What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2021-02-09 · 388 added, 252 removed, 256 unchanged (71% of the section changed)

7 unchanged sentences

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.

All services and management operations are conducted by subsidiaries of RCIHH.

our subsidiaries, as of March 31, 2021, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant

and bar operations, including one club that is being renovated due to hurricane damage.

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.

Our corporate offices are located in Houston, Texas.

Nightclubs and

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,

of COVID-19 Pandemic

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;

in March 2020, our businesses were heavily impacted by the COVID-19 pandemic through the temporary closure and reopening of a

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

Our total revenues for the three

and six months ended March 31, 2021 increased by 9.0% and declined by 7.2%, respectively, versus last year.

The increase in the

quarter ended March 31, 2021 was mainly caused by Bombshells’ same-store sales increase and revenue from two new units.

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

our cash flow situation, we instituted the following measures:

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;

enacted a pay reduction 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 deferred board of director compensation;

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

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

and investor relations coverage, among others.

* As of the date of this report, we have

recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.

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

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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.

the three and six months ended March 31, 2021, 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.

to the Company’s results of operations and cash flows for the three and six months ended March 31, 2021.

of Operations

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

of the Company’s operating results are as follows:

revenues were $44.1 million compared to $40.4 million during the comparable prior-year period, a 9.0% increase (Nightclubs

revenue of $30.8 million compared to $31.4 million, a 1.8% decrease;

and Bombshells revenue of $13.1 million compared to $8.8

million, a 49.2% increase)

same-store sales increased by 26.3% (Nightclubs increased by 3.6% while Bombshells increased by 48.7%) (refer to the definition

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

on forgiven PPP loans amounted to $380,000

and diluted earnings per share (“EPS”) of $0.68 compared to a basic and diluted loss per share of $0.37 (non-GAAP

diluted EPS* of $0.75 compared to $0.47)

cash provided by operating activities of $11.0 million compared to $1.7 million during the comparable prior-year period, a

542.4% increase (free cash flow* of $9.0 million compared to $618,000, a 1,354.0% increase)

revenues were $82.5 million compared to $88.8 million during the comparable prior-year period, a 7.2% decrease (Nightclubs

2 unchanged sentences

$19.2 million, a 36.5% increase)

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

same-store sales increased by 6.9% (Nightclubs decreased by 4.4% while Bombshells increased by 27.9%) (refer to the definition

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

on forgiven PPP loans amounted to $5.3 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)

and diluted EPS of $1.75 compared to $0.24 (non-GAAP diluted EPS* of $1.15 compared to $1.09)

cash provided by operating activities of $17.2 million compared to $12.0 million during the comparable prior-year period,

a 43.9% increase (free cash flow* of $14.7 million compared to $9.9 million, a 48.5% increase)

Reconciliation

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

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

Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

following table summarizes our results of operations for the three months ended March 31, 2021 (dollars in thousands):

the Three Months Ended

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Depreciation and amortization

Other gains, net

Other charges, net

Total operating expenses

Income from operations

Income (loss) from operations

Other income (expenses)

2 unchanged sentences

Non-operating gains (losses), net

Income before income taxes

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Percentages may not foot due to rounding.

1 unchanged sentence

revenue line.

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.

revenues increased by approximately $3.6 million, or 9.0%, due primarily to the timing of closures caused by the COVID-19 pandemic.

Consolidated same-store sales increased by 26.3%.

The 9.0% increase in consolidated revenues was primarily from the 8.7% impact

of the same-store increase and a 2.6% increase from new Bombshells units, partially offset by a 2.0% decrease due to closures

from COVID-19 and a 0.3% decline in other revenues.

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

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.

revenues decreased by 1.8% for the quarter ended March 31, 2021 compared to the prior-year quarter.

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 increased

The remaining decline in revenues reflects lower sales for clubs in states where the number of days closed did not qualify

them for same-store sales.

revenues increased by 49.2%, of which 37.1% was due to the impact of the same-store sales increase with the remaining 12.1% increase

generated by two new locations.

operating expenses, as a percent of revenues, decreased to 77.7% from 106.1% from last year’s second quarter, with a $8.7

million decrease, or 20.2%, which is mainly caused by the higher impairment in the prior year.

Significant contributors

to the changes in operating expenses are explained below.

of goods sold increased by $1.0 million, or 17.6%, mainly due to higher sales in the current quarter.

As a percent of total revenues,

cost of goods sold increased to 15.4% from 14.3% mainly due to the sales mix shifting from higher-margin service revenues.

and wages decreased by $1.0 million, or 8.4%.

As a percent of total revenues, salaries and wages were 29.9% from 27.3% mainly

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.

As a percent of total revenues, salaries and wages were lower at 25.4% from

30.2% mainly due to fixed salaries paid on lower sales during the prior-year quarter.

general and administrative expenses decreased by $1.8 million, or 12.7%, primarily due to decreased audit and legal fees from

prior year’s SEC matters and controlled advertising and marketing expenses due to uncertainty brought about by the pandemic.

As a percent of total revenues, selling, general and administrative expenses decreased to 28.6% from 35.7% due to the lower

expenses from the above-cited reasons leveraged on higher sales in the current quarter.

total occupancy costs, defined as the sum of lease expense and interest expense (see below), were $3.3 million and $3.5 million

for the quarter ended March 31, 2021 and 2020, respectively.

As a percentage of revenue, total occupancy costs were 7.6% and 8.6%

during the quarter ended March 31, 2021 and 2020, respectively, primarily due to higher sales base in the current quarter.

and amortization decreased by $140,000, or 6.2% partly due to fully depreciated real estate and software assets.

Other charges, net decreased to $1.5 million from

$8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million during the quarter ended March 31, 2021

and 2020, respectively.

(Loss) from Operations

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.

the three months ended March 31, 2021 and 2020, our consolidated operating margin was 22.3% and (6.1)%, respectively.

drivers for the increase in operating margin are the current quarter’s higher sales and the impairment charges in both quarters.

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 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.

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.

margin for the Nightclubs segment was 34.0% and 7.3% for the three months ended March 31, 2021 and 2020, respectively,

while operating margin for Bombshells was 23.9% and 7.8%, respectively.

The increase in Nightclubs operating margin was mainly due to

last year’s impairment charges as triggered by the pandemic.

The increase in Bombshells operating margin was mainly from higher

sales and a decrease in pre-opening expenses from several Bombshells openings in prior periods.

certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the table below (dollars in thousands).

See further discussion in the “Non-GAAP Financial Measures” section below.

the Three Months Ended March 31, 2021

the Three Months Ended March 31, 2020

(loss) from operations

of intangibles

(gain) on sale of businesses and assets

(gain) on insurance

operating income (loss)

operating margin

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.

the quarter ended March 31, 2021, we received one notice of forgiveness for one PPP loan, which forgave 100% of the PPP loan’s

principal and interest amounting to $380,000.

expense decreased by $95,000, or 3.9%.

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.

taxes were an expense of $1.9 million during the quarter ended March 31, 2021 compared to a benefit of $1.4 million during the

quarter ended March 31, 2020.

The effective income tax rate was an expense of 24.3% and a benefit of 28.9% for the quarter ended

March 31, 2021 and 2020, respectively.

Our effective tax rate is affected by the statutory federal income tax rate, state taxes,

permanent differences, and tax credits, including the FICA tip credit, for both years, 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

Statutory federal income tax rate

State income taxes, net of federal benefit

Permanent differences

Effective income tax rate

Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

following table summarizes our results of operations for the six months ended March 31, 2021 (dollars in thousands):

the Six 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, net

Total operating expenses

Income from operations

Other income (expenses)

Interest expense

Interest income

Non-operating gains (losses), net

Income before income taxes

Income tax expense

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 approximately $6.4 million, or 7.2%, due primarily to the closures caused by the COVID-19 pandemic.

same-store sales increased by 6.9%.

The 7.2% decrease in consolidated revenues was primarily from the 13.5% decrease due to closures

from COVID-19 and a 0.1% decline in other revenues, partially offset by the 3.4% impact of the same-store increase and a 3.0%

increase from new Bombshells units.

