What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-12-14 compared with 2020-12-14 · 652 added, 628 removed, 232 unchanged (85% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

is intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment.

MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the

accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of this report.

This overview summarizes the MD&A, which includes the following sections:

following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended

to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment.

MD&A is provided

as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto

contained in Item 8 – “Financial Statements and Supplementary Data” of this report.

This overview summarizes the MD&A,

which includes the following sections:

Business — a general description of our business and the adult nightclub industry, our objective, our strategic priorities,

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Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.

Review — an analysis of our Company’s consolidated results of operations for the three years presented in our

consolidated financial statements.

Review — an analysis of our Company’s consolidated results of operations for the three years presented in our consolidated

financial statements.

and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview of financial position.

Financial Performance

During our first quarter ended December 31,

2019, total revenues were $4.4 million higher, or 9.9%, than the same quarter in the prior year.

Consolidated same-store

sales were up by 0.7%.

During the first two months of the second quarter (January and February 2020), 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

Because of stay-at-home orders and

social distancing guidelines put into place, our total revenues for the full fiscal year ended September 30, 2020 declined by

26.9% versus last year.

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

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;

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.

As of the release of this report, we do not

know the future extent and duration of the impact of COVID-19 on our businesses.

Lower 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.

Impact of COVID-19 Pandemic

declaration of COVID-19 as a pandemic in March 2020, we have had a major disruption in our business operations that threatened

to significantly impact our cash flow.

The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants

due to changes in consumer behavior as social distancing practices, dining room closures, and other restrictions that were mandated

or encouraged by federal, state, and local governments.

To adapt to the situation, we took significant steps to augment an anticipated

decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related

payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges.

Our strategy is to open

locations and operate in accordance with local and state guidelines.

We believe that we can borrow capital if needed but currently

we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available

on favorable terms, especially the longer the COVID-19 pandemic lasts.

to fiscal 2020, which showed a significant impact of the pandemic in terms of revenues and bottom line, in fiscal 2021 our operations

exhibited tremendous recovery.

Revenues were up by 47.6% from prior year and up by 7.8% from pre-pandemic fiscal 2019.

Net income increased

by 47.5% from fiscal 2019 (fiscal 2020 had a net loss) and free cash flow increased by 167.7% from fiscal 2020 and by 8.3% from

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

operating restrictions, 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.

following are our operating segments:

wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving primarily businessmen and professionals.

nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Abilene, Lubbock,

El Paso and Odessa, Texas;

nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Aledo,

Round Rock, El Paso and Odessa, Texas;

Charlotte, North Carolina;

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New York, New York;

Miami Gardens and Pembroke

Park, Florida;

Miami Gardens and

Pembroke Park, Florida;

Pittsburgh, Pennsylvania;

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and Washington Park, Kappa and Chicago, Illinois.

No sexual contact

is permitted at any of our locations.

contact is permitted at any of our locations.

We also own and operate a Studio 80 dance club in Fort Worth, Texas.

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lease to third parties real properties that are adjacent to (or used to be locations of) our clubs.

wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland and Katy,

Texas under the brand name Bombshells Restaurant & Bar.

wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the

multibillion-dollar adult nightclubs industry and the adult retail products industry.

We also own an industry trade show,

an industry trade publication and more than a dozen industry and social media websites.

Included here is Drink Robust, which

is licensed to sell Robust Energy Drink in the United States.

In relation to acquisitions that closed in October and November 2021,

we now have club locations in Denver, Colorado;

Louisville, Kentucky;

Raleigh, North Carolina;

Portland, Maine;

Indianapolis, Indiana;

Sauget, Illinois;

and Newburgh, New York.

wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball

and Katy, Texas under the brand name Bombshells Restaurant & Bar.

wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the multibillion-dollar

adult nightclubs industry and the adult retail products industry.

We also own an industry trade show, an industry trade publication

and more than a dozen industry and social media websites.

Included here is Drink Robust, which is licensed to sell Robust Energy

Drink in the United States.

revenues are derived from the sale of liquor, beer, wine, food, merchandise;

service revenues such as cover charges, membership

fees, and facility use fees;

and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking,

and other products and services for both nightclub and restaurant/sports bar operations.

Other revenues include Media Group revenues

for the sale of advertising content and revenues from our annual Expo convention, and Drink Robust sales.

Our fiscal year-end

is September 30.

service revenues such as cover charges, membership fees,

and facility use fees;

and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking, and other

products and services for both nightclub and restaurant/sports bar operations.

Other revenues include Media Group revenues for the sale

of advertising content and revenues from our annual Expo convention, and Drink Robust sales.

Our fiscal year-end is September 30.

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.

the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher

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 definitions stated above.

Revenues outside of our Nightclubs and Bombshells reportable segments’

core business are excluded from same-store sales calculation.

Same-Store Sales.

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.

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.

Adjusted Same-Store Sales.

Due to the disruption created by the COVID-19 pandemic and in an effort to minimize the complexity in the calculation of same-store

sales caused by closing and opening again our locations, we are presenting two alternative same-store sales results calculated

Due to the disruption created by the COVID-19 pandemic and in an effort to minimize the complexity in the calculation

of same-store sales caused by closing and opening again our locations, we are presenting two alternative same-store sales results calculated

with and without the impact of closures caused by state and local government mandates.

In the alternative calculation, a comparable

location will remain in the same-store sales base regardless of closing and reopening due to COVID-19 restrictions.

In the alternative calculation, a comparable location

will remain in the same-store sales base regardless of closing and reopening due to COVID-19 restrictions.

goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our management

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ACCOUNTING POLICIES AND ESTIMATES

discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been

prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The preparation

of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply

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

assets and liabilities.

These estimates are based on management’s historical and industry experience and on various other

assumptions that are believed to be reasonable under the circumstances.

On a regular basis, we evaluate these accounting policies,

assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

However, because future events and their effects cannot be determined with certainty, actual results may differ from our estimates,

and such differences could be material.

full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which

is included in Item 8 – “Financial Statements and Supplementary Data” of this report.

We believe that the following

accounting estimates are the most critical to aid in fully understanding and evaluating our financial results.

discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared

in accordance with accounting principles generally accepted in the United States (“GAAP”).

The preparation of these consolidated

financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the

reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

These estimates

require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain.

reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.

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.

review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected

future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business,

and significant negative industry or economic trends.

Recoverability of assets to be held and used is measured by a comparison

of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of

the primary asset included in the asset group.

If the asset group is not recoverable, the impairment loss is calculated as the

excess of the carrying value over the fair value.

We define our asset group as an operating club or restaurant location, which

is also our reporting unit or the lowest level for which cash flows can be identified.

Key estimates in the undiscounted cash

flow model include management’s estimate of the projected revenues and operating margins.

If fair value is used to determine

an impairment loss, an additional key assumption is the selection of a weighted-average cost of capital to discount cash flows.

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair

value less costs to sell and are no longer depreciated.

During the second quarter of 2020, we impaired two clubs to a total of

$302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use

asset for $104,000.

During the fourth quarter of 2019, we impaired two clubs for a total of $4.2 million.

During the fourth quarter

of 2018, we impaired one club and one Bombshells by a total of $1.6 million.

are based on management’s historical and industry experience and on various other assumptions that are believed to be reasonable

under the circumstances.

On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that

our financial statements are presented fairly and in accordance with GAAP.

However, because future events and their effects cannot be

determined with certainty, actual results may differ from our estimates, and such differences could be material.

full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included

in Item 8 – “Financial Statements and Supplementary Data” of this report.

We believe that the following accounting

estimates are the most critical to aid in fully understanding and evaluating our financial results.

These estimates require our most

difficult, subjective or complex judgments because they relate to matters that are inherently uncertain.

We have reviewed these critical

accounting policies and estimates and related disclosures with our Audit Committee.

review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever events

or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

These events or changes

in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results,

significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry

or economic trends.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group

to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group.

the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value.

our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows

can be identified.

Key estimates in the undiscounted cash flow model include management’s estimate of the projected revenues and

operating margins.

If fair value is used to determine an impairment loss, an additional key assumption is the selection of a weighted-average

cost of capital to discount cash flows.

Assets to be disposed of are separately presented in the balance sheet and reported at the lower

of the carrying amount or fair value less costs to sell and are no longer depreciated.

During the second quarter of 2021, we impaired

one property that was reclassified to assets held for sale for $1.4 million, and during the fourth quarter of 2021, we impaired four

clubs for $584,000.

During the second quarter of 2020, we impaired one club and one Bombshells unit for a total

of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use asset for $104,000.

the fourth quarter of 2019, we impaired two clubs for a total of $4.2 million.

and Other Intangible Assets

and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter

and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and

are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

impairment calculations require management to make assumptions and to apply judgment in order to estimate fair values.

actual results are not consistent with our estimates and assumptions, we may be exposed to impairments that could be material.

We do not believe that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that

could cause a material change in our calculated impairment charges.

our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely

than not that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors,

including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to

actual and projected results of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting

unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1

quantitative analysis to determine the fair value of the reporting unit.

The fair value is determined using market-related valuation

models, including earnings multiples, discounted cash flows, and comparable asset market values.

Key estimates in the discounted

cash flow model include management’s estimate of the projected revenues and operating margins, along with the selection

of a weighted-average cost of capital to discount cash flows.

We recognize goodwill impairment in the amount that the carrying

value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the

reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2020, we identified seven reporting

units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.

For the year ended September 30, 2019,

we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $1.6 million.

year ended September 30, 2018, we identified two reporting units that were impaired and recognized a goodwill impairment loss

totaling $834,000.

indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings

of the asset with key assumptions being similar to those used in the goodwill impairment valuation model.

For indefinite-lived

tradename, we determine fair value by using the relief from royalty method.

The fair value is then compared to the carrying value

and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

impairment charges for SOB licenses amounting to $2.3 million in 2020 related to two clubs, $178,000 in 2019 related to

one club, and $3.1 million in 2018 related to three clubs.

Available-for-sale

investments are carried at fair value with the unrealized gain or loss recorded in other comprehensive income until our adoption

of Accounting Standards Update No.

2016-01 on October 1, 2018, at which the change in fair value is recorded in current earnings.

estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise

from temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax

These estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for

items such as taxes paid on employee tip income, effective rates for state and local income taxes, and the deductibility of certain

other items, among others.

We adjust our annual effective income tax rate as additional information on outcomes or events becomes

When necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than

not to be realized.

December 22, 2017, the Tax Act was signed into law.

The Tax Act contains significant changes to corporate taxation, including

reduction of the corporate tax rate from 35% to 21%, additional limitations on the tax deductibility of interest, immediate deductions

for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business

deductions and credits.

Our federal corporate income tax rate for fiscal 2018 was 24.5% and represents a blended income tax rate

for that fiscal year.

For fiscal 2020 and 2019, our federal corporate income tax rate was 21%.

If our actual

results are not consistent with our estimates and assumptions, we may be exposed to impairments that could be material.

We do not believe

that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that could cause a material

change in our calculated impairment charges.

our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not

that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors, including industry

and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results

of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying

value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the

fair value of the reporting unit.

The fair value is determined using market-related valuation models, including discounted

cash flows and comparable asset market values.

Key estimates in the discounted cash flow model include management’s estimate of

the projected revenues and operating margins, along with the selection of a weighted-average cost of capital to discount cash flows.

We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting

unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling

$6.3 million.

For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill

impairment loss totaling $7.9 million.

For the year ended September 30, 2019, we identified four reporting units that were impaired and

recognized a goodwill impairment loss totaling $1.6 million.

indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the

asset with key assumptions being similar to those used in the goodwill impairment valuation model.

For indefinite-lived tradename, we

determine fair value by using the relief from royalty method.

The fair value is then compared to the carrying value and an impairment

charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

We recorded impairment charges for

SOB licenses amounting to $5.3 million in 2021 related to three clubs, $2.3 million in 2020 related to two clubs, and $178,000

in 2019 related to one club.

estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from temporary

differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases.

These estimates

include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee

tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others.

We adjust our

annual effective income tax rate as additional information on outcomes or events becomes available.

When necessary, we record a valuation

allowance to reduce deferred tax assets to a balance that is more likely than not to be realized.

and Other Contingencies

mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 12 to our consolidated

financial statements, we are involved in various suits and claims in the normal course of business.

We record a liability when

it is probable that a loss has been incurred and the amount is reasonably estimable.

There is significant judgment required in

both the probability determination and as to whether an exposure can be reasonably estimated.

In the opinion of management, there

was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded

accrual, with respect to loss contingencies for asserted legal and other claims.

However, the outcome of legal proceedings and

claims brought against the Company is subject to significant uncertainty.

Therefore, although management considers the likelihood

of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period

for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting

period could be materially adversely affected.

In matters where there is insurance coverage, in the event we incur any liability,

we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

of operations from fiscal 2020 compared to fiscal 2019 (with fiscal 2018 comparative data) are as follows:

revenues of $132.3 million compared to $181.1 million, a 26.9% decrease

Nightclubs revenue of $88.4 million compared to $148.6 million in

2019, a 40.5% decrease

revenue of $43.2 million compared to $30.8 million in 2019, a 40.2% increase

2018 total revenues of $165.7 million (Nightclubs revenue of $140.1 million and Bombshells revenue of $24.1 million)

same-store sales, as defined on page 23, decrease of 4.4% (9.0% decrease for Nightclubs and 18.3% increase for Bombshells);

adjusted to keep the impact of the COVID-19 pandemic in same-store sales, adjusted consolidated same-store sales, as defined

on page 23, decreased by 34.7% (41.7% decrease for Nightclubs and 6.5% increase for Bombshells)

Consolidated,

Nightclubs and Bombshells same-store sales in 2019 (compared to 2018) of -0.3%, +0.6% and -6.1%, respectively

Consolidated,

Nightclubs and Bombshells same-store sales in 2018 (compared to 2017) of +4.6%, +5.8% and -3.3%, respectively

earnings (loss) per share of $(0.66) compared to $2.10, a 131% decrease (non-GAAP diluted EPS* of $0.51

compared to $2.44, a 79% decrease) (diluted EPS of $2.15 and non-GAAP diluted EPS of $2.18 in fiscal 2018)

cash flow* of $13.5 million compared to $33.3 million, a 59.5% decrease ($23.2 million in fiscal 2018)

mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 11 to our consolidated financial

statements, we are involved in various suits and claims in the normal course of business.

