UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2019~~March 31, 2020

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-13992

RCI HOSPITALITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Texas

76-0458229

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10737 Cutten Road

Houston, Texas 77066

(Address of principal executive offices) (Zip Code)

(281) 397-6730

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.01 par value		RICK		The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ~~No [X]~~

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of ~~August 31, 2019, 9,616,598~~May 8, 2020, 9,125,281 shares of the registrant’s common stock were outstanding.

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack thereof in launching and building the company’s businesses, (iv) cyber security, (v) conditions relevant to real estate transactions, (vi) our ability to ~~regain and~~ maintain compliance with the filing requirements of the SEC and the Nasdaq Stock Market, (vii) the impact of the COVID-19 pandemic, and ~~(vii)~~(viii) numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, the “Company,” “we,” “our,” and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 (unaudited) and September 30, ~~2018~~2019	4

	Condensed Consolidated Statements of ~~Income~~Operations (unaudited) for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5

	Condensed Consolidated Statements of Changes in ~~Stockholders’~~ Equity (unaudited) for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2422

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3935

Item 4.	Controls and Procedures	3935

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	4336

Item1A.	Risk Factors	4336

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4337

Item 6.	Exhibits	4438

	Signatures	4539

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

June 30, 2019 September 30, 2018
(unaudited) (As Revised)
ASSETS
Current assets
Cash and cash equivalents $ 10,956 $ 17,726
Accounts receivable, net 5,001 7,320
Current portion of notes receivable 1,152 -
Inventories 2,502 2,353
Prepaid insurance 896 4,910
Other current assets 2,090 1,591
Assets held for sale - 2,902
Total current assets 22,597 36,802
Property and equipment, net 191,493 172,403
Notes receivable, net of current portion 3,810 2,874
Goodwill 55,271 43,591
Intangibles, net 76,285 71,532
Other assets 1,422 2,530
Total assets $ 350,878 $ 329,732

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 2,544 $ 2,825
Accrued liabilities 9,117 11,973
Current portion of long-term debt 16,374 19,047
Total current liabilities 28,035 33,845
Deferred tax liability, net 22,076 19,552
Long-term debt, net of current portion and debt discount and issuance costs 130,205 121,580
Other long-term liabilities 1,656 1,423
Total liabilities 181,972 176,400

Commitments and contingencies (Note 10)

Stockholders’ equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding - -
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,617 and 9,719 shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively 96 97
Additional paid-in capital 61,849 64,212
Retained earnings 106,976 88,906
Accumulated other comprehensive income - 220
Total RCIHH stockholders’ equity 168,921 153,435
Noncontrolling interests (15 ) (103 )
Total stockholders’ equity 168,906 153,332
Total liabilities and stockholders’ equity $ 350,878 $ 329,732

	March 31, 2020			September 30, 2019
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	9,825		$	14,097
Accounts receivable, net		3,559			6,289
Current portion of notes receivable		675			954
Inventories		2,735			2,598
Prepaid insurance		2,805			5,446
Other current assets		2,343			2,521
Assets held for sale		4,825			2,866
Total current assets		26,767			34,771
Property and equipment, net		182,234			183,956
Operating lease right-of-use assets		26,485			-
Notes receivable, net of current portion		4,087			4,211
Goodwill		47,109			53,630
Intangibles, net		74,251			75,951
Other assets		963			1,118
Total assets	$	361,896		$	353,637

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	2,805		$	3,810
Accrued liabilities		8,671			14,644
Current portion of long-term debt		14,771			15,754
Current portion of operating lease liabilities		1,552			-
Total current liabilities		27,799			34,208
Deferred tax liability, net		20,503			21,658
Long-term debt, net of current portion and debt discount and issuance costs		125,669			127,774
Operating lease liabilities, net of current portion		26,275			-
Other long-term liabilities		374			1,696
Total liabilities		200,620			185,336

Commitments and contingencies (Note 10)

Equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding		-			-
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,125 and 9,591 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively		91			96
Additional paid-in capital		52,829			61,312
Retained earnings		108,584			107,049
Total RCIHH stockholders’ equity		161,504			168,457
Noncontrolling interests		(228	)		(156	)
Total equity		161,276			168,301
Total liabilities and equity	$	361,896		$	353,637

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(in thousands, except per share data)

(unaudited)

For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2019 2018 2019 2018
Revenues
Sales of alcoholic beverages $ 19,570 $ 17,658 $ 56,366 $ 52,835
Sales of food and merchandise 7,046 6,175 19,175 16,906
Service revenues 17,299 16,316 51,609 48,338
Other 3,112 2,485 8,726 6,993
Total revenues 47,027 42,634 135,876 125,072
Operating expenses
Cost of goods sold
Alcoholic beverages sold 4,015 3,632 11,541 10,976
Food and merchandise sold 2,565 2,140 6,857 6,198
Service and other 121 94 307 173
Total cost of goods sold (exclusive of items shown separately below) 6,701 5,866 18,705 17,347
Salaries and wages 13,164 11,362 37,168 33,086
Selling, general and administrative 14,895 13,476 43,263 39,136
Depreciation and amortization 2,465 1,998 6,718 5,806
Other charges (gains), net (172 ) 440 (2,250 ) 2,834
Total operating expenses 37,053 33,142 103,604 98,209
Income from operations 9,974 9,492 32,272 26,863
Other income (expenses)
Interest expense (2,543 ) (2,308 ) (7,709 ) (7,493 )
Interest income 92 52 218 187
Non-operating loss (38 ) - (408 ) -
Income before income taxes 7,485 7,236 24,373 19,557
Income tax expense (benefit) 1,806 1,829 5,547 (4,899 )
Net income 5,679 5,407 18,826 24,456
Net income attributable to noncontrolling interests (41 ) (18 ) (109 ) (71 )
Net income attributable to RCIHH common stockholders $ 5,638 $ 5,389 $ 18,717 $ 24,385

Earnings per share
Basic and diluted $ 0.59 $ 0.55 $ 1.94 $ 2.51

Weighted average number of common shares outstanding
Basic and diluted 9,620 9,719 9,671 9,719

Dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~(in thousands)~~

~~(unaudited)~~

Accumulated
Common Stock Additional Other Treasury Stock Total
Number Paid-In Retained Comprehensive Number Noncontrolling Stockholders’
of Shares Amount Capital Earnings Income of Shares Amount Interests Equity
Balance at September 30, 2018 9,719 $ 97 $ 64,212 $ 88,906 $ 220 - $ - $ (103 ) $ 153,332
Reclassification upon adoption of ASU 2016-01 - - - 220 (220 ) - - - -
Purchase of treasury shares - - - - - (14 ) (355 ) - (355 )
Canceled treasury shares (14 ) - (355 ) - - 14 355 - -
Payment of dividends - - - (291 ) - - - - (291 )
Net income - - - 6,344 - - - 60 6,404
Balance at December 31, 2018 9,705 97 63,857 95,179 - - - (43 ) 159,090
Purchase of treasury shares - - - - - (71 ) (1,606 ) - (1,606 )
Canceled treasury shares (71 ) (1 ) (1,605 ) - - 71 1,606 - -
Payment of dividends - - - (291 ) - - - - (291 )
Net income - - - 6,735 - - - 8 6,743
Balance at March 31, 2019 9,634 96 62,252 101,623 - - - (35 ) 163,936
Purchase of treasury shares - - - - - (17 ) (403 ) - (403 )
Canceled treasury shares (17 ) - (403 ) - - 17 403 - -
Payment of dividends - - - (285 ) - - - - (285 )
Payments to noncontrolling interests - - - - - - - (21 ) (21 )
Net income - - - 5,638 - - - 41 5,679
Balance at June 30, 2019 9,617 $ 96 $ 61,849 $ 106,976 $ - - $ - $ (15 ) $ 168,906

Balance at September 30, 2017 9,719 $ 97 $ 63,453 $ 69,195 $ - - $ - $ 2,480 $ 135,225
Payment of dividends - - - (292 ) - - - - (292 )
Payments to noncontrolling interests - - - - - - - (54 ) (54 )
Net income - - - 14,311 - - - 44 14,355
Balance at December 31, 2017 9,719 97 63,453 83,214 - - - 2,470 149,234
Payments to noncontrolling interests - - - - - - - (54 ) (54 )
Payment of dividends - - - (291 ) - - - - (291 )
Net income - - - 4,685 - - - 9 4,694
Balance at March 31, 2018 9,719 97 63,453 87,608 - - - 2,425 153,583
Payments to noncontrolling interests - - - - - - - (54 ) (54 )
Payment of dividends - - - (293 ) - - - - (293 )
Net income - - - 5,389 - - - 18 5,407
Balance at June 30, 2018 9,719 $ 97 $ 63,453 $ 92,704 $ - - $ - $ 2,389 $ 158,643

	For the Three Months						For the Six Months
	EndedMarch 31,						EndedMarch 31,
	2020			2019			2020			2019
Revenues
Sales of alcoholic beverages	$	16,919		$	18,486		$	37,662		$	36,796
Sales of food and merchandise		6,479			6,439			13,926			12,129
Service revenues		14,348			16,979			31,541			34,310
Other		2,680			2,922			5,691			5,614
Total revenues		40,426			44,826			88,820			88,849
Operating expenses
Cost of goods sold
Alcoholic beverages sold		3,435			3,790			7,581			7,526
Food and merchandise sold		2,239			2,308			4,792			4,292
Service and other		108			94			185			186
Total cost of goods sold (exclusive of items shown separately below)		5,782			6,192			12,558			12,004
Salaries and wages		12,222			11,908			25,445			24,004
Selling, general and administrative		14,450			14,341			30,981			28,368
Depreciation and amortization		2,257			2,200			4,461			4,253
Other charges (gains), net		8,190			(981	)		8,164			(2,078	)
Total operating expenses		42,901			33,660			81,609			66,551
Income (loss) from operations		(2,475	)		11,166			7,211			22,298
Other income (expenses)
Interest expense		(2,459	)		(2,645	)		(4,944	)		(5,166	)
Interest income		85			75			183			126
Unrealized gain (loss) on equity securities		(62	)		77			(134	)		(370	)
Income (loss) before income taxes		(4,911	)		8,673			2,316			16,888
Income tax expense (benefit)		(1,418	)		1,930			175			3,741
Net income (loss)		(3,493	)		6,743			2,141			13,147
Net loss (income) attributable to noncontrolling interests		41			(8	)		41			(68	)
Net income (loss) attributable to RCIHH common stockholders	$	(3,452	)	$	6,735		$	2,182		$	13,079

Earnings (loss) per share
Basic and diluted	$	(0.37	)	$	0.70		$	0.24		$	1.35

Weighted average number of common shares outstanding
Basic and diluted		9,225			9,679			9,274			9,696

Dividends per share	$	0.04		$	0.03		$	0.07		$	0.06

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

													Accumulated
	Common Stock						Additional						Other			Treasury Stock
	Number						Paid-In			Retained			Comprehensive			Number						Noncontrolling			Total
	of Shares			Amount			Capital			Earnings			Income			of Shares			Amount			Interests			Equity
Balance at September 30, 2019		9,591		$	96		$	61,312		$	107,049		$	-			-		$	-		$	(156	)	$	168,301
Purchase of treasury shares		-			-			-			-			-			(333	)		(6,441	)		-			(6,441	)
Canceled treasury shares		(333	)		(3	)		(6,438	)		-			-			333			6,441			-			-
Payment of dividends		-			-			-			(279	)		-			-			-			-			(279	)
Payment to noncontrolling interest		-			-			-			-			-			-			-			(10	)		(10	)
Net income		-			-			-			5,634			-			-			-			-			5,634
Balance at December 31, 2019		9,258		$	93			54,874			112,404		$	-			-			-			(166	)		167,205
Purchase of treasury shares		-			-			-			-			-			(133	)		(2,047	)		-			(2,047	)
Canceled treasury shares		(133	)		(2	)		(2,045	)		-			-			133			2,047			-			-
Payment of dividends		-			-			-			(368	)		-			-			-			-			(368	)
Payment to noncontrolling interest		-			-			-			-			-			-			-			(21	)		(21	)
Net loss		-			-			-			(3,452	)		-			-			-			(41	)		(3,493	)
Balance at March 31, 2020		9,125		$	91		$	52,829		$	108,584		$	-			-		$	-		$	(228	)	$	161,276

Balance at September 30, 2018		9,719		$	97		$	64,212		$	88,906		$	220			-		$	-		$	(103	)	$	153,332
Reclassification upon adoption of ASU 2016-01		-			-			-			220			(220	)		-			-			-			-
Purchase of treasury shares		-			-			-			-			-			(14	)		(355	)		-			(355	)
Canceled treasury shares		(14	)		-			(355	)		-			-			14			355			-			-
Payment of dividends		-			-			-			(291	)		-			-			-			-			(291	)
Net income		-			-			-			6,344			-			-			-			60			6,404
Balance at December 31, 2018		9,705			97			63,857			95,179			-			-			-			(43	)		159,090
Purchase of treasury shares		-			-			-			-			-			(71	)		(1,606	)		-			(1,606	)
Canceled treasury shares		(71	)		(1	)		(1,605	)		-			-			71			1,606			-			-
Payment of dividends		-			-			-			(291	)		-			-			-			-			(291	)
Net income		-			-			-			6,735			-			-			-			8			6,743
Balance at March 31, 2019		9,634		$	96		$	62,252		$	101,623		$	-			-		$	-		$	(35	)	$	163,936

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

For the Nine Months
Ended June 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,826 $ 24,456
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,718 5,806
Deferred income tax expense (benefit) 1,237 (9,659 )
Loss (gain) on sale of businesses and assets (2,704 ) 70
Unrealized loss on equity securities 408 -
Amortization of debt discount and issuance costs 276 469
Deferred rent 236 224
Impairment of assets - 1,550
Loss (gain) on insurance settlements 93 (20 )
Debt prepayment penalty - 543
Changes in operating assets and liabilities:
Accounts receivable 2,305 (1,788 )
Inventories (87 ) (257 )
Prepaid insurance, other current assets and other assets 4,199 1,264
Accounts payable and accrued liabilities (3,093 ) (247 )
Net cash provided by operating activities 28,414 22,411
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets 5,106 629
Proceeds from insurance - 20
Proceeds from notes receivable 107 98
Issuance of note receivable (420 ) -
Additions to property and equipment (16,901 ) (18,827 )
Acquisition of businesses, net of cash acquired (13,500 ) (484 )
Net cash used in investing activities (25,608 ) (18,564 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 12,330 72,387
Payments on long-term debt (18,634 ) (70,444 )
Debt prepayment penalty - (543 )
Purchase of treasury stock (2,364 ) -
Payment of dividends (867 ) (876 )
Payment of loan origination costs (20 ) (960 )
Distribution to noncontrolling interests (21 ) (162 )
Net cash used in financing activities (9,576 ) (598 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,770 ) 3,249
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,726 9,922
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,956 $ 13,171

CASH PAID DURING PERIOD FOR:
Interest, net of amounts capitalized $ 7,769 $ 7,168
Income taxes $ 1,827 $ 3,263

	For the Six Months
	Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,141		$	13,147
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,461			4,253
Deferred income tax expense (benefit)		(1,155	)		1,131
Gain on sale of businesses and assets		(36	)		(2,197	)
Impairment of assets		8,210			-
Unrealized loss on equity securities		134			370
Amortization of debt discount and issuance costs		129			202
Deferred rent		-			189
Noncash lease expense		825			-
Gain on insurance		(33	)		-
Changes in operating assets and liabilities:
Accounts receivable		1,917			1,727
Inventories		(137	)		(182	)
Prepaid insurance, other current and other assets		2,840			3,550
Accounts payable, accrued and other liabilities		(7,315	)		(1,219	)
Net cash provided by operating activities		11,981			20,971
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets		105			2,866
Proceeds from insurance		945			-
Proceeds from notes receivable		403			68
Issuance of note receivable		-			(420	)
Payments for property and equipment and intangible assets		(5,323	)		(13,902	)
Acquisition of businesses, net of cash acquired		-			(13,500	)
Net cash used in investing activities		(3,870	)		(24,888	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		880			10,296
Payments on long-term debt		(4,097	)		(13,287	)
Purchase of treasury stock		(8,488	)		(1,961	)
Payment of dividends		(647	)		(582	)
Payment of loan origination costs		-			(20	)
Distribution to noncontrolling interests		(31	)		-
Net cash used in financing activities		(12,383	)		(5,554	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(4,272	)		(9,471	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		14,097			17,726
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,825		$	8,255

CASH PAID DURING PERIOD FOR:
Interest (net of amounts capitalized of $155 and $324, respectively)	$	4,891		$	5,173
Income taxes	$	2,105		$	319

Noncash investing and financing transactions:
Notes receivable received as proceeds from sale of assets	$	-		$	625
Operating lease right-of-use assets established upon adoption of ASC 842	$	27,310		$	-
Deferred rent liabilities reclassified upon adoption of ASC 842	$	1,241		$	-
Operating lease liabilities established upon adoption of ASC 842	$	28,551		$	-
Unpaid liabilities on capital expenditures	$	21		$	-

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

Non-cash and other transactions:

During the ~~nine~~six months ended ~~June 30,~~March 31, 2019, in conjunction with the borrowings of $2.35 million from certain investors, the Company exchanged two notes payable with principal balances of $300,000 and $100,000 for two new notes amounting to $450,000 and $200,000, respectively. The Company received cash amounting to $1.95 million on the entire transaction. ~~See Note 6.~~

During the ~~nine~~six months ended ~~June 30,~~March 31, 2019, the Company acquired two clubs for a total acquisition price of $25.5 million by paying a total of $13.5 million at closing and executing three seller-financed notes for a total of $12.0 million. ~~See Note 14.~~

During the ~~nine~~six months ended ~~June 30,~~March 31, 2019, the Company sold a nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash at closing and a $625,000 note receivable. ~~See Note 14.~~

During the ~~nine~~six months ended ~~June 30,~~March 31, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4 million, payable $163,000 in cash at closing, net of closing costs and property taxes of $87,000, and a $1.15 million note receivable. ~~See Note 14.~~

~~During the nine months ended June 30, 2018, the Company refinanced $81.2 million of long-term debt comprised of 21~~See accompanying notes ~~payable with the execution of three notes payable with a lender bank. The new notes and the repaid balance included $18.7 million worth of debt with the same lender bank.~~to unaudited condensed consolidated financial statements.

During the nine months ended June 30, 2018, the Company borrowed $7.1 million from a lender to purchase an aircraft by trading in an aircraft that the Company owned and the assumption of the old aircraft’s note payable liability.

During the nine months ended June 30, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over prime with a 5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company or “RCIHH”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, ~~2018~~2019 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, ~~2018~~2019 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on ~~December 31, 2018.~~February 13, 2020. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and ~~nine~~six months ended ~~June 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2019.~~2020.

2. Recent Accounting Standards and Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2014-09,~~~~Revenue from Contracts with Customers~~(“ASU 2014-09” and codified as Accounting Standards Codification No. 606, “ASC 606”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard’s effective date has been deferred by the issuance of ASU No. 2015-14, and is effective for annual periods beginning after December 15, 2017, and interim periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early application is permitted but not before December 15, 2016, the ASU’s original effective date. The Company adopted the new revenue recognition standard as of October 1, 2018 using the cumulative effect method, which did not have a material impact on its consolidated financial statements. See Note 4 for new disclosures as required by ASC 606.

~~In January 2016, the FASB issued ASU No. 2016-01,~~~~Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The amendments of the ASU are effective for us for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 as of October 1, 2018. Our adoption required the Company to reclassify $220,000 from accumulated other comprehensive income to retained earnings as of the beginning of the quarter ended December 31, 2018. All succeeding unrealized gains or losses related the changes in the market value of our equity securities are included in non-operating gains/losses in our consolidated statement of income.

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~In February 2016, the FASB issued ASU~~ No. 2016-02,Leases (Topic 842), on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases, and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11 providing for certain practical expedients in the implementation of ASU 2016-02. The guidance requires the use of a modified retrospective approach. We adopted ASU 2016-02 and related amendments as of October 1, 2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to retain historical lease classification, as well as relief from reviewing expired and existing contracts to determine if they contain leases. Our adoption of the new leasing standard resulted in an increase of $27.3 million in our total assets as of October 1, 2019 due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities. Our adoption of ASC 842 did not have an impact on our consolidated statements of operations and cash flows, except for additional required disclosures. See additional disclosures in Note 14.

In June 2016, the FASB issued ASU 2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. ~~Early adoption is permitted. The guidance requires the use of a modified retrospective approach.~~ We expect our consolidated balance sheets to be materially impacted upon adoption due to the recognition of right-of-use assets and lease liabilities related to currently classified operating leases. We are in the process of compiling an inventory of all lease documents and comparing them to recorded expenses to determine completeness. We have also evaluated several real estate leases according to the classification criteria of ASC 842. While we anticipate changes in the classification of expenses in our income statement and the timing of recognition of these expenses, we are still evaluating the ~~materiality of the implementation~~impact of this ~~standard.~~ASU, including all related updates, on the Company’s consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In February 2018, the FASB issued ASU 2018-02,Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial statement preparers with an option to reclassify stranded tax effects within ~~AOCI~~accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) is recorded. The ASU requires financial statement preparers to disclose (1) a description of the accounting policy for releasing income tax effects from AOCI; (2) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (3) information about the other income tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Topic 220,Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The ASU is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We ~~believe that the~~adopted ASU 2018-02 as of October 1, 2019. Our adoption of this ~~ASU will~~guidance did not have ~~a material~~an impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. We are still evaluating the impact of this ASU on the Company’s consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2019, the FASB issued ASU No. 2019-01,Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply. However, if there has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are still evaluating the impact of this ASU on the Company’s consolidated financial statements.

~~3. Revision~~In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of ~~Prior Year Immaterial Misstatement~~

~~During~~income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the ~~quarter ended December 31, 2018, the Company identified certain mechanical errors~~tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in ~~our goodwill impairment analysis that was performed~~tax laws in interim periods. The ASU is effective for ~~our annual impairment testing~~public business entities for fiscal ~~year ended September 30, 2018. These errors related to the use of an incorrect income tax rate assumption~~years beginning after December 15, 2020, and ~~the exclusion of certain debt service payments as part of our goodwill impairment testing~~interim periods within those fiscal years. Early adoption is permitted for ~~two of our reporting units,~~public business entities for periods for which ~~resulted in a goodwill impairment charge of $834,000.~~

The Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined that for both the quarter and fiscal year ended September 30, 2018, the errors were immaterial. The Company has decided to correct these immaterial errors as revisions to our previously issued financial statements ~~and will adjust~~have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the ~~Form 10-K when filed~~beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in ~~succeeding periods of this fiscal year.~~

~~The tables below present~~the same period. We are still evaluating the impact of ~~the revision in~~this ASU on the Company’s consolidated financial ~~statements (in thousands):~~statements.

Fiscal Year Ended September 30, 2018
As Previously Reported Adjustments As Revised
Statement of Income/Comprehensive Income:
Other charges, net $ 8,350 $ 834 $ 9,184
Total operating expenses 137,352 834 138,186
Income from operations 28,396 (834 ) 27,562
Income before income taxes 18,676 (834 ) 17,842
Net income 21,794 (834 ) 20,960
Net income attributable to RCIHH common stockholders 21,713 (834 ) 20,879
Earnings per share - basic $ 2.23 $ (0.08 ) $ 2.15
Earnings per share - diluted $ 2.23 $ (0.08 ) $ 2.15
Comprehensive income $ 22,014 $ (834 ) $ 21,180
Comprehensive income attributable to RCI Hospitality Holdings, Inc. 21,933 (834 ) 21,099

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2018
As Previously Reported Adjustment As Revised
Balance Sheet/Statement of Changes in Stockholders’ Equity
Goodwill $ 44,425 $ (834 ) $ 43,591
Total assets 330,566 (834 ) 329,732
Retained earnings 89,740 (834 ) 88,906
Total RCIHH stockholders’ equity 154,269 (834 ) 153,435
Total stockholders’ equity 154,166 (834 ) 153,332
Total liabilities and stockholders’ equity 330,566 (834 ) 329,732

3. Liquidity and Impact of COVID-19 Pandemic

In March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency. COVID-19 is the disease caused by a novel strain of a coronavirus that originated from Wuhan, China in November 2019. The ~~table below presents~~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, and as of March 18, 2020, we temporarily closed all of our clubs and restaurants.

The closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate positive cash flows for us. Depending on the timing and number of locations we get open, and their ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

To augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:

	●	Arranged for deferment of principal and interest payment on certain of our debts;
	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
	●	Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
	●	Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the CARES Act for its restaurants, shared service entity and lounge. See Note 9. 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.

As of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the ~~revision in~~uncertainty about the ~~Company’s notes to its consolidated financial statements related to unaudited quarterly results~~spread of ~~operations (in thousands):~~

Quarter Ended September 30, 2018
As Previously Reported Adjustment As Revised
Income from operations $ 1,533 $ (834 ) $ 699
Net loss attributable to RCIHH common stockholders (2,672 ) (834 ) (3,506 )
Loss per share - basic $ (0.27 ) $ (0.09 ) $ (0.36 )
Loss per share - diluted $ (0.27 ) $ (0.09 ) $ (0.36 )

The consolidated statements of cash flows are not presented because there is no impact on total cash flows from operating activities, investing activities and financing activities. Certain components of net cash provided by operating activities changed,the virus. Lower sales, as caused by social distancing guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the ~~revision, but~~situation and will determine any further measures to be instituted.

Also as of the ~~net change amounted to zero for both quarter~~release of this report, we have ten locations in Texas that have partially reopened with 25% occupancy requirement.

Valuation of Goodwill, Indefinite-Lived Intangibles and ~~fiscal year ended September 30, 2018.~~Long-Lived tangible Assets

We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles and long-lived tangible assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering future assumed impact of COVID-19 pandemic on sales. Based on our evaluation, we determined our assets are impaired in a total amount of approximately $8.2 million comprised of $6.5 million in goodwill, $1.4 million in SOB licenses, and $302,000 in property and equipment.

4. Revenues

~~On October 1, 2018, the Company adopted ASC Topic 606,~~~~Revenue from Contracts with Customers~~ ~~(formerly ASU 2014-09).~~ The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of ~~income.~~operations. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Other ~~rental~~lease revenues are recognized when earned (recognized over time) and are more appropriately covered by guidance under ASC Topic ~~840,~~842,Leases (ASC 840 in prior year). See Note 14.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note ~~11)~~12), are shown ~~below.~~below (in thousands):

	Three Months Ended June 30, 2019									Three Months Ended June 30, 2018									Three Months Ended March 31, 2020									Three Months Ended March 31, 2019
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	14,597		$	4,973	$	-	$	19,570	$	13,510		$	4,148	$	-	$	17,658	$	11,860		$	5,059	$	-	$	16,919	$	14,148		$	4,338	$	-	$	18,486
Sales of food and merchandise		3,313			3,733		-		7,046		3,224			2,951		-		6,175		2,799			3,680		-		6,479		3,293			3,146		-		6,439
Service revenues		17,257			42		-		17,299		16,301			15		-		16,316		14,290			58		-		14,348		16,943			36		-		16,979
Other revenues		2,722			7		383		3,112		2,218			6		261		2,485		2,418			6		256		2,680		2,663			7		252		2,922
	$	37,889		$	8,755	$	383	$	47,027	$	35,253		$	7,120	$	261	$	42,634	$	31,367		$	8,803	$	256	$	40,426	$	37,047		$	7,527	$	252	$	44,826

Recognized at a point in time	$	37,457		$	8,755	$	369	$	46,581	$	34,932		$	7,120	$	237	$	42,289	$	30,977		$	8,803	$	252	$	40,032	$	36,582		$	7,527	$	238	$	44,347
Recognized over time		432	*		-		14		446		321	*		-		24		345		390	*		-		4		394		465	*		-		14		479
	$	37,889		$	8,755	$	383	$	47,027	$	35,253		$	7,120	$	261	$	42,634	$	31,367		$	8,803	$	256	$	40,426	$	37,047		$	7,527	$	252	$	44,826

	Nine Months Ended June 30, 2019									Nine Months Ended June 30, 2018									Six Months Ended March 31, 2020									Six Months Ended March 31, 2019
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	43,547		$	12,819	$	-	$	56,366	$	41,627		$	11,208	$	-	$	52,835	$	26,544		$	11,118	$	-	$	37,662	$	28,950		$	7,846	$	-	$	36,796
Sales of food and merchandise		9,813			9,362		-		19,175		9,594			7,312		-		16,906		6,063			7,863		-		13,926		6,500			5,629		-		12,129
Service revenues		51,513			96		-		51,609		48,323			15		-		48,338		31,384			157		-		31,541		34,256			54		-		34,310
Other revenues		7,791			18		917		8,726		6,370			15		608		6,993		5,235			15		441		5,691		5,069			11		534		5,614
	$	112,664		$	22,295	$	917	$	135,876	$	105,914		$	18,550	$	608	$	125,072	$	69,226		$	19,153	$	441	$	88,820	$	74,775		$	13,540	$	534	$	88,849

Recognized at a point in time	$	111,431		$	22,295	$	874	$	134,600	$	105,011		$	18,550	$	545	$	124,106	$	68,411		$	19,153	$	430	$	87,994	$	73,974		$	13,540	$	505	$	88,019
Recognized over time		1,233	*		-		43		1,276		903	*		-		63		966		815	*		-		11		826		801	*		-		29		830
	$	112,664		$	22,295	$	917	$	135,876	$	105,914		$	18,550	$	608	$	125,072	$	69,226		$	19,153	$	441	$	88,820	$	74,775		$	13,540	$	534	$	88,849

* ~~Rental~~Lease revenue (included in Other Revenues) as covered by ASC Topic ~~840.~~842 in the current year (and ASC Topic 840 in the prior year). All other revenues are covered by ASC Topic 606.

The Company does not have contract assets with customers. The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet. A reconciliation of contract liabilities with customers is presented ~~below:~~below (in thousands):

	Balance at September 30, 2018		Consideration Received		Recognized in Revenue			Balance at June 30, 2019		Balance at September 30, 2019		Consideration Received		Recognized in Revenue			Balance at March 31, 2020
Ad revenue	$	126	$	492	$	(475	)	$	143	$	76	$	355	$	(303	)	$	128
Expo revenue		-		444		(2	)		442		-		351		-			351
Other		8		44		(43	)		9		7		12		(17	)		2
	$	134	$	980	$	(520	)	$	594	$	83	$	718	$	(320	)	$	481

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of ~~income.~~operations.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Selected Account Information

The components of accrued liabilities are as follows (in thousands):

	June 30, 2019		September 30, 2018		March 31, 2020		September 30, 2019
Insurance					$	1,700	$	4,937
Sales and liquor taxes						2,460		3,086
Payroll and related costs	$	2,475	$	2,293		1,372		2,892
Sales and liquor taxes		1,671		1,883
Property taxes		1,330		1,796		829		1,675
Patron tax		595		532		480		595
Unearned revenues		594		134		481		83
Income taxes		555		-
Insurance		339		3,807
Lawsuit settlement		75		230		75		115
Other		1,483		1,298		1,274		1,261
	$	9,117	$	11,973	$	8,671	$	14,644

The components of selling, general and administrative expenses are as follows (in thousands):

For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2019 2018 2019 2018
Taxes and permits $ 2,258 $ 2,372 $ 6,809 $ 6,543
Advertising and marketing 2,083 1,861 6,301 5,663
Supplies and services 1,493 1,352 4,414 4,035
Legal 1,479 858 3,310 2,244
Insurance 1,367 1,409 4,122 4,036
Charge card fees 1,011 813 2,830 2,484
Rent 965 944 2,941 2,841
Repairs and maintenance 787 574 2,095 1,665
Security 757 652 2,222 1,922
Utilities 756 731 2,262 2,164
Accounting and professional fees 631 718 2,559 2,274
Other 1,308 1,192 3,398 3,265
$ 14,895 $ 13,476 $ 43,263 $ 39,136

	For the Three Months				For the Six Months
	Ended March 31,				Ended March 31,
	2020		2019		2020		2019
Taxes and permits	$	2,240	$	2,370	$	4,914	$	4,551
Advertising and marketing		1,907		2,070		4,317		4,218
Supplies and services		1,390		1,465		2,924		2,921
Insurance		1,473		1,402		2,956		2,755
Accounting and professional fees		1,311		1,278		2,509		1,928
Lease		1,023		957		2,053		1,976
Charge card fees		845		886		1,891		1,819
Legal		1,072		773		2,268		1,831
Utilities		798		762		1,693		1,506
Security		749		756		1,597		1,465
Repairs and maintenance		652		721		1,449		1,308
Other		990		901		2,410		2,090
	$	14,450	$	14,341	$	30,981	$	28,368

6. ~~Long-Term~~Assets Held for Sale

As of September 30, 2019, the Company had two real estate properties for sale. The aggregate estimated fair value of the properties less cost to sell as of September 30, 2019 was approximately $2.9 million and was reclassified to assets held for sale in the Company’s consolidated balance sheet. The assets were measured at the carrying value as adjusted for depreciation, which was lower than the fair value at the date reclassified.

During the six months ended March 31, 2020, the Company classified as held-for-sale another real estate property. The aggregate estimated fair value of the property less cost to sell was $1.9 million. As of March 31, 2020, the Company has a total of three real estate properties held for sale with a total value of $4.8 million.

The Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers.

Liabilities associated with held-for-sale assets amounting to $1.2 million and $0 as of March 31, 2020 and September 30, 2019, respectively, are included in current portion of long-term debt in our unaudited consolidated balance sheets. The gain or loss on the sale of properties held for sale is included in other charges/gains, net in the unaudited condensed consolidated statements of operations.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Long-term Debt

~~On November~~In December 2019, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $3.0 million as of the amendment date, extending the maturity date to October 1, 2022. The amendment did not have an impact in the Company’s results of operations and cash flows.

In February 2020, in relation to a $4.0 million 12% note payable earlier refinanced on August 15, 2018, the Company ~~raised $2.35~~restructured the note with a private lender by executing a 12% 10-year note payable $57,388 monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal payment of $4.0 million ~~through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on November 1,~~in August 2021. The ~~notes pay interest-only~~refinancing did not have an impact in ~~equal~~the Company’s results of operations and cash flows.

In February 2020, in relation to a $9.9 million 12% note payable that was partially paid during the December 2017 Refinancing Loan, the Company restructured the note, which had a balance of $5.2 million as of the amendment date, by executing a 12% 10-year note payable $74,515 monthly, ~~installments, with~~including interest, starting March 2020. The restructured note eliminates a ~~lump sum~~scheduled balloon principal payment ~~at maturity. Among~~of $3.8 million in October 2021. As a result of the ~~promissory notes are two notes with a principal of $450,000 and $200,000. The $450,000 note was~~refinancing, the Company wrote off approximately $25,400 in ~~exchange for a $300,000 12% note and the $200,000 note was in exchange for a $100,000 note, both of which were included~~unamortized debt issuance cost as interest expense in the ~~May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami. Also included~~unaudited condensed consolidated statement of operations for the quarter ended March 31, 2020.

Included in the ~~$2.35 million borrowing~~balance of long-term debt as of March 31, 2020 and September 30, 2019 is a $500,000 note borrowed from a related party (see Note 13) and ~~two~~three notes totaling ~~$400,000~~$600,000 borrowed from atwo non-officer ~~employee~~employees and a family member of a non-officer employee in which the terms of the notes are the same as the rest of the lender ~~group.~~groups.

Future maturities of long-term debt as of March 31, 2020 are as follows: $14.8 million, $11.7 million, $11.6 million, $8.1 million, $8.4 million and $87.2 million for the twelve months ending March 31, 2021, 2022, 2023, 2024, 2025, and thereafter, respectively. Of the maturity schedule mentioned above, $6.1 million, $2.8 million, $3.8 million, $0, $0 and $56.0 million, respectively, relate to scheduled balloon payments.

On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000 of $2,040,000 of notes to individuals that were due on May 1, 2020. The Company paid $300,000 to certain lenders and received $200,000 in new debt from existing lenders and their affiliates. The aggregate amount of debt due on these notes on November 1, 2020 is now $1,940,000.

8. Equity

During the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares, respectively, at a cost of approximately $2.0 and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividends during the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.

During the three and six months ended March 31, 2019, the Company purchased and retired 70,700 and 84,811 common shares, respectively, at a cost of approximately $1.6 million and $2.0 million, respectively. The Company paid a $0.03 per share cash dividend per quarter totaling approximately $291,000 and $582,000 for the three and six months ended March 31, 2019, respectively.

On February 6, 2020, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock. As of May 8, 2020, the Company has $11.8 million remaining to purchase additional shares under its share repurchase program.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On December 6, 2018, the Company amended the $5.0 million short-term note payable related to the Scarlett’s acquisition, which had a remaining balance of $3.0 million as of December 6, 2018, extending the maturity date from May 8, 2019, as previously amended, to May 8, 2020.

On December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed the remaining $2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest.

On February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%, with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime plus 0.5% with a 6.0% floor per annum. The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized debt issuance costs of the old bank note to interest expense.

Included in the balance of long-term debt as of June 30, 2019 and September 30, 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer employee in which the terms of the note are the same as the rest of the lender group.

Future maturities of long-term debt are as follows: $16.4 million, $11.3 million, $18.7 million, $8.0 million, $9.0 million and $84.8 million for the twelve months ending June 30, 2020, 2021, 2022, 2023, 2024, and thereafter, respectively. Of the maturity schedule mentioned above, $7.2 million, $2.5 million, $10.2 million, $651,000, $1.3 million and $39.7 million, respectively, relate to scheduled balloon payments.

~~7. Stockholders’ Equity~~

During the three and nine months ended June 30, 2019, the Company purchased and retired 17,302 and 102,113 common shares, respectively, at a cost of approximately $403,000 and $2.4 million, respectively. The Company paid a $0.03 per share cash dividend per quarter totaling approximately $285,000 and $867,000 for the three and nine months ended June 30, 2019, respectively.

During the three and nine months ended June 30, 2018, the Company did not purchase shares of its common stock. The Company also paid a $0.03 per share cash dividend per quarter totaling approximately $293,000 and $876,000 for the three and nine months ended June 30, 2018, respectively.

On January 2, 2019, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock. As of June 30, 2019, we have $10.8 million remaining to purchase additional shares under our share repurchase program.

~~8. Earnings Per Share~~

Basic earnings per share (“EPS”) includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the “treasury stock method”) and from outstanding convertible debentures (the number of which is computed using the “if converted method”). Diluted EPS considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings (as adjusted for interest expense that would no longer occur if the debentures were converted).

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

During the three and nine months ended June 30, 2019 and 2018, the Company did not have any outstanding dilutive securities that are considered adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted EPS.

9. Income Taxes

Income taxes were an$1.4 million benefit and $175,000 expense during the three and six months ended March 31, 2020, respectively, compared to income tax expense of ~~$1.8~~$1.9 million and ~~$5.5~~$3.7 million during the three and ~~nine~~six months ended ~~June 30,~~March 31, 2019, ~~respectively, compared to an expense of $1.8 million and a benefit of $4.9 million during the three and nine months ended June 30, 2018,~~ respectively. The effective income tax rate ~~for~~was a 28.9% benefit and a 7.6% expense during the three and ~~nine~~six months ended ~~June 30, 2019 was an expense of 24.1% and 22.8%,~~March 31, 2020, respectively, compared to an expense rates of ~~25.3%~~22.3% and ~~a benefit of 25.0% for~~22.2% during the three and ~~nine~~six months ended ~~June 30, 2018,~~March 31, 2019, respectively. Our effective tax rate for both years is affected by state taxes, permanent differences, and tax credits, including the FICA tip ~~credit, for both years while the first quarter of 2018 was significantly impacted by a $9.7 million reduction of our deferred tax liability caused by then-enacted tax laws (see below).~~

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate for fiscal 2018 was 24.5% percent and represents a blended income tax rate for our fiscal year ended September 30, 2018. For fiscal 2019, our federal corporate income tax rate is 21%.

Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $8.7 million full year adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statement of income for the fiscal year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118, which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. There were no additional measurement adjustments since September 30, 2018 until the end of the measurement period on December 22, 2018.

Under generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At September 30, 2017, the Company’s deferred tax assets and liabilities were determined based on the then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate under the Tax Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities expected to be realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21%.credit.

The Company or one of its subsidiaries ~~files~~file income tax returns for U.S. federal jurisdiction and various states. Fiscal years ended September 30, 2016 and thereafter remain open to tax examination. The Company’s federal income tax returns for the years ended September 30, 2015, 2014 and 2013 have been examined by the Internal Revenue Service with no changes. ~~These~~Tax years 2014 through 2017 are now under examination for payroll taxes. The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The Company accounts for uncertain tax positions pursuant to ASC Topic 740,Income Taxes. As of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, the liability for uncertain tax positions ~~totaled approximately $165,000 as of each date, which is included in current liabilities on our condensed consolidated balance sheets.~~was $0 and $0, respectively. The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of ~~income.~~operations.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") into law. As a result of this, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act includes, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company has submitted its application for a PPP loan and on May 8, 2020 has received approval and funding 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. There is no certainty that the loan will qualify for forgiveness.

10. Commitments and Contingencies

Legal Matters

Texas Patron Tax

In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company ~~has~~ recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.

In March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest. ~~The Company believes that it does not have any further liability related to the other location.~~

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets, amounted to ~~$3.7~~$2.8 million and ~~$4.5~~$3.4 million as of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, respectively.

A ~~Declaratory~~declaratory judgment action was brought by five operating subsidiaries of the Company ~~in state court,~~ to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. ~~Other challenges remain and will be resolved at trial. In addition to~~On March 6, 2020, the ~~foregoing state court lawsuit,~~U.S. District Court for the Western District of Texas, Entertainment Association filed a federal lawsuit against the Comptroller challenging the constitutionality of the administrative rule. On February 27, 2019, the Court ruled on summary judgment motions filed by the parties. The CourtAustin Division, ruled that the ~~amended rule was an~~Texas Patron Tax is unconstitutional ~~restriction on expressive conduct under~~as it has been applied and enforced by the ~~First Amendment~~Comptroller. The State of Texas has filed a Notice of Appeal. We will continue to vigorously defend the ~~U.S. Constitution, unconstitutionally retroactive under~~matter through the ~~Due Process Clause and violated the provisions of 42 U.S.C. §1983. There are remaining claims and defenses pending with the Court.~~appeals process.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Indemnity Insurance Corporation

As previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation, RRG (“IIC”) through October 25, 2013. The Company and its subsidiaries changed insurance companies on that date.

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”). The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary. Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must behave been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer ~~are~~were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of ~~June 30, 2019,~~March 31, 2020, we have 2 unresolved claims out of the original 71 claims.

Shareholder Class and Derivative Actions

In May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District of Texas, Houston Division. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management. The complaints seek unspecified damages, costs, and attorneys’ fees. These lawsuits areHoffman v. RCI Hospitality Holdings, Inc., et al. (filed May 21, 2019, naming the Company and Eric Langan);Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall); andGrossman v. RCI Hospitality Holdings, Inc., et al. (filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases ~~have~~ moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director Nour-Dean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. The plaintiff’s response to the motion is currently due June 23, 2020. The Company ~~anticipates~~and the individual defendants will have the opportunity to file a ~~consolidated class action complaint will be filed~~reply in ~~the next few months.~~support of their motion by July 23, 2020. The Company intends to continue to vigorously defend against ~~these actions. These actions are~~this action. This action is in ~~their~~its preliminary ~~phases,~~phase, and a potential loss cannot yet be estimated.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against officers and directors, Eric S. Langan, Phillip Marshall, Nour-Dean Anakar, Yura Barabash, ~~Steven Jenkins,~~ Luke Lirot, Travis Reese, former director Steven Jenkins, and RCI Hospitality Holdings, Inc., as nominal defendant. The action alleges that the individual officers and directors made or caused the Company to make a series of materially false and/or misleading statements and omissions regarding the Company’s business, operations, prospects, and legal compliance and engaged in or caused the Company to engage in, inter alia, related party transactions, questionable uses of corporate assets, and failure to maintain internal controls. The action asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks injunctive relief, damages, restitution, costs, and attorneys’ fees. The case,Cecere v. Langan, et al., is in its early stage, and a potential loss cannot yet be estimated.

SEC Matter and Internal Review

In mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of the Company’s audit committee engaged independent outside counsel to conduct an internal review. Management of the Company fully cooperated with the internal review conducted by the special committee and its outside counsel. The board of directors ~~is implementing~~has implemented the recommendations resulting from the internal review. As of the date hereof, the internal review has been completed subject to any ongoing cooperation with regulatory authorities.

Since the initiation of the informal inquiry by the SEC in early 2019, the Company and its management have fully cooperated and continue to fully cooperate with the SEC matter, which has now converted to a formal investigation and is ongoing. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the investigation. The Company is also unable to predict what, if any, action may be taken as a result of the investigation. Any determination by the SEC that the Company’s activities were not in compliance with federal securities laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, or equitable relief, which could have a material adverse effect on the Company.

Other

On March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against the Company and several of its subsidiaries. Plaintiffs allege that their images were misappropriated, intentionally altered and published without their consent by clubs affiliated with the Company. The causes of action asserted in Plaintiffs’ Complaint include alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories. The Company contends that there is insurance coverage under an applicable insurance policy. The insurer has raised several issues regarding coverage under the policy. At this time, this disagreement remains unresolved. The Company has denied all allegations, continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.

The Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook), Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc. asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims and third-party claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord breached the applicable agreements. The case was tried to a jury in late September 2018 and an adverse judgment was entered in January 2019 in the amount totaling $1.0 million, which includes damages, attorney fees and interest. The matter is being appealed. The appeal process required that a check be deposited in the registry of the court in the amount of $690,000, which was deposited in April 2019 and included in other current assets in ~~our unaudited condensed~~both consolidated balance ~~sheet~~sheets as of ~~June~~March 31, 2020 and September 30, 2019. Management believes that the case has no merit and is vigorously defending itself in the appeal.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. ~~The Plaintiffs have filed~~It is anticipated that a ~~petition for review with~~new trial will occur at some point in the ~~Arizona Supreme Court.~~future. JAI Phoenix ~~has filed a response and~~ will continue to vigorously defend itself.

As set forth in the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018,~~2019, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the ~~entertainer's~~entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

General

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. 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.

Settlements of lawsuits for the three and ~~nine~~six months ended ~~June 30, 2019~~March 31, 2020 total approximately $0 and ~~$144,000,~~$24,000, respectively, while for the three and ~~nine~~six months ended ~~June 30, 2018~~March 31, 2019 total ~~$474,000~~$84,000 and ~~$1.3 million,~~$144,000, respectively. As of ~~June~~March 31, 2020 and September 30, 2019, ~~or September 30, 2018,~~ the Company has accrued $75,000 and ~~$230,000~~$115,000 in accrued liabilities, respectively, related to settlement of lawsuits.

11. Acquisition

On November 5, 2019, we announced that our subsidiaries had signed definitive agreements to acquire the assets and related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0 million. The agreements terminated prior to closing. We provided the sellers notice of the termination in April 2020.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~11.~~12. Segment Information

The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such reportable segments based on management responsibility and the nature of the Company’s products, services, and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment. The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements.

Below is the financial information related to the Company’s segments (in thousands):

	For the Three Months						For the Nine Months						For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,						Ended March 31,						Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenues
Nightclubs	$	37,889		$	35,253		$	112,664		$	105,914		$	31,367		$	37,047		$	69,226		$	74,775
Bombshells		8,755			7,120			22,295			18,550			8,803			7,527			19,153			13,540
Other		383			261			917			608			256			252			441			534
	$	47,027		$	42,634		$	135,876		$	125,072		$	40,426		$	44,826		$	88,820		$	88,849	��

Income (loss) from operations
Nightclubs	$	14,034		$	12,584		$	44,499		$	37,835		$	2,314		$	15,078		$	16,090		$	30,465
Bombshells		686			1,391			1,543			3,247			690			738			2,263			857
Other		(111	)		(328	)		(406	)		(547	)		(178	)		(176	)		(385	)		(295	)
General corporate		(4,635	)		(4,155	)		(13,364	)		(13,672	)		(5,301	)		(4,474	)		(10,757	)		(8,729	)
	$	9,974		$	9,492		$	32,272		$	26,863		$	(2,475	)	$	11,166		$	7,211		$	22,298

Depreciation and amortization
Nightclubs	$	1,737		$	1,381		$	4,711		$	4,050		$	1,486		$	1,467		$	2,956		$	2,974
Bombshells		370			322			1,001			999			456			339			873			631
Other		102			103			312			76			104			106			208			210
General corporate		256			192			694			681			211			288			424			438
	$	2,465		$	1,998		$	6,718		$	5,806		$	2,257		$	2,200		$	4,461		$	4,253

Capital expenditures
Nightclubs	$	1,935		$	253		$	3,029		$	1,550		$	526		$	647		$	2,858		$	1,094
Bombshells		900			9,125			10,697			16,625			612			5,788			2,337			9,797
Other		2			29			20			33			-			9			-			18
General corporate		162			409			3,155			619			127			163			128			2,993
	$	2,999		$	9,816		$	16,901		$	18,827		$	1,265		$	6,607		$	5,323		$	13,902

	June 30, 2019		September 30, 2018
			(As Revised)		March 31, 2020		September 30, 2019
Total assets
Nightclubs	$	276,002	$	252,335	$	281,080	$	274,071
Bombshells		42,006		39,560		48,271		44,144
Other		1,975		1,978		1,723		1,773
General corporate		30,895		35,859		30,822		33,649
	$	350,878	$	329,732	$	361,896	$	353,637

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.

Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.

~~12. Noncontrolling Interests~~

Noncontrolling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Noncontrolling interests are reported in the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income attributable to both the Company and the noncontrolling interests are reported in the consolidated statements of income.

Our consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51% of an entity which owns one of the Company’s nightclubs in New York City.

13. Related Party Transactions

Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018~~2019 is ~~$89.4~~$86.0 million and ~~$88.9~~$86.8 million, respectively.

Included in the $2.35 million borrowing on November 1, 2018 ~~(see Note 6)~~ was a $500,000 note borrowed from a related party (Ed Anakar, an employee of the Company and brother of our director Nourdean Anakar). The terms of this related party note are the same as the rest of the lender group in the November 1, 2018 transaction.

We used the services of Nottingham Creations (formerly Sherwood Forest Creations, ~~LLC,~~LLC), a furniture fabrication company that manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations (as was Sherwood ~~Forest~~Forest) is owned by a brother of Eric Langan. Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were ~~$12,990~~$53,556 and ~~$120,805~~$72,809 during the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, respectively, and ~~$107,044~~$98,072 and ~~$221,605~~$107,815 during the three and ~~nine~~six months ended ~~June 30, 2018,~~March 31, 2019, respectively. As of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, we owed Nottingham Creations and Sherwood Forest ~~$7,903~~$13,705 and ~~$73,377,~~$6,588, respectively, in unpaid billings.

TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal ~~2018~~2020 and 2019. ~~TW Mechanical is 20% owned by the~~A son-in-law of Eric ~~Langan.~~Langan owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0$18,758 and $30,585 for the three and six months ended March 31, 2020, respectively, and $359,500 and $435,800 for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2019, ~~respectively, and $120,000 and $120,000 for the three and nine months ended June 30, 2018,~~ respectively. Amounts billed directly to the Company were $0$24,416 and $26,241 for the three and six months ended March 31, 2020, respectively, and $206 and $206 for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2019, ~~respectively, and $2,965 and $2,965 for the three and nine months ended June 30, 2018,~~ respectively. As of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018, we~~2019, the Company owed TW Mechanical $0$20,401 and $0, respectively, in unpaid direct billings.

~~14. Acquisitions and Disposition~~

In 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 $625,000 9% note payable over a 10-year period. The note is payable interest-only for twelve months at the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is payable in 108 equal installments of $5,078 per month until October 2028. The buyer will lease the property from the Company’s real estate subsidiary under the following terms: $36,000 per month lease payments for ten years; renewal option for a succeeding ten years at a minimum of $48,000 per month; lessee has option to purchase the property for $6.0 million during a term beginning November 2023 and expiring in October 2028. The Company recorded a gain on the sale transaction of approximately $879,000, which is included in other charges (gains), net in our consolidated statement of income during the quarter ended December 31, 2018. In July 2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from April to September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest payments for a total principal balance of $879,085. The note, as modified, still bears interest at 9% and is payable in 108 equal monthly installments of $11,905, including principal and interest, until July 2028.

On November 1, 2018, a club in Chicago was acquired for $10.5 million with $6.0 million cash paid at closing and the $4.5 million in a 6-year seller financed note with interest at 7%. The Company paid approximately $37,000 in acquisition-related costs for this transaction, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statement of income. The club generated revenue of approximately $3.4 million since acquisition date. In relation to this acquisition, on September 25, 2018, the Company borrowed $5.0 million through a credit facility with a bank lender. The loan has a 7% fixed interest rate with a maturity date in May 2019. The loan was fully paid as of June 30, 2019. Goodwill and SOB license for the Chicago acquisition will not be amortized but will be tested at least annually for impairment. Goodwill recognized for this transaction is not deductible for tax purposes. Noncompete will be amortized on a straight-line basis over five years from acquisition date.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Leases

The ~~following information summarizes~~Company leases certain facilities and equipment under operating leases. Under ASC 840, lease expense for the ~~preliminary allocation~~Company’s operating leases, which generally have escalating rentals over the term of ~~fair values assigned~~the lease, is recorded using the straight-line method over the initial lease term whereby an equal amount of lease expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease expense less than cash payments in the later years. The difference between lease expense recognized and actual lease payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.

Included in lease expense in our unaudited condensed consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO rented to the ~~assets at acquisition date~~Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $0 and $19,500 for the three and six months ended March 31, 2020, respectively, and $19,500 and $39,000 for the three and six months ended March 31, 2019. This lease terminated on December 31, 2019.

Undiscounted future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):

Land and building $ 4,325
Inventory 57
Furniture and equipment 50
Noncompete 100
SOB license 5,252
Goodwill 2,003
Deferred tax liability (1,287 )
Net assets $ 10,500

2020	$	3,237
2021		3,154
2022		3,057
2023		2,889
2024		2,850
Thereafter		21,038
Total future minimum lease obligations	$	36,225

~~On November 5, 2018, a Pittsburgh club was acquired for $15.0 million, with $7.5 million cash paid at closing~~Included in the future minimum lease obligations are billboard and ~~two seller notes payable. The first note is 2-year 7% note for~~outdoor sign leases. These leases were recorded as advertising and marketing expenses, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of operations. Under ASC 840, we recorded lease expense amounting to $957,000 and $2.0 million during the three and ~~the second is a 10-year 8% note for $5.5 million.~~ six months ended March 31, 2019.

The Company ~~paid acquisition-related costs~~adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options for ~~this transaction~~varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of ~~approximately $134,000,~~certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Our adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 4.

Future maturities of lease liabilities as of March 31, 2020 are as follows (in thousands):

	Principal Payments		Interest Payments		Total Payments
April 2020 – March 2021	$	1,552	$	1,641	$	3,193
April 2021 – March 2022		1,692		1,543		3,235
April 2022 – March 2023		1,728		1,438		3,166
April 2023 – March 2024		1,706		1,336		3,042
April 2024 – March 2025		1,860		1,229		3,089
Thereafter		19,289		5,992		25,281
	$	27,827	$	13,179	$	41,006

Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statement of ~~income. The club generated~~operations, except for sublease income which was included in other revenue, ~~of approximately $3.4 million since acquisition date. Goodwill~~ for the Pittsburgh acquisition will not be amortized but will be tested at least annually for impairment. Goodwill recognized for this transaction is deductible for tax purposes. Noncompete will be amortized on a straight-line basis over five years from acquisition date.

~~The following information summarizes the preliminary allocation of fair values assigned to the assets at acquisition date~~three and six months ended March 31, 2020 as follows (in thousands):

Land and building $ 5,000
Inventory 23
Furniture and equipment 200
Noncompete 100
Goodwill 9,677
Net assets $ 15,000

It is management’s expectation that the purchase price of these acquisitions will be allocated to assets, including land, buildings, inventory, noncompetes, SOB license, and goodwill; however, the final purchase price allocation of the two clubs remains subject to post-closing adjustments until the Company has completed final valuation and accounting for the transactions.

In November 2018, the Company sold two assets held for sale in Houston and San Antonio, Texas for a combined sales price of $868,000. Net gain on the two transactions amounted to $273,000 after closing costs. The Company used $945,500 of the proceeds to pay down loans related to the properties.

On January 24, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4 million, payable $163,000 in cash at closing, net of closing costs and property taxes of $87,000, and a $1.15 million 8% note payable over a three-year period. The note is payable $9,619 per month, principal and interest, for the first 35 months with the remaining balance payable at maturity. The buyer has the option to extend the maturity date by one year at least 60 days prior to maturity, as long as the buyer is not in default. The Company recorded a gain on the sale transaction of approximately $383,000.

On March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales price of $1.4 million in cash. Net gain on the transaction amounted to approximately $628,000 after closing costs. The Company used $980,000 of the proceeds to pay off a loan related to the property.

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

In April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of $1.1 million in cash. Net gain on the transaction amounted to approximately $331,000 after closing costs. The Company used $942,000 of the proceeds to pay off a loan related to the property.

In June 2019, the Company sold a property located in Lubbock, Texas for $350,000 in cash. Net loss on the transaction amounted to $376,000 after closing costs. The Company used $331,000 of the proceeds from the sale to pay down debt.

In June 2019, the Company sold an aircraft for $690,000 in cash. Net loss on the transaction amounted to $9,000 after closing costs. The Company used $666,000 of the proceeds from the sale to pay down related debt.

	Three Months Ended March 31, 2020			Six Months Ended March 31, 2020
Operating lease expense – fixed payments	$	838		$	1,680
Variable lease expense		65			130
Short-term equipment and other lease expense (includes $145 and $291 recorded in advertising and marketing, and $100 and $225 recorded in repairs and maintenance for the three and six months ended March 31, 2020, respectively; see Note 5)		365			759
Sublease income		(4	)		(6	)
Total lease expense, net	$	1,264		$	2,563

Other information:
Operating cash outflows from operating leases	$	1,207		$	2,462
Weighted average remaining lease term					13 years
Weighted average discount rate					6.1	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, ~~2018.~~2019.

Overview

RCI Hospitality Holdings, Inc. (“RCIHH”) is a holding company engaged in a number of activities in the hospitality and related businesses. All services and management operations are conducted by subsidiaries of RCIHH, including RCI Management Services, Inc.

Through our subsidiaries, as of ~~June 30, 2019,~~March 31, 2020, we operated a total of 4648 establishments that offer live adult entertainment and/or restaurant and bar operations. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine other operating segments into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

Pre-COVID-19 Financial Performance

During our first quarter ended December 31, 2019, total revenues were $4.4 million, or 9.9%, higher than the same quarter in the prior year. Consolidated same-store sales were up by 0.7%. During the first two months of the second quarter, our consolidated same-store sales were up by 12.4%, giving us a cumulative five-month same-store sales increase of 5.3%. With the outbreak of the coronavirus and COVID-19 national emergency guidelines put in place, we experienced a significant downturn in sales brought about by the temporary closure of all of our clubs and restaurants as of March 18, 2020.

Impact of COVID-19 Pandemic

After the stay-at-home order and social distancing guidelines were put into place, our total revenues for the full six-month period ended March 31, 2020 went flat versus last year. Though we earn no revenues from our core businesses during the period of closures, we continue to incur expenses. To alleviate our cash flow situation, we instituted the following measures:

	●	Arranged for deferment of principal and interest payment on certain of our debts;
	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
	●	Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation;
	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
	●	Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor relations coverage, among others.

As of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty about the spread of the virus. Lower sales, as caused by social distancing 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.

Also see the risk factor in “Item 1A. Risk Factors” regarding risks and uncertainties associated with the COVID-19 pandemic.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018~~2019 filed with the SEC on ~~December 31, 2018.~~February 13, 2020.

We adopted ASC 842,Leases, as of October 1, 2019. Our adoption of ASC 842 resulted in an increase of $27.3 million in our total assets as of the adoption date due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities.

During the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.

Results of Operations

Highlights of the operating results ~~and the strategic activities~~ of the Company during the three ~~and nine~~ months ended ~~June 30, 2019~~March 31, 2020 are as follows:

~~Third~~Second Quarter ~~2019~~2020

	●	Total revenues were ~~$47.0~~$40.4 million compared to ~~$42.6~~$44.8 million during the comparable prior-year period, a ~~10.3% increase~~9.8% decrease (Nightclubs revenue of ~~$37.9~~$31.4 million compared to ~~$35.3~~$37.0 million, a ~~7.5% increase;~~15.3% decrease; and Bombshells revenue of $8.8 million compared to ~~$7.1~~$7.5 million, a ~~23.0%~~17.0% increase)

	●	Consolidated same-store sales decreased by ~~1.4% (0.1% increase~~14.7% (14.8% decrease for Nightclubs and ~~10.6%~~13.8% decrease for Bombshells)


	●	Basic and diluted loss per share of $0.37 compared to basic and diluted earnings per share (“EPS”) of ~~$0.59 compared to $0.55, a 7.3% increase~~$0.70 (non-GAAP diluted EPS* of ~~$0.59~~$0.47 compared to ~~$0.58,~~$0.63, a ~~0.8% increase)~~ 25.0% decrease)

	●	Net cash provided by operating activities of ~~$7.4~~$1.7 million compared to ~~$8.3~~$9.5 million during the comparable prior-year period, an 82.1% decrease (free cash flow* of $0.6 million compared to $8.8 million, a 93.0% decrease)

Year-to-Date 2020

	●	Total revenues were $88.8 million compared to $88.8 million during the comparable prior-year period, flat as compared to prior year (Nightclubs revenue of $69.2 million compared to $74.8 million, a 7.4% decrease; and Bombshells revenue of $19.2 million compared to $13.5 million, a 41.5% increase)

	●	Consolidated same-store sales decreased by 7.3% (8.4% decrease for Nightclubs and 0.7% increase for Bombshells)

	●	Basic and diluted EPS of $0.24 compared to $1.35, an 82.2% decrease (non-GAAP diluted EPS* of $1.09 compared to $1.24, an 11.8% decrease)

	●	Net cash provided by operating activities of $12.0 million compared to $21.0 million during the comparable prior-year period, a ~~10.7%~~42.9% decrease (free cash flow* of ~~$6.5~~$9.9 million compared to ~~$7.7~~$19.9 million, a ~~16.3%~~50.3% decrease)

~~Year-to-Date 2019~~

	●	Total revenues were $135.9 million compared to $125.1 million during the comparable prior-year period, an 8.6% increase (Nightclubs revenue of $112.7 million compared to $105.9 million, a 6.4% increase; and Bombshells revenue of $22.3 million compared to $18.6 million, an 20.2% increase)
	●	~~Consolidated same-store sales decreased by 0.9% (1.0% increase for Nightclubs and 13.3% decrease for Bombshells)~~
	●	~~Basic and diluted EPS of $1.94 compared to $2.51, a 22.7% decrease (non-GAAP diluted EPS* of $1.83 compared to $1.76, a 3.7% increase)~~
	●	Net cash provided by operating activities of $28.4 million compared to $22.4 million during the comparable prior-year period, a 26.8% increase (free cash flow* of $26.3 million compared to $20.6 million, a 28.1% increase)
	●	~~Completed the acquisition of one club in Pittsburgh, Pennsylvania for $15.0 million and another club in Chicago, Illinois for $10.5 million~~

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

Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~June 30, 2018~~March 31, 2019

The following table summarizes our results of operations for the three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (dollars in thousands):

	For the Three Months Ended																		For the Three Months Ended
	June 30, 2019						June 30, 2018						Increase (Decrease)						March 31, 2020						March 31, 2019						Increase (Decrease)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%			Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	19,570			41.6	%	$	17,658			41.4	%	$	1,912			10.8	%	$	16,919			41.9	%	$	18,486			41.2	%	$	(1,567	)		(8.5	)%
Sales of food and merchandise		7,046			15.0	%		6,175			14.5	%		871			14.1	%		6,479			16.0	%		6,439			14.4	%		40			0.6	%
Service revenues		17,299			36.8	%		16,316			38.3	%		983			6.0	%		14,348			35.5	%		16,979			37.9	%		(2,631	)		(15.5	)%
Other		3,112			6.6	%		2,485			5.8	%		627			25.2	%		2,680			6.6	%		2,922			6.5	%		(242	)		(8.3	)%
Total revenues		47,027			100.0	%		42,634			100.0	%		4,393			10.3	%		40,426			100.0	%		44,826			100.0	%		(4,400	)		(9.8	)%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		4,015			20.5	%		3,632			20.6	%		383			10.5	%		3,435			20.3	%		3,790			20.5	%		(355	)		(9.4	)%
Food and merchandise sold		2,565			36.4	%		2,140			34.7	%		425			19.9	%		2,239			34.6	%		2,308			35.8	%		(69	)		(3.0	)%
Service and other		121			0.6	%		94			0.5	%		27			28.7	%		108			0.6	%		94			0.5	%		14			14.9	%
Total cost of goods sold (exclusive of items shown separately below)		6,701			14.2	%		5,866			13.8	%		835			14.2	%		5,782			14.3	%		6,192			13.8	%		(410	)		(6.6	)%
Salaries and wages		13,164			28.0	%		11,362			26.7	%		1,802			15.9	%		12,222			30.2	%		11,908			26.6	%		314			2.6	%
Selling, general and administrative		14,895			31.7	%		13,476			31.6	%		1,419			10.5	%		14,450			35.7	%		14,341			32.0	%		109			0.8	%
Depreciation and amortization		2,465			5.2	%		1,998			4.7	%		467			23.4	%		2,257			5.6	%		2,200			4.9	%		57			2.6	%
Other charges (gains), net		(172	)		-0.4	%		440			1.0	%		(612	)		-139.1	%		8,190			20.3	%		(981	)		(2.2	)%		9,171			934.9	%
Total operating expenses		37,053			78.8	%		33,142			77.7	%		3,911			11.8	%		42,901			106.1	%		33,660			75.1	%		9,241			27.5	%
Income from operations		9,974			21.2	%		9,492			22.3	%		482			5.1	%
Income (loss) from operations																				(2,475	)		(6.1	)%		11,166			24.9	%		(13,641	)		(122.2	)%
Other income (expenses)
Interest expense		(2,543	)		-5.4	%		(2,308	)		-5.4	%		235			10.2	%		(2,459	)		(6.1	)%		(2,645	)		(5.9	)%		(186	)		(7.0	)%
Interest income		92			0.2	%		52			0.1	%		40			76.9	%		85			0.2	%		75			0.2	%		10			13.3	%
Non-operating loss		(38	)		-0.1	%		-			-			(38	)		100.0	%
Income before income taxes		7,485			15.9	%		7,236			17.0	%		249			3.4	%
Income tax expense		1,806			3.8	%		1,829			4.3	%		(23	)		-1.3	%
Net income	$	5,679			12.1	%	$	5,407			12.7	%	$	272			5.0	%
Unrealized gain (loss) on equity securities																				(62	)		(0.2	)%		77			0.2	%		(139	)		(180.5	)%
Income (loss) before income taxes																				(4,911	)		(12.1	)%		8,673			19.3	%		(13,584	)		(156.6	)%
Income tax expense (benefit)																				(1,418	)		(3.5	)%		1,930			4.3	%		(3,348	)		(173.5	)%
Net income (loss)																			$	(3,493	)		(8.6	)%	$	6,743			15.0	%	$	(10,236	)		(151.8	)%

* Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

2624

Revenues

Consolidated revenues ~~increased~~decreased by $4.4 million, or ~~10.3%~~9.8%, due primarily to ~~a 11.7% increase from new units, a 1.4% decrease~~lost sales caused by the COVID-19 pandemic in March 2020. Consolidated same-store sales ~~(contributing a 1.3% decrease in total revenues), a 0.9% decrease from closed units,~~during the quarter decreased by 14.7% (Nightclubs decreased by 14.8% while Bombshells decreased by 13.8%). Prior to the stay-at-home and ~~a 0.8% increase in other revenues. Nightclub~~social distancing guidelines imposed by the federal, state and local governments, during the first ten weeks of the quarter, consolidated same-store sales was up by 5.3% (Nightclubs increased by ~~0.1%,~~5.6% while Bombshells ~~same-store sales decreased~~increased by ~~10.6%~~3.6%).

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

	For the Three Months				For the Three Months
	Ended June 30,				EndedMarch 31,
	2019		2018		2020		2019
Nightclubs	$	37,889	$	35,253	$	31,367	$	37,047
Bombshells		8,755		7,120		8,803		7,527
Other		383		261		256		252
	$	47,027	$	42,634	$	40,426	$	44,826

Nightclubs same-store sales slightly increased by 0.1% during the quarter due to strong performance of our clubs in New York, Minnesota and Texas, partially offset by decreases in clubs in Florida and North Carolina. Sales from new clubs included $2.9 million from the two clubs we acquired in November 2018 and $272,000 from a club acquired in May 2018.

~~Bombshells still showed negative same-store~~total sales for the quarter ~~but monthly sequential~~declined by 15.3% compared to a year ago because of COVID-19-related closures during the second half of March 2020. Same-store sales decrease of 14.8% included two clubs in Chicago and Pittsburgh (acquired in November 2018) for the first time. Nightclubs total sales for the first ten weeks of the quarter increased by 5.0% compared to the comparable year-ago period. Adjusted ten-week same-store sales ~~have been improving. June 2019 was~~increased by 5.6%. Sales during the first ten weeks of the current quarter benefited from a strong sports lineup in January and February, including the professional football championship in South Florida, and the professional basketball mid-season event in Chicago, as well as improved weather in January compared to the polar vortex a year ago.

Bombshells total sales for the quarter increased by 17.0% compared to a year ago, and same-store sales ~~positive month since May 2018,~~decreased by 13.8%. Sales reflected the success of new units, continued same-store rebound for most of the quarter, and ~~July 2019 improved~~then the COVID-19 related closures. Same-store sales included a Bombshells in the Houston suburb Pearland (opened in April 2018) for the first time. The four new Bombshells, all in the Houston area, were I-10 (opened December 2018), Tomball (March 2019), Katy (October 2019), and US 59 (January 30, 2020). Bombshells total sales for the first ten weeks of the quarter increased 45.4% compared to ~~a positive double digit. Newly opened Bombshells units in fiscal 2019 contributed approximately $2.5 million.~~the corresponding year-ago period. Adjusted ten-week same-store sales increased 3.6%.

Operating Expenses

Total operating expenses, as a percent of revenues, increased to ~~78.8%~~106.1% from ~~77.7%~~75.1% from year-ago, with a ~~$3.9~~$9.2 million increase, or ~~11.8%~~27.5%. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold ~~increased~~decreased by ~~$835,000,~~$410,000, or ~~14.2%~~6.6%, mainly due to ~~the increase in sales from newly acquired clubs and newly constructed Bombshells.~~COVID-19-related closures. As a percent of total revenues, cost of goods sold increased to ~~14.2%~~14.3% from 13.8% mainly due to ~~food cost inefficiencies from newly opened Bombshells units (26.3% from 24.3%), partially offset by tighter food cost control in Nightclubs (11.3% from 11.6%).~~perishable inventory spoilage.

Salaries and wages increased by ~~$1.8 million,~~$314,000, or ~~15.9%, mainly due to newly acquired and opened units, especially those new Bombshells opening/training teams whose restaurants have not yet contributed to the sales base.~~2.6%. As a percent of total revenues, salaries and wages were ~~28.0%~~30.2% from ~~26.7%~~26.6% mainly due to ~~new Bombshells opening/training teams.~~fixed salaries paid even during COVID-19-related closures.

Selling, general and administrative expenses increased by ~~$1.4 million,~~$109,000, or ~~10.5%~~0.8%, primarily ~~due~~caused by fixed costs.

Our adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations and cash flows for the three months ended March 31, 2020. See Note 2 to increases in legal expenses, advertising and marketing, repairs and maintenance, and charge card fees. Legal expenses increased primarily due to expenses related to the SEC review, while advertising and marketing, repairs and maintenance, and charge card fees increased due to increase in units. As a percent of total revenues, selling, general and administrative expenses slightly increased to 31.7% from 31.6%.our unaudited condensed consolidated financial statements.

Depreciation and amortization increased by ~~$467,000,~~$57,000, or ~~23.4%~~2.6% due to higher unit count from new ~~construction and acquisitions.~~units.

Other ~~charges (gains),~~charges/gains, net ~~resulted to a~~of $8.2 million in net ~~gain of $172,000 in~~charge during the current quarter compared to a net ~~charge~~gain of ~~$440,000~~$981,000 in the prior-year quarter. The ~~swing~~current quarter net charge was ~~primarily due to a net gain~~mainly from approximately $8.2 million in impairment of goodwill ($6.5 million), SOB licenses ($1.4 million), and property and equipment ($302,000). Last year’s quarter benefited from the sale of two real estate ~~properties and an aircraft during the current-year third quarter compared to lawsuit settlements during the prior-year third quarter.~~properties.

Income from Operations

For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ our operating margin was ~~21.2%~~(6.1%) and ~~22.3%~~24.9%, respectively. The main ~~drivers~~driver for the decrease in operating margin ~~are discussed above, but more significantly from salaries and wages, partially offset by~~is the ~~shift from a net charge to a net gain of other charges/gains, net.~~COVID-19-related closures.

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

	For the Three Months						For the Three Months
	Ended June 30,						EndedMarch 31,
	2019			2018			2020			2019
Nightclubs	$	14,034		$	12,584		$	2,314		$	15,078
Bombshells		686			1,391			690			738
Other		(111	)		(328	)		(178	)		(176	)
General corporate		(4,635	)		(4,155	)		(5,301	)		(4,474	)
	$	9,974		$	9,492		$	(2,475	)	$	11,166

Operating margin for the Nightclubs segment was ~~37.0%~~7.4% and ~~35.7%~~40.7% for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, while operating margin for Bombshells was 7.8% and ~~19.5%~~9.8%, respectively. The ~~increase~~decrease in both Nightclubs and Bombshells operating margin was mainly due to COVID-19-related closures plus the ~~shift in other charges/gains, net. The decrease in Bombshells operating margin was primarily due to fixed operating expenses~~impairment charges. Excluding impairment charges, amortization of intangibles and ~~food cost inefficiencies especially related to newly opened units. Excluding other gains/charges,~~gain on disposal of assets, Nightclubs would have had non-GAAP operating margin of ~~36.6%~~32.9% and ~~35.4%~~38.2% for the three months ended ~~June 30,~~March 31, 2020 and 2019, respectively. Excluding impairment charges and ~~2018, respectively, while~~amortization of intangibles, Bombshells would have had non-GAAP operating margin of ~~7.8%~~10.7% and ~~19.5%, respectively.~~9.8% for the three months ended March 31, 2020 and 2019.

Non-Operating Items

Interest expense ~~increased to $2.5 million from $2.3 million due to higher average debt balance mainly from acquisition-related debt, and a slightly higher average interest rate.~~decreased by $186,000, or 7.0%.

Our total occupancy costs, defined as the sum of ~~rent~~lease expense and interest expense, were ~~7.5%~~8.6% and ~~7.6%~~8.0% of revenue during the ~~quarter~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The ~~lower~~higher occupancy costs in the current quarter were ~~due to lower rent dollars~~fixed interest and lease expenses in relation to declining revenues.

Income Taxes

Income taxes were ana $1.4 million benefit and a $1.9 million expense ~~of $1.8 million in~~during the ~~third quarter of~~three months ended March 31, 2020 and 2019, ~~compared to $1.8 million in the third quarter of 2018. Although income tax dollars did not have a noticeable change, the~~respectively, with an effective income tax rate ~~for the third quarter~~ of ~~2019 was an~~28.9% benefit and 22.3% expense, ~~of 24.1% compared to 25.3% for the third quarter of 2018.~~respectively. Our effective tax rate for both years is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit.

Our ~~income tax expense decreased by 1.3%, while~~revised estimate of our ~~pre-tax income increased by 3.4%. This disproportionate change was primarily caused by the quarterly impact of the implementation of the Tax Act (see below) on our prior-year third quarter.~~

~~The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21%~~annual effective ~~January 1, 2018. Our federal corporate~~ income tax rate for fiscal ~~2018 was 24.5% percent and represents a blended income tax rate for our fiscal year ended September 30, 2018. For fiscal 2019, our federal corporate income tax rate is 21%.~~2020 caused the cumulative effect to be recognized in the current quarter.

Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $8.7 million full year adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of income for the fiscal year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118, which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. There were no additional measurement adjustments since September 30, 2018 until the end of the measurement period on December 22. 2018.

~~Nine~~Six Months Ended ~~June 30, 2019~~March 31, 2020 Compared to ~~Nine~~Six Months Ended ~~June 30, 2018~~March 31, 2019

The following table summarizes our results of operations for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (dollars in thousands):

For the Nine Months Ended
June 30, 2019 June 30, 2018 Increase (Decrease)
Amount % of Revenues Amount % of Revenues Amount %
Revenues
Sales of alcoholic beverages $ 56,366 41.5 % $ 52,835 42.2 % $ 3,531 6.7 %
Sales of food and merchandise 19,175 14.1 % 16,906 13.5 % 2,269 13.4 %
Service revenues 51,609 38.0 % 48,338 38.6 % 3,271 6.8 %
Other 8,726 6.4 % 6,993 5.6 % 1,733 24.8 %
Total revenues 135,876 100.0 % 125,072 100.0 % 10,804 8.6 %
Operating expenses
Cost of goods sold
Alcoholic beverages sold 11,541 20.5 % 10,976 20.8 % 565 5.1 %
Food and merchandise sold 6,857 35.8 % 6,198 36.7 % 659 10.6 %
Service and other 307 0.5 % 173 0.3 % 134 77.5 %
Total cost of goods sold (exclusive of items shown separately below) 18,705 13.8 % 17,347 13.9 % 1,358 7.8 %
Salaries and wages 37,168 27.4 % 33,086 26.5 % 4,082 12.3 %
Selling, general and administrative 43,263 31.8 % 39,136 31.3 % 4,127 10.5 %
Depreciation and amortization 6,718 4.9 % 5,806 4.6 % 912 15.7 %
Other charges (gains), net (2,250 ) -1.7 % 2,834 2.3 % (5,084 ) -179.4 %
Total operating expenses 103,604 76.2 % 98,209 78.5 % 5,395 5.5 %
Income from operations 32,272 23.8 % 26,863 21.5 % 5,409 20.1 %
Other income (expenses)
Interest expense (7,709 ) -5.7 % (7,493 ) -6.0 % 216 2.9 %
Interest income 218 0.2 % 187 0.1 % 31 16.6 %
Non-operating loss (408 ) -0.3 % - - 408 100.0 %
Income before income taxes 24,373 17.9 % 19,557 15.6 % 4,816 24.6 %
Income tax expense (benefit) 5,547 4.1 % (4,899 ) -3.9 % 10,446 213.2 %
Net income $ 18,826 13.9 % $ 24,456 19.6 % $ (5,630 ) -23.0 %

	For the Six Months Ended
	March 31, 2020						March 31, 2019						Increase (Decrease)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	37,662			42.4	%	$	36,796			41.4	%	$	866			2.4	%
Sales of food and merchandise		13,926			15.7	%		12,129			13.7	%		1,797			14.8	%
Service revenues		31,541			35.5	%		34,310			38.6	%		(2,769	)		(8.1	)%
Other		5,691			6.4	%		5,614			6.3	%		77			1.4	%
Total revenues		88,820			100.0	%		88,849			100.0	%		(29	)		(0.0	)%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		7,581			20.1	%		7,526			20.5	%		55			0.7	%
Food and merchandise sold		4,792			34.4	%		4,292			35.4	%		500			11.6	%
Service and other		185			0.5	%		186			0.5	%		(1	)		(0.5	)%
Total cost of goods sold (exclusive of items shown separately below)		12,558			14.1	%		12,004			13.5	%		554			4.6	%
Salaries and wages		25,445			28.6	%		24,004			27.0	%		1,441			6.0	%
Selling, general and administrative		30,981			34.9	%		28,368			31.9	%		2,613			9.2	%
Depreciation and amortization		4,461			5.0	%		4,253			4.8	%		208			4.9	%
Other charges (gains), net		8,164			9.2	%		(2,078	)		(2.3	%)		10,242			492.9	%
Total operating expenses		81,609			91.9	%		66,551			74.9	%		15,058			22.6	%
Income from operations		7,211			8.1	%		22,298			25.1	%		(15,087	)		(67.7	)%
Other income (expenses)
Interest expense		(4,944	)		(5.6	%)		(5,166	)		(5.8	%)		(222	)		(4.3	)%
Interest income		183			0.2	%		126			0.1	%		57			45.2	%
Unrealized loss on equity securities		(134	)		(0.2	%)		(370	)		(0.4	%)		236			63.8	%
Income before income taxes		2,316			2.6	%		16,888			19.0	%		(14,572	)		(86.3	)%
Income tax expense		175			0.2	%		3,741			4.2	%		(3,566	)		(95.3	)%
Net income	$	2,141			2.4	%	$	13,147			14.8	%	$	(11,006	)		(83.7	)%

* Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

Revenues

Consolidated revenues were flat at $88.8 million for both current and prior year. The sales decline caused by the COVID-19 pandemic decimated the sales gains we accumulated during the first five months of our fiscal year. Consolidated same-store sales during the quarter decreased by 7.3% (Nightclubs decreased by 8.4% while Bombshells increased by ~~$10.8 million, or 8.6%, due primarily~~0.7%). Prior to ~~a 10.4% increase from new units, a 1.5% decrease from closed units, a 0.9% decrease in~~the stay-at-home and social distancing guidelines imposed by the federal, state and local governments, during the first ten weeks of the quarter, consolidated same-store sales ~~(contributing a 0.8% decrease in total revenues), and a 0.6% increase in other revenues. Nightclub same-store sales~~was up by 5.3% (Nightclubs increased by ~~1.0%,~~5.6% while Bombshells ~~same-store sales decreased~~increased by ~~13.3%~~3.6%).

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

	For the Nine Months				For the Six Months
	Ended June 30,				EndedMarch 31,
	2019		2018		2020		2019
Nightclubs	$	112,664	$	105,914	$	69,226	$	74,775
Bombshells		22,295		18,550		19,153		13,540
Other		917		608		441		534
	$	135,876	$	125,072	$	88,820	$	88,849

Nightclubs total sales for the six months ended March 31, 2020 declined by 7.4% compared to a year ago because of COVID-19-related closures during the second half of March 2020. Same-store sales decrease of 8.4% included two clubs in Chicago and Pittsburgh (acquired in November 2018) for the first time in the current year second quarter. Nightclubs total sales for the first ten weeks of the quarter increased by 5.0% compared to the comparable year-ago period. Adjusted ten-week same-store sales ~~growth continued to reflect effective marketing, management and appeal, combined with a good economy, partially offset~~increased by 5.6%. Sales during the ~~impact~~first ten weeks of the ~~pro~~current quarter benefited from a strong sports lineup in January and February, including the professional football championship ~~on our Minneapolis clubs~~in South Florida, and the ~~sales decline on our Florida clubs.~~professional basketball mid-season event in Chicago, as well as improved weather in January compared to the polar vortex a year ago.

Bombshells total sales for the six months ended March 31, 2020 increased by 41.5% compared to a year ago, and same-store sales ~~decline~~increased by 0.7%. Sales reflected the success of ~~13.3% improved from the average~~new units, continued same-store rebound for most of the ~~first two quarters due to gradually improving~~six months, and then the COVID-19 related closures. Same-store sales ~~caused by prior year higher comparisons. New~~included a Bombshells ~~still not~~ in the ~~same-store base contributed $8.5 million~~Houston suburb Pearland (opened in ~~revenue~~April 2018) for the first time in the current year second quarter. The four new Bombshells, all in the Houston area, were I-10 (opened December 2018), Tomball (March 2019), Katy (October 2019), and US 59 (January 30, 2020). Bombshells total sales for the first ten weeks of the quarter increased 45.4% compared to the corresponding year-ago period. Adjusted ten-week same-store sales increased 3.6%.

Operating Expenses

Total operating expenses, as a percent of revenues, ~~decreased~~increased to ~~76.2%~~91.5% from ~~78.5%~~74.9% from year-ago, with a ~~year-ago although dollar value increased by $5.4~~$15.1 million increase, or ~~5.5%~~22.6%. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by ~~7.8%~~$554,000, or 4.6%, mainly due to ~~the increase in sales from newly acquired clubs and newly constructed Bombshells.~~COVID-19-related closures. As a percent of total revenues, cost of goods sold ~~was flat at 13.8%~~increased to 14.1% from ~~13.9%~~13.5% mainly due to ~~tighter food cost control in Nightclubs (11.3% from 11.9%) offset by food cost inefficiencies from newly opened Bombshells units (25.7% from 24.7%).~~perishable inventory spoilage.

Salaries and wages increased by ~~$4.1~~$1.4 million, or ~~12.3%, mainly due to newly acquired and opened units, especially those new Bombshells opening/training teams whose restaurants have not yet contributed to the sales base.~~6.0%. As a percent of total revenues, salaries and wages were ~~27.4%~~28.6% from ~~26.5%~~27.0% mainly due to ~~pre-opening teams on new Bombshells units.~~fixed salaries paid even during COVID-19-related closures.

Selling, general and administrative expenses increased by ~~$4.1~~$2.6 million, or ~~10.5%~~9.2%, primarily ~~due to~~caused by fixed costs. $2.5 million of the increase was from the first quarter, pre-COVID-19, mainly from increases in ~~legal expenses,~~accounting and professional fees, taxes and permits, advertising and marketing, utilities, and repairs and ~~maintenance, supplies, charge card fees,~~maintenance.

Our adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations and ~~security. Legal expenses increased primarily due~~cash flows for the six months ended March 31, 2020. See Note 2 to expenses related to the SEC review, trial costs associated with two cases, and the acquisition of two clubs in the first quarter of 2019. Advertising and marketing increased primarily due to additional expenses from acquired clubs and a new marketing program for Bombshells. Repairs and maintenance, supplies expense, charge card fees, and security increased due to increased unit count. As a percent of total revenues, selling, general and administrative expenses increased to 31.8% from 31.3% mainly due to legal expenses.our unaudited condensed consolidated financial statements.

Depreciation and amortization increased by ~~$912,000,~~$208,000, or ~~15.7%~~4.9% due to higher unit count from new ~~construction and acquisitions.~~units.

Other ~~charges (gains),~~charges/gains, net ~~resulted~~of $8.2 million in net charge in the current year compared to a net gain of ~~$2.3~~$2.1 million in the prior year. The current ~~nine-month period compared to a~~year net charge ~~of $2.8~~was mainly from approximately $8.2 million in ~~the prior-year nine-month period. The shift was caused by the net gain~~impairment of ~~approximately $2.1 million~~goodwill ($6.5 million), SOB licenses ($1.4 million), and property and equipment ($302,000). Last year benefited from the sale of ~~several~~two real estate properties, ~~during the first three quarters of the current year compared to an impairment charge of $1.6 million~~two assets held for sale and ~~settlement of lawsuits of $1.3 million~~a club in ~~the comparable prior-year period.~~Philadelphia.

Income from Operations

For the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ our operating margin was ~~23.8%~~8.1% and ~~21.5%~~25.1%, respectively. The main ~~drivers~~driver for the ~~increase~~decrease in operating margin ~~are discussed above, but more significantly from~~is the ~~shift from a net charge to a net gain of other charges/gains, net.~~COVID-19-related closures.

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

	For the Nine Months						For the Six Months
	Ended June 30,						EndedMarch 31,
	2019			2018			2020			2019
Nightclubs	$	44,499		$	37,835		$	16,090		$	30,465
Bombshells		1,543			3,247			2,263			857
Other		(406	)		(547	)		(385	)		(295	)
General corporate		(13,364	)		(13,672	)		(10,757	)		(8,729	)
	$	32,272		$	26,863		$	7,211		$	22,298

Operating margin for the Nightclubs segment was ~~39.5%~~23.2% and ~~35.7%~~40.7% for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, while operating margin for Bombshells was ~~6.9%~~11.8% and ~~17.5%~~6.3%, respectively. The ~~increase~~decrease in Nightclubs operating margin was mainly due to COVID-19-related closures plus the ~~net gain in the current year compared to the net charges in the prior year.~~impairment charges. The ~~decrease~~increase in Bombshells operating margin was ~~primarily due to fixed salaries~~caused by early gains from reduction in pre-opening expenses partially offset by COVID-19-related closures plus the impairment charges. Excluding impairment charges, amortization of intangibles, gain on disposal of assets, gain on insurance and ~~wages~~settlement of lawsuits, Nightclubs would have had non-GAAP operating margin of 34.9% and ~~selling, general~~38.0% for the six months ended March 31, 2020 and ~~administrative expenses deleveraged from negative same-store sales.~~2019, respectively. Excluding impairment charges, amortization of intangibles, settlement of lawsuits and loss on sale of assets, Bombshells would have had non-GAAP operating margin of 13.1% and 6.4% for the six months ended March 31, 2020 and 2019.

Non-Operating Items

Interest expense ~~increased to $7.7 million from $7.5 million, which was primarily caused~~decreased by ~~higher average debt balance partially offset by lower average interest rate.~~$222,000, or 4.3%.

Our total occupancy costs, defined as the sum of ~~rent~~lease expense and interest expense, ~~exclusive of prior-year refinancing-related costs above,~~ were ~~7.8%~~7.9% and ~~7.6%~~8.0% of revenue during the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The higher occupancy costs were due to the interest expense incurred at several Bombshells units under construction, which do not contribute to revenue, and the debt incurred on the two November 2018 club acquisitions, as well as higher average debt balance.

As part of our adoption of ASU 2016-01, we recorded a $370,000 net unrealized loss on the market value of equity securities during the current year. The cumulative net gain in market value of available-for sale securities, which was recorded in accumulated other comprehensive income as of September 30, 2018, has been reclassified to retained earnings as of the beginning of fiscal year 2019.

Income Taxes

Income taxes ~~were an~~ expense ~~of $5.5~~was $175,000 and $3.7 million during the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~compared to a benefit of $4.9 million during the same period of 2018. The~~respectively, with an effective income tax rate ~~for the nine-month period~~ of ~~2019 was an expense of 22.8% compared to a benefit of 25.0% for the same period in 2018.~~7.6% and 22.2%, respectively. Our effective tax rate for both years is affected by state taxes, permanent differences, and tax credits, including the FICA tip ~~credit, for both years while the first quarter of 2018 was significantly impacted by a $9.7 million reduction~~credit. We revised our estimate of our ~~deferred tax liability caused by newly enacted tax laws.~~

Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $8.7 million full year adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of income for the fiscal year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118, which allows companies to record provisional amounts during a measurement period that is similar2020 due to the ~~measurement period used when accounting for business combinations. There were no additional measurement adjustments since September 30, 2018 until the end~~forecasted financial impact of the ~~measurement period on December 22. 2018.~~COVID-19 pandemic.

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:

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)~~(c) gains or losses on insurance, (d) settlement of lawsuits, and (e) ~~settlement~~impairment of ~~lawsuits.~~assets. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.

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) costs and charges related to debt refinancing, (d)~~ gains or losses on sale of businesses and assets, ~~(e)~~(c) gains or losses on insurance, ~~(f)~~(d) unrealized gains or losses on equity securities, ~~(g)~~(e) settlement of lawsuits, (f) impairment of assets, and ~~(h)~~(g) the income tax effect of the above described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at ~~22.8%~~7.6% and ~~26.5%~~22.1% effective tax rate of the pre-tax non-GAAP income before taxes for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities.

Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation ~~expense,~~and amortization, (b) ~~amortization of intangibles, (c)~~ income tax expense (benefit), ~~(d)~~(c) net interest expense, ~~(e)~~(d) gains or losses on sale of businesses and assets, ~~(f)~~(e) gains or losses on insurance, ~~(g)~~(f) unrealized gains or losses on equity securities, (g) settlement of lawsuits, and (h) ~~settlement~~impairment of ~~lawsuits.~~assets. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion.

The following tables present our non-GAAP performance measures for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands, except per share amounts and percentages):

	For the Three Months						For the Nine Months						For the Three Months							For the Six Months
	Ended June 30,						Ended June 30,						EndedMarch 31,							EndedMarch 31,
	2019			2018			2019			2018			2020			2019				2020			2019
Reconciliation of GAAP net income to Adjusted EBITDA
Net income attributable to RCIHH common stockholders	$	5,638		$	5,389		$	18,717		$	24,385
Reconciliation of GAAP net income (loss) to Adjusted EBITDA
Net income (loss) attributable to RCIHH common stockholders													$	(3,452	)	$	6,735			$	2,182		$	13,079
Income tax expense (benefit)		1,806			1,829			5,547			(4,899	)		(1,418	)		1,930				175			3,741
Interest expense, net		2,451			2,256			7,491			7,306			2,374			2,570				4,761			5,040
Settlement of lawsuits		-			474			144			1,274			-			84				24			144
Impairment of assets		-			-			-			1,550			8,210			-				8,210			-
Loss (gain) on sale of businesses and assets		(265	)		(34	)		(2,487	)		30
Unrealized loss on equity securities		38			-			408			-
Loss (gain) on insurance		93			-			93			(20	)
Gain on sale of businesses and assets														(7	)		(1,065	)			(37	)		(2,222	)
Unrealized loss (gain) on equity securities														62			(77	)			134			370
Gain on insurance														(13	)		-				(33	)		-
Depreciation and amortization		2,465			1,998			6,718			5,806			2,257			2,200				4,461			4,253
Adjusted EBITDA	$	12,226		$	11,912		$	36,631		$	35,432		$	8,013		$	12,377			$	19,877		$	24,405

Reconciliation of GAAP net income to non-GAAP net income
Net income attributable to RCIHH common stockholders	$	5,638		$	5,389		$	18,717		$	24,385
Reconciliation of GAAP net income (loss) to non-GAAP net income
Net income (loss) attributable to RCIHH common stockholders													$	(3,452	)	$	6,735			$	2,182		$	13,079
Amortization of intangibles		165			65			474			161			157			153				313			309
Settlement of lawsuits		-			474			144			1,274			-			84				24			144
Impairment of assets		-			-			-			1,550			8,210			-				8,210			-
Loss (gain) on sale of businesses and assets		(265	)		(34	)		(2,487	)		30
Unrealized loss on equity securities		38			-			408			-
Loss (gain) on insurance		93			-			93			(20	)
Costs and charges related to debt refinancing		-			-			-			827
Gain on sale of businesses and assets														(7	)		(1,065	)			(37	)		(2,222	)
Unrealized loss (gain) on equity securities														62			(77	)			134			370
Gain on insurance														(13	)		-				(33	)		-
Income tax effect of adjustments above		(6	)		(218	)		327			(11,076	)		(633	)		223				(659	)		333
Non-GAAP net income	$	5,663		$	5,676		$	17,676		$	17,131		$	4,324		$	6,053			$	10,134		$	12,013

Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share
Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share
Diluted shares		9,620			9,719			9,671			9,719			9,225			9,679				9,274			9,696
GAAP diluted earnings per share	$	0.59		$	0.55		$	1.94		$	2.51
GAAP diluted earnings (loss) per share													$	(0.37	)	$	0.70			$	0.24		$	1.35
Amortization of intangibles		0.02			0.01			0.05			0.02			0.02			0.02				0.03			0.03
Settlement of lawsuits		-			0.05			0.01			0.13			-			0.01				0.00			0.01
Impairment of assets		-			-			-			0.16			0.89			-				0.89			-
Loss (gain) on sale of businesses and assets		(0.03	)		(0.00	)		(0.26	)		0.00
Unrealized loss on equity securities		0.00			-			0.04			-
Loss (gain) on insurance		0.01			-			0.01			(0.00	)
Costs and charges related to debt refinancing		-			-			-			0.09
Gain on sale of businesses and assets														(0.00	)		(0.11	)			(0.00	)		(0.23	)
Unrealized loss (gain) on equity securities														0.01			(0.01	)			0.01			0.04
Gain on insurance														(0.00	)		-				(0.00	)		-
Income tax effect of adjustments above		(0.00	)		(0.02	)		0.03			(1.14	)		(0.07	)		0.02				(0.07	)		0.03
Non-GAAP diluted earnings per share	$	0.59		$	0.58		$	1.83		$	1.76		$	0.47		$	0.63			$	1.09		$	1.24

Reconciliation of GAAP operating income to non-GAAP operating income
Income from operations	$	9,974		$	9,492		$	32,272		$	26,863
Reconciliation of GAAP operating income (loss) to non-GAAP operating income
Income (loss) from operations													$	(2,475	)	$	11,166			$	7,211		$	22,298
Amortization of intangibles		165			65			474			161			157			153				313			309
Settlement of lawsuits		-			474			144			1,274			-			84				24			144
Impairment of assets		-			-			-			1,550			8,210			-				8,210			-
Loss (gain) on insurance		93			-			93			(20	)
Loss (gain) on sale of businesses and assets		(265	)		(34	)		(2,487	)		30
Gain on insurance														(13	)		-				(33	)		-
Gain on sale of businesses and assets														(7	)		(1,065	)			(37	)		(2,222	)
Non-GAAP operating income	$	9,967		$	9,997		$	30,496		$	29,858		$	5,872		$	10,338			$	15,688		$	20,529

Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin		21.2	%		22.3	%		23.8	%		21.5	%		(6.1	%)		24.9	%			8.1	%		25.1	%
Amortization of intangibles		0.4	%		0.2	%		0.3	%		0.1	%		0.4	%		0.3	%			0.4	%		0.3	%
Settlement of lawsuits		-			1.1	%		0.1	%		1.0	%		-			0.2	%			0.0	%		0.2	%
Impairment of assets		-			-			-			1.2	%		20.3	%		-				9.2	%		-
Loss (gain) on insurance		0.2	%		-			0.1	%		-0.0	%
Loss (gain) on sale of businesses and assets		-0.6	%		-0.1	%		-1.8	%		0.0	%
Gain on insurance														(0.0	%)		-				(0.0	%)		-
Gain on sale of businesses and assets														(0.0	%)		(2.4	%	)		(0.0	%)		(2.5	%)
Non-GAAP operating margin		21.2	%		23.4	%		22.4	%		23.9	%		14.5	%		23.1	%			17.7	%		23.1	%

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

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.

3330

Liquidity and Capital Resources

At ~~June 30, 2019,~~March 31, 2020, our cash and cash equivalents were approximately ~~$11.0~~$9.8 million compared to ~~$17.7~~$14.1 million at September 30, ~~2018.~~2019. Because of the large volume of cash we handle, we have very stringent cash controls. As of ~~June 30, 2019,~~March 31, 2020, we had negative working capital of ~~$5.4~~$4.6 million compared to a ~~positive~~negative working capital of ~~$55,000~~$2.3 million as of September 30, ~~2018,~~2019, excluding net assets held for sale of $3.6 million and $2.9 million as of March 31, 2020 and September 30, ~~2018. We~~2019, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial ~~strengths.~~strengths, the closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our ~~net~~strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate positive cash ~~provided by operating activities increased to $28.4 million~~flows for us. Depending on the ~~nine months ended June 30, 2019 from $22.4 million for the nine months ended June 30, 2018. The near-term outlook for our business remains strong,~~timing and number of locations we ~~expect~~get open, and their ability to generate ~~substantial~~positive cash ~~flows from operations for the next 12 months from the issuance of this report. As a result of our expected cash flows from operations,~~flow, we ~~have significant flexibility~~may need to borrow funds to meet our obligations or consider selling certain assets. Based upon the small sampling of early openings in Texas, revenues seem favorable. We are hopeful that we can become profitable within a relatively short period of time after a majority of our locations have reopened, assuming these results can be sustained and the other locations, once opened, follow these early results. But if the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

We now currently forecast our cash flows to fall significantly lower than the levels that we initially targeted. To augment an expected decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures:

	●	Arranged for deferment of principal and interest payment on certain of our debts;
	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers;
	●	Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
	●	Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

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

As of the release of this report, we do not know the extent and duration of the impact of COVID-19 on our businesses due to the uncertainty about the spread of the virus. Lower sales, as caused by social distancing guidelines, could lead to adverse financial ~~commitments.~~results. However, we will continually monitor and evaluate our cash flow situation and will determine any further measures to be instituted.

Also as of the release of this report, we have ten locations in Texas that have partially reopened with 25% occupancy requirement.

We 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 recently secured traditional bank financing on our new development projects and refinancing of our existing notes ~~payable. We continue to have~~payable, but with the ~~ability to borrow funds~~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 ~~reasonable interest rates from those sources.~~all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs and restaurants/sports bars.

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

	For the Nine Months						For the Six Months
	Ended June 30,						EndedMarch 31,
	2019			2018			2020			2019
Operating activities	$	28,414		$	22,411		$	11,981		$	20,971
Investing activities		(25,608	)		(18,564	)		(3,870	)		(24,888	)
Financing activities		(9,576	)		(598	)		(12,383	)		(5,554	)
Net increase (decrease) in cash and cash equivalents	$	(6,770	)	$	3,249
Net decrease in cash and cash equivalents							$	(4,272	)	$	(9,471	)

Cash Flows from Operating Activities

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

	For the Nine Months						For the Six Months
	Ended June 30,						Ended March 31,
	2019			2018			2020			2019
Net income	$	18,826		$	24,456		$	2,141		$	13,147
Depreciation and amortization		6,718			5,806			4,461			4,253
Deferred tax expense (benefit)		1,237			(9,659	)		(1,155	)		1,131
Debt prepayment penalty		-			543
Impairment of assets								8,210			-
Net change in operating assets and liabilities		3,324			(1,028	)		(2,695	)		3,876
Impairment of assets		-			1,550
Other		(1,691	)		743			1,019			(1,436	)
Net cash provided by operating activities	$	28,414		$	22,411		$	11,981		$	20,971

Net cash provided by operating activities ~~increased~~decreased from year-to-year due primarily to the ~~increase in income from operations, lower~~impact of the COVID-19 pandemic and higher income taxes paid ~~and a favorable net change in operating assets and liabilities,~~ partially offset by ~~higher~~lower interest expense paid.

Cash Flows from Investing Activities

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

	For the Nine Months Ended June 30,						For the Six Months EndedMarch 31,
	2019			2018			2020			2019
Additions to property and equipment	$	(16,901	)	$	(18,827	)
Payments for property and equipment and intangible assets							$	(5,323	)	$	(13,902	)
Acquisition of businesses, net of cash acquired		(13,500	)		(484	)		-			(13,500	)
Proceeds from sale of businesses and assets		5,106			629			105			2,866
Proceeds from insurance		-			20			945			-
Proceeds from notes receivable								403			68
Issuance of note receivable		(420	)		-			-			(420	)
Proceeds from notes receivable		107			98
Net cash used in investing activities	$	(25,608	)	$	(18,564	)	$	(3,870	)	$	(24,888	)

Following is a breakdown of our ~~additions to~~payments for property and equipment and intangible assets for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):

	For the Nine Months Ended June 30,				For the Six Months Ended March 31,
	2019		2018		2020		2019
New facilities and equipment	$	14,829	$	16,980
New facilities, equipment and software					$	3,212	$	12,785
Maintenance capital expenditures		2,072		1,847		2,111		1,117
Total capital expenditures	$	16,901	$	18,827	$	5,323	$	13,902

The capital expenditures during the ~~nine~~six months ended ~~June 30,~~March 31, 2020 were composed primarily of construction and development costs for two new Bombshells locations and the rehabilitation of a club that was damaged by fire, while the capital expenditures during the six months ended March 31, 2019 were composed primarily of construction and development costs for four new locations, while the capital expenditures during the nine months ended June 30, 2018 were composed primarily of construction and development costs for one new location and purchase of real estate for three Bombshells locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

~~Acquisitions~~Prior year acquisitions of $13.5 million ~~excluding acquisition-related costs, for the nine months ended June 30, 2019~~ relate to $7.5 million cash paid on the Pittsburgh club acquisition and the $6.0 million cash paid on the Chicago club acquisition.

Cash Flows from Financing Activities

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

	For the Nine Months						For the Six Months
	Ended June 30,						EndedMarch 31,
	2019			2018			2020			2019
Proceeds from long-term debt	$	12,330		$	72,387		$	880		$	10,296
Payments on long-term debt		(18,634	)		(70,444	)		(4,097	)		(13,287	)
Debt prepayment penalty		-			(543	)
Purchase of treasury stock		(2,364	)		-			(8,488	)		(1,961	)
Payment of dividends		(867	)		(876	)		(647	)		(582	)
Payment of loan origination costs		(20	)		(960	)		-			(20	)
Distribution to noncontrolling interests		(21	)		(162	)		(31	)		-
Net cash used in financing activities	$	(9,576	)	$	(598	)	$	(12,383	)	$	(5,554	)

We purchased ~~102,113~~465,390 shares of our common stock at an average price of ~~$23.15~~$18.24 during the ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, while we ~~did not purchase~~purchased 84,811 shares of our ~~Company’s~~ common stock at an average price of $23.13 during the same period last year. We paid quarterly dividends of $0.03 per share during each of the current- and prior-year ~~quarters.~~

On November 1, 2018, the Company raised $2.35 million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on November 1, 2021. The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity. Among the promissory notes are two notes with a principal of $450,000 and $200,000. The $450,000 note was in exchange for a $300,000 12% note and the $200,000 note was in exchange for a $100,000 note, both of which were includedquarters, except in the May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami. Also included in the $2.35 million borrowing is a $500,000 note borrowed from a related party and two notes totaling $400,000 borrowed from a non-officer employee and a family membersecond quarter of ~~a non-officer employee in which the terms of the notes are the same as the rest of the lender group. See Notes 6 and 13 to our unaudited condensed consolidated financial statements.~~

On February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%, with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime plus 0.5% with a 6.0% floor2020 where we paid $0.04 per annum. The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate. The Company paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction loan with the remaining charged to interest expense. The Company also wrote off the remaining unamortized debt issuance costs of the old bank note to interest expense.

Included in the balance of long-term debt as of March 31, 2019 and September 30, 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer employee in which the terms of the note are the same as the rest of the lender group.

share.

Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy.

	For the Nine Months				For the Six Months
	Ended June 30,				Ended March 31,
	2019		2018		2020		2019
Net cash provided by operating activities	$	28,414	$	22,411	$	11,981	$	20,971
Less: Maintenance capital expenditures		2,072		1,847		2,111		1,117
Free cash flow	$	26,342	$	20,564	$	9,870	$	19,854

Our free cash flow for the ~~current-year nine-month period increased~~current year decreased by ~~28.1%~~50.3% compared to the comparable prior-year period. Though we generated a sizeable amount of free cash flow during the nine months ended June 30, 2019, we still ended with a net decrease in cash and cash equivalents from the most recent year-endperiod primarily due to the impact of the COVID-19 pandemic and capital expenditures on remodeling of an older Bombshells unit and on upgrades in our ~~acquisition of two new~~Miami clubs ~~and~~in preparation for the ~~construction of new Bombshells units.~~pro football championship.

Other than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not aware of any event or trend that would potentially significantly affect liquidity. ~~In the event such a trend develops, we believe our working capital and capital expenditure requirements will be adequately met by cash flows from operations.~~ In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business down turns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.

The following table presents a summary of such indicators for the ~~nine~~six months ended ~~June 30:~~March 31:

			Increase					Increase							Increase					Increase
	2019		(Decrease)			2018		(Decrease)			2017		2020		(Decrease)			2019		(Decrease)			2018

Sales of alcoholic beverages	$	56,366		6.7	%	$	52,835		19.8	%	$	44,085	$	37,662		2.4	%	$	36,796		4.6	%	$	35,177
Sales of food and merchandise		19,175		13.4	%		16,906		28.1	%		13,201		13,926		14.8	%		12,129		13.0	%		10,731
Service revenues		51,609		6.8	%		48,338		12.4	%		42,995		31,541		(8.1	%)		34,310		7.1	%		32,022
Other		8,726		24.8	%		6,993		29.4	%		5,405		5,691		1.4	%		5,614		24.5	%		4,508
Total revenues		135,876		8.6	%		125,072		18.3	%		105,686		88,820		(0.0	%)		88,849		7.8	%		82,438
Net cash provided by operating activities	$	28,414		26.8	%	$	22,411		25.2	%	$	17,897	$	11,981		(42.9	%)	$	20,971		49.0	%	$	14,077
Adjusted EBITDA*	$	36,631		3.4	%	$	35,432		27.8	%	$	27,715	$	19,877		(18.6	%)	$	24,405		3.8	%	$	23,520
Free cash flow*	$	26,342		28.1	%	$	20,564		23.9	%	$	16,592	$	9,870		(50.3	%)	$	19,854		54.9	%	$	12,815
Long-term debt (end of period)	$	146,579		11.7	%	$	131,255		4.8	%	$	125,268
Long-term debt (end of period)**													$	140,440		(6.3	%)	$	149,818		17.8	%	$	127,213

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

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

**	Balance as of March 31, 2020 includes liabilities associated with held-for-sale assets amounting to $1.2 million.

Share Repurchase

We purchased ~~102,113~~465,390 shares of our common stock at an average price of ~~$23.15 per share~~$18.24 during the ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, while we ~~did not purchase~~purchased 84,811 shares of our common stock at an average price of $23.13 during the same period last year. In ~~January 2019,~~February 2020, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock. As of ~~June 30, 2019,~~March 31, 2020, we have ~~$10.8~~$11.8 million remaining to purchase additional shares under our share repurchase program.

~~Other Liquidity and Capital Resources~~

We have not established financing other than the notes payable discussed in Note 6 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.

We believe that the adult entertainment industry standard of treating entertainers as independent contractors provides us with safe harbor protection to preclude payroll tax assessment for prior years. We have prepared plans that we believe will protect our profitability in the event that the sexually-oriented business industry is required in all states to convert dancers who are now independent contractors into employees.

The sexually-oriented business industry is highly competitive with respect to price, service and location, as well as the professionalism of the entertainment. Although management believes that we are well-positioned to compete successfully in the future, there can be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.

Impact of Inflation

We have not experienced a material overall impact from inflation in our operations during the past several years. To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future.

3733

Seasonality

Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if the circumstances warrant. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, ~~we believe~~management believes that we are able to make better investment ~~decisions unless there is another strategic rationale, in management’s opinion.~~decisions.

Based on our current capital allocation strategy:

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

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

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

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

Growth Strategy

We believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. Our growth strategy involves the following: (i) to acquire existing units in locations that are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed; (ii) to open new units after market analysis; (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.

We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All ~~seven~~ten of the ~~currently~~ existing Bombshells as of March 31, 2020 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~~one Bombshells unit during the quarter ended December 31, 2019, and opened another unit during the quarter ended March 31, 2020.

On November 5, 2019, we announced that our subsidiaries have signed definitive agreements to acquire the assets and related real estate of a well-established, top gentlemen’s club located in ~~fiscal 2019, one that opened~~the Northeast Corridor for $15.0 million. The agreements terminated prior to closing. We provided the sellers notice of the termination in ~~December 2018 and another that opened in March 2019. We currently have two Bombshells projects under construction, which are expected to open in early first quarter of fiscal~~April 2020.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of ~~June 30, 2019,~~March 31, 2020, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, ~~2018.~~2019.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that the information required to be filed or submitted with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management of the company with the participation of its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2019,~~March 31, 2020, an evaluation was performed under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on their evaluation, they have concluded that our disclosure controls and procedures were not effective as of ~~June 30, 2019.~~March 31, 2020. This determination is based on the previously reported material ~~weaknesses~~weakness management previously identified in our internal control over financial reporting, as described ~~below, and on the conclusion to supplement certain disclosure in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as described in our Form 8-K filed on July 22, 2019.~~below. We are in the process of remediating the material weaknesses in our internal control, as described ~~below, and we are implementing a more robust corporate and accounting governance program, as described in the July 22, 2019 Form 8-K.~~below. We believe the completion of these processes should remedy our disclosure controls and procedures. We will continue to monitor these issues.

Previously Reported Material ~~Weaknesses~~Weakness in Internal Control Over Financial Reporting

In our Annual Report for the year ended September 30, ~~2018,~~2019, filed with the SEC on ~~December 31, 2018,~~February 13, 2020, management concluded that our internal control over financial reporting was not effective as of September 30, ~~2018.~~2019. In ~~management’s~~the evaluation, management identified a material weakness in internal control related to ineffective financial statement close and reporting controls in the ~~following deficiencies were identified as material weaknesses:~~

●

~~Control Environment~~

~~The control environment, which is the responsibility~~areas of ~~senior~~ management ~~helps set the tone~~review of ~~the organization, influences the control consciousness~~financial statement information, independent review of ~~its officers~~journal entries, disclosure of related party transactions, and ~~employees, and is an important component affecting how the organization performs financial analysis,~~ accounting and financial reporting. A proper organizational tone can be promoted through a variety of means, such as well documented and communicated policies, a commitment to hiring competent employees, the manner and content of oral and written communications, strong internal controls and effective governance.for loss contingencies.

●

~~Control Environment, Risk Assessment and Monitoring~~

We did not properly design or maintain effective controls over the control environment, risk assessment, and monitoring components which contributed to a number of material weaknesses at the control activity level. As it relates to the control environment and risk assessment, we did not have a sufficient complement of accounting, financial, and information technology personnel with an appropriate level of knowledge to assess internal control risks, address known internal control weaknesses, and address the Company’s overall financial reporting and information technology requirements. As it relates to monitoring, we did not perform timely and ongoing evaluations to ascertain whether the components of internal control are present and functioning. The failures within these three COSO components contributed to the following material weaknesses at the control activity level:

●

~~Control Activities~~

●

Revenues – We did not properly design or maintain effective controls over the segregation of cash counts at our nightclubs and restaurants, the information produced by our point-of-sale systems, other revenues generated outside the point-of-sale system, and the review of journal entries used to record revenue transactions.

●

Complex Accounting and Management Estimates – We did not properly design or maintain effective controls over complex accounting and management estimates related to the impairment analyses for indefinite lived intangible assets, goodwill, and property and equipment, and the accounting for income taxes, assets held for sale, business combinations, debt modifications, and useful lives of leasehold improvements, which resulted in certain instances of incorrect accounting and improper valuation decisions.

	●	Financial Statement Close and Reporting – We did not properly design or maintain effective controls, in aggregate, over the period end financial close and reporting process to enable timely reporting of complete and accurate financial information. Specifically, we lacked controls to define financial statement review thresholds, consistently perform independent reviews of journal entries prior to posting, and consistently prepare, approve, and retain adequate supporting documentation for financial statement balances and the related footnote disclosures.

	●	Information Technology – We did not properly design or maintain effective controls to prevent unauthorized access to certain systems, programs and data, and provide for periodic review and monitoring of access and changes in programs, including review of security logs and analysis of segregation of duties conflicts.

	●	Segregation of Duties – We did not maintain effective policies, procedures, or controls in aggregate to ensure adequate segregation of duties within the Company’s business processes, financial applications, and IT systems. Specifically, we did not have appropriate controls in place to adequately assess the segregation of job responsibilities and system user access for initiating, authorizing, and recording transactions.

Remediation Efforts to Address Material ~~Weaknesses~~Weakness

~~As disclosed in our most recent Annual Report on Form 10-K, we have, and continue~~Management is committed to identify and implement actions to improve our internal control over financial reporting and disclosure controls and procedures including actions to enhance our resources and training with respect to financial reporting and disclosure responsibilities, and increase utilization of accounting system functionality, with continued oversight from the Audit Committee.

We have taken, and continue to take, the actions described below to remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described in this section. While the Audit Committee and senior management are closely monitoring the implementation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, tested and determined effective,of the material ~~weaknesses~~weakness described above, ~~will continue to exist.~~

~~Control Environment, Risk Assessment and Monitoring~~

~~Our Board~~as well as the continued improvement of ~~Directors has directed senior management to ensure that a proper, consistent tone is communicated throughout~~ the organization, which emphasizes the expectation that previously existing deficiencies will be rectified through implementation of processes and controls to ensure strict compliance with U.S. GAAP and regulatory requirements. We also have taken steps to effect a proper tone through our policies and personnel. To effect this, we have retained an external consulting firm to effectively act as an internal audit department to assist in implementing an enterprise risk assessment which would include following up with additional internal audits as needed. The external consulting firm will also provide additional scrutiny around control activities and help with the enhancement of ongoing monitoring activities related to such controls.

~~Control Activities~~

~~Strengthening the controls and processes regarding the recording and reporting of revenue –~~Currently, one of our point-of-sale (“POS”) system providers does not issue an SOC 1 report. An SOC 1 Report (System and Organization Controls Report) is a report on Controls at a Service Organization which are relevant to user entities’Company’s internal control over financial reporting. As a result of the non-issuance of this report by the provider, it is necessary for us to use alternative procedures to gain the required level of confidence regarding the reliability of this system to accurately report sale information. In the case of credit card sales, data is effectively processed using other third-party providers with whom we have a higher degree of confidence. We will workManagement has been implementing, and continues to implement, ~~stronger~~measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls ~~regarding~~are designed, implemented, and operating effectively.

To address the verification of data from the POS provider if no service provider internal controls adequacy report can be obtained. In the case of cash sales, we would seek to point to compensating detective controls, such as nightly cash counts, recurring surprise unannounced cash audits and monthly detailed revenue reconciliations to potentially detect any irregularities. Such controls will be evaluated for proper segregation of duties bothmaterial weakness, management has completed, or is in the nightly cash counts and in the related journal entries to remediate controls over both point-of-sale and other revenues. We have strengthened these controls and are continuously working with our system provider to ensure the required level of confidence necessary to prevent any material weaknesses in the future.

~~Strengthening internal controls over complex accounting and management estimates and financial statement preparation –~~Subsequent to September 30, 2018, we have added review procedures and controls over complex accounting and estimates and prevent instances of incorrect accounting, incorrect financial statement preparation and improper valuation decisions, by increasing our own level of competency as well as using third-party consultants to assist where necessary such as with our goodwill, indefinite-lived intangible assets, and property and equipment impairment analyses whenever necessary and also using appropriate third-party resources to help with the analysis and accounting for assets held for sale, business combinations, income taxes, debt modifications, assessment of useful lives of leasehold improvements, and other complex accounting matters.

~~Strengthening internal controls over financial statement close and reporting –~~ With the oversight of our Audit Committee, we have continued to take proactive steps and implement additional measures to remediate the underlying causes of the material weaknesses. We are taking significant steps to improve our risk assessment process ~~and monitoring structure, as follows:~~of:

	●	~~The new ERP system described below has~~developing policies and ~~will continue~~procedures to ~~assist us in strengthening~~enhance the ~~controls over financial reporting, and we have also added an overlay~~precision of management review of ~~our~~ financial ~~statements during our financial reporting process. In addition, we have further trained our current personnel and have expanded our accounting team to assist in the review of our financial reporting.~~
		statement information;
	●	~~On top~~implementing policies and procedures to enhance independent review of the ERP system described above, we have also implemented, in April 2018, a new monitoring and security software to automate identification of our segregation of duties conflicts, as well as improve access monitoring controls and generate compliance documentation. The effective implementation of this software remains in process as we continually evaluate both manual and automated controls impacted by segregation of duties.

	●	We have retained a more robust outside consulting firm to assist us in evaluating, redesigning and implementing necessary steps to maintain adequate internal controls. Given that this is the second year of performing internal audit services, there have been many synergies, operational efficiencies and alignment between management and our consulting firm.
		journal entries;
	●	~~We have developed more robust controls~~developing and implementing procedures to ~~evaluate monthly~~ensure the completeness of related party disclosures; and ~~quarterly financial statement variances.~~

	●	~~We have developed more robust controls over~~developing and implementing procedures related to the ~~review~~identification and ~~evaluation of financial statement balances and the related footnote disclosures.~~

	●	~~We have started to implement certain enhanced journal review procedures which will ensure that proper review can be executed and evidenced.~~accounting for loss contingencies.

~~Strengthening~~We believe that these actions will remediate the ~~information technology application~~ ~~– We were previously aware~~material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of ~~the limitations of our accounting software~~time and had been in the planning/implementation process of replacing the software for many months prior to September 30, 2017. In October 2017, we completed the conversion to a new Enterprise Resource Planning (“ERP”) system which, along with changes to our manual internalmanagement has concluded, through testing, that these controls we believe has resolved some of the issues detailed above relating to the information systems. The new ERP system has features that prevent unauthorized access to certain programs and data, and also provides for periodic review and monitoring of access including review of security logs. In addition to the ERP system, we are ~~taking steps to improve monitoring of access to point-of-sale systems at remote locations, as well as review of change management protocols.~~operating effectively.

~~Strengthening our segregation of duties issues –~~ The features mentioned above include proper segregation of duties within our journal entry process, including analysis of segregation of duties conflicts, which we hope to more fully utilize in fiscal year 2019. We have also hired a Director of ERP & Business Intelligence. In addition to the segregation of duties improvements, there will be continuing improvements in the controls that would mitigate any potential conflicts, most importantly regarding the length of time the controls have been operating effectively.

Changes in Internal Control Over Financial Reporting

Other than as described above, no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~June 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

See the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

Item 1A. Risk Factors.

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018,~~2019, except for such risks and uncertainties that may result from the additional disclosure in the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference, as well as such risks and uncertainties associated with the ~~Company’s ability to regain and maintain compliance with the filing requirements of the SEC and the Nasdaq Stock Market.~~COVID-19 pandemic, as disclosed below. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition or results of operations.

The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has and could continue to materially affect our operations, financial condition and results of operations for an extended period of time.

The COVID-19 pandemic has had an adverse effect that is material on our business. The COVID-19 pandemic, federal, state and local government responses to COVID-19, our customers’ responses to the pandemic, and our Company’s responses to the pandemic have all disrupted and will continue to disrupt our business. In the United States, as well as globally, individuals are being encouraged to practice social distancing, restricted from gathering in groups and in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 pandemic and these changing conditions, as of March 18, 2020, we temporarily closed all of our clubs and restaurants. We furloughed club and restaurant employees, except for a limited number of unit managers, and implemented cost savings measures throughout our operations. The COVID-19 pandemic’s impact on the economy in general could also adversely affect our customers’ financial condition, resulting in reduced spending at our clubs and restaurants. The COVID-19 pandemic and these responses have affected and will continue to adversely affect our customer traffic, sales and operating costs and we cannot predict how long the pandemic will last or what other government responses may occur.

If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

Our club and restaurant operations could be further disrupted if any of our employees are diagnosed with COVID-19 and the circumstances require quarantine of some or all of a club or restaurant’s employees and disinfection of the facilities. If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations. Those employees might seek and find other employment during our business interruption, which could materially adversely affect our ability to properly staff and reopen our clubs and restaurants with experienced team members when permitted to do so by governments.

Our suppliers could be adversely impacted by the COVID-19 pandemic. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply interruptions.

The equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and the Company’s stock price has fluctuated significantly.

We cannot predict how soon we will be able to reopen all our clubs and restaurants, as our ability to reopen our locations will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is unclear how quickly customers will return to our clubs and restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses. Considering the significant uncertainty as to when we can reopen some or all of our locations and the uncertain customer demand environment, in addition to the actions described above, we have taken action to reduce our cash expenditures, which may impact our future growth, refer to Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further information.

If we are unable to maintain compliance with certain of our debt covenants, we may be unable to make additional borrowings and be declared in default where our debt will be made immediately due and payable. In addition, global economic conditions may make it more difficult to access new credit facilities.

Our liquidity position is, in part, dependent upon our ability to borrow funds from financial institutions and/or private individuals. Certain of our debts have financial covenants that require us to maintain certain operating income to debt service ratios. As of March 31, 2020, we were in compliance with all covenants. However, as a result of the COVID-19 outbreak, our total revenues have decreased significantly and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our operations. Due to the impact of COVID-19, our financial performance in future fiscal quarters will be negatively impacted. A failure to comply with the financial covenants under our credit facility would give rise to an event of default under the terms of certain of our debts, allowing the lenders to accelerate repayment of any outstanding debt.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In September 2008, our Board of Directors authorized us to repurchase up to $5.0 million worth of our common stock in the open market or in privately negotiated transactions. As of April 2013, we completed the repurchase of all $5.0 million in stock authorized under this plan. In April 2013, our Board of Directors authorized us to repurchase up to an additional $3.0 million worth of our common stock, and in May 2014, our Board of Directors increased the repurchase authorization by another $7.0 million. In May 2016, the Board of Directors increased the repurchase authorization by an additional $5.0 million. ~~During the quarter ended December 31, 2018, we purchased 14,111 shares of our common stock in the open market at prices ranging from $24.85 to $25.15 per share.~~ In January 2019, the Board of Directors increased the repurchase authorization by an additional $10.0 million. During the quarter ended ~~March~~December 31, 2019, we purchased ~~70,700~~332,671 shares of our common stock in the open market at prices ranging from ~~$20.75~~$18.30 to ~~$24.00~~$20.80 per share. ~~During~~In February 2020, the ~~quarter ended June 30, 2019, we purchased 17,302 shares~~Board of ~~our common stock in~~Directors increased the ~~open market at prices ranging from $22.70 to $23.50 per share.~~repurchase authorization by an additional $10.0 million. As of ~~June 30, 2019,~~May 8, 2020, we have ~~$10.8~~$11.8 million remaining to purchase additional shares.

Following is a summary of our purchases during the quarter ended ~~June 30, 2019:~~March 31, 2020:

Period Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit)(2) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
April 1-30, 2019 17,302 $ 23.26 17,302 $ 10,776,929
May 1-31, 2019 - - $ 10,776,929
June 1-30, 2019 - - $ 10,776,929
Total 17,302 $ 23.26 17,302

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)(2)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1)		Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
January 1-31, 2020		-				-	$	3,798,030
February 1-29, 2020		-				-	$	13,798,030
March 1-31, 2020		132,719	$	15.42		132,719	$	11,751,514
Total		132,719	$	15.42		132,719

	(1)	All shares were purchased pursuant to the repurchase plans approved by the Board of Directors, as described above.

	(2)	Prices include any commissions and transaction costs.

4337

Item 6. Exhibits.

Exhibit No.		Description
~~3.1~~		Articles of Incorporation dated December 9, 1994. (Incorporated by reference from Form SB-2 filed with the SEC on January 11, 1995.) *

~~3.2~~		Certificate of Amendment to Articles of Incorporation dated September 9, 2008. (Incorporated by reference from Definitive Schedule 14A filed with the SEC on July 21, 2008.) *

~~3.3~~		Certificate of Amendment to Articles of Incorporation dated August 6, 2014. (Incorporated by reference from Definitive Schedule 14A filed with the SEC on June 24, 2014.) *

~~3.4~~		Amended and Restated Bylaws. (Incorporated by reference from Form 8-K filed with the SEC on March 16, 2016.) *

~~4.1~~		Consolidated, Amended and Restated Promissory Note for $62,539,366.08 with Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

~~4.2~~		Amended and Restated Promissory Note for $10,558,311.35 with Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

~~4.3~~		Amended and Restated Promissory Note for $8,147,572.57 with Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

~~10.1~~		Employment Agreement with Eric S. Langan. (Incorporated by reference from Form 8-K filed with the SEC on May 4, 2018.) *

~~10.2~~		Employment Agreement with Travis Reese. (Incorporated by reference from Form 8-K filed with the SEC on May 4, 2018.) *

~~10.3~~		Employment Agreement with Phillip K. Marshall. (Incorporated by reference from Form 8-K filed with the SEC on May 4, 2018.) *

~~10.4~~		Loan Agreement between RCI Holdings, Inc. and Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

~~10.5~~		Absolute Unconditional and Continuing Guaranty of RCI Hospitality Holdings, Inc. to Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

~~10.6~~		Absolute Unconditional and Continuing Guaranty of Eric S. Langan to Centennial Bank (Incorporated by reference from Form 8-K filed with the SEC on December 19, 2017) *

31.1		Certification of Chief Executive Officer of RCI Hospitality Holdings, Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer of RCI Hospitality Holdings, Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer of RCI Hospitality Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.

101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

* Incorporated by reference from our previous filings with the SEC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	RCI HOSPITALITY HOLDINGS, INC.

Date: ~~September 24, 2019~~May 11, 2020	By:	/s/ Eric S. Langan
		Eric S. Langan
		Chief Executive Officer and President

Date: ~~September 24, 2019~~May 11, 2020	By:	/s/ Phillip K. Marshall
		Phillip K. Marshall
		Chief Financial Officer and Principal Accounting Officer

	Fiscal Year Ended September 30, 2018
	As Previously Reported		Adjustments			As Revised
Statement of Income/Comprehensive Income:
Other charges, net	$	8,350	$	834		$	9,184
Total operating expenses		137,352		834			138,186
Income from operations		28,396		(834	)		27,562
Income before income taxes		18,676		(834	)		17,842
Net income		21,794		(834	)		20,960
Net income attributable to RCIHH common stockholders		21,713		(834	)		20,879
Earnings per share - basic	$	2.23	$	(0.08	)	$	2.15
Earnings per share - diluted	$	2.23	$	(0.08	)	$	2.15
Comprehensive income	$	22,014	$	(834	)	$	21,180
Comprehensive income attributable to RCI Hospitality Holdings, Inc.		21,933		(834	)		21,099

	September 30, 2018
	As Previously Reported		Adjustment			As Revised
Balance Sheet/Statement of Changes in Stockholders’ Equity
Goodwill	$	44,425	$	(834	)	$	43,591
Total assets		330,566		(834	)		329,732
Retained earnings		89,740		(834	)		88,906
Total RCIHH stockholders’ equity		154,269		(834	)		153,435
Total stockholders’ equity		154,166		(834	)		153,332
Total liabilities and stockholders’ equity		330,566		(834	)		329,732

	Quarter Ended September 30, 2018
	As Previously Reported			Adjustment			As Revised
Income from operations	$	1,533		$	(834	)	$	699
Net loss attributable to RCIHH common stockholders		(2,672	)		(834	)		(3,506	)
Loss per share - basic	$	(0.27	)	$	(0.09	)	$	(0.36	)
Loss per share - diluted	$	(0.27	)	$	(0.09	)	$	(0.36	)

Land and building	$	4,325
Inventory		57
Furniture and equipment		50
Noncompete		100
SOB license		5,252
Goodwill		2,003
Deferred tax liability		(1,287	)
Net assets	$	10,500

Land and building	$	5,000
Inventory		23
Furniture and equipment		200
Noncompete		100
Goodwill		9,677
Net assets	$	15,000

	For the Nine Months Ended
	June 30, 2019						June 30, 2018						Increase (Decrease)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	56,366			41.5	%	$	52,835			42.2	%	$	3,531			6.7	%
Sales of food and merchandise		19,175			14.1	%		16,906			13.5	%		2,269			13.4	%
Service revenues		51,609			38.0	%		48,338			38.6	%		3,271			6.8	%
Other		8,726			6.4	%		6,993			5.6	%		1,733			24.8	%
Total revenues		135,876			100.0	%		125,072			100.0	%		10,804			8.6	%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		11,541			20.5	%		10,976			20.8	%		565			5.1	%
Food and merchandise sold		6,857			35.8	%		6,198			36.7	%		659			10.6	%
Service and other		307			0.5	%		173			0.3	%		134			77.5	%
Total cost of goods sold (exclusive of items shown separately below)		18,705			13.8	%		17,347			13.9	%		1,358			7.8	%
Salaries and wages		37,168			27.4	%		33,086			26.5	%		4,082			12.3	%
Selling, general and administrative		43,263			31.8	%		39,136			31.3	%		4,127			10.5	%
Depreciation and amortization		6,718			4.9	%		5,806			4.6	%		912			15.7	%
Other charges (gains), net		(2,250	)		-1.7	%		2,834			2.3	%		(5,084	)		-179.4	%
Total operating expenses		103,604			76.2	%		98,209			78.5	%		5,395			5.5	%
Income from operations		32,272			23.8	%		26,863			21.5	%		5,409			20.1	%
Other income (expenses)
Interest expense		(7,709	)		-5.7	%		(7,493	)		-6.0	%		216			2.9	%
Interest income		218			0.2	%		187			0.1	%		31			16.6	%
Non-operating loss		(408	)		-0.3	%		-			-			408			100.0	%
Income before income taxes		24,373			17.9	%		19,557			15.6	%		4,816			24.6	%
Income tax expense (benefit)		5,547			4.1	%		(4,899	)		-3.9	%		10,446			213.2	%
Net income	$	18,826			13.9	%	$	24,456			19.6	%	$	(5,630	)		-23.0	%

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)(2)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1)		Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
April 1-30, 2019		17,302	$	23.26		17,302	$	10,776,929
May 1-31, 2019		-				-	$	10,776,929
June 1-30, 2019		-				-	$	10,776,929
Total		17,302	$	23.26		17,302