased by 1.9%0.2% (Nightclubs decreased by 0.7%,0.8%, while Bombshells decreasedincreased by 11.1%4.7%) (refer to the definition of same-store sales in the discussion of revenues below)

•Basic and diluted earnings per share (“EPS”) of $0.04 loss$0.83 compared to $0.36 income$0.46

•Net cash provided by operating activities of $17.7$11.3 million compared to $21.9$13.8 million, aan 19.2%18.2% decrease

•Free cash flow* of $15.1$10.6 million compared to $19.0$13.3 million, a 20.5%20.2% decrease Nine Months Ended June 30, 2026

Consolidated revenues for the secondthird quarter increased by $2.8 million, or 4.3%,3.9%, versus the comparable prior-year quarter due primarily to a $3.4$2.8 million increase in sales from new locations and a $1.2$1.4 million increase from reformatted/rebranded locations, partially offset by a $1.2 million$121,000 impact of the decrease in consolidated same-stores sales and a $500,000$1.2 million impact of closed locations.

Consolidated revenues for the sixnine months increased by $2.2$5.0 million, or 1.6%,2.4%, versus the comparable prior-year six-monthnine-month period due primarily to a $8.4$11.2 million increase in sales from new locations and a $2.3$3.7 million increase from reformatted/rebranded locations, partially offset by a $6.5$6.6 million impact of the decrease in consolidated same-stores sales and a $1.9$3.2 million impact of closed locations.

Nightclubs revenues increased by 4.8%1.0% during the secondthird quarter compared to the same quarter last year primarily due to the $2.4 million$950,000 contribution of newly acquired clubs and $1.2$1.4 million from clubs that have been reformatted and/or rebranded, partially offset by the $358,000$493,000 impact of the decrease in same-store sales and the $500,000$1.2 million impact of closed clubs. For clubs that were open enough days to qualify as a same-store location (refer to the definition of same-store sales in the preceding paragraph),location, sales decreased by 0.7%.0.8%. By type of revenue, alcoholic beverage sales decreased by 0.9%,4.2%, food, merchandise and other revenue increaseddecreased by 3.8%,1.4%, while service revenues increased by 11.3%.7.6%.

During the six-monthnine-month period, Nightclubs revenues increased by 2.8%2.2% mainly due to the $5.6$6.5 million contribution of newly acquired clubs and $2.3$3.7 million from clubs that have been reformatted and/or rebranded, partially offset by the $3.8$4.3 million impact of the decrease in same-store sales and the $756,000$2.0 million impact of closed clubs. By type of revenue, alcoholic beverage sales decreased by 2.8%,3.3%, food, merchandise and other revenue increased by 2.8%,1.3%, while service revenues increased by 8.9%.8.5%.

Bombshells secondthird quarter revenues increased by 1.6%25.4% primarily due to the increase in same-store sales and sales from a new location, partially offset by the decline in same-store sales.location. By type of revenue, food and merchandise sales decreasedincreased by 0.3%,16.3%, while alcoholic beverage sales increased by 4.0%.33.6%.

During the six-monthnine-month period, Bombshells revenues decreasedincreased by 6.0%.4.2%. This was mainly caused by a $2.7$2.3 million decrease in same-store sales and a $1.2 million decrease from closed locations, partially offset by a $2.8$4.6 million contribution from new locations. By type of revenue, alcoholic beverage sales decreasedincreased by 6.7%6.2% while food, merchandise and other decreasedincreased by 5.2%.2.0%.

Total operating expenses, as a percent of revenues, increaseddecreased to 94.5%82.5% from 87.6%87.8% from last year’s secondthird quarter, and increased to 89.4%87.0% from 83.9%85.2% for the six-monthnine-month period. Year-over-year change was a $7.2$1.5 million decrease, or 12.5%,2.3%, for the quarter and aan $9.4$8.0 million increase, or 8.2%,4.5%, for the sixnine months. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold. Cost of goods sold for the secondthird quarter increased by $394,000,$548,000, or 4.7%,6.0%, and increased by $154,000,$702,000, or 0.9%,2.6%, for the six-monthnine-month period mainly due to higher sales. As a percent of total revenues, cost of goods sold was flatincreased atto 13.1% from 12.8% during the quarter and decreasedwas toflat 12.9% fromat 13.0% during the six-monthnine-month period mainly due to shift in sales mix to higher-margin service revenues.period. Nightclubs cost of goods sold during the quarter decreased to 11.2% from 11.3% and for the sixnine months decreased to 11.3% from 11.4%. Bombshells cost of goods sold increased to 24.7%24.1% from 22.9%23.7% during the quarter and increased to 24.2% from 23.4%23.5% during the sixnine months.

Salaries and wages. Salaries and wages increased by $751,000,$944,000, or 3.7%,4.5%, for the quarter and increased by $1.6$2.6 million, or 4.0%,4.2%, for the six-monthnine-month period mainly due to new clubs and Bombshells units. As a percent of total revenues, salaries and wages decreasedincreased to 30.9%29.6% from 31.1%29.4% for the quarter and increased to 30.6%30.2% from 29.9%29.7% for the sixnine months. During the quarter, Nightclubs decreasedincreased to 24.2%23.3% from 24.5%,22.9%, Bombshells decreased to 33.7%30.5% from 33.9%,33.2%, while Corporate increasedwas toflat 5.4%at from 5.3%.5.1%. During the six-monthnine-month period, Nightclubs increased to 23.9%23.7% from 23.5%,23.3%, Bombshells increased to 34.0%32.6% from 31.4%,32.0%, and Corporate increased to 5.3% from 5.2%.

Selling, general, and administrative expenses. Total selling, general, and administrative expenses increaseddecreased by $297,000,$768,000, or 1.3%,2.9%, for the quarter and decreased by $1.2$2.0 million, or 2.5%,2.6%, for the six-monthnine-month period. Dollar amounts in the tables below are in thousands, except percentages.thousands.

Insurance expense decreased due to last year's estimated self-insurance reserve. ChargeTaxes and permits, charge card fees, supplies and services, utilities, and repairs and maintenance increased due to the increase in sales. Stock-based compensation decreased due to the completion of the expense recognition of the 2022 stock options in February 2026.

Depreciation and amortization. Depreciation and amortization increased by $241,000,$138,000, or 6.4%,3.5%, during the quarter and increased by $859,000,$997,000, or 11.7%,8.9%, during the six-monthnine-month period primarily due to additional assets from last year's club acquisitions and newly opened Bombshells.

Impairments and other charges (gains),charges, net. Impairments and other charges (gains),charges, net changed mainly due to current-year increased impairment of assets, thelower recoverylawsuit settlements in the current quarter from a previously recorded lawsuit settlement,year, and the sale of our Bombshells location in Austin, Texas, which was significantly impaired in a prior period, and the insurance recovery for a club razed by fire in last year's first quarter.

By segment, impairment and other charges (gains),charges, net are as follows (in thousands):

For the three and sixnine months ended MarchJune 31,30, 2026, and 2025, our consolidated operating margin was 5.5%17.5% and 12.4%,12.2%, and 10.6%13.0% and 16.1%,14.8%, respectively. Segment contribution to income (loss) from operations is presented in the table below (in thousands):

Excluding certain items, the three months ended MarchJune 31,30, 2026, and 2025 non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands). Refer to the discussion of Non-GAAP Financial Measures on page 31.

Excluding certain items, the sixnine months ended MarchJune 31,30, 2026, and 2025 non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tables below (dollars in thousands).

Interest expense increased by $467,000,$422,000, or 11.5%,10.5%, while interest income decreased by $57,000,$31,000, or 41.0%,26.5%, during the quarter. Interest expense increased by $665,000,$1.1 million, or 8.1%,8.9%, while interest income decreased by $137,000,$168,000, or 43.1%,38.6%, during the six-monthnine-month period. Non-operating gains and losses include premium on stock repurchase and gain on lease termination. Premium on stock repurchase resulted from the November 2025 block stock buyback. Gain on lease termination was from a settlement of lease obligation related to a closed Bombshells unit in a prior period.

Our total occupancy costs, which we define as the sum of operating lease expense and interest expense, were $6.1 million and $5.6 million for the quarters ended MarchJune 31,30, 2026, and 2025, respectively. As a percentage of revenue, total occupancy costs were 8.9%8.3% and 8.5%7.9% during the quarters ended MarchJune 31,30, 2026, and 2025, respectively. Total occupancy costs were $12.1$18.2 million and $11.3$17.0 million for the sixnine months ended MarchJune 31,30, 2026, and 2025, respectively. As a percentage of revenue, total occupancy costs were 8.7%8.5% and 8.3%8.1% during the sixnine months ended MarchJune 31,30, 2026, and 2025, respectively.