We record a liability when it is probable that

a loss has been incurred and the amount is reasonably estimable.

There is significant judgment required in both the probability determination

and as to whether an exposure can be reasonably estimated.

In the opinion of management, there was not at least a reasonable possibility

that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for

asserted legal and other claims.

However, the outcome of legal proceedings and claims brought against the Company is subject to significant

Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters

were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s

consolidated financial statements for that reporting period could be materially adversely affected.

In matters where there is insurance

coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess

of our insurance coverage.

of operations from fiscal 2021, 2020, and 2019 are as follows (in thousands, except percentages and per share amounts):

Same-store sales

Income from operations

Diluted earnings (loss) per share

Net cash provided by operating activities

Free cash flow*

Reconciliation

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

and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial Measures” section of this Item.

These measures should be considered in addition to, rather than as a substitute for, U.S.

GAAP measures.

The following common size tables present

a comparison of our results of operations as a percentage of total revenues for the past three fiscal years (see Note 4 to

our consolidated financial statements regarding revision of prior year immaterial misstatement in fiscal 2019):

following common size tables present a comparison of our results of operations as a percentage of total revenues for the three most recently

completed fiscal years:

Sales of alcoholic beverages

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Interest income

Unrealized loss on equity securities

Non-operating gains (losses), net

Income (loss) before income taxes

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

is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar amounts in

of alcoholic beverages

of food and merchandise

of goods sold

and merchandise

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

general and administrative

and amortization

operating expenses

from operations

income/expenses

loss on equity securities

before income taxes

tax expense/benefit

revenues decreased by $48.7 million, or 26.9%, from 2019 to 2020, and increased by $15.3 million, or 9.2%, from 2018 to 2019.

The decrease from 2019 to 2020 was mainly caused by significantly lower traffic due to the COVID-19 restrictions.

Excluding COVID-19

impact, consolidated same-store sales decrease was 4.4%.

Including the impact of COVID-19 on comparable units, same-store sales

would be a decrease of 34.7%.

The increase from 2018 to 2019 was mainly due to a 10.9% increase from newly acquired or constructed

units and a 0.3% increase in other revenues, partially offset by a 1.7% decrease from closed units and the impact of the 0.3%

decline in same-store sales.

reportable segment, revenues were as follows (in thousands):

is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar amounts in thousands)

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Cost of goods sold

Alcoholic beverages

Food and merchandise

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/loss before income taxes

Income tax expense/benefit

Net income/loss

Not meaningful.

Overall, our consolidated revenues trended significantly

better in fiscal 2021 compared to the more pandemic impacted fiscal 2020 with a 47.6% increase.

But even though 2021 was still affected

by the pandemic, revenues grew 7.8% compared to pre-pandemic fiscal 2019.

Excluding COVID-19 impact, consolidated same-store sales increase

in 2021 was 1.5%.

Including the impact of COVID-19 on comparable units (see definition of Adjusted Same-Store Sales on page 25), adjusted

same-store sales in 2021 would be an increase of 48.7%.

Consolidated revenues decreased by $48.7 million, or 26.9%, from 2019

The decrease from 2019 to 2020 was mainly caused by significantly

lower traffic due to the COVID-19 restrictions.

Excluding COVID-19 impact, consolidated same-store sales decrease in 2020 was 4.4%.

the impact of COVID-19 on comparable units, adjusted same-store sales in 2020 would be a decrease of 34.7%.

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

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Other revenues

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Other revenues

segment revenues.

Nightclubs revenues decreased by 40.5% from 2019 to 2020 and increased by 6.1% from 2018 to 2019.

Nightclubs revenues increased by 55.4% from 2020 to 2021 and decreased by 40.5% from 2019 to 2020.

of the changes compared to total change in Nightclubs revenues is as follows:

Impact of 9.0% decrease and 0.6% increase in same-store sales, respectively, to total revenues (excluding COVID-19 impact)

Impact of 2.1% and 9.0% decrease in same-store sales, respectively, to total revenues (excluding COVID-19 impact)

Newly acquired and reconcepted units

Closed units (including COVID-19 impact)

the impact of COVID-19 on comparable Nightclubs locations (see Adjusted Same-Store Sales on page 23), the breakdown would

Impact of 41.7% decrease and 0.6% increase in same-store sales, respectively, to total revenues (including COVID-19 impact)

the impact of COVID-19 on comparable Nightclubs locations (see Adjusted Same-Store Sales on page 25), the breakdown would have

Impact of 59.2% increase and 41.7% decrease in same-store sales, respectively, to

total revenues (including COVID-19 impact)

Newly acquired and reconcepted units

8 unchanged sentences

Service revenues

in the 2018 new units is Kappa Men’s Club, which was acquired in May 2018.

Included in the 2019 new units are Rick’s

Cabaret Chicago and Rick’s Cabaret Pittsburgh, which were acquired in November 2018 (see Note 16 to our consolidated

financial statements) and contributed $5.0 million and $4.6 million in revenues for 2019 since acquisition date.

were acquired or constructed in 2020.

in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.3 million in 2020, $1.7 million in 2019,

and $1.2 million in 2018.

in the 2019 new units are Rick’s Cabaret Chicago and Rick’s Cabaret Pittsburgh, which were acquired in November 2018 (see

Note 15 to our consolidated financial statements) and contributed $5.0 million and $4.6 million in revenues for 2019 since acquisition

No new clubs were acquired or constructed in 2020 and 2021.

in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.5 million in 2021, $1.3 million in 2020, and

$1.7 million in 2019.

segment revenues.

Bombshells revenues increased by 31.0% from 2020 to 2021 and by 40.2% from 2019 to 2020.

A breakdown of

the changes compared to total changes in Bombshells revenues is as follows:

Impact of 18.3% increase and 6.1% decrease in same-store sales, respectively, to total revenues (excluding COVID-19 impact)

A breakdown of the changes

compared to total changes in Bombshells revenues is as follows:

Impact of 7.7% and 18.3% increase in same-store sales, respectively, to total revenues (excluding COVID-19 impact)

Closed units (including COVID-19 impact)

the impact of COVID-19 on comparable Bombshells locations (see Adjusted Same-Store Sales on page 23), the breakdown would

Impact of 6.5% increase and 6.1% decrease in same-store sales, respectively, to total revenues (including COVID-19 impact)

the impact of COVID-19 on comparable Bombshells locations (see Adjusted Same-Store Sales on page 25), the breakdown would have

Impact of 24.8% and 6.5% increase in same-store sales, respectively, to total revenues (including COVID-19 impact)

Closed units (excluding COVID-19 impact)

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Service and other revenues

Pearland was opened in the third quarter of 2018.

Bombshells I-10 was opened in the first quarter of 2019, while Bombshells 249

was opened in the second quarter of 2019.

Bombshells Katy was opened in the first quarter of 2020, while Bombshells 59 was opened

in the second quarter of 2020.

I-10 was opened in the first quarter of 2019, while Bombshells 249 was opened in the second quarter of 2019.

