What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-08-05 · 321 added, 444 removed, 181 unchanged (81% of the section changed)

5 unchanged sentences

(“RCIHH”) is a holding company.

Through our subsidiaries, we engaged in a number of activities

Through our subsidiaries, we engage in a number of activities

in the hospitality and related businesses.

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

our subsidiaries, as of June 30, 2021, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant

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

We also operated a leading business communications

company serving the multi-billion-dollar adult nightclubs industry.

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

Management Services, Inc.

our subsidiaries, as of December 31, 2021, we operated a total of 58 establishments that offer live adult entertainment and/or restaurant

and bar operations.

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

We have two principal reportable segments:

Nightclubs and Bombshells.

We combine other operating segments into “Other.” In the context of club and restaurant/sports bar operations, the terms

the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries

RCIHH was incorporated in the State of Texas in 1994.

We combine operating segments not included in Nightclubs and Bombshells

into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,”

“our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH.

RCIHH was incorporated in the

State of Texas in 1994.

Our corporate offices are located in Houston, Texas.

of COVID-19 Pandemic

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

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

Our total revenues for the three and nine

months ended June 30, 2021 increased by 293.0% and 35.5%, respectively, versus last year due to the impact of the pandemic in fiscal

For illustrative purposes, the current quarter and current year-to-date total revenues increased by 23.0% and 3.3% compared to

the corresponding period in pre-pandemic fiscal 2019.

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.

Impact of COVID-19 Pandemic

Since the U.S.

declaration of the COVID-19

pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly

impact our cash flow.

The pandemic 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.

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

2 unchanged sentences

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

Currently, all Bombshells

and club locations are operating at normal business hours.

New York is currently mandating vaccines for entry into restaurants, bars,

and nightclubs.

Accounting Policies and Estimates

10 unchanged sentences

filed with the SEC on December 14, 2021.

the three and nine months ended June 30, 2021, there were no significant changes in our accounting policies and estimates other than

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

signed our first franchise agreement for Bombshells in December 2020.

The financial impact of the franchise agreement was immaterial

to the Company’s results of operations and cash flows for the three and nine months ended June 30, 2021.

the three months ended December 31, 2021, there were no significant changes in our accounting policies and estimates other than the newly

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

of Operations

of the Company’s operating results are as follows:

revenues were $57.9 million compared to $14.7 million during the corresponding prior-year quarter, a 293.0% increase (Nightclubs

revenue of $41.0 million compared to $6.0 million, a 582.4% increase;

and Bombshells revenue of $16.1 million compared to $8.5 million,

an 88.5% increase)

illustrative purposes, total revenues increased by 23.0% compared to the corresponding period in fiscal 2019 (Nightclubs revenue

increased by 8.3% and Bombshells revenue increased by 83.6%)

club nor Bombshells location qualified for same-store sales comparisons because of closures in fiscal 2020 in connection with

and diluted earnings per share (“EPS”) of $1.37 compared to a basic and diluted loss per share of $0.60 last year (non-GAAP

diluted EPS* of $1.36 compared to a loss of $0.74)

cash provided by operating activities of $15.0 million compared to $166,000 during the comparable prior-year period, an 8,918.7%

increase (free cash flow* of $13.0 million compared to $166,000, a 7,703.6% increase)

revenues were $140.3 million compared to $103.5 million during the corresponding prior-year period, a 35.5% increase (Nightclubs

revenue of $97.0 million compared to $75.2 million, a 28.9% increase;

of the operating results of the Company during the three months ended December 31, 2021 are as follows:

revenues were $61.8 million compared to $38.4 million during the comparable prior-year period, a 61.0% increase (Nightclubs revenue

of $46.8 million compared to $25.2 million, an 85.7% increase;

and Bombshells revenue of $14.8 million compared to $13.0 million,

a 13.6% increase)

illustrative purposes, total revenues increased by 3.3% compared to the corresponding period in fiscal 2019 (Nightclubs revenue decreased

