RCI HOSPITALITY HOLDINGS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report, and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2020. Overview RCI Hospitality Holdings, Inc. (“RCIHH”) is a holding 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. Through our subsidiaries, as of December 31, 2020, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant and bar operations. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine other operating segments into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas. Impact of COVID-19 Pandemic Since March 2020, our businesses have been heavily impacted by the COVID-19 pandemic through the temporary closure and reopening of several of our clubs and restaurants in adherence to federal, state and local government mandates. Because of the stay-at-home order and social distancing guidelines put into place, our total revenues for the quarter ended December 31, 2020 declined by 20.7% versus last year. Though we earned no revenues from our core businesses during the period of closures, we continue to incur expenses. To alleviate our cash flow situation, we instituted the following measures: ● Arranged 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; ● Temporarily enacted a pay reduction 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; ● 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 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. 21 Critical Accounting Policies and Estimates The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 filed with the SEC on December 14, 2020. During the three months ended December 31, 2020, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements. 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 quarter ended December 31, 2020. Results of Operations Highlights of the operating results of the Company during the three months ended December 31, 2020 are as follows: ● Total revenues were $38.4 million compared to $48.4 million during the comparable prior-year period, a 20.7% decrease (Nightclubs revenue of $25.2 million compared to $37.9 million, a 33.4% decrease; and Bombshells revenue of $13.0 million compared to $10.4 million, a 25.7% increase) ● Consolidated same-store sales decreased by 1.5% (Nightclubs decreased by 6.8% while Bombshells increased by 12.0%) (refer to the definition of same-store sales in the discussion of Revenues below) ● Gain on forgiven PPP loans amounted to $4.9 million ● Basic and diluted earnings per share (“EPS”) of $1.07 compared to $0.60 (non-GAAP diluted EPS* of $0.39 compared to $0.62) ● Net cash provided by operating activities of $6.3 million compared to $10.3 million during the comparable prior-year period, a 38.9% decrease (free cash flow* of $5.7 million compared to $9.3 million, a 38.7% decrease) * Reconciliation and discussion of non-GAAP financial measures are included in the “Non-GAAP Financial Measures” section below. 22 The following table summarizes our results of operations for the three months ended December 31, 2020 and 2019 (dollars in thousands): For the Three Months Ended December 31, 2020 December 31, 2019 Increase (Decrease) Amount % of Revenues Amount % of Revenues Amount % Revenues Sales of alcoholic beverages $ 17,360 45.2 % $ 20,743 42.9 % $ (3,383 ) (16.3 )% Sales of food and merchandise 8,609 22.4 % 7,447 15.4 % 1,162 15.6 % Service revenues 10,060 26.2 % 17,193 35.5 % (7,133 ) (41.5 )% Other 2,369 6.2 % 3,011 6.2 % (642 ) (21.3 )% Total revenues 38,398 100.0 % 48,394 100.0 % (9,996 ) (20.7 )% Operating expenses Cost of goods sold Alcoholic beverages sold 3,262 18.8 % 4,146 20.0 % (884 ) (21.3 )% Food and merchandise sold 2,863 33.3 % 2,553 34.3 % 310 12.1 % Service and other 79 0.6 % 77 0.4 % 2 2.6 % Total cost of goods sold (exclusive of items shown separately below) 6,204 16.2 % 6,776 14.0 % (572 ) (8.4 )% Salaries and wages 11,486 29.9 % 13,223 27.3 % (1,737 ) (13.1 )% Selling, general and administrative 12,152 31.6 % 16,531 34.2 % (4,379 ) (26.5 )% Depreciation and amortization 2,023 5.3 % 2,204 4.6 % (181 ) (8.2 )% Other gains, net (50 ) (0.1 )% (26 ) (0.1 )% 24 92.3 % Total operating expenses 31,815 82.9 % 38,708 80.0 % (6,893 ) (17.8 )% Income from operations 6,583 17.1 % 9,686 20.0 % (3,103 ) (32.0 )% Other income (expenses) Interest expense (2,434 ) (6.3 )% (2,485 ) (5.1 )% (51 ) (2.1 )% Interest income 60 0.2 % 98 0.2 % (38 ) (38.8 )% Non-operating gains (losses), net 4,916 12.8 % (72 ) (0.1 )% 4,988 6,927.8 % Income before income taxes 9,125 23.8 % 7,227 14.9 % 1,898 26.3 % Income tax expense (benefit) (384 ) (1.0 )% 1,593 3.3 % (1,977 ) (124.1 )% Net income $ 9,509 24.8 % $ 5,634 11.6 % $ 3,875 68.8 % * Percentages may not foot due to rounding. Percentage of revenue for individual cost of goods sold items pertains to their respective revenue line. 23 Revenues Consolidated revenues decreased by approximately $10.0 million, or 20.7%, due primarily to lost sales caused by the COVID-19 pandemic. Consolidated same-store sales decreased by 1.5%. The 20.7% decrease in consolidated revenues was primarily from a 23.1% decrease due to closures from COVID-19, a 0.9% decrease from the impact of same-store sales decline, partially offset by a 3.3% 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 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 Ended December 31, 2020 2019 Nightclubs $ 25,197 $ 37,859 Bombshells 13,006 10,350 Other 195 185 $ 38,398 $ 48,394 Nightclubs revenues decreased by 33.4% for the quarter ended December 31, 2020 compared to the prior-year quarter, where the prior-year first quarter was the last period that did not have government restrictions related to COVID-19. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales decreased by 6.8%. The remaining decline in revenues reflects lower sales in states that continue to keep locations closed such as New York, Illinois and Minnesota. Bombshells revenues increased by 25.7%, of which 12.0% was for same-store sales increase with the remaining 13.7% increase caused by two new locations. Operating Expenses Total operating expenses, as a percent of revenues, increased to 82.9% from 80.0% from last year’s first quarter, with a $6.9 million decrease, or 17.8%, which is mainly caused by fixed overhead expenses in relation to significantly lower sales. Significant contributors to the changes in operating expenses are explained below. Cost of goods sold decreased by $572,000, or 8.4%, mainly due to lower sales from COVID-19-related closures and indoor dining occupancy restrictions. As a percent of total revenues, cost of goods sold increased to 16.2% from 14.0% mainly due to the sales mix having a decrease in lower higher-margin service revenues. Salaries and wages decreased by $1.7 million, or 13.1%. As a percent of total revenues, salaries and wages were 29.9% from 27.3% mainly due to fixed salaries paid on lower sales due to COVID-19. Selling, general and administrative expenses decreased by $4.4 million, or 26.5%, primarily due to decreased sales activity during the quarter partially offset by fixed overhead costs. Depreciation and amortization decreased by $181,000, or 8.2% partly due to fully depreciated real estate and software assets. 24 Income (Loss) from Operations For the three months ended December 31, 2020 and 2019, our consolidated operating margin was 17.1% and 20.0%, respectively. The main driver for the decrease in operating margin is the COVID-19-related closures. Segment contribution to income (loss) from operations is presented in the table below (in thousands): For the Three Months Ended December 31, 2020 2019 Nightclubs $ 8,495 $ 13,776 Bombshells 2,717 1,573 Other (75 ) (207 ) General corporate (4,554 ) (5,456 ) $ 6,583 $ 9,686 Operating margin for the Nightclubs segment was 33.7% and 36.4% for the three months ended December 31, 2020 and 2019, respectively, while operating margin for Bombshells was 20.9% and 15.2%, respectively. The decrease in Nightclubs operating margin was mainly due to fixed operating costs and expenses in relation to lower sales from the pandemic. The increase in Bombshells operating margin was mainly from decrease in pre-opening expenses from several Bombshells openings in the prior-year quarter. Excluding amortization of intangibles, settlement of lawsuits, gain on insurance, and loss on disposal of assets, Nightclubs would have had non-GAAP operating margin of 33.6% and 36.6% for the three months ended December 31, 2020 and 2019, respectively. Excluding amortization of intangibles and settlement of lawsuits, Bombshells would have had non-GAAP operating margin of 21.2% and 15.2% for the three months ended December 31, 2020 and 2019. Our total occupancy costs, defined as the sum of lease expense and interest expense, were $3.4 million and $3.5 million for the quarter ended December 31, 2020 and 2019, respectively. As a percentage of revenue, total occupancy costs were 8.9% and 7.3% during the quarter ended December 31, 2020 and 2019, respectively, primarily due to lower sales base. Non-Operating Items During the quarter ended December 31, 2020, we received notices of forgiveness for ten out of twelve of our PPP loans. All of the notices received forgave 100% of each of the ten PPP loans totaling $4.9 million. Interest expense decreased by $51,000, or 2.1%. Income Taxes Income taxes were a benefit of $384,000 during the quarter ended December 31, 2020 compared to an expense of $1.6 million during the quarter ended December 31, 2019. The effective income tax rate was a benefit of 4.2% and an expense of 22.0% for the quarter ended December 31, 2020 and 2019, respectively. Our effective tax rate is affected by state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current period, as presented below. For the Three Months Ended December 31, 2020 2019 Computed expected income tax expense 21.0 % 21.0 % State income taxes, net of federal benefit 3.3 % 4.3 % Permanent differences (8.2 )% 1.0 % Change in valuation allowance (14.0 )% 0.0 % Tax credits (6.3 )% (4.3 )% Total income tax expense (benefit) (4.2 )% 22.0 % 25 Non-GAAP Financial Measures In addition to our financial information presented in accordance with GAAP, management uses certain non-GAAP financial measures, within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the Company and helps management and investors gauge our ability to generate cash flow, excluding (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows: Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, and (d) settlement of lawsuits. 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) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) unrealized gains or losses on equity securities, (e) settlement of lawsuits, (f) gain on debt extinguishment, and (g) the income tax effect of the above described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at 19.1% and 21.8% effective tax rate of the pre-tax non-GAAP income before taxes for the three months ended December 31, 2020 and 2019, respectively, and the GAAP income tax expense (benefit). We believe that excluding and including such items help management and investors better understand our operating activities. Adjusted EBITDA . We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common stockholders: (a) depreciation and amortization, (b) income tax expense (benefit), (c) net interest expense, (d) gains or losses on sale of businesses and assets, (e) gains or losses on insurance, (f) unrealized gains or losses on equity securities, (g) settlement of lawsuits, and (h) 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. 26 The following tables present our non-GAAP performance measures for the three months ended December 31, 2020 and 2019 (in thousands, except per share amounts and percentages): For the Three Months Ended December 31, 2020 2019 Reconciliation of GAAP net income to Adjusted EBITDA Net income attributable to RCIHH common stockholders $ 9,643 $ 5,634 Income tax expense (benefit) (384 ) 1,593 Interest expense, net 2,374 2,387 Settlement of lawsuits 152 24 Gain on sale of businesses and assets (5 ) (30 ) Gain on debt extinguishment (4,949 ) - Unrealized loss on equity securities 33 72 Gain on insurance (197 ) (20 ) Depreciation and amortization 2,023 2,204 Adjusted EBITDA $ 8,690 $ 11,864 Reconciliation of GAAP net income to non-GAAP net income Net income attributable to RCIHH common stockholders $ 9,643 $ 5,634 Amortization of intangibles 79 156 Settlement of lawsuits 152 24 Gain on sale of businesses and assets (5 ) (30 ) Gain on debt extinguishment (4,949 ) - Unrealized loss on equity securities 33 72 Gain on insurance (197 ) (20 ) Net income tax effect (1,219 ) (26 ) Non-GAAP net income $ 3,537 $ 5,810 Reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share Diluted shares 9,019 9,322 GAAP diluted earnings per share $ 1.07 $ 0.60 Amortization of intangibles 0.01 0.02 Settlement of lawsuits 0.02 0.00 Gain on sale of businesses and assets (0.00 ) (0.00 ) Gain on debt extinguishment (0.55 ) - Unrealized loss on equity securities 0.00 0.01 Gain on insurance (0.02 ) (0.00 ) Net income tax effect (0.14 ) (0.00 ) Non-GAAP diluted earnings per share $ 0.39 $ 0.62 Reconciliation of GAAP operating income to non-GAAP operating income Income from operations $ 6,583 $ 9,686 Amortization of intangibles 79 156 Settlement of lawsuits 152 24 Gain on sale of businesses and assets (5 ) (30 ) Gain on insurance (197 ) (20 ) Non-GAAP operating income $ 6,612 $ 9,816 Reconciliation of GAAP operating margin to non-GAAP operating margin Income from operations 17.1 % 20.0 % Amortization of intangibles 0.2 % 0.3 % Settlement of lawsuits 0.4 % 0.0 % Gain on sale of businesses and assets (0.0 )% (0.1 )% Gain on insurance (0.5 )% (0.0 )% Non-GAAP operating margin 17.2 % 20.3 % * 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. 27 Liquidity and Capital Resources At December 31, 2020, our cash and cash equivalents were approximately $17.0 million compared to $15.6 million at September 30, 2020. Because of the large volume of cash we handle, we have very stringent cash controls. As of December 31, 2020, we had negative working capital of $3.8 million compared to a negative working capital of $5.9 million as of September 30, 2020. 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 we are uncertain as to 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. To augment an expected 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; ● Temporarily enacted a pay reduction 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; ● 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. 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. During the quarter ended December 31, 2020, we received ten Notices of PPP Forgiveness Payment (“Notice”) 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 and included in non-operating gains (losses), net in our unaudited condensed consolidated statement of income. Subsequent to December 31, 2020, we received another Notice for one PPP loan which forgave 100% of the loan or $378,000 in principal. No assurance can be provided that the Company will in fact obtain forgiveness of the 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 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. 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 Three Months Ended December 31, 2020 2019 Operating activities $ 6,274 $ 10,273 Investing activities (1,013 ) (2,718 ) Financing activities (3,899 ) (8,493 ) Net increase (decrease) in cash and cash equivalents $ 1,362 $ (938 ) Cash Flows from Operating Activities Following are our summarized cash flows from operating activities (in thousands): For the Three Months Ended December 31, 2020 2019 Net income $ 9,509 $ 5,634 Depreciation and amortization 2,023 2,204 Deferred income tax benefit - (150 ) Gain on debt extinguishment (4,920 ) - Net change in operating assets and liabilities (495 ) 2,173 Other 157 412 Net cash provided by operating activities $ 6,274 $ 10,273 Net cash provided by operating activities decreased from year to year due primarily to the impact of the COVID-19 pandemic and higher interest expense paid partially offset by lower income taxes paid. 28 Cash Flows from Investing Activities Following are our cash flows from investing activities (in thousands): For the Three Months Ended December 31, 2020 2019 Payments for property and equipment and intangible assets $ (1,289 ) $ (4,058 ) Proceeds from sale of businesses and assets - 51 Proceeds from insurance 250 932 Proceeds from note receivable 26 357 Net cash used in investing activities $ (1,013 ) $ (2,718 ) Following is a breakdown of our payments for property and equipment and intangible assets for the three months ended December 31, 2020 and 2019 (in thousands): For the Three Months Ended December 31, 2020 2019 New facilities, equipment and intangible assets $ 684 $ 3,037 Maintenance capital expenditures 605 1,021 Total capital expenditures $ 1,289 $ 4,058 The capital expenditures during the three months ended December 31, 2020 were composed of primarily of real estate and liquor license purchases. The capital expenditures during the three months ended December 31, 2019 were composed primarily of construction and development costs for two new Bombshells locations. Maintenance capital expenditures refer mainly to capitalized replacement of productive assets in already existing locations. Variances in capital expenditures are primarily due to the number and timing of new, remodeled, or reconcepted locations under construction. Cash Flows from Financing Activities Following are our cash flows from financing activities (in thousands): For the Three Months Ended December 31, 2020 2019 Proceeds from debt obligations $ - $ 318 Payments on debt obligations (1,745 ) (2,081 ) Purchase of treasury stock (1,794 ) (6,441 ) Payment of dividends (360 ) (279 ) Distribution to noncontrolling interests - (10 ) Net cash used in financing activities $ (3,899 ) $ (8,493 ) We purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while we purchased 332,671 shares of our common stock at an average price of $19.36 during the same period last year. We paid quarterly dividends of $0.04 per share during the current first quarter compared to $0.03 per share in the prior year. Management also uses certain non-GAAP cash flow measures such as free cash flow. We calculate free cash flow as net cash provided by operating activities less maintenance capital expenditures. Net cash provided by operating activities was $6.3 million and $10.3 million during the three months ended December 31, 2020 and 2019, respectively. Maintenance capital expenditures were $605,000 and $1.0 million during the three months ended December 31, 2020 and 2019, respectively. We use free cash flow as the baseline for the implementation of our capital allocation strategy. Below is a table reconciling free cash flow to its most directly comparable GAAP measure (in thousands): For the Three Months Ended December 31, 2020 2019 Net cash provided by operating activities $ 6,274 $ 10,273 Less: Maintenance capital expenditures 605 1,021 Free cash flow $ 5,669 $ 9,252 Our free cash flow for the current quarter decreased by 38.7% compared to the comparable prior-year period primarily due to the impact of the COVID-19 partially offset by lower maintenance capital expenditures. Other than the potentially prolonged effect of the COVID-19 pandemic and the notes payable financing described above, we are not aware of any event or trend that would potentially significantly affect liquidity. In our opinion, working capital is not a true indicator of our financial status. Typically, businesses in our industry carry current liabilities in excess of current assets because businesses in our industry receive substantially immediate payment for sales, with nominal receivables, while inventories and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms, providing businesses in our industry with opportunities to adjust to short-term business down turns. We consider the primary indicators of financial status to be the long-term trend of revenue growth, the mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt. 29 The following table presents a summary of such indicators for the three months ended December 31 (in thousands, except percentages): Increase Increase 2020 (Decrease) 2019 (Decrease) 2018 Sales of alcoholic beverages $ 17,360 (16.3 )% $ 20,743 13.3 % $ 18,310 Sales of food and merchandise 8,609 15.6 % 7,447 30.9 % 5,690 Service revenues 10,060 (41.5 )% 17,193 (0.8 )% 17,331 Other 2,369 (21.3 )% 3,011 11.8 % 2,692 Total revenues 38,398 (20.7 )% 48,394 9.9 % 44,023 Net cash provided by operating activities $ 6,274 (38.9 )% $ 10,273 (10.3 )% $ 11,452 Adjusted EBITDA* $ 8,690 (26.8 )% $ 11,864 (1.4 )% $ 12,028 Free cash flow* $ 5,669 (38.7 )% $ 9,252 (16.5 )% $ 11,076 Debt (end of period) $ 134,821 (4.9 )% $ 141,826 (7.4 )% $ 153,095 * See definition and calculation of Adjusted EBITDA and Free Cash Flow above in the Non-GAAP Financial Measures subsection of Results of Operations. Share Repurchase We purchased 74,659 shares of our common stock at an average price of $24.03 during the three months ended December 31, 2020, while we purchased 332,671 shares of our common stock at an average price of $19.36 during the same period last year. As of December 31, 2020, we have approximately $9.0 million remaining to purchase additional shares. 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. 30 Seasonality Our nightclub operations are affected by seasonal factors. Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters). Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year. Capital Allocation Strategy Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if other strategic rationale warrants. We calculate free cash flow as net cash flows from operating activities minus maintenance capital expenditures. Using the after-tax yield of buying our own stock as baseline, management believes that we are able to make better investment decisions. 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. 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 December 31, 2020 are located in Texas. Our growth strategy is to diversify our operations with these units which do not require SOB licenses, which are sometimes difficult to obtain. While we are searching for adult nightclubs to acquire, we are able to also search for restaurant/sports bar locations that are consistent with our income targets. We are currently in the process of site selection for new Bombshells locations and have recently signed our first franchisee for Bombshells restaurants in the San Antonio, Texas area. 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. 31 Item 3. Quantitative and Qualitative Disclosures About Market Risk. As of December 31, 2020, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2020.