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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q
x

FORM 10-Q

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

For the quarterly period ended March 31, 20212022
o

☐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)

Texas76-0458229

(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

10737 Cutten Road

Houston,, Texas77066

(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueRICKRICKThe 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 Yesx ☒ No ☐

o

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 Yesx ☒ No ☐

o

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 ☐o Accelerated filer ☒x Non-accelerated filer ☐o Smaller reporting company ☒o Emerging growth company ☐o

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. ☐

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Noo ☒

No

x

As of May 6, 2021, 8,999,9102022, 9,416,567 shares of the registrant’s common stock were outstanding.


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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) the impact of the COVID-19 pandemic, and (vii) 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.

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RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

  March 31, 2021  September 30, 2020 
  (unaudited)    
ASSETS        
Current assets        
Cash and cash equivalents $20,156  $15,605 
Accounts receivable, net  3,630   6,767 
Current portion of notes receivable  214   201 
Inventories  2,403   2,372 
Prepaid expenses and other current assets  5,020   6,488 
Assets held for sale  7,382   - 
Total current assets  38,805   31,433 
Property and equipment, net  175,153   181,383 
Operating lease right-of-use assets, net  24,698   25,546 
Notes receivable, net of current portion  2,892   2,908 
Goodwill  45,686   45,686 
Intangibles, net  73,070   73,077 
Other assets  806   900 
Total assets $361,110  $360,933 
         
LIABILITIES AND EQUITY        
Current liabilities        
Accounts payable $4,021  $4,799 
Accrued liabilities  12,321   14,573 
Current portion of debt obligations, net  16,380   16,304 
Current portion of operating lease liabilities  1,692   1,628 
Total current liabilities  34,414   37,304 
Deferred tax liability, net  20,390   20,390 
Debt, net of current portion and debt discount and issuance costs  116,032   125,131 
Operating lease liabilities, net of current portion  24,583   25,439 
Other long-term liabilities  357   362 
Total liabilities  195,776   208,626 
         
Commitments and contingencies (Note 10)  -   - 
         
Equity        
Preferred stock, $0.10 par value per share; 1,000 shares authorized; NaN issued and outstanding  -   - 
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,000 and 9,075 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively  90   91 
Additional paid-in capital  50,040   51,833 
Retained earnings  115,811   100,797 
Total RCIHH stockholders’ equity  165,941   152,721 
Noncontrolling interests  (607)  (414)
Total equity  165,334   152,307 
Total liabilities and equity $361,110  $360,933 

value and number of shares)

March 31, 2022September 30, 2021
(unaudited)
ASSETS
Current assets
Cash and cash equivalents$38,067 $35,686 
Accounts receivable, net6,262 7,570 
Current portion of notes receivable292 220 
Inventories3,361 2,659 
Prepaid expenses and other current assets6,880 1,928 
Assets held for sale6,126 4,887 
Total current assets60,988 52,950 
Property and equipment, net203,434 175,952 
Operating lease right-of-use assets, net36,180 24,308 
Notes receivable, net of current portion5,411 2,839 
Goodwill54,484 39,379 
Intangibles, net125,284 67,824 
Other assets1,771 1,367 
Total assets$487,552 $364,619 
LIABILITIES AND EQUITY
Current liabilities
Accounts payable$6,255 $4,408 
Accrued liabilities15,576 10,403 
Current portion of debt obligations, net11,177 6,434 
Current portion of operating lease liabilities2,306 1,780 
Total current liabilities35,314 23,025 
Deferred tax liability, net22,040 19,137 
Debt, net of current portion and debt discount and issuance costs166,903 118,734 
Operating lease liabilities, net of current portion35,517 24,150 
Other long-term liabilities355 350 
Total liabilities260,129 185,396 
Commitments and contingencies (Note 10)00
Equity
Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding— — 
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,454,267 and 8,999,910 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively94 90 
Additional paid-in capital77,553 50,040 
Retained earnings150,366 129,693 
Total RCIHH stockholders’ equity228,013 179,823 
Noncontrolling interests(590)(600)
Total equity227,423 179,223 
Total liabilities and equity$487,552 $364,619 
See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

INCOME

(in thousands, except per share and number of share data)

(unaudited)

  2021  2020  2021  2020 
  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Revenues                
Sales of alcoholic beverages $20,273  $16,919  $37,633  $37,662 
Sales of food and merchandise  9,538   6,479   18,147   13,926 
Service revenues  11,502   14,348   21,562   31,541 
Other  2,746   2,680   5,115   5,691 
Total revenues  44,059   40,426   82,457   88,820 
Operating expenses                
Cost of goods sold                
Alcoholic beverages sold  3,730   3,435   6,992   7,581 
Food and merchandise sold  3,029   2,271   5,918   4,846 
Service and other  43   76   96   131 
Total cost of goods sold (exclusive of items shown separately below)  6,802   5,782   13,006   12,558 
Salaries and wages  11,200   12,222   22,686   25,445 
Selling, general and administrative  12,618   14,450   24,770   30,981 
Depreciation and amortization  2,117   2,257   4,140   4,461 
Other charges, net  1,481   8,190   1,431   8,164 
Total operating expenses  34,218   42,901   66,033   81,609 
Income (loss) from operations  9,841   (2,475)  16,424   7,211 
Other income (expenses)                
Interest expense  (2,364)  (2,459)  (4,798)  (4,944)
Interest income  62   85   122   183 
Non-operating gains (losses), net  431   (62)  5,347   (134)
Income (loss) before income taxes  7,970   (4,911)  17,095   2,316 
Income tax expense (benefit)  1,938   (1,418)  1,554   175 
Net income (loss)  6,032   (3,493)  15,541   2,141 
Net loss attributable to noncontrolling interests  59   41   193   41 
Net income (loss) attributable to RCIHH common stockholders $6,091  $(3,452) $15,734  $2,182 
                 
Earnings (loss) per share                
Basic and diluted $0.68  $(0.37) $1.75  $0.24 
                 
Weighted average number of common shares outstanding                
Basic and diluted  9,000   9,225   9,010   9,274 
                 
Dividends per share $0.04  $0.04  $0.08  $0.07 

For the Three Months Ended
March 31,		For the Six Months Ended
March 31,
2022202120222021
Revenues
Sales of alcoholic beverages$27,335 $20,273 $53,766 $37,633 
Sales of food and merchandise11,160 9,538 22,054 18,147 
Service revenues21,501 11,502 42,377 21,562 
Other3,696 2,746 7,331 5,115 
Total revenues63,692 44,059 125,528 82,457 
Operating expenses
Cost of goods sold
Alcoholic beverages sold4,896 3,730 9,730 6,992 
Food and merchandise sold3,840 3,029 7,797 5,918 
Service and other24 43 124 96 
Total cost of goods sold (exclusive of items shown separately below)8,760 6,802 17,651 13,006 
Salaries and wages16,530 11,200 33,035 22,686 
Selling, general and administrative18,437 12,618 36,923 24,770 
Depreciation and amortization2,877 2,117 5,071 4,140 
Other charges (gains), net7 1,481 (144)1,431 
Total operating expenses46,611 34,218 92,536 66,033 
Income from operations17,081 9,841 32,992 16,424 
Other income (expenses)
Interest expense(2,864)(2,364)(5,468)(4,798)
Interest income112 62 218 122 
Non-operating gains, net— 431 84 5,347 
Income before income taxes14,329 7,970 27,826 17,095 
Income tax expense3,356 1,938 6,289 1,554 
Net income10,973 6,032 21,537 15,541 
Net loss (income) attributable to noncontrolling interests(21)59 (10)193 
Net income attributable to RCIHH common shareholders$10,952 $6,091 $21,527 $15,734 
Earnings per share
Basic and diluted$1.15 $0.68 $2.28 $1.75 
Weighted average number of common shares outstanding
Basic and diluted9,489,085 8,999,910 9,447,854 9,009,604 
Dividends per share$0.05 $0.04 $0.09 $0.08 
See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

thousands, except number of shares)

(unaudited)

  of Shares  Amount  Capital  Earnings  of Shares  Amount  Interests  Equity 
  Common Stock  Additional     Treasury Stock       
  Number     Paid-In  Retained  Number     Noncontrolling  Total 
  of Shares  Amount  Capital  Earnings  of Shares  Amount  Interests  Equity 
Balance at September 30, 2020  9,075  $91  $51,833  $100,797   -  $-  $(414) $152,307 
Purchase of treasury shares  -   -   -   -   (75)  (1,794)  -   (1,794)
Canceled treasury shares  (75)  (1)  (1,793)  -   75   1,794   -   - 
Payment of dividends  -   -   -   (360)  -   -   -   (360)
Payment to noncontrolling interest                                
Net income (loss)  -   -   -   9,643   -   -   (134)  9,509 
Balance at December 31, 2020  9,000  $90   50,040   110,080   -   -   (548)  159,662 
Balance at December 31, 2020  9,000  $90   50,040   110,080   -   -   (548)  159,662 
Payment of dividends  -   -   -   (360)  -   -   -   (360)
Payment to noncontrolling interest                                
Net income (loss)  -   -   -   6,091   -   -   (59)  6,032 
Balance at March 31, 2021  9,000  $90  $50,040  $115,811   -  $-  $(607) $165,334 
                                 
Balance at September 30, 2019  9,591  $96  $61,312  $108,168   -  $-  $(156) $169,420 
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   113,523   -   -   (166)  168,324 
Balance at December 31, 2019  9,258   93   54,874   113,523   -   -   (166)  168,324 
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  $109,703   -  $-  $(228) $162,395 

Common StockAdditional
Paid-In
Capital		Retained
Earnings		Treasury StockNoncontrolling
Interests		Total
Equity
Number
of Shares		AmountNumber
of Shares		Amount
Balance at September 30, 20218,999,910 $90 $50,040 $129,693 — $— $(600)$179,223 
Issuance of common shares500,000 5 30,357 — — — — 30,362 
Payment of dividends— — — (380)— — — (380)
Net income (loss)— — — 10,575 — — (11)10,564 
Balance at December 31, 20219,499,910 95 80,397 139,888 — — (611)219,769 
Purchase of treasury shares— — — — (45,643)(2,845)— (2,845)
Canceled treasury shares(45,643)(1)(2,844)— 45,643 2,845 — — 
Payment of dividends— — — (474)— — — (474)
Net income— — — 10,952 — — 21 10,973 
Balance at March 31, 20229,454,267 $94 $77,553 $150,366 — $— $(590)$227,423 
Balance at September 30, 20209,074,569 $91 $51,833 $100,797 — $— $(414)$152,307 
Purchase of treasury shares— — — — (74,659)(1,794)— (1,794)
Canceled treasury shares(74,659)(1)(1,793)— 74,659 1,794 — — 
Payment of dividends— — — (360)— — — (360)
Net income (loss)— — — 9,643 — — (134)9,509 
Balance at December 31, 20208,999,910 90 50,040 110,080 — — (548)159,662 
Payment of dividends— — — (360)— — — (360)
Net income (loss)— — — 6,091 — — (59)6,032 
Balance at March 31, 20218,999,910 $90 $50,040 $115,811 — $— $(607)$165,334 
See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)thousands, except number of shares)
(unaudited)
For the Six Months Ended March 31,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$21,537 $15,541 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization5,071 4,140 
Loss (gain) on sale of businesses and assets(708)86 
Impairment of assets— 1,401 
Unrealized loss on equity securities1 67 
Amortization of debt discount and issuance costs136 101 
Gain on debt extinguishment(83)(5,298)
Noncash lease expense1,238 848 
Gain on insurance(321)(294)
Doubtful accounts expense (reversal) on notes receivable53 (58)
Changes in operating assets and liabilities:
Accounts receivable1,065 3,137 
Inventories(276)(31)
Prepaid expenses, other current and other assets(5,360)1,494 
Accounts payable, accrued and other liabilities5,508 (3,888)
Net cash provided by operating activities27,861 17,246 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets2,910 8 
Proceeds from insurance485 294 
Proceeds from notes receivable82 61 
Payments for property and equipment and intangible assets(13,990)(6,718)
Acquisition of businesses, net of cash acquired(39,302)— 
Net cash used in investing activities(49,815)(6,355)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively35,742 2,176 
Payments on debt obligations(7,290)(5,977)
Purchase of treasury stock(2,845)(1,794)
Payment of dividends(854)(720)
Payment of loan origination costs(418)(25)
Net cash provided by (used in) financing activities24,335 (6,340)
NET INCREASE IN CASH AND CASH EQUIVALENTS2,381 4,551 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD35,686 15,605 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$38,067 $20,156 
CASH PAID DURING PERIOD FOR:
Interest$5,064 $5,512 
Income taxes$4,008 $29 
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(unaudited)

  2021  2020 
  For the Six Months 
  Ended March 31, 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $15,541  $2,141 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  4,140   4,461 
Deferred income tax benefit  -   (1,155)
Loss (gain) on sale of businesses and assets  86   (36)
Impairment of assets  1,401   8,210 
Unrealized loss on equity securities  67   134 
Amortization of debt discount and issuance costs  101   129 
Gain on debt extinguishment  (5,298)  - 
Noncash lease expense  848   825 
Gain on insurance  (294)  (33)
Doubtful accounts reversal on notes receivable  (58)  - 
Changes in operating assets and liabilities:        
Accounts receivable  3,137   1,917 
Inventories  (31)  (137)
Prepaid expenses, other current and other assets  1,494   2,840 
Accounts payable, accrued and other liabilities  (3,888)  (7,315)
Net cash provided by operating activities  17,246   11,981 
CASH FLOWS FROM INVESTING ACTIVITIES        
Proceeds from sale of businesses and assets  8   105 
Proceeds from insurance  294   945 
Proceeds from notes receivable  61   403 
Payments for property and equipment and intangible assets  (6,718)  (5,323)
Net cash used in investing activities  (6,355)  (3,870)
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from debt obligations  2,176   880 
Payments on debt obligations  (5,977)  (4,097)
Purchase of treasury stock  (1,794)  (8,488)
Payment of dividends  (720)  (647)
Payment of loan origination costs  (25)  - 
Distribution to noncontrolling interests  -   (31)
Net cash used in financing activities  (6,340)  (12,383)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  4,551   (4,272)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  15,605   14,097 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,156  $9,825 
         
CASH PAID DURING PERIOD FOR:        
Interest (net of amounts capitalized of $0 and $155, respectively) $5,512  $4,891 
Income taxes $29  $2,105 
         
Noncash investing and financing transactions:        
Principal of Paycheck Protection Program loans forgiven $5,298  $- 
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 $98  $21 

Noncash investing and financing transactions:
Debt incurred in connection with acquisition of businesses$22,200 $— 
Debt incurred in connection with purchase of property and equipment$2,625 $— 
Note receivable from sale of property$2,700 $— 
Issuance of shares of common stock for acquisition of businesses:
Number of shares500,000 — 
Fair value$30,362 $— 
Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases$19,187 $— 
Unpaid liabilities on capital expenditures$1,201 $98 
See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “RCIHH”“us”) 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, 20202021 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, 20202021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 2020.2021. 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 six months ended March 31, 20212022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021.

Certain reclassifications of cost of goods sold components with immaterial amounts have been made to prior year’s financial statements to conform to the current year financial statement presentation. There is no impact in total cost of goods sold, results of operations, and cash flows in all periods presented.

2022.

2. Recent Accounting Standards and Pronouncements

In June 2016,December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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. We adopted ASU 2016-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our consolidated financial statements.

8

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 adopted ASU 2018-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our consolidated financial statements.

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 adopted ASU 2019-01 as of October 1, 2020. Our adoption of this guidance did not have an impact on our consolidated financial statements.

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 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 tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. We adopted ASU 2019-12 on October 1, 2021. Our adoption of this update did not have a significant impact on our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are still evaluating the impact of this ASU but we do not expect it to have a material impact on the Company’sour consolidated financial statements.

9

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. Liquidity andOngoing Impact of COVID-19 Pandemic

In March 2020, former President Donald Trump declared

Since the coronavirus disease 2019 (“COVID-19”)U.S. declaration of the COVID-19 pandemic as a national public health emergency.emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly impact our cash flow. The declarationpandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. StartingTo adapt to the situation, we took significant steps to augment an anticipated decline in March 2020, we closed and reopened aoperating cash flows, including negotiating deferment of some of our debts, reducing the number of our clubsemployees and restaurantsrelated payroll costs where necessary, and implemented curfewdeferring or modifying certain fixed and capacity restrictions as required by local authorities. We do not know the effects the pandemic may have on our operations in the future.

variable monthly expenses, among others.

The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in theWe believe that we can borrow capital if needed but currently we do not have unused credit markets, andfacilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

9

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; *
●Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *
●Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
●Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

* AsTable of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.Contents

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 6 and 8. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining PPP loan in whole or in part.

Note 9.

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower sales,Closures and operating restrictions, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.

instituted.

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

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

Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived 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 assets in our clubs and restaurants that are affected. We evaluated forecasted cash flows considering the future assumed impact of the COVID-19 pandemic on sales. Based on ourthe evaluation we conducted during the interim period ended March 31, 2022, we determined that there is no impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets except for assets held for sale, as of March 31, 2021.

2022.

4. Acquisitions and Dispositions
On October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $3.0 million for $3.2 million, of which $2.7 million was in the form of a secured promissory note. This 7% note receivable has a term of eight years and is collectible in equal monthly installments of $21,544 in principal and interest with the remaining balance to be paid at maturity.
On October 8, 2021, the Company sold 1 of its clubs in South Houston for $300,000.
On October 18, 2021, we and certain of our subsidiaries completed our acquisition of 11 gentlemen’s clubs, 6 related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period, with interest rates on promissory notes reflective of market yields). The acquisition was structured by entering into 9 asset purchase agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in that business except certain excluded assets, and 2 stock purchase agreements, where a newly formed subsidiary purchased 100% of the capital stock of 2 club-owning entities. Along with the asset and stock purchase agreements, the Company also entered into a real estate purchase and sale agreement for 6 real estate properties and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the sellers. The acquisition gives the Company presence in four additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in 4 seller-financed notes (see Note 7), and 500,000 shares of our common stock. The preliminary fair value of the consideration transferred is as follows (in thousands):
Cash$36,800 
Notes payable21,200 
Common stock30,362 
Total consideration fair value$88,362 
We recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in our Nightclubs reportable segment. We have not finalized our valuation of the tangible and identifiable intangible assets acquired in this transaction. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets are provisional pending receipt of the final valuations for those assets. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
adjustments, the amount of goodwill is estimated to be $13.8 million. Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired entities. Goodwill will not be amortized but will be tested at least annually for impairment. Approximately $9.3 million of the recognized goodwill will be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of October 18, 2021:
Current assets$386 
Property and equipment19,534 
Licenses50,080 
Trademarks7,460 
Deferred tax liability(2,903)
Total net assets acquired74,557 
Goodwill13,805 
Acquisition price fair value$88,362 
Licenses and trademarks will not be amortized but will be tested at least annually for impairment.
The Company entered into leases with third parties for certain clubs where the real estate was not part of the acquisition. See Note 13.
In connection with the acquisition, we incurred acquisition-related expenses of approximately $417,000 ($173,000 recognized in fiscal 2021 and $244,000 recognized in fiscal 2022), of which $12,000 and $12,000 were expensed during the three and six months ended March 31, 2021 and $0 and $244,000 were expensed during the three and six months ended March 31, 2022, and in those periods included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.
From the date of acquisition until March 31, 2022, the 11 acquired clubs contributed revenues of $8.4 million and $14.4 million and income from operations of $2.0 million and $3.7 million during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statements of income. The following table presents the unaudited pro forma combined results of operations of the Company and the 11 acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amounts and number of shares):
For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Pro forma revenues$63,692 $47,393 $127,254 $90,777 
Pro forma net income attributable to RCIHH common stockholders$10,953 $5,615 $20,945 $15,507 
Pro forma earnings per share – basic and diluted$1.15 $0.59 $2.22 $1.63 
Pro forma weighted average number of common shares outstanding9,489,085 9,499,910 9,447,854 9,509,604 
The above unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021. The unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related tax effects. Since we do not have a final valuation of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and amortization and related tax effects. Pro forma net income and pro forma earnings per share include the impact of
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
acquisition-related expenses and interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were incurred as of the first day of fiscal 2021. Pro forma weighted average number of common shares outstanding includes the impact of 500,000 shares of our common stock issued as partial consideration for the acquisition.
On November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total preliminary purchase price of $3.5 million, by which $2.5 million was paid in cash at closing and $1.0 million through a seller-financed 7-year promissory note with an interest rate of 4.0% per annum. The $3.5 million acquisition price is preliminarily allocated $2.0 million to real estate, $200,000 to tangible assets, and $1.3 million to goodwill, which is deductible for tax purposes. The note is payable $13,669 per month, including principal and interest. See Note 7. From the date of acquisition until March 31, 2022, the acquired club contributed revenues of $424,000 and $713,000 and loss from operations of $28,000 and $24,000 during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statement of income. The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company.
On December 30, 2021, the Company acquired the real estate of 1 of its clubs in South Florida, which the Company previously leased, for $7.0 million in an all-cash purchase. At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating lease liability related to the discontinued lease.
On March 1, 2022, the Company acquired real estate in Stafford, Texas worth $3.5 million for a future Bombshells location. The Company secured a $2.6 million loan in relation to the purchase (see Note 7).
On March 1, 2022, the Company acquired real estate in Lubbock, Texas worth $400,000 to transfer one of our existing clubs due to eminent domain.
On March 23, 2022, the Company sold a property classified as held-for-sale with a carrying value of $1.9 million for $2.1 million in cash. The Company used $816,000 of the proceeds to pay off a loan related to the property.
5. Revenues

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 operations.income. 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. Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021, hence, 0 Expo-related revenue in fiscal 2020. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.

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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), are shown below (in thousands):

Schedule of Disaggregation of Segment Revenues

  Three Months Ended March 31, 2021  Three Months Ended March 31, 2020 
  Nightclubs  Bombshells  Other  Total  Nightclubs  Bombshells  Other  Total 
Sales of alcoholic beverages $12,634  $7,639  $-  $20,273  $11,860  $5,059  $-  $16,919 
Sales of food and merchandise  4,082   5,456   -   9,538   2,799   3,680   -   6,479 
Service revenues  11,446   56   -   11,502   14,290   58   -   14,348 
Other revenues  2,625   (16)  137   2,746   2,418   6   256   2,680 
  $30,787  $13,135  $137  $44,059  $31,367  $8,803  $256  $40,426 
                                 
Recognized at a point in time $30,382  $13,134  $136  $43,652  $30,977  $8,803  $252  $40,032 
Recognized over time  405*  1   1   407   390*  -   4   394 
  $30,787  $13,135  $137  $44,059  $31,367  $8,803  $256  $40,426 

  Six Months Ended March 31, 2021  Six Months Ended March 31, 2020 
  Nightclubs  Bombshells  Other  Total  Nightclubs  Bombshells  Other  Total 
Sales of alcoholic beverages $22,268  $15,365  $-  $37,633  $26,544  $11,118  $-  $37,662 
Sales of food and merchandise  7,505   10,642   -   18,147   6,063   7,863   -   13,926 
Service revenues  21,444   118   -   21,562   31,384   157   -   31,541 
Other revenues  4,767   16   332   5,115   5,235   15   441   5,691 
  $55,984  $26,141  $332  $82,457  $69,226  $19,153  $441  $88,820 
                                 
Recognized at a point in time $55,217  $26,140  $329  $81,686  $68,411  $19,153  $430  $87,994 
Recognized over time  767*  1   3   771   815*  -   11   826 
  $55,984  $26,141  $332  $82,457  $69,226  $19,153  $441  $88,820 

*Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 606.

Three Months Ended March 31, 2022Three Months Ended March 31, 2021
NightclubsBombshellsOtherTotalNightclubsBombshellsOtherTotal
Sales of alcoholic beverages$18,673 $8,662 $— $27,335 $12,634 $7,639 $— $20,273 
Sales of food and merchandise4,498 6,662 — 11,160 4,082 5,456 — 9,538 
Service revenues21,501 — — 21,501 11,446 56 — 11,502 
Other revenues3,502 9 185 3,696 2,625 (16)137 2,746 
$48,174 $15,333 $185 $63,692 $30,787 $13,135 $137 $44,059 
Recognized at a point in time$47,722 $15,332 $185 $63,239 $30,382 $13,134 $136 $43,652 
Recognized over time452 *1 — 453 405 *1 1 407 
$48,174 $15,333 $185 $63,692 $30,787 $13,135 $137 $44,059 
Six Months Ended March 31, 2022Six Months Ended March 31, 2021
NightclubsBombshellsOtherTotalNightclubsBombshellsOtherTotal
Sales of alcoholic beverages$36,840 $16,926 $— $53,766 $22,268 $15,365 $— $37,633 
Sales of food and merchandise9,087 12,967 — 22,054 7,505 10,642 — 18,147 
Service revenues42,185 192 — 42,377 21,444 118 — 21,562 
Other revenues6,843 19 469 7,331 4,767 16 332 5,115 
$94,955 $30,104 $469 $125,528 $55,984 $26,141 $332 $82,457 
Recognized at a point in time$94,066 $30,102 $468 $124,636 $55,217 $26,140 $329 $81,686 
Recognized over time889 *2 1 892 767 *1 3 771 
$94,955 $30,104 $469 $125,528 $55,984 $26,141 $332 $82,457 
* Lease revenue (included in Other Revenues) as covered by ASC 842. All other revenues are covered by ASC 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 (in thousands):

Schedule of Reconciliation of Contract Liabilities with Customers

  

Balance at

September 30, 2020

  Consideration Received  Recognized in Revenue  

Balance at

March 31, 2021

 
Ad revenue $92  $356  $(278) $170 
Expo revenue  211   105   -   316 
Other  33   108   (4)  137 
  $336  $569  $(282) $623 

Balance at
September 30, 2021
Consideration
Received		Recognized in
Revenue
Balance at
March 31, 2022
Ad revenue$84 $450 $(330)$204 
Expo revenue151 178 — 329 
Other (including franchise fees)119 9 (20)108 
$354 $637 $(350)$641 
Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 5)6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of operations.

income.

13

On December 22, 2020, the Company signed a franchise development agreement with a groupTable of private investors to open three Bombshells locations in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in Corpus Christi, New Braunfels, and San Marcos, all in Texas. Upon execution of the agreement, the Company collected $75,000 Contentsin development fees representing 100% of the initial franchise fee of the first restaurant and 50% of the initial franchise fee of the second restaurant. Revenue from initial franchise fees is recognized as the performance obligations are satisfied over the term of the franchise agreement.

11

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.

6. Selected Account Information

The components of accounts receivable, net are as follows (in thousands):

Schedule of Accounts Receivable

  March 31, 2021  September 30, 2020 
Credit card receivables $1,354  $880 
Income tax refundable  599   4,325 
ATM in-transit  273   160 
Insurance receivable  -   191 
Other (net of allowance for doubtful accounts of $483 and $261, respectively)  1,404   1,211 
Total accounts receivable, net $3,630  $6,767 

March 31, 2022September 30, 2021
Credit card receivables$2,152 $1,447 
Income tax refundable2,148 4,472 
Insurance receivable21 185 
ATM in-transit443 277 
Other (net of allowance for doubtful accounts of $517 and $382, respectively)1,498 1,189 
Total accounts receivable, net$6,262 $7,570 
Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6%6% to 9%9% per annum and having terms ranging from 1 to 20 years,, net of allowance for doubtful notes amounting to $124,000$154,000 and $182,000$102,000 as of March 31, 20212022 and September 30, 2020,2021, respectively.

The components of prepaid expenses and other current assets are as follows (in thousands):

Schedule

March 31, 2022September 30, 2021
Prepaid insurance$4,712 $277 
Prepaid legal25 112 
Prepaid taxes and licenses565 380 
Prepaid rent471 309 
Other1,107 850 
Total prepaid expenses and other current assets$6,880 $1,928 
A reconciliation of Prepaid Expensesgoodwill as of March 31, 2022 and Other Current AssetsSeptember 30, 2021 is as follows (in thousands):
GrossAccumulated ImpairmentNet
Balance at September 30, 2021$59,967 $20,588 $39,379 
Acquisitions (see Note 4)15,105 — 15,105 
Balance at March 31, 2022$75,072 $20,588 $54,484 
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  March 31, 2021  September 30, 2020 
Prepaid insurance $2,549  $4,884 
Prepaid legal  715   735 
Prepaid taxes and licenses  398   428 
Prepaid rent  373   37 
Other  985   404 
Total prepaid expenses and other current assets $5,020  $6,488 

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of intangible assets, net are as follows (in thousands):
March 31, 2022September 30, 2021
Indefinite-lived:
Licenses$115,266 $65,186 
Trademarks9,675 2,215 
Domain names23 23 
Definite-lived:
Noncompete agreements92 182 
Discounted leases82 86 
Software146 132 
Total intangible assets, net$125,284 $67,824 
The components of accrued liabilities are as follows (in thousands):

March 31, 2022September 30, 2021
Insurance$4,558 $54 
Sales and liquor taxes2,270 2,261 
Payroll and related costs4,470 3,220 
Property taxes1,063 2,178 
Interest411 145 
Patron tax399 452 
Unearned revenues641 354 
Lawsuit settlement301 378 
Other1,463 1,361 
Total accrued liabilities$15,576 $10,403 
15
ScheduleTable of Accrued LiabilitiesContents

  March 31, 2021  September 30, 2020 
Payroll and related costs $3,633  $2,419 
Sales and liquor taxes  2,580   2,613 
Insurance  2,399   4,405 
Property taxes  1,055   2,003 
Unearned revenues  623   336 
Interest  544   1,390 
Patron tax  386   309 
Lawsuit settlement  228   100 
Other  873   998 
Total accrued liabilities $12,321  $14,573 

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of selling, general and administrative expenses are as follows (in thousands):

Schedule of Selling, General and Administrative Expenses

  2021  2020  2021  2020 
  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Taxes and permits $2,084  $2,240  $4,112  $4,914 
Supplies and services  1,488   1,390   2,716   2,924 
Insurance  1,427   1,473   2,884   2,956 
Advertising and marketing  1,384   1,907   2,573   4,317 
Lease  972   1,023   1,949   2,053 
Utilities  858   798   1,571   1,693 
Security  830   749   1,690   1,597 
Legal  812   1,072   1,673   2,268 
Charge card fees  695   845   1,259   1,891 
Repairs and maintenance  677   652   1,250   1,449 
Accounting and professional fees  297   1,311   1,012   2,509 
Other  1,094   990   2,081   2,410 
Total selling, general and administrative expenses $12,618  $14,450  $24,770  $30,981 

For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Taxes and permits$2,361 $2,084 $4,597 $4,112 
Advertising and marketing2,248 1,384 4,631 2,573 
Supplies and services2,175 1,488 4,155 2,716 
Insurance2,481 1,427 4,876 2,884 
Legal898 812 1,958 1,673 
Lease1,572 972 3,212 1,949 
Charge card fees1,466 695 2,797 1,259 
Utilities1,108 858 2,043 1,571 
Security1,050 830 2,137 1,690 
Accounting and professional fees622 297 1,968 1,012 
Repairs and maintenance903 677 1,628 1,250 
Other1,553 1,094 2,921 2,081 
Total selling, general and administrative expenses$18,437 $12,618 $36,923 $24,770 
The components of other charges (gains), net are as follows (in thousands):

Schedule of Components of Other Charges (Gains), Net

  2021  2020  2021  2020 
  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Impairment of assets $1,401  $8,210  $1,401  $8,210 
Settlement of lawsuits  1   -   153   24 
Loss (gain) on disposal of assets  91   (7)  86   (37)
Gain on insurance  (12)  (13)  (209)  (33)
Total other charges, net $1,481  $8,190  $1,431  $8,164 

For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Impairment of assets$— $1,401 $— $1,401 
Settlement of lawsuits385 1 577 153 
Loss (gain) on disposal of businesses and assets(58)91 (400)86 
Gain on insurance(320)(12)(321)(209)
Other charges (gains), net$7 $1,481 $(144)$1,431 
The components of non-operating gains (losses), net are as follows (in thousands):

Components

For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Gain on debt extinguishment$— $380 $85 $5,329 
Unrealized loss on equity securities— (34)(1)(67)
Other— 85 — 85 
Non-operating gains, net$— $431 $84 $5,347 
7. Debt
On October 12, 2021, we closed a debt financing transaction with 28 investors for unsecured promissory notes with a total principal amount of Non-Operating Gains (Losses), Net

  2021  2020  2021  2020 
  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Gain on debt extinguishment $380  $-  $5,329  $- 
Unrealized loss on equity securities  (34)  (62)  (67)  (134)
Other  85   -   85   - 
Total non-operating gains (losses), net $431  $(62) $5,347  $(134)

12
$17.0 million, all of which bear interest at a rate of 12% per annum. Of this amount, $9.5 million are promissory notes, payable interest only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October 1, 2024. The remaining amount of the financing is $7.5 million in promissory notes, payable in monthly payments of principal and interest based on a 10-year amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in full on October 12, 2024. Included in the $17.0 million borrowing are two notes for $500,000 and $150,000 borrowed from related parties (see Note
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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Assets Held

12) and two notes for Sale

As$500,000 and $300,000 borrowed from two non-officer employees in which the terms of March 31,the notes are the same as the rest of the lender group.

On October 18, 2021, and September 30, 2020,in relation to an acquisition (see Note 4), the Company had net carrying valueexecuted 4 seller-financed promissory notes. The first promissory note was a 10-year $11.0 million 6% secured note payable in 120 equal monthly payments of assets held for sale$122,123 in principal and interest. The second promissory note was a 20-year $8.0 million 6% secured note payable in 240 equal monthly payments of $57,314 in principal and interest. The third promissory note was a 10-year $1.2 million 5.25% note payable in monthly payments of $8,086 in principal and interest based on a 20-year amortization period, with the balance payable at $7.4maturity date. The fourth note was a 20-year $1.0 million 6% note payable in 240 equal monthly payments of $7,215 in principal and $0interest.
On November 8, 2021, in relation to an acquisition (see Note 4), respectively.

During the three months ended March 31, 2021, the Company classified as held-for-sale three real estate propertiesexecuted a $1.0 million 7-year promissory note with an aggregate estimated fair value less cost to sellinterest rate of $7.4 million after recognizing a Nightclub segment impairment charge of $1.4 million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property.4.0% per annum. The Company expects the properties, which are primarily comprised of landnote is payable $13,669 per month, including principal and buildings, to be sold within 12 months through property listings by our real estate brokers. Liabilities that are expected to be paid with the sale of held-for-sale assets were $3.2 million as of March 31, 2021, which is included in current portion of debt obligations in our unaudited condensed consolidated balance sheet. See Note 14.

7. Debt

On October 31, 2020, the Company negotiated extensions to November 1, 2021 on $1,690,000 of $1,940,000 of notes to individuals that were due on November 1, 2020. The Company paid $250,000 to a certain lender who only extended a portion of his original note.

interest.

On January 25, 2021,2022, the Company borrowed $2.175$18.7 million from a bank lender for working capital purposes by executing a 20-year10-year promissory note with an initial interest rate of 3.99%5.25% per annum.annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is payable $13,232in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured by 11 real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 12). After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan, among which is to maintain a debt service coverage of not less than 1.4 times, reviewed annually.
On March 1, 2022, the Company borrowed $2.6 million from a bank lender in relation to a purchase of real estate (see Note 4). The 21-year promissory note has an initial interest rate of 4.25% per month for the firstannum, repriced after five years after which the interest rate will be repriced at the then-currentand then again annually to prime rate plus 1.0% per annum,1% with a floor rate of 3.99%4.25%. The note is guaranteed bypayable interest only during the Company’s CEO, Eric Langan. See Note 12. The Company paid approximately $25,000 in debt issuance costsfirst 12 months; then the next 48 months with $16,338 equal monthly payments of principal and interest; then the next 191 months at closing.

Included inan equal monthly payment based on a 20-year amortization; with the balance of principal and interest payable at the 252nd month.

Future maturities of long-term debt obligations as of March 31, 2021 and September 30, 2020 are two notes borrowed from related parties (see Note 12)—one note for $500,000 (from an employee of the Company who is also the brother of our director, Nourdean Anakar) and another note for $100,000 (from a brother of Company CFO, Bradley Chhay)—and two notes totaling $500,000 borrowed from two non-officer employees. All four notes are part of a larger group of private lenders, with the terms of the notes being the same as the rest of the lender group.

Future maturities of debt obligations as of March 31, 20212022 are as follows: $16.6 $11.4 million, $11.7 $7.5 million, $8.1 $23.4 million, $8.4 $7.9 million, $8.4 $8.4 million and $80.4 $121.4 million for the twelve months ending March 31, 2022, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively. Of the maturity schedule mentioned above, $4.5 $651,000, $0, $15.6 million, $3.7 million, $0, $0, $0,$0, $0 and $42.3 $71.9 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $1.2 $1.9 million and $1.2 $1.6 million as of March 31, 20212022 and September 30, 2020,2021, respectively.

Included

8. Equity
On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock with a fair value of $30.4 million at issuance. See Note 4.
On February 7, 2022, our board of directors approved the 2022 Stock Option Plan (the “2022 Plan”). The board’s adoption of the 2022 Plan is subject to approval of shareholders, and in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $124,000 and $5.4 million, respectively. Duringevent that the three and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving2022 Plan is not approved by the forgiveness of 100% of each of the 11 PPP loans amounting to $380,000 and $5.3 million, respectively, in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. Asshareholders within one year of the date of adoption of the filing2022 Plan by the board, or less than the required amount of this report,votes of shareholders are received in favor of approval of the 2022 Plan at a duly held meeting of shareholders within one year of the board’s adoption of the 2022 Plan, then we have not received a forgiveness notice for only one PPP loanwill unwind and terminate the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled. The 2022 Plan provides that if not forgiven,the maximum aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000. The options granted under the 2022 Plan may be either incentive stock options or non-qualified options. The 2022 Plan is administered by the compensation committee of the board of directors. The compensation committee has the exclusive power to select individuals to receive grants, to establish the terms of the loans asoptions granted to each participant, provided that all options granted shall be granted at an exercise price not less than the fair market value of the common stock covered by the CARES Act, bears an interest rateoption on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of 1% per annum. See Note 3.

8. Equity

Duringdirectors approved a grant of 50,000 stock options each to 6 members of management subject to the threeapproval of the 2022 Plan.


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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Income Taxes
Income tax expense was $3.4 million and six months ended March 31, 2021, the Company purchased and retired 0 and 74,659 common shares, respectively, at a cost of approximately $0 and $1.8 $6.3 million respectively. The Company paid $0.04and $0.08per share cash dividend during the three and six months ended March 31, 2021 totaling approximately $360,000 and $720,000, respectively.

During the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares,2022, respectively, at a cost of approximately $2.0compared to $1.9 million and $8.5 million, respectively. The Company paid $0.04 and $0.07 per share cash dividend during the three and six months ended March 31, 2020 totaling approximately $368,000 and $647,000, respectively.

13

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Income Taxes

Income taxes were an expense of $1.9million and $1.6 $1.6 million during the three and six months ended March 31, 2021, respectively, compared to a benefit of $1.4 millionrespectively. The effective income tax expense rate was 23.4% and an expense of $175,000 during22.6% for the three and six months ended March 31, 2020, respectively. The effective income tax rate was an expense of 24.3% 2022, respectively, compared to 24.3% and 9.1% 9.1% for the three and six months ended March 31, 2021, respectively, compared to a benefit of 28.9% and an expense of 7.6% for the three and six months ended March 31, 2020, respectively. Our effective income tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current period.

prior period, as presented below.

For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Federal statutory income tax expense21.0 %21.0 %21.0 %21.0 %
State income taxes, net of federal benefit2.9 %7.0 %2.9 %5.0 %
Permanent differences0.5 %(5.9)%0.4 %(7.1)%
Change in valuation allowance— %— %— %(7.4)%
Tax credits(3.1)%2.2 %(2.6)%(2.3)%
Other2.1 %— %0.8 %— %
Total income tax expense23.4 %24.3 %22.6 %9.1 %
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service with only immaterialno changes. The Company ordinarily goes through various federal and state reviews and examinations for various tax matters. Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax examination.

The Company accountsis also being examined for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. Asstate income taxes, the outcome of March 31, 2021 and September 30, 2020, there was 0 liability for uncertain tax positions. 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 operations.

which may occur within the next twelve months.

On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were madebecame 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 included, 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 thea Paycheck Protection Program, whereby certain small businesses arewere eligible for loansa loan to fund payroll expenses, rent, and related costs. The loansloan may be forgiven if the funds are used for payroll and other qualified expenses. The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 $271,000 to $579,000 $579,000 for an aggregate amount of $4.2 $4.2 million; our shared-services subsidiary received $1.1 $1.1 million; and one of our lounges received $124,000.$124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. During the three and six months ended March 31,fiscal 2021, we received 1 and 11 Notices of PPP Forgiveness Payment respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.No assurance can be provided thatoperations for the Company will obtainfiscal year ended September 30, 2021. In November 2021, we received a partial forgiveness of the one remaining $124,000 PPP loan for $85,000 in whole orprincipal and interest. The remaining unforgiven portion of approximately $41,000 in part.principal will be repaid as debt plus accrued interest. See Note 3.
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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$10.0 million in equal monthly installments of $119,000,$119,000, without interest, over 84 months, beginning in June 2015, for all but two2 non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5$5 per customer. For accounting purposes, the Company discounted the $10.0$10.0 million at an imputed interest rate of 9.6%9.6%, establishing a net present value for the settlement of $7.2$7.2 million. As a consequence, the Company recorded an $8.2$8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2$7.2 million and the amount previously accrued for the tax.

In March 2017, the Company settled with the State of Texas for one1 of the two2 remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815$687,815 with $195,815$195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200$8,200 without interest.

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to $1.5 million$130,000 and $2.2 million$813,000 as of March 31, 20212022 and September 30, 2020,2021, respectively.

See Note 14.

A declaratory judgment action was brought by five5 operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5$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. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas has filed an appeal. We will continue to vigorously defend the matter through the appeals process.

14

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.

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 have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer 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%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 March 31, 2021,2022, we have 21 remaining unresolved claimsclaim out of the original 71 claims.
19
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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Shareholder Class and Derivative Actions

In May and June 2019, three3 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 allegealleged 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 seeksought unspecified damages, costs, and attorneys’ fees. These lawsuits are were Hoffman 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 (who is no longer an officer of the Company)); and Grossman v. RCI Hospitality Holdings, Inc., et al. (filed(filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three3 cases 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 directoradded former directors Nourdean 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. On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims. On June 14, 2021, a scheduling order was entered in the case, setting January 9, 2023 as the trial date. On December 22, 2021, an amended scheduling order was entered, extending the trial date to April 7, 2023 and extending all other case deadlines. The Company intends to continue to vigorously defenddefended against this action. In January 2022, the parties engaged in settlement discussions beginning with a formal mediation on January 13, 2022, which resulted in an agreement-in-principle to resolve the matter. On January 24, 2022, a Joint Notice of Settlement was filed. On April 15, 2022, counsel for Plaintiffs filed an Unopposed Motion for (I) Preliminary Approval of Class Action Settlement; (II) Certification of the Settlement Class; and (III) Approval of the Notice of Settlement. On April 28, 2022, the Court entered an Order preliminarily approving the Class Action Settlement and Notice. The Court set the final approval hearing for June 24, 2022. Plaintiffs have sought to extend the hearing until August to comply with certain potential notice and related obligations to the purported class, and Defendants concur with the request.
On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L. Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K. Marshall, Elaine J. Martin, Allan Priaulx, and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc. as nominal defendant. The action, styled Stein v. Anakar, et al., No. 4:22-mc-00149 (S.D. Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate information, alleged failure to maintain internal controls, and alleged failure to properly manage company property. This action is in its preliminary phase, and a potential loss cannot yet be estimated.

15

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 16, 2019, These allegations are substantively similar to claims asserted in the class action and a shareholderprior derivative action that was fileddismissed in June of 2021. RCI intends to vigorously defend against the Southern District of Texas, Houston Division againstaction. On April 2, 2022, the Company and its current and former officers and directors Eric S. Langan, Phillip Marshall, Nourdean Anakar, Yura Barabash, Luke Lirot, Travis Reese, former director Steven Jenkins,named in the shareholder derivative complaint filed their Motions to Dismiss. Briefing should be concluded within the next 30 days 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 claimsMotions will be ripe 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.consideration.

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 both consolidated balance sheets as of March 31, 2021 and September 30, 2020. Management believes that the case has no merit and is vigorously defending itself in the appeal.

16

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

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RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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$1.4 million and its share of punitive damages is $4$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. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.

As set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, 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 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.

Due to several COVID-19 regulations and restrictions imposed on some of our businesses by local municipalities and/or States, certain of our subsidiaries are plaintiffs to lawsuits that have been filed on behalf of the affected entities to have the restrictions eased or removed entirely. The lawsuits may increase or decrease based on the spread of the disease and new or additional restrictions placed on our businesses.

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 six months ended March 31, 2022 amount to approximately $385,000 and $577,000, respectively, and for the three and six months ended March 31, 2021 amount to approximately $1,000$1,000 and $153,000, respectively, while for the three and six months ended March 31, 2020 amount to approximately $0 and $24,000,$153,000, respectively. As of March 31, 20212022 and September 30, 2020,2021, the Company has accrued $228,000$301,000 and $100,000$378,000 in accrued liabilities, respectively, related to settlement of lawsuits.

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Table of Contents

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Segment Information

The Company owns and operates adult nightclubs and Bombshells Restaurants and Bars. The Company has identified such 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 unaudited condensed consolidated financial statements.

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

For the Three Months Ended March 31,For the Six Months Ended March 31,
2022202120222021
Revenues (from external customers)
Nightclubs$48,174 $30,787 $94,955 $55,984 
Bombshells15,333 13,135 30,104 26,141 
Other185 137 469 332 
$63,692 $44,059 $125,528 $82,457 
Income (loss) from operations
Nightclubs$19,126 $10,468 $37,862 $18,963 
Bombshells3,468 3,142 6,270 5,859 
Other(34)(139)(77)(214)
General corporate(5,479)(3,630)(11,063)(8,184)
$17,081 $9,841 $32,992 $16,424 
Depreciation and amortization
Nightclubs$2,206 $1,413 $3,753 $2,737 
Bombshells454 461 883 918 
Other7 36 13 72 
General corporate210 207 422 413 
$2,877 $2,117 $5,071 $4,140 
Capital expenditures
Nightclubs$1,662 $2,201 $10,890 $3,331 
Bombshells1,901 3,104 2,205 3,255 
Other359 (2)548 1 
General corporate218 126 347 131 
$4,140 $5,429 $13,990 $6,718 
22
ScheduleTable of Segment Reporting InformationContents

  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Revenues (from external customers)                
Nightclubs $30,787  $31,367  $55,984  $69,226 
Bombshells  13,135   8,803   26,141   19,153 
Other  137   256   332   441 
  $44,059  $40,426  $82,457  $88,820 
                 
Income (loss) from operations                
Nightclubs $10,468  $2,284  $18,963  $16,040 
Bombshells  3,142   688   5,859   2,259 
Other  (139)  (146)  (214)  (331)
General corporate  (3,630)  (5,301)  (8,184)  (10,757)
  $9,841  $(2,475) $16,424  $7,211 
                 
Depreciation and amortization                
Nightclubs $1,413  $1,486  $2,737  $2,956 
Bombshells  461   456   918   873 
Other  36   104   72   208 
General corporate  207   211   413   424 
  $2,117  $2,257  $4,140  $4,461 
                 
Capital expenditures                
Nightclubs $2,201  $526  $3,331  $2,858 
Bombshells  3,104   612   3,255   2,337 
Other  (2)  -   1   - 
General corporate  126   127   131   128 
  $5,429  $1,265  $6,718  $5,323 

  March 31, 2021  September 30, 2020 
Total assets        
Nightclubs $280,060  $277,960 
Bombshells  50,832   48,991 
Other  1,303   1,269 
General corporate  28,915   32,713 
  $361,110  $360,933 

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022September 30, 2021
Total assets
Nightclubs$396,560 $280,561 
Bombshells55,382 52,073 
Other2,418 1,573 
General corporate33,192 30,412 
$487,552 $364,619 
Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2022 amounting to $3.2 million and $31,000, respectively, and for the six months ended March 31, 2022 amounting to $6.5 million and $199,000, respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2022 amounting to $53,000 and $122,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2021 amounting to $2.8 $2.8 million and $31,000,$31,000, respectively, and for the six months ended March 31, 2021 amounting to $5.6 $5.6 million and $141,000,$141,000, respectively, and intercompany sales of Robust Energy Drink ofincluded in Other segment for the three and six months ended March 31, 2021 amounting to $49,000 $49,000 and $75,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and corporate segments for the three months ended March 31, 2020 amounting to $2.8 million and $32,000, respectively, and for the six months ended March 31, 2020 amounting to $5.4 million and $63,000, respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2020 amounting to $32,000 and $54,000,$75,000, respectively. These intercompany revenue amounts are eliminated upon consolidation.

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. 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 March 31, 20212022 and September 30, 2020,2021, was $84.6$116.7 million and $83.8$99.7 million, respectively.

Included in the $2.35$17.0 million borrowing on November 1, 2018 (included in debt obligations as of March 31,October 12, 2021 and September 30, 2020) were(see Note 7) are notes borrowed from related parties—one note for $500,000 (from$500,000 (Ed Anakar, an employee of the Company who is also theand brother of our former director Nourdean Anakar) and another note for $100,000$150,000 (from a brother of Company CFO, Bradley Chhay) as part of a larger group of private lenders. Thein which the terms of these related partythe notes are the same as the rest of the lender group in the November 1, 2018 transaction.

group.

We used the services of Nottingham Creations, (formerlyand previously Sherwood Forest Creations, LLC), aLLC, both furniture fabrication companycompanies that manufacturesmanufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $114,910$3,112 and $114,910$27,149 during the three and six months ended March 31, 2022, respectively, and $114,910 and $114,910 during the three and six months ended March 31, 2021, respectively, and $53,556 and $72,809 during the three and six months ended March 31, 2020, respectively. As of March 31, 20212022 and September 30, 2020,2021, we owed Nottingham Creations and Sherwood Forest $64,910$1,299 and $0,$12,205, 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 20212022 and 2020.2021. A son-in-law of Eric Langan owns a noncontrolling50% interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0$3,809 and $0$3,809 for the three and six months ended March 31, 2022, respectively, and $0 and $0 for the three and six months ended March 31, 2021, respectively,respectively. Amounts billed directly to the Company were $3,704 and $18,758 and $30,585$84,700 for the three and six months ended March 31, 2020, respectively. Amounts billed directly to the Company were $55,6212022, respectively, and $62,751$55,621 and $62,751 for the three and six months ended March 31, 2021, respectively, and $
23
24,416 and $26,241 for the three and six months ended March 31, 2020, respectively. AsTable of March 31, 2021 and September 30, 2020, the Company owed TW Mechanical $1,545Contents and $5,700, respectively, in unpaid direct billings.

19

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

months ended March 31, 2021, respectively. As of March 31, 2022 and September 30, 2021, the Company owed TW Mechanical $0 and $7,500, respectively, in unpaid direct billings.
13. Leases

The Company leases certain facilities and equipment under operating leases. In relation to an acquisition that was completed on October 18, 2021 (see Note 4), the Company entered into leases with third parties for certain clubs where the real estate locations were not part of the acquisition.
Total lease expense under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statementstatements of operations, except for sublease income which was included in other revenue, for the three and six months ended March 31, 2022 and 2021 and 2020is as follows (in thousands):

Schedule of Lease Expense

  2021  2020  2021  2020 
  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Operating lease expense – fixed payments $828  $838  $1,657  $1,680 
Variable lease expense  44   65   108   130 
Short-term equipment and other lease expense (includes $102 and $145 recorded in advertising and marketing for the three months ended March 31, 2021 and 2020, respectively, and $159 and $291 for the six months ended March 31, 2021 and 2020, respectively; and $116 and $100 recorded in repairs and maintenance for the three months ended March 31, 2021 and 2020, respectively, and $204 and $225 for the six months ended March 31, 2021 and 2020, respectively; see Note 5)  318   365   547   759 
Sublease income  (1)  (4)  (3)  (6)
Total lease expense, net $1,189  $1,264  $2,309  $2,563 
                 
Other information:                
Operating cash outflows from operating leases $1,162  $1,207  $2,253  $2,462 
Weighted average remaining lease term          12 years   13 years 
Weighted average discount rate          6.1%  6.1%

Three Months Ended
March 31, 2022		Three Months Ended
March 31, 2021		Six Months Ended
March 31, 2022		Six Months Ended
March 31, 2021
Operating lease expense – fixed payments$1,136 $828 $2,267 $1,657 
Variable lease expense233 44 567 108 
Short-term equipment and other lease expense (includes $58 and $102 recorded in advertising and marketing for the three months ended March 31, 2022 and 2021, respectively, and $130 and $159 for the six months ended March 31, 2022 and 2021, respectively; and $107 and $116 recorded in repairs and maintenance for the three months ended March 31, 2022 and 2021, respectively, and $190 and $204 for the six months ended March 31, 2022 and 2021, respectively; see Note 6)368 318 698 547 
Sublease income(1)(1)(3)(3)
Total lease expense, net$1,736 $1,189 $3,529 $2,309 
Other information:
Operating cash outflows from operating leases$1,690 $1,162 $3,439 $2,253 
Weighted average remaining lease term – operating leases12 years12 years
Weighted average discount rate – operating leases5.6 %6.1 %
Future maturities of ASC 842operating lease liabilities as of March 31, 20212022 are as follows (in thousands):

Schedule

Principal PaymentsInterest PaymentsTotal Payments
April 2022 - March 2023$2,306 $2,080 $4,386 
April 2023 - March 20242,503 1,938 4,441 
April 2024 - March 20252,712 1,789 4,501 
April 2025 - March 20262,957 1,627 4,584 
April 2026 - March 20273,118 1,452 4,570 
Thereafter24,227 5,906 30,133 
$37,823 $14,792 $52,615 
The above table of Future Maturitiesmaturities of Lease Liabilitiesoperating lease liabilities does not include future payments of an assigned lease executed in April 2022 related to the October 18, 2021 acquisition, which has a total of approximately $2.6 million of future lease payments until August 2027.
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Table of Contents

  Principal Payments  Interest Payments  Total Payments 
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 
April 2025 – March 2026  2,054   1,111   3,165 
Thereafter  17,235   4,881   22,116 
  $26,275  $11,538  $37,813 

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Subsequent Events

On April 7, 2021,20, 2022, the Company acquired land near the southern boundaryfinally settled all of Houston, Texas for $1.3 million.

its remaining Patron Tax liability. See Note 10.

On May 7, 2021,2, 2022, the Company sold onecompleted an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity; and (3) $5.0 million under a 10% ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the properties held for sale as of March 31, 2021 for $3.1 million. The property had a carrying value of $2.3total $5.0 million as of March 31, 2021. See Note 6.in principal plus accrued interest due at maturity. The Company paid related debt amounting to $2.0 million from the proceedsacquired 100% of the sale.

20
capital stock of the acquired companies in each of the stock purchase agreements mentioned above. The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement.

Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired, along with the determination of any goodwill or gain on the transaction.

The seller has not maintained historical U.S. GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.

On May 2, 2022, the Company signed a franchise development agreement with a private investor to open 3 Bombshells locations in the state of Alabama over a period of five years. Upon execution of the agreement, the Company received $50,000 in development fees representing 100% of the initial franchise fee of the first restaurant.
Subsequent to the reporting date until May 6, 2022, the Company purchased 37,700 shares of its own common stock at a cost of $2.4 million.

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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, 2020.

2021.

Overview

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

RCIHH, including RCI Management Services, Inc.

Through our subsidiaries, as of March 31, 2021,2022, we operated a total of 4859 establishments that offer live adult entertainment and/or restaurant and bar operations, including one club that is being renovated due to hurricane damage.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 not included in Nightclubs and Bombshells into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

Ongoing Impact of COVID-19 Pandemic

Starting

Since the U.S. declaration of the COVID-19 pandemic as a national emergency in March 2020, we have had a major disruption in our businessesbusiness operations that threatened to significantly impact our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures, and other restrictions that were heavily impactedmandated or encouraged by federal, state, and local governments. To adapt to the COVID-19 pandemic throughsituation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.
The temporary closure and reopening of a number of our clubs and restaurants in adherence to federal, state and local government mandates. Our total revenues for the three and six months ended March 31, 2021 increased by 9.0% and declined by 7.2%, respectively, versus last year. The increase in the quarter ended March 31, 2021 was mainly caused by Bombshells’ same-store sales increasethe COVID-19 pandemic presented operational challenges. Our strategy was to open locations and revenue from two new units. Thoughoperate in accordance with local and state guidelines. We believe that we earnedcan borrow capital if needed but currently we do not have unused credit facilities so there can be no revenues from our core businesses duringguarantee that additional liquidity will be readily available or available on favorable terms, especially the period of closures, we continued to incur expenses. To alleviate our cash flow situation, we institutedlonger 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; *
●Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *
●Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
●Temporarily reduced or 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 date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.

COVID-19 pandemic lasts.

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower sales,Closures and operating restrictions, as caused by local, state, and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing severalinstituted. As of the date of this report, all COVID-related restrictions on our debt obligations.

21
businesses have been lifted.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. 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, 20202021 filed with the SEC on December 14, 2020.

2021.

During the three and six months ended March 31, 2021,2022, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.

26

We signed our first franchise agreement for Bombshells in December 2020. The financial impactTable of the franchise agreement was immaterial to the Company’s results of operations and cash flows for the three and six months ended March 31, 2021.Contents

Results of Operations

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

Second Quarter 2021

●Total revenues were $44.1 million compared to $40.4 million during the comparable prior-year period, a 9.0% increase (Nightclubs revenue of $30.8 million compared to $31.4 million, a 1.8% decrease; and Bombshells revenue of $13.1 million compared to $8.8 million, a 49.2% increase)
●Consolidated same-store sales increased by 26.3% (Nightclubs increased by 3.6% while Bombshells increased by 48.7%) (refer to the definition of same-store sales in the discussion of Revenues below)
●Gain on forgiven PPP loans amounted to $380,000
●Basic and diluted earnings per share (“EPS”) of $0.68 compared to a basic and diluted loss per share of $0.37 (non-GAAP diluted EPS* of $0.75 compared to $0.47)
●Net cash provided by operating activities of $11.0 million compared to $1.7 million during the comparable prior-year period, a 542.4% increase (free cash flow* of $9.0 million compared to $618,000, a 1,354.0% increase)

22
2022
•Total revenues were $63.7 million compared to $44.1 million during the comparable prior-year period, a 44.6% increase (Nightclubs revenue of $48.2 million compared to $30.8 million, a 56.5% increase; and Bombshells revenue of $15.3 million compared to $13.1 million, a 16.7% increase)

•

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

•Twelve newly acquired clubs contributed $8.8 million to revenues, while a newly constructed Bombshells contributed $1.9 million
•Basic and diluted earnings per share (“EPS”) of $1.15 compared to $0.68 (non-GAAP diluted EPS* of $1.19 compared to $0.75) during the comparable prior-year period
•Net cash provided by operating activities of $11.6 million compared to $11.0 million during the comparable prior-year period, a 5.7% increase (free cash flow* of $11.1 million compared to $9.0 million, a 23.3% increase)
Year-to-Date 20212022
•Total revenues were $125.5 million compared to $82.5 million during the comparable prior-year period, a 52.2% increase (Nightclubs revenue of $95.0 million compared to $56.0 million, a 69.6% increase; and Bombshells revenue of $30.1 million compared to $26.1 million, a 15.2% increase)

•

●Total revenues were $82.5 million compared to $88.8 million during the comparable prior-year period, a 7.2% decrease (Nightclubs revenue of $56.0 million compared to $69.2 million, a 19.1% decrease; and Bombshells revenue of $26.1 million compared to $19.2 million, a 36.5% increase)
●Consolidated same-store sales increased by 6.9% (Nightclubs decreased by 4.4% while Bombshells increased by 27.9%) (refer to the definition of same-store sales in the discussion of Revenues below)
●Gain on forgiven PPP loans amounted to $5.3 million
●Basic and diluted EPS of $1.75 compared to $0.24 (non-GAAP diluted EPS* of $1.15 compared to $1.09)
●Net cash provided by operating activities of $17.2 million compared to $12.0 million during the comparable prior-year period, a 43.9% increase (free cash flow* of $14.7 million compared to $9.9 million, a 48.5% increase)

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

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

•

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

•Basic and diluted EPS of $2.28 compared to $1.75 (non-GAAP diluted EPS* of $2.29 compared to $1.15) during the comparable prior-year period
•Net cash provided by operating activities of $27.9 million compared to $17.2 million during the comparable prior-year period, a 61.6% increase (free cash flow* of $26.3 million compared to $14.7 million, a 79.8% increase)
*Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below.
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Table of Contents
Three Months Ended March 31, 20212022 Compared to Three Months Ended March 31, 2020

2021

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

  For the Three Months Ended    
  March 31, 2021  March 31, 2020  Better (Worse) 
  Amount  % of Revenues  Amount  % of Revenues  Amount  % 
Revenues                  
Sales of alcoholic beverages $20,273   46.0% $16,919   41.9% $3,354   19.8%
Sales of food and merchandise  9,538   21.6%  6,479   16.0%  3,059   47.2%
Service revenues  11,502   26.1%  14,348   35.5%  (2,846)  (19.8)%
Other  2,746   6.2%  2,680   6.6%  66   2.5%
Total revenues  44,059   100.0%  40,426   100.0%  3,633   9.0%
Operating expenses                        
Cost of goods sold                        
Alcoholic beverages sold  3,730   18.4%  3,435   20.3%  (295)  (8.6)%
Food and merchandise sold  3,029   31.8%  2,271   35.1%  (758)  (33.4)%
Service and other  43   0.3%  76   0.4%  33   43.4%
Total cost of goods sold (exclusive of items shown separately below)  6,802   15.4%  5,782   14.3%  (1,020)  (17.6)%
Salaries and wages  11,200   25.4%  12,222   30.2%  1,022   8.4%
Selling, general and administrative  12,618   28.6%  14,450   35.7%  1,832   12.7%
Depreciation and amortization  2,117   4.8%  2,257   5.6%  140   6.2%
Other charges, net  1,481   3.4%  8,190   20.3%  6,709   81.9%
Total operating expenses  34,218   77.7%  42,901   106.1%  8,683   20.2%
Income (loss) from operations  9,841   22.3%  (2,475)  (6.1)%  12,316   497.6%
Other income (expenses)                        
Interest expense  (2,364)  (5.4)%  (2,459)  (6.1)%  95   3.9%
Interest income  62   0.1%  85   0.2%  (23)  (27.1)%
Non-operating gains (losses), net  431   1.0%  (62)  (0.2)%  493   795.2%
Income (loss) before income taxes  7,970   18.1%  (4,911)  (12.1)%  12,881   262.3%
Income tax expense (benefit)  1,938   4.4%  (1,418)  (3.5)%  (3,356)  (236.7)%
Net income (loss) $6,032   13.7% $(3,493)  (8.6)% $9,525   272.7%

For the Three Months Ended
March 31, 2022		For the Three Months Ended
March 31, 2021		Better (Worse)
Amount% of RevenuesAmount% of RevenuesAmount%
Revenues
Sales of alcoholic beverages$27,335 42.9 %$20,273 46.0 %$7,062 34.8 %
Sales of food and merchandise11,160 17.5 %9,538 21.6 %1,622 17.0 %
Service revenues21,501 33.8 %11,502 26.1 %9,999 86.9 %
Other3,696 5.8 %2,746 6.2 %950 34.6 %
Total revenues63,692 100.0 %44,059 100.0 %19,633 44.6 %
Operating expenses
Cost of goods sold
Alcoholic beverages sold4,896 17.9 %3,730 18.4 %(1,166)(31.3)%
Food and merchandise sold3,840 34.4 %3,029 31.8 %(811)(26.8)%
Service and other24 0.1 %43 0.3 %19 44.2 %
Total cost of goods sold (exclusive of items shown separately below)8,760 13.8 %6,802 15.4 %(1,958)(28.8)%
Salaries and wages16,530 26.0 %11,200 25.4 %(5,330)(47.6)%
Selling, general and administrative18,437 28.9 %12,618 28.6 %(5,819)(46.1)%
Depreciation and amortization2,877 4.5 %2,117 4.8 %(760)(35.9)%
Other charges (gains), net7 — %1,481 3.4 %1,474 99.5 %
Total operating expenses46,611 73.2 %34,218 77.7 %(12,393)(36.2)%
Income from operations17,081 26.8 %9,841 22.3 %7,240 73.6 %
Other income (expenses)
Interest expense(2,864)(4.5)%(2,364)(5.4)%(500)(21.2)%
Interest income112 0.2 %62 0.1 %50 80.6 %
Non-operating gains, net— — %431 1.0 %(431)(100.0)%
Income before income taxes14,329 22.5 %7,970 18.1 %6,359 79.8 %
Income tax expense3,356 5.3 %1,938 4.4 %(1,418)(73.2)%
Net income$10,973 17.2 %$6,032 13.7 %$4,941 81.9 %
*Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

23
Revenues

Revenues

Consolidated revenues for the second quarter increased by approximately $3.6$19.6 million, or 9.0%44.6%, versus the comparable prior-year quarter due primarily to the timing of closures caused bypartial recovery from the COVID-19 pandemic.pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales increased by 26.3%9.0%. The 9.0%44.6% increase in consolidated revenues was primarily from an 11.6% increase from last year’s COVID-19 closures, an 8.5% increase from the 8.7% impact of the same-store increase andsales growth, a 2.6%24.2% increase from new Bombshells units, partially offset by a 2.0% decrease due to closures from COVID-19 andwith a 0.3% decline in other revenues.

increase from non-core operations.

We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full month of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired
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units are included in the same-store sales calculation as long as they qualify based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.

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

  For the Three Months 
  Ended March 31, 
  2021  2020 
Nightclubs $30,787  $31,367 
Bombshells  13,135   8,803 
Other  137   256 
  $44,059  $40,426 

For the Three Months
Ended March 31,
20222021
Nightclubs$48,174 $30,787 
Bombshells15,333 13,135 
Other185 137 
$63,692 $44,059 
Nightclubs revenues decreasedincreased by 1.8%56.5% for the quarter ended March 31, 20212022 compared to the prior-year quarter.quarter, where the prior-year second quarter was just starting to ease up from government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 3.6%12.1%. The remaining decline in revenues reflects lowerNewly acquired clubs contributed $8.8 million to the total Nightclubs revenue increase of $17.4 million. By type of revenue, service revenue increased by 87.8%, alcoholic beverage sales for clubs in states where the number of days closed did not qualify them for same-store sales.

increased by 47.8%, and food, merchandise and other revenue increased by 19.3%.

Bombshells revenues increased by 49.2%16.7%, of which 37.1%2.3% was due to the impact of thefor same-store sales increase with the remaining 12.1% increase generatedcaused by twoone new locations.

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

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to 77.7%73.2% from 106.1%77.7% from last year’s second quarter, withalthough there was a $8.7$12.4 million decrease,increase, or 20.2%36.2%, which iswas mainly caused by thecosts and expenses directly related to significantly higher impairmentsales in the prior year.current-year quarter. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by $1.0$2.0 million, or 17.6%28.8%, mainly due to higher sales in the current quarter.sales. As a percent of total revenues, cost of goods sold increaseddecreased to 15.4%13.8% from 14.3%15.4% mainly due to the increase in sales mix shifting fromof higher-margin service revenues.

Salaries and wages decreasedincreased by $1.0$5.3 million, or 8.4%.47.6%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were lower at26.0% from 25.4% from 30.2% mainly due to additional employees from new units partially offset by fixed salaries paid on lower sales during the prior-year quarter.

higher sales.

Selling, general and administrative expenses decreasedincreased by $1.8$5.8 million, or 12.7%46.1%, primarily due to decreased auditincreased variable expenses related to sales activity during the current-year quarter.
Depreciation and legal fees from prior year’s SEC matters and controlled advertising and marketing expensesamortization increased by $760,000, or 35.9% due to uncertainty brought aboutnew depreciable assets from newly acquired and constructed units partially offset by the pandemic. Asfully depreciated and sold assets.
Other charges, net was a percent of total revenues, selling, general and administrative expenses decreased to 28.6% from 35.7% due to the lower expenses from the above-cited reasons leveraged on higher salesnominal net charge in the current quarter.

Our total occupancy costs, defined as the sumquarter while a net charge of lease expense and interest expense (see below), were $3.3$1.5 million and $3.5 million for the quarter ended March 31, 2021 and 2020, respectively. As a percentage of revenue, total occupancy costs were 7.6% and 8.6% during the quarter ended March 31, 2021 and 2020, respectively, primarily due to higher sales base in the currentcomparable prior-year quarter.

Depreciation and amortization decreased by $140,000, or 6.2% partly due to fully depreciated real estate and software assets.

Other charges, net decreased to $1.5 million The swing was mainly from $8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million duringin the quarter ended March 31, 2021 and 2020, respectively.

24
prior-year quarter.

Income (Loss) from Operations

For the three months ended March 31, 20212022 and 2020,2021, our consolidated operating margin was 22.3%26.8% and (6.1)%22.3%, respectively. The main driversdriver for the increase in operating margin areis the current quarter’sleveraging of fixed expenses on higher sales and the impairment charges in both quarters.sales.
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Segment contribution to income (loss) from operations is presented in the table below (in thousands):

  For the Three Months 
  Ended March 31, 
  2021  2020 
Nightclubs $10,468  $2,284 
Bombshells  3,142   688 
Other  (139)  (146)
General corporate  (3,630)  (5,301)
  $9,841  $(2,475)

Operating

For the Three Months
Ended March 31,
20222021
Nightclubs$19,126 $10,468 
Bombshells3,468 3,142 
Other(34)(139)
General corporate(5,479)(3,630)
$17,081 $9,841 
Nightclubs operating margin for the Nightclubs segment was 34.0%39.7% and 7.3%34.0% for the three months ended March 31, 20212022 and 2020,2021, respectively, while operating margin for Bombshells was 23.9%22.6% and 7.8%23.9%, respectively. The increase in Nightclubs operating margin was mainly due to last year’s impairment charges as triggered by the pandemic.increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The increasedecrease in Bombshells operating margin was mainly from higher sales and a decrease in pre-opening expensescost inefficiencies from severalinitial operations of the newly opened Bombshells openings in prior periods.

25
unit.

Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tabletables below (dollars in thousands). See furtherRefer to the discussion of Non-GAAP Financial Measures on page 36.

For the Three Months Ended March 31, 2022
NightclubsBombshellsOtherCorporateTotal
Income (loss) from operations$19,126 $3,468 $(34)$(5,479)$17,081 
Amortization of intangibles47 1 — 1 49 
Settlement of lawsuits277 — — 108 385 
Loss (gain) on sale of businesses and assets(125)4 — 63 (58)
Gain on insurance(320)— — — (320)
Non-GAAP operating income (loss)$19,005 $3,473 $(34)$(5,307)$17,137 
     
GAAP operating margin39.7 %22.6 %(18.4)%(8.6)%26.8 %
Non-GAAP operating margin39.5 %22.7 %(18.4)%(8.3)%26.9 %
For the Three Months Ended March 31, 2021
NightclubsBombshellsOtherCorporateTotal
Income (loss) from operations$10,468 $3,142 $(139)$(3,630)$9,841 
Amortization of intangibles47 3 29 — 79 
Settlement of lawsuits(4)— 5 — 1 
Impairment of assets1,401 — — — 1,401 
Loss on sale of businesses and assets14 47 — 30 91 
Loss (gain) on insurance32 — — (44)(12)
Non-GAAP operating income (loss)$11,958 $3,192 $(105)$(3,644)$11,401 
      
GAAP operating margin34.0 %23.9 %(101.5)%(8.2)%22.3 %
Non-GAAP operating margin38.8 %24.3 %(76.6)%(8.3)%25.9 %
Other Income/Expenses
Interest expense increased by $500,000, or 21.2%, which was mainly caused by higher average debt balance and partially offset by a lower average interest rate.
Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were $4.4 million and $3.3 million for the quarters ended March 31, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs
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were 7.0% and 7.6% during the quarters ended March 31, 2022 and 2021, respectively, primarily due to the increase in the “Non-GAAP Financial Measures” section below.

  For the Three Months Ended March 31, 2021  For the Three Months Ended March 31, 2020 
  Nightclubs  Bombshells  Other  Corporate  Total  Nightclubs  Bombshells  Other  Corporate  Total 
Income (loss) from operations $10,468  $3,142  $(139) $(3,630) $9,841  $2,284  $688  $(146) $(5,301) $(2,475)
Amortization of intangibles  47   3   29   -   79   57   4   96   -   157 
Settlement of lawsuits  (4)  -   5   -   1   -   -   -   -   - 
Impairment of assets  1,401   -   -   -   1,401   7,965   245   -   -   8,210 
Loss (gain) on sale of businesses and assets  14   47   -   30   91   (3)  -   -   (4)  (7)
Loss (gain) on insurance  32   -   -   (44)  (12)  -   -   -   (13)  (13)
Non-GAAP operating income (loss) $11,958  $3,192  $(105) $(3,644) $11,401  $10,303  $937  $(50) $(5,318) $5,872 
                                         
GAAP operating margin  34.0%  23.9%  (101.5)%  (8.2)%  22.3%  7.3%  7.8%  (57.0)%  (13.1)%  (6.1)%
Non-GAAP operating margin  38.8%  24.3%  (76.6)%  (8.3)%  25.9%  32.8%  10.6%  (19.5)%  (13.2)%  14.5%

Non-Operating Items

Duringsales base.

Income Taxes
Income tax expense was $3.4 million during the quarter ended March 31, 2021, we received one notice of forgiveness for one PPP loan, which forgave 100% of the PPP loan’s principal and interest amounting2022 compared to $380,000.

Interest expense decreased by $95,000, or 3.9%.

Income Taxes

Income taxes were an expense of $1.9 million during the quarter ended March 31, 2021 compared to a benefit of $1.4 million during the quarter ended March 31, 2020.2021. The effective income tax rate was an expense of23.4% and 24.3% and a benefit of 28.9% for the quarterquarters ended March 31, 20212022 and 2020,2021, respectively. Our effective tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the impact of the forgiveness of the PPP loans in the current period, as presented below.

  For the Three Months 
  Ended March 31, 
  2021  2020 
Statutory federal income tax rate  21.0%  21.0%
State income taxes, net of federal benefit  7.0%  4.2%
Permanent differences  (5.9)%  1.3%
Tax credits  2.2%  2.3%
Effective income tax rate  24.3%  28.9%

26
For the Three Months
Ended March 31,
20222021
Computed expected income tax expense21.0 %21.0 %
State income taxes, net of federal benefit2.9 %7.0 %
Permanent differences0.5 %(5.9)%
Tax credit(3.1)%2.2 %
Other2.1 %— %
Total income tax expense23.4 %24.3 %

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Six Months Ended March 31, 20212022 Compared to Six Months Ended March 31, 2020

2021

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

  For the Six Months Ended    
  March 31, 2021  March 31, 2020  Better (Worse) 
  Amount  % of Revenues  Amount  % of Revenues  Amount  % 
Revenues                        
Sales of alcoholic beverages $37,633   45.6% $37,662   42.4% $(29)  (0.1)%
Sales of food and merchandise  18,147   22.0%  13,926   15.7%  4,221   30.3%
Service revenues  21,562   26.1%  31,541   35.5%  (9,979)  (31.6)%
Other  5,115   6.2%  5,691   6.4%  (576)  (10.1)%
Total revenues  82,457   100.0%  88,820   100.0%  (6,363)  (7.2)%
Operating expenses                        
Cost of goods sold                        
Alcoholic beverages sold  6,992   18.6%  7,581   20.1%  589   7.8%
Food and merchandise sold  5,918   32.6%  4,846   34.8%  (1,072)  (22.1)%
Service and other  96   0.4%  131   0.4%  

35

   26.7%
Total cost of goods sold (exclusive of items shown separately below)  13,006   15.8%  12,558   14.1%  (448)  (3.6)%
Salaries and wages  22,686   27.5%  25,445   28.6%  2,759   10.8%
Selling, general and administrative  24,770   30.0%  30,981   34.9%  6,211   20.0%
Depreciation and amortization  4,140   5.0%  4,461   5.0%  321   7.2%
Other charges, net  1,431   1.7%  8,164   9.2%  6,733   82.5%
Total operating expenses  66,033   80.1%  81,609   91.9%  15,576   19.1%
Income from operations  16,424   19.9%  7,211   8.1%  9,213   127.8%
Other income (expenses)                        
Interest expense  (4,798)  (5.8)%  (4,944)  (5.6)%  146   3.0%
Interest income  122   0.1%  183   0.2%  (61)  (33.3)%
Non-operating gains (losses), net  5,347   6.5%  (134)  (0.2)%  5,481   4,090.3%
Income before income taxes  17,095   20.7%  2,316   2.6%  14,779   638.1%
Income tax expense  1,554   1.9%  175   0.2%  (1,379)  (788.0)%
Net income $15,541   18.8% $2,141   2.4% $13,400   625.9%

For the Six Months Ended
March 31, 2022		For the Six Months Ended
March 31, 2021		Better (Worse)
Amount% of RevenuesAmount% of RevenuesAmount%
Revenues
Sales of alcoholic beverages$53,766 42.8 %$37,633 45.6 %$16,133 42.9 %
Sales of food and merchandise22,054 17.6 %18,147 22.0 %3,907 21.5 %
Service revenues42,377 33.8 %21,562 26.1 %20,815 96.5 %
Other7,331 5.8 %5,115 6.2 %2,216 43.3 %
Total revenues125,528 100.0 %82,457 100.0 %43,071 52.2 %
Operating expenses
Cost of goods sold
Alcoholic beverages sold9,730 18.1 %6,992 18.6 %(2,738)(39.2)%
Food and merchandise sold7,797 35.4 %5,918 32.6 %(1,879)(31.8)%
Service and other124 0.2 %96 0.4 %(28)(29.2)%
Total cost of goods sold (exclusive of items shown separately below)17,651 14.1 %13,006 15.8 %(4,645)(35.7)%
Salaries and wages33,035 26.3 %22,686 27.5 %(10,349)(45.6)%
Selling, general and administrative36,923 29.4 %24,770 30.0 %(12,153)(49.1)%
Depreciation and amortization5,071 4.0 %4,140 5.0 %(931)(22.5)%
Other charges (gains), net(144)(0.1)%1,431 1.7 %1,575 110.1 %
Total operating expenses92,536 73.7 %66,033 80.1 %(26,503)(40.1)%
Income from operations32,992 26.3 %16,424 19.9 %16,568 100.9 %
Other income (expenses)
Interest expense(5,468)(4.4)%(4,798)(5.8)%(670)(14.0)%
Interest income218 0.2 %122 0.1 %96 78.7 %
Non-operating gains, net84 0.1 %5,347 6.5 %(5,263)(98.4)%
Income before income taxes27,826 22.2 %17,095 20.7 %10,731 62.8 %
Income tax expense6,289 5.0 %1,554 1.9 %(4,735)(304.7)%
Net income$21,537 17.2 %$15,541 18.8 %$5,996 38.6 %
*Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line.

27
Revenues

Revenues

Consolidated revenues decreasedfor the six months ended March 31, 2022 increased by approximately $6.4$43.1 million, or 7.2%52.2%, versus to the comparable prior-year period due primarily to the closures caused bypartial recovery from the COVID-19 pandemic.pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales increased by 6.9%14.8%. The 7.2% decrease52.2% increase in consolidated revenues was primarily from the 13.5% decrease due to closures from COVID-19 and a 0.1% decline in other revenues, partially offset by the 3.4% impact of the same-store increase and a 3.0%21.6% increase from new Bombshells units.

We calculateunits, a 16.9% increase from last year’s COVID-19 closures, a 13.5% increase from the impact of same-store sales by comparing year-over-year revenuesgrowth, with a 0.3% increase from nightclubs and restaurants/sports bars startingnon-core operations.

Refer to the definition of same-store sales in the first fullRevenues section of the second quarter discussion above.
32
Table of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. We consider the first six months of operations of a Bombshells unit to be the “honeymoon period” where sales are significantly higher than normal. We exclude from a particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full month of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify, based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.Contents

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

  For the Six Months 
  Ended March 31, 
  2021  2020 
Nightclubs $55,984  $69,226 
Bombshells  26,141   19,153 
Other  332   441 
  $82,457  $88,820 

For the Six Months
Ended March 31,
20222021
Nightclubs$94,955 $55,984 
Bombshells30,104 26,141 
Other469 332 
$125,528 $82,457 
Nightclubs revenues decreasedincreased by 19.1%69.6% for the six-month periodsix months ended March 31, 20212022 compared to the comparable prior-year period.period, where the prior-year first quarter was still heavily impacted by government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales decreasedincreased by 4.4%20.0%. The remaining decline in revenues reflects lowerNewly acquired clubs contributed $15.1 million to the total Nightclubs revenue increase of $39.0 million. By type of revenue, service revenue increased by 96.7%, alcoholic beverage sales for clubs in states where the number of days closed did not qualify them for same-store sales.

increased by 65.4%, and food, merchandise and other revenue increased by 29.8%.

Bombshells revenues increased by 36.5%15.2%, of which 22.5%5.0% was due to the impact of thefor same-store sales increase with the remaining 14.0% increase generatedcaused by twoone new locations.

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

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to 73.7% from 80.1% from 91.9% from the comparablelast year’s six-month period, last year, with a $15.6although there was an $26.5 million decrease,increase, or 19.1%40.1%, which iswas mainly caused by thecosts and expenses directly related to significantly higher impairmentsales in the prior year, a $6.2 million decrease in selling, general and administrative expenses, and a $2.8 million decrease in salaries and wages.current six-month period. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by $448,000,$4.6 million, or 3.6%35.7%, mainly due to a shift in sales mix from higher-margin service revenues to alcohol and food sales in the current six-month period.higher sales. As a percent of total revenues, cost of goods sold increaseddecreased to 15.8%14.1% from 14.1%15.8% mainly due to the shiftincrease in sales mix.

mix of higher-margin service revenues.

Salaries and wages decreasedincreased by $2.8$10.3 million, or 10.8%45.6%, mainly due to COVID-19-related closures.increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were lower at26.3% from 27.5% from 28.6% mainly due to fixed salaries paid on lowerhigher sales during the prior-year period.

partially offset by additional employees from new units.

Selling, general and administrative expenses decreasedincreased by $6.2$12.2 million, or 20.0%49.1%, primarily due to decreased audit and legal fees from prior year’s SEC matters, controlled advertising and marketingincreased variable expenses duerelated to uncertainty brought about by the pandemic, and lower taxes and permits and charge card fees due to lower sales. As a percent of total revenues, selling, general and administrative expenses decreased to 30.0% from 34.9% due to legal and accounting fees and advertising and marketing expenses.

Our total occupancy costs, defined as the sum of lease expense and interest expense (see below), were $6.7 million and $7.0 million for the six months ended March 31, 2021 and 2020, respectively. As a percentage of revenue, total occupancy costs were 8.2% and 7.9%sales activity during the six months ended March 31, 2021 and 2020, respectively, primarily due to lower sales base in the current six-month period.

Depreciation and amortization decreasedincreased by $321,000,$931,000, or 7.2% partly22.5% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated real estate and softwaresold assets.

Other charges (gains), net decreased toshifted from a $1.4 million from $8.2 million, whichnet charge to a $144,000 net gain. The swing was primarily caused bymainly from impairment charges of $1.4 million and $8.2 million duringin the six months ended March 31, 2021 and 2020, respectively.

prior-year period.

Income (Loss) from Operations

For the six months ended March 31, 20212022 and 2020,2021, our consolidated operating margin was 19.9%26.3% and 8.1%19.9%, respectively. The main driversdriver for the increase in operating margin areis the current period’s lower sales and gainleveraging of fixed expenses on debt extinguishment, and the prior-year period’s higher impairment charges.sales.
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Segment contribution to income (loss) from operations is presented in the table below (in thousands):

  For the Six Months 
  Ended March 31, 
  2021  2020 
Nightclubs $18,963  $16,040 
Bombshells  5,859   2,259 
Other  (214)  (331)
General corporate  (8,184)  (10,757)
  $16,424  $7,211 

Operating

For the Six Months
Ended March 31,
20222021
Nightclubs$37,862 $18,963 
Bombshells6,270 5,859 
Other(77)(214)
General corporate(11,063)(8,184)
$32,992 $16,424 
Nightclubs operating margin for the Nightclubs segment was 33.9%39.9% and 23.2%33.9% for the six months ended March 31, 20212022 and 2020,2021, respectively, while operating margin for Bombshells was 22.4%20.8% and 11.8%22.4%, respectively. The increase in Nightclubs operating margin was mainly due to last year’s impairment charges as triggered by the pandemic.increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The increasedecrease in Bombshells operating margin was mainly from higher sales and a decrease in pre-openingpreopening expenses from severalrelated to the new Bombshells openings in prior periods.

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unit.

Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the tabletables below (dollars in thousands). See furtherRefer to the discussion inof Non-GAAP Financial Measures on page 36.

For the Six Months Ended March 31, 2022
NightclubsBombshellsOtherCorporateTotal
Income (loss) from operations$37,862 $6,270 $(77)$(11,063)$32,992 
Amortization of intangibles94 4 — 1 99 
Settlement of lawsuits454 10 — 113 577 
Loss (gain) on sale of businesses and assets(80)17 — (337)(400)
Gain on insurance(321)— — — (321)
Non-GAAP operating income (loss)$38,009 $6,301 $(77)$(11,286)$32,947 
     
GAAP operating margin39.9 %20.8 %(16.4)%(8.8)%26.3 %
Non-GAAP operating margin40.0 %20.9 %(16.4)%(9.0)%26.2 %
For the Six Months Ended March 31, 2021
NightclubsBombshellsOtherCorporateTotal
Income (loss) from operations$18,963 $5,859 $(214)$(8,184)$16,424 
Amortization of intangibles94 7 57 — 158 
Settlement of lawsuits114 34 5 — 153 
Impairment of assets1,401 — — — 1,401 
Loss on sale of businesses and assets14 47 — 25 86 
Gain on insurance(165)— — (44)(209)
Non-GAAP operating income (loss)$20,421 $5,947 $(152)$(8,203)$18,013 
      
GAAP operating margin33.9 %22.4 %(64.5)%(9.9)%19.9 %
Non-GAAP operating margin36.5 %22.7 %(45.8)%(9.9)%21.8 %
Other Income/Expenses
Interest expense increased by $670,000, or 14.0%, which was mainly caused by higher average debt balance and partially offset by a lower average interest rate.
Our total occupancy costs, defined as the “Non-GAAP Financial Measures” section below.

  For the Six Months Ended March 31, 2021  For the Six Months Ended March 31, 2020 
  Nightclubs  Bombshells  Other  Corporate  Total  Nightclubs  Bombshells  Other  Corporate  Total 
Income (loss) from operations $18,963  $5,859  $(214) $(8,184) $16,424  $16,040  $2,259  $(331) $(10,757) $7,211 
Amortization of intangibles  94   7   57   -   158   114   8   191   -   313 
Settlement of lawsuits  114   34   5   -   153   24   -   -   -   24 
Impairment of assets  1,401   -   -   -   1,401   7,965   245   -   -   8,210 
Loss (gain) on sale of businesses and assets  14   47   -   25   86   -   -   -   (37)  (37)
Gain on insurance  (165)  -   -   (44)  (209)  (20)  -   -   (13)  (33)
Non-GAAP operating income (loss) $20,421  $5,947  $(152) $(8,203) $18,013  $24,123  $2,512  $(140) $(10,807) $15,688 
                                         
GAAP operating margin  33.9%  22.4%  (64.5)%  (9.9)%  19.9%  23.2%  11.8%  (75.1)%  (12.1)%  8.1%
Non-GAAP operating margin  36.5%  22.7%  (45.8)%  (9.9)%  21.8%  34.8%  13.1%  (31.7)%  (12.2)%  17.7%

Non-Operating Items

Duringsum of operating lease expense and interest expense, were $8.7 million and $6.7 million for the six months ended March 31, 2022 and 2021, we received 11 noticesrespectively. As a percentage of forgiveness for a PPP loan,revenue, total occupancy costs

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were 6.9% and 8.2% during the six months ended March 31, 2022 and 2021, respectively, primarily due to the increase in sales base.
Non-operating gains decreased by $5.3 million, which forgave 100% ofwas primarily the gain on debt extinguishment from the PPP loans’ principal and interest amounting to $5.3 million.

Interest expense decreased by $146,000, or 3.0%.

loans during last year's first quarter.

Income Taxes

Income tax expense was $1.6$6.3 million during the six months ended March 31, 20212022 compared to $175,000$1.6 million during the six months ended March 31, 2020.comparable prior-year period. The effective income tax rate was 9.1%22.6% and 7.6%9.1% for the six months ended March 31, 20212022 and 2020,2021, respectively. Our effective tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the currentprior period, as presented below.

  For the Six Months 
  Ended March 31, 
  2021  2020 
Statutory federal income tax rate  21.0%  21.0%
State income taxes, net of federal benefit  5.0%  4.5%
Permanent differences  (7.1)%  0.3%
Change in valuation allowance  (7.5)%  - 
Tax credits  (2.3)%  (18.3)%
Effective income tax rate  9.1%  7.6%

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For the Six Months
Ended March 31,
20222021
Computed expected income tax expense21.0 %21.0 %
State income taxes, net of federal benefit2.9 %5.0 %
Permanent differences0.4 %(7.1)%
Change in valuation allowance— %(7.4)%
Tax credit(2.6)%(2.3)%
Other0.8 %— %
Total income tax expense22.6 %9.1 %

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:

Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) impairment of assets, and (e)(d) settlement of lawsuits. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.

Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (c)(d) gains or losses on insurance, (d)(e) unrealized gains or losses on equity securities, (e) impairment of assets, (f) settlement of lawsuits, (g) gain on debt extinguishment, and (h) the income tax effect of the above describedabove-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 24.2%21.8% and 7.6%24.2% effective tax rate of the pre-tax non-GAAP income before taxes for the six months ended March 31, 20212022 and 2020,2021, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities.

Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity

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securities, (g) impairment of assets, (h) settlement of lawsuits, and (i) gain on debt extinguishment. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

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

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The following tables present our non-GAAP performance measures for the three and six months ended March 31, 20212022 and 20202021 (in thousands, except per share, amountsnumber of shares and percentages):

Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Reconciliation of GAAP net income to Adjusted EBITDA
Net income attributable to RCIHH common stockholders$10,952 $6,091 $21,527 $15,734 
Income tax expense3,356 1,938 6,289 1,554 
Interest expense, net2,752 2,302 5,250 4,676 
Settlement of lawsuits385 1 577 153 
Impairment of assets— 1,401 — 1,401 
Loss (gain) on sale of businesses and assets(58)91 (400)86 
Gain on debt extinguishment— (380)(85)(5,329)
Unrealized loss on equity securities— 34 1 67 
Gain on insurance(320)(12)(321)(209)
Depreciation and amortization2,877 2,117 5,071 4,140 
Adjusted EBITDA$19,944 $13,583 $37,909 $22,273 
Reconciliation of GAAP net income to non-GAAP net income
Net income attributable to RCIHH common stockholders$10,952 $6,091 $21,527 $15,734 
Amortization of intangibles49 79 99 158 
Settlement of lawsuits385 1 577 153 
Impairment of assets— 1,401 — 1,401 
Loss (gain) on sale of businesses and assets(58)91 (400)86 
Gain on debt extinguishment— (380)(85)(5,329)
Unrealized loss on equity securities— 34 1 67 
Gain on insurance(320)(12)(321)(209)
Net income tax effect291 (522)253 (1,741)
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  For the Three Months  For the Six Months 
  Ended March 31,  Ended March 31, 
  2021  2020  2021  2020 
Reconciliation of GAAP net income (loss) to Adjusted EBITDA                
Net income (loss) attributable to RCIHH common stockholders $6,091  $(3,452) $15,734  $2,182 
Income tax expense (benefit)  1,938   (1,418)  1,554   175 
Interest expense, net  2,302   2,374   4,676   4,761 
Settlement of lawsuits  1   -   153   24 
Impairment of assets  1,401   8,210   1,401   8,210 
Loss (gain) on sale of businesses and assets  91   (7)  86   (37)
Gain on debt extinguishment  (380)  -   (5,329)  - 
Unrealized loss on equity securities  34   62   67   134 
Gain on insurance  (12)  (13)  (209)  (33)
Depreciation and amortization  2,117   2,257   4,140   4,461 
Adjusted EBITDA $13,583  $8,013  $22,273  $19,877 
                 
Reconciliation of GAAP net income (loss) to non-GAAP net income (loss)                
Net income (loss) attributable to RCIHH common stockholders $6,091  $

(3,452

) $15,734  $2,182 
Amortization of intangibles  79   157   158   313 
Settlement of lawsuits  1   -   153   24 
Impairment of assets  1,401   8,210   1,401   8,210 
Loss (gain) on sale of businesses and assets  91   (7)  86   (37)
Gain on debt extinguishment  (380)  -   (5,329)  - 
Unrealized loss on equity securities  34   62   67   134 
Gain on insurance  (12)  (13)  (209)  (33)
Net income tax effect  (522)  (633)  (1,741)  (659)
Non-GAAP net income (loss) $6,783  $4,324  $10,320  $10,134 
                 
Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings (loss) per share                
Diluted shares  9,000   9,225   9,010   9,274 
GAAP diluted earnings (loss) per share $0.68  $(0.37) $1.75  $0.24 
Amortization of intangibles  0.01   0.02   0.02   0.03 
Settlement of lawsuits  0.00   -   0.02   0.00 
Impairment of assets  0.16   0.89   0.16   0.89 
Loss (gain) on sale of businesses and assets  0.01   (0.00)  0.01   (0.00)
Gain on debt extinguishment  (0.04)  -   (0.59)  - 
Unrealized loss on equity securities  0.00   0.01   0.01   0.01 
Gain on insurance  (0.00)  (0.00)  (0.02)  (0.00)
Net income tax effect  (0.06)  (0.07)  (0.19)  (0.07)
Non-GAAP diluted earnings per share $0.75  $0.47  $1.15  $1.09 
                 
Reconciliation of GAAP operating income (loss) to non-GAAP operating income (loss)                
Income (loss) from operations $9,841  $(2,475) $16,424  $7,211 
Amortization of intangibles  79   157   158   313 
Settlement of lawsuits  1   -   153   24 
Impairment of assets  1,401   8,210   1,401   8,210 
Gain on insurance  (12)  (13)  (209)  (33)
Loss (gain) on sale of businesses and assets  91   (7)  86   (37)
Non-GAAP operating income (loss) $11,401  $5,872  $18,013  $15,688 
                 
Reconciliation of GAAP operating margin to non-GAAP operating margin                
GAAP operating margin  22.3%  (6.1)%  19.9%  8.1%
Amortization of intangibles  0.2%  0.4%  0.2%  0.4%
Settlement of lawsuits  0.0%  -   0.2%  0.0%
Impairment of assets  3.2%  20.3%  1.7%  9.2%
Gain on insurance  (0.0)%  (0.0)%  (0.3)%  0.0%
Loss (gain) on sale of businesses and assets  0.2%  (0.0)%  0.1%  0.0%
Non-GAAP operating margin  25.9%  14.5%  21.8%  17.7%

Non-GAAP net income$11,299 $6,783 $21,651 $10,320 
Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share
Diluted shares9,489,085 8,999,910 9,447,854 9,009,604 
GAAP diluted earnings per share$1.15 $0.68 $2.28 $1.75 
Amortization of intangibles0.01 0.01 0.01 0.02 
Settlement of lawsuits0.04 0.00 0.06 0.02 
Impairment of assets0.00 0.16 0.00 0.16 
Loss (gain) on sale of businesses and assets(0.01)0.01 (0.04)0.01 
Gain on debt extinguishment0.00 (0.04)(0.01)(0.59)
Unrealized loss on equity securities0.00 0.00 0.00 0.01 
Gain on insurance(0.03)0.00 (0.03)(0.02)
Net income tax effect0.03 (0.06)0.03 (0.19)
Non-GAAP diluted earnings per share$1.19 $0.75 $2.29 $1.15 
Reconciliation of GAAP operating income to non-GAAP operating income
Income from operations$17,081 $9,841 $32,992 $16,424 
Amortization of intangibles49 79 99 158 
Settlement of lawsuits385 1 577 153 
Impairment of assets— 1,401 — 1,401 
Loss (gain) on sale of businesses and assets(58)91 (400)86 
Gain on insurance(320)(12)(321)(209)
Non-GAAP operating income$17,137 $11,401 $32,947 $18,013 
Reconciliation of GAAP operating margin to non-GAAP operating margin
Income from operations26.8 %22.3 %26.3 %19.9 %
Amortization of intangibles0.1 %0.2 %0.1 %0.2 %
Settlement of lawsuits0.6 %0.0 %0.5 %0.2 %
Impairment of assets0.0 %3.2 %0.0 %1.7 %
Loss (gain) on sale of businesses and assets(0.1)%0.2 %(0.3)%0.1 %
Gain on insurance(0.5)%0.0 %(0.3)%(0.3)%
Non-GAAP operating margin26.9 %25.9 %26.2 %21.8 %
* 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.

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Liquidity and Capital Resources

At March 31, 2021,2022, our cash and cash equivalents were approximately $20.2$38.1 million compared to $15.6$35.7 million at September 30, 2020.2021. Because of the large volume of cash we handle, we have very stringent cash controls. As of March 31, 2021,2022, we had positive working capital of $175,000$23.1 million compared to a negative working capital of $5.9$26.1 million as of September 30, 2020,2021, excluding net assets held for sale (net of associated liabilities of $3.2$3.6 million and $0,$1.1 million, respectively) amounting to $4.2$2.6 million and $0$3.8 million as of March 31, 20212022 and September 30, 2020,2021, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. Based upon the current stateRevenues seem favorable now that all our locations are
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Table of allowed openings, revenues seem favorable. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in theContents
not under pandemic-related closure mandates. We believe that we can borrow capital if needed but currently we do not have unused credit markets, andfacilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms.

To

In fiscal 2020, to adapt to the situation, we took significant steps to augment an expectedanticipated decline in operating cash flows, caused byincluding negotiating deferment of some of our debts, reducing the COVID-19 pandemic, we instituted the following measures:

●Arranged for deferment of principal and interest payment on certainnumber of our debts;
●Furloughed employees working at our clubs and restaurants, except for a limited number of managers; *
●Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *
●Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
●Temporarily reduced or 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 date of this report, we have recalled all furloughed employees and reinstated the pay for all salariedrelated payroll costs where necessary, and hourly employees.

deferring or modifying certain fixed and variable monthly expenses, among others.

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program of the CARES Act for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the three and six monthsyear ended March 31,September 30, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment (“Notice”), respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the ten11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively,period and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will in fact obtainIn November 2021, we received a partial forgiveness of the one remaining $124,000 PPP loan for $85,000 in whole orprincipal and interest. The remaining unforgiven portion of approximately $41,000 in part.

principal will be repaid as debt plus accrued interest.

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower sales,Closures and operating restrictions, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate our cash flow situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.

instituted.

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

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

We have not recently raised capital through the issuance of equity securities.securities although we have recently issued shares of our common stock to partly pay for an acquisition (see next paragraph). Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.
On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period). The acquisition gives the Company presence in four additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in four seller-financed notes, and 500,000 shares of our common stock with a fair value of $30.4 million at issuance.
On January 25, 2022, the Company borrowed $18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is payable in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured by eleven real estate properties. After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan, among which to maintain a debt service coverage of not less than 1.4 times, reviewed annually

.

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with
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a balloon payment for the remaining principal and accrued interest due at maturity; and (3) $5.0 million under a 10% ten-year interest-only promissory note payable in 119 equal monthly payments of $41,667 in interest, with a balloon payment of the total $5.0 million in principal plus accrued interest due at maturity. The $5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement.
We expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report.

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

  For the Six Months 
  Ended March 31, 
  2021  2020 
Operating activities $17,246  $11,981 
Investing activities  (6,355)  (3,870)
Financing activities  (6,340)  (12,383)
Net increase (decrease) in cash and cash equivalents $4,551  $(4,272)

For the Six Months
Ended March 31,
20222021
Operating activities$27,861 $17,246 
Investing activities(49,815)(6,355)
Financing activities24,335 (6,340)
Net increase in cash and cash equivalents$2,381 $4,551 
Cash Flows from Operating Activities

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

  For the Six Months 
  Ended March 31, 
  2021  2020 
Net income $15,541  $2,141 
Depreciation and amortization  4,140   4,461 
Deferred income tax benefit  -   (1,155)
Gain on debt extinguishment  (5,298)  - 
Impairment of assets  1,401   8,210 
Net change in operating assets and liabilities  712   (2,695)
Other  750   1,019 
Net cash provided by operating activities $17,246  $11,981 

For the Six Months
Ended March 31,
20222021
Net income$21,537 $15,541 
Depreciation and amortization5,071 4,140 
Impairment of assets— 1,401 
Gain on debt extinguishment(83)(5,298)
Net change in operating assets and liabilities937 712 
Other399 750 
Net cash provided by operating activities$27,861 $17,246 
Net cash provided by operating activities increased from year to year due primarily todriven by the impact of higher income from operationssales and lower income taxesinterest expense paid partially offset by higher interest expense paid.

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

Cash Flows from Investing Activities

Following are our cash flows from investing activities (in thousands):
For the Six Months
Ended March 31,
20222021
Payments for property and equipment and intangible assets$(13,990)$(6,718)
Acquisition of businesses(39,302)— 
Proceeds from sale of businesses and assets2,910 8 
Proceeds from insurance485 294 
Proceeds from notes receivable82 61 
Net cash used in investing activities$(49,815)$(6,355)
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For the Six Months

Ended March 31,

 
  2021  2020 
Payments for property and equipment and intangible assets $(6,718) $(5,323)
Proceeds from sale of businesses and assets  8   105 
Proceeds from insurance  294   945 
Proceeds from note receivable  61   403 
Net cash used in investing activities $(6,355) $(3,870)

Following is a breakdown of our payments for property and equipment and intangible assets for the six months ended March 31, 20212022 and 20202021 (in thousands):

  For the Six Months
Ended March 31,		 
  2021  2020 
New facilities, equipment and intangible assets $4,127  $3,212 
Maintenance capital expenditures  2,591   2,111 
Total capital expenditures $6,718  $5,323 

Capital

For the Six Months
Ended March 31,
20222021
New facilities, equipment, and intangible assets$12,474 $4,127 
Maintenance capital expenditures1,516 2,591 
Total capital expenditures$13,990 $6,718 
The capital expenditures during the six months ended March 31, 2022 were composed of primarily of real estate and new equipment and furniture purchases for new facilitiesthe newly acquired clubs. The capital expenditures during the six months ended March 31, 2021 were composed of primarily of real estate and construction of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license purchase. Capital expenditures for new facilities during the six months ended March 31, 2020 were composed primarily of construction and development costs for two new Bombshells locations that opened in the first and second quarters of fiscal 2020.purchases. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

Cash Flows from Financing Activities

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

  For the Six Months 
  Ended March 31, 
  2021  2020 
Proceeds from debt obligations $2,176  $880 
Payments on debt obligations  (5,977)  (4,097)
Purchase of treasury stock  (1,794)  (8,488)
Payment of dividends  (720)  (647)
Payment of loan origination costs  (25)  - 
Distribution to noncontrolling interests  -   (31)
Net cash used in financing activities $(6,340) $(12,383)

For the Six Months
Ended March 31,
20222021
Proceeds from debt obligations$35,742 $2,176 
Payments on debt obligations(7,290)(5,977)
Purchase of treasury stock(2,845)(1,794)
Payment of dividends(854)(720)
Payment of loan origination costs(418)(25)
Net cash provided by (used in) financing activities$24,335 $(6,340)
We purchased 45,643 shares of our common stock at an average price of $62.33 during the six months ended March 31, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year.2021. We paid quarterly dividends of $0.04 per share duringin both the six months ended March 31, 2021 compared to $0.03 per share in the first quartercurrent- and $0.04 inprior-year periods, except for the second quarter during the prior year.

of fiscal 2022 where we paid $0.05 per share.

See Note 7 to our unaudited condensed consolidated financial statements for future maturities of our debt obligations.
Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. Net cash provided by operating activities was $17.2 million and $12.0 million during the six months ended March 31, 2021 and 2020, respectively. Maintenance capital expenditures were $2.6 million and $2.1 million during the six months ended March 31, 2021 and 2020, respectively. We use free cash flow as the baseline for the implementation of our capital allocation strategy.

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

  For the Six Months 
  Ended March 31, 
  2021  2020 
Net cash provided by operating activities $17,246  $11,981 
Less: Maintenance capital expenditures  2,591   2,111 
Free cash flow $14,655  $9,870 

For the Six Months
Ended March 31,
20222021
Net cash provided by operating activities$27,861 $17,246 
Less: Maintenance capital expenditures1,516 2,591 
Free cash flow$26,345 $14,655 
Our free cash flow for the current six-month period increased by 48.5%79.8% compared to the comparable prior-year period primarily due to higher income from operationssales, net of related expense payments, lower interest expense payments, and lower income taxes paid,maintenance capital expenditures, partially offset by higher interest expense paidincome tax refunds in the prior year and higher maintenanceincome tax payments in the current year.
We do not include capital expenditures.expenditures related to new facilities construction, equipment and intangibles assets as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow.
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Other than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not aware of any event or trend that would potentially significantly affect liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business down turns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.

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

2022Increase (Decrease)2021Increase (Decrease)2020
Sales of alcoholic beverages$53,766 42.9 %$37,633 (0.1)%$37,662 
Sales of food and merchandise22,054 21.5 %18,147 30.3 %13,926 
Service revenues42,377 96.5 %21,562 (31.6)%31,541 
Other7,331 43.3 %5,115 (10.1)%5,691 
Total revenues125,528 52.2 %82,457 (7.2)%88,820 
Net cash provided by operating activities$27,861 61.6 %$17,246 43.9 %$11,981 
Net income attributable to RCIHH common stockholders$21,527 36.8 %$15,734 621.1 %$2,182 
Adjusted EBITDA*$37,909 70.2 %$22,273 12.1 %$19,877 
Free cash flow*$26,345 79.8 %$14,655 48.5 %$9,870 
Debt (end of period)$178,080 34.5 %$132,412 (5.7)%$140,440 
*

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

     Increase     Increase    
  2021  (Decrease)  2020  (Decrease)  2019 
                
Sales of alcoholic beverages $37,633   (0.1)% $37,662   2.4% $36,796 
Sales of food and merchandise  18,147   30.3%  13,926   14.8%  12,129 
Service revenues  21,562   (31.6)%  31,541   (8.1)%  34,310 
Other  5,115   (10.1)%  5,691   1.4%  5,614 
Total revenues  82,457   (7.2)%  88,820   (0.0)%  88,849 
Net cash provided by operating activities $17,246   43.9% $11,981   (42.9)% $20,971 
Adjusted EBITDA* $22,273   12.1% $19,877   (18.6)% $24,405 
Free cash flow* $14,655   48.5% $9,870   (50.3)% $19,854 
Debt (end of period) $132,412   (5.7)% $140,440   (6.3)% $149,818 

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

Share Repurchase

We purchased 45,643 shares of our common stock at an average price of $62.33 during the six months ended March 31, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year.2021. As of March 31, 2021,2022, we have approximately $9.0$6.1 million remaining to purchase additional shares.

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

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.

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

Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions.
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Based on our current capital allocation strategy:
•

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

●We consider acquiring or developing our own clubs or restaurants that we believe have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale;
●We consider disposing of underperforming units to free up capital for more productive use;
●We consider buying back our own stock if the after-tax yield on free cash flow is above 10%;
●We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale.

•

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

•We consider buying back our own stock if the after-tax yield on free cash flow is above 10%;
•We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale.
Growth Strategy

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

Nightclubs

We believe that our nightclub operationsBombshells can continue to grow organically and through careful entry into markets and demographic segments with high growth potential.

All eleven of the existing Bombshells as of March 31, 2022 are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.

We are currently in the process of site selection for new Bombshells locations and made a purchase of real estate in Stafford, Texas for a future Bombshells site. Our first franchisee for Bombshells restaurants in the San Antonio, Texas area is scheduled to open in June 2022.
We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy.

Bombshells

We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All ten of the existing Bombshells as of March 31, 2021 are located in Texas. Part of our growth strategy is to continue to appeal to men, women, families, friends, singles, couples, and millennials through better quality of food, service and experience that is more upscale than a traditional sports bar.

We continue to search for suitable markets where we can open new Bombshells and are currently in the process of development in several of these locations. We have also increased our efforts on Bombshells franchising and have recently signed our first franchisee for Bombshells restaurants in the San Antonio, Texas area.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of March 31, 2021,2022, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2020.

2021.

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 March 31, 2021,2022, 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 March 31, 2021.2022. This determination is based on the previously reported material weakness management previously identified in our internal control over financial reporting, as described below. We are in the process of
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remediating the material weakness in our internal control, as described 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 Weakness in Internal Control Over Financial Reporting

In our Annual Report for the year ended September 30, 2020,2021, filed with the SEC on December 14, 2020,2021, management concluded that our internal control over financial reporting was not effective as of September 30, 2020.2021. In the evaluation, management identified a material weakness in internal control related to the proper design and implementation of controls over our income tax provision,estimates relating to the impairment of goodwill, indefinite-lived intangibles and long-lived assets, specifically over the precision of management’s review of the income tax provision.

certain assumptions.

Remediation Efforts to Address Material Weakness

Management is committed to the remediation of the material weakness described above, as well as the continued improvement of the Company’s internal control over financial reporting. Management has been implementing, and continues to implement, measures designed to ensure that control deficiencies contributing toAs such, we are in the material weakness are remediated, such that these controls are designed, implemented, and operating effectively.

Management will enhance our risk assessment process over the design and implementation of internal controls over the income tax provision, including enhanced reviewadding controls to be performed by senior accounting management. In addition, management has retainedincrease the servicesprecision of a new third-party income tax consultant to assistthe review of all assumptions used in the preparationimpairment valuation model. We will also conduct senior management reviews of any and review of the income tax provision.

all material estimates that are applied in these instances.

It is our belief that these actions will effectively remediate the existing material weakness.

Changes in Internal Control Over Financial Reporting
On October 18, 2021, we completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property (see Note 4 to our unaudited condensed consolidated financial statements). Management has considered this transaction material to the results of operations, cash flows, and financial position from the date of acquisition through March 31, 2022, and believes that the internal controls and procedures of the acquisition have a material effect on internal controls over financial reporting. We are currently in the process of incorporating the internal controls of the acquired group into the internal controls over financial reporting for our assessment of and report on internal controls over financi

al reporting for September 30, 2023.

Other than as described above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2020,2021, 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 suchany additional risks relating to the conflict between Russia and uncertainties associated with franchising operations,Ukraine, as discloseddiscussed 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.

Our business, financial condition, and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine.
The ongoing conflict between Russia and Ukraine could have adverse effects on global macroeconomic conditions which could negatively impact our business, financial condition, and results of operations. The conflict is highly unpredictable and has already resulted in significant volatility in oil and natural gas prices worldwide. We face a varietycurrently have some software developers in Ukraine and the uncertainty of risks associated with doing business with franchisees and licenseestheir living conditions has delayed some of the deliverables in our soon-to-
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We have started franchising Bombshells. We believe

launch internet venture. In addition, the conflict could lead to increased cyberattacks or could aggravate other risk factors that we have selected highly competent operating partners and franchisees with significant experience in restaurant operations, and we are providing them training and support on the Bombshells brand. However, the probability of opening, ultimate success and quality of any franchise or licensed restaurant rests principally with the franchisee. If the franchisee does not successfully open and operate its restaurants in a manner consistent with our standards, or if guests have negative experiences due to issues with food quality or operational execution, our brand values could suffer, which could have an adverse impact on our business.

previously identified.

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

During

We purchased 45,643 shares of our common stock at an average price of $62.33 during the three months ended March 31, 2021, we did not repurchase any shares of our common stock.2022. As of May 6, 2021,March 31, 2022, we have approximately $9.0$6.1 million remaining to purchase additional shares.

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PeriodTotal Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)(1)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
January 1-31, 2022— — — $8,961,775 
February 1-28, 202211,793 $63.80 11,793 $8,209,404 
March 1-31, 202233,850 $61.82 33,850 $6,116,635 
45,643 $62.33 45,643 
(1)    Prices include any commissions and transaction costs.
(2)    All shares were purchased pursuant to the repurchase plans approved by the Board of Directors as disclosed in our most recent Annual Report on Form 10-K.

Item 6. Exhibits.

Exhibit No.Description
31.1
31.2
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101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.

39104Cover Page Interactive Data File (embedded within the Inline XBRL document)
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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: May 10, 20219, 2022By:/s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer and President

Date: May 10, 20219, 2022By:/s/ Bradley Chhay
Bradley Chhay
Chief Financial Officer and Principal Accounting Officer

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