Bombshells Katy was opened

in the first quarter of 2020, while Bombshells 59 was opened in the second quarter of 2020.

No new Bombshells location was opened in

segment revenues.

Other revenues included revenues from Drink Robust in all three fiscal years presented.

After a brief period

when a majority of our interest in Drink Robust was sold, we later reacquired Drink Robust in March 2018 (see Note 16 to

our consolidated financial statements).

Drink Robust sales were $150,000, $231,000, and $141,000 in fiscal 2020, 2019, and 2018,

respectively, which excludes intercompany sales to Nightclubs and Bombshells units.

Media business revenues were $589,000, $1.4

million, and $1.4 million in fiscal 2020, 2019, and 2018, respectively.

Due to the COVID-19 pandemic, the 2020 ED EXPO that was

supposed to be held in August 2020 was canceled.

Drink Robust sales were

$249,000, $150,000, and $231,000 in fiscal 2021, 2020, and 2019, respectively, which excludes intercompany sales to Nightclubs and Bombshells

units amounting to $141,000, $70,000, and $140,000 in fiscal 2021, 2020, and 2019, respectively.

Media business revenues were $1.0 million,

$589,000, and $1.4 million in fiscal 2021, 2020, and 2019, respectively.

Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed

to be held in August 2020 (fiscal 2020) was canceled.

All unearned sponsorship and advertising revenues related to the event were either

further deferred or refunded and no revenue was recognized.

operating expenses, as a percent of revenues, were 97.9%, 80.8%, and 83.4% for the fiscal year 2020, 2019, and 2018, respectively.

operating expenses, as a percent of consolidated revenues, were 80.3%, 97.9%, and 80.8% for the fiscal year 2021, 2020, and 2019,

respectively.

Significant contributors to the change in operating expenses as a percent of revenues are explained below.

of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding,

and Drink Robust.

As a percentage of consolidated revenues, consolidated cost of goods sold was 15.4%, 14.7%, and 13.8% for fiscal 2021,

2020, and 2019, respectively.

See above for breakdown of percentages for each line item of consolidated cost of goods sold as

it relates to the respective consolidated revenue line.

For the Nightclubs segment, cost of goods sold was 10.7%, 11.2%, and 11.8%

for fiscal 2020, 2019, and 2018, respectively, which was primarily caused by sales mix shifting over to higher-margin service

Bombshells cost of goods sold was 22.6%, 25.3%, and 24.7% for fiscal 2020, 2019, and 2018, respectively, which was

mainly driven by the shift in sales mix to higher-margin alcoholic beverage sales in 2020 and from food cost inflation in 2019.

A significant decrease in cost of goods sold dollars was caused by COVID-19-related closures and indoor dining occupancy restrictions.

salaries and wages decreased by $10.8 million, or 21.6%, from 2019 to 2020 and increased by $5.3 million, or 11.9%, from 2018

The dollar decrease from 2019 to 2020 was mainly from furloughed employees due to COVID-19.

The dollar increase from

2018 to 2019 primarily came from newly opened units plus the impact of pre-opening salaries and wages on still under-construction

Bombshells units.

As a percentage of revenues, consolidated salaries and wages has been fairly stable at 27.5% and 26.9% for 2019

and 2018, respectively, but rose to 29.5% in 2020 due to fixed salaries paid on significantly lower sales.

See above for breakdown of percentages for each line item of consolidated cost of goods sold as it relates

to the respective consolidated revenue line.

For the Nightclubs segment, cost of goods sold was 11.8%, 10.7%, and 11.2% for fiscal 2021,

2020, and 2019, respectively, which was primarily caused by shifts in sales mix.

Bombshells cost of goods sold was 23.8%, 22.6%,

and 25.3% for fiscal 2021, 2020, and 2019, respectively, which was mainly driven by the shift in sales mix to lower-margin food sales

in 2021, to higher-margin alcoholic beverage sales in 2020, and from food cost inflation in 2019.

Consolidated salaries and wages increased by $11.6

million, or 29.6%, from 2020 to 2021 and decreased by $10.8 million, or 21.6%, from 2019 to 2020.

The dollar decrease from

2019 to 2020 was mainly from furloughed employees due to COVID-19, which increased back in 2021 due to hiring and rehiring after

easing restrictions.

As a percentage of revenues, consolidated salaries and wages were 25.9%, 29.5%, and 27.5% in 2021, 2020, and 2019,

respectively, mainly due to sales trend and the impact of fixed salaries on lower sales.

Corporate salary pay cuts made in 2020 during

the height of the pandemic restrictions were paid back in 2021.

reportable segment, salaries and wages are broken down as follows (in thousands):

General corporate

manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included

in general corporate.

manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general

components of consolidated selling, general and administrative expenses are in the tables below (dollars in thousands):

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significant variances in selling, general and administrative expenses are as follows:

light of decreased sales activity caused by the COVID-19 pandemic, most of our selling, general and administrative expenses for

2020 decreased, except for relatively fixed expenses such as insurance, rent, and accounting and professional fees.

As a percentage

of revenues, relatively fixed expenses increased in rate due to lower sales, while more discretionary/controllable expenses such

as advertising and marketing were kept to a minimum.

Discussions below relate mainly to significant fluctuations from 2018 to

and permits increased by $1.2 million, or 12.9%, from 2018 to 2019 primarily due to new units, higher taxes on those new units,

and increases in patron taxes and property taxes as a result of increased sales revenues.

As a percentage of revenues, taxes and

permits were 6.0% and 5.8% for 2019 and 2018, respectively.

and marketing increased by $856,000, or 11.4%, from 2018 to 2019 mainly due to new units.

As a percentage of revenues, advertising

and marketing was relatively flat at 4.6% and 4.5% for 2019 and 2018, respectively.

expense increased by $176,000, or 4.7%, from 2018 to 2019 mainly due to adjustments in deferred rent liability in fiscal year

As a percentage of revenues, rent expense has been flat at 2.2% in 2019 and 2018.

expenses increased in 2019 from 2018 by $1.6 million, or 44.5%, mainly due to SEC-related matters.

card fees increased by $559,000, or 17.5%, from 2018 to 2019 mainly from higher revenues.

As a percentage of revenues, charge

card fees were 2.1% and 2.0% in 2019 and 2018, respectively.

and professional fees decreased by $129,000, or 4.4%, from 2018 to 2019 mainly due to consulting services during our ERP implementation

and amortization decreased by $236,000, or 2.6%, from 2019 to 2020 and increased by $1.4 million, or 17.5%, from 2018 to 2019.

The increase from 2018 to 2019 came from newly acquired and constructed units, while the decrease from 2019 to 2020 was mainly

due to properties sold or disposed during the current and prior year.

light of decreased sales activity caused by the COVID-19 pandemic from 2019 to 2020, most of our selling, general and administrative

expenses for 2020 decreased, except for relatively fixed expenses such as insurance, rent, and accounting and professional fees.

percentage of revenues, relatively fixed expenses increased in rate due to lower sales, while more discretionary/controllable expenses

such as advertising and marketing were kept to a minimum.

Conversely, due to the increase in revenues in 2021 from 2020, almost all selling,

general and administrative expenses consequently increased except accounting and professional fees, insurance, leases, and legal.

and legal fees primarily decreased from prior year’s SEC matters;

lease expense decreased due to lease credits we received from

certain landlords;

while insurance decreased due to credits given by insurers for unused coverage due to COVID-19 closures in 2020.

and amortization decreased by $598,000, or 6.8%, from 2020 to 2021 and by $236,000, or 2.6%, from 2019 to 2020.

The decrease from 2019

to 2020 was mainly due to properties sold or disposed during the current and prior year, while the decrease from 2020 to 2021 was mainly

from significantly low capital expenditure in 2020.

components of other charges, net are in the table below (dollars in thousands):

2 unchanged sentences

Settlement of lawsuits

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Loss (gain) on insurance

1 unchanged sentence

significant variances in other charges, net are discussed below:

During the year ended September 30, 2020,

we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses

of two clubs ($2.3 million), and $406,000 of long-lived assets of one club and one Bombshells restaurant (including impairment

on operating lease right-of-use assets of $104,000).

During the year ended September 30, 2019, we recorded aggregate impairment

charges amounting to $6.0 million related to goodwill of four clubs ($1.6 million), SOB license of one club ($178,000), and property

and equipment of two clubs ($4.2 million).

During the year ended September 30, 2018, we recorded a loss on the note owed to us

the by former owner of Drink Robust in relation to our reacquisition of Drink Robust ($1.55 million in the second quarter), impairment

related to SOB licenses of three clubs ($3.1 million in the fourth quarter), impairment related to goodwill of two clubs ($834,000

in the fourth quarter), and impairment related to long-lived assets of a club that closed and a still-operating Bombshells ($1.6

million in the fourth quarter).

See Notes 16 and 18 to our consolidated financial statements for further discussion.

During 2021, we recorded aggregate impairment charges

amounting to $13.6 million related to goodwill of seven clubs ($6.3 million), SOB licenses of three clubs ($5.3 million),

and property and equipment of five clubs, one of which is held for sale ($2.0 million).

During 2020, we recorded aggregate

impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million),

and $406,000 of long-lived assets of one club and one Bombshells restaurant (including impairment on operating lease right-of-use assets

of $104,000).

During 2019, we recorded aggregate impairment charges amounting to $6.0 million related to goodwill of four clubs ($1.6

million), SOB license of one club ($178,000), and property and equipment of two clubs ($4.2 million).

See Notes 2 and 15 to our consolidated

financial statements.

2021, we settled a case with one of our Bombshells landlord for $1.0 million.

See Note 11 to our consolidated financial statements.

relation to insurance claims and recoveries, we recognized a $1.3 million gain in 2021, a $420,000 loss in 2020, and a $768,000 gain

in 2019 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that

damaged one of our clubs in Sulphur, Louisiana in August 2020.

Gains related to insurance recoveries were recognized when the contingencies

related to the insurance claims have been resolved, which may be in a subsequent reporting period.

See Note 14 to our consolidated

financial statements.

from Operations

fiscal 2021, 2020, and 2019, our consolidated operating margin was 19.7%, 2.1%, and 19.2%, respectively.

is a table which reflects segment contribution to income from operations (in thousands):

General corporate

operating margin (income from operations divided by revenues) was 2.1% in 2020, 19.2% in 2019, and 16.6% in 2018.

Nightclubs operating

margin was 14.8%, 34.1%, and 31.1% in 2020, 2019, and 2018, respectively, primarily due to the impact of the COVID-19 pandemic

in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $10.4

million, $5.9 million, and $4.4 million for 2020, 2019, and 2018, respectively.

Bombshells operating margin was 21.4%, 7.5%, and

8.5% in 2020, 2019, and 2018, respectively, mainly due to two new units partially offset by COVID-19 impact in 2020, pre-opening

expenses in 2019 (particularly in salaries and wages and selling, general and administrative expenses), and impairment of assets

of $1.1 million in 2018.

the impact of settlement of lawsuits, impairment of assets, gain on insurance, gain on sale of businesses and assets, and amortization

of intangibles, operating margin for the Nightclub segment would have been 26.8%, 35.9%, and 35.1% for 2020, 2019, and 2018, respectively.

Excluding the impact of impairment of assets, loss on sale of assets, settlement of lawsuits, and amortization of intangibles,

Bombshells segment operating margin would have been 22.0%, 7.6%, and 15.1% for 2020, 2019, and 2018, respectively.

Refer to discussion

of Non-GAAP Financial Measures on page 33.

expense decreased by $398,000 from 2019 to 2020 and increased by $255,000 from 2018 to 2019.

The decrease in interest expense

in 2020 was primarily due to the lower average debt balance.

The increase in interest expense in 2019 was due to higher average

debt balance partially offset by lower weighted average interest rate.

During the first quarter of 2018, we significantly increased

our debt balance with our $81 million refinancing, but that transaction also significantly reduced our weighted average interest

During 2019, our debt repayments were significantly higher than our borrowing, excluding borrowings from acquisitions, thereby

reducing interest expense as a percentage of revenue.

During 2020, with the onset of the COVID-19 pandemic, certain debt principal

and interest payments have been deferred, but we continue to accrue interest on these debts.

consider rent plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and

restaurants are located.

Nightclubs operating margin was 31.9%,

14.8%, and 34.1% in 2021, 2020, and 2019, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure

of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $13.6 million, $10.4 million,

and $5.9 million for 2021, 2020, and 2019, respectively.

Bombshells operating margin was 23.4%, 21.4%, and 7.5% in 2021, 2020, and 2019,

respectively, mainly due to two new units and same-store sales increase in 2021, partially offset by COVID-19 impact in 2020, and pre-opening

expenses in 2019 (particularly in salaries and wages and selling, general and administrative expenses.

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

Refer to discussion of Non-GAAP Financial Measures on page 35.

the Year Ended September 30, 2021

(loss) from operations

of intangibles

and charges related to debt refinancing

(gain) on sale of businesses and assets

operating income (loss)

operating margin

the Year Ended September 30, 2020

Income (loss) from operations

Amortization of intangibles

Settlement of lawsuits

Impairment of assets

Loss (gain) on sale of businesses and assets

Loss (gain) on insurance

Non-GAAP operating income (loss)

GAAP operating margin

Non-GAAP operating margin

the Year Ended September 30, 2019

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

Income/Expenses

expense increased by $181,000 from 2020 to 2021 and decreased by $398,000 from 2019 to 2020.

The net increase in interest expense in

2021 was primarily caused by the expensed loan costs and written off unamortized debt issuance costs related to the September 2021 Refinancing

Note (see Note 9 to our consolidated financial statements), partially offset by the impact of a lower average debt balance.

in interest expense in 2020 was primarily due to the lower average debt balance.

During 2019, our debt repayments were significantly

higher than our borrowing, excluding borrowings from acquisitions, thereby reducing interest expense as a percentage of revenue.

2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments were deferred, but we continue to

accrue interest on these debts.

At the end of 2021, we refinanced several of our existing bank and seller-financed real estate debt with

the issuance of a $99.1 million 5.25% note with a term of 10 years.

consider rent plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and restaurants

For occupancy cost purposes, we exclude non-real-estate-related interest expense.

Total occupancy cost

rate (total occupancy cost as a percentage of revenues) increased in 2020 due to lower sales activity (i.e.

by the pandemic as shown below.

Total occupancy cost rate (total occupancy

cost as a percentage of revenues) increased in 2020 due to lower sales activity caused by the pandemic as shown below.

Total occupancy cost

taxes were a benefit of $493,000 in 2020, an expense of $3.7 million in 2019, and a benefit of $3.1 million in 2018.

Our effective income tax rate was a 7.2% benefit in 2020, a 15.5% expense in 2019, and a 17.5% benefit in 2018.

The components of our annual effective income tax rate are the following:

expected income tax expense

income taxes, net of federal benefit

taxes on subsidiaries acquired/sold

in deferred tax liability rate

2021 interest expense rate above excludes certain costs and charges related to the September 2021 Refinancing Note amounting to

approximately $637,000, or 0.3% of consolidated revenues.

The $637,000 interest expense includes $103,000 in unamortized debt issuance

costs that were written off and $228,000 in expensed new loan costs.

fiscal 2021, we received 11 notices of forgiveness for our PPP loans approving the forgiveness of 100% of each of the 11 PPP loans amounting

to $5.3 million in principal and interest, which were included in non-operating gains (losses), net.

In November 2021, we received

a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest.

See Note 9 to our consolidated financial

Income taxes were an expense of approximately

$4.0 million in 2021, a benefit of $493,000 in 2020, and an expense of $3.7 million in 2019.

Our effective income tax rate was a

11.7% expense in 2021, 7.2% benefit in 2020, and a 15.5% expense in 2019.

The components of our annual effective income tax rate

are the following:

Federal statutory income tax expense/benefit

State income taxes, net of federal benefit

Permanent differences

Change in state tax rate

Change in valuation allowance

effective income tax rate

December 22, 2017, during our first quarter 2018, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law,

which provided for significant changes to the U.S.

Internal Revenue Code of 1986, as amended, such as a reduction in the statutory

federal corporate tax rate from a maximum of 35% to a flat 21% rate effective from January 1, 2018 forward and changes and limitations

to certain tax deductions.

The Company has a fiscal year end of September 30, so the change to the statutory corporate tax rate

resulted in a blended federal statutory rate of 24.5% for its fiscal year 2018.

fiscal 2020 and 2019, the effective income tax rate has changed to 7.2% and 15.5%, respectively, with the

rate difference from the statutory federal corporate tax rate of 21% coming from offsetting impact of state income tax, net of

federal benefit, and tax credits that are mostly FICA tip credits.

The effective income tax rate for fiscal 2020 was also affected

by the pre-tax loss mostly caused by the pandemic and the recognition of a deferred tax asset valuation allowance amounting

to $1.3 million.

Total effective income tax rate

* Positive or negative percentages are in relation

to income or loss before income taxes of the respective fiscal year.

Percentages may not foot due to rounding.

The effective income tax rate difference from

the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, and

tax credits that are mostly FICA tip credits.

The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly

caused by the pandemic and the changes in the deferred tax asset valuation allowance in fiscal 2021 and 2020.

Financial Measures

addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures,

within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future.

Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position

or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated

addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within

the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future.

a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that

excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance

We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management

and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative

of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated

and presented in accordance with GAAP.

We monitor non-GAAP financial measures because it describes the operating performance of

the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that

management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded

from) the most directly comparable measures calculated and presented in accordance with GAAP.

Relative to each of the non-GAAP

financial measures, we further set forth our rationale as follows:

Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:

Operating Income and Non-GAAP Operating Margin.

1 unchanged sentence

the following items from income from operations and operating margin:

(a) amortization of intangibles, (b) impairment of assets,

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) impairment of assets, (c)

gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) settlement of lawsuits, and (f) costs and

charges related to debt refinancing.

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 .

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

Adjustment items are:

(a) amortization of intangibles, (b) impairment of assets, (c) costs and charges related to debt

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

securities, (g) settlement of lawsuits, (h) the income tax effect of the above described adjustments, and (i) deferred tax

asset valuation allowance.

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision

for income taxes, calculated at 26.0%, 15.5%, and 24.5% effective tax rate of the pre-tax non-GAAP income before

taxes for the 2020, 2019, and 2018, respectively, and the GAAP income tax expense (benefit).

We believe that excluding and including

such items help management and investors better understand our operating activities.

The calculated amount for adjustment (h)

above in fiscal 2018 was significantly affected by the change in the statutory federal corporate tax rate caused by the Tax Act.

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) impairment of assets, (c) costs and charges related to debt refinancing, (d) gains or

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

lawsuits, (h) gain on debt extinguishment, (i) costs and charges related to debt refinancing, (j) the income tax effect of the

above-described adjustments, and (k) change in deferred tax asset valuation allowance.

Included in the income tax effect of the

above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 13.5%, 26.0%, and 15.5% effective

tax rate of the pre-tax non-GAAP income before taxes for the 2021, 2020, and 2019, respectively, and the GAAP income tax expense (benefit).

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

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

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

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

of assets, and (h) settlement of lawsuits.

(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.

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

We use adjusted EBITDA as one guideline to

assess the unleveraged performance return on our investments.

Adjusted EBITDA multiple is also used as a target benchmark for

our acquisitions of nightclubs.

Adjusted EBITDA provides a core operational performance measurement that compares results without the need

to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions.

The results are, therefore,

without consideration of financing alternatives of capital employed.

We use adjusted EBITDA as one guideline to assess the unleveraged

performance return on our investments.

Adjusted EBITDA multiple is also used as a target benchmark for our acquisitions of nightclubs.

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

See “Liquidity and Capital Resources” section

for further discussion.

following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and

percentages):

the Year Ended

See “Liquidity and Capital Resources” section for further

following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and percentages):

the Year Ended September 30,

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

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Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Depreciation and amortization

Unrealized loss on equity securities

Gain on debt extinguishment

Loss (gain) on insurance

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Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Costs and charges related to debt refinancing**

Unrealized loss on equity securities

Gain on debt extinguishment

Loss (gain) on insurance

Deferred tax asset valuation allowance

Change in deferred tax asset valuation allowance

Net income tax effect

Non-GAAP net income

the Year Ended

the Year Ended September 30,

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

Diluted shares

GAAP diluted earnings

(loss) per share

GAAP diluted earnings (loss) per share

Amortization of intangibles

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Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Costs and charges related to debt refinancing**

Unrealized loss on equity securities

Gain on debt extinguishment

Loss (gain) on insurance

Deferred tax asset valuation allowance

Change in deferred tax asset valuation allowance

Net income tax effect

5 unchanged sentences

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Costs and charges related to debt refinancing**

Loss (gain) on insurance

5 unchanged sentences

Impairment of assets

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Costs and charges related to debt refinancing**

Loss (gain) on insurance

1 unchanged sentence

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

adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact

of adjustments related to noncontrolling interests, which is immaterial.

Costs and charges related to debt refinancing consist of $637,000 in interest expense and $57,000 in legal and professional fees.

$637,000 interest expense portion above includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed

new loan costs.

adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments

related to noncontrolling interests, which is immaterial.

AND CAPITAL RESOURCES

September 30, 2020, our cash and cash equivalents were approximately $15.6 million compared to $14.1 million at September 30,

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

As of September 30, 2020, we had negative

working capital of $5.9 million compared to a negative working capital of $1.2 million as of September 30, 2019, excluding

net assets held for sale of $0 and $2.9 million as of September 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 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 it is too early to know when and if they will generate positive cash flows for

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.

net cash flow from operating activities for 2020 has gone down to less than half of last year’s result.

To augment the current

and expected future 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;

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.

On May 8, 2020, the Company received approval

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

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

shared-services subsidiary received $1.1 million;

At September 30, 2021, our cash and cash equivalents

were approximately $35.7 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 September 30, 2021, we had working capital of $26.1 million compared to a negative working

capital of $5.9 million as of September 30, 2020, excluding net assets held for sale (net of associated liabilities of $1.1 million and

$0, respectively) amounting to $3.8 million and $0 as of September 30, 2021 and 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.

Revenues seem favorable now that all our locations are not under pandemic-related closure mandates.

We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee

that additional liquidity will be readily available or available on favorable terms.

In fiscal 2020, to adapt to the situation,

we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts,

reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable

monthly expenses, among others.

On May 8, 2020, the Company received approval and

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

Ten of our restaurant

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

our shared-services subsidiary

received $1.1 million;

and one of our lounges received $124,000.

None of our adult nightclub and other

non-core business subsidiaries received funding under the PPP.

The Company believes it has used the entire loan amount for qualifying

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.

As of the filing of this report, we have received ten Notices of PPP Forgiveness Payment 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.

No assurance can be provided that the Company will in fact obtain forgiveness of the remaining

two PPP loans in whole or in part.

As of the release of this report, we do not

know the future extent and duration of the impact of COVID-19 on our businesses.

Lower 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.

None of our adult nightclub and other non-core business subsidiaries

received funding under the PPP.

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 year ended September 30, 2021, we received 11 Notices of

PPP Forgiveness Payment 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 11 PPP loans totaling the amount of $5.3 million in principal and interest during the period and were included

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

In November 2021, we received a partial forgiveness

of the remaining $124,000 PPP loan for $85,000 in principal and interest.

The remaining unforgiven portion of approximately $41,000 in principal will be repaid as debt plus accrued interest.

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

operating restrictions, 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.

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, where applicable.

Currently, all of our locations are open except two clubs that are being renovated and/or remodeled.

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

Instead, we use debt financing to lower our overall

cost of capital and increase our return on stockholders’ equity.

We have a history of borrowing funds in private transactions

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

of our existing notes payable, 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.

our cash flows are not as we expected at the beginning of the year, we expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.

Instead, we use debt financing to lower our overall cost

of capital and increase our return on stockholders’ equity.

We have a history of borrowing funds in private transactions and from

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

existing notes payable, 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.

On October 18, 2021, we and certain of our

subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated

intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of

$88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period).

acquisition gives the Company presence in six additional states.

We paid for the acquisition with $36.8 million in cash, $21.2

million in four seller-financed notes, and 500,000 shares of our common stock.

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 net cash flows from operating, investing, and financing activities (in thousands):

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in technology.

We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital

allocation strategy guidelines, and to pay our quarterly dividends.

We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital allocation

strategy guidelines, and to pay our quarterly dividends.

Flows from Operating Activities

5 unchanged sentences

Impairment of assets

Gain on debt extinguishment

Net change in operating assets and liabilities

Net cash provided by operating

cash flows from operating activities significantly decreased from 2019 to 2020 mainly due to the impact of the COVID-19 pandemic

on our operations and partially offset by lower interest and income taxes paid.

Net cash flows from operating activities

increased from 2018 to 2019 primarily from higher income from operations plus lower income taxes paid.

Net cash provided by operating activities

cash flows from operating activities increased from 2020 to 2021 mainly due to significantly higher income from operations partially

offset by higher interest payments, which included deferred debt interest payments from 2020, and higher income taxes paid.

flows from operating activities significantly decreased in 2020 mainly due to the impact of the COVID-19 pandemic on our operations and

partially offset by lower interest and income taxes paid.

Flows from Investing Activities

6 unchanged sentences

Acquisition of businesses, net of cash acquired

Net cash used in investing

opened two new Bombshells units in 2020 (one in Katy, Texas and another on Southwest Freeway in Houston, Texas);

opened four new

units in 2019 (acquired two clubs in Chicago, Illinois and Pittsburgh, Pennsylvania, and built two new Bombshells in Houston,

and opened two new units in 2018 (one acquired club in Kappa, Illinois and one built Bombshells in Pearland, Texas).

Note 16 to our consolidated financial statements.

As of September 30, 2020, 2019, and 2018, we had $20,000, $8.9 million,

and $6.4 million in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year.

Net cash used in investing activities

In 2021, we acquired four real estate properties

either for future club or restaurant locations or for corporate use.

On one of the real properties purchased, we opened a Bombshells

restaurant on December 6, 2021 in Arlington, Texas.

There were no new Bombshells units opened in 2021.

We also sold two real estate properties

We opened two new Bombshells units in 2020 (one in Katy, Texas and another on U.S.

Highway 59 in

Houston, Texas) and sold three real estate properties.

In 2019, we opened four new units (acquired two clubs in Chicago, Illinois

and Pittsburgh, Pennsylvania, and built two new Bombshells in Houston, Texas) and seven real estate properties sold.

As of September

30, 2021, 2020, and 2019, we had $3.4 million, $20,000, and $8.9 million in construction-in-progress related mostly to Bombshells

opening in the subsequent fiscal year.

In 2019, we acquired two clubs (one in Pittsburgh and another in Chicago) where

we paid a total of $13.5 million at closing.

See Note 15 to our consolidated financial statements.

is a reconciliation of our additions to property and equipment for the years ended September 30, 2021, 2020, and 2019 (in thousands):

Ended September 30,

Purchase of real estate*

New capital expenditures in new clubs and Bombshells units and equipment*

1 unchanged sentence

Total capital expenditures, excluding business acquisitions

Excludes real estate acquired through business acquisitions.

Includes real estate except those acquired through business acquisitions.

See discussion of acquisitions subsequent to September

30, 2021 in Note 15 to our consolidated financial statements, the most significant of which is our acquisition of eleven clubs on October

18, 2021 for which part of the total acquisition price was paid with $36.8 million in cash at closing.

Flows from Financing Activities

6 unchanged sentences

Payment of loan origination costs

Debt prepayment penalty

Distribution of noncontrolling interests

Net cash provided by (used

in) financing activities

purchased shares of our common stock representing 516,102 shares, 128,040 shares, and 0 shares in 2020, 2019, and 2018, respectively.

We have paid quarterly dividends of $0.03 per share for fiscal 2020, 2019, and 2018, except for the fourth quarter of 2019 and

the second and fourth quarter of 2020 where we paid $0.04 per share.

Distribution to noncontrolling interests

Net cash used in financing activities

See Note 9 to our consolidated financial statements

for a detailed discussion of our debt obligations.

purchased shares of our common stock representing 74,659 shares, 516,102 shares, and 128,040 shares in 2021, 2020, and 2019, respectively.

We paid quarterly dividends of $0.03 per share in fiscal 2020 and 2019, except for the fourth quarter of 2019 and the second and fourth

quarter of 2020 where we paid $0.04 per share.

We paid quarterly dividends of $0.04 per share in fiscal 2021.

Cash Flow Measure

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

We define free cash flow as net cash provided by operating

activities less maintenance capital expenditures.

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

allocation strategy.

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

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

less maintenance capital expenditures.

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

See table below (in thousands):

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do not include total capital expenditures as a reduction from net cash flow from operating activities to arrive at free cash flow.

This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our

primary uses of free cash flow.

Our free cash flow after long-term debt repayments was $4.6 million, $10.4 million, and $(49.6)

million during fiscal 2020, 2019, and 2018, respectively.

Free cash flow after long-term debt repayments in fiscal 2018 was significantly

impacted by our $81.2 million refinancing in December 2017.

Note 10 to our consolidated financial statements for detail regarding our long-term debt activity.

is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses

of free cash flow.

financing activities were as follows:

million bank refinancing loan on September 30, 2021

million borrowings from private investors on October 12, 2021 (subsequent to year-end)

$21.2 million seller-financed notes related to the October

18, 2021 acquisition (subsequent to year-end)

Note 9 to our consolidated financial statements for more details regarding our debt activity.

Obligations and Commitments

have long-term contractual obligations primarily in the form of debt obligations and operating leases.

The following table (in

thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments.

interest payments related to debt were estimated using the interest rate in effect at September 30, 2020.

Due by Period

debt – regular

debt – balloon

payments on debt

October 1, 2019, we adopted Accounting Standards Update No.

2016-02, Leases (Topic 842) , which will significantly affect

our accounting of all leases.

See Notes 2 and 22 to our consolidated financial statements.

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

of any event or trend that would adversely impact our liquidity.

In our opinion, working capital is not a true indicator

of our financial status.

Typically, businesses in our industry carry current liabilities in excess of current assets because businesses

in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current

liabilities normally carry longer payment terms.

Vendors and purveyors often remain flexible with payment terms, providing businesses

in our industry with opportunities to adjust to short-term business downturns.

We consider the primary indicators of financial

status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations

and the level of long-term debt.

The following table (in thousands)

summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments.

Future interest payments

related to debt were estimated using the interest rate in effect as of September 30, 2021.

Payments Due by Period

Long-term debt – regular (a)

Long-term debt – balloon (a)

Interest payments on debt

Operating leases (b)

Note 9 to our consolidated financial statements.

Note 19 to our consolidated financial statements.

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

event or trend that would adversely impact our liquidity.

In our opinion, working capital is not a true indicator of our financial status.

Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive

substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer

payment terms.

Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities

to adjust to short-term business downturns.

We consider the primary indicators of financial status to be the long-term trend of revenue

growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.

following table presents a summary of such indicators (dollars in thousands):

of alcoholic beverages

of food and merchandise

cash provided by operating activities

(end of period)

See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and Capital

Resources above.

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Net cash provided by operating activities

Adjusted EBITDA*

Free cash flow*

Debt (end of period)

See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and Capital Resources

have not established financing other than the notes payable discussed in Note 9 to the consolidated financial statements.

There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should

the need arise.

As part of our capital allocation strategy,

we buy back shares in the open market or through negotiated purchases, as authorized by our Board of Directors.

During fiscal

years 2020, 2019, and 2018, we paid for treasury stock amounting to $9.5 million, $2.9 million, and $0 representing 516,102 shares,

128,040 shares, and 0 shares, respectively.

On February 6, 2020, the Board of Directors increased the repurchase authorization

by an additional $10.0 million.

We have $10.8 million remaining to purchase additional shares as of September 30, 2020.

to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common

stock for a total of $1.8 million.

no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise.

part of our capital allocation strategy, we buy back shares in the open market or through negotiated purchases, as authorized by our

Board of Directors.

During fiscal years 2021, 2020, and 2019, we paid for treasury stock amounting to $1.8 million, $9.5 million, and

$2.9 million representing 74,659 shares, 516,102 shares, and 128,040 shares, respectively.

On February 6, 2020, the Board of Directors

increased the repurchase authorization by an additional $10.0 million.

We have approximately $9.0 million remaining to purchase additional

shares as of September 30, 2021.

additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for Registrant’s

Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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

To the extent permitted

by competition, we have managed to recover increased costs through price increases and may continue to do so.

However, there can

be no assurance that we will be able to do so in the future.

To the extent permitted by competition, we have

managed to recover increased costs through price increases and may continue to do so.

However, there can be no assurance that we will

be able to do so in the future.

nightclub operations are affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September

(our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal

first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter

were significantly reduced.

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

sales from year to year.

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

segments with high growth potential.

(our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first

and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly

Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

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;

(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;

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

(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 Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential.

All ten of the existing Bombshells as of September 30, 2021 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

fiscal 2018, we reacquired Drink Robust (see Note 16 to our consolidated financial statements).

Also in fiscal 2018, we

acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest at 8%.

The Kappa transaction

provides for the purchase of the real estate for $825,000 and other non-real-estate business assets for $180,000, with goodwill

amounting to $495,000.

See Note 16 to the consolidated financial statements for details of the transactions.

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 targets.

fiscal 2019, we acquired two clubs, one in Illinois (rebranded as Rick’s Cabaret Chicago) and another in Pennsylvania (rebranded

as Rick’s Cabaret Pittsburgh) for an aggregate purchase price of $25.5 million.

See Note 16 to the consolidated financial

statements for details of the transactions.

See Note 15 to the consolidated financial statements

for details of the transactions.

opened two new Bombshells units in fiscal 2019.

October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash

at closing and a 9% note payable over a 10-year period.

See Note 16 to the consolidated financial statements for details

of the disposition.

October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash at closing

and a 9% note payable over a 10-year period.

See Note 15 to the consolidated financial statements for details of the disposition.

opened two new Bombshells units in fiscal 2020.

November 5, 2019, we announced that our subsidiaries had 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.

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

as we have done in the past.

The acquisition of additional clubs may require us to take on additional debt or issue our common

stock, or both.

There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future,

if at all, should the need arise.

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

October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real

estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with

a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and

discounted due to the lock-up period).

See Note 15 to our consolidated financial statements for details of the

November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total purchase price of $3.5 million,

by which $2.5 million was paid in cash at closing and $1.0 million through a seller-financed 7-year promissory note with an interest

rate of 4.0% per annum.

The note is payable $13,669 per month, including principal and interest.

See Note 15 to our consolidated financial

In December 2021, we opened a new Bombshells location in Arlington,

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

have done in the past.

The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both.

There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the

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

Quantitative and Qualitative Disclosures About Market Risk

items in our financial statements subject to market risk are potential debt instruments with variable interest rates.

carry any debt with a variable interest rate in effect as of September 30, 2020.

Certain of our debt have variable interest rates

but will only be effective in future years.

We do not carry

any debt with a variable interest rate in effect as of September 30, 2021.

Certain of our debt have variable interest rates but will

only be effective in future years.

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-K

Item 7. Management’s Discussion and Analysis