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 Six Months

revenues decreased by 19.1% for the six-month period ended March 31, 2021 compared to the prior-year period.

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 by 4.4%.

The remaining decline in revenues reflects lower sales for clubs in states where the number of days closed

did not qualify them for same-store sales.

revenues increased by 36.5%, of which 22.5% was due to the impact of the same-store sales increase with the remaining 14.0% increase

generated by two new locations.

operating expenses, as a percent of revenues, decreased to 80.1% from 91.9% from the comparable period last year, with a $15.6

million decrease, or 19.1%, which is mainly caused by the higher impairment in the prior year, a $6.2 million decrease

in selling, general and administrative expenses, and a $2.8 million decrease in salaries and wages.

Significant contributors to the changes

in operating expenses are explained below.

of goods sold increased by $448,000, or 3.6%, mainly due to a shift in sales mix from higher-margin service revenues to alcohol

and food sales in the current six-month period.

As a percent of total revenues, cost of goods sold increased to 15.8% from 14.1%

mainly due to the shift in sales mix.

and wages decreased by $2.8 million, or 10.8%, mainly due to COVID-19-related closures.

As a percent of total revenues, salaries

and wages were lower at 27.5% from 28.6% mainly due to fixed salaries paid on lower sales during the prior-year period.

general and administrative expenses decreased by $6.2 million, or 20.0%, primarily due to decreased audit and legal fees from

prior year’s SEC matters, controlled advertising and marketing expenses due to uncertainty brought about by the pandemic,

and lower taxes and permits and charge card fees due to lower sales.

As a percent of total revenues, selling, general and administrative

expenses decreased to 30.0% from 34.9% due to legal and accounting fees and advertising and marketing expenses.

total occupancy costs, defined as the sum of lease expense and interest expense (see below), were $6.7 million and $7.0 million

for the six months ended March 31, 2021 and 2020, respectively.

As a percentage of revenue, total occupancy costs were 8.2% and

7.9% during the six months ended March 31, 2021 and 2020, respectively, primarily due to lower sales base in the current six-month

and amortization decreased by $321,000, or 7.2% partly due to fully depreciated real estate and software assets.

Other charges, net decreased to $1.4 million from

$8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million during the six months ended March 31,

2021 and 2020, respectively.

from Operations

the six months ended March 31, 2021 and 2020, our consolidated operating margin was 19.9% and 8.1%, respectively.

The main drivers

for the increase in operating margin are the current period’s lower sales and gain on debt extinguishment, and the prior-year period’s

higher impairment charges.

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

For the Six Months

General corporate

margin for the Nightclubs segment was 33.9% and 23.2% for the six months ended March 31, 2021 and 2020, respectively, while operating

margin for Bombshells was 22.4% and 11.8%, respectively.

The increase in Nightclubs operating margin was mainly due to last year’s

impairment charges as triggered by the pandemic.

The increase in Bombshells operating margin was mainly from higher sales and a decrease

in pre-opening expenses from several Bombshells openings in prior periods.

certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the table below (dollars in thousands).

See further discussion in the “Non-GAAP Financial Measures” section below.

the Six Months Ended March 31, 2021

the Six Months Ended March 31, 2020

Income (loss) from operations

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on insurance

Non-GAAP operating income (loss)

GAAP operating margin

Non-GAAP operating margin

Non-Operating

the six months ended March 31, 2021, we received 11 notices of forgiveness for a PPP loan, which forgave 100% of the PPP

loans’ principal and interest amounting to $5.3 million.

expense decreased by $146,000, or 3.0%.

tax expense was $1.6 million during the six months ended March 31, 2021 compared to $175,000 during the six months ended March

The effective income tax rate was 9.1% and 7.6% for the six months ended March 31, 2021 and 2020, respectively.

effective tax rate is affected by the statutory federal income tax rate, 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 Six Months

Statutory federal income tax rate

State income taxes, net of federal benefit

Permanent differences

Change in valuation allowance

Total income tax expense (benefit)

Effective income tax rate

Financial Measures

13 unchanged sentences

the following items from income from operations and operating margin:

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

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.

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

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

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 .

We calculate non-GAAP net income and non-GAAP net income per diluted

share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per

Adjustment items are:

(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) gain on debt extinguishment,

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

Included in the income tax effect of the above adjustments is

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 three months ended December 31, 2020 and 2019, respectively, and the GAAP income tax expense (benefit).

We calculate non-GAAP net income and non-GAAP net income per diluted share

by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share.

(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) impairment of assets, (f) settlement of lawsuits, (g) gain on debt

extinguishment, and (h) the income tax effect of the above described adjustments.

Included in the income tax effect of the above

adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 24.2% and 7.6% effective tax rate of the pre-tax

non-GAAP income before taxes for the six months ended March 31, 2021 and 2020, respectively, and the GAAP income tax expense (benefit).

We believe that excluding and including such items help management and investors better understand our operating activities.

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) gain on debt extinguishment.

We believe that adjusting for such items helps management and investors better

understand our operating activities.

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

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

settlement of lawsuits, and (i) 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.

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 months ended December 31, 2020 and 2019 (in thousands,

following tables present our non-GAAP performance measures for the three and six months ended March 31, 2021 and 2020 (in thousands,

except per share amounts and percentages):

For the Three Months

Reconciliation of GAAP net income to Adjusted EBITDA

Net income attributable to RCIHH common stockholders

For the Six Months

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

Net income (loss) attributable to RCIHH common stockholders

Income tax expense (benefit)

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Settlement of lawsuits

Gain on sale of businesses and assets

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on debt extinguishment

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Adjusted EBITDA

Reconciliation of GAAP net income to non-GAAP net income

Net income attributable to RCIHH common stockholders

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

Gain on sale of businesses and assets

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on debt extinguishment

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Net income tax effect

Non-GAAP net income

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

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 per share

GAAP diluted earnings (loss) per share

Amortization of intangibles

Settlement of lawsuits

Gain on sale of businesses and assets

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on debt extinguishment

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Non-GAAP diluted earnings per share

Reconciliation of GAAP operating income to non-GAAP operating income

Income from operations

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

Income (loss) from operations

Amortization of intangibles

Settlement of lawsuits

Gain on sale of businesses and assets

Impairment of assets

Gain on insurance

Non-GAAP operating income

Loss (gain) on sale of businesses and assets

Non-GAAP operating income (loss)

Reconciliation of GAAP operating margin to non-GAAP operating margin

Income from operations

GAAP operating margin

Amortization of intangibles

Settlement of lawsuits

Gain on sale of businesses and assets

Impairment of assets

Gain on insurance

Loss (gain) on sale of businesses and assets

Non-GAAP operating margin

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and Capital Resources

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

March 31, 2021, our cash and cash equivalents were approximately $20.2 million compared to $15.6 million at September 30,

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

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.

As of March 31, 2021, we had positive working

capital of $175,000 compared to a negative working capital of $5.9 million as of September 30, 2020, excluding assets

held for sale (net of associated liabilities of $3.2 million and $0, respectively) amounting to $4.2 million

and $0 as of March 31, 2021 and September 30, 2020, respectively.

Although 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 presented operational challenges.

Our strategy was to open locations and operate in accordance with

local and state guidelines.

Based upon the current state of allowed openings, revenues seem favorable.

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.

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;

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;

enacted a pay reduction 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 deferred board of director compensation;

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

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

and investor relations coverage, among others.

* As of the date of this report, we have

recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.

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.

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.

The Company believes it 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 utilized all of the PPP funds and submitted its forgiveness

applications.

During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP

Forgiveness Payment (“Notice”), respectively, from the Small Business Administration out of the 12 of our PPP

loans granted.

All of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $380,000 and $5.3

million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included

in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.

No assurance can be provided

that the Company will in fact obtain forgiveness of the one 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.

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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.

We continue to adhere to state and local government

mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing

government mandates, including operating hour and limited occupancy restrictions.

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

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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.

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 Three Months

For the Six Months

Operating activities

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

For the Three Months

For the Six Months

Depreciation and amortization

1 unchanged sentence

Gain on debt extinguishment

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

interest expense paid partially offset by lower income taxes paid.

cash provided by operating activities increased from year to year due primarily to higher income from operations and lower income

taxes paid, partially offset by higher interest expense paid.

Flows from Investing Activities

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

the Three Months

the Six Months

Payments for property and equipment and intangible assets

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Net cash used in investing activities

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

is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 2021 and 2020

(in thousands):

the Three Months

Ended December 31,

the Six Months

Ended March 31,

New facilities, equipment and intangible assets

1 unchanged sentence

Total capital expenditures

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.

expenditures for new facilities during the six months ended March 31, 2021 were composed primarily of real estate and construction

of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license purchase.

Capital expenditures for new facilities during the six months ended March 31, 2020 were composed primarily of construction and

development costs for two new Bombshells locations that opened in the first and second quarters of fiscal 2020.

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 Three Months

For the Six Months

Proceeds from debt obligations

2 unchanged sentences

Payment of dividends

Payment of loan origination costs

Distribution to noncontrolling interests

Net cash used in financing activities

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.

purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we

purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year.

We paid quarterly

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

dividends of $0.04 per share during the six months ended March 31, 2021 compared to $0.03 per share in the first quarter and $0.04

in the second quarter during the prior year.

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

We calculate free cash flow as net cash provided by operating

activities less maintenance capital expenditures.

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.

We calculate free cash flow as net cash provided by operating activities

less maintenance capital expenditures.

Net cash provided by operating activities was $17.2 million and $12.0 million during the

six months ended March 31, 2021 and 2020, respectively.

Maintenance capital expenditures were $2.6 million and $2.1 million during the

six months ended March 31, 2021 and 2020, respectively.

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

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

For the Three Months

For the Six Months

Net cash provided by operating activities

1 unchanged sentence

Free cash flow

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.

free cash flow for the current six-month period increased by 48.5% compared to the comparable prior-year period primarily due

to higher income from operations and lower income taxes paid, partially offset by higher interest expense paid and higher 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 three months ended December 31 (in thousands, except percentages):

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

Sales of alcoholic beverages

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of Operations.

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

purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we

purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year.

As of March 31, 2021,

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

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first and second quarters).

Our revenues in certain markets are also affected by sporting events that cause unusual changes in

sales from year to year.

Our revenues in Bombshells are also affected by sporting events that cause unusual changes in sales

from year to year.

Allocation Strategy

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

growth strategy involves the following:

(i) to acquire existing units in locations that are consistent with our growth and income

targets and which appear receptive to the upscale club formula we have developed;

(ii) to open new units after market analysis;

(iii) to franchise our Bombshells brand;

(iv) to form joint ventures or partnerships to reduce start-up and operating costs, with

us contributing equity in the form of our brand name and management expertise;

(v) to develop new club concepts that are consistent

with our management and marketing skills;

(vi) to develop and open our restaurant concepts as our capital and manpower allow;

and (vii) to control the real estate in connection with club operations, although some units may be in leased premises.

believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic

segments with high growth potential.

Our growth strategy involves the following:

(i) to acquire existing units in locations that

are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed;

to open new units after market analysis;

(iii) to franchise our Bombshells brand;

(iv) to form joint ventures or partnerships

to reduce start-up and operating costs, with us contributing equity in the form of our brand name and management expertise;

to develop new club concepts that are consistent with our management and marketing skills;

(vi) to develop and open our restaurant

concepts as our capital and manpower allow;

and (vii) to control the real estate in connection with club operations, although

some units may be in leased premises.

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 December 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.

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

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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An inability to obtain such additional financing could have an adverse effect on our growth

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, 2021 are located in Texas.

Part of our growth strategy is to continue

to appeal to men, women, families, friends, singles, couples, and millennials through better quality of food, service and experience

that is more upscale than a traditional sports bar.

continue to search for suitable markets where we can open new Bombshells and are currently in the process of development in several

of these locations.

We have also increased our efforts on Bombshells franchising and have recently signed our first franchisee

for Bombshells restaurants in the San Antonio, Texas area.

Quantitative and Qualitative Disclosures About Market Risk.

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

of March 31, 2021, 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