by 13.9% and Bombshells revenue increased by 89.4%)

and diluted EPS of $3.11 compared to a basic and diluted loss per share of $0.36 (non-GAAP diluted EPS* of $2.50 compared to $0.36)

same-store sales increased by 21.8% (Nightclubs increased by 30.6% while Bombshells increased by 7.6%) (refer to the definition of

same-store sales in the discussion of revenues below)

newly acquired clubs contributed $6.3 million to revenues, while a newly constructed Bombshells contributed $796,000

and diluted earnings per share (“EPS”) of $1.12 compared to $1.07 (non-GAAP diluted EPS* of $1.10 compared

to $0.39) during the comparable prior-year period

cash provided by operating activities of $16.3 million compared to $6.3 million during the comparable prior-year period, a

2 unchanged sentences

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

Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

following table summarizes our results of operations for the three months ended June 30, 2021 (dollars in thousands):

the Three Months Ended

following table summarizes our results of operations for the three months ended December 31, 2021 and 2020 (dollars in

For the Three Months Ended

December 31, 2021

December 31, 2020

Better (Worse)

Sales of alcoholic beverages

11 unchanged sentences

Depreciation and amortization

Other charges (gains), net

Other gains, net

Total operating expenses

Income (loss) from operations

Income from operations

Other income (expenses)

2 unchanged sentences

Non-operating gains, net

Income (loss) before income taxes

Income before income taxes

Income tax expense (benefit)

Net income (loss)

Percentages may not foot due to rounding.

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revenue line.

revenues increased by approximately $43.1 million, or 293.0%, due primarily to last year’s impact of closures caused by the COVID-19

No club or Bombshells location qualified for same-store sales since all units exceeded

the number of closure days in the prior year to be considered not comparable.

For illustrative purposes, we are including a comparison

to the corresponding quarter of fiscal 2019 in the revenue discussion below.

revenues increased by approximately $23.4 million, or 61.0%, compared to the prior-year quarter due primarily to partial recovery

from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening.

Consolidated same-store sales increased

The 61.0% increase in consolidated revenues was primarily from a 22.9% increase from last year’s COVID-19 closures, a

19.2% increase from the impact of same-store sales growth, an 18.6% increase from new units, with a 0.4% increase from non-core operations.

calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full

quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells.

We consider the first

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

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

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

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

or are closed due to renovations or remodels.

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

based on the definition stated above.

Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store

sales calculation.

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

the Three Months Ended June 30,

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

revenues increased by 582.4% for the quarter ended June 30, 2021 compared to the prior-year quarter mainly due to the closure of all

clubs in April 2020.

Compared to pre-pandemic third quarter of 2019, current quarter Nightclubs revenues increased by 8.3% due to

alcoholic beverages sales and food and merchandise sales increases of 10.5% and 52.8%, respectively, from higher traffic partially

offset by a service revenue decrease of 2.8% due to social distancing restrictions.

revenues increased by 88.5% compared to last year mainly due to closures in April 2020, while also up 83.6% compared to the 2019 quarter

primarily due to two new locations.

operating expenses, as a percent of revenues, for the third quarter ended June 30, 2021 decreased to 68.0% from 131.6% from last

year’s third quarter, with a $20.0 million decrease, or 103.1%, which is mainly caused by the overall impact of last year’s

pandemic closures.

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

of goods sold increased by $6.5 million, or 271.2%, mainly due to higher sales in the current quarter.

As a percent of total revenues,

cost of goods sold decreased to 15.3% from 16.2% mainly due to the sales mix shifting to higher-margin service revenues.

and wages increased by $8.4 million, or 155.9%, due to the closures last year.

As a percent of total revenues, salaries and wages were

lower at 24.0% from 36.8% mainly due to fixed salaries paid on lower sales during the prior-year quarter.

general and administrative expenses increased by $5.8 million, or 65.0%, primarily due to the increase in most of the variable expenses

as caused by higher sales in the current year.

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

to 25.4% from 60.5% due to last year’s fixed expenses on significantly lower sales.

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

quarter ended June 30, 2021 and 2020, respectively.

As a percentage of revenue, total occupancy costs were 5.7% and 23.6% during the

quarter ended June 30, 2021 and 2020, respectively, primarily due to the lower sales base in last year’s quarter.

and amortization decreased by $178,000, or 8.0% partly due to fully depreciated real estate and software assets.

charges (gains), net was a net gain of $143,000 from a net charge of $424,000, which was primarily due to the current quarter’s

lower impairment charges.

the Three Months

revenues increased by 85.7% for the quarter ended December 31, 2021 compared to the prior-year quarter, where the prior-year first quarter

was still heavily impacted by government restrictions related to COVID-19.

For Nightclubs that were open enough days to qualify for same-store

sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 30.6%.

Newly acquired clubs

contributed $6.3 million to the total Nightclubs revenue increase of $21.6 million.

revenues increased by 13.6%, of which 7.6% was for same-store sales increase with the remaining increase caused by one new location.

operating expenses, as a percent of revenues, decreased to 74.3% from 82.9% from last year’s first quarter, although there

was a $14.1 million increase, or 44.4%, which was mainly caused by significantly higher sales in the current-year quarter.

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

of goods sold increased by $2.7 million, or 43.3%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold

decreased to 14.4% from 16.2% mainly due to the sales mix of higher-margin service revenues increasing.

and wages increased by $5.0 million, or 43.7%, due to increase in personnel and shifts to accommodate the increase in sales.

a percent of total revenues, salaries and wages were 26.7% from 29.9% mainly due to fixed salaries paid on higher sales.

general and administrative expenses increased by $6.3 million, or 52.1%, primarily due to increased variable expenses

related to sales activity during the current-year quarter.

and amortization increased by $171,000, or 8.5% due to new depreciable assets from newly acquired and constructed units

partially offset by fully depreciated and sold assets.

gains, net increased by $101,000 mainly due to an increase in gain from properties sold, partially

offset by a lower gain on insurance.

(Loss) from Operations

the three months ended June 30, 2021 and 2020, our consolidated operating margin was 32.0% and (31.6)%, respectively.

The main driver

for the increase in operating margin is the current quarter’s higher sales.

the three months ended December 31, 2021 and 2020, our consolidated operating margin was 25.7% and 17.1%, respectively.

driver for the increase in operating margin is the leveraging of fixed expenses on higher sales.

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

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General corporate

margin for the Nightclubs segment was 44.7% and (50.5)% for the three months ended June 30, 2021 and 2020, respectively, while operating

margin for Bombshells was 27.4% and 21.7%, respectively.

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

closures caused by the pandemic.

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

expenses from several Bombshells openings in prior periods.

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

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

the Three Months Ended June 30, 2021

the Three Months Ended June 30, 2020

operating margin was 40.1% and 33.7% for the three months ended December 31, 2021 and 2020, respectively, while operating margin

for Bombshells was 19.0% and 20.9%, respectively.

The increase in Nightclubs operating margin was mainly due to the increase in

higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales.

The decrease in

Bombshells operating margin was mainly from pre-opening expenses for the new Bombshells unit.

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

Refer to the discussion of Non-GAAP Financial Measures on page 26.

the Three Months Ended December 31, 2021

(loss) from operations

of intangibles

(gain) on sale of businesses and assets

(gain) on insurance

Settlement of lawsuits

on sale of businesses and assets

operating income (loss)

operating margin

GAAP operating

operating margin

Non-Operating

expense decreased by $178,000, or 7.2%.

taxes were an expense of $4.0 million during the quarter ended June 30, 2021 compared to a benefit of $1.4 million during the quarter

ended June 30, 2020.

The effective income tax rate was an expense of 24.4% and a benefit of 20.5% for the quarter ended June 30, 2021

and 2020, respectively.

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

and tax credits, including the FICA tip credit, for both years, as presented below.

For the Three Months

Statutory federal income tax rate

State income taxes, net of federal benefit

Permanent differences

Effective income tax rate

Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020

following table summarizes our results of operations for the nine months ended June 30, 2021 (dollars in thousands):

the Nine Months Ended

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Operating expenses

Cost of goods sold

Alcoholic beverages sold

Food and merchandise sold

Service and other

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

Salaries and wages

Selling, general and administrative

Depreciation and amortization

Other charges, 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)

Percentages may not foot due to rounding.

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

revenue line.

revenues increased by approximately $36.8 million, or 35.5%, due primarily to reopenings after the closures caused by the COVID-19 pandemic.

For illustrative purposes, we are including a comparison to the corresponding quarter of fiscal 2019 in the revenue discussion below.

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

the Nine Months Ended June 30,

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

revenues increased by 28.9% for the nine-month period ended June 30, 2021 compared to the comparable prior-year period mainly due to

pandemic restrictions in 2020.

Compared to pre-pandemic nine-month period of fiscal 2019, current year Nightclubs revenues decreased

by 13.9% due to alcoholic beverages sales and service revenue decreases of 11.8% and 25.8%, respectively, caused by stricter pandemic

restriction at the early part of fiscal 2021 partially offset by food and merchandise sales increase of 28.1% due to customer spending

revenues increased by 52.5% compared to last year mainly due to closures in April 2020, and increased by 89.4% compared to the

2019 nine-month period primarily due to two new locations.

operating expenses, as a percent of revenues, for the nine months ended June 30, 2021 decreased to 75.1% from 97.5% from the comparable

period last year, with a $4.4 million increase, or 4.4%, which is mainly caused by a $6.9 million increase in cost of goods sold and

a $5.7 million increase in salaries and wages, partially offset by a higher impairment in the prior year.

Significant contributors to

the changes in operating expenses for the year-to-date period are explained below.

of goods sold increased by $6.9 million, or 46.4%, mainly due the increase in sales.

As a percent of total revenues, cost of goods sold

increased to 15.6% from 14.4% mainly due to the shift in sales mix.

and wages increased by $5.7 million, or 18.4%, mainly due to increased staffing for reopenings after COVID-19-related closures.

percent of total revenues, salaries and wages were lower at 26.1% from 29.8% mainly due to fixed salaries paid on lower sales during

the prior-year period.

general and administrative expenses decreased by $422,000, or 1.1%, primarily due to decreased audit and legal fees from prior year’s

SEC matters, and controlled advertising and marketing expenses due to uncertainty brought about by the pandemic.

As a percent of total

revenues, selling, general and administrative expenses decreased to 28.1% from 38.5% due to legal and accounting fees and advertising

and marketing expenses.

total occupancy costs, defined as the sum of lease expense and interest expense (see below), were $10.0 million and $10.5 million for

the nine months ended June 30, 2021 and 2020, respectively.

As a percentage of revenue, total occupancy costs were 7.1% and 10.1% during

the nine months ended June 30, 2021 and 2020, respectively, primarily due to lower sales base in the prior-year nine-month period.

and amortization decreased by $499,000, or 7.5% partly due to fully depreciated real estate and software assets.

charges, net decreased to $1.3 million from $8.6 million, which was primarily caused by impairment charges of $1.7 million and $9.2 million

during the nine months ended June 30, 2021 and 2020, respectively.

from Operations

the nine months ended June 30, 2021 and 2020, our consolidated operating margin was 24.9% and 2.5%, respectively.

The main drivers for

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

higher impairment charges.

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

For the Nine Months

General corporate

margin for the Nightclubs segment was 38.5% and 17.3% for the nine months ended June 30, 2021 and 2020, respectively, while operating

margin for Bombshells was 24.3% and 14.8%, respectively.

