What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-09 · 131 added, 161 removed, 375 unchanged (44% of the section changed)

5 unchanged sentences

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.

Through our subsidiaries, as of June 30, 2022, we operated a total of 60 establishments that offer live adult entertainment and/or restaurant and bar operations, including one club that is temporarily closed.

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

4 unchanged sentences

Our corporate offices are located in Houston, Texas.

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.

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.

Ongoing Impact of COVID-19 Pandemic and Potential Economic Slowdown

Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March 2020.

We had a major disruption in our business operations that affected 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 were mandated or encouraged by federal, state and local governments.

In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic.

There have been several variants to the coronavirus since then that threatened our operations throughout the period of recovery.

We continue to adhere to state and local government mandates regarding the pandemic.

Since early 2021, there has been a worldwide increase in inflation.

In the event this global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

Critical Accounting Policies and Estimates

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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.

During the three and nine months ended June 30, 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

Third Quarter 2022

• Total revenues were $70.7 million compared to $57.9 million during the comparable prior-year period, a 22.2% increase (Nightclubs revenue of $54.7 million compared to $41.0 million, a 33.3% 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

and Bombshells revenue of $15.8 million compared to $16.1 million, a 1.8% decrease)

• Consolidated same-store sales decreased by 0.1% (Nightclubs increased by 4.8% while Bombshells decreased by 12.3%) (refer to the definition of same-store sales in the discussion of revenues below)

• Thirteen newly acquired clubs contributed $11.8 million to revenues, while a newly constructed Bombshells contributed $1.7 million

• Basic and diluted earnings per share (“EPS”) of $1.48 compared to $1.37 (non-GAAP diluted EPS* of $1.60 compared to $1.36) during the comparable prior-year period

3 unchanged sentences

and Bombshells revenue of $45.9 million compared to $42.2 million, a 8.7% 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

• Consolidated same-store sales increased by 8.4% (Nightclubs increased by 13.2% while Bombshells decreased by 1.6%) (refer to the definition of same-store sales in the discussion of Revenues below)

• Thirteen newly acquired clubs contributed $27.0 million to revenues, while a newly constructed Bombshells contributed $4.3 million

• Basic and diluted EPS of $3.76 compared to $3.11 (non-GAAP diluted EPS* of $3.89 compared to $2.50) during the comparable prior-year period

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* 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):

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (dollars in thousands):

For the Three Months Ended

March 31, 2022 For the Three Months Ended

March 31, 2021 Better (Worse)

June 30, 2022 For the Three Months Ended

June 30, 2021 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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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.

Consolidated revenues for the third quarter increased by approximately $12.9 million, or 22.2%, 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 decreased by 0.1%.

The total increase in consolidated revenues was primarily from a 23.4% increase from new units and partially offset by a 0.1% decrease from last year’s COVID-19 closures, a 0.1% decrease from the impact of same-store sales growth, and a 1.0% decrease 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.

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

For the Three Months

Ended March 31,

For the Three Months Ended

Nightclubs $ 54,684 $ 41,031

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$ 70,714 $ 57,860

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.

Nightclubs revenues increased by 33.3% for the quarter ended June 30, 2022 compared to the prior-year quarter primarily due to the contribution of newly acquired clubs and the impact of the increase in same-store sales.

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 4.8%.

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By type of revenue, service revenue increased by 50.8%, alcoholic beverage sales increased by 30.6%, and food, merchandise and other revenue increased by 2.5%.

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%.

Bombshells revenues decreased by 1.8%, of which 12.3% was for same-store sales decrease with the offsetting increase caused by one new location.

By type of revenue, food and merchandise sales were flat while alcoholic beverage sales decreased by 3.2%.

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.

Total operating expenses, as a percent of revenues, increased to 71.0% from 68.0% from last year’s third quarter, with a $10.9 million increase, or 27.6%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current-year quarter and additional fixed expenses partly from new units plus the impairment charge in the current quarter.

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

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.

Cost of goods sold increased by $310,000, or 3.5%, mainly due to higher sales but offset by the mix of higher-margin service revenue increasing from 29.2% to 36.0%.

As a percent of total revenues, cost of goods sold decreased to 13.0% from 15.3% mainly due to the sales mix shift mentioned above.

Salaries and wages increased by $3.5 million, or 25.4%, due to increase in personnel and shifts to accommodate the increase in sales.

As a percent of total revenues, salaries and wages were 24.6% from 24.0% 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.

Selling, general and administrative expenses increased by $4.9 million, or 33.2%, primarily due to increased variable expenses related to sales activity during the current-year quarter and other increases from insurance, accounting and professional fees, and advertising.

Depreciation and amortization increased by $508,000, or 24.7% due to new depreciable assets from newly acquired and constructed units.

Other charges, net was a net charge of $1.5 million in the current quarter while a net gain of $143,000 in the comparable prior-year quarter.

The swing was mainly from impairment charges of $1.7 million in the current third 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.

For the three months ended June 30, 2022 and 2021, our consolidated operating margin was 29.0% and 32.0%, respectively.

The main drivers for the decrease in operating margin are the presence of less variable costs and expenses such as impairment charge, insurance, and accounting and professional fees, partially offset by the increase in mix of higher-margin service revenue.

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

For the Three Months

Ended March 31,

For the Three Months Ended

Nightclubs $ 22,459 $ 18,350

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$ 20,507 $ 18,507

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.

Nightclubs operating margin was 41.1% and 44.7% for the three months ended June 30, 2022 and 2021, respectively, while operating margin for Bombshells was 19.4% and 27.4%, respectively.

The decreases in both Nightclubs and Bombshells operating margin were mainly due to increases in salaries and wages and certain selling, general and administrative expenses plus the impairment charge.

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 Three Months Ended March 31, 2022

For the Three Months Ended June 30, 2022

Nightclubs Bombshells Other Corporate Total

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Settlement of lawsuits 124 8 — — 132

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

Impairment of assets 1,072 650 — — 1,722

Gain on sale of businesses and assets (264) — — (2) (266)

Gain on insurance (87) — — — (87)

2 unchanged sentences

Non-GAAP operating margin 42.7 % 23.6 % (34.0) % (7.0) % 31.2 %

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2021

Nightclubs Bombshells Other Corporate Total

3 unchanged sentences

Impairment of assets 271 — — — 271

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

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

Loss (gain) on sale of businesses and assets (512) 9 — (38) (541)

Non-GAAP operating income (loss) $ 18,279 $ 4,421 $ 321 $ (4,606) $ 18,415

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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.

Interest expense increased by $747,000, or 32.7%, primarily caused by a 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 $4.8 million and $3.3 million for the quarters ended June 30, 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.

were 6.7% and 5.7% during the quarters ended June 30, 2022 and 2021, respectively, primarily due to the interest from higher average debt balance and the increased mix of our clubs where we lease our locations from third parties.

Income tax expense was $3.8 million during the quarter ended June 30, 2022 compared to $4.0 million during the quarter ended June 30, 2021.

The effective income tax rate was 21.3% and 24.4% for the quarters ended June 30, 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 %

For the Three Months Ended

Federal statutory income tax expense 21.0 % 21.0 %

State income taxes, net of federal benefit 2.9 % 4.8 %

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Total income tax expense 21.3 % 24.4 %

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)

Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021

The following table summarizes our results of operations for the nine months ended June 30, 2022 and 2021 (dollars in thousands):

For the Nine Months Ended

June 30, 2022 For the Nine Months Ended

June 30, 2021 Better (Worse)

Amount % of Revenues Amount % of Revenues Amount %

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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 revenues for the nine months ended June 30, 2022 increased by approximately $55.9 million, or 39.9%, 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 8.4%.

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.

The 39.9% increase in consolidated revenues was primarily from a 22.3% increase from new units, a 9.9% increase from last year’s COVID-19 closures, a 7.9% increase from the impact of same-store sales growth, with a partially offsetting 0.2% decrease from non-core operations.

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

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

For the Six Months

Ended March 31,

For the Nine Months Ended

Nightclubs $ 149,639 $ 97,015

2 unchanged sentences

$ 196,242 $ 140,317

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.

Nightclubs revenues increased by 54.2% for the nine months ended June 30, 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 13.2%.

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By type of revenue, service revenue increased by 76.6%, alcoholic beverage sales increased by 50.8%, and food, merchandise and other revenue increased by 18.9%.

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.

Bombshells revenues increased by 8.7%, of which 1.6% was from an offsetting same-store sales decrease with the remaining 10.3% increase caused by one new location.

By type of revenue, food, merchandise and other revenue increased by 13.4% while alcoholic beverages sales increased by 5.2%.

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.

Total operating expenses, as a percent of revenues, decreased to 72.7% from 75.1% from last year’s nine-month period, although there was an $37.4 million increase, or 35.4%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current nine-month period.

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

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Selling, general and administrative expenses increased by $17.0 million, or 43.1%, 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.

Depreciation and amortization increased by $1.4 million, or 23.2% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.

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.

For the nine months ended June 30, 2022 and 2021, our consolidated operating margin was 27.3% and 24.9%, respectively.

The main drivers for the increase in operating margin are the increase in mix of higher-margin service revenue and 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,

For the Nine Months

Ended June 30,

Nightclubs $ 60,321 $ 37,313

3 unchanged sentences

$ 53,499 $ 34,931

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.

Nightclubs operating margin was 40.3% and 38.5% for the nine months ended June 30, 2022 and 2021, respectively, while operating margin for Bombshells was 20.3% and 24.3%, 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.

The decrease in Bombshells operating margin was mainly from preopening expenses related to the new Bombshells unit and the impairment in the current year.

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

For the Nine Months Ended June 30, 2022

Nightclubs Bombshells Other Corporate Total

2 unchanged sentences

Settlement of lawsuits 578 18 — 113 709

Impairment of assets 1,072 650 — — 1,722

Loss (gain) on sale of businesses and assets (344) 17 — (339) (666)

3 unchanged sentences

Non-GAAP operating margin 41.0 % 21.8 % (22.4) % (8.3) % 28.0 %

For the Six Months Ended March 31, 2021

For the Nine Months Ended June 30, 2021

Nightclubs Bombshells Other Corporate Total

3 unchanged sentences

Impairment of assets 1,672 — — — 1,672

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

Loss (gain) on sale of businesses and assets (498) 56 — (13) (455)

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

3 unchanged sentences

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.

Interest expense increased by $1.4 million, or 20.0%, which was mainly caused by a 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 $13.4 million and $10.0 million for the nine months ended June 30, 2022 and 2021, respectively.

As a percentage of revenue, total occupancy costs were 6.9% and 7.1% during the nine months ended June 30, 2022 and 2021, respectively, primarily due to the increase in sales base partially offset by higher interest expense from higher average debt balance and more leased properties from new acquisitions.

Non-operating gains decreased by $5.1 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,

Income tax expense was $10.1 million during the nine months ended June 30, 2022 compared to $5.5 million during the comparable prior-year period.

The effective income tax rate was 22.1% and 16.6% for the nine months ended June 30, 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 Nine Months Ended

Computed expected income tax expense 21.0 % 21.0 %

12 unchanged sentences

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.

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

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.

3 unchanged sentences

(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).

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 21.6% and 24.3% effective tax rate of the pre-tax non-GAAP income before taxes for the nine months ended June 30, 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.

1 unchanged sentence

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

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

(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.

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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,

The following tables present our non-GAAP performance measures for the three and nine months ended June 30, 2022 and 2021 (in thousands, except per share, number of shares and percentages):

Three Months Ended June 30, Nine Months Ended June 30,

2022 2021 2022 2021

5 unchanged sentences

Impairment of assets 1,722 271 1,722 1,672

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

Gain on sale of businesses and assets (266) (541) (666) (455)

Gain on debt extinguishment (53) — (138) (5,329)

Unrealized loss on equity securities — 34 1 67

Unrealized loss (gain) on equity securities — (9) 1 58

Gain on insurance (87) — (408) (209)

6 unchanged sentences

Impairment of assets 1,722 271 1,722 1,672

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

Gain on sale of businesses and assets (266) (541) (666) (455)

Gain on debt extinguishment (53) — (138) (5,329)

Unrealized loss on equity securities — 34 1 67

Unrealized loss (gain) on equity securities — (9) 1 58

Gain on insurance (87) — (408) (209)

7 unchanged sentences

Impairment of assets 0.18 0.03 0.18 0.19

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

Gain on sale of businesses and assets (0.03) (0.06) (0.07) (0.05)

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

Unrealized loss on equity securities 0.00 0.00 0.00 0.01

Unrealized loss (gain) on equity securities 0.00 0.00 0.00 0.01

Gain on insurance (0.01) 0.00 (0.04) (0.02)

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Impairment of assets 1,722 271 1,722 1,672

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

Gain on sale of businesses and assets (266) (541) (666) (455)

Gain on insurance (87) — (408) (209)

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Impairment of assets 2.4 % 0.5 % 0.9 % 1.2 %

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

Gain on sale of businesses and assets (0.4) % (0.9) % (0.3) % (0.3) %

Gain on insurance (0.1) % 0.0 % (0.2) % (0.1) %

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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.

At June 30, 2022, our cash and cash equivalents were approximately $37.5 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.

As of June 30, 2022, we had working capital of $20.5 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 $4.2 million and $1.1 million, respectively) amounting to $2.7 million and $3.8 million as of June 30, 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.

Revenues seem favorable now that all our locations are not under

pandemic-related closure mandates.

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 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.

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.

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(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;

(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.

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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,

For the Nine Months Ended June 30,

Operating activities $ 46,754 $ 32,217

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

For the Six Months

Ended March 31,

For the Nine Months Ended June 30,

Net income $ 35,479 $ 27,862

Depreciation and amortization 7,636 6,197

Deferred income tax benefit (409) (430)

Impairment of assets 1,722 1,672

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Net cash provided by operating activities $ 46,754 $ 32,217

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.

Net cash provided by operating activities increased from year to year primarily driven by the impact of higher sales partially offset by higher interest expense and income taxes paid.

Cash Flows from Investing Activities

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

For the Six Months

Ended March 31,

For the Nine Months Ended June 30,

Payments for property and equipment and intangible assets $ (17,173) $ (10,788)

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Net cash used in investing activities $ (56,222) $ (7,186)

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,

Following is a breakdown of our payments for property and equipment and intangible assets for the nine months ended June 30, 2022 and 2021 (in thousands):

For the Nine Months Ended June 30,

New facilities, equipment, and intangible assets $ 14,788 $ 6,180

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Total capital expenditures $ 17,173 $ 10,788

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.

The capital expenditures during the nine months ended June 30, 2022 were composed of primarily of real estate and new equipment and furniture purchases for the newly acquired clubs.

The capital expenditures during the nine months ended June 30, 2021 were composed of 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.

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

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

For the Six Months

Ended March 31,

For the Nine Months Ended June 30,

Proceeds from debt obligations $ 35,820 $ 2,176

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Net cash provided by (used in) financing activities $ 11,282 $ (11,568)

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.

We purchased 213,712 shares of our common stock at an average price of $56.42 during the nine months ended June 30, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the nine months ended June 30, 2021.

On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program.

As of June 30, 2022, we have approximately $21.9 million remaining to purchase additional shares.

Subsequent to the reporting date until August 5, 2022, the Company purchased 42,250 shares of its own common stock at a cost of $2.3 million.

We paid quarterly dividends of $0.04 per share in both the current- and prior-year periods, except for the second and third quarters 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.

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

For the Six Months

Ended March 31,

For the Nine Months

Ended June 30,

Net cash provided by operating activities $ 46,754 $ 32,217

1 unchanged sentence

Free cash flow $ 44,369 $ 27,609

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.

Our free cash flow for the current nine-month period increased by 60.7% compared to the comparable prior-year period primarily due to higher sales, net of related expense payments and lower maintenance capital expenditures, partially offset by higher interest expense payments and higher 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.

Other than the potentially prolonged effect of the COVID-19 pandemic, the potential economic slowdown, 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.

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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

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

2022 Increase

(Decrease) 2021 Increase

(Decrease) 2020

Sales of alcoholic beverages $ 83,504 33.1 % $ 62,725 38.5 % $ 45,285

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Total revenues $ 196,242 39.9 % $ 140,317 35.5 % $ 103,541

Net income (loss) attributable to RCIHH common stockholders $ 35,429 26.4 % $ 28,036 (951.6) % $ (3,292)

Net cash provided by operating activities $ 46,754 45.1 % $ 32,217 165.2 % $ 12,147

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

Adjusted EBITDA* $ 62,516 46.5 % $ 42,675 137.4 % $ 17,973

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* 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

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(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;

(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;

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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.

All eleven of the existing company-owned Bombshells as of June 30, 2022 are located in Texas.

Our first franchisee for Bombshells restaurants in the San Antonio, Texas area opened in June 2022.

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 are currently in the process of site selection for new Bombshells locations and made purchases of real estate in Stafford and Rowlett, both in Texas, for future Bombshells sites.

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.

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Quantitative and Qualitative Disclosures About Market Risk.

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.

As of June 30, 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