What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2022-02-09 · 468 added, 434 removed, 68 unchanged (93% of the section changed)

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

following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto

included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report

on Form 10-K for the year ended September 30, 2021.

Hospitality Holdings, Inc.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2021.

RCI Hospitality Holdings, Inc.

(“RCIHH”) is a holding company.

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, 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.

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, including RCI Management Services, Inc.

Through our subsidiaries, as of March 31, 2022, we operated a total of 59 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.

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Nightclubs and Bombshells.

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.

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.

Impact of COVID-19 Pandemic

Ongoing 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.

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.

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

preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that

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

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.

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.

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.

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.

Closures and 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.

As of the date of this report, all COVID-related restrictions on our businesses have been lifted.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On a regular basis, we evaluate these estimates.

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

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

These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.

Actual results may differ from these estimates.

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

involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position,

results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations

– Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021

filed with the SEC on December 14, 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 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)

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

159.2% increase (free cash flow* of $15.3 million compared to $5.7 million, a 169.3% increase)

Reconciliation

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

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

For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 filed with the SEC on December 14, 2021.

During the three and six months ended March 31, 2022, 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.

Results of Operations

Highlights of the Company's operating results are as follows:

Second Quarter 2022

• Total revenues were $63.7 million compared to $44.1 million during the comparable prior-year period, a 44.6% increase (Nightclubs revenue of $48.2 million compared to $30.8 million, a 56.5% increase;

and Bombshells revenue of $15.3 million compared to $13.1 million, a 16.7% increase)

• Consolidated same-store sales increased by 9.0% (Nightclubs increased by 12.1% while Bombshells increased by 2.3%) (refer to the definition of same-store sales in the discussion of revenues below)

• Twelve newly acquired clubs contributed $8.8 million to revenues, while a newly constructed Bombshells contributed $1.9 million

• Basic and diluted earnings per share (“EPS”) of $1.15 compared to $0.68 (non-GAAP diluted EPS* of $1.19 compared to $0.75) during the comparable prior-year period

• Net cash provided by operating activities of $11.6 million compared to $11.0 million during the comparable prior-year period, a 5.7% increase (free cash flow* of $11.1 million compared to $9.0 million, a 23.3% increase)

Year-to-Date 2022

• Total revenues were $125.5 million compared to $82.5 million during the comparable prior-year period, a 52.2% increase (Nightclubs revenue of $95.0 million compared to $56.0 million, a 69.6% increase;

and Bombshells revenue of $30.1 million compared to $26.1 million, a 15.2% increase)

• Consolidated same-store sales increased by 14.8% (Nightclubs increased by 20.0% while Bombshells increased by 5.0%) (refer to the definition of same-store sales in the discussion of Revenues below)

• Twelve newly acquired clubs contributed $15.1 million to revenues, while a newly constructed Bombshells contributed $2.7 million

• Basic and diluted EPS of $2.28 compared to $1.75 (non-GAAP diluted EPS* of $2.29 compared to $1.15) during the comparable prior-year period

• Net cash provided by operating activities of $27.9 million compared to $17.2 million during the comparable prior-year period, a 61.6% increase (free cash flow* of $26.3 million compared to $14.7 million, a 79.8% increase)

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (dollars in thousands):

For the Three Months Ended

December 31, 2021

December 31, 2020

Better (Worse)

March 31, 2022 For the Three Months Ended

March 31, 2021 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

Sales of alcoholic beverages $ 27,335 42.9 % $ 20,273 46.0 % $ 7,062 34.8 %

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Service revenues 21,501 33.8 % 11,502 26.1 % 9,999 86.9 %

Other 3,696 5.8 % 2,746 6.2 % 950 34.6 %

Total revenues 63,692 100.0 % 44,059 100.0 % 19,633 44.6 %

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Depreciation and amortization 2,877 4.5 % 2,117 4.8 % (760) (35.9) %

Other gains, net

Other charges (gains), net 7 — % 1,481 3.4 % 1,474 99.5 %

Total operating expenses 46,611 73.2 % 34,218 77.7 % (12,393) (36.2) %

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Income before income taxes 14,329 22.5 % 7,970 18.1 % 6,359 79.8 %

Income tax expense (benefit)

Income tax expense 3,356 5.3 % 1,938 4.4 % (1,418) (73.2) %

Net income $ 10,973 17.2 % $ 6,032 13.7 % $ 4,941 81.9 %

* 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 $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

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.

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

Consolidated revenues for the second quarter increased by approximately $19.6 million, or 44.6%, versus the comparable 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 by 9.0%.

The 44.6% increase in consolidated revenues was primarily from an 11.6% increase from last year’s COVID-19 closures, an 8.5% increase from the impact of same-store sales growth, a 24.2% increase from new units, with a 0.3% increase from non-core operations.

We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells.

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

We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full month of operations.

We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels.

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.

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

For the Three Months

Ended March 31,

Nightclubs $ 48,174 $ 30,787

Bombshells 15,333 13,135

Other 185 137

$ 63,692 $ 44,059

Nightclubs revenues increased by 56.5% for the quarter ended March 31, 2022 compared to the prior-year quarter, where the prior-year second quarter was just starting to ease up from 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 12.1%.

Newly acquired clubs contributed $8.8 million to the total Nightclubs revenue increase of $17.4 million.

By type of revenue, service revenue increased by 87.8%, alcoholic beverage sales increased by 47.8%, and food, merchandise and other revenue increased by 19.3%.

Bombshells revenues increased by 16.7%, of which 2.3% was for same-store sales increase with the remaining increase caused by one new location.

By type of revenue, food and merchandise sales increased by 22.1% and alcoholic beverage sales increased by 13.4%.

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to 73.2% from 77.7% from last year’s second quarter, although there was a $12.4 million increase, or 36.2%, which was mainly caused by costs and expenses directly related to 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 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):

Cost of goods sold increased by $2.0 million, or 28.8%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold decreased to 13.8% from 15.4% mainly due to the increase in sales mix of higher-margin service revenues.

Salaries and wages increased by $5.3 million, or 47.6%, due to increase in personnel and shifts to accommodate the increase in sales.

As a percent of total revenues, salaries and wages were 26.0% from 25.4% mainly due to additional employees from new units partially offset by fixed salaries paid on higher sales.

Selling, general and administrative expenses increased by $5.8 million, or 46.1%, primarily due to increased variable expenses related to sales activity during the current-year quarter.

Depreciation and amortization increased by $760,000, or 35.9% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.

Other charges, net was a nominal net charge in the current quarter while a net charge of $1.5 million in the comparable prior-year quarter.

The swing was mainly from impairment charges of $1.4 million in the prior-year quarter.

Income (Loss) from Operations

For the three months ended March 31, 2022 and 2021, our consolidated operating margin was 26.8% and 22.3%, respectively.

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

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

For the Three Months

Ended March 31,

Nightclubs $ 19,126 $ 10,468

Bombshells 3,468 3,142

Other (34) (139)

General corporate (5,479) (3,630)

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).

$ 17,081 $ 9,841

Nightclubs operating margin was 39.7% and 34.0% for the three months ended March 31, 2022 and 2021, respectively, while operating margin for Bombshells was 22.6% and 23.9%, 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 cost inefficiencies from initial operations of the newly opened Bombshells unit.

Excluding 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 36.

the Three Months Ended December 31, 2021

(loss) from operations

of intangibles

For the Three Months Ended March 31, 2022

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 19,126 $ 3,468 $ (34) $ (5,479) $ 17,081

Amortization of intangibles 47 1 — 1 49

Settlement of lawsuits 277 — — 108 385

on sale of businesses and assets

operating income (loss)

GAAP operating

operating margin

the Three Months Ended December 31, 2020

(loss) from operations

Loss (gain) on sale of businesses and assets (125) 4 — 63 (58)

Gain on insurance (320) — — — (320)

Non-GAAP operating income (loss) $ 19,005 $ 3,473 $ (34) $ (5,307) $ 17,137

GAAP operating margin 39.7 % 22.6 % (18.4) % (8.6) % 26.8 %

Non-GAAP operating margin 39.5 % 22.7 % (18.4) % (8.3) % 26.9 %

For the Three Months Ended March 31, 2021

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 10,468 $ 3,142 $ (139) $ (3,630) $ 9,841

Amortization of intangibles 47 3 29 — 79

Settlement of lawsuits (4) — 5 — 1

on sale of businesses and assets

operating income (loss)

operating margin

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.

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

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.

Impairment of assets 1,401 — — — 1,401

Loss on sale of businesses and assets 14 47 — 30 91

Loss (gain) on insurance 32 — — (44) (12)

Non-GAAP operating income (loss) $ 11,958 $ 3,192 $ (105) $ (3,644) $ 11,401

GAAP operating margin 34.0 % 23.9 % (101.5) % (8.2) % 22.3 %

Non-GAAP operating margin 38.8 % 24.3 % (76.6) % (8.3) % 25.9 %

Other Income/Expenses

Interest expense increased by $500,000, or 21.2%, 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 $4.4 million and $3.3 million for the quarters ended March 31, 2022 and 2021, respectively.

As a percentage of revenue, total occupancy costs

were 7.0% and 7.6% during the quarters ended March 31, 2022 and 2021, respectively, primarily due to the increase in sales base.

Income tax expense was $3.4 million during the quarter ended March 31, 2022 compared to $1.9 million during the quarter ended March 31, 2021.

The effective income tax rate was 23.4% and 24.3% for the quarters ended March 31, 2022 and 2021, respectively.

Our effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below.

For the Three Months

Ended March 31,

Computed expected income tax expense 21.0 % 21.0 %

State income taxes, net of federal benefit 2.9 % 7.0 %

Permanent differences 0.5 % (5.9) %

Tax credit (3.1) % 2.2 %

Other 2.1 % — %

Total income tax expense 23.4 % 24.3 %

Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021

The following table summarizes our results of operations for the six months ended March 31, 2022 and 2021 (dollars in thousands):

For the Six Months Ended

March 31, 2022 For the Six Months Ended

March 31, 2021 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

Sales of alcoholic beverages $ 53,766 42.8 % $ 37,633 45.6 % $ 16,133 42.9 %

Sales of food and merchandise 22,054 17.6 % 18,147 22.0 % 3,907 21.5 %

Service revenues 42,377 33.8 % 21,562 26.1 % 20,815 96.5 %

Other 7,331 5.8 % 5,115 6.2 % 2,216 43.3 %

Total revenues 125,528 100.0 % 82,457 100.0 % 43,071 52.2 %

Operating expenses

Cost of goods sold

Alcoholic beverages sold 9,730 18.1 % 6,992 18.6 % (2,738) (39.2) %

Food and merchandise sold 7,797 35.4 % 5,918 32.6 % (1,879) (31.8) %

Service and other 124 0.2 % 96 0.4 % (28) (29.2) %

Total cost of goods sold (exclusive of items shown separately below) 17,651 14.1 % 13,006 15.8 % (4,645) (35.7) %

Salaries and wages 33,035 26.3 % 22,686 27.5 % (10,349) (45.6) %

Selling, general and administrative 36,923 29.4 % 24,770 30.0 % (12,153) (49.1) %

Depreciation and amortization 5,071 4.0 % 4,140 5.0 % (931) (22.5) %

Other charges (gains), net (144) (0.1) % 1,431 1.7 % 1,575 110.1 %

Total operating expenses 92,536 73.7 % 66,033 80.1 % (26,503) (40.1) %

Income from operations 32,992 26.3 % 16,424 19.9 % 16,568 100.9 %

Other income (expenses)

Interest expense (5,468) (4.4) % (4,798) (5.8) % (670) (14.0) %

Interest income 218 0.2 % 122 0.1 % 96 78.7 %

Non-operating gains, net 84 0.1 % 5,347 6.5 % (5,263) (98.4) %

Income before income taxes 27,826 22.2 % 17,095 20.7 % 10,731 62.8 %

Income tax expense 6,289 5.0 % 1,554 1.9 % (4,735) (304.7) %

Net income $ 21,537 17.2 % $ 15,541 18.8 % $ 5,996 38.6 %

* Percentages may not foot due to rounding.

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

Consolidated revenues for the six months ended March 31, 2022 increased by approximately $43.1 million, or 52.2%, versus to the comparable prior-year period 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 by 14.8%.

The 52.2% increase in consolidated revenues was primarily from a 21.6% increase from new units, a 16.9% increase from last year’s COVID-19 closures, a 13.5% increase from the impact of same-store sales growth, with a 0.3% increase from non-core operations.

Refer to the definition of same-store sales in the Revenues section of the second quarter discussion above.

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

For the Six Months

Ended March 31,

Nightclubs $ 94,955 $ 55,984

Bombshells 30,104 26,141

Other 469 332

$ 125,528 $ 82,457

Nightclubs revenues increased by 69.6% for the six months ended March 31, 2022 compared to the comparable prior-year period, 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 20.0%.

Newly acquired clubs contributed $15.1 million to the total Nightclubs revenue increase of $39.0 million.

By type of revenue, service revenue increased by 96.7%, alcoholic beverage sales increased by 65.4%, and food, merchandise and other revenue increased by 29.8%.

Bombshells revenues increased by 15.2%, of which 5.0% was for same-store sales increase with the remaining increase caused by one new location.

By type of revenue, food, merchandise and other revenue increased by 22.3% while alcoholic beverages sales increased by 10.2%.

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to 73.7% from 80.1% from last year’s six-month period, although there was an $26.5 million increase, or 40.1%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current six-month period.

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

Cost of goods sold increased by $4.6 million, or 35.7%, mainly due to higher sales.

As a percent of total revenues, cost of goods sold decreased to 14.1% from 15.8% mainly due to the increase in sales mix of higher-margin service revenues.

Salaries and wages increased by $10.3 million, or 45.6%, due to increase in personnel and shifts to accommodate the increase in sales.

As a percent of total revenues, salaries and wages were 26.3% from 27.5% mainly due to fixed salaries paid on higher sales partially offset by additional employees from new units.

Selling, general and administrative expenses increased by $12.2 million, or 49.1%, primarily due to increased variable expenses related to sales activity during the current period.

Depreciation and amortization increased by $931,000, or 22.5% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.

Other charges (gains), net shifted from a $1.4 million net charge to a $144,000 net gain.

The swing was mainly from impairment charges of $1.4 million in the prior-year period.

Income (Loss) from Operations

For the six months ended March 31, 2022 and 2021, our consolidated operating margin was 26.3% and 19.9%, respectively.

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

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

For the Six Months

Ended March 31,

Nightclubs $ 37,862 $ 18,963

Bombshells 6,270 5,859

Other (77) (214)

General corporate (11,063) (8,184)

$ 32,992 $ 16,424

Nightclubs operating margin was 39.9% and 33.9% for the six months ended March 31, 2022 and 2021, respectively, while operating margin for Bombshells was 20.8% and 22.4%, 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 preopening expenses related to the new Bombshells unit.

Excluding 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 36.

For the Six Months Ended March 31, 2022

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 37,862 $ 6,270 $ (77) $ (11,063) $ 32,992

Amortization of intangibles 94 4 — 1 99

Settlement of lawsuits 454 10 — 113 577

Loss (gain) on sale of businesses and assets (80) 17 — (337) (400)

Gain on insurance (321) — — — (321)

Non-GAAP operating income (loss) $ 38,009 $ 6,301 $ (77) $ (11,286) $ 32,947

GAAP operating margin 39.9 % 20.8 % (16.4) % (8.8) % 26.3 %

Non-GAAP operating margin 40.0 % 20.9 % (16.4) % (9.0) % 26.2 %

For the Six Months Ended March 31, 2021

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 18,963 $ 5,859 $ (214) $ (8,184) $ 16,424

Amortization of intangibles 94 7 57 — 158

Settlement of lawsuits 114 34 5 — 153

Impairment of assets 1,401 — — — 1,401

Loss on sale of businesses and assets 14 47 — 25 86

Gain on insurance (165) — — (44) (209)

Non-GAAP operating income (loss) $ 20,421 $ 5,947 $ (152) $ (8,203) $ 18,013

GAAP operating margin 33.9 % 22.4 % (64.5) % (9.9) % 19.9 %

Non-GAAP operating margin 36.5 % 22.7 % (45.8) % (9.9) % 21.8 %

Other Income/Expenses

Interest expense increased by $670,000, or 14.0%, 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 $8.7 million and $6.7 million for the six months ended March 31, 2022 and 2021, respectively.

As a percentage of revenue, total occupancy costs

were 6.9% and 8.2% during the six months ended March 31, 2022 and 2021, respectively, primarily due to the increase in sales base.

Non-operating gains decreased by $5.3 million, which was primarily the gain on debt extinguishment from the PPP loans during last year's first quarter.

Income tax expense was $6.3 million during the six months ended March 31, 2022 compared to $1.6 million during the comparable prior-year period.

The effective income tax rate was 22.6% and 9.1% for the six months ended March 31, 2022 and 2021, 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.

For the Six Months

Ended March 31,

Computed expected income tax expense 21.0 % 21.0 %

State income taxes, net of federal benefit 2.9 % 5.0 %

Permanent differences 0.4 % (7.1) %

Change in valuation allowance — % (7.4) %

Tax credit (2.6) % (2.3) %

Other 0.8 % — %

Total income tax expense 22.6 % 9.1 %

Non-GAAP Financial Measures

In 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 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:

Operating Income and Non-GAAP Operating Margin.

We calculate non-GAAP operating income and non-GAAP operating margin by excluding

the following items from income from operations and operating margin:

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

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

We believe that excluding these items assists

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

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

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

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

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

Non-GAAP Operating Income and Non-GAAP Operating Margin.

We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin:

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

We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.

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

We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share.

Adjustment items are:

(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) unrealized gains or losses on equity securities, (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 21.8% and 24.2% effective tax rate of the pre-tax non-GAAP income before taxes for the six months ended March 31, 2022 and 2021, 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.

Adjusted EBITDA .

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

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

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

gain on debt extinguishment.

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

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.

(a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity

securities, (g) impairment of assets, (h) settlement of lawsuits, and (i) gain on debt extinguishment.

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

Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions.

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

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

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

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

See “Liquidity and Capital Resources” section for further

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)

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

See “Liquidity and Capital Resources” section for further discussion.

The following tables present our non-GAAP performance measures for the three and six months ended March 31, 2022 and 2021 (in thousands, except per share, number of shares and percentages):

Three Months Ended March 31, Six Months Ended March 31,

2022 2021 2022 2021

Reconciliation of GAAP net income to Adjusted EBITDA

Net income attributable to RCIHH common stockholders $ 10,952 $ 6,091 $ 21,527 $ 15,734

Income tax expense 3,356 1,938 6,289 1,554

Interest expense, net 2,752 2,302 5,250 4,676

Settlement of lawsuits 385 1 577 153

of businesses and assets

extinguishment

loss on equity securities

Impairment of assets — 1,401 — 1,401

Loss (gain) on sale of businesses and assets (58) 91 (400) 86

Gain on debt extinguishment — (380) (85) (5,329)

Unrealized loss on equity securities — 34 1 67

Gain on insurance (320) (12) (321) (209)

and amortization

Reconciliation

of GAAP net income to non-GAAP net income

attributable to RCIHH common stockholders

of intangibles

Depreciation and amortization 2,877 2,117 5,071 4,140

Adjusted EBITDA $ 19,944 $ 13,583 $ 37,909 $ 22,273

Reconciliation of GAAP net income to non-GAAP net income

Net income attributable to RCIHH common stockholders $ 10,952 $ 6,091 $ 21,527 $ 15,734

Amortization of intangibles 49 79 99 158

Settlement of lawsuits 385 1 577 153

of businesses and assets

extinguishment

loss on equity securities

Impairment of assets — 1,401 — 1,401

Loss (gain) on sale of businesses and assets (58) 91 (400) 86

Gain on debt extinguishment — (380) (85) (5,329)

Unrealized loss on equity securities — 34 1 67

Gain on insurance (320) (12) (321) (209)

income tax effect

Reconciliation

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

Net income tax effect 291 (522) 253 (1,741)

Non-GAAP net income $ 11,299 $ 6,783 $ 21,651 $ 10,320

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

Diluted shares 9,489,085 8,999,910 9,447,854 9,009,604

GAAP diluted earnings per share $ 1.15 $ 0.68 $ 2.28 $ 1.75

of intangibles

Amortization of intangibles 0.01 0.01 0.01 0.02

Settlement of lawsuits 0.04 0.00 0.06 0.02

of businesses and assets

extinguishment

loss on equity securities

Impairment of assets 0.00 0.16 0.00 0.16

Loss (gain) on sale of businesses and assets (0.01) 0.01 (0.04) 0.01

Gain on debt extinguishment 0.00 (0.04) (0.01) (0.59)

Unrealized loss on equity securities 0.00 0.00 0.00 0.01

Gain on insurance (0.03) 0.00 (0.03) (0.02)

income tax effect

diluted earnings per share

Reconciliation

of GAAP operating income to non-GAAP operating income

of intangibles

Net income tax effect 0.03 (0.06) 0.03 (0.19)

Non-GAAP diluted earnings per share $ 1.19 $ 0.75 $ 2.29 $ 1.15

Reconciliation of GAAP operating income to non-GAAP operating income

Income from operations $ 17,081 $ 9,841 $ 32,992 $ 16,424

Amortization of intangibles 49 79 99 158

Settlement of lawsuits 385 1 577 153

of businesses and assets

operating income

Reconciliation

of GAAP operating margin to non-GAAP operating margin

of intangibles

Impairment of assets — 1,401 — 1,401

Loss (gain) on sale of businesses and assets (58) 91 (400) 86

Gain on insurance (320) (12) (321) (209)

Non-GAAP operating income $ 17,137 $ 11,401 $ 32,947 $ 18,013

Reconciliation of GAAP operating margin to non-GAAP operating margin

Income from operations 26.8 % 22.3 % 26.3 % 19.9 %

Amortization of intangibles 0.1 % 0.2 % 0.1 % 0.2 %

Settlement of lawsuits 0.6 % 0.0 % 0.5 % 0.2 %

of businesses and assets

operating margin

Impairment of assets 0.0 % 3.2 % 0.0 % 1.7 %

Loss (gain) on sale of businesses and assets (0.1) % 0.2 % (0.3) % 0.1 %

Gain on insurance (0.5) % 0.0 % (0.3) % (0.3) %

Non-GAAP operating margin 26.9 % 25.9 % 26.2 % 21.8 %

* 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.

and Capital Resources

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.

The 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.

Liquidity and Capital Resources

At March 31, 2022, our cash and cash equivalents were approximately $38.1 million compared to $35.7 million at September 30, 2021.

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

As of March 31, 2022, we had working capital of $23.1 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 $3.6 million and $1.1 million, respectively) amounting to $2.6 million and $3.8 million as of March 31, 2022 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.

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.

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

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;

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 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.

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 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

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.

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.

Closures and 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.

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable.

Currently, all of our locations are open except one club that is being renovated and/or remodeled.

We 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.

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).

The acquisition gives the Company presence in four 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 years.

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):

the Three Months

increase (decrease) in cash and cash equivalents

Flows from Operating Activities

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

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 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

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):

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.

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

less maintenance capital expenditures.

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 .

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million.

The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows:

(1) $2.0 million in cash at closing;

(2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with

a balloon payment for the remaining principal and accrued interest due at maturity;

and (3) $5.0 million under a 10% ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity.

The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement.

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

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

For the Six Months

Ended March 31,

Operating activities $ 27,861 $ 17,246

Investing activities (49,815) (6,355)

Financing activities 24,335 (6,340)

Net increase in cash and cash equivalents $ 2,381 $ 4,551

Cash Flows from Operating Activities

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

For the Six Months

Ended March 31,

Net income $ 21,537 $ 15,541

Depreciation and amortization 5,071 4,140

Impairment of assets — 1,401

Gain on debt extinguishment (83) (5,298)

Net change in operating assets and liabilities 937 712

Other 399 750

Net cash provided by operating activities $ 27,861 $ 17,246

Net 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 income tax refunds in the prior year compared to income tax payments in the current year.

Cash Flows from Investing Activities

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

For the Six Months

Ended March 31,

Payments for property and equipment and intangible assets $ (13,990) $ (6,718)

Acquisition of businesses (39,302) —

Proceeds from sale of businesses and assets 2,910 8

Proceeds from insurance 485 294

Proceeds from notes receivable 82 61

Net cash used in investing activities $ (49,815) $ (6,355)

Following is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 2022 and 2021 (in thousands):

For the Six Months

Ended March 31,

New facilities, equipment, and intangible assets $ 12,474 $ 4,127

Maintenance capital expenditures 1,516 2,591

Total capital expenditures $ 13,990 $ 6,718

The capital expenditures during the six months ended March 31, 2022 were composed of primarily of real estate and new equipment and furniture purchases for the newly acquired clubs.

The capital expenditures during the six months ended March 31, 2021 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.

Cash Flows from Financing Activities

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

For the Six Months

Ended March 31,

Proceeds from debt obligations $ 35,742 $ 2,176

Payments on debt obligations (7,290) (5,977)

Purchase of treasury stock (2,845) (1,794)

Payment of dividends (854) (720)

Payment of loan origination costs (418) (25)

Net cash provided by (used in) financing activities $ 24,335 $ (6,340)

We purchased 45,643 shares of our common stock at an average price of $62.33 during the six months ended March 31, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021.

We paid quarterly dividends of $0.04 per share in both the current- and prior-year periods, except for the second quarter of fiscal 2022 where we paid $0.05 per share.

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

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

We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures.

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):

the Three Months

cash provided by operating activities

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

For the Six Months

Ended March 31,

Net cash provided by operating activities $ 27,861 $ 17,246

Maintenance capital expenditures 1,516 2,591

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

event or trend that would potentially significantly affect 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 down turns.

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 for the three months ended December 31 (in thousands, except percentages):

of alcoholic beverages

of food and merchandise

cash provided by operating activities

Free cash flow $ 26,345 $ 14,655

Our free cash flow for the current six-month period increased by 79.8% compared to the comparable prior-year period primarily due to higher sales, net of related expense payments, lower interest expense payments, and lower maintenance capital expenditures, partially offset by income tax refunds in the prior year and income tax payments in the current year.

We do not include capital expenditures related to new facilities construction, equipment and intangibles assets 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.

Other 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 potentially significantly affect 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 down turns.

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

2022 Increase (Decrease) 2021 Increase (Decrease) 2020

Sales of alcoholic beverages $ 53,766 42.9 % $ 37,633 (0.1) % $ 37,662

Sales of food and merchandise 22,054 21.5 % 18,147 30.3 % 13,926

Service revenues 42,377 96.5 % 21,562 (31.6) % 31,541

Other 7,331 43.3 % 5,115 (10.1) % 5,691

Total revenues 125,528 52.2 % 82,457 (7.2) % 88,820

Net cash provided by operating activities $ 27,861 61.6 % $ 17,246 43.9 % $ 11,981

Net income attributable to RCIHH common stockholders $ 21,527 36.8 % $ 15,734 621.1 % $ 2,182

Adjusted EBITDA* $ 37,909 70.2 % $ 22,273 12.1 % $ 19,877

Free cash flow* $ 26,345 79.8 % $ 14,655 48.5 % $ 9,870

Debt (end of period) $ 178,080 34.5 % $ 132,412 (5.7) % $ 140,440

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 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.

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).

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

Allocation Strategy

capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows;

provided however, that

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

We calculate free cash flow as net cash flows from operating

activities minus maintenance capital expenditures.

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

that we are able to make better investment decisions.

on our current capital allocation strategy:

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

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

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

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

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

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

with high growth potential.

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

Share Repurchase

As of March 31, 2022, we have approximately $6.1 million remaining to purchase additional shares.

Subsequent to the reporting date until May 6, 2022, the Company purchased 37,700 shares of its own common stock at a cost of $2.4 million.

Impact of Inflation

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.

Our 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).

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

Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows;

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

We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures.

Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions.

Based on our current capital allocation strategy:

• We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale;

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

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

• We 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

We 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;

(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;

(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

have done in the past.

We 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 March 31, 2022 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.

We are currently in the process of site selection for new Bombshells locations and made a purchase of real estate in Stafford, Texas for a future Bombshells site.

Our first franchisee for Bombshells restaurants in the San Antonio, Texas area is scheduled to open in June 2022.

We 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

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 strategy.

Quantitative and Qualitative Disclosures About Market Risk.

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.

As of March 31, 2022, 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