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Item 7. Management’s Discussion and Analysis

2022-12-14 compared with 2021-12-14 · 471 added, 669 removed, 215 unchanged (84% of the section changed)

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

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

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

MD&A is provided

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

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

This overview summarizes the MD&A,

which includes the following sections:

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

our core capabilities, and challenges and risks of our business.

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

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

financial statements.

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

Impact of COVID-19 Pandemic

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

to significantly impact our cash flow.

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

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

or encouraged by federal, state, and local governments.

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

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

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

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

Our strategy is to open

locations and operate in accordance with local and state guidelines.

We believe that we can borrow capital if needed but currently

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

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

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

exhibited tremendous recovery.

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

Net income increased

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

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

operating restrictions, as caused by local, state, and national guidelines, could lead to adverse financial results.

However, we will

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

following are our operating segments:

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

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

Round Rock, El Paso and Odessa, Texas;

Charlotte, North Carolina;

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment.

MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of this report.

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

• Our Business — a general description of our business and the adult nightclub industry, our objective, our strategic priorities, our core capabilities, and challenges and risks of our business.

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

• Operations Review — an analysis of our Company’s consolidated results of operations for the three years presented in our consolidated financial statements.

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

Current Operating Environment

Our fiscal 2020 was the period hard hit by the COVID-19 pandemic causing 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 fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased.

Stimulus money also flowed to the economy at that time which prompted discretionary spending.

In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions.

Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S.

economy in general, with global inflation and supply chain disruptions impacting our businesses.

Geopolitical and macroeconomic events are still developing.

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

The following are our operating segments:

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

These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Tye, Lubbock, Aledo, Round Rock, El Paso and Odessa, Texas;

Denver, Colorado;

Charlotte and Raleigh, North Carolina;

Minneapolis, Minnesota;

New York, New York;

Miami Gardens and

Pembroke Park, Florida;

New York and Newburgh, New York;

Miami Gardens, Pembroke Park and Miami, Florida;

Pittsburgh, Pennsylvania;

Phoenix, Arizona;

and Washington Park, Kappa and Chicago, Illinois.

contact is permitted at any of our locations.

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

We also own and

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

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

we now have club locations in Denver, Colorado;

Louisville, Kentucky;

Raleigh, North Carolina;

Portland, Maine;

Indianapolis, Indiana;

Sauget, Illinois;

and Newburgh, New York.

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

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

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

adult nightclubs industry and the adult retail products industry.

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

and more than a dozen industry and social media websites.

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

Drink in the United States.

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

service revenues such as cover charges, membership fees,

and facility use fees;

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

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

Other revenues include Media Group revenues for the sale

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

and Washington Park, Kappa, Sauget and Chicago, Illinois.

No sexual contact is permitted at any of our locations.

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

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

Bombshells Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland, Tomball, Katy and Arlington, Texas under the brand name Bombshells Restaurant & Bar.

We have one franchised unit in San Antonio, Texas.

Other Our wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the multibillion-dollar adult nightclubs industry and the adult retail products industry.

We also own an industry trade show, an industry trade publication and more than a dozen industry and social media websites.

Included here is Drink Robust, which is licensed to sell Robust Energy Drink in the United States.

We generate our revenues from the sale of liquor, beer, wine, food, and merchandise;

service revenues such as cover charges, membership fees, and facility use fees;

and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations.

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

Our fiscal year-end is September 30.

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

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

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

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

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

We also exclude from the same-store sales base units

that are being reconcepted or are closed due to renovations or remodels.

Acquired units are included in the same-store sales calculation

as long as they qualify based on the definitions stated above.

Revenues outside of our Nightclubs and Bombshells reportable segments’

core business are excluded from same-store sales calculation.

Same-Store Sales.

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

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

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

In the alternative calculation, a comparable location

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

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

and employees—to become more competitive and to accelerate growth.

ACCOUNTING POLICIES AND ESTIMATES

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

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

The preparation of these consolidated

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

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

These estimates

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

under the circumstances.

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

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

However, because future events and their effects cannot be

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

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

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

We believe that the following accounting

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

These estimates require our most

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

We have reviewed these critical

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

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

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

These events or changes

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

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

or economic trends.

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

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

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

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

can be identified.

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

operating margins.

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

cost of capital to discount cash flows.

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

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

During the second quarter of 2021, we impaired

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

clubs for $584,000.

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

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

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

and Other Intangible Assets

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

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

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

If our actual

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

We do not believe

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

change in our calculated impairment charges.

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

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

This assessment is based on several factors, including industry

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

of prior periods.

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

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

fair value of the reporting unit.

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

cash flows and comparable asset market values.

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

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

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

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

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

$6.3 million.

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

impairment loss totaling $7.9 million.

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

recognized a goodwill impairment loss totaling $1.6 million.

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

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

For indefinite-lived tradename, we

determine fair value by using the relief from royalty method.

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

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

We recorded impairment charges for

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

in 2019 related to one club.

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

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

These estimates

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

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

We adjust our

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

When necessary, we record a valuation

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

and Other Contingencies

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

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

We record a liability when it is probable that

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

There is significant judgment required in both the probability determination

and as to whether an exposure can be reasonably estimated.

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

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

asserted legal and other claims.

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

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

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

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

In matters where there is insurance

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

of our insurance coverage.

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

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 quarter of operations.

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

Acquired units are included in the same-store sales calculation as long as they qualify based on the definitions stated above.

Revenues outside of our Nightclubs and Bombshells reportable segments’ core business are excluded from same-store sales calculation.

Our goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our management and employees—to become more competitive and to accelerate growth.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The preparation of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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

On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

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

A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included in Item 8 – “Financial Statements and Supplementary Data” of this report.

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

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

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

Impairment of Long-Lived Assets

We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group.

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

We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified.

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

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

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

During the third quarter of 2022, we impaired two properties for a total of $1.0 million one due to eminent domain by the state of Texas and the other due to underperformance.

During the second quarter of 2021, we impaired one property that was reclassified to assets held for sale for $1.4 million, and during the fourth quarter of 2021, we impaired four clubs for $584,000.

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

Goodwill and Other Intangible Assets

Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

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

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

We do not believe that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that could cause a material change in our calculated impairment charges.

For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit.

The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values.

Key estimates in the discounted cash flow model include management’s estimate of the projected revenues and operating margins, along with the selection of a weighted-average cost of capital to discount cash flows.

We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $566,000.

For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $6.3 million.

For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million.

For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model.

For indefinite-lived tradename, we determine fair value by using the relief from royalty method.

The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount

exceeds the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $293,000 in 2022 related to one club, $5.3 million in 2021 related to three clubs, and $2.3 million in 2020 related to two clubs.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values.

The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill.

Results of operations related to acquired entities are included prospectively beginning with the date of acquisition.

Acquisition-related costs are expensed as incurred.

Stock-based Compensation

We recognize expense for stock-based compensation awards, which is equal to the fair value of the awards at grant date, ratably in selling, general and administrative expenses in our consolidated statements of operations over their requisite service period.

Calculating the grant date fair value of stock-based compensation awards requires the input of subjective assumptions.

We determine the fair value of each stock option grant using the Black-Scholes option-pricing model with assumptions based primarily on historical data.

Specific inputs to the model include the expected term of the stock options, stock price volatility, dividend yield, and risk-free interest rate.

We used our historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan which may not be reflective of current stock market environment and current mix of grantees.

We estimated expected volatility based on historical volatility of the Company's stock price for a period equal to the award's expected term.

We estimated expected dividend yield based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged).

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant.

We recognize forfeitures when they occur.

We estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases.

These estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others.

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

When necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be realized.

Legal and Other Contingencies

As mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 11 to our consolidated financial statements, we are involved in various suits and claims in the normal course of business.

We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.

There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.

In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.

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

Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.

In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

OPERATIONS REVIEW

Highlights of operations from fiscal 2022, 2021, and 2020 are as follows (in thousands, except percentages and per share amounts):

2022 Inc (Dec) 2021 Inc (Dec) 2020

Consolidated $ 267,620 37.1 % $ 195,258 47.6 % $ 132,327

Nightclubs $ 206,251 50.2 % $ 137,348 55.4 % $ 88,373

Bombshells $ 59,925 5.8 % $ 56,621 31.0 % $ 43,215

Same-store sales

Consolidated +5.6 % +1.5 %

Nightclubs +10.1 % -2.1 %

Bombshells -4.6 % +7.7 %

Income from operations

Consolidated $ 71,459 85.4 % $ 38,548 1,303.8 % $ 2,746

Nightclubs $ 82,798 89.0 % $ 43,815 235.6 % $ 13,056

Bombshells $ 11,504 (13.3) % $ 13,264 43.6 % $ 9,237

Diluted earnings (loss) per share $ 4.91 $ 3.37 $ (0.66)

1 unchanged sentence

Free cash flow* $ 58,911 63.3 % $ 36,084 167.7 % $ 13,481

Reconciliation

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

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

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

GAAP measures.

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

completed fiscal years:

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

2022 2021 2020

Sales of alcoholic beverages 42.3 % 44.4 % 44.6 %

1 unchanged sentence

Service revenues 35.1 % 28.4 % 31.1 %

Other 6.0 % 6.1 % 5.8 %

Total revenues 100.0 % 100.0 % 100.0 %

Operating expenses

Cost of goods sold

Alcoholic beverages

Food and merchandise

Alcoholic beverages sold 17.8 % 18.3 % 18.8 %

Food and merchandise sold 35.1 % 33.6 % 33.0 %

Service and other 0.3 % 0.6 % 0.5 %

13 unchanged sentences

Net income (loss) 17.2 % 15.4 % (4.8) %

may not foot due to rounding.

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

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

† Percentages may not foot due to rounding in this and in all of the succeeding tables presenting percentages in this report.

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

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

Better (Worse)

2021 2021 vs.

Amount % Amount %

Sales of alcoholic beverages $ 26,631 30.7 % $ 27,605 46.7 %

1 unchanged sentence

Service revenues 38,427 69.3 % 14,299 34.7 %

Other 4,121 34.3 % 4,376 57.4 %

Total revenues 72,362 37.1 % 62,931 47.6 %

Operating expenses

Cost of goods sold

Alcoholic beverages

Food and merchandise

Alcoholic beverages sold (4,272) (26.9) % (4,786) (43.1) %

Food and merchandise sold (1,743) (12.6) % (5,723) (70.9) %

Service and other 57 15.2 % (107) (40.1) %

14 unchanged sentences

* Not meaningful.

Overall, our consolidated revenues trended significantly

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

But even though 2021 was still affected

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

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

in 2021 was 1.5%.

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

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

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

The decrease from 2019 to 2020 was mainly caused by significantly

lower traffic due to the COVID-19 restrictions.

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

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

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

Our consolidated revenues continued their upward trend from 2020 to 2021 (with an increase of 47.6%) rebounding from the heavily COVID-19 affected 2020 to a more stable increase from 2021 to 2022 (with an increase of 37.1%) aided by acquisitions.

Consolidated same-store sales increased by 5.6% from 2021 to 2022 and by 1.5% from 2020 to 2021.

New units contributed $47.6 million, or 24.4% of total prior-year revenue, to the total revenue increase from 2021 to 2022 (mostly from club acquisitions) and $4.2 million, or 3.1% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021 (all from new Bombshells).

Closed units in the comparable prior year contributed $13.9 million, or 7.1% of total prior-year revenue, to the total revenue increase from 2021 to 2022 and $56.8 million, or 42.9% of total prior-year revenue, to the total consolidated revenue increase from 2020 to 2021.

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

2022 Inc (Dec) 2021 Inc (Dec) 2020

Sales of alcoholic beverages $ 80,001 47.3 % $ 54,305 70.0 % $ 31,950

2 unchanged sentences

Other revenues 14,480 35.6 % 10,676 55.7 % 6,858

206,251 50.2 % 137,348 55.4 % 88,373

Sales of alcoholic beverages 33,315 2.9 % 32,380 19.4 % 27,130

2 unchanged sentences

Other revenues 198 450.0 % 36 28.6 % 28

59,925 5.8 % 56,621 31.0 % 43,215

Other revenues 1,444 12.0 % 1,289 74.4 % 739

segment revenues.

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

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

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

Newly acquired and reconcepted units

Closed units (including COVID-19 impact)

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

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

total revenues (including COVID-19 impact)

Newly acquired and reconcepted units

Closed units (excluding COVID-19 impact)

type of revenue line item, changes in Nightclubs segment revenue dollars are broken down as:

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

segment sales mix did not change much through the three fiscal years:

$ 267,620 37.1 % $ 195,258 47.6 % $ 132,327

Nightclubs segment revenues.

Nightclubs revenues increased by 50.2% from 2021 to 2022 and by 55.4% from 2020 to 2021.

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

2021 2021 vs.

Impact of 10.1% increase and 2.1% decrease in same-store sales, respectively, to total revenues 9.5 % (1.2) %

Newly acquired units 30.5 % — %

Closed units 10.1 % 56.4 %

Other 0.1 % 0.2 %

50.2 % 55.4 %

Nightclubs segment sales mix for the three fiscal years, below:

2022 2021 2020

Sales of alcoholic beverages 38.8 % 39.5 % 36.2 %

1 unchanged sentence

Service revenues 45.3 % 40.2 % 46.4 %

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

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

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

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

$1.7 million in 2019.

segment revenues.

Other 7.0 % 7.8 % 7.7 %

100.0 % 100.0 % 100.0 %

The 2022 new units include 15 clubs, of which eleven were acquired in October 2021, one acquired in November 2021, one acquired in May 2022, and two acquired in July 2022.

See Note 16 to our consolidated financial statements.

In total, these newly acquired clubs contributed $41.9 million in revenues during 2022 since their acquisition dates.

No new clubs were acquired in 2020 and 2021.

Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.6 million in 2022, $1.5 million in 2021, and $1.3 million in 2020.

Bombshells segment revenues.

Bombshells revenues increased by 5.8% from 2021 to 2022 and by 31.0% from 2020 to 2021.

A breakdown of the changes

compared to total changes in Bombshells revenues is as follows:

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

Closed units (including COVID-19 impact)

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

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

Closed units (excluding COVID-19 impact)

type of revenue line item, changes in Bombshells segment revenues are broken down as:

Sales of alcoholic beverages

Sales of food and merchandise

Service and other revenues

segment sales mix for the three fiscal years is as follows:

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

2021 2021 vs.

Impact of 4.6% decrease and 7.7% increase in same-store sales, respectively, to total revenues (4.6) % 5.2 %

New units 10.1 % 9.6 %

Closed units — % 16.2 %

Other 0.3 % — %

Bombshells segment sales mix for the three fiscal years is as follows:

2022 2021 2020

Sales of alcoholic beverages 55.6 % 57.2 % 62.8 %

1 unchanged sentence

Service and other revenues 1.0 % 0.6 % 0.4 %

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

Bombshells Katy was opened

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

100.0 % 100.0 % 100.0 %

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

No new Bombshells location was opened in 2021.

segment revenues.

Bombshells Arlington was opened in the first quarter of 2022.

Other segment revenues.

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

Drink Robust sales were

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

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

Media business revenues were $1.0 million,

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

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

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

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

further deferred or refunded and no revenue was recognized.

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

respectively.

Drink Robust sales were $201,000, $249,000, and $150,000 in fiscal 2022, 2021, and 2020, respectively, which excludes intercompany sales to Nightclubs and Bombshells units amounting to $261,000, $141,000, and $70,000 in fiscal 2022, 2021, and 2020, respectively.

Media business revenues were $1.2 million, $1.0 million, and $589,000 in fiscal 2022, 2021, and 2020, respectively.

Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed to be held in August 2020 (fiscal 2020) was canceled.

All unearned sponsorship and advertising revenues related to the event were either further deferred or refunded and no revenue was recognized.

Operating Expenses

Total operating expenses, as a percent of consolidated revenues, were 73.3%, 80.3%, and 97.9% for the fiscal year 2022, 2021, and 2020, respectively.

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

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

and Drink Robust.

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

2020, and 2019, respectively.

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

to the respective consolidated revenue line.

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

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

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

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

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

Consolidated salaries and wages increased by $11.6

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

The dollar decrease from

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

easing restrictions.

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

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

Corporate salary pay cuts made in 2020 during

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

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

General corporate

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

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

Ended September 30,

Cost of goods sold .

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

As a percentage of consolidated revenues, consolidated cost of goods sold was 13.5%, 15.4%, and 14.7% for fiscal 2022, 2021, and 2020, respectively.

See page 29 above for the breakdown of percentages for each line item of consolidated cost of goods sold as it relates to the respective consolidated revenue line.

For the Nightclubs segment, cost of goods sold was 10.5%, 11.8%, and 10.7% for fiscal 2022, 2021, and 2020, respectively, which was primarily caused by shifts in sales mix.

Bombshells cost of goods sold was 23.5%, 23.8%, and 22.6% for fiscal 2022, 2021, and 2020, respectively, which was mainly driven by menu price increases in 2022 in response to inflation, the shift in sales mix to lower-margin food sales in 2021, and to higher-margin alcoholic beverage sales in 2020.

Salaries and wages .

Consolidated salaries and wages increased by $17.8 million, or 35.2%, from 2021 to 2022 and increased by $11.6 million, or 29.6%, from 2020 to 2021.

The dollar decrease from 2020 to 2021 was mainly from personnel hiring and rehiring after easing restrictions from COVID-19, and the dollar increase from 2021 to 2022 was mainly from new employees caused by the fifteen new club acquisitions and one Bombshells opening.

As a percentage of revenues, consolidated salaries and wages were 25.6%, 25.9%, and 29.5% in 2022, 2021, and 2020, respectively, mainly due to sales trend and the impact of fixed salaries on increasing sales.

Corporate salary pay cuts made in 2020 during the height of the pandemic restrictions were paid back in 2021.

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

2022 Inc (Dec) 2021 Inc (Dec) 2020

Nightclubs $ 40,859 51.4 % $ 26,986 37.8 % $ 19,590

Bombshells 14,585 11.8 % 13,041 25.1 % 10,427

Other 601 3.3 % 582 18.5 % 491

Corporate 12,402 23.8 % 10,018 17.0 % 8,562

$ 68,447 35.2 % $ 50,627 29.6 % $ 39,070

Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general corporate.

Salaries and wages as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):

2022 2021 2020

Nightclubs 19.8 % 19.6 % 22.2 %

Bombshells 24.3 % 23.0 % 24.1 %

Other 41.6 % 45.2 % 66.4 %

Corporate 4.6 % 5.1 % 6.5 %

25.6 % 25.9 % 29.5 %

Selling, general and administrative expenses .

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

2022 2021 2020

Amount % Amount % Amount %

Taxes and permits $ 9,468 3.5 % $ 8,701 4.5 % $ 8,071 6.1 %

1 unchanged sentence

Supplies and services 8,614 3.2 % 6,190 3.2 % 4,711 3.6 %

Insurance 10,152 3.8 % 5,676 2.9 % 5,777 4.4 %

Lease 6,706 2.5 % 3,942 2.0 % 4,060 3.1 %

Legal 1,995 0.7 % 3,997 2.0 % 4,725 3.6 %

Utilities 4,585 1.7 % 3,366 1.7 % 2,945 2.2 %

Charge card fees 6,292 2.4 % 3,376 1.7 % 2,382 1.8 %

Security 4,404 1.6 % 3,892 2.0 % 2,582 2.0 %

Accounting and professional fees 3,909 1.5 % 2,031 1.0 % 3,463 2.6 %

Repairs and maintenance 3,754 1.4 % 2,767 1.4 % 2,289 1.7 %

reportable segment, selling, general and administrative expenses are broken down as follows (in thousands):

General corporate

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

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

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

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

such as advertising and marketing were kept to a minimum.

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

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

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

lease expense decreased due to lease credits we received from

certain landlords;

Stock-based compensation 2,353 0.9 % — — % — — %

Other 6,755 2.5 % 3,994 2.0 % 5,320 4.0 %

$ 78,847 29.5 % $ 54,608 28.0 % $ 51,692 39.1 %

By reportable segment, selling, general and administrative expenses are broken down as follows (dollar amounts in thousands):

2022 Inc (Dec) 2021 Inc (Dec) 2020

Nightclubs $ 51,285 56.7 % $ 32,725 8.7 % $ 30,105

Bombshells 17,295 16.2 % 14,883 26.8 % 11,735

Other 418 76.4 % 237 (11.6) % 268

Corporate 9,849 45.6 % 6,763 (29.4) % 9,584

$ 78,847 44.4 % $ 54,608 5.6 % $ 51,692

Selling, general and administrative expenses as a percentage of segment revenue (except Corporate, which is based on consolidated revenues):

2022 2021 2020

Nightclubs 24.9 % 23.8 % 34.1 %

Bombshells 28.9 % 26.3 % 27.2 %

Other 28.9 % 18.4 % 36.3 %

Corporate 3.7 % 3.5 % 7.2 %

29.5 % 28.0 % 39.1 %

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

As a percentage of revenues, relatively fixed expenses were high in rate due to lower sales in fiscal 2020, while more discretionary/controllable expenses such as advertising and marketing were kept to a minimum.

Conversely, due to the increase in revenues in 2021 from 2020, almost all selling, general and administrative expenses consequently increased except accounting and professional fees, insurance, leases, and legal.

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

lease expense decreased due to lease credits we received from certain landlords;

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

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

The decrease from 2019

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

from significantly low capital expenditure in 2020.

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

Ended September 30,

Most of the selling, general and administrative expense increases in 2022 came from the Nightclub acquisitions we made.

We also incurred stock-based compensation expense from a new 2022 Stock Option Plan.

Depreciation and amortization .

Depreciation and amortization increased by $4.2 million, or 50.4%, from 2021 to 2022 and decreased by $598,000, or 6.8%, from 2020 to 2021.

The decrease from 2020 to 2021 was mainly from significantly low capital expenditure in 2020 while the increase from 2021 to 2022 was mainly caused by the growth in our depreciable asset base and amortizable intangibles caused by acquired clubs and a new Bombshells unit.

Other charges, net .

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

2022 Inc (Dec) 2021 Inc (Dec) 2020

Impairment of assets $ 1,888 (86.1) % $ 13,612 28.2 % $ 10,615

2 unchanged sentences

Loss (gain) on insurance (463) (63.0) % (1,253) (398.3) % 420

Total other charges, net

significant variances in other charges, net are discussed below:

During 2021, we recorded aggregate impairment charges

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

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

During 2020, we recorded aggregate

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

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

of $104,000).

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

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

See Notes 2 and 15 to our consolidated

financial statements.

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

$ 467 (96.5) % $ 13,186 25.0 % $ 10,548

The significant variances in other charges, net are discussed below:

During 2022, we recorded aggregate impairment charges amounting to $1.9 million related to goodwill of one club ($566,000), SOB license of one club ($293,000), and property and equipment of one club and one Bombshells unit ($1.0 million).

During 2021, we recorded aggregate impairment charges amounting to $13.6 million related to goodwill of seven clubs ($6.3 million), SOB licenses of three clubs ($5.3 million), and property and equipment of five clubs, one of which is held for sale ($2.0 million).

During 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one

club and one Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000).

See Notes 2 and 16 to our consolidated financial statements.

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

See Note 11 to our consolidated financial statements.

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

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

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

Gains related to insurance recoveries were recognized when the contingencies

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

See Note 14 to our consolidated

financial statements.

from Operations

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

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

General corporate

Nightclubs operating margin was 31.9%,

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

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

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

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

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

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

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

In 2022, we settled several cases including the image infringement lawsuit and the securities class actions part of which was paid by insurance.

Refer to dispositions in Note 16 to our consolidated financial statement for details on gains or losses on sale of businesses and assets.

In relation to insurance claims and recoveries, we recognized a $463,000 gain in 2022, $1.3 million gain in 2021, and a $420,000 loss in 2020 mainly related to a fire in one of our clubs in Washington Park, Illinois toward the end of fiscal 2018 and a hurricane that damaged one of our clubs in Sulphur, Louisiana in August 2020.

The rest of the claims for the Sulphur club were received in 2022.

Gains related to insurance recoveries are recognized when the contingencies related to the insurance claims have been resolved, which may be in a subsequent reporting period.

See Note 15 to our consolidated financial statements.

Income from Operations

During fiscal 2022, 2021, and 2020, our consolidated operating margin was 26.7%, 19.7%, and 2.1%, respectively.

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

2022 2021 2020

Nightclubs $ 82,798 $ 43,815 $ 13,056

Bombshells 11,504 13,264 9,237

Other 57 35 (614)

Corporate (22,900) (18,566) (18,933)

$ 71,459 $ 38,548 $ 2,746

Nightclubs operating margin was 40.1%, 31.9%, and 14.8% in 2022, 2021, and 2020, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $1.2 million, $13.6 million, and $10.4 million for 2022, 2021, and 2020, respectively.

Bombshells operating margin was 19.2%, 23.4%, and 21.4% in 2022, 2021, and 2020, respectively, mainly due to one new unit and same-store sales decrease in 2022, two new units and same-store sales increase in 2021, partially offset by COVID-19 impact in 2020.

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

Refer to discussion of Non-GAAP Financial Measures on page 37.

the Year Ended September 30, 2021

(loss) from operations

of intangibles

and charges related to debt refinancing

(gain) on sale of businesses and assets

operating income (loss)

operating margin

the Year Ended September 30, 2020

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 82,798 $ 11,504 $ 57 $ (22,900) $ 71,459

3 unchanged sentences

Loss (gain) on sale of businesses and assets (2,010) 17 — (382) (2,375)

Loss (gain) on insurance

Gain on insurance (463) — — — (463)

Stock-based compensation — — — 2,353 2,353

Non-GAAP operating income (loss) $ 84,892 $ 12,195 $ 118 $ (20,808) $ 76,397

1 unchanged sentence

Non-GAAP operating margin 41.2 % 20.4 % 8.2 % (7.8) % 28.5 %

the Year Ended September 30, 2019

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 43,815 $ 13,264 $ 35 $ (18,566) $ 38,548

2 unchanged sentences

Impairment of assets 13,612 — — — 13,612

Costs and charges related to debt refinancing 17 — — 40 57

Loss (gain) on sale of businesses and assets (580) 72 — (14) (522)

3 unchanged sentences

Non-GAAP operating margin 40.9 % 23.7 % 7.5 % (9.0) % 26.7 %

Income/Expenses

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

The net increase in interest expense in

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

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

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

During 2019, our debt repayments were significantly

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

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

accrue interest on these debts.

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

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

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

Nightclubs Bombshells Other Corporate Total

Income (loss) from operations $ 13,056 $ 9,237 $ (614) $ (18,933) $ 2,746

Amortization of intangibles 211 15 383 — 609

Settlement of lawsuits 174 — — — 174

Impairment of assets 10,370 245 — — 10,615

Loss (gain) on sale of businesses and assets (639) 16 — (38) (661)

Loss (gain) on insurance 433 — — (13) 420

Non-GAAP operating income (loss) $ 23,605 $ 9,513 $ (231) $ (18,984) $ 13,903

GAAP operating margin 14.8 % 21.4 % (83.1) % (14.3) % 2.1 %

Non-GAAP operating margin 26.7 % 22.0 % (31.3) % (14.3) % 10.5 %

Other Income/Expenses

Interest expense increased by $2.0 million from 2021 to 2022 and by $181,000 from 2020 to 2021.

The increase in interest expense in 2022 was primarily caused by the significantly higher average debt balance from borrowings to finance our acquisitions.

The net increase in interest expense in 2021 was primarily caused by the expensed loan costs and written off unamortized debt issuance costs related to the September 2021 Refinancing Note (see Note 9 to our consolidated financial statements), partially offset by the impact of a lower average debt balance.

During 2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments were deferred, but we continued to accrue interest on these debts.

At the end of 2021, we refinanced several of our existing bank and seller-financed real estate debt with the issuance of a $99.1 million 5.25% note with a term of 10 years.

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

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

Total occupancy cost rate (total occupancy

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

Total occupancy cost rate (total occupancy cost as a percentage of revenues) was high in 2020 due to lower sales activity caused by the pandemic, as shown below.

2022 2021 2020

Lease 2.5 % 2.0 % 3.1 %

Interest 4.5 % 4.8 % 7.4 %

Total occupancy cost 7.0 % 6.8 % 10.5 %

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

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

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

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

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

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

In November 2021, we received

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

See Note 9 to our consolidated financial

Income taxes were an expense of approximately

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

Our effective income tax rate was a

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

The components of our annual effective income tax rate

are the following:

The 2021 interest expense rate above excludes certain costs and charges related to the September 2021 Refinancing Note amounting to approximately $637,000, or 0.3% of consolidated revenues.

The $637,000 interest expense includes $103,000 in unamortized debt issuance costs that were written off and $228,000 in expensed new loan costs.

In fiscal 2021, we received 11 notices of forgiveness for our PPP loans approving the forgiveness of 100% of each of the 11 PPP loans amounting to $5.3 million in principal and interest, which were included in non-operating gains (losses), net.

In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest.

See Note 9 to our consolidated financial statements.

Income taxes were an expense of approximately $14.1 million in 2022, $4.0 million in 2021, and a benefit of $493,000 in 2020.

Our effective income tax rate was a 23.4% expense in 2022, 11.7% expense in 2021, and 7.2% benefit in 2020.

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

2022 2021 2020

Federal statutory income tax expense/benefit 21.0 % 21.0 % 21.0 %

3 unchanged sentences

Change in valuation allowance 0.6 % (1.9) % (18.7) %

Tax credits (3.0) % (3.5) % 13.9 %

Other 0.2 % (2.4) % 0.6 %

Total effective income tax rate 23.4 % 11.7 % 7.2 %

* Positive or negative percentages are in relation

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

Percentages may not foot due to rounding.

The effective income tax rate difference from

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

tax credits that are mostly FICA tip credits.

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

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

Financial Measures

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

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

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.

* Positive or negative percentages are in relation to income or loss before income taxes of the respective fiscal year.

The effective income tax rate difference from the statutory federal corporate tax rate of 21% comes from offsetting impact of state income tax, net of federal benefit, and tax credits that are mostly FICA tip credits.

The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the pandemic and the changes in the deferred tax asset valuation allowance in all three fiscal years presented.

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) impairment of assets, (c)

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

charges related to debt refinancing.

We believe that excluding these items assists investors in evaluating period-over-period changes

in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.

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

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

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

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

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

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

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

Included in the income tax effect of the

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

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

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) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) settlement of lawsuits, (f) costs and charges related to debt refinancing, and (g) stock-based compensation.

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 loss on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, (h) costs and charges related to debt refinancing, (i) stock-based compensation, (j) the income tax effect of the above-described adjustments, and (k) change in deferred tax asset valuation allowance.

Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 22.8%, 13.5%, and 26.0% effective tax rate of the pre-tax non-GAAP income before taxes for the 2022, 2021, and 2020, respectively, and the GAAP income tax expense (benefit).

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

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) 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 the 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, (i) gain on debt extinguishment, and (j) stock-based compensation.

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 the unleveraged performance return on our investments.

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

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

See “Liquidity and Capital Resources” section for further

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

the Year Ended September 30,

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 periods indicated (in thousands, except per share amounts and percentages):

2022 2021 2020

Reconciliation of GAAP net income (loss) to Adjusted EBITDA

9 unchanged sentences

Loss (gain) on insurance (463) (1,253) 420

Stock-based compensation 2,353 — —

Adjusted EBITDA $ 86,724 $ 60,243 $ 22,357

9 unchanged sentences

Loss (gain) on insurance (463) (1,253) 420

Stock-based compensation 2,353 — —

Change in deferred tax asset valuation allowance 343 (632) 1,273

1 unchanged sentence

Non-GAAP net income $ 50,455 $ 36,752 $ 4,709

the Year Ended September 30,

2022 2021 2020

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

9 unchanged sentences

Loss (gain) on insurance (0.05) (0.14) 0.05

Stock-based compensation 0.25 — —

Change in deferred tax asset valuation allowance 0.04 (0.07) 0.14

6 unchanged sentences

Impairment of assets 1,888 13,612 10,615

Gain on sale of businesses and assets

Costs and charges related to debt refinancing* — 57 —

Gain on sale of businesses and assets (2,375) (522) (661)

Loss (gain) on insurance (463) (1,253) 420

Stock-based compensation 2,353 — —

Non-GAAP operating income $ 76,397 $ 52,049 $ 13,903

2022 2021 2020

Reconciliation of GAAP operating margin to non-GAAP operating margin

3 unchanged sentences

Impairment of assets 0.7 % 7.0 % 8.0 %

Gain on sale of businesses and assets

Costs and charges related to debt refinancing* — % 0.0 % — %

Gain on sale of businesses and assets (0.9) % (0.3) % (0.5) %

Loss (gain) on insurance (0.2) % (0.6) % 0.3 %

Stock-based compensation 0.9 % — % — %

Non-GAAP operating margin 28.5 % 26.7 % 10.5 %

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

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

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

new loan costs.

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

related to noncontrolling interests, which is immaterial.

AND CAPITAL RESOURCES

At September 30, 2021, our cash and cash equivalents

were approximately $35.7 million compared to $15.6 million at September 30, 2020.

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

very stringent cash controls.

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

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

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

Although we believe that our ability

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

caused by the COVID-19 pandemic presented operational challenges.

Our strategy was to open locations and operate in accordance

with local and state guidelines.

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

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

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

In fiscal 2020, to adapt to the situation,

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

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

monthly expenses, among others.

On May 8, 2020, the Company received approval and

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

Ten of our restaurant

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

our shared-services subsidiary

received $1.1 million;

and one of our lounges received $124,000.

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

received funding under the PPP.

The Company believes it used the entire loan amount for qualifying expenses.

Under the terms of the PPP,

certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

The Company utilized

all of the PPP funds and submitted its forgiveness applications.

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

PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP loans granted.

All of the notices received forgave

100% of each of the 11 PPP loans totaling the amount of $5.3 million in principal and interest during the period and were included

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

In November 2021, we received a partial forgiveness

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

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

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

operating restrictions, as caused by local, state and national guidelines, could lead to adverse financial results.

However, we will

continually monitor and evaluate our cash flow situation and will determine any further measures to be instituted.

continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number

of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable.

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

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

Instead, we use debt financing to lower our overall cost

of capital and increase our return on stockholders’ equity.

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

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

existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these

financing options would be presently available on favorable terms, if at all.

We also have historically utilized these cash flows to

invest in property and equipment, adult nightclubs, and restaurants/sports bars.

On October 18, 2021, we and certain of our

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

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

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

acquisition gives the Company presence in six additional states.

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

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

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

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

Ended September 30,

Operating activities

Investing activities

Financing activities

Net increase (decrease) in cash and cash equivalents

require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments

in technology.

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

strategy guidelines, and to pay our quarterly dividends.

Flows from Operating Activities

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

Ended September 30,

* Costs and charges related to debt refinancing in 2021 consist of $637,000 in interest expense and $57,000 in legal and professional fees.

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

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 September 30, 2022, our cash and cash equivalents were approximately $36.0 million as 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 September 30, 2022, we had working capital of $18.6 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 $0 and $1.1 million, respectively) amounting to $1.0 million and $3.8 million as of September 30, 2022 and 2021, respectively.

Since the pandemic hard hit fiscal 2020, we have since recovered and have seen a more normal stream of operations in 2021 and 2022.

Geopolitical and macroeconomic events are still developing.

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

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.

We have not recently raised capital through the issuance of equity securities although we have used equity recently in one of our acquisitions.

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 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.

During 2022, we acquired fifteen clubs at an aggregate acquisition price of $132.6 million, of which $55.3 million was in cash, $49.0 million in debt, and $30.0 million in equity (500,000 shares of our common stock with an acquisition date fair value of $29.9 million, discounted for lack of marketability due to the lock-up period).

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

2022 2021 2020

Operating $ 64,509 $ 41,991 $ 15,632

Investing (67,797) (6,814) (994)

Financing 3,582 (15,096) (13,130)

Net increase in cash and cash equivalents $ 294 $ 20,081 $ 1,508

We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments in technology.

We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital allocation strategy guidelines, and to pay our quarterly dividends.

Cash Flows from Operating Activities

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

2022 2021 2020

Net income (loss) $ 46,060 $ 30,150 $ (6,312)

1 unchanged sentence

Deferred tax expense (benefit) 3,080 (1,253) (1,268)

Stock-based compensation expense 2,353 — —

Impairment of assets 1,888 13,612 10,615

1 unchanged sentence

Net change in operating assets and liabilities (1,421) (3,451) 1,380

Other 241 (7) 2,381

Net cash provided by operating activities $ 64,509 $ 41,991 $ 15,632

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

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

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

partially offset by lower interest and income taxes paid.

Flows from Investing Activities

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

Ended September 30,

Net cash flows from operating activities increased from 2021 to 2022 mainly due to the operating results of the fifteen acquired clubs and one Bombshells opened.

Net cash flows from operating activities increased from 2020 to 2021 mainly due to significantly higher income from operations partially offset by higher interest payments, which included deferred debt interest payments from 2020, and higher income taxes paid.

Cash Flows from Investing Activities

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

2022 2021 2020

Proceeds from sale of businesses and assets $ 10,669 $ 5,415 $ 2,221

Proceeds from insurance and notes receivable

Issuance of notes receivable

Proceeds from notes receivable 182 130 1,576

Proceeds from insurance 648 1,152 945

Payments for property and equipment and intangible assets (24,003) (13,511) (5,736)

1 unchanged sentence

Net cash used in investing activities $ (67,797) $ (6,814) $ (994)

In 2021, we acquired four real estate properties

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

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

restaurant on December 6, 2021 in Arlington, Texas.

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity.

We also purchased an aircraft and six real estate properties, of which, four are for future Bombshells locations, one for a club that we were leasing, and another to replace a club location which was taken by eminent domain.

Also in 2022, we received payment for four real estate properties.

We did not receive payment for the eminent domain property mentioned above until November 2022.

In 2021, we acquired four real estate properties either for future club or restaurant locations or for corporate use.

On one of the real properties purchased, we opened a Bombshells restaurant on December 6, 2021 in Arlington, Texas.

There were no new Bombshells units opened in 2021.

We also sold two real estate properties

We also sold two real estate properties in 2021.

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

Highway 59 in

Houston, Texas) and sold three real estate properties.

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

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

As of September

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

opening in the subsequent fiscal year.

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

we paid a total of $13.5 million at closing.

Highway 59 in Houston, Texas) and sold three real estate properties.

As of September 30, 2022, 2021, and 2020, we had $1.5 million, $3.4 million, and $20,000 in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year.

See Note 16 to our consolidated financial statements.

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

Ended September 30,

Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2022, 2021, and 2020 (in thousands):

2022 2021 2020

New capital expenditures in new clubs and Bombshells units and equipment* $ 18,405 $ 7,604 $ 3,585

2 unchanged sentences

* Includes real estate except those acquired through business acquisitions.

See discussion of acquisitions subsequent to September

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

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

Flows from Financing Activities

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

Ended September 30,

Proceeds from long-term debt

Payments on long-term debt

Payment of dividends

See discussion of acquisitions and dispositions subsequent to September 30, 2022 in Note 16 to our consolidated financial statements.

Cash Flows from Financing Activities

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

2022 2021 2020

Proceeds from debt obligations $ 35,820 $ 38,490 $ 6,503

Payments on debt obligations (14,894) (49,178) (8,832)

Purchase of treasury stock (15,097) (1,794) (9,484)

Payment of dividends (1,784) (1,440) (1,286)

Payment of loan origination costs (463) (1,174) —

Distribution to noncontrolling interests — — (31)

Net cash used in financing activities

See Note 9 to our consolidated financial statements

for a detailed discussion of our debt obligations.

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

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

quarter of 2020 where we paid $0.04 per share.

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

Cash Flow Measure

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

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

less maintenance capital expenditures.

Net cash provided by (used in) financing activities $ 3,582 $ (15,096) $ (13,130)

See Note 9 to our consolidated financial statements for a detailed discussion of our debt obligations.

We purchased shares of our common stock representing 268,185 shares, 74,659 shares, and 516,102 shares in 2022, 2021, and 2020, respectively.

We paid quarterly dividends of $0.03 per share in fiscal 2020, except in the second and fourth quarter of 2020 where we paid $0.04 per share.

We paid quarterly dividends of $0.04 per share in fiscal 2021 through the first quarter of 2022.

Then starting in the second quarter of 2022, we increased our quarterly dividends to $0.05 per share.

Non-GAAP Cash Flow Measure

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

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

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

See table below (in thousands):

2022 2021 2020

Net cash provided by operating activities $ 64,509 $ 41,991 $ 15,632

1 unchanged sentence

Free cash flow $ 58,911 $ 36,084 $ 13,481

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.

financing activities were as follows:

million bank refinancing loan on September 30, 2021

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

$21.2 million seller-financed notes related to the October

18, 2021 acquisition (subsequent to year-end)

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

Obligations and Commitments

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

The following table (in thousands)

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

Future interest payments

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

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

This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow.

Debt Financing

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

Contractual Obligations and Commitments

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

The following table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments.

Future interest payments related to debt were estimated using the interest rate in effect as of September 30, 2022.

Payments Due by Period

Long-term debt – regular (a)

Long-term debt – balloon (a)

Total 2023 2024 2025 2026 2027 Thereafter

Debt obligations - regular (a)

$ 106,102 $ 10,216 $ 9,663 $ 9,527 $ 9,825 $ 10,424 $ 56,447

Debt obligations - balloon (a)

99,738 2,226 2,195 20,457 — — 74,860

Interest payments on debt 78,616 12,792 11,987 9,468 8,418 7,820 28,131

Operating leases (b)

Note 9 to our consolidated financial statements.

Note 19 to our consolidated financial statements.

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

event or trend that would adversely impact our liquidity.

52,789 4,895 4,944 5,024 5,089 4,895 27,942

(a) See Note 9 to our consolidated financial statements.

(b) See Note 20 to our consolidated financial statements.

Other than the ongoing impact of the COVID-19 pandemic, the current geopolitical and macroeconomic events happening globally, and the notes payable financing described above, we are not aware of any event or trend that would adversely impact our liquidity.

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

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

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

payment terms.

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

to adjust to short-term business downturns.

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

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

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

Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms.

Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns.

We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.

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

2022 Inc (Dec) 2021 Inc (Dec) 2020

Sales of alcoholic beverages $ 113,316 30.7 % $ 86,685 46.7 % $ 59,080

1 unchanged sentence

Service revenues 93,888 69.3 % 55,461 34.7 % 41,162

Other revenues 16,122 34.3 % 12,001 57.4 % 7,625

Total revenues $ 267,620 37.1 % $ 195,258 47.6 % $ 132,327

Net income (loss) attributable to RCIHH common stockholders $ 46,041 51.8 % $ 30,336 (598.5) % $ (6,085)

Net cash provided by operating activities $ 64,509 53.6 % $ 41,991 168.6 % $ 15,632

2 unchanged sentences

Debt (end of period) $ 202,463 61.8 % $ 125,168 (11.5) % $ 141,435

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

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

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

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

Board of Directors.

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

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

On February 6, 2020, the Board of Directors

increased the repurchase authorization by an additional $10.0 million.

We have approximately $9.0 million remaining to purchase additional

shares as of September 30, 2021.

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

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

To the extent permitted by competition, we have

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

However, there can be no assurance that we will

be able to do so in the future.

nightclub operations are affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September

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

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

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

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

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

Share Repurchase

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

During fiscal years 2022, 2021, and 2020, we paid for treasury stock amounting to $15.1 million, $1.8 million, and $9.5 million representing 268,185 shares, 74,659 shares, and 516,102 shares, respectively.

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

We have approximately $18.9 million remaining to purchase additional shares as of September 30, 2022.

For additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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

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

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

with high growth potential.

Our growth strategy involves the following:

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

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

(ii) to open new units after

market analysis;

(iii) to franchise our Bombshells brand;

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

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

(v) to develop new club concepts that are

consistent with our management and marketing skills;

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

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

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

All ten of the existing Bombshells as of September 30, 2021 are located in Texas.

Our growth strategy is to diversify our operations

with these units which do not require SOB licenses, which are sometimes difficult to obtain.

While we are searching for adult nightclubs

to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.

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

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

See Note 15 to the consolidated financial statements

for details of the transactions.

opened two new Bombshells units in fiscal 2019.

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

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

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

opened two new Bombshells units in fiscal 2020.

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

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

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

discounted due to the lock-up period).

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

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

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

rate of 4.0% per annum.

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

See Note 15 to our consolidated financial

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

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

have done in the past.

GROWTH STRATEGY

We believe that we can continue to grow organically and through careful entry into markets with high growth potential.

Our growth strategy includes acquiring existing units, opening new units after market analysis, developing new club concepts that are consistent with our management and marketing skills, franchising our Bombshells brand, and developing and opening our Bombshells concept as our capital and manpower allow.

All eleven of the existing Bombshells as of September 30, 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 opened two new Bombshells units in fiscal 2020.

In 2022, we acquired fifteen clubs with an aggregate acquisition price of $132.6 million, of which $55.3 million in cash, $49.0 million in debt, and 500,000 shares of our common stock in equity.

See Note 16 to our consolidated financial statements.

We also opened a new Bombshells location in Arlington, Texas in December 2021 and our first franchised location in San Antonio, Texas opened in June 2022.

On October 26, 2022, subsequent to the current reporting date, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $9.0 million.

The acquisition includes (1) $2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $6.5 million for the real estate property covered in a real estate purchase agreement paid $1.5 million in cash at closing and $5.0 million under a 6% 15-year promissory note payable in 180 equal monthly payments of $42,193 in principal and interest.

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

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

We do not carry

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

Certain of our debt have variable interest rates but will

only be effective in future years.

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

We do not carry any debt with a variable interest rate in effect as of September 30, 2022.

Certain of our debt have variable interest rates but will only be effective in future years.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis