RCI HOSPITALITY HOLDINGS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand RCI Hospitality Holdings, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto contained in Item 8 – “Financial Statements and Supplementary Data” of this report. This overview summarizes the MD&A, which includes the following sections: ● Our Business — a general description of our business and the adult nightclub industry, our objective, our strategic priorities, our core capabilities, and challenges and risks of our business. ● Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates. ● Operations Review — an analysis of our Company’s consolidated results of operations for the three years presented in our consolidated financial statements. ● Liquidity and Capital Resources — an analysis of cash flows, aggregate contractual obligations, and an overview of financial position. Pre-COVID-19 Financial Performance During our first quarter ended December 31, 2019, total revenues were $4.4 million higher, or 9.9%, than the same quarter in the prior year. Consolidated same-store sales were up by 0.7%. During the first two months of the second quarter (January and February 2020), our consolidated same-store sales were up by 12.4%, giving us a cumulative five-month same-store sales increase of 5.3%. With the outbreak of the coronavirus and COVID-19 national emergency guidelines put in place, we experienced a significant downturn in sales brought about by the temporary closure of all of our clubs and restaurants as of March 18, 2020. Impact of COVID-19 Pandemic Because of stay-at-home orders and social distancing guidelines put into place, our total revenues for the full fiscal year ended September 30, 2020 declined by 26.9% versus last year. 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 and continue to arrange for deferment of principal and interest payment on certain of our debts; ● Furloughed employees working at our clubs and restaurants, except for a limited number of managers; ● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation; ● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others; ● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor relations coverage, among others. As of the release of this report, we do not know the 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. OUR BUSINESS The following are our operating segments: Nightclubs Our wholly-owned subsidiaries own and/or operate upscale adult nightclubs serving primarily businessmen and professionals. These nightclubs are in Houston, Austin, San Antonio, Dallas, Fort Worth, Beaumont, Longview, Harlingen, Edinburg, Abilene, Lubbock, El Paso and Odessa, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York, New York; Miami Gardens and Pembroke Park, Florida; Pittsburgh, Pennsylvania; Phoenix, Arizona; and Washington Park, Kappa and Chicago, Illinois. No sexual contact is permitted at any of our locations. We also own and operate a Studio 80 dance club in Fort Worth, Texas. We also own and lease to third parties real properties that are adjacent to (or used to be locations of) our clubs. Bombshells Our wholly-owned subsidiaries own and operate restaurants and sports bars in Houston, Dallas, Austin, Spring, Pearland and Katy, Texas under the brand name Bombshells Restaurant & Bar. Other Our wholly-owned subsidiaries own a media division (“Media Group”), including the leading trade magazine serving the multibillion-dollar adult nightclubs industry and the adult retail products industry. We also own an industry trade show, an industry trade publication and more than a dozen industry and social media websites. Included here is Drink Robust, which is licensed to sell Robust Energy Drink in the United States. Our revenues are derived from the sale of liquor, beer, wine, food, merchandise; service revenues such as cover charges, membership fees, and facility use fees; and other revenues such as commissions from vending and ATM machines, real estate rental, valet parking, and other products and services for both nightclub and restaurant/sports bar operations. Other revenues include Media Group revenues for the sale of advertising content and revenues from our annual Expo convention, and Drink Robust sales. Our fiscal year-end is September 30. 22 Same-Store Sales. 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. Adjusted Same-Store Sales. Due to the disruption created by the COVID-19 pandemic and in an effort to minimize the complexity in the calculation of same-store sales caused by closing and opening again our locations, we are presenting two alternative same-store sales results calculated with and without the impact of closures caused by state and local government mandates. In the alternative calculation, a comparable location will remain in the same-store sales base regardless of closing and reopening due to COVID-19 restrictions. Our goal is to use our Company’s assets—our brands, financial strength, and the talent and strong commitment of our management and employees—to become more competitive and to accelerate growth. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our estimates, and such differences could be material. A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included in Item 8 – “Financial Statements and Supplementary Data” of this report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial results. These estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee. We adopted ASC 842, Leases , as of October 1, 2019. Our adoption of ASC 842 resulted in an increase of $27.3 million in our total assets as of the adoption date due to the recognition of operating lease right-of-use assets net of the reclassification of deferred rent liability of $1.2 million and an increase in total liabilities due to the recognition of a $28.6 million operating lease liabilities. Long-Lived Assets We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value. We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified. Key estimates in the undiscounted cash flow model include management’s estimate of the projected revenues and operating margins. If fair value is used to determine an impairment loss, an additional key assumption is the selection of a weighted-average cost of capital to discount cash flows. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. During the second quarter of 2020, we impaired two clubs to a total of $302,000, and during the third quarter of 2020, we impaired one club for its operating lease right-of-use asset for $104,000. During the fourth quarter of 2019, we impaired two clubs for a total of $4.2 million. During the fourth quarter of 2018, we impaired one club and one Bombshells by a total of $1.6 million. Goodwill and Other Intangible Assets Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. 23 Our impairment calculations require management to make assumptions and to apply judgment in order to estimate fair values. If our actual results are not consistent with our estimates and assumptions, we may be exposed to impairments that could be material. We do not believe that there is a reasonable likelihood that there will be a change in the estimates or assumptions we used that could cause a material change in our calculated impairment charges. For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. The fair value is determined using market-related valuation models, including earnings multiples, discounted cash flows, and comparable asset market values. Key estimates in the discounted cash flow model include management’s estimate of the projected revenues and operating margins, along with the selection of a weighted-average cost of capital to discount cash flows. We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis. For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $7.9 million. For the year ended September 30, 2019, we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $1.6 million. For the year ended September 30, 2018, we identified two reporting units that were impaired and recognized a goodwill impairment loss totaling $834,000. For indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings of the asset with key assumptions being similar to those used in the goodwill impairment valuation model. For indefinite-lived tradename, we determine fair value by using the relief from royalty method. The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. We recorded impairment charges for SOB licenses amounting to $2.3 million in 2020 related to two clubs, $178,000 in 2019 related to one club, and $3.1 million in 2018 related to three clubs. Investment Available-for-sale investments are carried at fair value with the unrealized gain or loss recorded in other comprehensive income until our adoption of Accounting Standards Update No. 2016-01 on October 1, 2018, at which the change in fair value is recorded in current earnings. Income Taxes We estimate certain components of our provision for income taxes including the recoverability of deferred tax assets that arise from temporary differences between the tax and book carrying amounts of existing assets and liabilities and their respective tax bases. These estimates include depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on employee tip income, effective rates for state and local income taxes, and the deductibility of certain other items, among others. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. When necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be realized. On December 22, 2017, the Tax Act was signed into law. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, additional limitations on the tax deductibility of interest, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits. Our federal corporate income tax rate for fiscal 2018 was 24.5% and represents a blended income tax rate for that fiscal year. For fiscal 2020 and 2019, our federal corporate income tax rate was 21%. Legal and Other Contingencies As mentioned in Item 3 – “Legal Proceedings” and in a more detailed discussion in Note 12 to our consolidated financial statements, we are involved in various suits and claims in the normal course of business. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage. 24 OPERATIONS REVIEW Highlights of operations from fiscal 2020 compared to fiscal 2019 (with fiscal 2018 comparative data) are as follows: ● Consolidated revenues of $132.3 million compared to $181.1 million, a 26.9% decrease Nightclubs revenue of $88.4 million compared to $148.6 million in 2019, a 40.5% decrease Bombshells revenue of $43.2 million compared to $30.8 million in 2019, a 40.2% increase Fiscal 2018 total revenues of $165.7 million (Nightclubs revenue of $140.1 million and Bombshells revenue of $24.1 million) ● Consolidated same-store sales, as defined on page 23, decrease of 4.4% (9.0% decrease for Nightclubs and 18.3% increase for Bombshells); adjusted to keep the impact of the COVID-19 pandemic in same-store sales, adjusted consolidated same-store sales, as defined on page 23, decreased by 34.7% (41.7% decrease for Nightclubs and 6.5% increase for Bombshells) Consolidated, Nightclubs and Bombshells same-store sales in 2019 (compared to 2018) of -0.3%, +0.6% and -6.1%, respectively Consolidated, Nightclubs and Bombshells same-store sales in 2018 (compared to 2017) of +4.6%, +5.8% and -3.3%, respectively ● Diluted earnings (loss) per share of $(0.66) compared to $2.10, a 131% decrease (non-GAAP diluted EPS* of $0.51 compared to $2.44, a 79% decrease) (diluted EPS of $2.15 and non-GAAP diluted EPS of $2.18 in fiscal 2018) ● Free cash flow* of $13.5 million compared to $33.3 million, a 59.5% decrease ($23.2 million in fiscal 2018) * Reconciliation and discussion of non-GAAP financial measures are included under the “Non-GAAP Financial Measures” section of this Item. These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures. The following common size tables present a comparison of our results of operations as a percentage of total revenues for the past three fiscal years (see Note 4 to our consolidated financial statements regarding revision of prior year immaterial misstatement in fiscal 2019): 2020 2019 2018 Revenues Sales of alcoholic beverages 44.6 % 41.5 % 41.7 % Sales of food and merchandise 18.5 % 14.3 % 13.5 % Service revenues 31.1 % 37.6 % 38.7 % Other 5.8 % 6.6 % 6.1 % Total revenues 100.0 % 100.0 % 100.0 % Cost of goods sold Alcoholic beverages 18.8 % 20.4 % 20.7 % Food and merchandise 33.0 % 35.1 % 36.3 % Service and other 0.5 % 0.7 % 0.6 % Total cost of goods sold (exclusive of items shown separately below) 14.7 % 13.8 % 13.8 % Salaries and wages 29.5 % 27.5 % 26.9 % Selling, general and administrative 39.1 % 33.1 % 32.5 % Depreciation and amortization 6.7 % 5.0 % 4.7 % Other charges, net 8.0 % 1.4 % 5.5 % Total operating expenses 97.9 % 80.8 % 83.4 % Income from operations 2.1 % 19.2 % 16.6 % Other income (expenses) Interest expense (7.4 )% (5.6 )% (6.0 )% Interest income 0.2 % 0.2 % 0.1 % Unrealized loss on equity securities (0.0 )% (0.3 )% - Income (loss) before income taxes (5.1 )% 13.4 % 10.8 % Income tax expense (benefit) (0.4 )% 2.1 % (1.9 )% Net income (loss) (4.8 )% 11.3 % 12.6 % † Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line. 25 Below is a table presenting the changes in each line item of the income statement for the last three fiscal years (dollar amounts in thousands) Increase (Decrease) 2020 vs. 2019 2019 vs. 2018 Amount % Amount % Sales of alcoholic beverages $ (16,060 ) (21.4 )% $ 6,020 8.7 % Sales of food and merchandise (1,370 ) (5.3 )% 3,397 15.1 % Service revenues (26,893 ) (39.5 )% 3,951 6.2 % Other (4,409 ) (36.6 )% 1,943 19.3 % Total revenues (48,732 ) (26.9 )% 15,311 9.2 % Cost of goods sold Alcoholic beverages (4,206 ) (27.5 )% 976 6.8 % Food and merchandise (985 ) (10.9 )% 923 11.3 % Service and other (311 ) (53.8 )% 129 28.7 % Total cost of goods sold (exclusive of items shown separately below) (5,502 ) (22.1 )% 2,028 8.9 % Salaries and wages (10,763 ) (21.6 )% 5,286 11.9 % Selling, general and administrative (8,204 ) (13.7 )% 6,072 11.3 % Depreciation and amortization (236 ) (2.6 )% 1,350 17.5 % Other charges, net 7,928 302.6 % (6,564 ) (71.5 )% Total operating expenses (16,777 ) (11.5 )% 8,172 5.9 % Income from operations (31,955 ) (92.1 )% 7,139 25.9 % Other income/expenses Interest expense (398 ) (3.9 )% 255 2.6 % Interest income 15 4.9 % 75 32.1 % Unrealized loss on equity securities (548 ) (89.5 )% 612 100.0 % Income/loss before income taxes (30,994 ) (128.1 )% 6,347 35.6 % Income tax expense/benefit (4,237 ) (113.2 ) % 6,862 220.1 % Net income/loss $ (26,757 ) (130.9 ) % $ (515 ) (2.5 ) % Revenues Consolidated revenues decreased by $48.7 million, or 26.9%, from 2019 to 2020, and increased by $15.3 million, or 9.2%, from 2018 to 2019. The decrease from 2019 to 2020 was mainly caused by significantly lower traffic due to the COVID-19 restrictions. Excluding COVID-19 impact, consolidated same-store sales decrease was 4.4%. Including the impact of COVID-19 on comparable units, same-store sales would be a decrease of 34.7%. The increase from 2018 to 2019 was mainly due to a 10.9% increase from newly acquired or constructed units and a 0.3% increase in other revenues, partially offset by a 1.7% decrease from closed units and the impact of the 0.3% decline in same-store sales. 26 By reportable segment, revenues were as follows (in thousands): 2020 2019 2018 Nightclubs $ 88,373 $ 148,606 $ 140,060 Bombshells 43,215 30,828 24,094 Other 739 1,625 1,594 $ 132,327 $ 181,059 $ 165,748 Nightclubs segment revenues. Nightclubs revenues decreased by 40.5% from 2019 to 2020 and increased by 6.1% from 2018 to 2019. A breakdown of the changes compared to total change in Nightclubs revenues is as follows: 2020 vs. 2019 2019 vs. 2018 Impact of 9.0% decrease and 0.6% increase in same-store sales, respectively, to total revenues (excluding COVID-19 impact) (4.9 )% 0.5 % Newly acquired and reconcepted units 0.9 % 7.4 % Closed units (including COVID-19 impact) (36.3 )% (2.1 )% Other (0.2 )% 0.4 % (40.5 )% 6.1 % Including the impact of COVID-19 on comparable Nightclubs locations (see Adjusted Same-Store Sales on page 23), the breakdown would have been: 2020 vs. 2019 2019 vs. 2018 Impact of 41.7% decrease and 0.6% increase in same-store sales, respectively, to total revenues (including COVID-19 impact) (40.3 )% 0.5 % Newly acquired and reconcepted units 0.9 % 7.4 % Closed units (excluding COVID-19 impact) (0.9 )% (2.1 )% Other (0.2 )% 0.4 % (40.5 )% 6.1 % By type of revenue line item, changes in Nightclubs segment revenue dollars are broken down as: 2020 vs. 2019 2019 vs. 2018 Sales of alcoholic beverages (44.2 )% 4.5 % Sales of food and merchandise (34.4 )% 2.5 % Service revenues (39.6 )% 6.0 % Other (34.0 )% 22.6 % Nightclubs segment sales mix did not change much through the three fiscal years: 2020 2019 2018 Sales of alcoholic beverages 36.2 % 38.5 % 39.1 % Sales of food and merchandise 9.7 % 8.8 % 9.1 % Service revenues 46.4 % 45.7 % 45.7 % Other 7.7 % 7.0 % 6.1 % 100.0 % 100.0 % 100.0 % Included in the 2018 new units is Kappa Men’s Club, which was acquired in May 2018. Included in the 2019 new units are Rick’s Cabaret Chicago and Rick’s Cabaret Pittsburgh, which were acquired in November 2018 (see Note 16 to our consolidated financial statements) and contributed $5.0 million and $4.6 million in revenues for 2019 since acquisition date. No new clubs were acquired or constructed in 2020. Included in other revenues of the Nightclubs segment is real estate rental revenue amounting to $1.3 million in 2020, $1.7 million in 2019, and $1.2 million in 2018. 27 Bombshells segment revenues. Bombshells revenues increased by 40.2% from 2019 to 2020 and by 27.9% from 2018 to 2019. A breakdown of the changes compared to total changes in Bombshells revenues is as follows: 2020 vs. 2019 2019 vs. 2018 Impact of 18.3% increase and 6.1% decrease in same-store sales, respectively, to total revenues (excluding COVID-19 impact) 9.7 % (5.1 )% New units 35.0 % 32.4 % Closed units (including COVID-19 impact) (4.5 )% 0.6 % 40.2 % 27.9 % Including the impact of COVID-19 on comparable Bombshells locations (see Adjusted Same-Store Sales on page 23), the breakdown would have been: 2020 vs. 2019 2019 vs. 2018 Impact of 6.5% increase and 6.1% decrease in same-store sales, respectively, to total revenues (including COVID-19 impact) 5.1 % (5.1 )% New units 35.0 % 32.4 % Closed units (excluding COVID-19 impact) 0.1 % 0.6 % 40.2 % 27.9 % By type of revenue line item, changes in Bombshells segment revenues are broken down as: 2020 vs. 2019 2019 vs. 2018 Sales of alcoholic beverages 51.9 % 24.7 % Sales of food and merchandise 24.4 % 31.7 % Service and other revenues 0.0 % 154.8 % Bombshells segment sales mix for the three fiscal years is as follows: 2020 2019 2018 Sales of alcoholic beverages 62.8 % 57.9 % 59.4 % Sales of food and merchandise 36.8 % 41.5 % 40.3 % Service and other revenues 0.4 % 0.6 % 0.3 % 100.0 % 100.0 % 100.0 % Bombshells Pearland was opened in the third quarter of 2018. Bombshells I-10 was opened in the first quarter of 2019, while Bombshells 249 was opened in the second quarter of 2019. Bombshells Katy was opened in the first quarter of 2020, while Bombshells 59 was opened in the second quarter of 2020. Other segment revenues. Other revenues included revenues from Drink Robust in all three fiscal years presented. After a brief period when a majority of our interest in Drink Robust was sold, we later reacquired Drink Robust in March 2018 (see Note 16 to our consolidated financial statements). Drink Robust sales were $150,000, $231,000, and $141,000 in fiscal 2020, 2019, and 2018, respectively, which excludes intercompany sales to Nightclubs and Bombshells units. Media business revenues were $589,000, $1.4 million, and $1.4 million in fiscal 2020, 2019, and 2018, respectively. Due to the COVID-19 pandemic, the 2020 ED EXPO that was supposed to be held in August 2020 was canceled. All unearned sponsorship and advertising revenues related to the event were either further deferred or refunded and no revenue was recognized. Operating Expenses Total operating expenses, as a percent of revenues, were 97.9%, 80.8%, and 83.4% for the fiscal year 2020, 2019, and 2018, respectively. Significant contributors to the change in operating expenses as a percent of revenues are explained below. Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding and media. As a percentage of consolidated revenues, consolidated cost of goods sold was 14.7%, 13.8%, and 13.8% for fiscal 2020, 2019, and 2018, respectively. See above for breakdown of percentages for each line item of consolidated cost of goods sold as it relates to the respective consolidated revenue line. For the Nightclubs segment, cost of goods sold was 10.7%, 11.2%, and 11.8% for fiscal 2020, 2019, and 2018, respectively, which was primarily caused by sales mix shifting over to higher-margin service revenues. Bombshells cost of goods sold was 22.6%, 25.3%, and 24.7% for fiscal 2020, 2019, and 2018, respectively, which was mainly driven by the shift in sales mix to higher-margin alcoholic beverage sales in 2020 and from food cost inflation in 2019. A significant decrease in cost of goods sold dollars was caused by COVID-19-related closures and indoor dining occupancy restrictions. 28 Consolidated salaries and wages decreased by $10.8 million, or 21.6%, from 2019 to 2020 and increased by $5.3 million, or 11.9%, from 2018 to 2019. The dollar decrease from 2019 to 2020 was mainly from furloughed employees due to COVID-19. The dollar increase from 2018 to 2019 primarily came from newly opened units plus the impact of pre-opening salaries and wages on still under-construction Bombshells units. As a percentage of revenues, consolidated salaries and wages has been fairly stable at 27.5% and 26.9% for 2019 and 2018, respectively, but rose to 29.5% in 2020 due to fixed salaries paid on significantly lower sales. By reportable segment, salaries and wages are broken down as follows (in thousands): 2020 2019 2018 Nightclubs $ 19,590 $ 32,267 $ 30,788 Bombshells 10,427 8,887 5,804 Other 491 617 789 General corporate 8,562 8,062 7,166 $ 39,070 $ 49,833 $ 44,547 Unit-level manager payroll is included in salaries and wages of each location, while payroll for regional manager and above are included in general corporate. The components of consolidated selling, general and administrative expenses are in the tables below (dollars in thousands): Years Ended September 30, Percentage of Revenues 2020 2019 2018 2020 2019 2018 Taxes and permits $ 8,071 $ 10,779 $ 9,545 6.1 % 6.0 % 5.8 % Advertising and marketing 5,367 8,392 7,536 4.1 % 4.6 % 4.5 % Supplies and services 4,711 5,911 5,344 3.6 % 3.3 % 3.2 % Insurance 5,777 5,429 5,473 4.4 % 3.0 % 3.3 % Rent 4,060 3,896 3,720 3.1 % 2.2 % 2.2 % Legal 4,725 5,180 3,586 3.6 % 2.9 % 2.2 % Utilities 2,945 3,165 2,969 2.2 % 1.7 % 1.8 % Charge card fees 2,382 3,803 3,244 1.8 % 2.1 % 2.0 % Security 2,582 2,973 2,617 2.0 % 1.6 % 1.6 % Accounting and professional fees 3,463 2,815 2,944 2.6 % 1.6 % 1.8 % Repairs and maintenance 2,289 2,980 2,184 1.7 % 1.6 % 1.3 % Other 5,320 4,573 4,662 4.0 % 2.5 % 2.8 % $ 51,692 $ 59,896 $ 53,824 39.1 % 33.1 % 32.5 % By reportable segment, selling, general and administrative expenses are broken down as follows (in thousands): 2020 2019 2018 Nightclubs $ 30,105 $ 40,033 $ 38,200 Bombshells 11,735 10,441 7,454 Other 268 356 467 General corporate 9,584 9,066 7,703 $ 51,692 $ 59,896 $ 53,824 29 The significant variances in selling, general and administrative expenses are as follows: In light of decreased sales activity caused by the COVID-19 pandemic, most of our selling, general and administrative expenses for 2020 decreased, except for relatively fixed expenses such as insurance, rent, and accounting and professional fees. As a percentage of revenues, relatively fixed expenses increased in rate due to lower sales, while more discretionary/controllable expenses such as advertising and marketing were kept to a minimum. Discussions below relate mainly to significant fluctuations from 2018 to 2019. Taxes and permits increased by $1.2 million, or 12.9%, from 2018 to 2019 primarily due to new units, higher taxes on those new units, and increases in patron taxes and property taxes as a result of increased sales revenues. As a percentage of revenues, taxes and permits were 6.0% and 5.8% for 2019 and 2018, respectively. Advertising and marketing increased by $856,000, or 11.4%, from 2018 to 2019 mainly due to new units. As a percentage of revenues, advertising and marketing was relatively flat at 4.6% and 4.5% for 2019 and 2018, respectively. Rent expense increased by $176,000, or 4.7%, from 2018 to 2019 mainly due to adjustments in deferred rent liability in fiscal year 2018. As a percentage of revenues, rent expense has been flat at 2.2% in 2019 and 2018. Legal expenses increased in 2019 from 2018 by $1.6 million, or 44.5%, mainly due to SEC-related matters. Charge card fees increased by $559,000, or 17.5%, from 2018 to 2019 mainly from higher revenues. As a percentage of revenues, charge card fees were 2.1% and 2.0% in 2019 and 2018, respectively. Accounting and professional fees decreased by $129,000, or 4.4%, from 2018 to 2019 mainly due to consulting services during our ERP implementation in 2018. 30 Depreciation and amortization decreased by $236,000, or 2.6%, from 2019 to 2020 and increased by $1.4 million, or 17.5%, from 2018 to 2019. The increase from 2018 to 2019 came from newly acquired and constructed units, while the decrease from 2019 to 2020 was mainly due to properties sold or disposed during the current and prior year. The components of other charges, net are in the table below (dollars in thousands): Years Ended September 30, Percentage of Revenues 2020 2019 2018 2020 2019 2018 Impairment of assets $ 10,615 $ 6,040 $ 5,570 8.0 % 3.3 % 3.4 % Settlement of lawsuits 174 225 1,669 0.1 % 0.1 % 1.0 % Loss (gain) on sale of businesses and assets (661 ) (2,877 ) 1,965 (0.5 )% (1.6 )% 1.2 % Loss (gain) on insurance 420 (768 ) (20 ) 0.3 % (0.4 )% (0.0 )% Total other charges, net $ 10,548 $ 2,620 $ 9,184 8.0 % 1.4 % 5.5 % The significant variances in other charges, net are discussed below: During the year ended September 30, 2020, we recorded aggregate impairment charges amounting to $10.6 million related to goodwill of seven clubs ($7.9 million), SOB licenses of two clubs ($2.3 million), and $406,000 of long-lived assets of one club and one Bombshells restaurant (including impairment on operating lease right-of-use assets of $104,000). During the year ended September 30, 2019, we recorded aggregate impairment charges amounting to $6.0 million related to goodwill of four clubs ($1.6 million), SOB license of one club ($178,000), and property and equipment of two clubs ($4.2 million). During the year ended September 30, 2018, we recorded a loss on the note owed to us the by former owner of Drink Robust in relation to our reacquisition of Drink Robust ($1.55 million in the second quarter), impairment related to SOB licenses of three clubs ($3.1 million in the fourth quarter), impairment related to goodwill of two clubs ($834,000 in the fourth quarter), and impairment related to long-lived assets of a club that closed and a still-operating Bombshells ($1.6 million in the fourth quarter). See Notes 16 and 18 to our consolidated financial statements for further discussion. Income from Operations Below is a table which reflects segment contribution to income from operations (in thousands): 2020 2019 2018 Nightclubs $ 13,118 $ 50,724 $ 43,624 Bombshells 9,245 2,307 2,040 Other (684 ) (309 ) (252 ) General corporate (18,933 ) (18,021 ) (17,850 ) $ 2,746 $ 34,701 $ 27,562 Our operating margin (income from operations divided by revenues) was 2.1% in 2020, 19.2% in 2019, and 16.6% in 2018. Nightclubs operating margin was 14.8%, 34.1%, and 31.1% in 2020, 2019, and 2018, respectively, primarily due to the impact of the COVID-19 pandemic in 2020 and the closure of underperforming units, fixed expense leverage on increasing sales, and impairment of assets of $10.4 million, $5.9 million, and $4.4 million for 2020, 2019, and 2018, respectively. Bombshells operating margin was 21.4%, 7.5%, and 8.5% in 2020, 2019, and 2018, respectively, mainly due to two new units partially offset by COVID-19 impact in 2020, pre-opening expenses in 2019 (particularly in salaries and wages and selling, general and administrative expenses), and impairment of assets of $1.1 million in 2018. 31 Excluding the impact of settlement of lawsuits, impairment of assets, gain on insurance, gain on sale of businesses and assets, and amortization of intangibles, operating margin for the Nightclub segment would have been 26.8%, 35.9%, and 35.1% for 2020, 2019, and 2018, respectively. Excluding the impact of impairment of assets, loss on sale of assets, settlement of lawsuits, and amortization of intangibles, Bombshells segment operating margin would have been 22.0%, 7.6%, and 15.1% for 2020, 2019, and 2018, respectively. Refer to discussion of Non-GAAP Financial Measures on page 33. Interest Expense Interest expense decreased by $398,000 from 2019 to 2020 and increased by $255,000 from 2018 to 2019. The decrease in interest expense in 2020 was primarily due to the lower average debt balance. The increase in interest expense in 2019 was due to higher average debt balance partially offset by lower weighted average interest rate. During the first quarter of 2018, we significantly increased our debt balance with our $81 million refinancing, but that transaction also significantly reduced our weighted average interest rate. During 2019, our debt repayments were significantly higher than our borrowing, excluding borrowings from acquisitions, thereby reducing interest expense as a percentage of revenue. During 2020, with the onset of the COVID-19 pandemic, certain debt principal and interest payments have been deferred, but we continue to accrue interest on these debts. We consider rent plus interest expense as our occupancy costs since most of our debts are for real properties where our clubs and restaurants are located. For occupancy cost purposes, we exclude non-real-estate-related interest expense. Total occupancy cost rate (total occupancy cost as a percentage of revenues) increased in 2020 due to lower sales activity (i.e. base) caused by the pandemic as shown below. 2020 2019 2018 Rent 3.1 % 2.2 % 2.2 % Interest 7.4 % 5.6 % 5.4 % Total occupancy cost 10.5 % 7.8 % 7.7 % Income Taxes Income taxes were a benefit of $493,000 in 2020, an expense of $3.7 million in 2019, and a benefit of $3.1 million in 2018. Our effective income tax rate was a 7.2% benefit in 2020, a 15.5% expense in 2019, and a 17.5% benefit in 2018. The components of our annual effective income tax rate are the following: 2020 2019 2018 Computed expected income tax expense 21.0 % 21.0 % 24.5 % State income taxes, net of federal benefit (3.7 ) % 2.8 % 4.5 % Deferred taxes on subsidiaries acquired/sold - - 4.0 % Permanent differences (5.8 )% 0.2 % 0.5 % Change in deferred tax liability rate - - (49.5 )% Change in valuation allowance (18.7 )% - - Tax credits 13.9 % (3.7 )% (4.5 )% Other 0.6 % (4.8 )% 3.1 % Total effective income tax rate 7.2 % 15.5 % (17.5 )% On December 22, 2017, during our first quarter 2018, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which provided for significant changes to the U.S. Internal Revenue Code of 1986, as amended, such as a reduction in the statutory federal corporate tax rate from a maximum of 35% to a flat 21% rate effective from January 1, 2018 forward and changes and limitations to certain tax deductions. The Company has a fiscal year end of September 30, so the change to the statutory corporate tax rate resulted in a blended federal statutory rate of 24.5% for its fiscal year 2018. During fiscal 2020 and 2019, the effective income tax rate has changed to 7.2% and 15.5%, respectively, with the rate difference from the statutory federal corporate tax rate of 21% coming from offsetting impact of state income tax, net of federal benefit, and tax credits that are mostly FICA tip credits. The effective income tax rate for fiscal 2020 was also affected by the pre-tax loss mostly caused by the pandemic and the recognition of a deferred tax asset valuation allowance amounting to $1.3 million. 32 Non-GAAP Financial Measures In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows: Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) impairment of assets, (c) gains or losses on sale of businesses and assets, (d) gains or losses on insurance, 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 calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common stockholders and diluted earnings per share. Adjustment items are: (a) amortization of intangibles, (b) impairment of assets, (c) costs and charges related to debt refinancing, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized loss on equity securities, (g) settlement of lawsuits, (h) the income tax effect of the above described adjustments, and (i) deferred tax asset valuation allowance. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 26.0%, 15.5%, and 24.5% effective tax rate of the pre-tax non-GAAP income before taxes for the 2020, 2019, and 2018, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities. The calculated amount for adjustment (h) above in fiscal 2018 was significantly affected by the change in the statutory federal corporate tax rate caused by the Tax Act. Adjusted EBITDA . We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance (f) unrealized gains or losses on equity securities, (g) impairment of assets, and (h) settlement of lawsuits. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess the unleveraged performance return on our investments. Adjusted EBITDA multiple is also used as a target benchmark for our acquisitions of nightclubs. We also use certain non-GAAP cash flow measures such as free cash flow. See “Liquidity and Capital Resources” section for further discussion. 33 The following tables present our non-GAAP performance measures for the periods indicated (in thousands, except per share amounts and percentages): For the Year Ended September 30, 2020 2019 2018 Reconciliation of GAAP net income (loss) to Adjusted EBITDA Net income (loss) attributable to RCIHH common stockholders $ (6,085 ) $ 20,294 $ 20,879 Income tax expense (benefit) (493 ) 3,744 (3,118 ) Interest expense, net 9.487 9,900 9,720 Settlement of lawsuits 174 225 1,669 Impairment of assets 10,615 6,040 5,570 Loss (gain) on sale of businesses and assets (661 ) (2,877 ) 1,965 Depreciation and amortization 8,836 9,072 7,722 Unrealized loss on equity securities 64 612 - Loss (gain) on insurance 420 (768 ) (20 ) Adjusted EBITDA $ 22,357 $ 46,242 $ 44,387 Reconciliation of GAAP net income (loss) to non-GAAP net income Net income (loss) attributable to RCIHH common stockholders $ (6,085 ) $ 20,294 $ 20,879 Amortization of intangibles 609 624 254 Settlement of lawsuits 174 225 1,669 Impairment of assets 10,615 6,040 5,570 Loss (gain) on sale of businesses and assets (661 ) (2,877 ) 1,965 Costs and charges related to debt refinancing - - 827 Unrealized loss on equity securities 64 612 - Loss (gain) on insurance 420 (768 ) (20 ) Deferred tax asset valuation allowance 1,273 - - Net income tax effect (1,700 ) (580 ) (9,984 ) Non-GAAP net income $ 4,709 $ 23,570 $ 21,160 For the Year Ended September 30, 2020 2019 2018 Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings per share Diluted shares 9,199 9,657 9,719 GAAP diluted earnings (loss) per share $ (0.66 ) $ 2.10 $ 2.15 Amortization of intangibles 0.07 0.06 0.03 Settlement of lawsuits 0.02 0.02 0.17 Impairment of assets 1.15 0.63 0.57 Loss (gain) on sale of businesses and assets (0.07 ) (0.30 ) 0.20 Costs and charges related to debt refinancing - - 0.09 Unrealized loss on equity securities 0.01 0.06 - Loss (gain) on insurance 0.05 (0.08 ) (0.00 ) Deferred tax asset valuation allowance 0.14 - - Net income tax effect (0.18 ) (0.05 ) (1.02 ) Non-GAAP diluted earnings per share $ 0.51 $ 2.44 $ 2.18 Reconciliation of GAAP operating income to non-GAAP operating income Income from operations $ 2,746 $ 34,701 $ 27,562 Amortization of intangibles 609 624 254 Settlement of lawsuits 174 225 1,669 Impairment of assets 10,615 6,040 5,570 Loss (gain) on sale of businesses and assets (661 ) (2,877 ) 1,965 Loss (gain) on insurance 420 (768 ) (20 ) Non-GAAP operating income $ 13,903 $ 37,945 $ 37,000 Reconciliation of GAAP operating margin to non-GAAP operating margin GAAP operating margin 2.1 % 19.2 % 16.6 % Amortization of intangibles 0.5 % 0.3 % 0.2 % Settlement of lawsuits 0.1 % 0.1 % 1.0 % Impairment of assets 8.0 % 3.3 % 3.4 % Loss (gain) on sale of businesses and assets (0.5 )% (1.6 )% 1.2 % Loss (gain) on insurance 0.3 % (0.4 )% (0.0 )% Non-GAAP operating margin 10.5 % 21.0 % 22.3 % * Per share amounts and percentages may not foot due to rounding. The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial. 34 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2020, our cash and cash equivalents were approximately $15.6 million compared to $14.1 million at September 30, 2019. Because of the large volume of cash we handle, we have very stringent cash controls. As of September 30, 2020, we had negative working capital of $5.9 million compared to a negative working capital of $1.2 million as of September 30, 2019, excluding net assets held for sale of $0 and $2.9 million as of September 30, 2020 and September 30, 2019, respectively. Although we believe that our ability to generate cash from operating activities is one of our fundamental financial strengths, the temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges. Our strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will generate positive cash flows for us. Depending on the timing and number of locations we are allowed to open, and their ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets. Based upon the current state of allowed openings in Texas, revenues seem favorable. We are hopeful that we can become profitable within a relatively short period of time after a majority of our locations have reopened, assuming these results can be sustained and the other locations, once opened, follow these early results. But if the business interruptions and occupancy limitations caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts. Our net cash flow from operating activities for 2020 has gone down to less than half of last year’s result. To augment the current and expected future decline in operating cash flows caused by the COVID-19 pandemic, we instituted the following measures: ● Arranged and continue to arrange for deferment of principal and interest payment on certain of our debts; ● Furloughed employees working at our clubs and restaurants, except for a limited number of managers; ● Pay cut for all remaining salaried and hourly employees and deferral of board of director compensation; ● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others; ● Canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others. On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program of the CARES Act for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it 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. As of the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9 million. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining two PPP loans 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 businesses. Lower sales, as caused by local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate our cash flow situation and will determine any further measures to be instituted, including refinancing several of our debt obligations. We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened several of our locations depending on changing government mandates. As of the release of this report, we have reopened many of our club and Bombshells locations with certain operating hour restrictions and with limited occupancy. We have not recently raised capital through the issuance of equity securities. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and have secured traditional bank financing on our new development projects and refinancing of our existing notes payable, but with the significant global impact of the COVID-19 pandemic, there can be no assurance that any of these financing options would be presently available on favorable terms, if at all. We also have historically utilized these cash flows to invest in property and equipment, adult nightclubs, and restaurants/sports bars. Though our cash flows are not as we expected at the beginning of the year, we expect to generate adequate cash flows from operations for the next 12 months from the issuance of this report. The following table presents a summary of our net cash flows from operating, investing, and financing activities (in thousands): Year Ended September 30, 2020 2019 2018 Operating activities $ 15,632 $ 37,174 $ 25,769 Investing activities (994 ) (27,147 ) (26,339 ) Financing activities (13,130 ) (13,656 ) 8,374 Net increase (decrease) in cash and cash equivalents $ 1,508 $ (3,629 ) $ 7,804 We require capital principally for the acquisition of new clubs, construction of new Bombshells, renovation of older units, and investments in technology. We also utilize capital to repurchase our common stock as part of our share repurchase program, based on our capital allocation strategy guidelines, and to pay our quarterly dividends. 35 Cash Flows from Operating Activities Following are our summarized cash flows from operating activities (in thousands): Year Ended September 30, 2020 2019 2018 Net income (loss) $ (6,312 ) $ 20,445 $ 20,960 Depreciation and amortization 8,836 9,072 7,722 Deferred tax expense (benefit) (1,268 ) 821 (6,775 ) Impairment of assets 10,615 6,040 5,570 Net change in operating assets and liabilities 1,380 2,822 (5,156 ) Other 2,381 (2,026 ) 3,448 Net cash provided by operating activities $ 15,632 $ 37,174 $ 25,769 Net cash flows from operating activities significantly decreased from 2019 to 2020 mainly due to the impact of the COVID-19 pandemic on our operations and partially offset by lower interest and income taxes paid. Net cash flows from operating activities increased from 2018 to 2019 primarily from higher income from operations plus lower income taxes paid. Cash Flows from Investing Activities Following are our summarized cash flows from investing activities (in thousands): Year Ended September 30, 2020 2019 2018 Proceeds from sale of businesses and assets $ 2,221 $ 7,223 $ 811 Proceeds from insurance and notes receivable 2,521 258 147 Issuance of notes receivable - (420 ) - Payments for property and equipment and intangible assets (5,736 ) (20,708 ) (25,263 ) Acquisition of businesses, net of cash acquired - (13,500 ) (2,034 ) Net cash used in investing activities $ (994 ) $ (27,147 ) $ (26,339 ) We opened two new Bombshells units in 2020 (one in Katy, Texas and another on Southwest Freeway in Houston, Texas); opened four new units in 2019 (acquired two clubs in Chicago, Illinois and Pittsburgh, Pennsylvania, and built two new Bombshells in Houston, Texas); and opened two new units in 2018 (one acquired club in Kappa, Illinois and one built Bombshells in Pearland, Texas). See Note 16 to our consolidated financial statements. As of September 30, 2020, 2019, and 2018, we had $20,000, $8.9 million, and $6.4 million in construction-in-progress related mostly to Bombshells opening in the subsequent fiscal year. Following is a reconciliation of our additions to property and equipment for the years ended September 30, 2020, 2019, and 2018 (in thousands): Year Ended September 30, 2020 2019 2018 Purchase of real estate* $ - $ - $ 12,260 New capital expenditures in new clubs and Bombshells units and equipment 3,585 16,850 10,476 Maintenance capital expenditures 2,151 3,858 2,527 Total capital expenditures, excluding business acquisitions $ 5,736 $ 20,708 $ 25,263 * Excludes real estate acquired through business acquisitions. 36 Cash Flows from Financing Activities Following are our summarized cash flows from financing activities (in thousands): Year Ended September 30, 2020 2019 2018 Proceeds from long-term debt $ 6,503 $ 13,511 $ 84,233 Payments on long-term debt (8,832 ) (22,924 ) (72,830 ) Payment of dividends (1,286 ) (1,252 ) (1,168 ) Purchase of treasury stock (9,484 ) (2,901 ) - Payment of loan origination costs - (20 ) (1,138 ) Debt prepayment penalty - - (543 ) Distribution of noncontrolling interests (31 ) (70 ) (180 ) Net cash provided by (used in) financing activities $ (13,130 ) $ (13,656 ) $ 8,374 We purchased shares of our common stock representing 516,102 shares, 128,040 shares, and 0 shares in 2020, 2019, and 2018, respectively. We have paid quarterly dividends of $0.03 per share for fiscal 2020, 2019, and 2018, except for the fourth quarter of 2019 and the second and fourth quarter of 2020 where we paid $0.04 per share. See Note 10 to our consolidated financial statements for a detailed discussion of our debt obligations. Non-GAAP Cash Flow Measure Management also uses certain non-GAAP cash flow measures such as free cash flows. We define free cash flow as net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy. See table below (in thousands): 2020 2019 2018 Net cash provided by operating activities $ 15,632 $ 37,174 $ 25,769 Less: Maintenance capital expenditures 2,151 3,858 2,527 Free cash flow $ 13,481 $ 33,316 $ 23,242 We do not include total capital expenditures as a reduction from net cash flow from operating activities to arrive at free cash flow. This is because, based on our capital allocation strategy, acquisitions and development of our own clubs and restaurants are our primary uses of free cash flow. Our free cash flow after long-term debt repayments was $4.6 million, $10.4 million, and $(49.6) million during fiscal 2020, 2019, and 2018, respectively. Free cash flow after long-term debt repayments in fiscal 2018 was significantly impacted by our $81.2 million refinancing in December 2017. Debt Financing See Note 10 to our consolidated financial statements for detail regarding our long-term debt activity. 37 Contractual Obligations and Commitments We have long-term contractual obligations primarily in the form of debt obligations and operating leases. The following table (in thousands) summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments. Future interest payments related to debt were estimated using the interest rate in effect at September 30, 2020. Payments Due by Period Total 2021 2022 2023 2024 2025 Thereafter Long-term debt – regular $ 90,252 $ 12,098 $ 11,032 $ 8,090 $ 8,642 $ 8,479 $ 41,911 Long-term debt – balloon 52,422 4,405 2,350 3,676 - - 41,991 Interest payments on debt 51,559 8,835 7,798 6,920 6,307 5,703 15,996 Operating leases(a) 39,413 3,221 3,233 3,065 3,058 3,124 23,712 (a) Effective October 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) , which will significantly affect our accounting of all leases. See Notes 2 and 22 to our consolidated financial statements. Other than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not aware of any event or trend that would adversely impact our liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business downturns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt. The following table presents a summary of such indicators (dollars in thousands): Increase Increase 2020 (Decrease) 2019 (Decrease) 2018 Sales of alcoholic beverages $ 59,080 (21.4 )% $ 75,140 8.7 % $ 69,120 Sales of food and merchandise 24,460 (5.3 )% 25,830 15.1 % 22,433 Service revenues 41,162 (39.5 )% 68,055 6.2 % 64,104 Other 7,625 (36.6 )% 12,034 19.3 % 10,091 Total revenues $ 132,327 (26.9 )% $ 181,059 9.2 % $ 165,748 Net cash provided by operating activities $ 15,632 (57.9 )% $ 37,174 44.3 % $ 25,769 Adjusted EBITDA* $ 22,357 (51.7 )% $ 46,242 4.2 % $ 44,387 Free cash flow* $ 13,481 (59.5 )% $ 33,316 43.3 % $ 23,242 Debt (end of period) $ 141,435 (1.5 )% $ 143,528 2.1 % $ 140,627 * See definition and calculation of Adjusted EBITDA and Free Cash Flow under Non-GAAP Financial Measures and Liquidity and Capital Resources above. 38 We have not established financing other than the notes payable discussed in Note 10 to the consolidated financial statements. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. Share Repurchase As part of our capital allocation strategy, we buy back shares in the open market or through negotiated purchases, as authorized by our Board of Directors. During fiscal years 2020, 2019, and 2018, we paid for treasury stock amounting to $9.5 million, $2.9 million, and $0 representing 516,102 shares, 128,040 shares, and 0 shares, respectively. On February 6, 2020, the Board of Directors increased the repurchase authorization by an additional $10.0 million. We have $10.8 million remaining to purchase additional shares as of September 30, 2020. Subsequent to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common stock for a total of $1.8 million. For additional details regarding our Board approved share repurchase plans, please refer to Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. IMPACT OF INFLATION 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), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced. Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year. GROWTH STRATEGY We believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. Our growth strategy involves the following: (i) to acquire existing units in locations that are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed; (ii) to open new units after market analysis; (iii) to franchise our Bombshells brand; (iv) to form joint ventures or partnerships to reduce start-up and operating costs, with us contributing equity in the form of our brand name and management expertise; (v) to develop new club concepts that are consistent with our management and marketing skills; (vi) to develop and open our restaurant concepts as our capital and manpower allow; and (vii) to control the real estate in connection with club operations, although some units may be in leased premises. We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All ten of the existing Bombshells as of September 30, 2020 are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets. 39 During fiscal 2018, we reacquired Drink Robust (see Note 16 to our consolidated financial statements). Also in fiscal 2018, we acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest at 8%. The Kappa transaction provides for the purchase of the real estate for $825,000 and other non-real-estate business assets for $180,000, with goodwill amounting to $495,000. See Note 16 to the consolidated financial statements for details of the transactions. During fiscal 2019, we acquired two clubs, one in Illinois (rebranded as Rick’s Cabaret Chicago) and another in Pennsylvania (rebranded as Rick’s Cabaret Pittsburgh) for an aggregate purchase price of $25.5 million. See Note 16 to the consolidated financial statements for details of the transactions. We opened two new Bombshells units in fiscal 2019. In October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $1.0 million, payable $375,000 in cash at closing and a 9% note payable over a 10-year period. See Note 16 to the consolidated financial statements for details of the disposition. We opened two new Bombshells units in fiscal 2020. On November 5, 2019, we announced that our subsidiaries had signed definitive agreements to acquire the assets and related real estate of a well-established, top gentlemen’s club located in the Northeast Corridor for $15.0 million. The agreements terminated prior to closing. We provided the sellers notice of the termination in April 2020. We continue to evaluate opportunities to acquire new nightclubs and anticipate acquiring new locations that fit our business model as we have done in the past. The acquisition of additional clubs may require us to take on additional debt or issue our common stock, or both. There can be no assurance that we will be able to obtain additional financing on reasonable terms in the future, if at all, should the need arise. An inability to obtain such additional financing could have an adverse effect on our growth strategy. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The items in our financial statements subject to market risk are potential debt instruments with variable interest rates. We do not carry any debt with a variable interest rate in effect as of September 30, 2020. Certain of our debt have variable interest rates but will only be effective in future years.