UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~June 30, 2022

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)


Texas						76-0458229
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

10737 Cutten Road

Houston, Texas 77066

(Address of principal executive offices) (Zip Code)

(281) 397-6730

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

RICK

The Nasdaq Global Market

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

As of ~~May 6,~~August 5, 2022, ~~9,416,567~~9,243,948 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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		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2022 (unaudited) and September 30, 2021	4

	Condensed Consolidated Statements of Income (unaudited) for the three and s ix nine months ended ~~March 31,~~June 30, 2022 and 2021	56

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and ~~six~~ nine months ended ~~March 31,~~ June 30, 2022 and 2021	67

	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~six~~nine months ended ~~March~~ ~~31,~~ June 30, 2022 and 2021	78

	Notes to Condensed Consolidated Financial Statements (unaudited)	910

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2628

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4244

Item 4.	Controls and Procedures	4244

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	4345

Item1A.	Risk Factors	4345

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4445

Item 6.	Exhibits	4446

	Signatures	4547

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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 and number of shares)


		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
		(unaudited)					(unaudited)
ASSETS	ASSETS					ASSETS
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	38,067	$	35,686	Cash and cash equivalents	$	37,500	$	35,686
Accounts receivable, net	Accounts receivable, net	6,262		7,570		Accounts receivable, net	3,955		7,570
Current portion of notes receivable	Current portion of notes receivable	292		220		Current portion of notes receivable	226		220
Inventories	Inventories	3,361		2,659		Inventories	3,749		2,659
Prepaid expenses and other current assets	Prepaid expenses and other current assets	6,880		1,928		Prepaid expenses and other current assets	4,475		1,928
Assets held for sale	Assets held for sale	6,126		4,887		Assets held for sale	6,989		4,887
Total current assets	Total current assets	60,988		52,950		Total current assets	56,894		52,950
Property and equipment, net	Property and equipment, net	203,434		175,952		Property and equipment, net	208,710		175,952
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	36,180		24,308		Operating lease right-of-use assets, net	37,753		24,308
Notes receivable, net of current portion	Notes receivable, net of current portion	5,411		2,839		Notes receivable, net of current portion	4,750		2,839
Goodwill	Goodwill	54,484		39,379		Goodwill	61,399		39,379
Intangibles, net	Intangibles, net	125,284		67,824		Intangibles, net	130,585		67,824
Other assets	Other assets	1,771		1,367		Other assets	2,088		1,367
Total assets	Total assets	$	487,552	$	364,619	Total assets	$	502,179	$	364,619

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	6,255	$	4,408	Accounts payable	$	5,767	$	4,408
Accrued liabilities	Accrued liabilities	15,576		10,403		Accrued liabilities	12,888		10,403
Current portion of debt obligations, net	Current portion of debt obligations, net	11,177		6,434		Current portion of debt obligations, net	12,295		6,434
Current portion of operating lease liabilities	Current portion of operating lease liabilities	2,306		1,780		Current portion of operating lease liabilities	2,730		1,780
Total current liabilities	Total current liabilities	35,314		23,025		Total current liabilities	33,680		23,025
Deferred tax liability, net	Deferred tax liability, net	22,040		19,137		Deferred tax liability, net	24,074		19,137
Debt, net of current portion and debt discount and issuance costs	Debt, net of current portion and debt discount and issuance costs	166,903		118,734		Debt, net of current portion and debt discount and issuance costs	175,670		118,734
Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	35,517		24,150		Operating lease liabilities, net of current portion	36,719		24,150
Other long-term liabilities	Other long-term liabilities	355		350		Other long-term liabilities	351		350
Total liabilities	Total liabilities	260,129		185,396		Total liabilities	270,494		185,396

Commitments and contingencies (Note 10)	Commitments and contingencies (Note 10)	0		0		Commitments and contingencies (Note 10)	0		0

Equity	Equity					Equity
Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding	Preferred stock, $0.10 par value per share; 1,000,000 shares authorized; none issued and outstanding	—		—		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, respectively		94		90
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,286,198 and 8,999,910 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively						Common stock, $0.01 par value per share; 20,000,000 shares authorized; 9,286,198 and 8,999,910 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	93		90
Additional paid-in capital	Additional paid-in capital	77,553		50,040		Additional paid-in capital	68,342		50,040
Retained earnings	Retained earnings	150,366		129,693		Retained earnings	163,800		129,693
Total RCIHH stockholders’ equity	Total RCIHH stockholders’ equity	228,013		179,823		Total RCIHH stockholders’ equity	232,235		179,823
Noncontrolling interests	Noncontrolling interests	(590)		(600)		Noncontrolling interests	(550)		(600)
Total equity	Total equity	227,423		179,223		Total equity	231,685		179,223
Total liabilities and equity	Total liabilities and equity	$	487,552	$	364,619	Total liabilities and equity	$	502,179	$	364,619

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See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)


		For the Three Months Ended March 31,				For the Six Months Ended March 31,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Revenues	Revenues									Revenues
Sales of alcoholic beverages	Sales of alcoholic beverages	$	27,335	$	20,273	$	53,766	$	37,633	Sales of alcoholic beverages	$	29,738	$	25,092	$	83,504	$	62,725
Sales of food and merchandise	Sales of food and merchandise	11,160		9,538		22,054		18,147		Sales of food and merchandise	11,574		12,058		33,628		30,205
Service revenues	Service revenues	21,501		11,502		42,377		21,562		Service revenues	25,444		16,880		67,821		38,442
Other	Other	3,696		2,746		7,331		5,115		Other	3,958		3,830		11,289		8,945
Total revenues	Total revenues	63,692		44,059		125,528		82,457		Total revenues	70,714		57,860		196,242		140,317
Operating expenses	Operating expenses									Operating expenses
Cost of goods sold	Cost of goods sold									Cost of goods sold
Alcoholic beverages sold	Alcoholic beverages sold	4,896		3,730		9,730		6,992		Alcoholic beverages sold	5,177		4,621		14,907		11,613
Food and merchandise sold	Food and merchandise sold	3,840		3,029		7,797		5,918		Food and merchandise sold	3,959		4,043		11,756		9,961
Service and other	Service and other	24		43		124		96		Service and other	46		208		170		304
Total cost of goods sold (exclusive of items shown separately below)	Total cost of goods sold (exclusive of items shown separately below)	8,760		6,802		17,651		13,006		Total cost of goods sold (exclusive of items shown separately below)	9,182		8,872		26,833		21,878
Salaries and wages	Salaries and wages	16,530		11,200		33,035		22,686		Salaries and wages	17,387		13,870		50,422		36,556
Selling, general and administrative	Selling, general and administrative	18,437		12,618		36,923		24,770		Selling, general and administrative	19,572		14,697		56,495		39,467
Depreciation and amortization	Depreciation and amortization	2,877		2,117		5,071		4,140		Depreciation and amortization	2,565		2,057		7,636		6,197
Other charges (gains), net	Other charges (gains), net	7		1,481		(144)		1,431		Other charges (gains), net	1,501		(143)		1,357		1,288
Total operating expenses	Total operating expenses	46,611		34,218		92,536		66,033		Total operating expenses	50,207		39,353		142,743		105,386
Income from operations	Income from operations	17,081		9,841		32,992		16,424		Income from operations	20,507		18,507		53,499		34,931
Other income (expenses)	Other income (expenses)									Other income (expenses)
Interest expense	Interest expense	(2,864)		(2,364)		(5,468)		(4,798)		Interest expense	(3,028)		(2,281)		(8,496)		(7,079)
Interest income	Interest income	112		62		218		122		Interest income	103		72		321		194
Non-operating gains, net	Non-operating gains, net	—		431		84		5,347		Non-operating gains, net	127		9		211		5,356
Income before income taxes	Income before income taxes	14,329		7,970		27,826		17,095		Income before income taxes	17,709		16,307		45,535		33,402
Income tax expense	Income tax expense	3,356		1,938		6,289		1,554		Income tax expense	3,767		3,986		10,056		5,540
Net income	Net income	10,973		6,032		21,537		15,541		Net income	13,942		12,321		35,479		27,862
Net loss (income) attributable to noncontrolling interests	Net loss (income) attributable to noncontrolling interests	(21)		59		(10)		193		Net loss (income) attributable to noncontrolling interests	(40)		(19)		(50)		174
Net income attributable to RCIHH common shareholders	Net income attributable to RCIHH common shareholders	$	10,952	$	6,091	$	21,527	$	15,734	Net income attributable to RCIHH common shareholders	$	13,902	$	12,302	$	35,429	$	28,036

Earnings per share	Earnings per share									Earnings per share
Basic and diluted	Basic and diluted	$	1.15	$	0.68	$	2.28	$	1.75	Basic and diluted	$	1.48	$	1.37	$	3.76	$	3.11

Weighted average number of common shares outstanding	Weighted average number of common shares outstanding									Weighted average number of common shares outstanding
Basic and diluted	Basic and diluted	9,489,085		8,999,910		9,447,854		9,009,604		Basic and diluted	9,389,675		8,999,910		9,428,461		9,006,373

Dividends per share	Dividends per share	$	0.05	$	0.04	$	0.09	$	0.08	Dividends per share	$	0.05	$	0.04	$	0.14	$	0.12

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, except number of shares)

(unaudited)


		Common Stock			Additional Paid-In Capital				Retained Earnings				Treasury Stock						Noncontrolling Interests					Total Equity			Common Stock							Additional Paid-In Capital			Retained Earnings		Treasury Stock				Noncontrolling Interests		Total Equity
		Number of Shares	Amount								Number of Shares			Amount									Number of Shares					Amount								Number of Shares			Amount
Balance at September 30, 2021	Balance at September 30, 2021	8,999,910	$	90			$	50,040			$	129,693		—			$	—			$	(600)					$	179,223	Balance at September 30, 2021	8,999,910			$		90		$	50,040	$	129,693	—		$	—	$	(600)	$	179,223
Issuance of common shares	Issuance of common shares	500,000	5		30,357				—				—		—				—					30,362		Issuance of common shares	500,000				5			30,357			—		—		—		—		30,362
Payment of dividends	Payment of dividends	—	—		—				(380)				—		—				—					(380)		Payment of dividends	—				—			—			(380)		—		—		—		(380)
Net income (loss)	Net income (loss)	—	—		—				10,575				—		—				(11)					10,564		Net income (loss)	—				—			—			10,575		—		—		(11)		10,564
Balance at December 31, 2021	Balance at December 31, 2021	9,499,910	95		80,397				139,888				—		—				(611)					219,769		Balance at December 31, 2021	9,499,910				95			80,397			139,888		—		—		(611)		219,769
Purchase of treasury shares	Purchase of treasury shares	—	—		—				—				(45,643)		(2,845)				—					(2,845)		Purchase of treasury shares	—				—			—			—		(45,643)		(2,845)		—		(2,845)
Canceled treasury shares	Canceled treasury shares	(45,643)	(1)		(2,844)				—				45,643		2,845				—					—		Canceled treasury shares	(45,643)				(1)			(2,844)			—		45,643		2,845		—		—
Payment of dividends	Payment of dividends	—	—		—				(474)				—		—				—					(474)		Payment of dividends	—				—			—			(474)		—		—		—		(474)
Net income	Net income	—	—		—				10,952				—		—				21					10,973		Net income	—				—			—			10,952		—		—		21		10,973
Balance at March 31, 2022	Balance at March 31, 2022	9,454,267	$	94	$	77,553			$	150,366			—		$	—			$	(590)				$	227,423	Balance at March 31, 2022	9,454,267				94			77,553			150,366		—		—		(590)		227,423
Purchase of treasury shares																										Purchase of treasury shares	—				—			—			—		(168,069)		(9,212)		—		(9,212)
Canceled treasury shares																										Canceled treasury shares	(168,069)				(1)			(9,211)			—		168,069		9,212		—		—
Payment of dividends																										Payment of dividends	—				—			—			(468)		—		—		—		(468)
Net income																										Net income	—				—			—			13,902		—		—		40		13,942
Balance at June 30, 2022																										Balance at June 30, 2022	9,286,198				$	93		$	68,342		$	163,800	—		$	—	$	(550)	$	231,685

Balance at September 30, 2020	Balance at September 30, 2020	9,074,569	$	91	$	51,833			$	100,797			—		$	—			$	(414)				$	152,307	Balance at September 30, 2020	9,074,569				$	91		$	51,833		$	100,797	—		$	—	$	(414)	$	152,307
Purchase of treasury shares	Purchase of treasury shares	—	—		—				—				(74,659)		(1,794)				—					(1,794)		Purchase of treasury shares	—				—			—			—		(74,659)		(1,794)		—		(1,794)
Canceled treasury shares	Canceled treasury shares	(74,659)	(1)		(1,793)				—				74,659		1,794				—					—		Canceled treasury shares	(74,659)				(1)			(1,793)			—		74,659		1,794		—		—
Payment of dividends	Payment of dividends	—	—		—				(360)				—		—				—					(360)		Payment of dividends	—				—			—			(360)		—		—		—		(360)
Net income (loss)	Net income (loss)	—	—		—				9,643				—		—				(134)					9,509		Net income (loss)	—				—			—			9,643		—		—		(134)		9,509
Balance at December 31, 2020	Balance at December 31, 2020	8,999,910	90		50,040				110,080				—		—				(548)					159,662		Balance at December 31, 2020	8,999,910				90			50,040			110,080		—		—		(548)		159,662
Payment of dividends	Payment of dividends	—	—		—				(360)				—		—				—					(360)		Payment of dividends	—				—			—			(360)		—		—		—		(360)
Net income (loss)	Net income (loss)	—	—		—				6,091				—		—				(59)					6,032		Net income (loss)	—				—			—			6,091		—		—		(59)		6,032
Balance at March 31, 2021	Balance at March 31, 2021	8,999,910	$	90	$	50,040			$	115,811			—		$	—			$	(607)				$	165,334	Balance at March 31, 2021	8,999,910				90			50,040			115,811		—		—		(607)		165,334
Payment of dividends																										Payment of dividends	—				—			—			(360)		—		—		—		(360)
Net income																										Net income	—				—			—			12,302		—		—		19		12,321
Balance at June 30, 2021																										Balance at June 30, 2021	8,999,910				$	90		$	50,040		$	127,753	—		$	—	$	(588)	$	177,295

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, except number of shares)

(unaudited)


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES	CASH FLOWS FROM OPERATING ACTIVITIES					CASH FLOWS FROM OPERATING ACTIVITIES
Net income	Net income	$	21,537	$	15,541	Net income	$	35,479	$	27,862
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	5,071		4,140		Depreciation and amortization	7,636		6,197
Loss (gain) on sale of businesses and assets		(708)		86
Deferred income tax benefit						Deferred income tax benefit	(409)		(430)
Gain on sale of businesses and assets						Gain on sale of businesses and assets	(1,282)		(626)
Impairment of assets	Impairment of assets	—		1,401		Impairment of assets	1,722		1,672
Unrealized loss on equity securities	Unrealized loss on equity securities	1		67		Unrealized loss on equity securities	1		58
Amortization of debt discount and issuance costs	Amortization of debt discount and issuance costs	136		101		Amortization of debt discount and issuance costs	199		160
Gain on debt extinguishment	Gain on debt extinguishment	(83)		(5,298)		Gain on debt extinguishment	(83)		(5,298)
Noncash lease expense	Noncash lease expense	1,238		848		Noncash lease expense	1,725		1,282
Gain on insurance	Gain on insurance	(321)		(294)		Gain on insurance	(408)		(294)
Doubtful accounts expense (reversal) on notes receivable	Doubtful accounts expense (reversal) on notes receivable	53		(58)		Doubtful accounts expense (reversal) on notes receivable	753		(22)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	1,065		3,137		Accounts receivable	3,411		4,309
Inventories	Inventories	(276)		(31)		Inventories	(492)		(107)
Prepaid expenses, other current and other assets	Prepaid expenses, other current and other assets	(5,360)		1,494		Prepaid expenses, other current and other assets	(3,271)		2,346
Accounts payable, accrued and other liabilities	Accounts payable, accrued and other liabilities	5,508		(3,888)		Accounts payable, accrued and other liabilities	1,773		(4,892)
Net cash provided by operating activities	Net cash provided by operating activities	27,861		17,246		Net cash provided by operating activities	46,754		32,217
CASH FLOWS FROM INVESTING ACTIVITIES	CASH FLOWS FROM INVESTING ACTIVITIES					CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets	Proceeds from sale of businesses and assets	2,910		8		Proceeds from sale of businesses and assets	4,611		3,213
Proceeds from insurance	Proceeds from insurance	485		294		Proceeds from insurance	515		294
Proceeds from notes receivable	Proceeds from notes receivable	82		61		Proceeds from notes receivable	127		95
Payments for property and equipment and intangible assets	Payments for property and equipment and intangible assets	(13,990)		(6,718)		Payments for property and equipment and intangible assets	(17,173)		(10,788)
Acquisition of businesses, net of cash acquired	Acquisition of businesses, net of cash acquired	(39,302)		—		Acquisition of businesses, net of cash acquired	(44,302)		—
Net cash used in investing activities	Net cash used in investing activities	(49,815)		(6,355)		Net cash used in investing activities	(56,222)		(7,186)
CASH FLOWS FROM FINANCING ACTIVITIES	CASH FLOWS FROM FINANCING ACTIVITIES					CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively	Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively	35,742		2,176		Proceeds from debt obligations, including related party proceeds of $650 and $0, respectively	35,820		2,176
Payments on debt obligations	Payments on debt obligations	(7,290)		(5,977)		Payments on debt obligations	(10,714)		(10,845)
Purchase of treasury stock	Purchase of treasury stock	(2,845)		(1,794)		Purchase of treasury stock	(12,057)		(1,794)
Payment of dividends	Payment of dividends	(854)		(720)		Payment of dividends	(1,322)		(1,080)
Payment of loan origination costs	Payment of loan origination costs	(418)		(25)		Payment of loan origination costs	(445)		(25)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	24,335		(6,340)		Net cash provided by (used in) financing activities	11,282		(11,568)
NET INCREASE IN CASH AND CASH EQUIVALENTS	NET INCREASE IN CASH AND CASH EQUIVALENTS	2,381		4,551		NET INCREASE IN CASH AND CASH EQUIVALENTS	1,814		13,463
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,686		15,605		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,686		15,605
CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,067	$	20,156	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	37,500	$	29,068

CASH PAID DURING PERIOD FOR:	CASH PAID DURING PERIOD FOR:					CASH PAID DURING PERIOD FOR:
Interest	Interest	$	5,064	$	5,512	Interest	$	7,915	$	7,761
Income taxes	Income taxes	$	4,008	$	29	Income taxes	$	8,990	$	4,047

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Noncash investing and financing transactions:	Noncash investing and financing transactions:					Noncash investing and financing transactions:
Debt incurred in connection with acquisition of businesses	Debt incurred in connection with acquisition of businesses	$	22,200	$	—	Debt incurred in connection with acquisition of businesses	$	33,200	$	—
Debt incurred in connection with purchase of property and equipment	Debt incurred in connection with purchase of property and equipment	$	2,625	$	—	Debt incurred in connection with purchase of property and equipment	$	4,820	$	—
Note receivable from sale of property	Note receivable from sale of property	$	2,700	$	—	Note receivable from sale of property	$	2,700	$	—
Issuance of shares of common stock for acquisition of businesses:	Issuance of shares of common stock for acquisition of businesses:					Issuance of shares of common stock for acquisition of businesses:
Number of shares	Number of shares	500,000		—		Number of shares	500,000		—
Fair value	Fair value	$	30,362	$	—	Fair value	$	30,362	$	—
Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases	Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases	$	19,187	$	—	Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases	$	21,247	$	217
Unpaid liabilities on capital expenditures	Unpaid liabilities on capital expenditures	$	1,201	$	98	Unpaid liabilities on capital expenditures	$	1,325	$	995

See accompanying notes to unaudited condensed consolidated financial statements.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company,” “RCIHH,” “we,” or “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, 2021 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, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 14, 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~~nine months ended ~~March 31,~~June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.

2. Recent Accounting Standards and Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 our consolidated financial statements.

3. Ongoing Impact of COVID-19 Pandemic and Potential Economic Slowdown

~~Since the U.S. declaration of~~Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March ~~2020, we have~~2020. We had a major disruption in our business operations that ~~threatened to significantly impact~~affected our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. ~~To adapt~~In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic. There have been several variants to the ~~situation, we took significant steps~~coronavirus since then that threatened our operations throughout the period of recovery. We continue to ~~augment an anticipated decline~~adhere to state and local government mandates regarding the pandemic.

Since early 2021, there has been a worldwide increase in ~~operating~~inflation. In the event this global inflation leads to a major economic downturn, our business operations and cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

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

910

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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") of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See 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. 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.

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable. 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 a probable economic slowdown on sales and, to a lesser extent, the future assumed impact of the COVID-19 ~~pandemic on sales.~~pandemic. Based on the evaluation we conducted during the interim period ended ~~March 31,~~June 30, 2022, we determined that ~~there is no impairment~~our assets are impaired in ~~our~~a total amount of $1.7 million comprised of $400,000 in goodwill ~~indefinite-lived intangibles,~~(for one club), $1.0 million in property and ~~long-lived assets as of March 31, 2022.~~equipment ($379,000 for one club and $650,000 for one Bombshells), and $293,000 in SOB license (for one club). See Note 6.

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 payable	21,200
Common stock	30,362
Total consideration fair value	$	88,362

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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

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 equipment	19,534
Licenses	50,080
~~Trademarks~~Tradenames	7,460
Deferred tax liability	(2,903)
Total net assets acquired	74,557
Goodwill	13,805
Acquisition price fair value	$	88,362

Licenses and ~~trademarks~~tradenames 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~~this acquisition, we incurred acquisition-related expenses of approximately ~~$417,000~~$403,000 ($~~173,000~~162,000 recognized in fiscal 2021 and ~~$244,000~~$241,000 recognized in fiscal 2022), of which ~~$12,000~~$30,000 and ~~$12,000~~$42,000 were expensed during the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021 and $0$7,000 and ~~$244,000~~$241,000 were expensed during the three and ~~six~~nine months ended ~~March 31,~~June 30, 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,~~June 30, 2022, the 11 acquired clubs contributed revenues of ~~$8.4~~$10.3 million and ~~$14.4~~$24.7 million and income from operations of ~~$2.0~~$3.6 million and ~~$3.7~~$7.3 million during the three and ~~six~~nine months ended ~~March 31,~~June 30, 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,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Pro forma revenues	Pro forma revenues	$	63,692	$	47,393	$	127,254	$	90,777	Pro forma revenues	$	70,714	$	64,407	$	197,968	$	155,184
Pro forma net income attributable to RCIHH common stockholders	Pro forma net income attributable to RCIHH common stockholders	$	10,953	$	5,615	$	20,945	$	15,507	Pro forma net income attributable to RCIHH common stockholders	$	13,931	$	13,745	$	34,876	$	29,252
Pro forma earnings per share – basic and diluted	Pro forma earnings per share – basic and diluted	$	1.15	$	0.59	$	2.22	$	1.63	Pro forma earnings per share – basic and diluted	$	1.48	$	1.45	$	3.70	$	3.08

Pro forma weighted average number of common shares outstanding	Pro forma weighted average number of common shares outstanding	9,489,085		9,499,910		9,447,854		9,509,604		Pro forma weighted average number of common shares outstanding	9,389,675		9,499,910		9,428,461		9,506,373

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.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The Company incurred approximately $21,000 of acquisition-related costs for this acquisition, of which $11,000 was incurred in fiscal 2021 and $10,000 was incurred in the first quarter of fiscal 2022, both of which were included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income. From the date of acquisition until ~~March 31,~~June 30, 2022, the acquired club contributed revenues of ~~$424,000~~$433,000 and ~~$713,000~~$1,146,000 and loss from operations of ~~$28,000~~$5,000 and ~~$24,000~~$29,000 during the three and ~~six~~nine months ended ~~March 31,~~June 30, 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~~for $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~~for $400,000 to ~~transfer~~move one of our existing clubs due to eminent ~~domain.~~domain on the current location.

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.

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $16.0 million. The acquisition price includes $3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows: (1) $2.0 million in cash at closing; (2) $6.0 million under a 10% three-year promissory note payable in 35 equal monthly payments of $79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal 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 total $5.0 million in principal plus accrued interest due at maturity. The Company acquired 100% of the 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. Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.

The preliminary fair value of the consideration transferred is as follows (in thousands) as of May 2, 2022:


Cash	$	5,000
Notes payable	11,000
Total consideration fair value	$	16,000

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, including the fair value of the contingent debt consideration. As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items. Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital adjustments, the amount of goodwill is estimated to be $7.3 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

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

annually for impairment. The recognized goodwill will not be deductible for tax purposes. The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022:


Current assets	$	172
Property and equipment	5,336
Licenses	4,510
Tradenames	1,110
Deferred tax liability	(2,443)
Total net assets acquired	8,685
Goodwill	7,315
Acquisition price fair value	$	16,000

Licenses and tradenames will not be amortized but will be tested at least annually for impairment.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $8,000 and $8,000 expensed during the three and nine months ended June 30, 2022, respectively, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until June 30, 2022, the acquired club contributed revenues of $1.1 million and $1.1 million and income from operations of $497,000 and $497,000 during the three and nine months ended June 30, 2022, respectively, which are included in our unaudited condensed consolidated statements of income.

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 17, 2022, the Company sold a property classified as held-for sale with a carrying value of $1.1 million for $1.7 million in cash. The Company used $1.6 million of the proceeds to pay off a loan related to the property.

On May 23, 2022, the Company acquired real estate in Rowlett, Texas for $3.3 million for a future Bombshells location. The Company secured a $2.2 million loan in relation to the purchase (see Note 7).

On July 12, 2022, the Company received $6.0 million from the Philadelphia Regional Port Authority for 1 of the Company's rental properties, with a carrying value of $4.9 million, due to eminent domain. The Company paid the current lessee a lease termination fee of $250,000, which will be included in other charges (gains), net in our consolidated statement of income for the year ending September 30, 2022. The Company used $2.1 million of the proceeds to pay down a loan related to the property.

On July 21, 2022, the Company acquired a club in Odessa, Texas for a total of $1.8 million, of which $1.0 million was for the real estate and $800,000 for the adult entertainment business. The Company paid $1.0 million at closing for the real estate and executed an $800,000 6% seller-financed promissory note for the business. The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest. See Note 7. 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 and the debt consideration, along with the determination of any goodwill or gain on the transaction. 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 July 27, 2022, the Company completed an acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $25.0 million. The acquisition price includes (1) $20.0 million for the adult entertainment business covered in a stock purchase agreement payable $10.0 million in cash at closing and $10.0 million under a 6% ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million for the real estate property covered in an asset purchase agreement payable under a 6% ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest. In the stock purchase agreement, the Company acquired 100% of the capital stock of the company which owned the adult entertainment business.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 and the debt consideration, 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.

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 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. 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.

1215

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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):


		Three Months Ended March 31, 2022									Three Months Ended March 31, 2021										Three Months Ended June 30, 2022									Three Months Ended June 30, 2021
		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total			Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	Sales of alcoholic beverages	$	18,673		$	8,662	$	—	$	27,335	$	12,634		$	7,639	$	—	$	20,273	Sales of alcoholic beverages	$	21,061		$	8,677	$	—	$	29,738	$	16,130		$	8,962	$	—	$	25,092
Sales of food and merchandise	Sales of food and merchandise	4,498			6,662		—		11,160		4,082			5,456		—		9,538		Sales of food and merchandise	4,639			6,935		—		11,574		5,062			6,996		—		12,058
Service revenues	Service revenues	21,501			—		—		21,501		11,446			56		—		11,502		Service revenues	25,287			157		—		25,444		16,772			108		—		16,880
Other revenues	Other revenues	3,502			9		185		3,696		2,625			(16)		137		2,746		Other revenues	3,697			20		241		3,958		3,067			11		752		3,830
		$	48,174		$	15,333	$	185	$	63,692	$	30,787		$	13,135	$	137	$	44,059		$	54,684		$	15,789	$	241	$	70,714	$	41,031		$	16,077	$	752	$	57,860

Recognized at a point in time	Recognized at a point in time	$	47,722		$	15,332	$	185	$	63,239	$	30,382		$	13,134	$	136	$	43,652	Recognized at a point in time	$	54,320		$	15,777	$	241	$	70,338	$	40,599		$	16,075	$	751	$	57,425
Recognized over time	Recognized over time	452		*	1		—		453		405		*	1		1		407		Recognized over time	364		*	12		—		376		432		*	2		1		435
		$	48,174		$	15,333	$	185	$	63,692	$	30,787		$	13,135	$	137	$	44,059		$	54,684		$	15,789	$	241	$	70,714	$	41,031		$	16,077	$	752	$	57,860

		Six Months Ended March 31, 2022									Six Months Ended March 31, 2021										Nine Months Ended June 30, 2022									Nine Months Ended June 30, 2021
		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total			Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	Sales of alcoholic beverages	$	36,840		$	16,926	$	—	$	53,766	$	22,268		$	15,365	$	—	$	37,633	Sales of alcoholic beverages	$	57,901		$	25,603	$	—	$	83,504	$	38,398		$	24,327	$	—	$	62,725
Sales of food and merchandise	Sales of food and merchandise	9,087			12,967		—		22,054		7,505			10,642		—		18,147		Sales of food and merchandise	13,726			19,902		—		33,628		12,567			17,638		—		30,205
Service revenues	Service revenues	42,185			192		—		42,377		21,444			118		—		21,562		Service revenues	67,472			349		—		67,821		38,216			226		—		38,442
Other revenues	Other revenues	6,843			19		469		7,331		4,767			16		332		5,115		Other revenues	10,540			39		710		11,289		7,834			27		1,084		8,945
		$	94,955		$	30,104	$	469	$	125,528	$	55,984		$	26,141	$	332	$	82,457		$	149,639		$	45,893	$	710	$	196,242	$	97,015		$	42,218	$	1,084	$	140,317

Recognized at a point in time	Recognized at a point in time	$	94,066		$	30,102	$	468	$	124,636	$	55,217		$	26,140	$	329	$	81,686	Recognized at a point in time	$	148,386		$	45,879	$	709	$	194,974	$	95,816		$	42,215	$	1,080	$	139,111
Recognized over time	Recognized over time	889		*	2		1		892		767		*	1		3		771		Recognized over time	1,253		*	14		1		1,268		1,199		*	3		4		1,206
		$	94,955		$	30,104	$	469	$	125,528	$	55,984		$	26,141	$	332	$	82,457		$	149,639		$	45,893	$	710	$	196,242	$	97,015		$	42,218	$	1,084	$	140,317

* 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):


		Balance at September 30, 2021		Consideration Received		Recognized in Revenue		Balance at March 31, 2022			Balance at September 30, 2021		Consideration Received		Recognized in Revenue		Balance at June 30, 2022
Ad revenue	Ad revenue	$	84	$	450	$	(330)	$	204	Ad revenue	$	84	$	530	$	(480)	$	134
Expo revenue	Expo revenue	151		178		—		329		Expo revenue	151		306		—		457
Other (including franchise fees)	Other (including franchise fees)	119		9		(20)		108		Other (including franchise fees)	119		16		(5)		130
		$	354	$	637	$	(350)	$	641		$	354	$	852	$	(485)	$	721

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets (see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed consolidated statements of income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

6. Selected Account Information

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


		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
Credit card receivables	Credit card receivables	$	2,152	$	1,447	Credit card receivables	$	1,800	$	1,447
Income tax refundable	Income tax refundable	2,148		4,472		Income tax refundable	741		4,472
Insurance receivable	Insurance receivable	21		185		Insurance receivable	78		185
ATM in-transit	ATM in-transit	443		277		ATM in-transit	433		277
Other (net of allowance for doubtful accounts of $517 and $382, respectively)		1,498		1,189
Other (net of allowance for doubtful accounts of $19 and $382, respectively)						Other (net of allowance for doubtful accounts of $19 and $382, respectively)	903		1,189
Total accounts receivable, net	Total accounts receivable, net	$	6,262	$	7,570	Total accounts receivable, net	$	3,955	$	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% to 9% per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to ~~$154,000~~$0 and $102,000 as of ~~March 31,~~June 30, 2022 and September 30, 2021, respectively.

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


		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
Prepaid insurance	Prepaid insurance	$	4,712	$	277	Prepaid insurance	$	2,562	$	277
Prepaid legal	Prepaid legal	25		112		Prepaid legal	77		112
Prepaid taxes and licenses	Prepaid taxes and licenses	565		380		Prepaid taxes and licenses	581		380
Prepaid rent	Prepaid rent	471		309		Prepaid rent	387		309
Other	Other	1,107		850		Other	868		850
Total prepaid expenses and other current assets	Total prepaid expenses and other current assets	$	6,880	$	1,928	Total prepaid expenses and other current assets	$	4,475	$	1,928

A reconciliation of goodwill as of ~~March 31,~~June 30, 2022 and September 30, 2021 is as follows (in thousands):


		Gross		Accumulated Impairment		Net			Gross		Accumulated Impairment		Net
Balance at September 30, 2021	Balance at September 30, 2021	$	59,967	$	20,588	$	39,379	Balance at September 30, 2021	$	59,967	$	20,588	$	39,379
Acquisitions (see Note 4)	Acquisitions (see Note 4)	15,105		—		15,105		Acquisitions (see Note 4)	22,420		—		22,420
Balance at March 31, 2022		$	75,072	$	20,588	$	54,484
Impairment (see Note 3)								Impairment (see Note 3)	—		400		(400)
Balance at June 30, 2022								Balance at June 30, 2022	$	82,387	$	20,988	$	61,399

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of intangible assets, net are as follows (in thousands):


		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
Indefinite-lived:	Indefinite-lived:					Indefinite-lived:
Licenses	Licenses	$	115,266	$	65,186	Licenses	$	119,483	$	65,186
Trademarks	Trademarks	9,675		2,215		Trademarks	10,785		2,215
Domain names	Domain names	23		23		Domain names	23		23

Definite-lived:	Definite-lived:					Definite-lived:
Noncompete agreements	Noncompete agreements	92		182		Noncompete agreements	70		182
Discounted leases	Discounted leases	82		86		Discounted leases	80		86
Software	Software	146		132		Software	144		132
Total intangible assets, net	Total intangible assets, net	$	125,284	$	67,824	Total intangible assets, net	$	130,585	$	67,824

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


		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
Insurance	Insurance	$	4,558	$	54	Insurance	$	2,193	$	54
Sales and liquor taxes	Sales and liquor taxes	2,270		2,261		Sales and liquor taxes	2,024		2,261
Payroll and related costs	Payroll and related costs	4,470		3,220		Payroll and related costs	3,553		3,220
Property taxes	Property taxes	1,063		2,178		Property taxes	1,710		2,178
Interest	Interest	411		145		Interest	472		145
Patron tax	Patron tax	399		452		Patron tax	429		452
Unearned revenues	Unearned revenues	641		354		Unearned revenues	721		354
Lawsuit settlement	Lawsuit settlement	301		378		Lawsuit settlement	181		378
Other	Other	1,463		1,361		Other	1,605		1,361
Total accrued liabilities	Total accrued liabilities	$	15,576	$	10,403	Total accrued liabilities	$	12,888	$	10,403

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


		For the Three Months Ended March 31,				For the Six Months Ended March 31,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Taxes and permits	Taxes and permits	$	2,361	$	2,084	$	4,597	$	4,112	Taxes and permits	$	2,418	$	2,345	$	7,015	$	6,457
Advertising and marketing	Advertising and marketing	2,248		1,384		4,631		2,573		Advertising and marketing	2,460		1,929		7,091		4,502
Supplies and services	Supplies and services	2,175		1,488		4,155		2,716		Supplies and services	2,068		1,701		6,223		4,417
Insurance	Insurance	2,481		1,427		4,876		2,884		Insurance	2,481		1,474		7,357		4,358
Legal	Legal	898		812		1,958		1,673		Legal	328		1,255		2,286		2,928
Lease	Lease	1,572		972		3,212		1,949		Lease	1,736		992		4,948		2,941
Charge card fees	Charge card fees	1,466		695		2,797		1,259		Charge card fees	1,829		988		4,626		2,247
Utilities	Utilities	1,108		858		2,043		1,571		Utilities	1,151		873		3,194		2,444
Security	Security	1,050		830		2,137		1,690		Security	1,081		1,073		3,218		2,763
Accounting and professional fees	Accounting and professional fees	622		297		1,968		1,012		Accounting and professional fees	818		336		2,786		1,348
Repairs and maintenance	Repairs and maintenance	903		677		1,628		1,250		Repairs and maintenance	960		787		2,588		2,037
Other	Other	1,553		1,094		2,921		2,081		Other	2,242		944		5,163		3,025
Total selling, general and administrative expenses	Total selling, general and administrative expenses	$	18,437	$	12,618	$	36,923	$	24,770	Total selling, general and administrative expenses	$	19,572	$	14,697	$	56,495	$	39,467

The components of other charges (gains), net are as follows (in thousands):


		For the Three Months Ended March 31,				For the Six Months Ended March 31,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Impairment of assets	Impairment of assets	$	—	$	1,401	$	—	$	1,401	Impairment of assets	$	1,722	$	271	$	1,722	$	1,672
Settlement of lawsuits	Settlement of lawsuits	385		1		577		153		Settlement of lawsuits	132		127		709		280
Loss (gain) on disposal of businesses and assets		(58)		91		(400)		86
Gain on disposal of businesses and assets										Gain on disposal of businesses and assets	(266)		(541)		(666)		(455)
Gain on insurance	Gain on insurance	(320)		(12)		(321)		(209)		Gain on insurance	(87)		—		(408)		(209)
Other charges (gains), net	Other charges (gains), net	$	7	$	1,481	$	(144)	$	1,431	Other charges (gains), net	$	1,501	$	(143)	$	1,357	$	1,288

The components of non-operating gains (losses), net are as follows (in thousands):


		For the Three Months Ended March 31,				For the Six Months Ended March 31,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Gain on debt extinguishment	Gain on debt extinguishment	$	—	$	380	$	85	$	5,329	Gain on debt extinguishment	$	53	$	—	$	138	$	5,329
Unrealized loss on equity securities		—		(34)		(1)		(67)
Unrealized gain (loss) on equity securities										Unrealized gain (loss) on equity securities	—		9		(1)		(58)
Other	Other	—		85		—		85		Other	74		—		74		85
Non-operating gains, net	Non-operating gains, net	$	—	$	431	$	84	$	5,347	Non-operating gains, net	$	127	$	9	$	211	$	5,356

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 $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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12) and two notes for $500,000 and $300,000 borrowed from two non-officer employees in which the terms of the notes are the same as the rest of the lender group. The proceeds from this financing transaction was used as part of the cash payment on the October 18, 2021 acquisition (see Note 4) at closing.

On October 18, 2021, in relation to an acquisition (see Note 4), the Company executed 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 $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 maturity 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 interest.

On November 8, 2021, in relation to an acquisition (see Note 4), the Company executed a $1.0 million 7-year promissory note with an interest rate of 4.0% per annum. The note is payable $13,669 per month, including principal and interest.

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 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 annum, repriced after five years and then again annually to prime plus 1% with a floor rate of 4.25%. The note is payable interest only during the first 12 months; then the next 48 months with $16,338 equal monthly payments of principal and interest; then the next 191 months at an equal monthly payment based on a 20-year amortization; with the balance of principal and interest payable at the 252nd month.

On May 2, 2022, in relation to a club acquisition (see Note 4), the Company executed 2 seller-financed notes totaling $11.0 million.

On May 23, 2022, the Company borrowed $2.2 million from a bank lender in relation to a purchase of real estate (see Note 4). The 18-month promissory note has an initial interest rate of 4.5% per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1% with a floor of 4.5%. The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity. The Company paid loan costs amounting to $25,000 for this note.

Future maturities of long-term debt as of ~~March 31,~~June 30, 2022 are as follows: ~~$11.4~~$12.6 million, ~~$7.5~~$10.4 million, ~~$23.4~~$28.7 million, ~~$7.9~~$8.2 million, ~~$8.4~~$8.7 million and ~~$121.4~~$121.3 million for the twelve months ending ~~March 31,~~June 30, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively. Of the maturity schedule mentioned above, $651,000, ~~$0, $15.6~~$2,195,000, $20.5 million, $0, $0 and ~~$71.9~~$73.4 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $1.9 million and $1.6 million as of ~~March 31,~~June 30, 2022 and September 30, 2021, respectively.

On July 21, 2022, the Company executed an $800,000 6% seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 4). The promissory note matures in seven years and is payable in 84 equal monthly installments of $11,687 of principal and interest.

On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 4), the Company executed 2 seller-financed promissory notes: (1) $10.0 million 6% ten-year promissory note payable in 120 equal monthly payments of $111,020 in principal and interest, and (2) $5.0 million 6% ten-year promissory note payable in 120 equal monthly payments of $55,510 in principal and interest.

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RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 event that the 2022 Plan is not approved by the shareholders within one year of the date of adoption of the 2022 Plan by the board, or less than the required amount of 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 will unwind and terminate the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled. The 2022 Plan provides that 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 options 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 option on the grant date, and to make all determinations necessary or advisable under the 2022 Plan. On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to 6 members of management subject to the approval of the 2022 Plan.

On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. As of June 30, 2022, we have approximately $21.9 million remaining to purchase additional shares.

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

~~Table of Contents~~

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

9. Income Taxes

Income tax expense was ~~$3.4~~$3.8 million and ~~$6.3~~$10.1 million during the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, compared to ~~$1.9~~$4.0 million and ~~$1.6~~$5.5 million during the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively. The effective income tax expense rate was ~~23.4%~~21.3% and ~~22.6%~~22.1% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, compared to ~~24.3%~~24.4% and ~~9.1%~~16.6% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively. Our effective income tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the prior period, as presented below.


		For the Three Months Ended March 31,				For the Six Months Ended March 31,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Federal statutory income tax expense	Federal statutory income tax expense	21.0	%	21.0	%	21.0	%	21.0	%	Federal statutory income tax expense	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	2.9	%	7.0	%	2.9	%	5.0	%	State income taxes, net of federal benefit	2.9	%	4.8	%	2.9	%	4.9	%
Permanent differences	Permanent differences	0.5	%	(5.9)	%	0.4	%	(7.1)	%	Permanent differences	0.4	%	(0.1)	%	0.4	%	(3.7)	%
Change in valuation allowance	Change in valuation allowance	—	%	—	%	—	%	(7.4)	%	Change in valuation allowance	—	%	—	%	—	%	(3.8)	%
Tax credits	Tax credits	(3.1)	%	2.2	%	(2.6)	%	(2.3)	%	Tax credits	(3.2)	%	(1.2)	%	(2.8)	%	(1.8)	%
Other	Other	2.1	%	—	%	0.8	%	—	%	Other	0.1	%	—	%	0.5	%	—	%
Total income tax expense	Total income tax expense	23.4	%	24.3	%	22.6	%	9.1	%	Total income tax expense	21.3	%	24.4	%	22.1	%	16.6	%

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~~Fiscal year ended September 30, ~~2013 through 2017 have been examined by the Internal Revenue Service with no changes.~~2019 and subsequent years remain open to federal tax examination. 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 is also being examined for state income taxes, the outcome of 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 became 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 CARES Act also established a Paycheck Protection Program, whereby certain small businesses were eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company 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 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 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 utilized all of the PPP funds and submitted its forgiveness applications. During fiscal 2021, we received 11 Notices of PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $5.3 million in principal and interest and were included in non-operating gains (losses), net in our consolidated statement of operations for the fiscal year ended September 30, 2021. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal ~~will be~~has been repaid as debt plus accrued interest. ~~See Note 3.~~

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~~(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 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but 2 non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company discounted the $10.0 million at an imputed interest rate of 9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.

In March 2017, the Company settled with the State of Texas for 1 of the 2 remaining unsettled Patron Tax locations. To resolve the issue of taxes owed, the Company agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest.

On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability. The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to ~~$130,000~~$0 and $813,000 as of ~~March 31,~~June 30, 2022 and September 30, 2021, respectively. ~~See Note 14.~~

A declaratory judgment action was brought by 5five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $5 per customer Patron ~~Tax~~ Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron ~~Tax~~Fee is unconstitutional as it has been applied and enforced by the Comptroller. The State of Texas ~~has filed an appeal. We will continue~~appealed to ~~vigorously defend~~ the ~~matter through~~Fifth Circuit Court of Appeals, who affirmed that the ~~appeals process.~~Texas Patron Fee is unconstitutional as applied. The State of Texas next sought review from the Supreme Court, but the high court declined to take the case. That lawsuit is now back before the trial court for post-trial proceedings but is final for purposes of determining the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

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.

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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~~had insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding 100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of ~~March 31,~~June 30, 2022, we have 1 remaining unresolved claim out of the original 71 claims.

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Shareholder Class and Derivative Actions

In May and June 2019, 3 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 alleged 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 sought unspecified damages, costs, and attorneys’ fees. These lawsuits 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 June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all 3 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 added former directors Nourdean Anakar and 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 vigorously defended 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~~concurred with the request. On July 8, 2022, plaintiffs moved for final approval of the settlement and a hearing has been set for August 12, 2022.

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~~22-

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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. These allegations are substantively similar to claims asserted in the class action and a prior derivative action that was dismissed in June of 2021. RCI intends to vigorously defend against the action. On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed their Motions to ~~Dismiss. Briefing should be concluded within the next 30 days~~Dismiss and the derivative plaintiffs have responded. The Motions ~~will be ripe~~now have been fully briefed for the Court's 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.

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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alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4$4.0 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.

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~~nine months ended ~~March 31,~~June 30, 2022 amount to approximately ~~$385,000~~$132,000 and ~~$577,000,~~$709,000, respectively, and for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021 amount to approximately ~~$1,000~~$127,000 and ~~$153,000,~~$280,000, respectively. As of ~~March 31,~~June 30, 2022 and September 30, 2021, the Company has accrued ~~$301,000~~$181,000 and $378,000 in accrued liabilities, respectively, related to settlement of lawsuits.

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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,					For the Three Months Ended June 30,				For the Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Revenues (from external customers)	Revenues (from external customers)									Revenues (from external customers)
Nightclubs	Nightclubs	$	48,174	$	30,787	$	94,955	$	55,984	Nightclubs	$	54,684	$	41,031	$	149,639	$	97,015
Bombshells	Bombshells	15,333		13,135		30,104		26,141		Bombshells	15,789		16,077		45,893		42,218
Other	Other	185		137		469		332		Other	241		752		710		1,084
		$	63,692	$	44,059	$	125,528	$	82,457		$	70,714	$	57,860	$	196,242	$	140,317

Income (loss) from operations	Income (loss) from operations									Income (loss) from operations
Nightclubs	Nightclubs	$	19,126	$	10,468	$	37,862	$	18,963	Nightclubs	$	22,459	$	18,350	$	60,321	$	37,313
Bombshells	Bombshells	3,468		3,142		6,270		5,859		Bombshells	3,065		4,404		9,335		10,263
Other	Other	(34)		(139)		(77)		(214)		Other	(82)		321		(159)		107
General corporate	General corporate	(5,479)		(3,630)		(11,063)		(8,184)		General corporate	(4,935)		(4,568)		(15,998)		(12,752)
		$	17,081	$	9,841	$	32,992	$	16,424		$	20,507	$	18,507	$	53,499	$	34,931

Depreciation and amortization	Depreciation and amortization									Depreciation and amortization
Nightclubs	Nightclubs	$	2,206	$	1,413	$	3,753	$	2,737	Nightclubs	$	1,880	$	1,380	$	5,633	$	4,117
Bombshells	Bombshells	454		461		883		918		Bombshells	449		459		1,332		1,377
Other	Other	7		36		13		72		Other	6		8		19		80
General corporate	General corporate	210		207		422		413		General corporate	230		210		652		623
		$	2,877	$	2,117	$	5,071	$	4,140		$	2,565	$	2,057	$	7,636	$	6,197

Capital expenditures	Capital expenditures									Capital expenditures
Nightclubs	Nightclubs	$	1,662	$	2,201	$	10,890	$	3,331	Nightclubs	$	1,678	$	2,479	$	12,568	$	5,810
Bombshells	Bombshells	1,901		3,104		2,205		3,255		Bombshells	1,188		1,329		3,393		4,584
Other	Other	359		(2)		548		1		Other	145		—		693		1
General corporate	General corporate	218		126		347		131		General corporate	172		262		519		393
		$	4,140	$	5,429	$	13,990	$	6,718		$	3,183	$	4,070	$	17,173	$	10,788

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		March 31, 2022		September 30, 2021			June 30, 2022		September 30, 2021
Total assets	Total assets					Total assets
Nightclubs	Nightclubs	$	396,560	$	280,561	Nightclubs	$	409,251	$	280,561
Bombshells	Bombshells	55,382		52,073		Bombshells	57,483		52,073
Other	Other	2,418		1,573		Other	2,622		1,573
General corporate	General corporate	33,192		30,412		General corporate	32,823		30,412
		$	487,552	$	364,619		$	502,179	$	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,~~June 30, 2022 amounting to ~~$3.2~~$3.4 million and $31,000, respectively, and for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 amounting to ~~$6.5~~$9.9 million and ~~$199,000,~~$231,000, respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 amounting to ~~$53,000~~$42,000 and ~~$122,000,~~$164,000, 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,~~June 30, 2021 amounting to $2.8 million and ~~$31,000,~~$32,000, respectively, and for the ~~six~~nine months ended ~~March 31,~~June 30, 2021 amounting to ~~$5.6~~$8.4 million and ~~$141,000,~~$173,000, respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021 amounting to ~~$49,000~~$20,000 and ~~$75,000,~~$95,000, 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,~~June 30, 2022 and September 30, 2021, was ~~$116.7~~$116.5 million and $99.7 million, respectively.

Included in the $17.0 million borrowing on October 12, 2021 (see Note 7) are notes borrowed from related parties—one note for $500,000 (Ed Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $150,000 (from a brother of Company CFO, Bradley Chhay) in which the terms of the notes are the same as the rest of the lender group.

We used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies that manufacture 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 ~~$3,112~~$42,093 and ~~$27,149~~$69,242 during the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, and ~~$114,910~~$3,182 and ~~$114,910~~$118,092 during the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively. As of ~~March 31,~~June 30, 2022 and September 30, 2021, we owed Nottingham Creations and Sherwood Forest ~~$1,299~~$12,093 and $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 2022 and 2021. A son-in-law of Eric Langan owns a 50% interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were ~~$3,809~~$0 and $3,809 for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, and $0 and $0 for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively. Amounts billed directly to the Company were ~~$3,704~~$16,500 and ~~$84,700~~$101,200 for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, and ~~$55,621~~$325,425 and ~~$62,751~~$388,176 for the three and ~~six~~nine months

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(Unaudited)

~~months~~ ended ~~March 31,~~June 30, 2021, respectively. As of ~~March 31,~~June 30, 2022 and September 30, 2021, the Company owed TW Mechanical $0$6,037 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 included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 is as follows (in thousands):


		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Six Months Ended March 31, 2022			Six Months Ended March 31, 2021				Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Nine Months Ended June 30, 2022			Nine Months Ended June 30, 2021
Operating lease expense – fixed payments	Operating lease expense – fixed payments	$	1,136	$	828	$	2,267		$	1,657		Operating lease expense – fixed payments	$	1,215	$	828	$	3,482		$	2,485
Variable lease expense	Variable lease expense	233		44		567			108			Variable lease expense	404		47		971			155
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
Short-term and other lease expense (includes $53 and $73 recorded in advertising and marketing for the three months ended June 30, 2022 and 2021, respectively, and $183 and $232 for the nine months ended June 30, 2022 and 2021, respectively; and $120 and $106 recorded in repairs and maintenance for the three months ended June 30, 2022 and 2021, respectively, and $310 and $310 for the nine months ended June 30, 2022 and 2021, respectively; see Note 6)												Short-term and other lease expense (includes $53 and $73 recorded in advertising and marketing for the three months ended June 30, 2022 and 2021, respectively, and $183 and $232 for the nine months ended June 30, 2022 and 2021, respectively; and $120 and $106 recorded in repairs and maintenance for the three months ended June 30, 2022 and 2021, respectively, and $310 and $310 for the nine months ended June 30, 2022 and 2021, respectively; see Note 6)	290		296		988			843
Sublease income	Sublease income	(1)		(1)		(3)			(3)			Sublease income	(1)		(2)		(4)			(5)
Total lease expense, net	Total lease expense, net	$	1,736	$	1,189	$	3,529		$	2,309		Total lease expense, net	$	1,908	$	1,169	$	5,437		$	3,478

Other information:	Other information:											Other information:
Operating cash outflows from operating leases	Operating cash outflows from operating leases	$	1,690	$	1,162	$	3,439		$	2,253		Operating cash outflows from operating leases	$	1,855	$	1,147	$	5,294		$	3,400
Weighted average remaining lease term – operating leases	Weighted average remaining lease term – operating leases					12 years			12 years			Weighted average remaining lease term – operating leases					11 years			12 years
Weighted average discount rate – operating leases	Weighted average discount rate – operating leases					5.6		%	6.1		%	Weighted average discount rate – operating leases					5.6		%	6.0		%

Future maturities of operating lease liabilities as of ~~March 31,~~June 30, 2022 are as follows (in thousands):

Principal Payments Interest Payments Total Payments
April 2022 - March 2023 $ 2,306 $ 2,080 $ 4,386
April 2023 - March 2024 2,503 1,938 4,441
April 2024 - March 2025 2,712 1,789 4,501
April 2025 - March 2026 2,957 1,627 4,584
April 2026 - March 2027 3,118 1,452 4,570
Thereafter 24,227 5,906 30,133
$ 37,823 $ 14,792 $ 52,615

The above table of maturities of operating 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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~~(Unaudited)~~

~~14. Subsequent Events~~

~~On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability. See Note 10.~~

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.~~

~~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.~~


	Principal Payments		Interest Payments		Total Payments
July 2022 - June 2023	$	2,730	$	2,141	$	4,871
July 2023 - June 2024	2,952		1,979		4,931
July 2024 - June 2025	3,194		1,808		5,002
July 2025 - June 2026	3,457		1,622		5,079
July 2026 - June 2027	3,569		1,423		4,992
Thereafter	23,547		5,571		29,118
	$	39,449	$	14,544	$	53,993

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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, 2021.

Overview

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

Through our subsidiaries, as of ~~March 31,~~June 30, 2022, we operated a total of 5960 establishments that offer live adult entertainment and/or restaurant and bar ~~operations.~~operations, including one club that is temporarily closed. 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 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 and Potential Economic Slowdown

~~Since the U.S. declaration of~~Our businesses were heavily impacted by the COVID-19 pandemic since its declaration as a national emergency in March ~~2020, we have~~2020. We had a major disruption in our business operations that ~~threatened to significantly impact~~affected our cash flow. The pandemic resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions ~~that~~ were mandated or encouraged by federal, state and local governments. ~~To adapt~~In 2021, our businesses started and continue to recover to date from the initial effects of the pandemic. There have been several variants to the ~~situation, we took significant steps~~coronavirus since then that threatened our operations throughout the period of recovery. We continue to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

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

~~As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Closures and operating restrictions, as caused by local,~~ state and ~~national guidelines,~~local government mandates regarding the pandemic.

Since early 2021, there has been a worldwide increase in inflation. In the event this global inflation leads to a major economic downturn, our business operations and cash flow could ~~lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to~~ be ~~instituted. As of the date of this report, all COVID-related restrictions on our businesses have been lifted.~~significantly affected.

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, 2021 filed with the SEC on December 14, 2021.

During the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.

~~Table of Contents~~

Results of Operations

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

~~Second~~Third Quarter 2022

•Total revenues were ~~$63.7~~$70.7 million compared to ~~$44.1~~$57.9 million during the comparable prior-year period, a ~~44.6%~~22.2% increase (Nightclubs revenue of ~~$48.2~~$54.7 million compared to ~~$30.8~~$41.0 million, a ~~56.5%~~33.3% increase; and Bombshells revenue of ~~$15.3~~$15.8 million compared to ~~$13.1~~$16.1 million, a ~~16.7% increase)~~1.8% decrease)

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•Consolidated same-store sales ~~increased~~decreased by ~~9.0%~~0.1% (Nightclubs increased by ~~12.1%~~4.8% while Bombshells ~~increased~~decreased by ~~2.3%~~12.3%) (refer to the definition of same-store sales in the discussion of revenues below)

•~~Twelve~~Thirteen newly acquired clubs contributed ~~$8.8~~$11.8 million to revenues, while a newly constructed Bombshells contributed ~~$1.9~~$1.7 million

•Basic and diluted earnings per share (“EPS”) of ~~$1.15~~$1.48 compared to ~~$0.68~~$1.37 (non-GAAP diluted EPS* of ~~$1.19~~$1.60 compared to ~~$0.75)~~$1.36) during the comparable prior-year period

•Net cash provided by operating activities of ~~$11.6~~$18.9 million compared to ~~$11.0~~$15.0 million during the comparable prior-year period, a ~~5.7%~~26.2% increase (free cash flow* of ~~$11.1~~$18.0 million compared to ~~$9.0~~$13.0 million, a ~~23.3%~~39.1% increase)

Year-to-Date 2022

•Total revenues were ~~$125.5~~$196.2 million compared to ~~$82.5~~$140.3 million during the comparable prior-year period, a ~~52.2%~~39.9% increase (Nightclubs revenue of ~~$95.0~~$149.6 million compared to ~~$56.0~~$97.0 million, a ~~69.6%~~54.2% increase; and Bombshells revenue of ~~$30.1~~$45.9 million compared to ~~$26.1~~$42.2 million, a ~~15.2%~~8.7% increase)

•Consolidated same-store sales increased by ~~14.8%~~8.4% (Nightclubs increased by ~~20.0%~~13.2% while Bombshells ~~increased~~decreased by ~~5.0%~~1.6%) (refer to the definition of same-store sales in the discussion of Revenues below)

•~~Twelve~~Thirteen newly acquired clubs contributed ~~$15.1~~$27.0 million to revenues, while a newly constructed Bombshells contributed ~~$2.7~~$4.3 million

•Basic and diluted EPS of ~~$2.28~~$3.76 compared to ~~$1.75~~$3.11 (non-GAAP diluted EPS* of ~~$2.29~~$3.89 compared to ~~$1.15)~~$2.50) during the comparable prior-year period

•Net cash provided by operating activities of ~~$27.9~~$46.8 million compared to ~~$17.2~~$32.2 million during the comparable prior-year period, a ~~61.6%~~45.1% increase (free cash flow* of ~~$26.3~~$44.4 million compared to ~~$14.7~~$27.6 million, a ~~79.8%~~60.7% increase)

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

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Three Months Ended ~~March 31,~~June 30, 2022 Compared to Three Months Ended ~~March 31,~~June 30, 2021

The following table summarizes our results of operations for the three months ended ~~March 31,~~June 30, 2022 and 2021 (dollars in thousands):


		For the Three Months Ended March 31, 2022				For the Three Months Ended March 31, 2021				Better (Worse)					For the Three Months Ended June 30, 2022				For the Three Months Ended June 30, 2021				Better (Worse)
		Amount		% of Revenues		Amount		% of Revenues		Amount		%			Amount		% of Revenues		Amount		% of Revenues		Amount		%
Revenues	Revenues													Revenues
Sales of alcoholic beverages	Sales of alcoholic beverages	$	27,335	42.9	%	$	20,273	46.0	%	$	7,062	34.8	%	Sales of alcoholic beverages	$	29,738	42.1	%	$	25,092	43.4	%	$	4,646	18.5	%
Sales of food and merchandise	Sales of food and merchandise	11,160		17.5	%	9,538		21.6	%	1,622		17.0	%	Sales of food and merchandise	11,574		16.4	%	12,058		20.8	%	(484)		(4.0)	%
Service revenues	Service revenues	21,501		33.8	%	11,502		26.1	%	9,999		86.9	%	Service revenues	25,444		36.0	%	16,880		29.2	%	8,564		50.7	%
Other	Other	3,696		5.8	%	2,746		6.2	%	950		34.6	%	Other	3,958		5.6	%	3,830		6.6	%	128		3.3	%
Total revenues	Total revenues	63,692		100.0	%	44,059		100.0	%	19,633		44.6	%	Total revenues	70,714		100.0	%	57,860		100.0	%	12,854		22.2	%
Operating expenses	Operating expenses													Operating expenses
Cost of goods sold	Cost of goods sold													Cost of goods sold
Alcoholic beverages sold	Alcoholic beverages sold	4,896		17.9	%	3,730		18.4	%	(1,166)		(31.3)	%	Alcoholic beverages sold	5,177		17.4	%	4,621		18.4	%	(556)		(12.0)	%
Food and merchandise sold	Food and merchandise sold	3,840		34.4	%	3,029		31.8	%	(811)		(26.8)	%	Food and merchandise sold	3,959		34.2	%	4,043		33.5	%	84		2.1	%
Service and other	Service and other	24		0.1	%	43		0.3	%	19		44.2	%	Service and other	46		0.2	%	208		1.0	%	162		77.9	%
Total cost of goods sold (exclusive of items shown separately below)	Total cost of goods sold (exclusive of items shown separately below)	8,760		13.8	%	6,802		15.4	%	(1,958)		(28.8)	%	Total cost of goods sold (exclusive of items shown separately below)	9,182		13.0	%	8,872		15.3	%	(310)		(3.5)	%
Salaries and wages	Salaries and wages	16,530		26.0	%	11,200		25.4	%	(5,330)		(47.6)	%	Salaries and wages	17,387		24.6	%	13,870		24.0	%	(3,517)		(25.4)	%
Selling, general and administrative	Selling, general and administrative	18,437		28.9	%	12,618		28.6	%	(5,819)		(46.1)	%	Selling, general and administrative	19,572		27.7	%	14,697		25.4	%	(4,875)		(33.2)	%
Depreciation and amortization	Depreciation and amortization	2,877		4.5	%	2,117		4.8	%	(760)		(35.9)	%	Depreciation and amortization	2,565		3.6	%	2,057		3.6	%	(508)		(24.7)	%
Other charges (gains), net	Other charges (gains), net	7		—	%	1,481		3.4	%	1,474		99.5	%	Other charges (gains), net	1,501		2.1	%	(143)		(0.2)	%	(1,644)		(1149.7)	%
Total operating expenses	Total operating expenses	46,611		73.2	%	34,218		77.7	%	(12,393)		(36.2)	%	Total operating expenses	50,207		71.0	%	39,353		68.0	%	(10,854)		(27.6)	%
Income from operations	Income from operations	17,081		26.8	%	9,841		22.3	%	7,240		73.6	%	Income from operations	20,507		29.0	%	18,507		32.0	%	2,000		10.8	%
Other income (expenses)	Other income (expenses)													Other income (expenses)
Interest expense	Interest expense	(2,864)		(4.5)	%	(2,364)		(5.4)	%	(500)		(21.2)	%	Interest expense	(3,028)		(4.3)	%	(2,281)		(3.9)	%	(747)		(32.7)	%
Interest income	Interest income	112		0.2	%	62		0.1	%	50		80.6	%	Interest income	103		0.1	%	72		0.1	%	31		43.1	%
Non-operating gains, net	Non-operating gains, net	—		—	%	431		1.0	%	(431)		(100.0)	%	Non-operating gains, net	127		0.2	%	9		—	%	118		1311.1	%
Income before income taxes	Income before income taxes	14,329		22.5	%	7,970		18.1	%	6,359		79.8	%	Income before income taxes	17,709		25.0	%	16,307		28.2	%	1,402		8.6	%
Income tax expense	Income tax expense	3,356		5.3	%	1,938		4.4	%	(1,418)		(73.2)	%	Income tax expense	3,767		5.3	%	3,986		6.9	%	219		5.5	%
Net income	Net income	$	10,973	17.2	%	$	6,032	13.7	%	$	4,941	81.9	%	Net income	$	13,942	19.7	%	$	12,321	21.3	%	$	1,621	13.2	%

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

Revenues

Consolidated revenues for the ~~second~~third quarter increased by approximately ~~$19.6~~$12.9 million, or ~~44.6%~~22.2%, versus the comparable prior-year quarter due primarily to partial recovery from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales ~~increased~~decreased by ~~9.0%~~0.1%. The ~~44.6%~~total increase in consolidated revenues was primarily from ~~an 11.6%~~a 23.4% increase from new units and partially offset by a 0.1% decrease from last year’s COVID-19 closures, ~~an 8.5% increase~~a 0.1% decrease from the impact of same-store sales growth, and a ~~24.2% increase from new units, with a 0.3% increase~~1.0% decrease from non-core operations.

We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of operations after at least 12 full months for Nightclubs and at least 18 full months for Bombshells. 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,					For the Three Months Ended June 30,
		2022		2021			2022		2021
Nightclubs	Nightclubs	$	48,174	$	30,787	Nightclubs	$	54,684	$	41,031
Bombshells	Bombshells	15,333		13,135		Bombshells	15,789		16,077
Other	Other	185		137		Other	241		752
		$	63,692	$	44,059		$	70,714	$	57,860

Nightclubs revenues increased by ~~56.5%~~33.3% for the quarter ended ~~March 31,~~June 30, 2022 compared to the prior-year quarter ~~where~~primarily due to the ~~prior-year second quarter was just starting to ease up from government restrictions related to COVID-19.~~contribution of newly acquired clubs and the impact of the increase in same-store sales. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by ~~12.1%~~4.8%. Newly acquired clubs contributed ~~$8.8~~$11.8 million to the total Nightclubs revenue increase of ~~$17.4~~$13.7 million. By type of revenue, service revenue increased by ~~87.8%~~50.8%, alcoholic beverage sales increased by ~~47.8%~~30.6%, and food, merchandise and other revenue increased by ~~19.3%~~2.5%.

Bombshells revenues ~~increased~~decreased by ~~16.7%~~1.8%, of which ~~2.3%~~12.3% was for same-store sales ~~increase~~decrease with the ~~remaining~~offsetting increase caused by one new location. By type of revenue, food and merchandise sales ~~increased by 22.1% and~~were flat while alcoholic beverage sales ~~increased~~decreased by ~~13.4%~~3.2%.

Operating Expenses

Total operating expenses, as a percent of revenues, ~~decreased~~increased to ~~73.2%~~71.0% from ~~77.7%~~68.0% from last year’s ~~second~~third quarter, ~~although there was~~with a ~~$12.4~~$10.9 million increase, or ~~36.2%~~27.6%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current-year quarter and additional fixed expenses partly from new units plus the impairment charge in the current quarter. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by ~~$2.0 million,~~$310,000, or ~~28.8%~~3.5%, mainly due to higher ~~sales.~~sales but offset by the mix of higher-margin service revenue increasing from 29.2% to 36.0%. As a percent of total revenues, cost of goods sold decreased to ~~13.8%~~13.0% from ~~15.4%~~15.3% mainly due to the ~~increase in~~ sales mix ~~of higher-margin service revenues.~~shift mentioned above.

Salaries and wages increased by ~~$5.3~~$3.5 million, or ~~47.6%~~25.4%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were ~~26.0%~~24.6% from ~~25.4%~~24.0% mainly due to additional employees from new units partially offset by fixed salaries paid on higher sales.

Selling, general and administrative expenses increased by ~~$5.8~~$4.9 million, or ~~46.1%~~33.2%, primarily due to increased variable expenses related to sales activity during the current-year ~~quarter.~~quarter and other increases from insurance, accounting and professional fees, and advertising.

Depreciation and amortization increased by ~~$760,000,~~$508,000, or ~~35.9%~~24.7% due to new depreciable assets from newly acquired and constructed ~~units partially offset by fully depreciated and sold assets.~~units.

Other charges, net was a ~~nominal~~ net charge of $1.5 million in the current quarter while a net ~~charge~~gain of ~~$1.5 million~~$143,000 in the comparable prior-year quarter. The swing was mainly from impairment charges of ~~$1.4~~$1.7 million in the ~~prior-year~~current third quarter.

Income (Loss) from Operations

For the three months ended ~~March 31,~~June 30, 2022 and 2021, our consolidated operating margin was ~~26.8%~~29.0% and ~~22.3%~~32.0%, respectively. The main ~~driver~~drivers for the decrease in operating margin are the presence of less variable costs and expenses such as impairment charge, insurance, and accounting and professional fees, partially offset by the increase in ~~operating margin is the leveraging~~mix of ~~fixed expenses on higher sales.~~higher-margin service revenue.

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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,					For the Three Months Ended June 30,
		2022		2021			2022		2021
Nightclubs	Nightclubs	$	19,126	$	10,468	Nightclubs	$	22,459	$	18,350
Bombshells	Bombshells	3,468		3,142		Bombshells	3,065		4,404
Other	Other	(34)		(139)		Other	(82)		321
General corporate	General corporate	(5,479)		(3,630)		General corporate	(4,935)		(4,568)
		$	17,081	$	9,841		$	20,507	$	18,507

Nightclubs operating margin was ~~39.7%~~41.1% and ~~34.0%~~44.7% for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, while operating margin for Bombshells was ~~22.6%~~19.4% and ~~23.9%~~27.4%, respectively. The ~~increase~~decreases in both Nightclubs and Bombshells operating margin ~~was~~were mainly due to increases in salaries and wages and certain selling, general and administrative expenses plus the increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The decrease in Bombshells operating margin was mainly from cost inefficiencies from initial operations of the newly opened Bombshells unit.impairment charge.

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


		For the Three Months Ended March 31, 2022																For the Three Months Ended June 30, 2022
		Nightclubs			Bombshells			Other			Corporate			Total				Nightclubs			Bombshells			Other			Corporate			Total
Income (loss) from operations	Income (loss) from operations	$	19,126		$	3,468		$	(34)		$	(5,479)		$	17,081		Income (loss) from operations	$	22,459		$	3,065		$	(82)		$	(4,935)		$	20,507
Amortization of intangibles	Amortization of intangibles	47			1			—			1			49			Amortization of intangibles	23			1			—			1			25
Settlement of lawsuits	Settlement of lawsuits	277			—			—			108			385			Settlement of lawsuits	124			8			—			—			132
Loss (gain) on sale of businesses and assets		(125)			4			—			63			(58)
Impairment of assets																	Impairment of assets	1,072			650			—			—			1,722
Gain on sale of businesses and assets																	Gain on sale of businesses and assets	(264)			—			—			(2)			(266)
Gain on insurance	Gain on insurance	(320)			—			—			—			(320)			Gain on insurance	(87)			—			—			—			(87)
Non-GAAP operating income (loss)	Non-GAAP operating income (loss)	$	19,005		$	3,473		$	(34)		$	(5,307)		$	17,137		Non-GAAP operating income (loss)	$	23,327		$	3,724		$	(82)		$	(4,936)		$	22,033

GAAP operating margin	GAAP operating margin	39.7		%	22.6		%	(18.4)		%	(8.6)		%	26.8		%	GAAP operating margin	41.1		%	19.4		%	(34.0)		%	(7.0)		%	29.0		%
Non-GAAP operating margin	Non-GAAP operating margin	39.5		%	22.7		%	(18.4)		%	(8.3)		%	26.9		%	Non-GAAP operating margin	42.7		%	23.6		%	(34.0)		%	(7.0)		%	31.2		%


		For the Three Months Ended March 31, 2021																For the Three Months Ended June 30, 2021
		Nightclubs			Bombshells			Other			Corporate			Total				Nightclubs			Bombshells			Other			Corporate			Total
Income (loss) from operations	Income (loss) from operations	$	10,468		$	3,142		$	(139)		$	(3,630)		$	9,841		Income (loss) from operations	$	18,350		$	4,404		$	321		$	(4,568)		$	18,507
Amortization of intangibles	Amortization of intangibles	47			3			29			—			79			Amortization of intangibles	47			4			—			—			51
Settlement of lawsuits	Settlement of lawsuits	(4)			—			5			—			1			Settlement of lawsuits	123			4			—			—			127
Impairment of assets	Impairment of assets	1,401			—			—			—			1,401			Impairment of assets	271			—			—			—			271
Loss on sale of businesses and assets		14			47			—			30			91
Loss (gain) on insurance		32			—			—			(44)			(12)
Loss (gain) on sale of businesses and assets																	Loss (gain) on sale of businesses and assets	(512)			9			—			(38)			(541)
Non-GAAP operating income (loss)	Non-GAAP operating income (loss)	$	11,958		$	3,192		$	(105)		$	(3,644)		$	11,401		Non-GAAP operating income (loss)	$	18,279		$	4,421		$	321		$	(4,606)		$	18,415

GAAP operating margin	GAAP operating margin	34.0		%	23.9		%	(101.5)		%	(8.2)		%	22.3		%	GAAP operating margin	44.7		%	27.4		%	42.7		%	(7.9)		%	32.0		%
Non-GAAP operating margin	Non-GAAP operating margin	38.8		%	24.3		%	(76.6)		%	(8.3)		%	25.9		%	Non-GAAP operating margin	44.5		%	27.5		%	42.7		%	(8.0)		%	31.8		%

Other Income/Expenses

Interest expense increased by ~~$500,000,~~$747,000, or ~~21.2%~~32.7%, ~~which was mainly~~primarily caused by a higher average debt balance and partially offset by a lower average interest rate.

Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were ~~$4.4~~$4.8 million and $3.3 million for the quarters ended ~~March 31,~~June 30, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs

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were ~~7.0%~~6.7% and ~~7.6%~~5.7% during the quarters ended ~~March 31,~~June 30, 2022 and 2021, respectively, primarily due to the ~~increase in sales base.~~interest from higher average debt balance and the increased mix of our clubs where we lease our locations from third parties.

Income Taxes

Income tax expense was ~~$3.4~~$3.8 million during the quarter ended ~~March 31,~~June 30, 2022 compared to ~~$1.9~~$4.0 million during the quarter ended ~~March 31,~~June 30, 2021. The effective income tax rate was ~~23.4%~~21.3% and ~~24.3%~~24.4% for the quarters ended ~~March 31,~~June 30, 2022 and 2021, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, as presented below.


		For the Three Months Ended March 31,					For the Three Months Ended June 30,
		2022		2021			2022		2021
Computed expected income tax expense		21.0	%	21.0	%
Federal statutory income tax expense						Federal statutory income tax expense	21.0	%	21.0	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	2.9	%	7.0	%	State income taxes, net of federal benefit	2.9	%	4.8	%
Permanent differences	Permanent differences	0.5	%	(5.9)	%	Permanent differences	0.4	%	(0.1)	%
Tax credit	Tax credit	(3.1)	%	2.2	%	Tax credit	(3.2)	%	(1.2)	%
Other	Other	2.1	%	—	%	Other	0.1	%	—	%
Total income tax expense	Total income tax expense	23.4	%	24.3	%	Total income tax expense	21.3	%	24.4	%

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~~Six~~Nine Months Ended ~~March 31,~~June 30, 2022 Compared to ~~Six~~Nine Months Ended ~~March 31,~~June 30, 2021

The following table summarizes our results of operations for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 (dollars in thousands):


		For the Six Months Ended March 31, 2022				For the Six Months Ended March 31, 2021				Better (Worse)					For the Nine Months Ended June 30, 2022				For the Nine Months Ended June 30, 2021				Better (Worse)
		Amount		% of Revenues		Amount		% of Revenues		Amount		%			Amount		% of Revenues		Amount		% of Revenues		Amount		%
Revenues	Revenues													Revenues
Sales of alcoholic beverages	Sales of alcoholic beverages	$	53,766	42.8	%	$	37,633	45.6	%	$	16,133	42.9	%	Sales of alcoholic beverages	$	83,504	42.6	%	$	62,725	44.7	%	$	20,779	33.1	%
Sales of food and merchandise	Sales of food and merchandise	22,054		17.6	%	18,147		22.0	%	3,907		21.5	%	Sales of food and merchandise	33,628		17.1	%	30,205		21.5	%	3,423		11.3	%
Service revenues	Service revenues	42,377		33.8	%	21,562		26.1	%	20,815		96.5	%	Service revenues	67,821		34.6	%	38,442		27.4	%	29,379		76.4	%
Other	Other	7,331		5.8	%	5,115		6.2	%	2,216		43.3	%	Other	11,289		5.8	%	8,945		6.4	%	2,344		26.2	%
Total revenues	Total revenues	125,528		100.0	%	82,457		100.0	%	43,071		52.2	%	Total revenues	196,242		100.0	%	140,317		100.0	%	55,925		39.9	%
Operating expenses	Operating expenses													Operating expenses
Cost of goods sold	Cost of goods sold													Cost of goods sold
Alcoholic beverages sold	Alcoholic beverages sold	9,730		18.1	%	6,992		18.6	%	(2,738)		(39.2)	%	Alcoholic beverages sold	14,907		17.9	%	11,613		18.5	%	(3,294)		(28.4)	%
Food and merchandise sold	Food and merchandise sold	7,797		35.4	%	5,918		32.6	%	(1,879)		(31.8)	%	Food and merchandise sold	11,756		35.0	%	9,961		33.0	%	(1,795)		(18.0)	%
Service and other	Service and other	124		0.2	%	96		0.4	%	(28)		(29.2)	%	Service and other	170		0.2	%	304		0.6	%	134		44.1	%
Total cost of goods sold (exclusive of items shown separately below)	Total cost of goods sold (exclusive of items shown separately below)	17,651		14.1	%	13,006		15.8	%	(4,645)		(35.7)	%	Total cost of goods sold (exclusive of items shown separately below)	26,833		13.7	%	21,878		15.6	%	(4,955)		(22.6)	%
Salaries and wages	Salaries and wages	33,035		26.3	%	22,686		27.5	%	(10,349)		(45.6)	%	Salaries and wages	50,422		25.7	%	36,556		26.1	%	(13,866)		(37.9)	%
Selling, general and administrative	Selling, general and administrative	36,923		29.4	%	24,770		30.0	%	(12,153)		(49.1)	%	Selling, general and administrative	56,495		28.8	%	39,467		28.1	%	(17,028)		(43.1)	%
Depreciation and amortization	Depreciation and amortization	5,071		4.0	%	4,140		5.0	%	(931)		(22.5)	%	Depreciation and amortization	7,636		3.9	%	6,197		4.4	%	(1,439)		(23.2)	%
Other charges (gains), net	Other charges (gains), net	(144)		(0.1)	%	1,431		1.7	%	1,575		110.1	%	Other charges (gains), net	1,357		0.7	%	1,288		0.9	%	(69)		(5.4)	%
Total operating expenses	Total operating expenses	92,536		73.7	%	66,033		80.1	%	(26,503)		(40.1)	%	Total operating expenses	142,743		72.7	%	105,386		75.1	%	(37,357)		(35.4)	%
Income from operations	Income from operations	32,992		26.3	%	16,424		19.9	%	16,568		100.9	%	Income from operations	53,499		27.3	%	34,931		24.9	%	18,568		53.2	%
Other income (expenses)	Other income (expenses)													Other income (expenses)
Interest expense	Interest expense	(5,468)		(4.4)	%	(4,798)		(5.8)	%	(670)		(14.0)	%	Interest expense	(8,496)		(4.3)	%	(7,079)		(5.0)	%	(1,417)		(20.0)	%
Interest income	Interest income	218		0.2	%	122		0.1	%	96		78.7	%	Interest income	321		0.2	%	194		0.1	%	127		65.5	%
Non-operating gains, net	Non-operating gains, net	84		0.1	%	5,347		6.5	%	(5,263)		(98.4)	%	Non-operating gains, net	211		0.1	%	5,356		3.8	%	(5,145)		(96.1)	%
Income before income taxes	Income before income taxes	27,826		22.2	%	17,095		20.7	%	10,731		62.8	%	Income before income taxes	45,535		23.2	%	33,402		23.8	%	12,133		36.3	%
Income tax expense	Income tax expense	6,289		5.0	%	1,554		1.9	%	(4,735)		(304.7)	%	Income tax expense	10,056		5.1	%	5,540		3.9	%	(4,516)		(81.5)	%
Net income	Net income	$	21,537	17.2	%	$	15,541	18.8	%	$	5,996	38.6	%	Net income	$	35,479	18.1	%	$	27,862	19.9	%	$	7,617	27.3	%

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

Revenues

Consolidated revenues for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 increased by approximately ~~$43.1~~$55.9 million, or ~~52.2%~~39.9%, versus to the comparable prior-year period due primarily to partial recovery from the COVID-19 pandemic and sales from newly acquired clubs and a new Bombshells opening. Consolidated same-store sales increased by ~~14.8%~~8.4%. The ~~52.2%~~39.9% increase in consolidated revenues was primarily from a ~~21.6%~~22.3% increase from new units, a ~~16.9%~~9.9% increase from last year’s COVID-19 closures, a ~~13.5%~~7.9% increase from the impact of same-store sales growth, with a ~~0.3% increase~~partially offsetting 0.2% decrease from non-core operations.

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

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


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Nightclubs	Nightclubs	$	94,955	$	55,984	Nightclubs	$	149,639	$	97,015
Bombshells	Bombshells	30,104		26,141		Bombshells	45,893		42,218
Other	Other	469		332		Other	710		1,084
		$	125,528	$	82,457		$	196,242	$	140,317

Nightclubs revenues increased by ~~69.6%~~54.2% for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 compared to the comparable prior-year period, where the prior-year first quarter was still heavily impacted by government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by ~~20.0%~~13.2%. Newly acquired clubs contributed ~~$15.1~~$27.0 million to the total Nightclubs revenue increase of ~~$39.0~~$52.6 million. By type of revenue, service revenue increased by ~~96.7%~~76.6%, alcoholic beverage sales increased by ~~65.4%~~50.8%, and food, merchandise and other revenue increased by ~~29.8%~~18.9%.

Bombshells revenues increased by ~~15.2%~~8.7%, of which ~~5.0%~~1.6% was ~~for~~from an offsetting same-store sales ~~increase~~decrease with the remaining 10.3% increase caused by one new location. By type of revenue, food, merchandise and other revenue increased by ~~22.3%~~13.4% while alcoholic beverages sales increased by ~~10.2%~~5.2%.

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to ~~73.7%~~72.7% from ~~80.1%~~75.1% from last year’s ~~six-month~~nine-month period, although there was an ~~$26.5~~$37.4 million increase, or ~~40.1%~~35.4%, which was mainly caused by costs and expenses directly related to significantly higher sales in the current ~~six-month~~nine-month period. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by ~~$4.6~~$5.0 million, or ~~35.7%~~22.6%, mainly due to higher sales. As a percent of total revenues, cost of goods sold decreased to ~~14.1%~~13.7% from ~~15.8%~~15.6% mainly due to the increase in sales mix of higher-margin service revenues.

Salaries and wages increased by ~~$10.3~~$13.9 million, or ~~45.6%~~37.9%, due to increase in personnel and shifts to accommodate the increase in sales. As a percent of total revenues, salaries and wages were ~~26.3%~~25.7% from ~~27.5%~~26.1% mainly due to fixed salaries paid on higher sales partially offset by additional employees from new units.

Selling, general and administrative expenses increased by ~~$12.2~~$17.0 million, or ~~49.1%~~43.1%, primarily due to increased variable expenses related to sales activity during the current period.

Depreciation and amortization increased by ~~$931,000,~~$1.4 million, or ~~22.5%~~23.2% due to new depreciable assets from newly acquired and constructed units partially offset by fully depreciated and sold assets.

~~Other charges (gains), net shifted from a $1.4 million net charge to a $144,000 net gain. The swing was mainly from impairment charges of $1.4 million in the prior-year period.~~

Income (Loss) from Operations

For the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, our consolidated operating margin was ~~26.3%~~27.3% and ~~19.9%~~24.9%, respectively. The main ~~driver~~drivers for the increase in operating margin isare the increase in mix of higher-margin service revenue and the leveraging of fixed expenses on higher 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,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Nightclubs	Nightclubs	$	37,862	$	18,963	Nightclubs	$	60,321	$	37,313
Bombshells	Bombshells	6,270		5,859		Bombshells	9,335		10,263
Other	Other	(77)		(214)		Other	(159)		107
General corporate	General corporate	(11,063)		(8,184)		General corporate	(15,998)		(12,752)
		$	32,992	$	16,424		$	53,499	$	34,931

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Nightclubs operating margin was ~~39.9%~~40.3% and ~~33.9%~~38.5% for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, respectively, while operating margin for Bombshells was ~~20.8%~~20.3% and ~~22.4%~~24.3%, respectively. The increase in Nightclubs operating margin was mainly due to the increase in higher-margin service revenues and the leveraging of fixed operating costs and expenses in relation to higher sales. The decrease in Bombshells operating margin was mainly from preopening expenses related to the new Bombshells ~~unit.~~unit and the impairment in the current year.


		For the Six Months Ended March 31, 2022																For the Nine Months Ended June 30, 2022
		Nightclubs			Bombshells			Other			Corporate			Total				Nightclubs			Bombshells			Other			Corporate			Total
Income (loss) from operations	Income (loss) from operations	$	37,862		$	6,270		$	(77)		$	(11,063)		$	32,992		Income (loss) from operations	$	60,321		$	9,335		$	(159)		$	(15,998)		$	53,499
Amortization of intangibles	Amortization of intangibles	94			4			—			1			99			Amortization of intangibles	117			5			—			2			124
Settlement of lawsuits	Settlement of lawsuits	454			10			—			113			577			Settlement of lawsuits	578			18			—			113			709
Impairment of assets																	Impairment of assets	1,072			650			—			—			1,722
Loss (gain) on sale of businesses and assets	Loss (gain) on sale of businesses and assets	(80)			17			—			(337)			(400)			Loss (gain) on sale of businesses and assets	(344)			17			—			(339)			(666)
Gain on insurance	Gain on insurance	(321)			—			—			—			(321)			Gain on insurance	(408)			—			—			—			(408)
Non-GAAP operating income (loss)	Non-GAAP operating income (loss)	$	38,009		$	6,301		$	(77)		$	(11,286)		$	32,947		Non-GAAP operating income (loss)	$	61,336		$	10,025		$	(159)		$	(16,222)		$	54,980

GAAP operating margin	GAAP operating margin	39.9		%	20.8		%	(16.4)		%	(8.8)		%	26.3		%	GAAP operating margin	40.3		%	20.3		%	(22.4)		%	(8.2)		%	27.3		%
Non-GAAP operating margin	Non-GAAP operating margin	40.0		%	20.9		%	(16.4)		%	(9.0)		%	26.2		%	Non-GAAP operating margin	41.0		%	21.8		%	(22.4)		%	(8.3)		%	28.0		%


		For the Six Months Ended March 31, 2021																For the Nine Months Ended June 30, 2021
		Nightclubs			Bombshells			Other			Corporate			Total				Nightclubs			Bombshells			Other			Corporate			Total
Income (loss) from operations	Income (loss) from operations	$	18,963		$	5,859		$	(214)		$	(8,184)		$	16,424		Income (loss) from operations	$	37,313		$	10,263		$	107		$	(12,752)		$	34,931
Amortization of intangibles	Amortization of intangibles	94			7			57			—			158			Amortization of intangibles	141			11			57			—			209
Settlement of lawsuits	Settlement of lawsuits	114			34			5			—			153			Settlement of lawsuits	237			38			5			—			280
Impairment of assets	Impairment of assets	1,401			—			—			—			1,401			Impairment of assets	1,672			—			—			—			1,672
Loss on sale of businesses and assets		14			47			—			25			86
Loss (gain) on sale of businesses and assets																	Loss (gain) on sale of businesses and assets	(498)			56			—			(13)			(455)
Gain on insurance	Gain on insurance	(165)			—			—			(44)			(209)			Gain on insurance	(165)			—			—			(44)			(209)
Non-GAAP operating income (loss)	Non-GAAP operating income (loss)	$	20,421		$	5,947		$	(152)		$	(8,203)		$	18,013		Non-GAAP operating income (loss)	$	38,700		$	10,368		$	169		$	(12,809)		$	36,428

GAAP operating margin	GAAP operating margin	33.9		%	22.4		%	(64.5)		%	(9.9)		%	19.9		%	GAAP operating margin	38.5		%	24.3		%	9.9		%	(9.1)		%	24.9		%
Non-GAAP operating margin	Non-GAAP operating margin	36.5		%	22.7		%	(45.8)		%	(9.9)		%	21.8		%	Non-GAAP operating margin	39.9		%	24.6		%	15.6		%	(9.1)		%	26.0		%

Other Income/Expenses

Interest expense increased by ~~$670,000,~~$1.4 million, or ~~14.0%~~20.0%, which was mainly caused by a higher average debt balance and partially offset by a lower average interest rate.

Our total occupancy costs, defined as the sum of operating lease expense and interest expense, were ~~$8.7~~$13.4 million and ~~$6.7~~$10.0 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, respectively. As a percentage of revenue, total occupancy costs

~~Table of Contents~~

were 6.9% and ~~8.2%~~7.1% during the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, respectively, primarily due to the increase in sales ~~base.~~base partially offset by higher interest expense from higher average debt balance and more leased properties from new acquisitions.

Non-operating gains decreased by ~~$5.3~~$5.1 million, which was primarily the gain on debt extinguishment from the PPP loans during last year's first quarter.

Income Taxes

Income tax expense was ~~$6.3~~$10.1 million during the ~~six~~nine months ended ~~March 31,~~June 30, 2022 compared to ~~$1.6~~$5.5 million during the comparable prior-year period. The effective income tax rate was ~~22.6%~~22.1% and ~~9.1%~~16.6% for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits,

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including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the prior period, as presented below.


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Computed expected income tax expense	Computed expected income tax expense	21.0	%	21.0	%	Computed expected income tax expense	21.0	%	21.0	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	2.9	%	5.0	%	State income taxes, net of federal benefit	2.9	%	4.9	%
Permanent differences	Permanent differences	0.4	%	(7.1)	%	Permanent differences	0.4	%	(3.7)	%
Change in valuation allowance	Change in valuation allowance	—	%	(7.4)	%	Change in valuation allowance	—	%	(3.8)	%
Tax credit	Tax credit	(2.6)	%	(2.3)	%	Tax credit	(2.8)	%	(1.8)	%
Other	Other	0.8	%	—	%	Other	0.5	%	—	%
Total income tax expense	Total income tax expense	22.6	%	9.1	%	Total income tax expense	22.1	%	16.6	%

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

Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, (e) unrealized gains or losses on equity securities, (f) settlement of lawsuits, (g) gain on debt extinguishment, and (h) the income tax effect of the above-described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at ~~21.8%~~21.6% and ~~24.2%~~24.3% effective tax rate of the pre-tax non-GAAP income before taxes for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities.

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

~~Table of Contents~~

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~~nine months ended ~~March 31,~~June 30, 2022 and 2021 (in thousands, except per share, number of shares and percentages):


		Three Months Ended March 31,				Six Months Ended March 31,					Three Months Ended June 30,				Nine Months Ended June 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Reconciliation of GAAP net income to Adjusted EBITDA	Reconciliation of GAAP net income to Adjusted EBITDA									Reconciliation of GAAP net income to Adjusted EBITDA
Net income attributable to RCIHH common stockholders	Net income attributable to RCIHH common stockholders	$	10,952	$	6,091	$	21,527	$	15,734	Net income attributable to RCIHH common stockholders	$	13,902	$	12,302	$	35,429	$	28,036
Income tax expense	Income tax expense	3,356		1,938		6,289		1,554		Income tax expense	3,767		3,986		10,056		5,540
Interest expense, net	Interest expense, net	2,752		2,302		5,250		4,676		Interest expense, net	2,925		2,209		8,175		6,885
Settlement of lawsuits	Settlement of lawsuits	385		1		577		153		Settlement of lawsuits	132		127		709		280
Impairment of assets	Impairment of assets	—		1,401		—		1,401		Impairment of assets	1,722		271		1,722		1,672
Loss (gain) on sale of businesses and assets		(58)		91		(400)		86
Gain on sale of businesses and assets										Gain on sale of businesses and assets	(266)		(541)		(666)		(455)
Gain on debt extinguishment	Gain on debt extinguishment	—		(380)		(85)		(5,329)		Gain on debt extinguishment	(53)		—		(138)		(5,329)
Unrealized loss on equity securities		—		34		1		67
Unrealized loss (gain) on equity securities										Unrealized loss (gain) on equity securities	—		(9)		1		58
Gain on insurance	Gain on insurance	(320)		(12)		(321)		(209)		Gain on insurance	(87)		—		(408)		(209)
Depreciation and amortization	Depreciation and amortization	2,877		2,117		5,071		4,140		Depreciation and amortization	2,565		2,057		7,636		6,197
Adjusted EBITDA	Adjusted EBITDA	$	19,944	$	13,583	$	37,909	$	22,273	Adjusted EBITDA	$	24,607	$	20,402	$	62,516	$	42,675

Reconciliation of GAAP net income to non-GAAP net income	Reconciliation of GAAP net income to non-GAAP net income									Reconciliation of GAAP net income to non-GAAP net income
Net income attributable to RCIHH common stockholders	Net income attributable to RCIHH common stockholders	$	10,952	$	6,091	$	21,527	$	15,734	Net income attributable to RCIHH common stockholders	$	13,902	$	12,302	$	35,429	$	28,036
Amortization of intangibles	Amortization of intangibles	49		79		99		158		Amortization of intangibles	25		51		124		209
Settlement of lawsuits	Settlement of lawsuits	385		1		577		153		Settlement of lawsuits	132		127		709		280
Impairment of assets	Impairment of assets	—		1,401		—		1,401		Impairment of assets	1,722		271		1,722		1,672
Loss (gain) on sale of businesses and assets		(58)		91		(400)		86
Gain on sale of businesses and assets										Gain on sale of businesses and assets	(266)		(541)		(666)		(455)
Gain on debt extinguishment	Gain on debt extinguishment	—		(380)		(85)		(5,329)		Gain on debt extinguishment	(53)		—		(138)		(5,329)
Unrealized loss on equity securities		—		34		1		67
Unrealized loss (gain) on equity securities										Unrealized loss (gain) on equity securities	—		(9)		1		58
Gain on insurance	Gain on insurance	(320)		(12)		(321)		(209)		Gain on insurance	(87)		—		(408)		(209)
Net income tax effect	Net income tax effect	291		(522)		253		(1,741)		Net income tax effect	(312)		39		(59)		(1,702)

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Non-GAAP net income	Non-GAAP net income	$	11,299		$	6,783		$	21,651		$	10,320		Non-GAAP net income	$	15,063		$	12,240		$	36,714		$	22,560

Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share	Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share													Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share
Diluted shares	Diluted shares	9,489,085			8,999,910			9,447,854			9,009,604			Diluted shares	9,389,675			8,999,910			9,428,461			9,006,373
GAAP diluted earnings per share	GAAP diluted earnings per share	$	1.15		$	0.68		$	2.28		$	1.75		GAAP diluted earnings per share	$	1.48		$	1.37		$	3.76		$	3.11
Amortization of intangibles	Amortization of intangibles	0.01			0.01			0.01			0.02			Amortization of intangibles	0.00			0.01			0.01			0.02
Settlement of lawsuits	Settlement of lawsuits	0.04			0.00			0.06			0.02			Settlement of lawsuits	0.01			0.01			0.08			0.03
Impairment of assets	Impairment of assets	0.00			0.16			0.00			0.16			Impairment of assets	0.18			0.03			0.18			0.19
Loss (gain) on sale of businesses and assets		(0.01)			0.01			(0.04)			0.01
Gain on sale of businesses and assets														Gain on sale of businesses and assets	(0.03)			(0.06)			(0.07)			(0.05)
Gain on debt extinguishment	Gain on debt extinguishment	0.00			(0.04)			(0.01)			(0.59)			Gain on debt extinguishment	(0.01)			0.00			(0.01)			(0.59)
Unrealized loss on equity securities		0.00			0.00			0.00			0.01
Unrealized loss (gain) on equity securities														Unrealized loss (gain) on equity securities	0.00			0.00			0.00			0.01
Gain on insurance	Gain on insurance	(0.03)			0.00			(0.03)			(0.02)			Gain on insurance	(0.01)			0.00			(0.04)			(0.02)
Net income tax effect	Net income tax effect	0.03			(0.06)			0.03			(0.19)			Net income tax effect	(0.03)			0.00			(0.01)			(0.19)
Non-GAAP diluted earnings per share	Non-GAAP diluted earnings per share	$	1.19		$	0.75		$	2.29		$	1.15		Non-GAAP diluted earnings per share	$	1.60		$	1.36		$	3.89		$	2.50

Reconciliation of GAAP operating income to non-GAAP operating income	Reconciliation of GAAP operating income to non-GAAP operating income													Reconciliation of GAAP operating income to non-GAAP operating income
Income from operations	Income from operations	$	17,081		$	9,841		$	32,992		$	16,424		Income from operations	$	20,507		$	18,507		$	53,499		$	34,931
Amortization of intangibles	Amortization of intangibles	49			79			99			158			Amortization of intangibles	25			51			124			209
Settlement of lawsuits	Settlement of lawsuits	385			1			577			153			Settlement of lawsuits	132			127			709			280
Impairment of assets	Impairment of assets	—			1,401			—			1,401			Impairment of assets	1,722			271			1,722			1,672
Loss (gain) on sale of businesses and assets		(58)			91			(400)			86
Gain on sale of businesses and assets														Gain on sale of businesses and assets	(266)			(541)			(666)			(455)
Gain on insurance	Gain on insurance	(320)			(12)			(321)			(209)			Gain on insurance	(87)			—			(408)			(209)
Non-GAAP operating income	Non-GAAP operating income	$	17,137		$	11,401		$	32,947		$	18,013		Non-GAAP operating income	$	22,033		$	18,415		$	54,980		$	36,428

Reconciliation of GAAP operating margin to non-GAAP operating margin	Reconciliation of GAAP operating margin to non-GAAP operating margin													Reconciliation of GAAP operating margin to non-GAAP operating margin
Income from operations	Income from operations	26.8		%	22.3		%	26.3		%	19.9		%	Income from operations	29.0		%	32.0		%	27.3		%	24.9		%
Amortization of intangibles	Amortization of intangibles	0.1		%	0.2		%	0.1		%	0.2		%	Amortization of intangibles	0.0		%	0.1		%	0.1		%	0.1		%
Settlement of lawsuits	Settlement of lawsuits	0.6		%	0.0		%	0.5		%	0.2		%	Settlement of lawsuits	0.2		%	0.2		%	0.4		%	0.2		%
Impairment of assets	Impairment of assets	0.0		%	3.2		%	0.0		%	1.7		%	Impairment of assets	2.4		%	0.5		%	0.9		%	1.2		%
Loss (gain) on sale of businesses and assets		(0.1)		%	0.2		%	(0.3)		%	0.1		%
Gain on sale of businesses and assets														Gain on sale of businesses and assets	(0.4)		%	(0.9)		%	(0.3)		%	(0.3)		%
Gain on insurance	Gain on insurance	(0.5)		%	0.0		%	(0.3)		%	(0.3)		%	Gain on insurance	(0.1)		%	0.0		%	(0.2)		%	(0.1)		%
Non-GAAP operating margin	Non-GAAP operating margin	26.9		%	25.9		%	26.2		%	21.8		%	Non-GAAP operating margin	31.2		%	31.8		%	28.0		%	26.0		%

* 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.

Liquidity and Capital Resources

At ~~March 31,~~June 30, 2022, our cash and cash equivalents were approximately ~~$38.1~~$37.5 million compared to $35.7 million at September 30, 2021. Because of the large volume of cash we handle, we have very stringent cash controls. As of ~~March 31,~~June 30, 2022, we had working capital of ~~$23.1~~$20.5 million compared to working capital of $26.1 million as of September 30, 2021, excluding net assets held for sale (net of associated liabilities of ~~$3.6~~$4.2 million and $1.1 million, respectively) amounting to ~~$2.6~~$2.7 million and $3.8 million as of ~~March 31,~~June 30, 2022 and September 30, 2021, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. Revenues seem favorable now that all our locations are not under

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~~not under~~ pandemic-related closure mandates. We believe that we can borrow capital if needed but currently we do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on favorable terms.

In fiscal 2020, to adapt to the situation, we took significant steps to augment an anticipated decline in operating cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program of the CARES Act for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the year ended September 30, 2021, we received 11 Notices of PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $5.3 million in principal and interest during the period and were included in non-operating gains (losses), net in our consolidated statement of operations. In November 2021, we received a partial forgiveness of the remaining $124,000 PPP loan for $85,000 in principal and interest. The remaining unforgiven portion of approximately $41,000 in principal will be repaid as debt plus accrued interest.

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

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable. Currently, all of our locations are open except one club that is being renovated and/or remodeled.

We have not recently raised capital through the issuance of equity securities although we have recently issued shares of our common stock to partly pay for an acquisition (see next paragraph). Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.

On October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real estate properties, and associated intellectual property for a total agreed acquisition price of $88.0 million (with a total consideration preliminary fair value of $88.4 million based on the Company’s stock price at acquisition date and discounted due to the lock-up period). The acquisition gives the Company presence in four additional states. We paid for the acquisition with $36.8 million in cash, $21.2 million in four seller-financed notes, and 500,000 shares of our common stock with a fair value of $30.4 million at issuance.

On January 25, 2022, the Company borrowed $18.7 million from a bank lender for working capital purposes by executing a 10-year promissory note with an initial interest rate of 5.25% per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S. Treasury securities plus 3.98% with a floor of 5.25%. The note is payable in monthly payments of $126,265 in principal and interest to be adjusted after five years. The promissory note is secured by eleven real estate properties. After the 10-year term, the remaining balance of principal and interest are payable at maturity date. There are certain financial covenants with which the Company is to be in compliance related to this loan, among which to maintain a debt service coverage of not less than 1.4 times, reviewed annually.

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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,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Operating activities	Operating activities	$	27,861	$	17,246	Operating activities	$	46,754	$	32,217
Investing activities	Investing activities	(49,815)		(6,355)		Investing activities	(56,222)		(7,186)
Financing activities	Financing activities	24,335		(6,340)		Financing activities	11,282		(11,568)
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	$	2,381	$	4,551	Net increase in cash and cash equivalents	$	1,814	$	13,463

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Cash Flows from Operating Activities

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


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Net income	Net income	$	21,537	$	15,541	Net income	$	35,479	$	27,862
Depreciation and amortization	Depreciation and amortization	5,071		4,140		Depreciation and amortization	7,636		6,197
Deferred income tax benefit						Deferred income tax benefit	(409)		(430)
Impairment of assets	Impairment of assets	—		1,401		Impairment of assets	1,722		1,672
Gain on debt extinguishment	Gain on debt extinguishment	(83)		(5,298)		Gain on debt extinguishment	(83)		(5,298)
Net change in operating assets and liabilities	Net change in operating assets and liabilities	937		712		Net change in operating assets and liabilities	1,421		1,656
Other	Other	399		750		Other	988		558
Net cash provided by operating activities	Net cash provided by operating activities	$	27,861	$	17,246	Net cash provided by operating activities	$	46,754	$	32,217

Net cash provided by operating activities increased from year to year primarily driven by the impact of higher sales ~~and lower interest expense paid~~ partially offset by higher interest expense and income ~~tax refunds in the prior year compared to income tax payments in the current year.~~taxes paid.

Cash Flows from Investing Activities

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

For the Six Months
Ended March 31,
2022 2021
Payments for property and equipment and intangible assets $ (13,990) $ (6,718)
Acquisition of businesses (39,302) —
Proceeds from sale of businesses and assets 2,910 8
Proceeds from insurance 485 294
Proceeds from notes receivable 82 61
Net cash used in investing activities $ (49,815) $ (6,355)

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	For the Nine Months Ended June 30,
	2022		2021
Payments for property and equipment and intangible assets	$	(17,173)	$	(10,788)
Acquisition of businesses	(44,302)		—
Proceeds from sale of businesses and assets	4,611		3,213
Proceeds from insurance	515		294
Proceeds from notes receivable	127		95
Net cash used in investing activities	$	(56,222)	$	(7,186)

Following is a breakdown of our payments for property and equipment and intangible assets for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 (in thousands):


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
New facilities, equipment, and intangible assets	New facilities, equipment, and intangible assets	$	12,474	$	4,127	New facilities, equipment, and intangible assets	$	14,788	$	6,180
Maintenance capital expenditures	Maintenance capital expenditures	1,516		2,591		Maintenance capital expenditures	2,385		4,608
Total capital expenditures	Total capital expenditures	$	13,990	$	6,718	Total capital expenditures	$	17,173	$	10,788

The capital expenditures during the ~~six~~nine months ended ~~March 31,~~June 30, 2022 were composed of primarily of real estate and new equipment and furniture purchases for the newly acquired clubs. The capital expenditures during the ~~six~~nine months ended ~~March 31,~~June 30, 2021 were composed of primarily of real estate and construction of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license ~~purchases.~~purchase. 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.

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Cash Flows from Financing Activities

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


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Proceeds from debt obligations	Proceeds from debt obligations	$	35,742	$	2,176	Proceeds from debt obligations	$	35,820	$	2,176
Payments on debt obligations	Payments on debt obligations	(7,290)		(5,977)		Payments on debt obligations	(10,714)		(10,845)
Purchase of treasury stock	Purchase of treasury stock	(2,845)		(1,794)		Purchase of treasury stock	(12,057)		(1,794)
Payment of dividends	Payment of dividends	(854)		(720)		Payment of dividends	(1,322)		(1,080)
Payment of loan origination costs	Payment of loan origination costs	(418)		(25)		Payment of loan origination costs	(445)		(25)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	$	24,335	$	(6,340)	Net cash provided by (used in) financing activities	$	11,282	$	(11,568)

We purchased ~~45,643~~213,712 shares of our common stock at an average price of ~~$62.33~~$56.42 during the ~~six~~nine months ended ~~March 31,~~June 30, 2022, while we purchased 74,659 shares of our common stock at an average price of $24.03 during the ~~six~~nine months ended ~~March 31,~~June 30, 2021. On May 24, 2022, the Board of Directors approved a $25.0 million increase in the Company's share repurchase program. As of June 30, 2022, we have approximately $21.9 million remaining to purchase additional shares.

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

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

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

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

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


		For the Six Months Ended March 31,					For the Nine Months Ended June 30,
		2022		2021			2022		2021
Net cash provided by operating activities	Net cash provided by operating activities	$	27,861	$	17,246	Net cash provided by operating activities	$	46,754	$	32,217
Less: Maintenance capital expenditures	Less: Maintenance capital expenditures	1,516		2,591		Less: Maintenance capital expenditures	2,385		4,608
Free cash flow	Free cash flow	$	26,345	$	14,655	Free cash flow	$	44,369	$	27,609

Our free cash flow for the current ~~six-month~~nine-month period increased by ~~79.8%~~60.7% compared to the comparable prior-year period primarily due to higher sales, net of related expense payments ~~lower interest expense payments,~~ and lower maintenance capital expenditures, partially offset by ~~income tax refunds in the prior year~~higher interest expense payments and higher income tax payments in the current year.

We do not include capital expenditures related to new facilities construction, equipment and intangibles assets as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow.

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Other than the potentially prolonged effect of the COVID-19 pandemic, the potential economic slowdown, and the notes payable financing described above, we are not aware of any event or trend that would potentially significantly affect liquidity. In our opinion, working capital is not a true indicator of our financial status. 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~~nine months ended ~~March 31~~June 30 (in thousands, except percentages):


		2022		Increase (Decrease)		2021		Increase (Decrease)		2020			2022		Increase (Decrease)		2021		Increase (Decrease)		2020
Sales of alcoholic beverages	Sales of alcoholic beverages	$	53,766	42.9	%	$	37,633	(0.1)	%	$	37,662	Sales of alcoholic beverages	$	83,504	33.1	%	$	62,725	38.5	%	$	45,285
Sales of food and merchandise	Sales of food and merchandise	22,054		21.5	%	18,147		30.3	%	13,926		Sales of food and merchandise	33,628		11.3	%	30,205		73.8	%	17,378
Service revenues	Service revenues	42,377		96.5	%	21,562		(31.6)	%	31,541		Service revenues	67,821		76.4	%	38,442		11.6	%	34,448
Other	Other	7,331		43.3	%	5,115		(10.1)	%	5,691		Other	11,289		26.2	%	8,945		39.1	%	6,430
Total revenues	Total revenues	125,528		52.2	%	82,457		(7.2)	%	88,820		Total revenues	$	196,242	39.9	%	$	140,317	35.5	%	$	103,541
Net income (loss) attributable to RCIHH common stockholders												Net income (loss) attributable to RCIHH common stockholders	$	35,429	26.4	%	$	28,036	(951.6)	%	$	(3,292)
Net cash provided by operating activities	Net cash provided by operating activities	$	27,861	61.6	%	$	17,246	43.9	%	$	11,981	Net cash provided by operating activities	$	46,754	45.1	%	$	32,217	165.2	%	$	12,147
Net income attributable to RCIHH common stockholders		$	21,527	36.8	%	$	15,734	621.1	%	$	2,182
Adjusted EBITDA*	Adjusted EBITDA*	$	37,909	70.2	%	$	22,273	12.1	%	$	19,877	Adjusted EBITDA*	$	62,516	46.5	%	$	42,675	137.4	%	$	17,973
Free cash flow*	Free cash flow*	$	26,345	79.8	%	$	14,655	48.5	%	$	9,870	Free cash flow*	$	44,369	60.7	%	$	27,609	175.1	%	$	10,036
Debt (end of period)	Debt (end of period)	$	178,080	34.5	%	$	132,412	(5.7)	%	$	140,440	Debt (end of period)	$	187,965	47.3	%	$	127,603	(10.6)	%	$	142,736

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

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

Impact of Inflation

To the extent permitted by competition, we have managed to recover increased costs through price increases and may continue to do so. However, there can be no assurance that we will be able to do so in the future.

Seasonality

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

Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if 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 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

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and management expertise; (v) to develop new club concepts that are consistent with our management and marketing skills; (vi) to develop and open our restaurant concepts as our capital and manpower allow; and (vii) to control the real estate in connection with club operations, although some units may be in leased premises.

We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All eleven of the existing company-owned Bombshells as of ~~March 31,~~June 30, 2022 are located in Texas. Our first franchisee for Bombshells restaurants in the San Antonio, Texas area opened in June 2022. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.

We are currently in the process of site selection for new Bombshells locations and made ~~a purchase~~purchases of real estate in Stafford and Rowlett, both in 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.~~sites.

We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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,~~June 30, 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,~~June 30, 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, 2021, filed with the SEC on December 14, 2021, management concluded that our internal control over financial reporting was not effective as of September 30, 2021. In the evaluation, management identified a material weakness in internal control related to the proper design and implementation of controls over our estimates relating to the impairment of goodwill, indefinite-lived intangibles and long-lived assets, specifically over the precision of management’s review of 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. As such, we ~~are in the process of adding~~have added controls to increase the precision of the review of all assumptions used in the impairment valuation model. We will also conduct senior management reviews of any and all material estimates that are applied in these instances.

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

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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,~~June 30, 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 financial 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,~~June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 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 any additional risks relating to the conflict between Russia and Ukraine, as discussed 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 currently have some software developers in Ukraine and the uncertainty of their living conditions has delayed some of the deliverables in our ~~soon-to-~~

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~~launch~~soon-to-launch internet venture. In addition, the conflict could lead to increased cyberattacks or could aggravate other risk factors that we have previously identified.

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

~~We purchased 45,643 shares of our common stock at an average price of $62.33~~Our share repurchase activity during the three months ended ~~March 31, 2022. As of March 31,~~June 30, 2022 ~~we have approximately $6.1 million remaining to purchase additional shares.~~was a follows:

Period Total 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, 2022 11,793 $ 63.80 11,793 $ 8,209,404
March 1-31, 2022 33,850 $ 61.82 33,850 $ 6,116,635
45,643 $ 62.33 45,643


Period	Total 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(3)
April 1-30, 2022	29,850	$	62.39	29,850	$	4,254,226
May 1-31, 2022	50,950	$	57.89	50,950	$	26,304,926
June 1-30, 2022	87,269	$	50.42	87,269	$	21,904,397
	168,069	$	54.81	168,069

(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.

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

Item 6. Exhibits.


Exhibit No.						Description

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

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

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

101.INS						XBRL Instance Document.
101.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.
104						Cover 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~~August 9, 2022	By:	/s/ Eric S. Langan
		Eric S. Langan
		Chief Executive Officer and President

Date: ~~May~~August 9, 2022	By:	/s/ Bradley Chhay
		Bradley Chhay
		Chief Financial Officer and Principal Accounting Officer

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