What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-08-10 · 271 added, 357 removed, 237 unchanged (73% of the section changed)

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Hospitality Holdings, Inc.

(“RCIHH”) is a holding company engaged in a number of activities in the hospitality and

related businesses.

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

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.

We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs

(“RCIHH”) is a holding company.

Through our subsidiaries, we engaged in a number of activities

in the hospitality and related businesses.

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

RCI Management Services, Inc.

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

restaurant and bar operations.

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 other operating segments 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.

We combine other operating segments

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.

Financial Performance

our first quarter ended December 31, 2019, total revenues were $4.4 million, or 9.9%, higher than the same quarter in the prior

Consolidated same-store sales were up by 0.7%.

During the first two months of the second quarter, our consolidated same-store

sales were up by 12.4%, giving us a cumulative five-month same-store sales increase of 5.3%.

With the outbreak of the coronavirus

and COVID-19 national emergency guidelines put in place, we experienced a significant downturn in sales brought about by the temporary

closure of all of our clubs and restaurants as of March 18, 2020.

of COVID-19 Pandemic

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:

March 2020, our businesses have been heavily impacted by the COVID-19 pandemic through the temporary closure and reopening of

several of our clubs and restaurants in adherence to federal, state and local government mandates.

Because of the stay-at-home

order and social distancing guidelines put into place, our total revenues for the quarter ended December 31, 2020 declined by

20.7% versus last year.

Though we earned 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:

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;

enacted a pay reduction 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

about the spread of the virus.

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, including

refinancing several of our debt obligations.

see the risk factor in “Item 1A.

Risk Factors” regarding risks and uncertainties associated with the COVID-19 pandemic.

reduced or canceled 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 future extent and duration of the impact of COVID-19 on our businesses.

sales, as caused by local, state and national 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, including refinancing several of

our debt obligations.

Accounting Policies and Estimates

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On a regular basis, we evaluate these estimates.

These estimates are based on management’s

historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.

results may differ from these estimates.

These estimates are based on management’s historical industry

experience and on various other assumptions that are believed to be reasonable under the circumstances.

Actual results may differ

from these estimates.

a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment

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Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal

year ended September 30, 2019 filed with the SEC on February 13, 2020.

adopted ASC 842, Leases , as of October 1, 2019.

Our adoption of ASC 842 resulted in an increase of $27.3 million in our

total assets as of the adoption date due to the recognition of operating lease right-of-use assets net of the reclassification

of deferred rent liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating

lease liabilities.

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.

year ended September 30, 2020 filed with the SEC on December 14, 2020.

the three months ended December 31, 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.

signed our first franchise agreement for Bombshells in December 2020.

The financial impact of the franchise agreement was immaterial

to the Company’s results of operations and cash flows for the quarter ended December 31, 2020.

of Operations

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

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

revenues were $38.4 million compared to $48.4 million during the comparable prior-year period, a 20.7% 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 $25.2 million compared to $37.9 million, a 33.4% decrease;

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$10.4 million, a 25.7% increase)

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,

a 57.2% decrease (free cash flow* of $10.0 million compared to $26.3 million, a 61.9% decrease)

same-store sales decreased by 1.5% (Nightclubs decreased by 6.8% while Bombshells increased by 12.0%) (refer to the definition

of same-store sales in the discussion of Revenues below)

on forgiven PPP loans amounted to $4.9 million

and diluted earnings per share (“EPS”) of $1.07 compared to $0.60 (non-GAAP diluted EPS* of $0.39

compared to $0.62)

cash provided by operating activities of $6.3 million compared to $10.3 million during the comparable prior-year period, a

38.9% decrease (free cash flow* of $5.7 million compared to $9.3 million, a 38.7% decrease)

Reconciliation

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

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):

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

the Three Months Ended

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Depreciation and amortization

Other charges (gains), net

Other gains, net

Total operating expenses

Income (loss) from operations

Income from operations

Other income (expenses)

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Interest income

Unrealized gain (loss) on equity securities

Income (loss) before income taxes

Non-operating gains (losses), net

Income 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 $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

revenues decreased by approximately $10.0 million, or 20.7%, due primarily to lost sales caused by the COVID-19 pandemic.

same-store sales decreased by 1.5%.

The 20.7% decrease in consolidated revenues was primarily from a 23.1% decrease

due to closures from COVID-19, a 0.9% decrease from the impact of same-store sales decline, partially offset by a 3.3% increase

from new Bombshells units.

We calculate same-store sales by comparing

year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at

least 12 full months for Nightclubs and at least 18 full months for Bombshells.

We consider the first six months of operations

of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal.

We exclude from

a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for

more than 15 days until its next full month of operations.

We also exclude from the same-store sales base units that are being

reconcepted or are closed due to renovations or remodels.

Acquired units are included in the same-store sales calculation as long

as they qualify based on the definition stated above.

Revenues outside of our Nightclubs and Bombshells reportable segments are

excluded from same-store sales calculation.

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

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%.

revenues decreased by 33.4% for the quarter ended December 31, 2020 compared to the prior-year quarter, where the prior-year first

quarter was the last period that did not have government restrictions related to COVID-19.

For Nightclubs that were open enough

days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales decreased

The remaining decline in revenues reflects lower sales in states that continue to keep locations closed such as New York,

Illinois and Minnesota.

revenues increased by 25.7%, of which 12.0% was for same-store sales increase with the remaining 13.7% increase caused by two

new locations.

operating expenses, as a percent of revenues, increased to 82.9% from 80.0% from last year’s first quarter, with a $6.9

million decrease, or 17.8%, which is mainly caused by fixed overhead expenses in relation to significantly lower sales.

contributors to the changes in operating expenses are explained below.

of goods sold decreased by $572,000, or 8.4%, mainly due to lower sales from COVID-19-related closures and indoor dining occupancy

restrictions.

As a percent of total revenues, cost of goods sold increased to 16.2% from 14.0% mainly due to the sales mix having

a decrease in lower higher-margin service revenues.

and wages decreased by $1.7 million, or 13.1%.

As a percent of total revenues, salaries and wages were 29.9% from 27.3% 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 June 30, 2020.

See Note 2 to our unaudited condensed consolidated financial statements.

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

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

general and administrative expenses decreased by $4.4 million, or 26.5%, primarily due to decreased sales activity during the

quarter partially offset by fixed overhead costs.

and amortization decreased by $181,000, or 8.2% partly due to fully depreciated real estate and software assets.

(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

decrease in operating margin is the COVID-19-related closures.

the three months ended December 31, 2020 and 2019, our consolidated operating margin was 17.1% and 20.0%, respectively.

driver for the decrease in operating margin is the COVID-19-related closures.

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

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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

margin for the Nightclubs segment was 33.7% and 36.4% for the three months ended December 31, 2020 and 2019, respectively, while

operating margin for Bombshells was 20.9% and 15.2%, 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 $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 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 from operations

Other income (expenses)

Interest expense

Interest income

Unrealized loss on equity securities

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Percentages may not foot due to rounding.

Percentage of revenue for individual cost of goods sold items pertains to their respective

revenue line.

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):

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 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 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.

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

The main driver for the decrease

in operating margin is the COVID-19-related closures.

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

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.

The decrease in Nightclubs operating margin was mainly due

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

The increase in Bombshells operating margin

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

Excluding amortization

of intangibles, settlement of lawsuits, gain on insurance, and loss on disposal of assets, Nightclubs would have had non-GAAP

operating margin of 33.6% and 36.6% for the three months ended December 31, 2020 and 2019, respectively.

Excluding amortization

of intangibles and settlement of lawsuits, Bombshells would have had non-GAAP operating margin of 21.2% and 15.2% for the three

months ended December 31, 2020 and 2019.

total occupancy costs, defined as the sum of lease expense and interest expense, were $3.4 million and $3.5 million for the quarter

ended December 31, 2020 and 2019, respectively.

As a percentage of revenue, total occupancy costs were 8.9% and 7.3% during the

quarter ended December 31, 2020 and 2019, respectively, primarily due to lower sales base.

Non-Operating

the quarter ended December 31, 2020, we received notices of forgiveness for ten out of twelve of our PPP loans.

All of the notices

received forgave 100% of each of the ten PPP loans totaling $4.9 million.

expense decreased by $51,000, or 2.1%.

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.

taxes were a benefit of $384,000 during the quarter ended December 31, 2020 compared to an expense of $1.6 million during the

quarter ended December 31, 2019.

The effective income tax rate was a benefit of 4.2% and an expense of 22.0% for the quarter ended

December 31, 2020 and 2019, respectively.

Our effective tax rate is affected by state taxes, permanent differences, and tax credits,

including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the

impact of the forgiveness of the PPP loans in the current period, as presented below.

For the Three Months

Ended December

Computed expected income tax expense

State income taxes, net of federal benefit

Permanent differences

Change in valuation allowance

Total income tax expense (benefit)

Financial Measures

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(a) amortization of intangibles, (b) gains or losses on

sale of businesses and assets, (c) gains or losses on insurance, (d) settlement of lawsuits, and (e) impairment of assets.

believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating

margin without the impact of items that are not a result of our day-to-day business and operations.

sale of businesses and assets, (c) gains or losses on insurance, and (d) settlement of lawsuits.

We believe that excluding these

items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact

of items that are not a result of our day-to-day business and operations.

Net Income and Non-GAAP Net Income per Diluted Share .

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(a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains

or losses on insurance, (d) unrealized gains or losses on equity securities, (e) settlement of lawsuits, (f) impairment of assets,

or losses on insurance, (d) unrealized gains or losses on equity securities, (e) settlement of lawsuits, (f) gain on debt extinguishment,

and (g) the income tax effect of the above described adjustments.

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the net effect of the non-GAAP provision for income taxes, calculated at 19.1% and 21.8% effective tax rate of the pre-tax non-GAAP

income before taxes for the nine months ended June 30, 2020 and 2019, respectively, and the GAAP income tax expense (benefit).

income before taxes for the three months ended December 31, 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.

2 unchanged sentences

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.

lawsuits, and (h) gain on debt extinguishment.

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.

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

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for further discussion.

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

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

except per share amounts and percentages):

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

Reconciliation of GAAP net income to Adjusted EBITDA

Net income attributable to RCIHH common stockholders

Income tax expense (benefit)

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Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Unrealized loss (gain) on equity securities

Loss (gain) on insurance

Gain on debt extinguishment

Unrealized loss on equity securities

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

Reconciliation of GAAP net income to non-GAAP net income

Net income attributable to RCIHH common stockholders

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Unrealized loss (gain) on equity securities

Loss (gain) on insurance

Gain on debt extinguishment

Unrealized loss on equity securities

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

Non-GAAP net income

Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share

Diluted shares

GAAP diluted earnings (loss) per share

GAAP diluted earnings 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

Gain on debt extinguishment

Unrealized loss on equity securities

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

Non-GAAP diluted earnings per share

Reconciliation of GAAP operating income to non-GAAP operating income

Income from operations

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on insurance

Gain on sale of businesses and assets

Non-GAAP operating income (loss)

Gain on insurance

Non-GAAP operating income

Reconciliation of GAAP operating margin to non-GAAP operating margin

GAAP operating margin

Income from operations

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on insurance

Gain on sale of businesses and assets

Gain on insurance

Non-GAAP operating margin

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and Capital Resources

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

December 31, 2020, our cash and cash equivalents were approximately $17.0 million compared to $15.6 million at September 30, 2020.

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.

To augment an expected

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

As of December 31, 2020, we had negative

working capital of $3.8 million compared to a negative working capital of $5.9 million as of September 30, 2020.

we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary

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 we are uncertain as to when and if they will generate positive

cash flows for us.

Depending on the timing and number of locations we are allowed to 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 current state

of allowed 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.

augment an expected decline in operating cash flows caused by the COVID-19 pandemic, 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;

enacted a pay reduction 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.

reduced or canceled 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,

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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

about the spread of the virus.

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

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

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.

The Company believes it has

used the entire loan amount for qualifying expenses.

Under the terms of the PPP, certain amounts of the loan may be forgiven if

they are used for qualifying expenses as described in the CARES Act.

The Company has currently utilized all of the PPP funds and

has submitted its forgiveness applications.

During the quarter ended December 31, 2020, we received ten Notices of PPP Forgiveness

Payment (“Notice”) from the Small Business Administration out of the twelve of our PPP loans granted.

All of the notices

received forgave 100% of each of the ten PPP loans totaling the amount of $4.9 million and included in non-operating gains (losses),

net in our unaudited condensed consolidated statement of income.

Subsequent to December 31, 2020, we received another Notice for

one PPP loan which forgave 100% of the loan or $378,000 in principal.

No assurance can be provided that the Company will in fact

obtain forgiveness of the remaining PPP loan in whole or in part.

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

sales, as caused by local, state and national guidelines, could lead to adverse financial results.

However, we will continually

monitor and evaluate our cash flow situation and will determine any further measures to be instituted, including refinancing several

of our debt obligations.

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 certain operating hour restrictions and with limited occupancy.

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 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.

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.

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.

We also have historically utilized

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

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):

For the Nine Months

For the Three Months

Operating activities

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

For the Nine Months

Net income (loss)

For the Three Months

Depreciation and amortization

Deferred income tax expense (benefit)

Impairment of assets

Deferred income tax benefit

Gain on debt extinguishment

Net change in operating assets and liabilities

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

income taxes paid partially offset by lower interest expense paid.

interest expense paid partially offset by lower income taxes paid.

Flows from Investing Activities

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

the Nine Months

the Three 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

Proceeds from 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

is a breakdown of our payments for property and equipment and intangible assets for the three months ended December 31, 2020 and

2019 (in thousands):

the Nine Months

Ended June30,

New facilities, equipment and software

the Three Months

Ended December 31,

New facilities, equipment and intangible assets

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 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

paid on the Chicago club acquisition.

capital expenditures during the three months ended December 31, 2020 were composed of primarily of real estate and liquor license

The capital expenditures during the three months ended December 31, 2019 were composed primarily of construction and

development costs for two new Bombshells locations.

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.

Flows from Financing Activities

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

For the Nine Months

For the Three Months

Proceeds from debt obligations

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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.

purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while

we purchased 332,671 shares of our common stock at an average price of $19.36 during the same period last year.

We paid quarterly

dividends of $0.03 per share during each of the current- and prior-year quarters, except in the second quarter of 2020 where we

paid $0.04 per share.

dividends of $0.04 per share during the current first quarter compared to $0.03 per share in the prior year.

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

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activities less maintenance capital expenditures.

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.

Net cash provided by operating activities was $6.3 million and $10.3 million

during the three months ended December 31, 2020 and 2019, respectively.

Maintenance capital expenditures were $605,000 and $1.0

million during the three months ended December 31, 2020 and 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

For the Three Months

Net cash provided by operating activities

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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.

free cash flow for the current quarter decreased by 38.7% compared to the comparable prior-year period primarily due to the impact

of the COVID-19 partially offset by lower maintenance capital expenditures.

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

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and the level of long-term debt.

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

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

Sales of alcoholic beverages

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Free cash flow*

Long-term debt (end of period)

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.

In February 2020,

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

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

purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while

we purchased 332,671 shares of our common stock at an average price of $19.36 during the same period last year.

As of December

31, 2020, we have approximately $9.0 million remaining to purchase additional shares.

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

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provided however,

that we may deviate from this strategy if the circumstances warrant.

We calculate free cash flow as net cash flows from operating

activities minus maintenance capital expenditures.

Using the after-tax yield of buying our own stock as baseline, management believes

that we are able to make better investment decisions.

that we may deviate from this strategy if other strategic rationale warrants.

We calculate free cash flow as net cash flows from

operating activities minus maintenance capital expenditures.

Using the after-tax yield of buying our own stock as baseline, management

believes that we are able to make better investment decisions.

on our current capital allocation strategy:

consider buying back our own stock if the after-tax yield on free cash flow is above 10%;

consider disposing of underperforming units to free up capital for more productive use;

consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash

on cash return of 25%-33%, absent an otherwise strategic rationale;

consider disposing of underperforming units to free up capital for more productive use;

consider buying back our own stock if the after-tax yield on free cash flow is above 10%;

consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic

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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 June 30, 2020 are located in Texas.

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

Our growth strategy is to diversify

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

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

estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0 million.

The agreements terminated

prior to closing.

We provided the sellers notice of the termination in April 2020.

are currently in the process of site selection for new Bombshells locations and have recently signed our first franchisee for

Bombshells restaurants in the San Antonio, Texas area.

continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model

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Quantitative and Qualitative Disclosures About Market Risk.

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.

of December 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, 2020.

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