What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-11 · 357 added, 338 removed, 237 unchanged (75% of the section changed)

7 unchanged sentences

All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services,

our subsidiaries, as of March 31, 2020, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant

our subsidiaries, as of June 30, 2020, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant

and bar operations.

17 unchanged sentences

of COVID-19 Pandemic

the stay-at-home order and social distancing guidelines were put into place, our total revenues for the full six-month period

ended March 31, 2020 went flat versus last year.

Though we earn no revenues from our core businesses during the period of closures,

we continue to incur expenses.

To alleviate our cash flow situation, we instituted the following measures:

for deferment of principal and interest payment on certain of our debts;

of the stay-at-home order and social distancing guidelines

put into place, our total revenues for the full nine-month period ended June 30, 2020 declined by 23.8% versus last year.

Though we earned no revenues from our core businesses during the period of closures, we continue to incur expenses.

alleviate our cash flow situation, we instituted the following measures:

and continue to arrange for deferment of principal and interest payment on certain of our debts;

employees working at our clubs and restaurants, except for a limited number of managers;

cut for all remaining salaried and hourly employees and deferral of board of director

compensation;

or modified certain fixed monthly expenses such as insurance, rent, and taxes, among

certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system

support, and investor relations coverage, among others.

cut for all remaining salaried and hourly employees and deferral of board of director compensation;

or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;

certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor relations

coverage, among others.

of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty

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Lower sales, as caused by social distancing guidelines, could lead to adverse financial results.

However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted.

However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including

refinancing several of our debt obligations.

see the risk factor in “Item 1A.

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that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and

On a regular basis, we evaluate these estimates, including investment impairment.

On a regular basis, we evaluate these estimates.

These estimates are based on management’s

11 unchanged sentences

lease liabilities.

the three and six months ended March 31, 2020, there were no significant changes in our accounting policies and estimates other

the three and nine months ended June 30, 2020, there were no significant changes in our accounting policies and estimates other

than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.

of Operations

of the operating results of the Company during the three months ended March 31, 2020 are as follows:

of the operating results of the Company during the three and nine months ended June 30, 2020 are as follows:

revenues were $14.7 million compared to $47.0 million during the comparable prior-year period, a 68.7% decrease (Nightclubs

revenue of $6.0 million compared to $37.9 million, an 84.1% decrease;

and Bombshells revenue of $8.5 million compared to $8.8

million, a 2.6% decrease)

club nor Bombshells location qualified for same-store sales

and diluted loss per share of $0.60 compared to basic and diluted earnings per share (“EPS”) of $0.59 (non-GAAP

diluted loss per share of $0.74 compared to a non-GAAP diluted EPS* of $0.59)

cash provided by operating activities of $166,000 compared to $7.4 million during the comparable prior-year period, a 97.8%

decrease (free cash flow* of $166,000 compared to $6.5 million, a 97.4% decrease)

revenues were $103.5 million compared to $135.9 million during the comparable prior-year period, a 23.8% decline (Nightclubs

revenue of $75.2 million compared to $112.7 million, a 33.2% decrease;

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$22.3 million, a 24.2% increase)

same-store sales decreased by 14.7% (14.8% decrease for Nightclubs and 13.8% decrease for Bombshells)

and diluted loss per share of $0.37 compared to basic and diluted earnings per share (“EPS”) of $0.70 (non-GAAP

diluted EPS* of $0.47 compared to $0.63, a 25.0% decrease)

cash provided by operating activities of $1.7 million compared to $9.5 million during the comparable prior-year period, an

82.1% decrease (free cash flow* of $0.6 million compared to $8.8 million, a 93.0% decrease)

revenues were $88.8 million compared to $88.8 million during the comparable prior-year period, flat as compared to prior year

(Nightclubs revenue of $69.2 million compared to $74.8 million, a 7.4% decrease;

and Bombshells revenue of $19.2 million compared

to $13.5 million, a 41.5% increase)

same-store sales decreased by 7.3% (8.4% decrease for Nightclubs and 0.7% increase for Bombshells)

and diluted EPS of $0.24 compared to $1.35, an 82.2% decrease (non-GAAP diluted EPS* of $1.09 compared to $1.24, an 11.8%

and diluted loss per share of $0.36 compared to basic and diluted EPS of $1.94 (non-GAAP diluted EPS* of $0.36 compared to

$1.83, an 80.3% decrease)

cash provided by operating activities of $12.1 million compared to $28.4 million during the comparable prior-year period,

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

Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (dollars in thousands):

Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (dollars in thousands):

the Three Months Ended

of alcoholic beverages

of food and merchandise

of goods sold

beverages sold

and merchandise sold

cost of goods sold (exclusive of items shown separately below)

general and administrative

and amortization

charges (gains), net

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Operating expenses

(loss) from operations

income (expenses)

gain (loss) on equity securities

(loss) before income taxes

tax expense (benefit)

income (loss)

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

Other charges (gains), net

Total operating expenses

Income (loss) from operations

Other income (expenses)

Interest expense

Interest income

Unrealized gain (loss) on equity securities

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Percentages may not foot due to rounding.

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revenue line.

revenues decreased by $4.4 million, or 9.8%, due primarily to lost sales caused by the COVID-19 pandemic in March 2020.

same-store sales during the quarter decreased by 14.7% (Nightclubs decreased by 14.8% while Bombshells decreased by 13.8%).

to the stay-at-home and social distancing guidelines imposed by the federal, state and local governments, during the first ten

weeks of the quarter, consolidated same-store sales was up by 5.3% (Nightclubs increased by 5.6% while Bombshells increased by

revenues decreased by $32.3 million, or 68.7%, due primarily to lost sales caused by the COVID-19 pandemic.

No club or Bombshells

location qualified for same-store sales since all units exceeded the number of closure days to be considered not comparable to

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

the Three Months

total sales for the quarter declined by 15.3% compared to a year ago because of COVID-19-related closures during the second half

of March 2020.

Same-store sales decrease of 14.8% included two clubs in Chicago and Pittsburgh (acquired in November 2018) for

the first time.

Nightclubs total sales for the first ten weeks of the quarter increased by 5.0% compared to the comparable year-ago

Adjusted ten-week same-store sales increased by 5.6%.

Sales during the first ten weeks of the current quarter benefited

from a strong sports lineup in January and February, including the professional football championship in South Florida, and the

professional basketball mid-season event in Chicago, as well as improved weather in January compared to the polar vortex a year

total sales for the quarter increased by 17.0% compared to a year ago, and same-store sales decreased by 13.8%.

Sales reflected

the success of new units, continued same-store rebound for most of the quarter, and then the COVID-19 related closures.

sales included a Bombshells in the Houston suburb Pearland (opened in April 2018) for the first time.

The four new Bombshells,

all in the Houston area, were I-10 (opened December 2018), Tomball (March 2019), Katy (October 2019), and US 59 (January 30, 2020).

Bombshells total sales for the first ten weeks of the quarter increased 45.4% compared to the corresponding year-ago period.

ten-week same-store sales increased 3.6%.

operating expenses, as a percent of revenues, increased to 106.1% from 75.1% from year-ago, with a $9.2 million increase, or 27.5%.

Significant contributors to the changes in operating expenses are explained below.

of goods sold decreased by $410,000, or 6.6%, mainly due to COVID-19-related closures.

As a percent of total revenues, cost of

goods sold increased to 14.3% from 13.8% mainly due to perishable inventory spoilage.

and wages increased by $314,000, or 2.6%.

As a percent of total revenues, salaries and wages were 30.2% from 26.6% mainly due

to fixed salaries paid even during COVID-19-related closures.

general and administrative expenses increased by $109,000, or 0.8%, primarily caused by fixed costs.

For the Three Months

state and local government restrictions caused by COVID-19 have kept our larger Nightclubs, particularly in Florida and New

York, closed for most of the quarter.

Although our Texas clubs were able to reopen in May, sales were kept to a minimum

due to social distancing and occupancy requirements.

locations were able to reopen in May 2020, but sales were limited due to indoor dining occupancy restrictions.

operating expenses, as a percent of revenues, increased to 131.6% from 78.8% from year-ago, with a $17.7 million decrease, or

47.7%, which is mainly caused by fixed overhead expenses in relation to significantly lower sales.

Significant contributors to

the changes in operating expenses are explained below.

of goods sold decreased by $4.3 million, or 64.3%, mainly due to COVID-19-related closures and indoor dining occupancy restrictions.

As a percent of total revenues, cost of goods sold increased to 16.2% from 14.2% mainly due to sales mix.

Higher-margin service

revenues dropped in sales mix year-over year from 36.8% to 19.7%.

and wages decreased by $7.7 million, or 58.8%.

As a percent of total revenues, salaries and wages were 36.8% from 28.0% mainly

due to fixed salaries paid on significantly lower sales due to COVID-19.

general and administrative expenses decreased by approximately $6.0 million, or 40.2%, primarily due to decreased sales activity

during the quarter partially offset by fixed overhead costs.

adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations and cash flows for the three months

ended March 31, 2020.

ended June 30, 2020.

See Note 2 to our unaudited condensed consolidated financial statements.

and amortization increased by $57,000, or 2.6% due to higher unit count from new units.

charges/gains, net of $8.2 million in net charge during the current quarter compared to a net gain of $981,000 in the prior-year

The current quarter net charge was mainly from approximately $8.2 million in impairment of goodwill ($6.5 million), SOB

licenses ($1.4 million), and property and equipment ($302,000).

Last year’s quarter benefited from the sale of two real

estate properties.

from Operations

the three months ended March 31, 2020 and 2019, our operating margin was (6.1%) and 24.9%, respectively.

and amortization decreased by $230,000, or 9.3% partly due to higher prior-year catch-up depreciation from properties

moved out of held-for-sale classification.

charges/gains, net of $424,000 in net charge during the current quarter compared to a net gain of $172,000 in the prior-year quarter.

The current quarter net charge was mainly from approximately $982,000 in impairment charge, partially offset by net gains of

$608,000 on sale of one held-for-sale property and another property held and used.

Last year’s quarter’s net gain

was from the sale of two real estate properties and an aircraft amounting to $265,000, partially offset by $93,000 in insurance

(Loss) from Operations

the three months ended June 30, 2020 and 2019, our operating margin was (31.6%) and 21.2%, respectively.

The main driver for the

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contribution to income (loss) from operations is presented in the table below (in thousands):

the Three Months

margin for the Nightclubs segment was 7.4% and 40.7% for the three months ended March 31, 2020 and 2019, respectively, while operating

margin for Bombshells was 7.8% and 9.8%, respectively.

The decrease in both Nightclubs and Bombshells operating margin was mainly

due to COVID-19-related closures plus the impairment charges.

Excluding impairment charges, amortization of intangibles and gain

on disposal of assets, Nightclubs would have had non-GAAP operating margin of 32.9% and 38.2% for the three months ended March

31, 2020 and 2019, respectively.

Excluding impairment charges and amortization of intangibles, Bombshells would have had non-GAAP

operating margin of 10.7% and 9.8% for the three months ended March 31, 2020 and 2019.

For the Three Months

General corporate

margin for the Nightclubs segment was (51.4%) and 37.0% for the three months ended June 30, 2020 and 2019, respectively, while

operating margin for Bombshells was 22.3% and 7.8%, respectively.

The decrease in Nightclubs operating margin was mainly due to

fixed operating costs and expenses in relation to lower sales from the pandemic plus the impairment charges.

The increase in Bombshells

operating margin was mainly from pre-opening expenses from several Bombshells openings in the prior-year quarter.

Excluding impairment

charges, amortization of intangibles, settlement of lawsuits, loss on insurance, and gain on disposal of assets, Nightclubs would

have had non-GAAP operating margin of (43.7%) and 36.6% for the three months ended June 30, 2020 and 2019, respectively.

loss on disposal of assets and amortization of intangibles, Bombshells would have had non-GAAP operating margin of 22.5% and 7.8%

for the three months ended June 30, 2020 and 2019.

Non-Operating

expense decreased by $84,000, or 3.3%.

total occupancy costs, defined as the sum of lease expense and interest expense, were 8.6% and 8.0% of revenue during the three

months ended March 31, 2020 and 2019, respectively.

The higher occupancy costs in the current quarter were fixed interest and

lease expenses in relation to declining revenues.

taxes were a $1.4 million benefit and a $1.9 million expense during the three months ended March 31, 2020 and 2019, respectively,

with an effective income tax rate of 28.9% benefit and 22.3% expense, respectively.

Our effective tax rate for both years is affected

by state taxes, permanent differences, and tax credits, including the FICA tip credit.

Our revised estimate of our annual effective

income tax rate for fiscal 2020 caused the cumulative effect to be recognized in the current quarter.

Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019

following table summarizes our results of operations for the six months ended March 31, 2020 and 2019 (dollars in thousands):

the Six Months Ended

of alcoholic beverages

Sales of food and

total occupancy costs, defined as the sum of lease expense and interest expense, were $3.5 million in both current-year and prior-year

third quarters but due to the significantly lower revenue in the current year, as a percentage of revenue 23.6% and 7.5% during

the three months ended June 30, 2020 and 2019, respectively.

tax benefit was $1.4 million during the current-year third quarter compared to an income tax expense of $1.8 million during the

prior-year third quarter.

The effective income tax rate was a benefit of 20.5% and an expense of 24.1%, respectively.

our annual forecast of pretax book income for fiscal 2020 which revised our annual effective income tax rate, for which impact

was recognized in the current-year third quarter.

Our effective tax rate for both years is affected by the estimate of pre-tax

accounting income (loss) for the year, state taxes, permanent differences, and tax credits, including the FICA tip credit.

Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019

following table summarizes our results of operations for the nine months ended June 30, 2020 and 2019 (dollars in thousands):

the Nine Months Ended

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Operating expenses

Cost of goods sold

Alcoholic beverages

Food and merchandise

Total cost of goods

sold (exclusive of items shown separately below)

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

charges (gains), net

operating expenses

Selling, general and administrative

Depreciation and amortization

Other charges (gains), net

Total operating expenses

Income from operations

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Interest income

loss on equity securities

Income before income taxes

Income tax expense

Unrealized loss on equity securities

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Percentages may not foot due to rounding.

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revenue line.

revenues were flat at $88.8 million for both current and prior year.

The sales decline caused by the COVID-19 pandemic decimated

the sales gains we accumulated during the first five months of our fiscal year.

Consolidated same-store sales during the quarter

decreased by 7.3% (Nightclubs decreased by 8.4% while Bombshells increased by 0.7%).

Prior to the stay-at-home and social distancing

guidelines imposed by the federal, state and local governments, during the first ten weeks of the quarter, consolidated same-store

sales was up by 5.3% (Nightclubs increased by 5.6% while Bombshells increased by 3.6%).

revenues decreased by $32.3 million, or 23.8%, for the nine months ended June 30, 2020 compared to prior year primarily due to

the COVID-19 pandemic.

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

the Six Months

total sales for the six months ended March 31, 2020 declined by 7.4% compared to a year ago because of COVID-19-related

closures during the second half of March 2020.

Same-store sales decrease of 8.4% included two clubs in Chicago and Pittsburgh

(acquired in November 2018) for the first time in the current year second quarter.

Nightclubs total sales for the first ten

weeks of the quarter increased by 5.0% compared to the comparable year-ago period.

Adjusted ten-week same-store sales

increased by 5.6%.

Sales during the first ten weeks of the current quarter benefited from a strong sports lineup in January

and February, including the professional football championship in South Florida, and the professional basketball mid-season

event in Chicago, as well as improved weather in January compared to the polar vortex a year ago.

total sales for the six months ended March 31, 2020 increased by 41.5% compared to a year ago, and same-store sales increased

Sales reflected the success of new units, continued same-store rebound for most of the six months, and then the COVID-19

related closures.

Same-store sales included a Bombshells in the Houston suburb Pearland (opened in April 2018) for the first time

in the current year second quarter.

The four new Bombshells, all in the Houston area, were I-10 (opened December 2018), Tomball

(March 2019), Katy (October 2019), and US 59 (January 30, 2020).

Bombshells total sales for the first ten weeks of the quarter

increased 45.4% compared to the corresponding year-ago period.

Adjusted ten-week same-store sales increased 3.6%.

operating expenses, as a percent of revenues, increased to 91.5% from 74.9% from year-ago, with a $15.1 million increase, or 22.6%.

For the Nine Months

total sales for the nine months ended June 30, 2020 declined by 33.2% compared to a year ago because of COVID-19-related closures

since March 2020.

total sales for the nine months ended June 30, 2020 increased by 24.2% compared to a year ago mainly due to sales from two new

Bombshells location, partially offset by closures due to the COVID-19 pandemic.

operating expenses, as a percent of revenues, increased to 97.5% from 76.2% from year-ago, with a $2.6 million decrease, or 2.5%.

Significant contributors to the changes in operating expenses are explained below.

of goods sold increased by $554,000, or 4.6%, mainly due to COVID-19-related closures.

As a percent of total revenues, cost of

goods sold increased to 14.1% from 13.5% mainly due to perishable inventory spoilage.

and wages increased by $1.4 million, or 6.0%.

of goods sold decreased by $3.8 million, or 20.1%, mainly due to COVID-19-related closures.

As a percent of total revenues, cost

of goods sold increased to 14.4% from 13.8% mainly due to perishable inventory spoilage and sales mix.

Higher-margin service revenues

dropped in sales mix year-over year from 38.0% to 33.3%.

and wages decreased by $6.3 million, or 17.0%.

As a percent of total revenues, salaries and wages were 29.8% from 27.4% mainly

due to fixed salaries paid even during COVID-19-related closures.

general and administrative expenses increased by $2.6 million, or 9.2%, primarily caused by fixed costs.

$2.5 million of the increase

was from the first quarter, pre-COVID-19, mainly from increases in accounting and professional fees, taxes and permits, advertising

and marketing, utilities, and repairs and maintenance.

adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations and cash flows for the six months

ended March 31, 2020.

due to fixed salaries paid on significantly lower sales due to COVID-19.

general and administrative expenses decreased by $3.4 million, or 7.8%, primarily due to decreased sales activity during the nine-month

period partially offset by fixed overhead costs.

adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations and cash flows for the nine months

ended June 30, 2020.

See Note 2 to our unaudited condensed consolidated financial statements.

and amortization increased by $208,000, or 4.9% due to higher unit count from new units.

charges/gains, net of $8.6 million in net charge in the current year compared to a net gain of $2.3 million in the prior year.

The current year net charge was mainly from approximately $8.2 million in impairment of goodwill ($6.5 million), SOB licenses

($1.4 million), and property and equipment ($302,000).

Last year benefited from the sale of two real estate properties, two assets

held for sale and a club in Philadelphia.

The current year net charge was mainly from approximately $9.2 million in impairment charges, partially offset by $645,000 of

net gains in the sale of real estate properties.

Last year benefited from the gain on the sale of several real estate properties

amounting to $2.5 million.

from Operations

the six months ended March 31, 2020 and 2019, our operating margin was 8.1% and 25.1%, respectively.

the nine months ended June 30, 2020 and 2019, our operating margin was 2.5% and 23.8%, respectively.

The main driver for the decrease

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contribution to income from operations is presented in the table below (in thousands):

the Six Months

margin for the Nightclubs segment was 23.2% and 40.7% for the six months ended March 31, 2020 and 2019, respectively, while

operating margin for Bombshells was 11.8% and 6.3%, respectively.

The decrease in Nightclubs operating margin was mainly due

to COVID-19-related closures plus the impairment charges.

The increase in Bombshells operating margin was caused by early

gains from reduction in pre-opening expenses partially offset by COVID-19-related closures plus the impairment charges.

Excluding impairment charges, amortization of intangibles, gain on disposal of assets, gain on insurance and settlement of

lawsuits, Nightclubs would have had non-GAAP operating margin of 34.9% and 38.0% for the six months ended March 31, 2020 and

2019, respectively.

Excluding impairment charges, amortization of intangibles, settlement of lawsuits and loss on sale of

assets, Bombshells would have had non-GAAP operating margin of 13.1% and 6.4% for the six months ended March 31, 2020 and

For the Nine Months

General corporate

margin for the Nightclubs segment was 17.3% and 39.5% for the nine months ended June 30, 2020 and 2019, respectively, while operating

margin for Bombshells was 15.0% and 6.9%, respectively.

The decrease in Nightclubs operating margin was mainly due to fixed operating

costs and expenses in relation to lower sales from the pandemic plus the impairment charges.

The increase in Bombshells operating

margin was caused by early gains from reduction in pre-opening expenses partially offset by COVID-19-related closures plus the

impairment charges.

Excluding impairment charges, amortization of intangibles, gain on disposal of assets, gain on insurance and

settlement of lawsuits, Nightclubs would have had non-GAAP operating margin of 28.6% and 37.6% for the nine months ended June

30, 2020 and 2019, respectively.

Excluding impairment charges, amortization of intangibles, settlement of lawsuits and loss on

sale of assets, Bombshells would have had non-GAAP operating margin of 16.0% and 6.9% for the nine months ended June 30, 2020

and 2019, respectively.

Non-Operating

expense decreased by $306,000, or 4.0%.

total occupancy costs, defined as the sum of lease expense and interest expense, were 7.9% and 8.0% of revenue during the six

months ended March 31, 2020 and 2019, respectively.

taxes expense was $175,000 and $3.7 million during the six months ended March 31, 2020 and 2019, respectively, with an effective

income tax rate of 7.6% and 22.2%, respectively.

Our effective tax rate for both years is affected by state taxes, permanent differences,

and tax credits, including the FICA tip credit.

We revised our estimate of our annual effective income tax rate for fiscal 2020

due to the forecasted financial impact of the COVID-19 pandemic.

total occupancy costs, defined as the sum of lease expense and interest expense, decreased to $10.5 million from $10.7 million

in the prior year, but due to the significantly lower revenue in the current year, our total occupancy cost as a percentage of

revenue increased to 10.1% from 7.8%.

tax benefit was $1.3 million during the current nine-month period compared to an income tax expense of $5.5 million during the

The effective income tax rate was a benefit of 26.9% and an expense of 22.8%, respectively.

We revised our annual

forecast of pretax book income for fiscal 2020 due to the forecasted financial impact of the COVID-19 pandemic, which revised

our annual effective income tax rate.

Our effective tax rate for both years is affected by the estimate of pre-tax accounting

income (loss) for the year, state taxes, permanent differences, and tax credits, including the FICA tip credit.

Financial Measures

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the net effect of the non-GAAP provision for income taxes, calculated at 26.9% and 22.8% effective tax rate of the pre-tax non-GAAP

income before taxes for the six months ended March 31, 2020 and 2019, respectively, and the GAAP income tax expense (benefit).

income before taxes for the nine months ended June 30, 2020 and 2019, 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.

We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common

stockholders:

(a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or

losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity

securities, (g) settlement of lawsuits, and (h) impairment of assets.

We believe that adjusting for such items helps

management and investors better understand our operating activities.

Adjusted EBITDA provides a core operational performance

measurement that compares results without the need to adjust for federal, state and local taxes which have considerable

variation between domestic jurisdictions.

The results are, therefore, without consideration of financing alternatives of

capital employed.

We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments.

Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders:

(a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of

businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity securities, (g) settlement of

lawsuits, and (h) impairment of assets.

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.

are, therefore, without consideration of financing alternatives of capital employed.

We use adjusted EBITDA as one guideline to

assess our unleveraged performance return on our investments.

Adjusted EBITDA is also the target benchmark for our acquisitions

of nightclubs.

also use certain non-GAAP cash flow measures such as free cash flow.

1 unchanged sentence

for further discussion.

following tables present our non-GAAP performance measures for the three and six months ended March 31, 2020 and 2019 (in thousands,

following tables present our non-GAAP performance measures for the three and nine months ended June 30, 2020 and 2019 (in thousands,

except per share amounts and percentages):

the Three Months

the Six Months

Reconciliation

of GAAP net income (loss) to Adjusted EBITDA

income (loss) attributable to RCIHH common stockholders

tax expense (benefit)

on sale of businesses and assets

loss (gain) on equity securities

and amortization

Reconciliation

of GAAP net income (loss) to non-GAAP net income

income (loss) attributable to RCIHH common stockholders

of intangibles

on sale of businesses and assets

loss (gain) on equity securities

tax effect of adjustments above

Reconciliation

of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share

diluted earnings (loss) per share

of intangibles

on sale of businesses and assets

loss (gain) on equity securities

tax effect of adjustments above

diluted earnings per share

Reconciliation

of GAAP operating income (loss) to non-GAAP operating income

(loss) from operations

of intangibles

on sale of businesses and assets

operating income

Reconciliation

of GAAP operating margin to non-GAAP operating margin

operating margin

of intangibles

on sale of businesses and assets

operating margin

For the Three Months

For the Nine Months

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

Net income (loss) 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

Unrealized loss (gain) on equity securities

Loss (gain) on insurance

Depreciation and amortization

Adjusted EBITDA

Reconciliation of GAAP net income (loss) to non-GAAP net income (loss)

Net income (loss) attributable to RCIHH common stockholders

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Unrealized loss (gain) on equity securities

Loss (gain) on insurance

Net income tax effect

Non-GAAP net income (loss)

Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings (loss) per share

Diluted shares

GAAP diluted earnings (loss) per share

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Unrealized loss (gain) on equity securities

Loss (gain) on insurance

Net income tax effect

Non-GAAP diluted earnings (loss) per share

Reconciliation of GAAP operating income (loss) to non-GAAP operating income (loss)

Income (loss) from operations

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on insurance

Gain on sale of businesses and assets

Non-GAAP operating income (loss)

Reconciliation of GAAP operating margin to non-GAAP operating margin

GAAP operating margin

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on insurance

Gain on sale of businesses and assets

Non-GAAP operating margin

Per share amounts and percentages may not foot due to rounding.

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and Capital Resources

At March 31, 2020, our cash and cash equivalents

were approximately $9.8 million compared to $14.1 million at September 30, 2019.

Because of the large volume of cash we handle,

we have very stringent cash controls.

As of March 31, 2020, we had negative working capital of $4.6 million compared to

a negative working capital of $2.3 million as of September 30, 2019, excluding net assets held for sale of $3.6

million and $2.9 million as of March 31, 2020 and September 30, 2019, respectively.

Although we believe that our ability to generate

cash from operating activities is one of our fundamental financial strengths, the closure of our clubs and restaurants caused

by the COVID-19 pandemic has presented operational challenges.

Our strategy is to open locations in accordance with local

and state guidelines and it is too early to know when and if they will generate positive cash flows for us.

Depending on the timing

and number of locations we get open, and their ability to generate positive cash flow, we may need to borrow funds to meet

our obligations or consider selling certain assets.

Based upon the small sampling of early openings in Texas, revenues seem favorable.

We are hopeful that we can become profitable within a relatively short period of time after a majority of our locations have reopened,

assuming these results can be sustained and the other locations, once opened, follow these early results.

But if the business

interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity.

The COVID-19 pandemic

is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional

liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

June 30, 2020, our cash and cash equivalents were approximately $14.8 million compared to $14.1 million at September 30, 2019.

Because of the large volume of cash we handle, we have very stringent cash controls.

As of June 30, 2020, we had negative working

capital of $6.7 million compared to a negative working capital of $2.3 million as of September 30, 2019, excluding net assets

held for sale of $2.0 million and $2.9 million as of June 30, 2020 and September 30, 2019, respectively.

Although we believe that

our ability to generate cash from operating activities is one of our fundamental financial strengths, the closure of our clubs

and restaurants caused by the COVID-19 pandemic has presented operational challenges.

Our strategy is to open locations in accordance

with local and state guidelines and it is too early to know when and if they will generate positive cash flows for us.

on the timing and number of locations we get open, and their ability to generate positive cash flow, we may need to borrow funds

to meet our obligations or consider selling certain assets.

Based upon the small sampling of early openings in Texas, revenues

seem favorable.

We are hopeful that we can become profitable within a relatively short period of time after a majority of our

locations have reopened, assuming these results can be sustained and the other locations, once opened, follow these early results.

But if the business interruptions and occupancy limitations caused by COVID-19 last longer than we expect, we may need to seek

other sources of liquidity.

The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit

markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially

the longer the COVID-19 pandemic lasts.

now currently forecast our cash flows to fall significantly lower than the levels that we initially targeted.

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decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:

for deferment of principal and interest payment on certain of our debts;

and continue to arrange for deferment of principal and interest payment on certain of our debts;

employees working at our clubs and restaurants, except for a limited number of managers;

cut for all remaining salaried and hourly employees and deferral of board of director

compensation Deferred or modified certain fixed monthly expenses such as insurance, rent,

and taxes, among others;

or modified certain fixed monthly expenses such as insurance, rent, and taxes, among

certain non-essential expenses such as advertising, cable, pest control, point-of-sale

system support, and investor relations coverage, among others.

On May 8, 2020, the Company received approval

and funding under the Paycheck Protection Program of the CARES Act for its restaurants, shared service entity and lounge.

of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million;

shared-services subsidiary received $1.1 million;

cut for all remaining salaried and hourly employees and deferral of board of director compensation;

or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;

certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations

coverage, among others.

May 8, 2020, the Company received approval and funding under the Paycheck Protection Program of the CARES Act for its restaurants,

shared service entity and lounge.

Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an

aggregate amount of $4.2 million;

our shared-services subsidiary received $1.1 million;

and one of our lounges received $124,000.

None of our adult nightclub and other

non-core business subsidiaries received funding under the PPP.

None of our adult nightclub and other non-core business subsidiaries received funding under the PPP.

of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty

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However, we will continually monitor and evaluate our cash flow situation and will determine any further measures to be instituted,

Also as of the release of this report,

we have ten locations in Texas that have partially reopened with 25% occupancy requirement.

including refinancing several of our debt obligations.

We continue to adhere to state and local

government mandates regarding the pandemic and, since March 2020, have closed and reopened several of our locations depending

on changing government mandates.

As of the release of this report, we have reopened many of our club and Bombshells

locations with limited occupancy but some of our bigger clubs are still closed.

have not recently raised capital through the issuance of equity securities.

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We have a history of borrowing funds in private transactions

and from sellers in acquisition transactions and have recently secured traditional bank financing on our new development projects

and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects

and refinancing of our existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no

assurance that any of these financing options would be presently available on favorable terms, if at all.

historically utilized these cash flows to invest in property and equipment, adult nightclubs and restaurants/sports bars.

We also have historically

utilized these cash flows to invest in property and equipment, adult nightclubs and restaurants/sports bars.

Though our cash flows are not as we expected

at the beginning of the year, the near-term outlook for our business remains strong, and we expect to generate adequate cash flows

from operations for the next 12 months from the issuance of this report.

following table presents a summary of our cash flows from operating, investing, and financing activities (in thousands):

the Six Months

decrease in cash and cash equivalents

For the Nine Months

Operating activities

Investing activities

Financing activities

Net increase (decrease) in cash and cash equivalents

Flows from Operating Activities

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

the Six Months

and amortization

tax expense (benefit)

change in operating assets and liabilities

cash provided by operating activities

For the Nine Months

Net income (loss)

Depreciation and amortization

Deferred income tax expense (benefit)

Impairment of assets

Net change in operating assets and liabilities

Net cash provided by operating activities

cash provided by operating activities decreased from year to year due primarily to the impact of the COVID-19 pandemic and higher

2 unchanged sentences

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

the Six Months

for property and equipment and intangible assets

of businesses, net of cash acquired

from sale of businesses and assets

from insurance

from notes receivable

of note receivable

cash used in investing activities

is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 2020 and 2019

the Nine Months

Payments for property and equipment and intangible assets

Acquisition of businesses, net of cash acquired

Proceeds from sale of businesses and assets

Proceeds from insurance

Proceeds from notes receivable

Issuance of note receivable

Net cash used in investing activities

is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2020 and 2019

(in thousands):

the Six Months

Ended March 31,

facilities, equipment and software

capital expenditures

capital expenditures during the six months ended March 31, 2020 were composed primarily of construction and development costs

the Nine Months

Ended June30,

New facilities, equipment and software

Maintenance capital expenditures

Total capital expenditures

capital expenditures during the nine months ended June 30, 2020 were composed primarily of construction and development costs

for two new Bombshells locations and the rehabilitation of a club that was damaged by fire, while the capital expenditures during

the six months ended March 31, 2019 were composed primarily of construction and development costs for four new Bombshells locations.

Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under

construction.

the nine months ended June 30, 2019 were composed primarily of construction and development costs for four new Bombshells locations.

Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations.

in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

year acquisitions of $13.5 million relate to $7.5 million cash paid on the Pittsburgh club acquisition and the $6.0 million cash

2 unchanged sentences

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

the Six Months

from long-term debt

on long-term debt

of treasury stock

of loan origination costs

to noncontrolling interests

cash used in financing activities

purchased 465,390 shares of our common stock at an average price of $18.24 during the six months ended March 31, 2020, while we

For the Nine Months

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

in the $6.5 million proceeds from debt obligations for the nine months ended June 30, 2020 are $5.4 million in PPP loans as provided

by the CARES Act.

purchased 465,390 shares of our common stock at an average price of $18.24 during the nine months ended June 30, 2020, while we

purchased 102,113 shares of our common stock at an average price of $23.15 during the same period last year.

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activities less maintenance capital expenditures.

We use free cash flow as the baseline for the implementation of our capital

allocation strategy.

the Six Months

cash provided by operating activities

Net cash provided by operating activities was $166,000 and $12.1 million

during the three and nine months ended June 30, 2020, respectively, and $7.4 million and $28.4 million during the three and nine

months ended June 30, 2019, respectively.

Maintenance capital expenditures were $0 and $2.1 million during the three and nine

months ended June 30, 2020, respectively, and $955,000 and $2.1 million during the three and nine months ended June 30, 2019,

respectively.

We use free cash flow as the baseline for the implementation of our capital allocation strategy.

is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands):

For the Nine Months

Net cash provided by operating activities

Maintenance capital expenditures

free cash flow for the current year decreased by 50.3% compared to the comparable prior-year period primarily due to the impact

of the COVID-19 pandemic and capital expenditures on remodeling of an older Bombshells unit and on upgrades in our Miami clubs

in preparation for the pro football championship.

Free cash flow

free cash flow for the current year decreased by 61.9% compared to the comparable prior-year period primarily due to the

impact of the COVID-19 pandemic and capital expenditures on remodeling of an older Bombshells unit and on upgrades in our Miami

clubs in preparation for the pro football championship.

than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not aware

10 unchanged sentences

and the level of long-term debt.

following table presents a summary of such indicators for the six months ended March 31:

of alcoholic beverages

of food and merchandise

cash provided by operating activities

debt (end of period)**

* See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial

Measures subsection of Results of Operations.

** Balance as of March 31, 2020 includes liabilities associated

with held-for-sale assets amounting to $1.2 million.

purchased 465,390 shares of our common stock at an average price of $18.24 during the six months ended March 31, 2020, while we

following table presents a summary of such indicators for the nine months ended June 30 (in thousands, except percentages):

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Net cash provided by operating activities

Adjusted EBITDA*

Free cash flow*

Long-term debt (end of period)

definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results

of Operations.

purchased 465,390 shares of our common stock at an average price of $18.24 during the nine months ended June 30, 2020, while we

purchased 102,113 shares of our common stock at an average price of $23.15 during the same period last year.

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the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock.

As of March 31, 2020, we have $11.8 million remaining to purchase additional shares under our share repurchase program.

As of June 30, 2020, we have $11.8 million remaining to purchase additional shares under our share repurchase program.

have not experienced a material overall impact from inflation in our operations during the past several years.

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believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth

All ten of the existing Bombshells as of March 31, 2020 are located in Texas.

Our growth strategy is to diversify our

operations with these units which do not require SOB licenses, which are sometimes difficult to obtain.

All ten of the existing Bombshells as of June 30, 2020 are located in Texas.

Our growth strategy is to diversify

our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain.

While we are searching

for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income

opened one Bombshells unit during the quarter ended December 31, 2019, and opened another unit during the quarter ended March

opened two new Bombshells units during the current year, one during the first quarter ended December 31, 2019, and another

during the second quarter ended March 31, 2020.

November 5, 2019, we announced that our subsidiaries have signed definitive agreements to acquire the assets and related real

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Quantitative and Qualitative Disclosures About Market Risk.

of March 31, 2020, there were no material changes to the information provided in Item 7A of the Company’s Annual Report

on Form 10-K for fiscal year ended September 30, 2019.

of June 30, 2020, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on

Form 10-K for fiscal year ended September 30, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis