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 ~~December~~March 31, ~~2017~~2021

~~[ ]~~ ☐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, Texas77066

(Address of principal executive offices) (Zip Code)

(~~281)~~ (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 ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ~~[X]~~ ☒ No ~~[ ]~~☐

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

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

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

~~Yes [ ] No [X]~~

As of ~~February 28, 2018, 9,718,711~~ May 6, 2021, 8,999,910shares of the registrant’s common stock were outstanding.

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack thereof in launching and building the company’s businesses, ~~risks and uncertainties related to~~(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.

RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of ~~December~~March 31, ~~2017~~2021 (unaudited) and September 30, ~~2017~~2020	4

	Condensed Consolidated Statements of ~~Income~~Operations (unaudited) for the three and six months ended ~~December~~March 31, ~~2017~~2021 and ~~2016~~2020	5

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended March 31, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2021 and ~~2016~~2020	67

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1721

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2537

Item 4.	Controls and Procedures	2537

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	2838

Item1A.	Risk Factors	2838

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2838

Item 6.	Exhibits	2839

	Signatures	2940

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	March 31, 2021			September 30, 2020
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	20,156		$	15,605
Accounts receivable, net		3,630			6,767
Current portion of notes receivable		214			201
Inventories		2,403			2,372
Prepaid expenses and other current assets		5,020			6,488
Assets held for sale		7,382			-
Total current assets		38,805			31,433
Property and equipment, net		175,153			181,383
Operating lease right-of-use assets, net		24,698			25,546
Notes receivable, net of current portion		2,892			2,908
Goodwill		45,686			45,686
Intangibles, net		73,070			73,077
Other assets		806			900
Total assets	$	361,110		$	360,933

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	4,021		$	4,799
Accrued liabilities		12,321			14,573
Current portion of debt obligations, net		16,380			16,304
Current portion of operating lease liabilities		1,692			1,628
Total current liabilities		34,414			37,304
Deferred tax liability, net		20,390			20,390
Debt, net of current portion and debt discount and issuance costs		116,032			125,131
Operating lease liabilities, net of current portion		24,583			25,439
Other long-term liabilities		357			362
Total liabilities		195,776			208,626

Commitments and contingencies (Note 10)		-			-

Equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; NaN issued and outstanding		-			-
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,000 and 9,075 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively		90			91
Additional paid-in capital		50,040			51,833
Retained earnings		115,811			100,797
Total RCIHH stockholders’ equity		165,941			152,721
Noncontrolling interests		(607	)		(414	)
Total equity		165,334			152,307
Total liabilities and equity	$	361,110		$	360,933

December 31, 2017 September 30,2017
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 11,954 $ 9,922
Accounts receivable, net 4,113 3,187
Inventories 2,419 2,149
Prepaid insurance 2,808 3,826
Other current assets 746 1,399
Assets held for sale 5,565 5,759
Total current assets 27,605 26,242
Property and equipment, net 154,259 148,410
Notes receivable 4,965 4,993
Goodwill 43,866 43,866
Intangibles, net 74,420 74,424
Other assets 1,464 1,949
Total assets $ 306,579 $ 299,884

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 2,601 $ 2,147
Accrued liabilities 11,584 11,524
Current portion of long-term debt 14,048 17,440
Total current liabilities 28,233 31,111
Deferred tax liability, net 15,844 25,541
Long-term debt 111,944 106,912
Other long-term liabilities 1,324 1,095
Total liabilities 157,345 164,659

Commitments and contingencies (Note 8)

Stockholders’ equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding - -
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,719 and 9,719 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively 97 97
Additional paid-in capital 63,453 63,453
Retained earnings 83,214 69,195
Total RCIHH stockholders’ equity 146,764 132,745
Noncontrolling interests 2,470 2,480
Total stockholders’ equity 149,234 135,225
Total liabilities and stockholders’ equity $ 306,579 $ 299,884

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(in thousands, except per share data)

(unaudited)

~~(unaudited)~~

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

Earnings (loss) per share
Basic and diluted	$	0.68		$	(0.37	)	$	1.75		$	0.24

Weighted average number of common shares outstanding
Basic and diluted		9,000			9,225			9,010			9,274

Dividends per share	$	0.04		$	0.04		$	0.08		$	0.07

For the Three Months
Ended December 31,
2017 2016
Revenues
Sales of alcoholic beverages $ 17,805 $ 14,375
Sales of food and merchandise 5,307 4,207
Service revenues 15,889 13,475
Other 2,211 1,682
Total revenues 41,212 33,739
Operating expenses
Cost of goods sold
Alcoholic beverages sold 3,755 3,168
Food and merchandise sold 2,094 1,653
Service and other 36 60
Cost of goods sold (exclusive of items shown separately below) 5,885 4,881
Salaries and wages 11,377 9,652
Selling, general and administrative 12,812 11,193
Depreciation and amortization 1,909 1,618
Other charges, net 89 62
Total operating expenses 32,072 27,406
Income from operations 9,140 6,333
Other income (expenses)
Interest expense (3,079 ) (2,015 )
Interest income 67 37
Income before income taxes 6,128 4,355
Income tax expense (benefit) (8,227 ) 1,450
Net income 14,355 2,905
Net income attributable to noncontrolling interests (44 ) (7 )
Net income attributable to RCIHH common shareholders $ 14,311 $ 2,898

Earnings per share attributable to RCIHH common shareholders
Basic $ 1.47 $ 0.30
Diluted $ 1.47 $ 0.30
Weighted average number of common shares outstanding
Basic 9,719 9,768
Diluted 9,719 9,814

Dividend per share $ 0.03 $ 0.03

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

	of Shares			Amount			Capital			Earnings			of Shares			Amount			Interests			Equity
	Common Stock						Additional						Treasury Stock
	Number						Paid-In			Retained			Number						Noncontrolling			Total
	of Shares			Amount			Capital			Earnings			of Shares			Amount			Interests			Equity
Balance at September 30, 2020		9,075		$	91		$	51,833		$	100,797			-		$	-		$	(414	)	$	152,307
Purchase of treasury shares		-			-			-			-			(75	)		(1,794	)		-			(1,794	)
Canceled treasury shares		(75	)		(1	)		(1,793	)		-			75			1,794			-			-
Payment of dividends		-			-			-			(360	)		-			-			-			(360	)
Payment to noncontrolling interest
Net income (loss)		-			-			-			9,643			-			-			(134	)		9,509
Balance at December 31, 2020		9,000		$	90			50,040			110,080			-			-			(548	)		159,662
Balance at December 31, 2020		9,000		$	90			50,040			110,080			-			-			(548	)		159,662
Payment of dividends		-			-			-			(360	)		-			-			-			(360	)
Payment to noncontrolling interest
Net income (loss)		-			-			-			6,091			-			-			(59	)		6,032
Balance at March 31, 2021		9,000		$	90		$	50,040		$	115,811			-		$	-		$	(607	)	$	165,334

Balance at September 30, 2019		9,591		$	96		$	61,312		$	108,168			-		$	-		$	(156	)	$	169,420
Purchase of treasury shares		-			-			-			-			(333	)		(6,441	)		-			(6,441	)
Canceled treasury shares		(333	)		(3	)		(6,438	)		-			333			6,441			-			-
Payment of dividends		-			-			-			(279	)		-			-			-			(279	)
Payment to noncontrolling interest		-			-			-			-			-			-			(10	)		(10	)
Net income		-			-			-			5,634			-			-			-			5,634
Balance at December 31, 2019		9,258			93			54,874			113,523			-			-			(166	)		168,324
Balance at December 31, 2019		9,258			93			54,874			113,523			-			-			(166	)		168,324
Purchase of treasury shares		-			-			-			-			(133	)		(2,047	)		-			(2,047	)
Canceled treasury shares		(133	)		(2	)		(2,045	)		-			133			2,047			-			-
Payment of dividends		-			-			-			(368	)		-			-			-			(368	)
Payment to noncontrolling interest		-			-			-			-			-			-			(21	)		(21	)
Net loss		-			-			-			(3,452	)		-			-			(41	)		(3,493	)
Balance at March 31, 2020		9,125		$	91		$	52,829		$	109,703			-		$	-		$	(228	)	$	162,395

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

~~(unaudited)~~

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

CASH PAID DURING PERIOD FOR:
Interest (net of amounts capitalized of $0 and $155, respectively)	$	5,512		$	4,891
Income taxes	$	29		$	2,105

Noncash investing and financing transactions:
Principal of Paycheck Protection Program loans forgiven	$	5,298		$	-
Operating lease right-of-use assets established upon adoption of ASC 842	$	-		$	27,310
Deferred rent liabilities reclassified upon adoption of ASC 842	$	-		$	1,241
Operating lease liabilities established upon adoption of ASC 842	$	-		$	28,551
Unpaid liabilities on capital expenditures	$	98		$	21

For the Three Months
Ended December 31,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,355 $ 2,905
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,909 1,618
Deferred taxes (9,697 ) -
Amortization of debt discount and issuance costs 324 85
Deferred rent 75 40
Loss on sale of assets 140 -
Gain on insurance settlements (20 ) -
Debt prepayment penalty 543 -
Changes in operating assets and liabilities:
Accounts receivable (926 ) 644
Inventories (270 ) (87 )
Prepaid expenses and other assets 1,044 588
Accounts payable and accrued liabilities 668 (272 )
Net cash provided by operating activities 8,145 5,521
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 632 -
Proceeds from insurance 20 -
Proceeds from notes receivable 28 20
Additions to property and equipment (2,769 ) (3,008 )
Net cash used in investing activities (2,089 ) (2,988 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 58,920 1,900
Payments on long-term debt (61,256 ) (2,152 )
Debt prepayment penalty (543 ) -
Purchase of treasury stock - (1,101 )
Payment of dividends (292 ) (290 )
Payment of loan origination costs (799 ) (99 )
Distribution to noncontrolling interests (54 ) (54 )
Net cash used in financing activities (4,024 ) (1,796 )
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,032 737
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,922 11,327
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,954 $ 12,064

CASH PAID DURING PERIOD FOR:
Interest $ 2,890 $ 1,920
Income taxes $ 157 $ 385

See accompanying notes to unaudited condensed consolidated financial statements.

~~Non-cash and other transactions:~~

During the quarter ended December 31, 2017, the Company refinanced $81.2 million of long-term debt comprised of 21 notes payable with the execution of three notes payable with a lender bank. The new notes and the repaid balance included $18.7 million worth of debt with the same lender bank. See Note 4 for a detailed discussion of the refinancing.

During the quarter ended December 31, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft by trading in an aircraft that the Company owned and the assumption of the old aircraft’s note payable liability. See Note 4 for a detailed discussion of the transaction.

~~During the quarter ended December 31, 2016, the Company refinanced $8.0 million of long-term debt by borrowing $9.9 million, resulting in net cash proceeds of $1.9 million.~~

~~During the quarter ended December 31, 2016, the Company purchased and retired 89,685 common shares at a cost of $1.1 million.~~

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company or “RCIHH”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or ~~“US~~“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, ~~2017~~2020 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, ~~2017~~2020 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on ~~February~~December 14, ~~2018.~~2020. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair ~~presentation~~statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and six months ended ~~December~~March 31, ~~2017~~2021 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2018.~~2021.

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

2. Recent Accounting Standards and Pronouncements

In ~~May 2014,~~June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09,~~2016-13, ~~Revenue from Contracts~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss impairment model with ~~Customers(“ASU 2014-09”),~~an expected loss model which ~~supersedes nearly all existing revenue recognition guidance under GAAP. The core principle~~requires the use of ~~ASU 2014-09 is~~forward-looking information to ~~recognize revenues when promised goods or services are transferred~~calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to ~~customers in an amount that reflects the consideration to which an entity expects~~available-for-sale debt securities to be ~~entitled~~recorded through an allowance for ~~those goods or services.~~credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard’s effective date has been deferred by the issuance of ASU No. 2015-14, and is effective for ~~annual~~fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2017,~~2019. Early application will be permitted for all entities for fiscal years, and interim periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early application is permitted but not beforewithin those fiscal years, beginning after December 15, ~~2016, the ASU’s original effective date. The Company is still evaluating the~~2018. We adopted ASU 2016-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact ~~of the standard and which transition method it is going to use upon adoption.~~on our consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In ~~July 2015,~~August 2018, the FASB issued ASU No. ~~2015-11,~~2018-13, ~~Inventory~~Fair Value Measurement (Topic ~~330)~~820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. We adopted ASU 2018-13 as of October 1, 2020. Our adoption of this guidance did not have a significant impact on our consolidated financial statements.

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply. However, if there has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of fair value as outlined in Topic 820 should be applied. In addition, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2019-01 as of October 1, 2020. Our adoption of this guidance did not have an impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the ~~Measurement of Inventory~~Accounting for Income Taxes. This ASU ~~does not apply~~simplifies accounting for income taxes by removing the following exceptions: (1) exception to ~~inventory~~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 ~~is measured using last-in, first-out (“LIFO”) or the retail inventory method.~~exceed anticipated losses. The ~~amendments apply to all other inventory, which includes inventory~~ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that is measured using FIFO or average cost. This ASU eliminates from U.S. GAAP the requirement to measure inventory at the lower of cost or market. Market under the previous requirement could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Entities within scope of this update will now be required to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling pricesare partially based on income; transactions with a government that result in a step up in the ~~ordinary course~~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 less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The amendments in this update are effectiveentities for fiscal years beginning after December 15, ~~2016, with early adoption permitted,~~2020, and ~~should be applied prospectively. The Company adopted ASU 2015-11 as of October 1, 2017, which did not have an impact on its consolidated financial statements.~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~~~Leases (Topic 842)~~~~, on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by~~interim periods within those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases, and will be effective for interim and annual periods beginning after December 15, 2018.fiscal years. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. We expect our consolidated balance sheets to be materially impacted upon adoption due to the recognition of right-of-use assets and lease liabilities related to currently classified operating leases. We do not expect ASU 2016-02 to have a material impact on our consolidated statements of income though we expect a shift in the classification of expenses, the materiality ofpermitted for public business entities for periods for which ~~we are currently evaluating.~~

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~In January 2017, the FASB issued ASU No. 2017-01,~~~~Business Combination (Topic 805): Clarifying the Definition of a Business~~. According to the guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. If met, this initial screen eliminates the need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 provides a framework to evaluate when an input and a substantive process are present. To be a business without outputs, there will now need to be an organized workforce. The FASB noted that outputs are a key element of a business and included more stringent criteria for aggregated sets of assets and activities without outputs. Finally, the guidance narrows the definition of the term “outputs” to be consistent with how it is described in Topic 606,~~Revenue from Contracts with Customers~~. Under the final definition, an output is the result of inputs and substantive processes that provide goods and services to customers, other revenue, or investment income, such as dividends and interest. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. ~~We have~~An entity that elects early ~~adopted ASU 2017-01~~adoption in an interim period should reflect any adjustments as of ~~October 1, 2017, and will apply its~~the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments ~~to future transactions.~~

~~In May 2017,~~in the ~~FASB issued ASU No. 2017-09,~~~~Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting~~~~. The amendments~~same period. We are still evaluating the impact of this ASU ~~provide guidance about which~~on the Company’s consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. Liquidity and Impact of COVID-19 Pandemic

In March 2020, former President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency. The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments. Starting in March 2020, we closed and reopened a number of our clubs and restaurants and implemented curfew and capacity restrictions as required by local authorities. We do not know the effects the pandemic may have on our operations in the future.

The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our strategy was to open locations and operate in accordance with local and state guidelines. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

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

	●	Arranged for deferment of principal and interest payment on certain of our debts;

	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers; *

	●	Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *

	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;

	●	Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

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

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 Notes 6 and 8. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms ~~or conditions~~ of ~~a share-based payment award require an entity to apply modification accounting~~the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in ~~Topic 718. An entity should account for~~ the ~~effects of a modification unless~~CARES Act. The Company utilized all of the ~~following are met: (1)~~PPP funds and submitted its forgiveness applications. During the ~~fair value~~three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the ~~modified award is the same as the fair value~~12 of our PPP loans granted. All of the ~~original award immediately before the modification; (2) the vesting conditions~~notices received forgave 100% of each of the ~~modified award are~~11 PPP loans totaling the ~~same as~~amount of $380,000 and $5.3 million in principal and interest during the ~~vesting conditions~~three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will in fact obtain forgiveness of the ~~original award immediately before the modification; and (3) the classification~~remaining PPP loan in whole or in part.

As of the ~~modified award as an equity instrument or a liability instrument is the same as the classification~~release of ~~the original award immediately before the modification. The current disclosure requirements in Topic 718 are not changed. The amendments in~~ this ~~ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Since March 31, 2017,~~report, we do not know the future extent and duration of the impact of COVID-19 on our businesses. Lower sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.

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

Valuation of Goodwill, Indefinite-Lived Intangibles and Long-Lived Assets

We ~~have early adopted ASU 2017-09~~consider the COVID-19 pandemic 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. Based on our evaluation, we determined that there is no impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets, except for assets held for sale, as of ~~October 1, 2017,~~March 31, 2021.

4. Revenues

The Company recognizes revenue from the sale of alcoholic beverages, food and ~~will apply its provisions~~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 ~~future stock compensation awards~~governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and ~~transactions.~~advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021, hence, 0 Expo-related revenue in fiscal 2020. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases. See Note 13.

3. RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Schedule of Disaggregation of Segment Revenues

	Three Months Ended March 31, 2021										Three Months Ended March 31, 2020
	Nightclubs			Bombshells			Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	12,634		$	7,639		$	-	$	20,273	$	11,860		$	5,059	$	-	$	16,919
Sales of food and merchandise		4,082			5,456			-		9,538		2,799			3,680		-		6,479
Service revenues		11,446			56			-		11,502		14,290			58		-		14,348
Other revenues		2,625			(16	)		137		2,746		2,418			6		256		2,680
	$	30,787		$	13,135		$	137	$	44,059	$	31,367		$	8,803	$	256	$	40,426

Recognized at a point in time	$	30,382		$	13,134		$	136	$	43,652	$	30,977		$	8,803	$	252	$	40,032
Recognized over time		405	*		1			1		407		390	*		-		4		394
	$	30,787		$	13,135		$	137	$	44,059	$	31,367		$	8,803	$	256	$	40,426

	Six Months Ended March 31, 2021									Six Months Ended March 31, 2020
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	22,268		$	15,365	$	-	$	37,633	$	26,544		$	11,118	$	-	$	37,662
Sales of food and merchandise		7,505			10,642		-		18,147		6,063			7,863		-		13,926
Service revenues		21,444			118		-		21,562		31,384			157		-		31,541
Other revenues		4,767			16		332		5,115		5,235			15		441		5,691
	$	55,984		$	26,141	$	332	$	82,457	$	69,226		$	19,153	$	441	$	88,820

Recognized at a point in time	$	55,217		$	26,140	$	329	$	81,686	$	68,411		$	19,153	$	430	$	87,994
Recognized over time		767	*		1		3		771		815	*		-		11		826
	$	55,984		$	26,141	$	332	$	82,457	$	69,226		$	19,153	$	441	$	88,820

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

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

Schedule of Reconciliation of Contract Liabilities with Customers

	Balance at September 30, 2020		Consideration Received		Recognized in Revenue			Balance at March 31, 2021
Ad revenue	$	92	$	356	$	(278	)	$	170
Expo revenue		211		105		-			316
Other		33		108		(4	)		137
	$	336	$	569	$	(282	)	$	623

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

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Selected Account Information

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

Schedule of Accounts Receivable

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

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 $124,000 and $182,000 as of March 31, 2021 and September 30, 2020, respectively.

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

Schedule of Prepaid Expenses and Other Current Assets

	March 31, 2021		September 30, 2020
Prepaid insurance	$	2,549	$	4,884
Prepaid legal		715		735
Prepaid taxes and licenses		398		428
Prepaid rent		373		37
Other		985		404
Total prepaid expenses and other current assets	$	5,020	$	6,488

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

Schedule of Accrued Liabilities

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

December 31, 2017 September 30, 2017
Insurance $ 2,173 $ 3,160
Payroll and related costs 2,375 1,889
Income taxes 1,862 549
Property taxes 1,361 1,270
Sales and liquor taxes 1,000 990
Patron tax 834 801
Unearned revenues 454 196
Lawsuit settlement 37 295
Other 1,488 2,374
$ 11,584 $ 11,524

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

Schedule of Selling, General and Administrative Expenses

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

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

Schedule of Components of Other Charges (Gains), Net

For the Three Months
Ended December 31,
2017 2016
Taxes and permits $ 2,166 $ 2,289
Advertising and marketing 1,965 1,657
Supplies and services 1,368 1,146
Insurance 1,259 935
Rent 940 690
Charge card fees 887 570
Accounting and professional fees 886 497
Utilities 695 670
Security 638 541
Repairs and maintenance 570 466
Legal 377 703
Other 1,061 1,029
$ 12,812 $ 11,193

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

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

Components of Non-Operating Gains (Losses), Net

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~4. Long-Term Debt~~6. Assets Held for Sale

~~Long-term~~As of March 31, 2021 and September 30, 2020, the Company had net carrying value of assets held for sale at $7.4 million and $0, respectively.

During the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate estimated fair value less cost to sell of $7.4 million after recognizing a Nightclub segment impairment charge of $1.4 million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property. The Company expects the properties, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers. Liabilities that are expected to be paid with the sale of held-for-sale assets were $3.2 million as of March 31, 2021, which is included in current portion of debt ~~consisted~~obligations in our unaudited condensed consolidated balance sheet. See Note 14.

7. Debt

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

On January 25, 2021, the Company borrowed $2.175 million from a bank lender by executing a 20-year promissory note with an initial interest rate of 3.99% per annum. The note is payable $13,232 per month for the first five years after which the interest rate will be repriced at the then-current prime rate plus 1.0% per annum, with a floor rate of 3.99%. The note is guaranteed by the Company’s CEO, Eric Langan. See Note 12. The Company paid approximately $25,000 in debt issuance costs at closing.

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

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

December 31, 2017 September 30, 2017

Notes payable at 10-11%, mature August 2022 and December 2024 $ - $ 2,358
Note payable at 7%, matures December 2019 - 95
Notes payable at 5.5%, matures January 2023 1,136 1,157
Notes payable at 5.5%, matures January 2023 and January 2022 - 4,510
Note payable refinanced at 6.25%, matures July 2018 - 1,120
Note payable at 9.5%, matures August 2024 - 6,941
Notes payable at 9.5%, mature September 2024 - 6,423
Notes payable at 5-7%, mature from 2018 to 2028 - 1,679
7.45% note payable, matures January 2019 - 2,740
Non-interest-bearing debt to State of Texas, matures May 2022, interest imputed at 9.6% 5,365 5,613
Note payable at 6.5%, matures January 2020 - 4,484
Note payable at 6%, matures January 2019 - 504
Notes payable at 5.5%, matures May 2020 - 5,320
Note payable at 6%, matures May 2020 - 1,037
Note payable at 5.25%, matures December 2024 - 1,777
Note payable initially at 5.45%, matures July 2020 (amended to December 2027 with refinancing) 10,536 10,620
Note payable at the greater of 2% above prime or 5% (6.25% at September 30, 2017), matures October 2025 - 4,303
Note payable at 5%, matures January 2026 - 9,672
Note payable at 5.25%, matures March 2037 - 4,651
Note payable at 6.25%, matures February 2018 1,894 1,894
Note payable initially at 5.95%, matures August 2021 (amended to December 2027 with refinancing) 8,095 8,267
Note payable at 12%, matures October 2021 6,704 9,671
Note payable at 4.99%, matures April 2037 934 941
Notes payable at 12%, mature May 2020 5,440 5,440
Note payable at 5%, matures November 2017 3,025 5,000
Note payable at 8%, matures May 2029 15,090 15,291
Note payable at 5%, matures May 2038 4,456 3,441
Note payable initially at 5.75%, matures December 2027 57,904 -
Note payable at 5.95%, matures December 2032 7,098 -
Total debt 127,677 129,949
Less unamortized debt issuance costs (1,685 ) (597 )
Less current portion (14,048 ) (17,440 )

Total long-term debt $ 111,944 $ 106,912

Included in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $124,000 and $5.4 million, respectively. During the three and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving the forgiveness of 100% of each of the 11 PPP loans amounting to $380,000 and $5.3 million, respectively, in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. As of the date of the filing of this report, we have not received a forgiveness notice for only one PPP loan that, if not forgiven, under the terms of the loans as provided by the CARES Act, bears an interest rate of 1% per annum. See Note 3.

8. Equity

During the three and six months ended March 31, 2021, the Company purchased and retired 0 and 74,659 common shares, respectively, at a cost of approximately $0 and $1.8 million, respectively. The Company paid $0.04and $0.08per share cash dividend during the three and six months ended March 31, 2021 totaling approximately $360,000 and $720,000, respectively.

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On December 14, 2017, the Company entered into a loan agreement (“New Loan”) with a bank for $81.2 million. The New Loan fully refinances 20 of the Company’s notes payable and partially pays down 1 note payable (collectively, “Repaid Notes”) with interest rates ranging from 5% to 12% covering 43 parcels of real properties the Company previously acquired (“Properties”). The New Loan consists of three promissory notes:

	~~(i)~~	The first note amounts to $62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five years, then repriced one time at the then current U.S. Treasury rate plus 3.5%, with a floor rate of 5.75%, and payable in monthly installments of $442,058, based upon a 20-year amortization period, with the balance payable at maturity;

	~~(ii)~~	The second note amounts to $10.6 million with a term of 10 years at a 5.45% fixed interest rate until July 2020, after which to be repriced at a fixed interest rate of 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest rate of the first note. This note is payable $78,098 monthly for principal and interest until July 2020, based upon a 20-year amortization period, after which the monthly payment for principal and interest is adjusted accordingly based on the repricing, with the balance payable at maturity; and

	~~(iii)~~	The third note amounts to $8.1 million with a term of 10 years at a 5.95% fixed interest rate until August 2021, after which to be repriced at 5.75% until the fifth anniversary of this note, and then to be repriced again at the then interest of the first note. This note is payable $100,062 monthly for principal and interest until August 2021, based upon a 20-year amortization period, after which the monthly payment for principal and interest is adjusted accordingly based on the repricing, with the balance payable at maturity.

In addition to the monthly principal and interest payments as provided above, the Company will pay monthly installments of principal of $250,000, applied to the first note, until such time as the loan-to-value ratio of the Properties, based upon reduced principal balance of the New Loan and the then current value of the Properties, is not greater than 65%. The New Loan has eliminated balloon payments of the Repaid Notes worth $2.9 million originally scheduled in fiscal 2018, $19.4 million originally scheduled in fiscal 2020 and $5.3 million originally scheduled in fiscal 2021.

In connection with the Repaid Notes, we wrote off $279,000 of unamortized debt issuance costs to interest expense. Prior to September 30, 2017, the Company paid a portion of debt issuance costs amounting to $612,500, which was included in other assets until the closing of the transaction. At closing, the Company paid an additional $764,000 in debt issuance costs, which together with the $612,500 prepayment will be amortized for the term of the loan using the effective interest rate method. We also paid prepayment penalties amounting to $543,000 on the Repaid Notes.

Included in the $62.5 million note detailed in (i) above, was $4.6 million that was escrowed and due to the bank lender of one of the Repaid Notes. The amount will be released from escrow when the construction, for which the original note was borrowed, is completed.

In December 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.95% interest. The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million with an assumption of the old aircraft’s note payable liability of $2.0 million. The note is payable in 15 years with monthly payments of $59,869, which includes interest.

~~As of December 31, 2017, the Company is in compliance with all its debt covenants.~~

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Future maturities of long-term debt consist of the following (in thousands) as of December 31, 2017:~~

Regular Balloon Total
12-Month Period Ending Amortization Payments Payments
December 31, 2018 $ 9,129 $ 4,919 $ 14,048
December 31, 2019 9,289 - 9,289
December 31, 2020 7,381 5,440 12,821
December 31, 2021 7,707 - 7,707
December 31, 2022 6,587 3,779 10,366
Thereafter 16,928 56,518 73,446
$ 57,021 $ 70,656 $ 127,677

On February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million with the difference paid by the Company in cash. The bank note bears interest at 5.25% adjusted after 36 months to prime plus 1% with a floor of 5.2% and matures on February 15, 2038. The bank note is payable interest-only during the first 18 months, after which monthly payments of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity.

On February 20, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over prime with a 5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million. The construction loan agreement bears an interest rate of prime plus 0.5% with a floor of 5.0% and matures on August 20, 2029. During the first 18 months of the construction loan, the Company will make monthly interest-only payments, and after such, monthly payments of principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity.

~~5. Stockholders’ Equity~~

~~During the quarter ended December 31, 2017, the Company did not purchase shares of its common stock. The Company also paid a $0.03 per share cash dividend totaling approximately $292,000.~~

During the quarter ended December 31, 2016, the Company purchased and retired 89,685 common shares at a cost of $1.1 million. The Company also paid a $0.03 per share cash dividend totaling approximately $290,000.

~~6. Earnings Per Share~~

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

~~The table below presents the reconciliation of the numerator and the denominator in the calculation of basic and diluted EPS (in thousands, except per share amounts):~~

For the Three Months
Ended December 31,
2017 2016
Numerator -
Net income attributable to RCIHH common shareholders – basic $ 14,311 $ 2,898
Adjustment to net income from assumed conversion of debentures(2) - 5
Adjusted net income attributable to RCIHH common shareholders – diluted $ 14,311 $ 2,903
Denominator(1)(3)-
Weighted average number of common shares outstanding – basic 9,719 9,768
Effect of potentially dilutive convertible debentures(2) - 46
Adjusted weighted average number of common shares outstanding – diluted 9,719 9,814

Basic earnings per share $ 1.47 $ 0.30
Diluted earnings per share $ 1.47 $ 0.30

~~RCI HOSPITALITY HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(1)~~	~~There were no outstanding restricted stock, warrants and options during the three months ended December 31, 2017 and 2016.~~

~~(2)~~	Convertible debentures (principal and accrued interest) outstanding at the beginning of the quarters ended December 31, 2017 and 2016 totaling $0 and $859,000, respectively, were convertible into common stock at a price of $10.25 and $12.50 per share until January 4, 2017, when the last conversion option expired in relation to the payment of the last convertible note.

~~(3)~~	~~Since January 4, 2017 to date, the Company has no outstanding convertible debt.~~

7. 9. Income Taxes

Income taxes were an expense of $1.9million and $1.6 million during the three and six months ended March 31, 2021, respectively, compared to a benefit of ~~$8.2~~ $1.4 million ~~for the first quarter of 2018 compared to~~and an expense of ~~$1.5 million for~~$175,000 during the ~~same quarter of 2017.~~three and six months ended March 31, 2020, respectively. The effective income tax rate was an expense of 24.3% and 9.1% for the ~~first quarter of 2018 was~~three and six months ended March 31, 2021, respectively, compared to a benefit of ~~134.3% compared with~~28.9% and an expense of ~~33.3%~~7.6% for the ~~comparable period of 2017.~~three and six months ended March 31, 2020, respectively. Our effective tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, ~~while~~and the ~~first quarter of 2018 was significantly impacted by a $9.7 million reduction of our deferred tax liability caused by newly enacted tax laws.~~

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of September 30, the reduced corporate tax rate will resultchange in ~~the application of a blended federal statutory tax rate for its fiscal year 2018 and then a flat 21% thereafter.~~

Under generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At September 30, 2017, the Company’s deferred tax assets and liabilities were determined based on the then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate under the Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities expected to be realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21%. These re-measurements collectively resulted in a discrete tax benefit of $9.7 million that was recognized during the three months ended December 31, 2017. The Company’s revaluation of its deferred tax assets and liabilities is subject to further clarification of the Act and refinements of its estimates. As a result, the actual impact on the deferred tax ~~assets~~asset valuation allowance and ~~liabilities and income tax expense due to~~ the ~~Act may vary from~~impact of the ~~amounts estimated.~~forgiveness of the PPP loans in the current period.

The Company or one of its subsidiaries files income tax returns ~~for~~in the U.S. federal jurisdiction, and various states. ~~The Company is no longer subject to federal, state and local income tax examinations by tax authorities for years before 2013.~~ The Company’s federal income tax returns for the ~~fiscal~~ years ended September 30, ~~2015, 2014 and~~ 2013 ~~are currently under examination~~through 2017 have been examined by the Internal Revenue ~~Service.~~Service with only immaterial changes. Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax examination.

The Company accounts for uncertain tax positions pursuant to ASC Topic 740,Income Taxes. As of ~~December~~March 31, ~~2017~~2021 and September 30, ~~2017, the~~2020, there was 0 liability for uncertain tax ~~positions totaled approximately $865,000 in each period, which is included in current liabilities on our condensed consolidated balance sheets.~~positions. The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of operations.

On March 27, 2020, former President Trump signed the CARES Act into law. As a result of this, additional avenues of relief were made available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act included, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established the Paycheck Protection Program, whereby certain small businesses are eligible for loans to fund payroll expenses, rent, and related costs. The loans 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 has currently utilized all of the PPP funds and has submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.No assurance can be provided that the Company will obtain forgiveness of the one remaining PPP loan in whole or in part. See Note 3.

10. Commitments and Contingencies

~~On December 22,~~

Legal Matters

Texas Patron Tax

In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company 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 ~~SEC issued Staff Accounting Bulletin No. 18 (“SAB 118”), which provides guidance on accounting~~Company settled with the State of Texas for ~~the tax effects~~one of the two remaining unsettled Patron Tax ~~Cuts and Jobs Act. In accordance with SAB 118,~~locations. To resolve the issue of taxes owed, the Company ~~has made reasonable estimates~~agreed to pay a total of $687,815 with $195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $8,200 without interest.

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

A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the ~~following areas impacted~~$5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses. An administrative rule attempted to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment. The administrative rule was challenged on both constitutional and statutory grounds. On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority. On March 6, 2020, the U.S. District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the ~~Act: existing timing differences, reversal~~Comptroller. The State of ~~existing timing differences, and accelerated depreciation. As such,~~Texas has filed an appeal. We will continue to vigorously defend the ~~Company has left~~matter through the ~~measurement period open as of December 31, 2017.~~appeals process.

~~8. Commitments and Contingencies~~

~~Legal Matters~~

~~New York Settlement~~

Filed in 2009, the case claimed Rick’s Cabaret New York misclassified entertainers as independent contractors. Plaintiffs sought minimum wage for the hours they danced and return of certain fees. RCI Entertainment (New York), Inc. and Peregrine Enterprises, Inc. maintained the dancers were properly classified, and alternatively, amounts earned were well in excess of the minimum wage and should satisfy any obligations.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On April 1, 2015, we and our subsidiaries, RCI Entertainment (New York), Inc. and Peregrine Enterprises, Inc., entered into an agreement to settle in full a New York based federal wage and hour class and collective action filed in the United States District Court for the Southern District of New York. On September 22, 2015, the Court granted final approval of the settlement. Under the terms of the agreement, Peregrine Enterprises, Inc. was to make up to $15.0 million available to class members and their attorneys. The actual amount paid was determined based on the number of class members responding by the end of a two-month notice period which ended on December 4, 2015. Unclaimed checks or payments reverted back to Peregrine at that time. Based on the current schedule, an initial payment for attorneys’ fees of $1,833,333 was made in October 2015, with two subsequent payments of $1,833,333 each being made in equal annual installments. As part of the settlement, RCIHH was required to guarantee the obligations of RCI Entertainment (New York), Inc. and Peregrine Enterprises, Inc. under the settlement.

Indemnity Insurance Corporation

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

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

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must behave been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer ~~are~~were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. ~~Currently, there are several civil lawsuits pending against the Company and its subsidiaries.~~ The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding ~~100%~~100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. WeAs of March 31, 2021, we have 82 unresolved ~~cases left~~claims out of the original 71 ~~cases.~~ claims.

~~General~~Shareholder Class and Derivative Actions

In May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District of Texas, Houston Division. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management. The complaints seek unspecified damages, costs, and attorneys’ fees. These lawsuits are 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 three cases moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director Nourdean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit. On April 14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims. The Company intends to continue to vigorously defend against this action. This action is in its preliminary phase, and a potential loss cannot yet be estimated.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Other

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

The Company has been sued by a landlord in the ~~33rd~~333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which was under renovation in 2015. The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook), Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping center, and by failing to provide Plaintiff with proposed plans before beginning construction. Plaintiff also asserts RCI Hospitality Holdings, Inc. is liable as guarantor of the lease. The lease was for a Bombshells restaurant to be opened in the Willowbrook Shopping Center in Houston, Texas. Both RCI Hospitality Holdings, Inc. and BMB Dining Services (Willowbrook), Inc. have denied liability and assert that Plaintiff has failed to mitigate its claimed damages. Further, BMB Dining Services (Willowbrook), Inc. asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims and third-party claims against Plaintiff ~~Plaintiff’s manager,~~ and Plaintiff’s ~~broker~~manager asserting that they committed fraud and that the landlord breached the applicable agreements. ItThe case was tried to a jury in late September 2018 and an adverse judgment was entered in January 2019 in the amount totaling $1.0 million, which includes damages, attorney fees and interest. The matter is ~~unknown at this time whether~~being appealed. The appeal process required that a check be deposited in the ~~resolution~~registry of ~~this uncertainty will have a material effect on~~ the ~~Company’s financial condition.~~court in the amount of $690,000, which was deposited in April 2019 and included in other current assets in both consolidated balance sheets as of March 31, 2021 and September 30, 2020. Management believes that the case has no merit and is vigorously defending itself in the appeal.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit ~~alleges~~alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit ~~alleges~~alleged that JAI Phoenix iswas liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately ~~$1.4~~$1.4 million and its share of punitive damages is $4$4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. ~~A hearing date for~~In June 2018, the ~~appeal has not yet been scheduled. JAI Phoenix believes the Court’s assessments of liability and damages are unsupportable~~matter was heard by the ~~facts~~Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case ~~and~~to the ~~law, and~~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. ~~RCI Hospitality Holdings, Inc.~~

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

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

General

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not ~~a party to~~an admission of any liability on the ~~lawsuit. The~~part of the Company ~~estimates a possible loss~~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 ~~$0 to $5.0 million~~reasonably possible liability. In matters where there is insurance coverage, in ~~this matter.~~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 ~~quarters~~three and six months ended ~~December~~March 31, ~~2017~~2021 amount to approximately $1,000 and ~~2016 total $27,000~~$153,000, respectively, while for the three and ~~$73,000,~~six months ended March 31, 2020 amount to approximately $0 and $24,000, respectively. As of ~~December~~March 31, ~~2017~~2021 and September 30, ~~2017,~~2020, the Company has accrued ~~$37,000~~$228,000 and ~~$295,000~~$100,000 in accrued liabilities, respectively, related to settlement of lawsuits.

RCI HOSPITALITY HOLDINGS, INC.

9. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Segment Information

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

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

For the Three Months
Ended December 31,
2017 2016
Revenues
Nightclubs $ 35,218 $ 29,282
Bombshells 5,828 4,295
Other 166 162
$ 41,212 $ 33,739

Income (loss) from operations
Nightclubs $ 13,371 $ 9,216
Bombshells 891 638
Other (137 ) (341 )
General corporate (4,985 ) (3,180 )
$ 9,140 $ 6,333

Depreciation and amortization
Nightclubs $ 1,335 $ 1,242
Bombshells 336 218
Other 2 5
General corporate 236 153
$ 1,909 $ 1,618

Capital expenditures
Nightclubs $ 450 $ 795
Bombshells 2,228 1,104
Other - 1
General corporate 91 1,108
$ 2,769 $ 3,008

Schedule of Segment Reporting Information

	For the Three Months						For the Six Months
	Ended March 31,						Ended March 31,
	2021			2020			2021			2020
Revenues (from external customers)
Nightclubs	$	30,787		$	31,367		$	55,984		$	69,226
Bombshells		13,135			8,803			26,141			19,153
Other		137			256			332			441
	$	44,059		$	40,426		$	82,457		$	88,820

Income (loss) from operations
Nightclubs	$	10,468		$	2,284		$	18,963		$	16,040
Bombshells		3,142			688			5,859			2,259
Other		(139	)		(146	)		(214	)		(331	)
General corporate		(3,630	)		(5,301	)		(8,184	)		(10,757	)
	$	9,841		$	(2,475	)	$	16,424		$	7,211

Depreciation and amortization
Nightclubs	$	1,413		$	1,486		$	2,737		$	2,956
Bombshells		461			456			918			873
Other		36			104			72			208
General corporate		207			211			413			424
	$	2,117		$	2,257		$	4,140		$	4,461

Capital expenditures
Nightclubs	$	2,201		$	526		$	3,331		$	2,858
Bombshells		3,104			612			3,255			2,337
Other		(2	)		-			1			-
General corporate		126			127			131			128
	$	5,429		$	1,265		$	6,718		$	5,323

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2017 September 30,2017
Total assets
Nightclubs $ 248,187 $ 254,432
Bombshells 28,206 18,870
Other 969 780
General corporate 29,217 25,802
$ 306,579 $ 299,884

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2021 amounting to $2.8 million and $31,000, respectively, and for the six months ended March 31, 2021 amounting to $5.6 million and $141,000, respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2021 amounting to $49,000 and $75,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and corporate segments for the three months ended March 31, 2020 amounting to $2.8 million and $32,000, respectively, and for the six months ended March 31, 2020 amounting to $5.4 million and $63,000, respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2020 amounting to $32,000 and $54,000, 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.

~~10. Noncontrolling Interests~~

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

~~Our consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51% of an entity which owns the~~Certain real estate ~~for~~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 ~~Company’s nightclub in Philadelphia.~~Bombshells segment.

~~11.~~ 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, 2021 and September 30, 2020, was $84.6 million and $83.8 million, respectively.

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

We used the services of Nottingham Creations (formerly Sherwood Forest Creations, LLC), a furniture fabrication company that manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $114,910 and $114,910 during the three and six months ended March 31, 2021, respectively, and $53,556 and $72,809 during the three and six months ended March 31, 2020, respectively. As of March 31, 2021 and September 30, 2020, we owed Nottingham Creations and Sherwood Forest $64,910 and $0, 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 2021 and 2020. A son-in-law of Eric Langan owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0 and $0 for the three and six months ended March 31, 2021, respectively, and $18,758 and $30,585 for the three and six months ended March 31, 2020, respectively. Amounts billed directly to the Company were $55,621 and $62,751 for the three and six months ended March 31, 2021, respectively, and $24,416 and $26,241 for the three and six months ended March 31, 2020, respectively. As of March 31, 2021 and September 30, 2020, the Company owed TW Mechanical $1,545 and $5,700, respectively, in unpaid direct billings.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13. Leases

The Company leases certain facilities and equipment under operating leases. Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income which was included in other revenue, for the three and six months ended March 31, 2021 and 2020 as follows (in thousands):

Schedule of Lease Expense

	2021			2020			2021			2020
	For the Three Months						For the Six Months
	Ended March 31,						Ended March 31,
	2021			2020			2021			2020
Operating lease expense – fixed payments	$	828		$	838		$	1,657		$	1,680
Variable lease expense		44			65			108			130
Short-term equipment and other lease expense (includes $102 and $145 recorded in advertising and marketing for the three months ended March 31, 2021 and 2020, respectively, and $159 and $291 for the six months ended March 31, 2021 and 2020, respectively; and $116 and $100 recorded in repairs and maintenance for the three months ended March 31, 2021 and 2020, respectively, and $204 and $225 for the six months ended March 31, 2021 and 2020, respectively; see Note 5)		318			365			547			759
Sublease income		(1	)		(4	)		(3	)		(6	)
Total lease expense, net	$	1,189		$	1,264		$	2,309		$	2,563

Other information:
Operating cash outflows from operating leases	$	1,162		$	1,207		$	2,253		$	2,462
Weighted average remaining lease term								12 years			13 years
Weighted average discount rate								6.1	%		6.1	%

Future maturities of ASC 842 lease liabilities as of March 31, 2021 are as follows (in thousands):

Schedule of Future Maturities of Lease Liabilities

	Principal Payments		Interest Payments		Total Payments
April 2021 – March 2022	$	1,692	$	1,543	$	3,235
April 2022 – March 2023		1,728		1,438		3,166
April 2023 – March 2024		1,706		1,336		3,042
April 2024 – March 2025		1,860		1,229		3,089
April 2025 – March 2026		2,054		1,111		3,165
Thereafter		17,235		4,881		22,116
	$	26,275	$	11,538	$	37,813

14. Subsequent Events

On April 7, 2021, the Company acquired land near the southern boundary of Houston, Texas for $1.3 million.

On May 7, 2021, the Company sold one of the properties held for sale as of March 31, 2021 for $3.1 million. The property had a carrying value of $2.3 million as of March 31, 2021. See Note 6. The Company paid related debt amounting to $2.0 million from the proceeds of the sale.

1620

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, ~~2017.~~2020.

Overview

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

Through our subsidiaries, as of ~~December~~March 31, ~~2017,~~2021, we operated a total of 4548 establishments that offer live adult entertainment and/or restaurant and bar ~~operations.~~operations, including one club that is being renovated due to hurricane damage. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine other operating segments into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

Impact of COVID-19 Pandemic

Starting in March 2020, our businesses were heavily impacted by the COVID-19 pandemic through the temporary closure and reopening of a number of our clubs and restaurants in adherence to federal, state and local government mandates. Our total revenues for the three and six months ended March 31, 2021 increased by 9.0% and declined by 7.2%, respectively, versus last year. The increase in the quarter ended March 31, 2021 was mainly caused by Bombshells’ same-store sales increase and revenue from two new units. Though we earned no revenues from our core businesses during the period of closures, we continued to incur expenses. To alleviate our cash flow situation, we instituted the following measures:

	●	Arranged for deferment of principal and interest payment on certain of our debts;

	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers; *

	●	Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *

	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;

	●	Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor relations coverage, among others.

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

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

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these ~~estimates, including investment impairment.~~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, ~~2017~~2020 filed with the SEC on ~~February~~December 14, ~~2018.~~2020.

During the three and six months ended ~~December~~March 31, ~~2017,~~2021, there were no significant changes in our accounting policies and ~~estimates.~~estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.

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

Results of Operations

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

Second Quarter 2021

	●	Total revenues were $44.1 million compared to $40.4 million during the comparable prior-year period, a 9.0% increase (Nightclubs revenue of $30.8 million compared to $31.4 million, a 1.8% decrease; and Bombshells revenue of $13.1 million compared to $8.8 million, a 49.2% increase)

	●	Consolidated same-store sales increased by 26.3% (Nightclubs increased by 3.6% while Bombshells increased by 48.7%) (refer to the definition of same-store sales in the discussion of Revenues below)

	●	Gain on forgiven PPP loans amounted to $380,000

	●	Basic and diluted earnings per share (“EPS”) of $0.68 compared to a basic and diluted loss per share of $0.37 (non-GAAP diluted EPS* of $0.75 compared to $0.47)

	●	Net cash provided by operating activities of $11.0 million compared to $1.7 million during the comparable prior-year period, a 542.4% increase (free cash flow* of $9.0 million compared to $618,000, a 1,354.0% increase)

Year-to-Date 2021

	●	Total revenues were $82.5 million compared to $88.8 million during the comparable prior-year period, a 7.2% decrease (Nightclubs revenue of $56.0 million compared to $69.2 million, a 19.1% decrease; and Bombshells revenue of $26.1 million compared to $19.2 million, a 36.5% increase)

	●	Consolidated same-store sales increased by 6.9% (Nightclubs decreased by 4.4% while Bombshells increased by 27.9%) (refer to the definition of same-store sales in the discussion of Revenues below)

	●	Gain on forgiven PPP loans amounted to $5.3 million

	●	Basic and diluted EPS of $1.75 compared to $0.24 (non-GAAP diluted EPS* of $1.15 compared to $1.09)

	●	Net cash provided by operating activities of $17.2 million compared to $12.0 million during the comparable prior-year period, a 43.9% increase (free cash flow* of $14.7 million compared to $9.9 million, a 48.5% increase)

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

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following table summarizes our results of operations for the three months ended ~~December~~March 31, ~~2017 and 2016~~2021 (dollars in thousands):

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

For the Three Months Ended
December 31, 2017 December 31, 2016
Change

Amount % of Revenues Amount % of Revenues Amount %
Revenues
Sales of alcoholic beverages $ 17,805 43.2 % $ 14,375 42.6 % $ 3,430 23.9 %
Sales of food and merchandise 5,307 12.9 % 4,207 12.5 % 1,100 26.1 %
Service revenues 15,889 38.6 % 13,475 39.9 % 2,414 17.9 %
Other 2,211 5.4 % 1,682 5.0 % 529 31.5 %
Total revenues 41,212 100.0 % 33,739 100.0 % 7,473 22.1 %
Operating expenses
Cost of goods sold
Alcoholic beverages sold 3,755 21.1 % 3,168 22.0 % 587 18.5 %
Food and merchandise sold 2,094 39.5 % 1,653 39.3 % 441 26.7 %
Service and other 36 0.2 % 60 0.4 % (24 ) -40.0 %
Cost of goods sold (exclusive of items shown separately below) 5,885 14.3 % 4,881 14.5 % 1,004 20.6 %
Salaries and wages 11,377 27.6 % 9,652 28.6 % 1,725 17.9 %
Selling, general and administrative 12,812 31.1 % 11,193 33.2 % 1,619 14.5 %
Depreciation and amortization 1,909 4.6 % 1,618 4.8 % 291 18.0 %
Other charges, net 89 0.2 % 62 0.2 % 27 43.5 %
Total operating expenses 32,072 77.8 % 27,406 81.2 % 4,666 17.0 %
Income from operations 9,140 22.2 % 6,333 18.8 % 2,807 44.3 %
Other income (expenses)
Interest expense (3,079 ) -7.5 % (2,015 ) -6.0 % (1,064 ) 52.8 %
Interest income 67 0.2 % 37 0.1 % 30 81.1 %
Income before income taxes 6,128 14.9 % 4,355 12.9 % 1,773 40.7 %
Income tax expense (benefit) (8,227 ) -20.0 % 1,450 4.3 % (9,677 ) -667.4 %
Net income $ 14,355 34.8 % $ 2,905 8.6 % $ 11,450 394.1 %

* 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 increased by ~~$7.5~~approximately $3.6 million, or ~~22.1%~~9.0%, due primarily to ~~a 16% increase from new units, 6.9% increase in same-store sales (contributing a 6.7% increase in total revenues), and a 0.7% decrease from closed units. Nightclub and Bombshells~~the timing of closures caused by the COVID-19 pandemic. Consolidated same-store sales increased by ~~7.1%~~26.3%. The 9.0% increase in consolidated revenues was primarily from the 8.7% impact of the same-store increase and ~~5.6%, respectively,~~a 2.6% increase from new Bombshells units, partially offset by a 2.0% decrease due to ~~strong lineup of sporting events pulling in increased customer count,~~closures from COVID-19 and a ~~continued recovery~~0.3% decline in ~~consumer spending.~~other revenues.

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 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				For the Three Months
	Ended December 31,				Ended March 31,
	2017		2016		2021		2020
Nightclubs	$	35,218	$	29,282	$	30,787	$	31,367
Bombshells		5,828		4,295		13,135		8,803
Other		166		162		137		256
	$	41,212	$	33,739	$	44,059	$	40,426

Nightclubs revenues decreased by 1.8% for the quarter ended March 31, 2021 compared to the prior-year quarter. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales increased by 3.6%. The remaining decline in revenues reflects lower sales for clubs in states where the number of days closed did not qualify them for same-store sales.

Bombshells revenues increased by 49.2%, of which 37.1% was due to the impact of the same-store sales increase with the remaining 12.1% increase generated by two new locations.

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to ~~77.8%~~77.7% from ~~81.2%~~106.1% from ~~year-ago although dollar value increased by $4.7~~last year’s second quarter, with a $8.7 million decrease, or ~~17.0%~~20.2%, which ~~was predominantly~~is mainly caused by the ~~22.1% increase~~higher impairment in ~~total revenues. Contributors~~the prior year. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by $1.0 million, or ~~20.6%~~17.6%, ~~primarily~~mainly due to ~~increase~~higher sales in ~~sales.~~the current quarter. As a percent of total revenues, cost of goods sold ~~slightly decreased~~increased to ~~14.3%~~15.4% from ~~14.5%~~14.3% mainly due to the ~~increase in revenue~~sales mix ~~of higher margin~~shifting from higher-margin service ~~revenue from units in the same-store sales base, partially offset by slightly lower margin new restaurant food sales.~~revenues.

Salaries and wages ~~increased~~decreased by ~~$1.7~~$1.0 million, or ~~17.9% mainly due to a shift to additional corporate headcount and labor from newly acquired and opened units.~~8.4%. As a percent of total revenues, salaries and wages ~~decreased to 27.6%~~were lower at 25.4% from ~~28.6% primarily~~30.2% mainly due to ~~leverage from higher sales.~~fixed salaries paid on lower sales during the prior-year quarter.

Selling, general and administrative expenses ~~increased~~decreased by ~~$1.6~~$1.8 million, or ~~14.5%~~12.7%, primarily due to ~~increases in charge card~~decreased audit and legal fees from prior year’s SEC matters and controlled advertising and marketing audit fee, insurance, rent, supplies, and repairs and maintenance. This is partially offset by decreases in legal costs and taxes and permits. Charge card fees and supplies are directly related to the increase in sales. Rent increasedexpenses due to uncertainty brought about by the ~~opening of a new Bombshells.~~pandemic. As a percent of total revenues, selling, general and administrative expenses decreased to ~~31.1%~~28.6% from ~~33.2% mainly~~35.7% due to the lower expenses from the above-cited reasons leveraged on higher sales ~~leverage partially offset by~~in the current quarter.

Our total occupancy costs, defined as the sum of lease expense and interest expense (see below), were $3.3 million and $3.5 million for the quarter ended March 31, 2021 and 2020, respectively. As a percentage of revenue, total occupancy costs were 7.6% and 8.6% during the quarter ended March 31, 2021 and 2020, respectively, primarily due to higher ~~mix of credit card usage.~~sales base in the current quarter.

Depreciation and amortization ~~increased~~decreased by ~~$291,000,~~$140,000, or ~~18.0%~~6.2% partly due to ~~higher unit count~~fully depreciated real estate and ~~the addition~~software assets.

Other charges, net decreased to $1.5 million from $8.2 million, which was primarily caused by impairment charges of ~~our corporate office~~$1.4 million and $8.2 million during the ~~middle of the first~~ quarter ~~of 2017.~~ended March 31, 2021 and 2020, respectively.

Income (Loss) from Operations

For the three months ended ~~December~~March 31, ~~2017~~2021 and ~~2016,~~2020, our consolidated operating margin was ~~22.2%~~22.3% and ~~18.8%~~(6.1)%, respectively. The main drivers for the increase in operating margin isare the ~~favorable leverage caused by fixed expenses on increasing~~current quarter’s higher sales and the ~~contribution of newly acquired and opened units, aside from the details previously discussed above.~~impairment charges in both quarters.

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

	For the Three Months						For the Three Months
	Ended December 31,						Ended March 31,
	2017			2016			2021			2020
Nightclubs	$	13,371		$	9,508		$	10,468		$	2,284
Bombshells		891			638			3,142			688
Other		(137	)		(341	)		(139	)		(146	)
General corporate		(4,985	)		(3,180	)		(3,630	)		(5,301	)
	$	9,140		$	6,333		$	9,841		$	(2,475	)

Operating margin for the Nightclubs segment was ~~38.0%~~34.0% and ~~31.5%~~7.3% for the three months ended ~~December~~March 31, ~~2017~~2021 and ~~2016,~~2020, respectively, while operating margin for Bombshells was ~~15.3%~~23.9% and ~~14.9%~~7.8%, respectively. The increase in Nightclubs operating margin was mainly due to last year’s impairment charges as triggered by the ~~favorable leverage caused by fixed expenses on increasing sales and the contribution of newly acquired and opened units.~~pandemic. The increase in Bombshells operating margin was ~~primarily due to positive same-stores~~mainly from higher sales ~~partially offset by~~and a decrease in pre-opening expenses from several Bombshells openings in prior periods.

Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the ~~underperformance of our Austin, Texas location.~~table below (dollars in thousands). See further discussion in the “Non-GAAP Financial Measures” section below.

	For the Three Months Ended March 31, 2021															For the Three Months Ended March 31, 2020
	Nightclubs			Bombshells			Other			Corporate			Total			Nightclubs			Bombshells			Other			Corporate			Total
Income (loss) from operations	$	10,468		$	3,142		$	(139	)	$	(3,630	)	$	9,841		$	2,284		$	688		$	(146	)	$	(5,301	)	$	(2,475	)
Amortization of intangibles		47			3			29			-			79			57			4			96			-			157
Settlement of lawsuits		(4	)		-			5			-			1			-			-			-			-			-
Impairment of assets		1,401			-			-			-			1,401			7,965			245			-			-			8,210
Loss (gain) on sale of businesses and assets		14			47			-			30			91			(3	)		-			-			(4	)		(7	)
Loss (gain) on insurance		32			-			-			(44	)		(12	)		-			-			-			(13	)		(13	)
Non-GAAP operating income (loss)	$	11,958		$	3,192		$	(105	)	$	(3,644	)	$	11,401		$	10,303		$	937		$	(50	)	$	(5,318	)	$	5,872

GAAP operating margin		34.0	%		23.9	%		(101.5	)%		(8.2	)%		22.3	%		7.3	%		7.8	%		(57.0	)%		(13.1	)%		(6.1	)%
Non-GAAP operating margin		38.8	%		24.3	%		(76.6	)%		(8.3	)%		25.9	%		32.8	%		10.6	%		(19.5	)%		(13.2	)%		14.5	%

Non-Operating Items

During the quarter ended March 31, 2021, we received one notice of forgiveness for one PPP loan, which forgave 100% of the PPP loan’s principal and interest amounting to $380,000.

Interest expense ~~increased to $3.1~~decreased by $95,000, or 3.9%.

Income Taxes

Income taxes were an expense of $1.9 million from $2.0 million due to the writeoff of debt issuance costs and prepayment penalties related to our debt refinancing (see Note 4 to our condensed consolidated financial statements) amounting to $827,000 and higher average debt balance quarter over quarter.

~~Our total occupancy, defined as the sum of rent expense and interest expense, exclusive of refinancing-related costs above, was 7.7% and 8.0% of revenue~~ during the quarter ended ~~December~~March 31, ~~2017 and 2016, respectively.~~

~~Income Taxes~~

~~Income taxes were~~2021 compared to a benefit of ~~$8.1~~$1.4 million ~~for~~during the ~~first~~ quarter ~~of 2018 compared to an expense of $1.5 million for the same quarter of 2017.~~ended March 31, 2020. The effective income tax rate ~~for the first quarter~~was an expense of ~~2018 was~~24.3% and a benefit of ~~134.3% compared with an expense of 33.3%~~28.9% for the ~~comparable period of 2017.~~quarter ended March 31, 2021 and 2020, respectively. Our effective tax rate is affected by the statutory federal income tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, ~~while~~and the impact of the forgiveness of the PPP loans in the current period, as presented below.

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

Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

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

	For the Six Months Ended
	March 31, 2021						March 31, 2020						Better (Worse)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	37,633			45.6	%	$	37,662			42.4	%	$	(29	)		(0.1	)%
Sales of food and merchandise		18,147			22.0	%		13,926			15.7	%		4,221			30.3	%
Service revenues		21,562			26.1	%		31,541			35.5	%		(9,979	)		(31.6	)%
Other		5,115			6.2	%		5,691			6.4	%		(576	)		(10.1	)%
Total revenues		82,457			100.0	%		88,820			100.0	%		(6,363	)		(7.2	)%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		6,992			18.6	%		7,581			20.1	%		589			7.8	%
Food and merchandise sold		5,918			32.6	%		4,846			34.8	%		(1,072	)		(22.1	)%
Service and other		96			0.4	%		131			0.4	%		35			26.7	%
Total cost of goods sold (exclusive of items shown separately below)		13,006			15.8	%		12,558			14.1	%		(448	)		(3.6	)%
Salaries and wages		22,686			27.5	%		25,445			28.6	%		2,759			10.8	%
Selling, general and administrative		24,770			30.0	%		30,981			34.9	%		6,211			20.0	%
Depreciation and amortization		4,140			5.0	%		4,461			5.0	%		321			7.2	%
Other charges, net		1,431			1.7	%		8,164			9.2	%		6,733			82.5	%
Total operating expenses		66,033			80.1	%		81,609			91.9	%		15,576			19.1	%
Income from operations		16,424			19.9	%		7,211			8.1	%		9,213			127.8	%
Other income (expenses)
Interest expense		(4,798	)		(5.8	)%		(4,944	)		(5.6	)%		146			3.0	%
Interest income		122			0.1	%		183			0.2	%		(61	)		(33.3	)%
Non-operating gains (losses), net		5,347			6.5	%		(134	)		(0.2	)%		5,481			4,090.3	%
Income before income taxes		17,095			20.7	%		2,316			2.6	%		14,779			638.1	%
Income tax expense		1,554			1.9	%		175			0.2	%		(1,379	)		(788.0	)%
Net income	$	15,541			18.8	%	$	2,141			2.4	%	$	13,400			625.9	%

* 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 decreased by approximately $6.4 million, or 7.2%, due primarily to the closures caused by the COVID-19 pandemic. Consolidated same-store sales increased by 6.9%. The 7.2% decrease in consolidated revenues was primarily from the 13.5% decrease due to closures from COVID-19 and a 0.1% decline in other revenues, partially offset by the 3.4% impact of the same-store increase and a 3.0% increase from new Bombshells units.

We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of ~~2018 was~~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 ~~impacted by~~higher than normal. We exclude from a ~~$9.7 million reduction~~particular month’s calculation units previously included in the same-store sales base that have closed temporarily for more than 15 days until its next full month of operations. We also exclude from the same-store sales base units that are being reconcepted or are closed due to renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify, based on the definition stated above. Revenues outside of our ~~deferred tax liability~~Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.

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

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

Nightclubs revenues decreased by 19.1% for the six-month period ended March 31, 2021 compared to the prior-year period. 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 decreased by 4.4%. The remaining decline in revenues reflects lower sales for clubs in states where the number of days closed did not qualify them for same-store sales.

Bombshells revenues increased by 36.5%, of which 22.5% was due to the impact of the same-store sales increase with the remaining 14.0% increase generated by two new locations.

Operating Expenses

Total operating expenses, as a percent of revenues, decreased to 80.1% from 91.9% from the comparable period last year, with a $15.6 million decrease, or 19.1%, which is mainly caused by ~~newly enacted tax laws.~~the higher impairment in the prior year, a $6.2 million decrease in selling, general and administrative expenses, and a $2.8 million decrease in salaries and wages. Significant contributors to the changes in operating expenses are explained below.

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

Salaries and wages decreased by $2.8 million, or 10.8%, mainly due to COVID-19-related closures. As a percent of total revenues, salaries and wages were lower at 27.5% from 28.6% mainly due to fixed salaries paid on lower sales during the prior-year period.

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

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

Depreciation and amortization decreased by $321,000, or 7.2% partly due to fully depreciated real estate and software assets.

Other charges, net decreased to $1.4 million from $8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million during the six months ended March 31, 2021 and 2020, respectively.

~~On December 22, 2017,~~Income from Operations

For the ~~Tax Cuts~~six months ended March 31, 2021 and ~~Jobs Act~~2020, our consolidated operating margin was ~~enacted into law,~~19.9% and 8.1%, respectively. The main drivers for the increase in operating margin are the current period’s lower sales and gain on debt extinguishment, and the prior-year period’s higher impairment charges.

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

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

Operating margin for the Nightclubs segment was 33.9% and 23.2% for the six months ended March 31, 2021 and 2020, respectively, while operating margin for Bombshells was 22.4% and 11.8%, respectively. The increase in Nightclubs operating margin was mainly due to last year’s impairment charges as triggered by the pandemic. The increase in Bombshells operating margin was mainly from higher sales and a decrease in pre-opening expenses from several Bombshells openings in prior periods.

Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the table below (dollars in thousands). See further discussion in the “Non-GAAP Financial Measures” section below.

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

GAAP operating margin		33.9	%		22.4	%		(64.5	)%		(9.9	)%		19.9	%		23.2	%		11.8	%		(75.1	)%		(12.1	)%		8.1	%
Non-GAAP operating margin		36.5	%		22.7	%		(45.8	)%		(9.9	)%		21.8	%		34.8	%		13.1	%		(31.7	)%		(12.2	)%		17.7	%

Non-Operating Items

During the six months ended March 31, 2021, we received 11 notices of forgiveness for a PPP loan, which ~~provides~~forgave 100% of the PPP loans’ principal and interest amounting to $5.3 million.

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

Income Taxes

Income tax expense was $1.6 million during the six months ended March 31, 2021 compared to $175,000 during the six months ended March 31, 2020. The effective income tax rate was 9.1% and 7.6% for ~~significant changes to~~ the ~~U.S. Internal Revenue Code of 1986, as amended, such as a reduction in~~six months ended March 31, 2021 and 2020, respectively. Our effective tax rate is affected by the statutory federal ~~corporate~~income tax rate, ~~from 35% to 21% effective from January 1, 2018 forward~~state taxes, permanent differences, and ~~changes or limitations to certain~~ tax ~~deductions. The Company has a fiscal year end of September 30, so~~credits, including the FICA tip credit, for both years, and the change toin the ~~statutory corporate~~deferred tax ~~rate results in a blended federal statutory tax rate of 24.5% for its fiscal year 2018. The financial statements for~~asset valuation allowance and the ~~first fiscal quarter 2018 were also impacted by a one-time revaluation~~impact of the ~~Company’s deferred tax assets and liabilities and this was recognized as a discrete income tax benefit~~forgiveness of the PPP loans in the ~~period. The Company estimates that its annual effective tax rate for fiscal 2018 (blended rate year) will be approximately 26.5%. The effective tax rate for the~~ current quarter was lower than the new 2018 statutory rate due to discrete tax benefits of $9.7 million recognized related to the revaluation of deferred tax assets and liabilities expected to be utilized in 2018.period, as presented below.

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

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

Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We ~~exclude from~~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, ~~costs and charges related to debt refinancing, income tax expense (benefit),~~(b) gains or losses on sale of businesses and assets, ~~gain~~(c) gains or losses on insurance, ~~and~~(d) unrealized gains or losses on equity securities, (e) impairment of assets, (f) settlement of lawsuits, (g) gain on debt extinguishment, and ~~include~~(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 ~~current and deferred~~ income taxes, calculated at ~~26.5%~~24.2% and ~~33%~~7.6% effective tax rate of the pre-tax non-GAAP income before taxes for the ~~quarter~~six months ended ~~December~~March 31, ~~2017~~2021 and ~~2016,~~2020, respectively, ~~because we~~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 ~~exclude from~~calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation ~~expense,~~and amortization, ~~of intangibles,~~(b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, ~~gain~~(e) gains or losses on insurance, ~~and~~(f) unrealized gains or losses on equity securities, (g) impairment of assets, (h) settlement of lawsuits, ~~because we~~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.

The following tables present our non-GAAP performance measures for the ~~quarters~~three and six months ended ~~December~~March 31, ~~2017~~2021 and ~~2016~~2020 (in thousands, except per share amounts and percentages):

For the Three Months
Ended December 31,
2017 2016
Reconciliation of GAAP net income to Adjusted EBITDA
Net income attributable to RCIHH common shareholders $ 14,311 $ 2,898
Income tax expense (benefit) (8,227 ) 1,450
Interest expense, net 3,012 1,978
Settlement of lawsuits 27 73
Loss (gain) on sale of assets 82 (11 )
Gain on insurance (20 ) -
Depreciation and amortization 1,909 1,618
Adjusted EBITDA $ 11,094 $ 8,006

Reconciliation of GAAP net income to non-GAAP net income
Net income attributable to RCIHH common shareholders $ 14,311 $ 2,898
Amortization of intangibles
48
46
Costs and charges related to debt refinancing 827 -
Settlement of lawsuits 27 73
Income tax expense (benefit) (8,227 ) 1,450
Loss (gain) on sale of assets 82 (11 )
Gain on insurance (20 ) -
Non-GAAP benefit (expense) for income taxes
Current 45 (1,455 )
Deferred (1,913 ) (15 )
Non-GAAP net income $ 5,180 $ 2,986

Reconciliation of GAAP diluted net income per share to non-GAAP diluted net income per share
Fully diluted shares 9,719 9,814
GAAP diluted net income per share $ 1.47 $ 0.30
Amortization of intangibles 0.00 0.00
Costs and charges related to debt refinancing 0.09 -
Settlement of lawsuits 0.00 0.01
Income tax expense (benefit) (0.85 ) 0.15
Loss (gain) on sale of assets 0.01 (0.00 )
Gain on insurance (0.00 ) -
Non-GAAP benefit (expense) for income taxes
Current 0.00 (0.15 )
Deferred (0.19 ) (0.00 )
Non-GAAP diluted net income per share $ 0.53 $ 0.31

Reconciliation of GAAP operating income to non-GAAP operating income
Income from operations $ 9,140 $ 6,333
Amortization of intangibles
48
46
Settlement of lawsuits 27 73
Loss (gain) on sale of assets 82 (11 )
Gain on insurance (20 ) -
Non-GAAP operating income $ 9,277 $ 6,441

Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin 22.2 % 18.8 %
Amortization of intangibles 0.1 % 0.1 %
Settlement of lawsuits 0.0 % 0.2 %
Loss (gain) on sale of assets 0.2 % -0.0 %
Gain on insurance -0.0 % -
Non-GAAP operating margin 22.5 % 19.1 %

	For the Three Months						For the Six Months
	Ended March 31,						Ended March 31,
	2021			2020			2021			2020
Reconciliation of GAAP net income (loss) to Adjusted EBITDA
Net income (loss) attributable to RCIHH common stockholders	$	6,091		$	(3,452	)	$	15,734		$	2,182
Income tax expense (benefit)		1,938			(1,418	)		1,554			175
Interest expense, net		2,302			2,374			4,676			4,761
Settlement of lawsuits		1			-			153			24
Impairment of assets		1,401			8,210			1,401			8,210
Loss (gain) on sale of businesses and assets		91			(7	)		86			(37	)
Gain on debt extinguishment		(380	)		-			(5,329	)		-
Unrealized loss on equity securities		34			62			67			134
Gain on insurance		(12	)		(13	)		(209	)		(33	)
Depreciation and amortization		2,117			2,257			4,140			4,461
Adjusted EBITDA	$	13,583		$	8,013		$	22,273		$	19,877

Reconciliation of GAAP net income (loss) to non-GAAP net income (loss)
Net income (loss) attributable to RCIHH common stockholders	$	6,091		$	(3,452	)	$	15,734		$	2,182
Amortization of intangibles		79			157			158			313
Settlement of lawsuits		1			-			153			24
Impairment of assets		1,401			8,210			1,401			8,210
Loss (gain) on sale of businesses and assets		91			(7	)		86			(37	)
Gain on debt extinguishment		(380	)		-			(5,329	)		-
Unrealized loss on equity securities		34			62			67			134
Gain on insurance		(12	)		(13	)		(209	)		(33	)
Net income tax effect		(522	)		(633	)		(1,741	)		(659	)
Non-GAAP net income (loss)	$	6,783		$	4,324		$	10,320		$	10,134

Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings (loss) per share
Diluted shares		9,000			9,225			9,010			9,274
GAAP diluted earnings (loss) per share	$	0.68		$	(0.37	)	$	1.75		$	0.24
Amortization of intangibles		0.01			0.02			0.02			0.03
Settlement of lawsuits		0.00			-			0.02			0.00
Impairment of assets		0.16			0.89			0.16			0.89
Loss (gain) on sale of businesses and assets		0.01			(0.00	)		0.01			(0.00	)
Gain on debt extinguishment		(0.04	)		-			(0.59	)		-
Unrealized loss on equity securities		0.00			0.01			0.01			0.01
Gain on insurance		(0.00	)		(0.00	)		(0.02	)		(0.00	)
Net income tax effect		(0.06	)		(0.07	)		(0.19	)		(0.07	)
Non-GAAP diluted earnings per share	$	0.75		$	0.47		$	1.15		$	1.09

Reconciliation of GAAP operating income (loss) to non-GAAP operating income (loss)
Income (loss) from operations	$	9,841		$	(2,475	)	$	16,424		$	7,211
Amortization of intangibles		79			157			158			313
Settlement of lawsuits		1			-			153			24
Impairment of assets		1,401			8,210			1,401			8,210
Gain on insurance		(12	)		(13	)		(209	)		(33	)
Loss (gain) on sale of businesses and assets		91			(7	)		86			(37	)
Non-GAAP operating income (loss)	$	11,401		$	5,872		$	18,013		$	15,688

Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin		22.3	%		(6.1	)%		19.9	%		8.1	%
Amortization of intangibles		0.2	%		0.4	%		0.2	%		0.4	%
Settlement of lawsuits		0.0	%		-			0.2	%		0.0	%
Impairment of assets		3.2	%		20.3	%		1.7	%		9.2	%
Gain on insurance		(0.0	)%		(0.0	)%		(0.3	)%		0.0	%
Loss (gain) on sale of businesses and assets		0.2	%		(0.0	)%		0.1	%		0.0	%
Non-GAAP operating margin		25.9	%		14.5	%		21.8	%		17.7	%

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

The adjustments to reconcile net income attributable to RCIHH common ~~shareholders~~stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial. In the calculation of non-GAAP diluted net income per share, we take into consideration the adjustment to net income from the assumed conversion of debentures (see Note 6 to the condensed consolidated financial statements).

Liquidity and Capital Resources

At ~~December~~March 31, ~~2017,~~2021, our cash and cash equivalents were ~~$12.0~~approximately $20.2 million compared to ~~$9.9~~$15.6 million at September 30, ~~2017.~~2020. Because of the large volume of cash we handle, we have very stringent cash controls. As of ~~December~~March 31, ~~2017,~~2021, we had positive working capital of $175,000 compared to a negative working capital of ~~$6.2 million compared to negative working capital of $10.6~~$5.9 million as of September 30, ~~2017, both figures~~2020, excluding assets held for sale (net of ~~$5.6~~associated liabilities of $3.2 million and $0, respectively) amounting to $4.2 million and $0 as of ~~December~~March 31, ~~2017~~2021 and ~~$5.8 million as of~~ September 30, ~~2017. We~~2020, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial ~~strengths.~~strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic presented operational challenges. Our ~~net~~strategy was to open locations and operate in accordance with local and state guidelines. Based upon the current state of allowed openings, revenues seem favorable. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms.

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

	●	Arranged for deferment of principal and interest payment on certain of our debts;

	●	Furloughed employees working at our clubs and restaurants, except for a limited number of managers; *

	●	Temporarily enacted a pay reduction for all remaining salaried and hourly employees and deferred board of director compensation; *

	●	Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;

	●	Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.

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

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 ~~$8.1~~$579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment (“Notice”), respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the ~~quarter~~three and six months ended ~~December~~March 31, ~~2017 from $5.5 million during~~2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the ~~quarter ended December 31, 2016. The near-term outlook for~~Company will in fact obtain forgiveness of the one remaining PPP loan in whole or in part.

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our ~~business remains strong,~~businesses. Lower sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we ~~expect~~will continually monitor and evaluate our cash flow situation and will determine any further measures to ~~generate substantial cash flows from operations for the entire fiscal 2018. As a result~~be instituted, including refinancing several of our ~~expected cash flows from operations, we~~debt obligations.

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

We have not recently raised capital through the issuance of equity securities. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and ~~recently~~ have secured ~~a significant~~traditional bank financing on our new development projects and refinancing of ~~several~~our existing notes payable, but with the significant global impact of ~~our notes payable. We continue to have~~ the ~~ability to borrow funds~~COVID-19 pandemic, there can be no assurance that any of these financing options would be presently available on favorable terms, if at ~~reasonable interest rates in that manner.~~all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars.

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
	For the Three Months Ended December 31,						Ended March 31,
	2017			2016			2021			2020
Operating activities	$	8,145		$	5,521		$	17,246		$	11,981
Investing activities		(2,089	)		(2,988	)		(6,355	)		(3,870	)
Financing activities		(4,024	)		(1,796	)		(6,340	)		(12,383	)
Net increase in cash and cash equivalents	$	2,032		$	737
Net increase (decrease) in cash and cash equivalents							$	4,551		$	(4,272	)

Cash Flows from Operating Activities

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

						For the Six Months
	For the Three Months Ended December 31,					Ended March 31,
	2017			2016		2021			2020
Net income	$	14,355		$	2,905	$	15,541		$	2,141
Depreciation and amortization		1,909			1,618		4,140			4,461
Deferred tax benefit		(9,697	)		-
Debt prepayment penalty		543			-
Deferred income tax benefit							-			(1,155	)
Gain on debt extinguishment							(5,298	)		-
Impairment of assets							1,401			8,210
Net change in operating assets and liabilities		516			873		712			(2,695	)
Other		519			125		750			1,019
Net cash provided by operating activities	$	8,145		$	5,521	$	17,246		$	11,981

Net cash provided by operating activities increased from ~~year-to-year~~year to year due primarily to ~~the increase in~~higher income from operations and lower income taxes paid, partially offset by higher interest expense ~~paid, which included debt prepayment penalty, and an unfavorable net change in operating assets and liabilities.~~paid.

Cash Flows from Investing Activities

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

For the Three Months
Ended December 31,

2017 2016
Additions to property and equipment $ (2,769 ) $ (3,008 )
Proceeds from sale of assets 632 -
Proceeds from insurance 20 -
Proceeds from notes receivable 28 20
Net cash used in investing activities $ (2,089 ) $ (2,988 )

	For the Six Months Ended March 31,
	2021			2020
Payments for property and equipment and intangible assets	$	(6,718	)	$	(5,323	)
Proceeds from sale of businesses and assets		8			105
Proceeds from insurance		294			945
Proceeds from note receivable		61			403
Net cash used in investing activities	$	(6,355	)	$	(3,870	)

Following is a breakdown of our ~~additions to~~payments for property and equipment and intangible assets for the ~~quarters~~six months ended ~~December~~March 31, ~~2017~~2021 and ~~2016~~2020 (in thousands):

	For the Three Months Ended December 31,				For the Six Months Ended March 31,
	2017		2016		2021		2020
New facilities capital expenditures	$	2,161	$	2,614
New facilities, equipment and intangible assets					$	4,127	$	3,212
Maintenance capital expenditures		608		394		2,591		2,111
Total capital expenditures	$	2,769	$	3,008	$	6,718	$	5,323

~~The capital~~Capital expenditures for new facilities during the ~~quarter~~six months ended ~~December~~March 31, ~~2017 is~~2021 were composed primarily of real estate and construction of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license purchase. Capital expenditures for new facilities during the six months ended March 31, 2020 were composed primarily of construction and development costs for ~~one~~two new ~~location, while~~Bombshells locations that opened in the first and second quarters of fiscal 2020. Maintenance capital expenditures ~~during the quarter ended December 31, 2016 is composed primarily~~refer mainly to capitalized replacement of ~~construction and development costs for three new locations and our new corporate office.~~productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction.

Cash Flows from Financing Activities

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

	For the Three Months Ended December 31,						For the Six Months
	2017			2016			Ended March 31,
Proceeds from long-term debt	$	58,920		$	1,900
Payments on long-term debt		(61,256	)		(2,152	)
Debt prepayment penalty		(543	)		-
							2021			2020
Proceeds from debt obligations							$	2,176		$	880
Payments on debt obligations								(5,977	)		(4,097	)
Purchase of treasury stock		-			(1,101	)		(1,794	)		(8,488	)
Payment of dividends								(720	)		(647	)
Payment of loan origination costs		(799	)		(99	)		(25	)		-
Payment of dividends		(292	)		(290	)
Distribution to noncontrolling interests		(54	)		(54	)		-			(31	)
Net cash used in financing activities	$	(4,024	)	$	(1,796	)	$	(6,340	)	$	(12,383	)

We ~~did not purchase~~purchased 74,659 shares of our ~~Company’s~~ common stock ~~during the quarter ended December 31, 2017, while, we purchased 89,685 treasury shares~~ at an average price of ~~$12.25 per share~~$24.03 during the ~~quarter~~six months ended ~~December~~March 31, ~~2016.~~2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year. We paid quarterly dividends of $0.04 per share during the six months ended March 31, 2021 compared to $0.03 per share in the first quarter and $0.04 in the second quarter during ~~both current and~~the prior ~~year quarters.~~year.

~~On December 14, 2017, we refinanced several of our notes payable with a local bank. Refer to Note 4 to our condensed consolidated financial statements for details of the refinancing.~~

Subsequent to quarter-end, we borrowed $3.0 million from a bank for the purchase of land worth $4.0 million, and refinanced one of our bank notes with a construction loan amounting to $4.7 million. See Note 4 to our condensed consolidated financial statements for details of these transactions.

Management also uses certain non-GAAP cash flow measures such as free cash flow. ~~Free~~We calculate free cash flow ~~is derived from~~as net cash provided by operating activities less maintenance capital expenditures. Net cash provided by operating activities was $17.2 million and $12.0 million during the six months ended March 31, 2021 and 2020, respectively. Maintenance capital expenditures were $2.6 million and $2.1 million during the six months ended March 31, 2021 and 2020, respectively. We use free cash flow as the baseline for the implementation of our capital allocation strategy.

For the Three Months
Ended December 31,
2017 2016
Net cash provided by operating activities $ 8,145 $ 5,521
Less: Maintenance capital expenditures 608 394
Free cash flow $ 7,537 $ 5,127

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

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

Our free cash flow for the current six-month period increased by 48.5% compared to the comparable prior-year period primarily due to higher income from operations and lower income taxes paid, partially offset by higher interest expense paid and higher maintenance capital expenditures.

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

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

															Increase					Increase
			Increase					Increase					2021		(Decrease)			2020		(Decrease)			2019
	2017		(Decrease)			2016		(Decrease)			2015
Sales of alcoholic beverages	$	17,805		23.9	%	$	14,375		-1.5	%	$	14,597	$	37,633		(0.1	)%	$	37,662		2.4	%	$	36,796
Sales of food and merchandise		5,307		26.1	%		4,207		-2.9	%		4,334		18,147		30.3	%		13,926		14.8	%		12,129
Service revenues		15,889		17.9	%		13,475		6.6	%		12,641		21,562		(31.6	)%		31,541		(8.1	)%		34,310
Other		2,211		31.5	%		1,682		-11.6	%		1,903		5,115		(10.1	)%		5,691		1.4	%		5,614
Total revenues		41,212		22.1	%		33,739		0.8	%		33,475		82,457		(7.2	)%		88,820		(0.0	)%		88,849
Net cash provided by operating activities	$	8,145		47.5	%	$	5,521		31.4	%	$	4,202	$	17,246		43.9	%	$	11,981		(42.9	)%	$	20,971
Adjusted EBITDA	$	11,094		38.6	%	$	8,006		-2.2	%	$	8,187
Long-term debt	$	125,992		19.3	%	$	105,620		11.9	%	$	94,356
Adjusted EBITDA*													$	22,273		12.1	%	$	19,877		(18.6	)%	$	24,405
Free cash flow*													$	14,655		48.5	%	$	9,870		(50.3	)%	$	19,854
Debt (end of period)													$	132,412		(5.7	)%	$	140,440		(6.3	)%	$	149,818

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

* See definition of Adjusted EBITDA above under the Non-GAAP Financial Measures subsection of Results of Operations.

Share Repurchase

We ~~did not purchase~~purchased 74,659 shares of our common ~~stock during the quarter ended December 31, 2017, while we purchased 89,685 shares of our~~ stock at an average price of ~~$12.25 per share~~$24.03 during the ~~quarter~~six months ended ~~December~~March 31, ~~2016.~~2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the same period last year. As of ~~December~~March 31, ~~2017,~~2021, we have ~~$3.1~~approximately $9.0 million remaining to purchase additional ~~shares under our share repurchase program.~~shares.

~~Other Liquidity and Capital Resources~~

We have not established financing other than the notes payable, including the New Loan discussed in Note 4 to the consolidated financial statements and our existing $1.0 million line of credit facility. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise.

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

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

Impact of Inflation

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

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 Bombshells 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.

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

Nightclubs

We believe that ~~Bombshells~~our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. All five of the currently existing Bombshells are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets.

~~We plan to open two Bombshells in fiscal 2018.~~

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

Bombshells

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of ~~December~~March 31, ~~2017,~~2021, 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, ~~2017.~~2020.

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.~~required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended ~~December~~March 31, ~~2017,~~2021, 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 ~~December~~March 31, ~~2017.~~2021. This determination is based on the previously reported material ~~weaknesses~~weakness management previously identified in our internal control over financial reporting, as described below. We are in the process of remediating the material ~~weaknesses,~~weakness in our internal control, as described ~~below, which~~below. We believe the completion of these processes should remedy our disclosure controls and ~~procedures, but we~~procedures. We will continue to monitor ~~this issue.~~these issues.

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

In our Annual Report for the year ended September 30, ~~2017,~~2020, filed with the SEC on ~~February~~December 14, ~~2018,~~2020, management concluded that our internal control over financial reporting was not effective as of September 30, ~~2017.~~2020. In the evaluation, management identified a material weakness in internal control related to the proper design and implementation of controls over our income tax provision, specifically over management’s ~~evaluation,~~review of the ~~following deficiencies were identified as material weaknesses:~~income tax provision.

●

~~Control Environment~~

●

Lack of effective control environment, which was primarily attributable to not having a sufficient complement of accounting and financial reporting personnel with an appropriate level of knowledge to address our financial reporting requirements which contributed to the following material weaknesses:

●

~~Control Activities~~

●

Lack of sufficient complement to design and maintain effective controls over complex accounting and management estimates related to assets held for sale, business combinations, cost method investments, income taxes, and the impairment analyses for indefinite lived intangible assets, goodwill, and property and equipment;

●

~~Lack of effective controls to support accurate accounting, reporting, and disclosures within our Form 10-K; and~~

●

Lack of effective controls to prevent unauthorized access to certain systems, programs and data, and provide for periodic review and monitoring of access including review of security logs and analysis of segregation of duties conflicts.

Remediation Efforts to Address Material ~~Weaknesses~~Weakness

~~As disclosed in our most recent Annual Report on Form 10-K, we have, and continue~~Management is committed to ~~identify and implement actions to improve our~~the remediation of the material weakness described above, as well as the continued improvement of the Company’s internal control over financial ~~reporting~~reporting. Management has been implementing, and ~~disclosure~~continues to implement, measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and ~~procedures including actions to~~operating effectively.

Management will enhance our ~~resources~~risk assessment process over the design and ~~training with respect to financial reporting and disclosure responsibilities, and increase utilization~~implementation of ~~accounting system functionality, with continued oversight from the Audit Committee.~~

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

~~Control Environment~~

Our Board of Directors has directed senior management to ensure that a proper, consistent tone is communicated throughout the organization, which emphasizes the expectation that previously existing deficiencies will be rectified through implementation of processes andenhanced review controls to ~~ensure strict compliance with US GAAP and regulatory requirements. We also have taken steps to effect~~be performed by senior accounting management. In addition, management has retained the services of a ~~proper tone through our policies and personnel.~~

~~Control Activities~~

~~Strengthening internal controls over complex accounting and management estimates –~~Subsequent to September 30, 2017, we have committed to resolve the controls over complex accounting and estimates and prevent instances of incorrect accounting and improper valuation decisions, by hiring valuation expertsnew third-party income tax consultant to assist ~~us with our goodwill, indefinite-lived intangible assets,~~in the preparation and ~~property and equipment impairment analyses whenever necessary and with the analysis and accounting for business combinations, income taxes, and other complex accounting matters.~~

~~Strengthening internal controls over financial reporting and disclosures -~~~~We believe the new Enterprise Resource Planning (“ERP”) system described below will assist us in strengthening the controls over financial reporting, and we are committed to also add an overlay of~~ review of the income tax provision.

It is our ~~financial statements during our financial reporting process. We have also upgraded our accounting staff with certain newly hired accountants.~~

~~We have also committed to hiring an outsourced internal audit group to assist with the controls over~~belief that these ~~processes and other internal control functions.~~

~~With the oversight of our Board of Directors and Audit Committee, the Company has also begun taking steps and plans to take additional measures to~~actions will effectively remediate the ~~underlying causes of the~~existing material ~~weaknesses.~~weakness.

~~Strengthening the information technology application and related segregation of duties issues –~~We were previously aware of the limitations of our accounting software and had been in the planning/implementation process of replacing the software for many months prior to September 30, 2017. In October 2017, we completed the conversion to a new ERP system which, along with changes to our manual internal controls, we believe will resolve the issues detailed above relating to the information systems and segregation of duties. The new ERP system has features that prevent unauthorized access to certain programs and data, and provides for periodic review and monitoring of access including review of security logs and analysis of segregation of duties conflicts. These features include proper segregation of duties within our journal entry process. We have also hired a Director of ERP & Business Intelligence.

Changes in Internal Control Over Financial Reporting

Other than as described above, no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~December~~March 31, ~~2017~~2021 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 810 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, ~~2017.~~2020, except for such risks and uncertainties that may result from the additional disclosure in the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference, as well as such risks and uncertainties associated with franchising operations, as disclosed below. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition or results of operations.

We face a variety of risks associated with doing business with franchisees and licensees.

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

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

In September 2008, our Board of Directors authorized us to repurchase up to $5.0 million worth of our common stock in the open market or in privately negotiated transactions. As of April 2013, we completed the repurchase of all $5.0 million in stock authorized under this plan. In April 2013, our Board of Directors authorized us to repurchase up to an additional $3.0 million worth of our common stock, and in May 2014, our Board of Directors increased the repurchase authorization by another $7.0 million. In May 2016, the Board of Directors increased the repurchase authorization by an additional $5.0 million. During the ~~quarter~~three months ended ~~December~~March 31, ~~2017,~~2021, we did not repurchase any shares of ~~the Company’s~~our common stock. As of ~~December 31, 2017,~~May 6, 2021, we have ~~$3.1~~approximately $9.0 million remaining to purchase additional shares.

Item 6. Exhibits.

Exhibit No.		Description
~~3.1~~		Articles of Incorporation dated December 9, 1994. (Incorporated by reference from Form SB-2 filed with the SEC on January 11, 1995.) *
31.1
~~3.2~~		Certificate of Amendment to Articles of Incorporation dated September 9, 2008. (Incorporated by reference from Definitive Schedule 14A filed with the SEC on July 21, 2008.) *

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

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

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

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

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

~~10.1~~		Employment Agreement with Eric S. Langan. (Incorporated by reference from Form 8-K filed with the SEC on July 27, 2015.) *

~~10.2~~		Employment Agreement with Travis Reese. (Incorporated by reference from Form 8-K filed with the SEC on September 19, 2014.) *

~~10.3~~		Employment Agreement with Phillip K. Marshall. (Incorporated by reference from Form 8-K filed with the SEC on August 5, 2016.) *

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

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

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

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

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

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

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

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

SIGNATURES

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

	RCI HOSPITALITY HOLDINGS, INC.

Date: ~~March 7, 2018~~May 10, 2021	By:	/s/ Eric S. Langan
		Eric S. Langan
		Chief Executive Officer and President

Date: ~~March 7, 2018~~May 10, 2021	By:	/s/ ~~Phillip K. Marshall~~Bradley Chhay
		~~Phillip K. Marshall~~Bradley Chhay
		Chief Financial Officer and Principal Accounting Officer

	December 31, 2017		September 30,2017
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	11,954	$	9,922
Accounts receivable, net		4,113		3,187
Inventories		2,419		2,149
Prepaid insurance		2,808		3,826
Other current assets		746		1,399
Assets held for sale		5,565		5,759
Total current assets		27,605		26,242
Property and equipment, net		154,259		148,410
Notes receivable		4,965		4,993
Goodwill		43,866		43,866
Intangibles, net		74,420		74,424
Other assets		1,464		1,949
Total assets	$	306,579	$	299,884

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	2,601	$	2,147
Accrued liabilities		11,584		11,524
Current portion of long-term debt		14,048		17,440
Total current liabilities		28,233		31,111
Deferred tax liability, net		15,844		25,541
Long-term debt		111,944		106,912
Other long-term liabilities		1,324		1,095
Total liabilities		157,345		164,659

Commitments and contingencies (Note 8)

Stockholders’ equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; none issued and outstanding		-		-
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,719 and 9,719 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively		97		97
Additional paid-in capital		63,453		63,453
Retained earnings		83,214		69,195
Total RCIHH stockholders’ equity		146,764		132,745
Noncontrolling interests		2,470		2,480
Total stockholders’ equity		149,234		135,225
Total liabilities and stockholders’ equity	$	306,579	$	299,884

	December 31, 2017		September 30, 2017
Insurance	$	2,173	$	3,160
Payroll and related costs		2,375		1,889
Income taxes		1,862		549
Property taxes		1,361		1,270
Sales and liquor taxes		1,000		990
Patron tax		834		801
Unearned revenues		454		196
Lawsuit settlement		37		295
Other		1,488		2,374
	$	11,584	$	11,524

	December 31, 2017			September 30, 2017

Notes payable at 10-11%, mature August 2022 and December 2024	$	-		$	2,358
Note payable at 7%, matures December 2019		-			95
Notes payable at 5.5%, matures January 2023		1,136			1,157
Notes payable at 5.5%, matures January 2023 and January 2022		-			4,510
Note payable refinanced at 6.25%, matures July 2018		-			1,120
Note payable at 9.5%, matures August 2024		-			6,941
Notes payable at 9.5%, mature September 2024		-			6,423
Notes payable at 5-7%, mature from 2018 to 2028		-			1,679
7.45% note payable, matures January 2019		-			2,740
Non-interest-bearing debt to State of Texas, matures May 2022, interest imputed at 9.6%		5,365			5,613
Note payable at 6.5%, matures January 2020		-			4,484
Note payable at 6%, matures January 2019		-			504
Notes payable at 5.5%, matures May 2020		-			5,320
Note payable at 6%, matures May 2020		-			1,037
Note payable at 5.25%, matures December 2024		-			1,777
Note payable initially at 5.45%, matures July 2020 (amended to December 2027 with refinancing)		10,536			10,620
Note payable at the greater of 2% above prime or 5% (6.25% at September 30, 2017), matures October 2025		-			4,303
Note payable at 5%, matures January 2026		-			9,672
Note payable at 5.25%, matures March 2037		-			4,651
Note payable at 6.25%, matures February 2018		1,894			1,894
Note payable initially at 5.95%, matures August 2021 (amended to December 2027 with refinancing)		8,095			8,267
Note payable at 12%, matures October 2021		6,704			9,671
Note payable at 4.99%, matures April 2037		934			941
Notes payable at 12%, mature May 2020		5,440			5,440
Note payable at 5%, matures November 2017		3,025			5,000
Note payable at 8%, matures May 2029		15,090			15,291
Note payable at 5%, matures May 2038		4,456			3,441
Note payable initially at 5.75%, matures December 2027		57,904			-
Note payable at 5.95%, matures December 2032		7,098			-
Total debt		127,677			129,949
Less unamortized debt issuance costs		(1,685	)		(597	)
Less current portion		(14,048	)		(17,440	)

Total long-term debt	$	111,944		$	106,912

	Regular		Balloon		Total
12-Month Period Ending	Amortization		Payments		Payments
December 31, 2018	$	9,129	$	4,919	$	14,048
December 31, 2019		9,289		-		9,289
December 31, 2020		7,381		5,440		12,821
December 31, 2021		7,707		-		7,707
December 31, 2022		6,587		3,779		10,366
Thereafter		16,928		56,518		73,446
	$	57,021	$	70,656	$	127,677

	December 31, 2017		September 30,2017
Total assets
Nightclubs	$	248,187	$	254,432
Bombshells		28,206		18,870
Other		969		780
General corporate		29,217		25,802
	$	306,579	$	299,884

	For the Three Months Ended
	December 31, 2017						December 31, 2016						Change
	Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	17,805			43.2	%	$	14,375			42.6	%	$	3,430			23.9	%
Sales of food and merchandise		5,307			12.9	%		4,207			12.5	%		1,100			26.1	%
Service revenues		15,889			38.6	%		13,475			39.9	%		2,414			17.9	%
Other		2,211			5.4	%		1,682			5.0	%		529			31.5	%
Total revenues		41,212			100.0	%		33,739			100.0	%		7,473			22.1	%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		3,755			21.1	%		3,168			22.0	%		587			18.5	%
Food and merchandise sold		2,094			39.5	%		1,653			39.3	%		441			26.7	%
Service and other		36			0.2	%		60			0.4	%		(24	)		-40.0	%
Cost of goods sold (exclusive of items shown separately below)		5,885			14.3	%		4,881			14.5	%		1,004			20.6	%
Salaries and wages		11,377			27.6	%		9,652			28.6	%		1,725			17.9	%
Selling, general and administrative		12,812			31.1	%		11,193			33.2	%		1,619			14.5	%
Depreciation and amortization		1,909			4.6	%		1,618			4.8	%		291			18.0	%
Other charges, net		89			0.2	%		62			0.2	%		27			43.5	%
Total operating expenses		32,072			77.8	%		27,406			81.2	%		4,666			17.0	%
Income from operations		9,140			22.2	%		6,333			18.8	%		2,807			44.3	%
Other income (expenses)
Interest expense		(3,079	)		-7.5	%		(2,015	)		-6.0	%		(1,064	)		52.8	%
Interest income		67			0.2	%		37			0.1	%		30			81.1	%
Income before income taxes		6,128			14.9	%		4,355			12.9	%		1,773			40.7	%
Income tax expense (benefit)		(8,227	)		-20.0	%		1,450			4.3	%		(9,677	)		-667.4	%
Net income	$	14,355			34.8	%	$	2,905			8.6	%	$	11,450			394.1	%