Income tax expense was a$2.1 $398,000 benefitmillion and a $1.1 million expense$733,000 during the three months ended MarchJune 31,30, 2026, and 2025, respectively. The effective income tax rate was approximately 64.5%24.7% and 25.1%15.3% for the three months ended MarchJune 31,30, 2026, and 2025, respectively. Income tax expense was $1.2$3.3 million and $2.9$3.6 million during the sixnine months ended MarchJune 31,30, 2026, and 2025, respectively. The effective income tax rate approximately was 31.0%66.8% and 19.2%18.3% for the sixnine months ended MarchJune 31,30, 2026, and 2025, respectively. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the impact of the nondeductible premium on stock repurchase on a pretax loss during the current year, particularly a low pretax loss in the current quarter.year.

Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income or loss attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets, (c) settlement of lawsuits, net of recoveries, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) stock-based compensation, (g) premium on stock repurchase, (h) gains or losses on lease termination, and (i) the income tax effect of the above-described adjustments. Included in the net income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at approximately 22.3%23.2% and 18.1%17.4% effective tax rate of the pre-tax non-GAAP income before taxes for the sixnine months ended MarchJune 31,30, 2026, and 2025, 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.

The following tables present our non-GAAP performance measures for the three and sixnine months ended MarchJune 31,30, 2026, and 2025 (in thousands, except per share, number of shares, and percentages):

At MarchJune 31,30, 2026, our cash and cash equivalents were approximately $26.9$26.4 million compared to $33.7 million at September 30, 2025. Because of the large volume of cash we handle, we have very stringent cash controls. As of MarchJune 31,30, 2026, we had negative working capital of $32.7$30.4 million compared to a negative working capital of $12.1 million as of September 30, 2025. 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.

Net cash provided by operating activities was lower in the current six-monthnine-month period by 19.2%18.8% primarily due to the higher vendor payments and higher interest expense paid, partially offset by higher cash collection from sales.sales and lower income tax payments.

Following is a breakdown of our payments for property and equipment and intangible assets for the sixnine months ended MarchJune 31,30, 2026, and 2025 (in thousands):

The capital expenditures during the quarter ended MarchJune 31,30, 2026, and 2025 were composed mostly of construction projects in progress. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

We purchased 177,061218,561 shares of our common stock in the open market at an average price of $24.11$24.23 during the sixnine months ended MarchJune 31,30, 2026, while we purchased 122,875198,200 shares of our common stock in the open market at an average price of $49.76$46.21 during the sixnine months ended MarchJune 31,30, 2025. As of MarchJune 31,30, 2026, we have approximately $4.9$23.9 million authorization remaining to purchase additional shares. On April 2, 2026, our board of directors approved a $20.0 million increase in the Company's share repurchase program. Outside of our open-market stock repurchase program, on November 21, 2025, the Company repurchased in a privately negotiated transaction 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 12% unsecured promissory note.

We paid $0.08 per share in quarterly dividends during the quartersecond endedand Marchthird 31,of fiscal 2026, while we paid $0.07 per share in quarterly dividends during each of the quarters endedfrom Decemberthe 31,first 2024,quarter Marchof 31,fiscal 2025,2025 andto Decemberthe 31,first 2025.quarter of fiscal 2026.

We have paid all our debts on time and have not defaulted nor requested forbearance on any of our debts during the sixnine months ended MarchJune 31,30, 2026, and 2025.

Our free cash flow for the quarternine-month period decreased by 20.5%20.4% compared to the comparable prior-year period primarily due to the higher vendor payments and higher interest expense paid, partially offset by higher cash collection from salessales, lower income tax payments, and lower maintenance capital expenditures.

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

The following table presents a summary of such indicators for the sixnine months ended MarchJune 3130 (in thousands, except percentages):

In December 2024, we launched our five-year Back-to-Basics strategy where we focus on improving performance of existing clubs and Bombshells units to fuel our capital allocation priorities. For the allocation of our free cash flow, we currently divide it among club acquisitions (investing), share buybacks (financing), and dividends (financing). Our financial targetsgoals by the end of fiscal 2029 are to achieve:

As of MarchJune 31,30, 2026, teneleven of the eleventwelve existing Bombshells restaurants were located in Texas, with one location in Denver, Colorado. As part of managing our free cash flow to fuel growth, we are evaluating our Bombshells program in view of recent performance trends. Currently,We we haveopened one Bombshells location thatin isRowlett, underTexas, constructionin June 2026 and we do not plan to add anymore locations after that.locations.