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

higher sales and last year’s impairment charges triggered by the pandemic.

The increase in Bombshells operating margin was mainly

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

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

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

the Nine Months Ended June 30, 2021

the Nine Months Ended June 30, 2020

the Three Months Ended December 31, 2020

(loss) from operations

of intangibles

(gain) on sale of businesses and assets

Amortization of intangibles

Settlement of lawsuits

on sale of businesses and assets

operating income (loss)

1 unchanged sentence

operating margin

Non-Operating

the nine months ended June 30, 2021, we received 11 notices of forgiveness for a PPP loan, which forgave 100% of the PPP loans’

principal and interest amounting to $5.3 million.

expense decreased by $324,000, or 4.4%.

taxes were an expense of $5.5 million during the nine months ended June 30, 2021 compared to a benefit of $1.3 million during the nine

months ended June 30, 2020.

The effective income tax rate was an expense of 16.6% and a benefit of 26.9% for the nine months ended June

Income/Expenses

During the quarter ended December 31, 2020, we

received notices of forgiveness for the first ten forgiven loans out of twelve of our PPP loans.

During the quarter

ended December 31, 2021, we received a notice of forgiveness for the last remaining forgiven loan out of twelve of our PPP loans.

recognized gains on debt extinguishment amounting to $85,000 and $4.9 million during the quarters ended December 31, 2021

and 2020, respectively.

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

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

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

For the Nine Months

Statutory federal income tax rate

State income taxes, net of federal benefit

Permanent differences

Change in valuation allowance

Effective income tax rate

expense increased by $170,000, or 7.0%, which was mainly caused by higher average debt balance and partially offset by a

lower average interest rate.

Our total occupancy costs, defined as the sum

of operating lease expense and interest expense, were $4.2 million and $3.4 million for the quarters ended

December 31, 2021 and 2020, respectively.

As a percentage of revenue, total occupancy costs were 6.9% and 8.9% during the quarters

ended December 31, 2021 and 2020, respectively, primarily due to the increase in sales base.

taxes were an expense of $2.9 million during the quarter ended December 31, 2021 compared to a benefit of $384,000 during the

quarter ended December 31, 2020.

The effective income tax rate was an expense of 21.7% and a benefit of 4.2% for the quarters

ended December 31, 2021 and 2020, respectively.

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

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

of the PPP loans in the prior period, as presented below.

the Three Months

expected income tax expense/benefit

income taxes, net of federal benefit

in valuation allowance

income tax expense (benefit)

Financial Measures

12 unchanged sentences

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

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

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.

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

We believe that excluding these items assists

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

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

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

1 unchanged sentence

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

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

unrealized gains or losses on equity securities, (e) impairment of assets, (f) settlement of lawsuits, (g) gain on debt extinguishment,

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

Included in the income tax effect of the above adjustments is the net

effect of the non-GAAP provision for income taxes, calculated at 24.3% and 26.9% effective tax rate of the pre-tax non-GAAP income before

taxes for the nine months ended June 30, 2021 and 2020, respectively, and the GAAP income tax expense (benefit).

We believe that excluding

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

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

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

debt extinguishment, and (g) the income tax effect of the above-described adjustments.

Included in the income tax effect of the

above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.3% and 19.1% effective tax rate of the

pre-tax non-GAAP income before taxes for the three months ended December 31, 2021 and 2020, respectively, and the GAAP income tax expense

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, (h) settlement

of lawsuits, and (i) gain on debt extinguishment.

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

our operating activities.

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

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

The results are, therefore,

without consideration of financing alternatives of capital employed.

We use adjusted EBITDA as one guideline to assess our unleveraged

performance return on our investments.

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

gain on debt extinguishment.

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

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

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

The results are, therefore, without

consideration of financing alternatives of capital employed.

We use adjusted EBITDA as one guideline to assess our unleveraged performance

return on our investments.

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

1 unchanged sentence

See “Liquidity and Capital Resources” section for further

following tables present our non-GAAP performance measures for the three and nine months ended June 30, 2021 and 2020 (in thousands,

except per share amounts and percentages):

For the Three Months

For the Nine Months

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

Net income (loss) attributable to RCIHH common stockholders

Income tax expense (benefit)

Interest expense, net

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

per share, number of shares and percentages):

the Three Months

Reconciliation

of GAAP net income to Adjusted EBITDA

income attributable to RCIHH common stockholders

expense (benefit)

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Gain on debt extinguishment

Unrealized loss (gain) on equity securities

of businesses and assets

extinguishment

loss on equity securities

Gain on insurance

Depreciation and amortization

Adjusted EBITDA

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

Net income (loss) attributable to RCIHH common stockholders

Amortization of intangibles

and amortization

Reconciliation

of GAAP net income to non-GAAP net income

attributable to RCIHH common stockholders

of intangibles

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Gain on debt extinguishment

Unrealized loss (gain) on equity securities

of businesses and assets

extinguishment

loss on equity securities

Gain on insurance

Net income tax effect

Non-GAAP net income (loss)

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

Diluted shares

GAAP diluted earnings (loss) per share

Amortization of intangibles

income tax effect

Reconciliation

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

GAAP diluted earnings per share

of intangibles

Settlement of lawsuits

Impairment of assets

Gain on sale of businesses and assets

Gain on debt extinguishment

Unrealized loss (gain) on equity securities

of businesses and assets

extinguishment

loss on equity securities

Gain on insurance

Net income tax effect

Non-GAAP diluted earnings per share

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

Income (loss) from operations

Amortization of intangibles

income tax effect

diluted earnings per share

Reconciliation

of GAAP operating income to non-GAAP operating income

of intangibles

Settlement of lawsuits

Impairment of assets

Gain on insurance

Gain on sale of businesses and assets

Non-GAAP operating income (loss)

Reconciliation of GAAP operating margin to non-GAAP operating margin

GAAP operating margin

Amortization of intangibles

of businesses and assets

operating income

Reconciliation

of GAAP operating margin to non-GAAP operating margin

of intangibles

Settlement of lawsuits

Impairment of assets

Gain on insurance

Gain on sale of businesses and assets

Non-GAAP operating margin

of businesses and assets

operating margin

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

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and Capital Resources

At June 30, 2021, our cash and cash equivalents were

approximately $29.1 million compared to $15.6 million at September 30, 2020.

Because of the large volume of cash we handle, we have very

stringent cash controls.

As of June 30, 2021, we had positive working capital of $7.3 million compared to a negative working capital

of $5.9 million as of September 30, 2020, excluding assets held for sale (net of associated liabilities of $1.1 million and $0, respectively)

amounting to $3.8 million and $0 as of June 30, 2021 and September 30, 2020, respectively.

Although we believe that our ability to generate

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

by the COVID-19 pandemic presented operational challenges.

Our strategy is 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.

that we can borrow capital if need be 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.

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.

December 31, 2021, our cash and cash equivalents were approximately $18.0 million compared to $35.7 million at September 30, 2021.

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

As of December 31, 2021, we had working capital of $1.3

million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated

liabilities of $800,000 and $1.1 million, respectively) amounting to $2.3 million and $3.8 million as of December 31, 2021 and September

30, 2021, 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.

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.

However, some locations do have certain restrictions still in place.

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.

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.

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

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The Company utilized all of the PPP funds and submitted its forgiveness applications.

During the three and nine months

ended June 30, 2021, we received 0 and 11 Notices of PPP Forgiveness Payment (“Notice”), respectively, from the Small Business

Administration out of the 12 of our PPP loans granted.

All of the notices received forgave 100% of each of the 11 PPP loans totaling

the amount of $0 and $5.3 million in principal and interest during the three and nine months ended June 30, 2021, respectively, and were

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

No assurance can be provided

that the Company will in fact obtain forgiveness of the $124,000 remaining PPP loan in whole or in part.

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.

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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.

have not recently raised capital through the issuance of equity securities although we have recently issued shares of our common stock

to partly pay for an acquisition (see next paragraph).

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.

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 with a fair value of $30.4 million at issuance.

On January 25, 2022, the Company borrowed

$18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate

of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S.

Treasury securities plus

3.98% with a floor of 5.25%.

The note is payable in monthly payments of $126,265 in principal and interest to be adjusted after five

The promissory note is secured by eleven real estate properties.

After the 10-year term, the remaining balance of principal

and interest are payable at maturity date.

There are certain financial covenants with which the Company is to be in compliance

related to this loan, among which to maintain a debt service coverage of not less than 1.4 times, reviewed annually.

expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.

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

For the Nine Months

Operating activities

Investing activities

Financing activities

Net increase in cash and cash equivalents

the Three Months

increase (decrease) in cash and cash equivalents

Flows from Operating Activities

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

For the Nine Months

Net income (loss)

Depreciation and amortization

Deferred income tax benefit

Gain on debt extinguishment

Impairment of assets

Net change in operating assets and liabilities

Net cash provided by operating activities

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

paid, partially offset by higher interest expense paid.

the Three Months

and amortization

on debt extinguishment

change in operating assets and liabilities

cash provided by operating activities

cash provided by operating activities increased from year to year primarily driven by the impact of higher sales and lower interest expense

paid partially offset by lower income tax refund in the current quarter.

Flows from Investing Activities

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

the Nine Months

Payments for property and equipment and intangible assets

Proceeds from sale of businesses and assets

Proceeds from insurance

Proceeds from note receivable

Net cash used in investing activities

is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2021 and 2020 (in

the Nine Months

Ended June 30,

New facilities, equipment and intangible assets

Maintenance capital expenditures

Total capital expenditures

expenditures for new facilities during the nine months ended June 30, 2021 were composed primarily of real estate and construction of

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

the Three Months

for property and equipment and intangible assets

for businesses

from sale of businesses and assets

from insurance

from note receivable

cash used in investing activities

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

(in thousands):

the Three Months

Ended December 31,

facilities, equipment and intangible assets

capital expenditures

for new facilities during the nine months ended June 30, 2020 were composed primarily of construction and development costs for two new

Bombshells locations that opened in the first and second quarters of fiscal 2020 and the rehabilitation of a club that was damaged by

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

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

On July 23, 2021, we and certain of our

subsidiaries entered into definitive agreements (the “Agreements”) to acquire eleven gentlemen’s clubs, nine of

which are controlled by club entrepreneur Troy Lowrie of Lakewood, Colorado, six related real estate properties, and associated

intellectual property for a total acquisition price of $88.0 million (the “Acquisition”).The Agreements for the eleven

clubs being purchased include ten Asset Purchase Agreements and one Stock Purchase Agreement.

The sellers collectively own and

operate adult entertainment clubs in six states, four of which we do not currently have a presence.

Closing of the Acquisition is

subject to transfer of all necessary permits, licenses, and other authorizations;

closing on the bank financing;

and other customary

closing conditions.

See our current report on Form 8-K filed on July 28, 2021 for more information regarding this

We have not completed our valuation analysis and

related calculations in sufficient detail necessary to arrive at the fair values of the assets acquired, along with the determination

of any goodwill or gain on the transaction.

Since the initial accounting of the acquisition is incomplete, we also could not provide

supplemental pro forma information of the combined entities as of this time.

As of the filing of this report, we are in negotiations with our bank lender to refinance

most of our existing real estate debt and to partially finance the real estate purchases related to the Acquisition.

capital expenditures

capital expenditures during the three months ended December 31, 2021 were composed of primarily of real estate and new equipment and

furniture purchases for the newly acquired clubs.

The capital expenditures during the three months ended December 31, 2020 were composed

of primarily of real estate and liquor license purchases.

Maintenance capital expenditures refer mainly to capitalized replacement of

productive assets in already existing locations.

Variances in capital expenditures are primarily due to the number and timing of new,

remodeled, or reconcepted locations under construction.

Flows from Financing Activities

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

For the Nine Months

Proceeds from debt obligations

Payments on debt obligations

Purchase of treasury stock

Payment of dividends

Payment of loan origination costs

Distribution to noncontrolling interests

Net cash used in financing activities

purchased 74,659 shares of our common stock at an average price of $24.03 during the nine months ended June 30, 2021, while we purchased

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

We paid quarterly dividends of $0.04

per share during the nine months ended June 30, 2021 compared to $0.03 per share in the first and third quarters and $0.04 in the second

quarter of the prior year.

the Three Months

from debt obligations

on debt obligations

of treasury stock

cash provided by (used in) financing activities

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

not purchase shares of our common stock during the three months ended December 31, 2021.

We paid quarterly dividends of $0.04 per share

in both the current- and prior-year first quarter.

Note 7 to our consolidated financial statements for future maturities of our debt obligations.

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

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less maintenance capital expenditures.

Net cash provided by operating activities was $32.2 million and $12.1 million during the nine

months ended June 30, 2021 and 2020, respectively.

Maintenance capital expenditures were $4.6 million and $2.1 million during the nine

months ended June 30, 2021 and 2020, respectively.

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

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

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

For the Nine Months

Net cash provided by operating activities

the Three Months

cash provided by operating activities

Maintenance capital expenditures

Free cash flow

free cash flow for the current nine-month period increased by 175.1% compared to the comparable prior-year period primarily due to higher

income from operations and lower income taxes paid, partially offset by higher interest expense paid and higher maintenance capital expenditures.

free cash flow for the current quarter increased by 169.3% compared to the comparable prior-year period primarily due to higher

sales, net of related expense payments, and lower interest expense payments, partially offset by income tax refunds in the

prior year and higher maintenance capital expenditures.

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

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.

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

9 unchanged sentences

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 for the nine months ended June 30 (in thousands, except percentages):

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

Net cash provided by operating activities

Adjusted EBITDA*

Free cash flow*

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

of alcoholic beverages

of food and merchandise

cash provided by operating activities

Debt (end of period)

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

purchased 74,659 shares of our common stock at an average price of $24.03 during the nine months ended June 30, 2021, while we purchased

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

As of June 30, 2021, we have approximately

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

not purchase shares of our common stock during the three months ended December 31, 2021.

As of December 31, 2021, we have approximately

$9.0 million remaining to purchase additional shares.

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

To the extent permitted

6 unchanged sentences

and second quarters).

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

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

Allocation Strategy

12 unchanged sentences

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

growth strategy involves the following:

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

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

(ii) to open new units after market analysis;

(iii) to franchise

our Bombshells brand;

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

in the form of our brand name and management expertise;

(v) to develop new club concepts that are consistent with our management and

marketing skills;

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

and (vii) to control the real estate

in connection with club operations, although some units may be in leased premises.

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

with high growth potential.

Our growth strategy involves the following:

(i) to acquire existing units in locations that are consistent

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

(ii) to open new units after

market analysis;

(iii) to franchise our Bombshells brand;

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

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

(v) to develop new club concepts that are

consistent with our management and marketing skills;

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

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

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

All eleven of the existing Bombshells as of December 31, 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 targets.

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

San Antonio, Texas area is scheduled to open in February 2022.

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

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

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 June 30, 2021 are located in Texas.

Part of our growth strategy is to continue to appeal to

men, women, families, friends, singles, couples, and millennials through better quality of food, service and experience that is more

upscale than a traditional sports bar.

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

these locations.

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

in the San Antonio, Texas area in December 2020.

Quantitative and Qualitative Disclosures About Market Risk.

of June 30, 2021, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form

of December 31, 2021, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form

10-K for fiscal year ended September 30, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis