UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June 30, 2020~~March 31, 2021

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

Commission File Number: 001-13992

RCI HOSPITALITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Texas

76-0458229

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10737 Cutten Road

Houston, Texas 77066

(Address of principal executive offices) (Zip Code)

(~~281~~(281)) 397-6730

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.01 par value		RICK		The Nasdaq Global Market~~NASDAQ~~

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

As of ~~August 7, 2020,~~May 6, 2021, ~~9,125,281~~8,999,910 shares of the registrant’s common stock were outstanding.

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including, without limitation, the following sections: Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, the risks and uncertainties associated with (i) operating and managing an adult business, (ii) the business climates in cities where it operates, (iii) the success or lack thereof in launching and building the company’s businesses, (iv) cyber security, (v) conditions relevant to real estate transactions, (vi) ~~our ability to maintain compliance with the filing requirements of the SEC and the Nasdaq Stock Market, (vii)~~ the impact of the COVID-19 pandemic, and ~~(viii)~~(vii) numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, the “Company,” “we,” “our,” and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

RCI HOSPITALITY HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of ~~June 30, 2020~~March 31, 2021 (unaudited) and September 30, ~~2019~~2020	4

	Condensed Consolidated Statements of Operations (unaudited) for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	5

	Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2221

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3537

Item 4.	Controls and Procedures	3537

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3638

Item1A.	Risk Factors	3638

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3738

Item 6.	Exhibits	3839

	Signatures	3940

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	June 30, 2020			September 30, 2019			March 31, 2021			September 30, 2020
	(unaudited)						(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	14,795		$	14,097		$	20,156		$	15,605
Accounts receivable, net		5,529			6,289			3,630			6,767
Current portion of notes receivable		219			954			214			201
Inventories		2,627			2,598			2,403			2,372
Prepaid insurance		1,415			5,446
Other current assets		1,752			2,521
Prepaid expenses and other current assets								5,020			6,488
Assets held for sale		2,013			2,866			7,382			-
Total current assets		28,350			34,771			38,805			31,433
Property and equipment, net		181,960			183,956			175,153			181,383
Operating lease right-of-use assets, net		25,962			-			24,698			25,546
Notes receivable, net of current portion		2,896			4,211			2,892			2,908
Goodwill		47,109			53,630			45,686			45,686
Intangibles, net		73,224			75,951			73,070			73,077
Other assets		873			1,118			806			900
Total assets	$	360,374		$	353,637		$	361,110		$	360,933

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	3,955		$	3,810		$	4,021		$	4,799
Accrued liabilities		10,286			14,644			12,321			14,573
Current portion of long-term debt, net		17,249			15,754
Current portion of debt obligations, net								16,380			16,304
Current portion of operating lease liabilities		1,586			-			1,692			1,628
Total current liabilities		33,076			34,208			34,414			37,304
Deferred tax liability, net		20,141			21,658			20,390			20,390
Long-term debt, net of current portion and debt discount and issuance costs		125,487			127,774
Debt, net of current portion and debt discount and issuance costs								116,032			125,131
Operating lease liabilities, net of current portion		25,863			-			24,583			25,439
Other long-term liabilities		372			1,696			357			362
Total liabilities		204,939			185,336			195,776			208,626

Commitments and contingencies (Note 10)		-			-			-			-

Equity
Preferred stock, $0.10 par value per share; 1,000 shares authorized; NaN issued and outstanding		-			-			-			-
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,125 and 9,591 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively		91			96
Common stock, $0.01 par value per share; 20,000 shares authorized; 9,000 and 9,075 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively								90			91
Additional paid-in capital		52,829			61,312			50,040			51,833
Retained earnings		102,837			107,049			115,811			100,797
Total RCIHH stockholders’ equity		155,757			168,457			165,941			152,721
Noncontrolling interests		(322	)		(156	)		(607	)		(414	)
Total equity		155,435			168,301			165,334			152,307
Total liabilities and equity	$	360,374		$	353,637		$	361,110		$	360,933

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	2020			2019			2020			2019			2021			2020			2021			2020
	For the Three Months						For the Nine Months						For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,						Ended March 31,						Ended March 31,
	2020			2019			2020			2019			2021			2020			2021			2020
Revenues
Sales of alcoholic beverages	$	7,623		$	19,570		$	45,285		$	56,366		$	20,273		$	16,919		$	37,633		$	37,662
Sales of food and merchandise		3,452			7,046			17,378			19,175			9,538			6,479			18,147			13,926
Service revenues		2,907			17,299			34,448			51,609			11,502			14,348			21,562			31,541
Other		739			3,112			6,430			8,726			2,746			2,680			5,115			5,691
Total revenues		14,721			47,027			103,541			135,876			44,059			40,426			82,457			88,820
Operating expenses
Cost of goods sold
Alcoholic beverages sold		1,245			4,015			8,826			11,541			3,730			3,435			6,992			7,581
Food and merchandise sold		1,125			2,565			5,917			6,857			3,029			2,271			5,918			4,846
Service and other		20			121			205			307			43			76			96			131
Total cost of goods sold (exclusive of items shown separately below)		2,390			6,701			14,948			18,705			6,802			5,782			13,006			12,558
Salaries and wages		5,421			13,164			30,866			37,168			11,200			12,222			22,686			25,445
Selling, general and administrative		8,908			14,895			39,889			43,263			12,618			14,450			24,770			30,981
Depreciation and amortization		2,235			2,465			6,696			6,718			2,117			2,257			4,140			4,461
Other charges (gains), net		424			(172	)		8,588			(2,250	)
Other charges, net														1,481			8,190			1,431			8,164
Total operating expenses		19,378			37,053			100,987			103,604			34,218			42,901			66,033			81,609
Income (loss) from operations		(4,657	)		9,974			2,554			32,272			9,841			(2,475	)		16,424			7,211
Other income (expenses)
Interest expense		(2,459	)		(2,543	)		(7,403	)		(7,709	)		(2,364	)		(2,459	)		(4,798	)		(4,944	)
Interest income		80			92			263			218			62			85			122			183
Unrealized gain (loss) on equity securities		31			(38	)		(103	)		(408	)
Non-operating gains (losses), net														431			(62	)		5,347			(134	)
Income (loss) before income taxes		(7,005	)		7,485			(4,689	)		24,373			7,970			(4,911	)		17,095			2,316
Income tax expense (benefit)		(1,437	)		1,806			(1,262	)		5,547			1,938			(1,418	)		1,554			175
Net income (loss)		(5,568	)		5,679			(3,427	)		18,826			6,032			(3,493	)		15,541			2,141
Net loss (income) attributable to noncontrolling interests		94			(41	)		135			(109	)
Net loss attributable to noncontrolling interests														59			41			193			41
Net income (loss) attributable to RCIHH common stockholders	$	(5,474	)	$	5,638		$	(3,292	)	$	18,717		$	6,091		$	(3,452	)	$	15,734		$	2,182

Earnings (loss) per share
Basic and diluted	$	(0.60	)	$	0.59		$	(0.36	)	$	1.94		$	0.68		$	(0.37	)	$	1.75		$	0.24

Weighted average number of common shares outstanding
Basic and diluted		9,125			9,620			9,224			9,671			9,000			9,225			9,010			9,274

Dividends per share	$	0.03		$	0.03		$	0.10		$	0.09		$	0.04		$	0.04		$	0.08		$	0.07

~~Sales of Food and Merchandise [Member]~~

See accompanying notes to unaudited condensed consolidated financial statements.

~~Service Revenues [Member]~~

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

	Shares			Amt			Amt			Amt			Amt			Shares			Amt			Amt			Total			of Shares			Amount			Capital			Earnings			of Shares			Amount			Interests			Equity
													Accumulated															Common Stock						Additional						Treasury Stock
	Common Stock						Additional						Other			Treasury Stock												Number						Paid-In			Retained			Number						Noncontrolling			Total
	Number						Paid-In			Retained			Comprehensive			Number						Noncontrolling			Total			of Shares			Amount			Capital			Earnings			of Shares			Amount			Interests			Equity
Balance at September 30, 2020																													9,075		$	91		$	51,833		$	100,797			-		$	-		$	(414	)	$	152,307
Purchase of treasury shares																													-			-			-			-			(75	)		(1,794	)		-			(1,794	)
Canceled treasury shares																													(75	)		(1	)		(1,793	)		-			75			1,794			-			-
Payment of dividends																													-			-			-			(360	)		-			-			-			(360	)
Payment to noncontrolling interest
Net income (loss)																													-			-			-			9,643			-			-			(134	)		9,509
Balance at December 31, 2020																													9,000		$	90			50,040			110,080			-			-			(548	)		159,662
Balance at December 31, 2020																													9,000		$	90			50,040			110,080			-			-			(548	)		159,662
Payment of dividends																													-			-			-			(360	)		-			-			-			(360	)
Payment to noncontrolling interest
Net income (loss)																													-			-			-			6,091			-			-			(59	)		6,032
Balance at March 31, 2021																													9,000		$	90		$	50,040		$	115,811			-		$	-		$	(607	)	$	165,334
	of Shares			Amount			Capital			Earnings			Income			of Shares			Amount			Interests			Equity
Balance at September 30, 2019		9,591		$	96		$	61,312		$	107,049		$	-			-		$	-		$	(156	)	$	168,301			9,591		$	96		$	61,312		$	108,168			-		$	-		$	(156	)	$	169,420
Purchase of treasury shares		-			-			-			-			-			(333	)		(6,441	)		-			(6,441	)		-			-			-			-			(333	)		(6,441	)		-			(6,441	)
Canceled treasury shares		(333)			(3	)		(6,438	)		-			-			333			6,441			-			-			(333	)		(3	)		(6,438	)		-			333			6,441			-			-
Payment of dividends		-			-			-			(279	)		-			-			-			-			(279	)		-			-			-			(279	)		-			-			-			(279	)
Payment to noncontrolling interest		-			-			-			-			-			-			-			(10	)		(10	)		-			-			-			-			-			-			(10	)		(10	)
Reclassification upon adoption of ASU 2016-01
Net income (loss)		-			-			-			5,634			-			-			-			-			5,634
Net income																													-			-			-			5,634			-			-			-			5,634
Balance at December 31, 2019		9,258			93			54,874			112,404			-			-			-			(166	)		167,205			9,258			93			54,874			113,523			-			-			(166	)		168,324
Balance at January 01, 2020		9,258			93			54,874			112,404			-			-			-			(166	)		167,205
Balance at December 31, 2019																													9,258			93			54,874			113,523			-			-			(166	)		168,324
Purchase of treasury shares		-			-			-			-			-			(133	)		(2,047	)		-			(2,047	)		-			-			-			-			(133	)		(2,047	)		-			(2,047	)
Canceled treasury shares		(133	)		(2	)		(2,045	)		-			-			133			2,047			-			-			(133	)		(2	)		(2,045	)		-			133			2,047			-			-
Payment of dividends		-			-			-			(368	)		-			-			-			-			(368	)		-			-			-			(368	)		-			-			-			(368	)
Payment to noncontrolling interest		-			-			-			-			-			-			-			(21	)		(21	)		-			-			-			-			-			-			(21	)		(21	)
Net income (loss)		-			-			-			(3,452	)		-			-			-			(41	)		(3,493	)
Net loss																													-			-			-			(3,452	)		-			-			(41	)		(3,493	)
Balance at March 31, 2020		9,125			91			52,829		$	108,584			-			-			-			(228	)		161,276			9,125		$	91		$	52,829		$	109,703			-		$	-		$	(228	)	$	162,395
Balance at April 01, 2020		9,125			91			52,829		$	108,584			-			-			-			(228	)		161,276
Payment of dividends		-			-			-			(273	)		-			-			-			-			(273	)
Net income (loss)		-			-			-			(5,474	)		-			-			-			(94	)		(5,568	)
Balance at June 30, 2020		9,125		$	91		$	52,829		$	102,837		$	-			-		$	-		$	(322	)	$	155,435

Balance at September 30, 2018		9,719		$	97		$	64,212		$	88,906		$	220			-		$	-		$	(103	)	$	153,332
Reclassification upon adoption of ASU 2016-01		-			-			-			220			(220	)		-			-			-			-
Purchase of treasury shares		-			-			-			-			-			(14	)		(355	)		-			(355	)
Canceled treasury shares		(14	)		-			(355	)		-			-			14			355			-			-
Payment of dividends		-			-			-			(291	)		-			-			-			-			(291	)
Net income (loss)		-			-			-			6,344			-			-			-			60			6,404
Balance at December 31, 2018		9,705			97			63,857			95,179			-			-			-			(43	)		159,090
Balance at January 01, 2019		9,705			97			63,857			95,179			-			-			-			(43	)		159,090
Purchase of treasury shares		-			-			-			-			-			(71	)		(1,606	)		-			(1,606	)
Canceled treasury shares		(71	)		(1	)		(1,605	)		-			-			71			1,606			-			-
Payment of dividends		-			-			-			(291	)		-			-			-			-			(291	)
Net income (loss)		-			-			-			6,735			-			-			-			8			6,743
Balance at March 31, 2019		9,634			96			62,252			101,623			-			-			-			(35	)		163,936
Balance at April 01, 2019		9,634			96			62,252			101,623			-			-			-			(35	)		163,936
Purchase of treasury shares		-			-			-			-			-			(17	)		(403	)		-			(403	)
Canceled treasury shares		(17	)		-			(403	)		-			-			17			403			-			-
Payment of dividends		-			-			-			(285	)		-			-			-			-			(285	)
Payment to noncontrolling interest		-			-			-			-			-			-			-			(21	)		(21	)
Net income (loss)		-			-			-			5,638			-			-			-			41			5,679
Balance at June 30, 2019		9,617		$	96		$	61,849		$	106,976		$	-			-		$	-		$	(15	)	$	168,906

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

2020 2019
For the Nine Months
Ended June 30,
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,427 ) $ 18,826
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 6,696 6,718
Deferred income tax expense (benefit) (1,517 ) 1,237
Gain on sale of businesses and assets (749 ) (2,704 )
Impairment of assets 9,192 -
Unrealized loss on equity securities 103 408
Amortization of debt discount and issuance costs 194 276
Deferred rent - 236
Noncash lease expense 1,244 -
Loss (gain) on insurance (33 ) 93
Doubtful accounts expense on notes receivable 495 -
Changes in operating assets and liabilities:
Accounts receivable (53 ) 2,305
Inventories (29 ) (87 )
Prepaid insurance, other current and other assets 4,942 4,199
Accounts payable, accrued and other liabilities (4,911 ) (3,093 )
Net cash provided by operating activities 12,147 28,414
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets 2,041 5,106
Proceeds from insurance 945 -
Proceeds from notes receivable 1,555 107
Issuance of note receivable - (420 )
Payments for property and equipment and intangible assets (5,565 ) (16,901 )
Acquisition of businesses, net of cash acquired - (13,500 )
Net cash used in investing activities (1,024 ) (25,608 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations 6,503 12,330
Payments on debt obligations (7,489 ) (18,634 )
Purchase of treasury stock (8,488 ) (2,364 )
Payment of dividends (920 ) (867 )
Payment of loan origination costs - (20 )
Distribution to noncontrolling interests (31 ) (21 )
Net cash used in financing activities (10,425 ) (9,576 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 698 (6,770 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,097 17,726
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,795 $ 10,956

CASH PAID DURING PERIOD FOR:
Interest (net of amounts capitalized of $155 and $447, respectively) $ 7,303 $ 7,769
Income taxes $ 2,067 $ 1,827

Noncash investing and financing transactions:
Notes receivable received as proceeds from sale of assets $ - $ 625
Operating lease right-of-use assets established upon adoption of ASC 842 $ 27,310 $ -
Deferred rent liabilities reclassified upon adoption of ASC 842 $ 1,241 $ -
Operating lease liabilities established upon adoption of ASC 842 $ 28,551 $ -
Unpaid liabilities on capital expenditures $ 6 $ -
~~Non-cash and other transactions:~~
~~During the nine months ended June 30, 2019, in conjunction with the borrowings of $2.35~~ ~~million from certain investors, the Company exchanged two notes payable with principal balances of $300,000 and $100,000 for two new notes amounting to $450,000 and $200,000, respectively. The Company received cash amounting to $1.95~~ ~~million on the entire transaction.~~
~~During the nine months ended June 30, 2019, the Company acquired two clubs for a total acquisition price of $25.5~~ ~~million by paying a total of $13.5~~ ~~million at closing and executing three seller-financed notes for a total of $12.0~~ ~~million.~~
~~During the nine months ended June 30, 2019, the Company sold a nightclub in Philadelphia for a total sales price of $1.0~~ ~~million, payable $375,000 in cash at closing and a $625,000 note receivable.~~
~~During the nine months ended June 30, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $1.4~~ ~~million, payable $163,000 in cash at closing, net of closing costs and property taxes of $~~87~~,000, and a $1.15~~ ~~million note receivable.~~
2021 2020
For the Six Months
Ended March 31,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,541 $ 2,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,140 4,461
Deferred income tax benefit - (1,155 )
Loss (gain) on sale of businesses and assets 86 (36 )
Impairment of assets 1,401 8,210
Unrealized loss on equity securities 67 134
Amortization of debt discount and issuance costs 101 129
Gain on debt extinguishment (5,298 ) -
Noncash lease expense 848 825
Gain on insurance (294 ) (33 )
Doubtful accounts reversal on notes receivable (58 ) -
Changes in operating assets and liabilities:
Accounts receivable 3,137 1,917
Inventories (31 ) (137 )
Prepaid expenses, other current and other assets 1,494 2,840
Accounts payable, accrued and other liabilities (3,888 ) (7,315 )
Net cash provided by operating activities 17,246 11,981
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of businesses and assets 8 105
Proceeds from insurance 294 945
Proceeds from notes receivable 61 403
Payments for property and equipment and intangible assets (6,718 ) (5,323 )
Net cash used in investing activities (6,355 ) (3,870 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt obligations 2,176 880
Payments on debt obligations (5,977 ) (4,097 )
Purchase of treasury stock (1,794 ) (8,488 )
Payment of dividends (720 ) (647 )
Payment of loan origination costs (25 ) -
Distribution to noncontrolling interests - (31 )
Net cash used in financing activities (6,340 ) (12,383 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,551 (4,272 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,605 14,097
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,156 $ 9,825

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

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

See accompanying notes to unaudited condensed consolidated financial statements.
7
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc. (the “Company or “RCIHH”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. The September 30, ~~2019~~2020 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended September 30, ~~2019~~2020 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on ~~February 13,~~December 14, 2020. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and ~~nine~~six months ended ~~June 30, 2020~~March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2020.~~2021.

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

In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-02,~~ ~~Leases (Topic 842)~~, on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases, and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11 providing for certain practical expedients in the implementation of ASU 2016-02. The guidance requires the use of a modified retrospective approach. We adopted ASU 2016-02 and related amendments as of October 1, 2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to retain historical lease classification, as well as relief from reviewing expired and existing contracts to determine if they contain leases. Our adoption of the new leasing standard resulted in an increase of $~~27.3~~ ~~million in our total assets as of October 1, 2019 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. Our adoption of ASC 842 did not have an impact on our consolidated statements of operations and cash flows, except for additional required disclosures. See additional disclosures in Note 14.
~~In June 2016, the FASB issued ASU~~ 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We adopted ASU 2016-13 as of October 1, 2020. Our ~~evaluation indicates that~~adoption of this guidance did not have a significant impact on our consolidated financial ~~statements will not be significantly impacted upon adoption of this guidance.~~statements.

8

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
~~In February 2018, the FASB issued ASU 2018-02,~~ ~~Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.~~ This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) is recorded. The ASU requires financial statement preparers to disclose (1) a description of the accounting policy for releasing income tax effects from AOCI; (2) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (3) information about the other income tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Topic 220, ~~Income Statement—Reporting Comprehensive Income~~, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The ASU is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We adopted ASU 2018-02 as of October 1, 2019. Our adoption of this guidance did not have an impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 with certain removals, modifications, and additions. Eliminated disclosures that may affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy. Modified disclosures that may affect the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additional disclosures that may affect the Company include (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. We adopted ASU 2018-13 as of October 1, 2020. Our ~~evaluation indicates that fair value disclosures in~~adoption of this guidance did not have a significant impact on our consolidated financial ~~statements will be minimally impacted by the requirements of this ASU.~~
9
~~RCI HOSPITALITY HOLDINGS, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~statements.

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. We are still evaluating the impact of this ASU on the Company’s consolidated financial statements.

109

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

3. Liquidity and Impact of COVID-19 Pandemic

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

The temporary closure of our clubs and restaurants caused by the COVID-19 pandemic ~~has~~ presented operational challenges. Our strategy iswas to open locations and operate 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 get open, and their ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets.guidelines. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

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

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

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

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

* As of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.
On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the ~~CARES~~Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge. See Notes 76 and 9.8. Ten of our restaurant subsidiaries received amounts ranging from $~~271~~271,000 ~~,000~~ to $~~579~~579,000 ~~,000~~ for an aggregate amount of $4.2million; our shared-services subsidiary received $1.1million; and one of our lounges received $~~124~~124,000~~,000.~~. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company utilized all of the PPP funds and submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining PPP loan in whole or in part.

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 due to the uncertainty about the spread of the virus.~~businesses. Lower sales, as caused by ~~social distancing~~local, state and national guidelines, could lead to adverse financial results. However, we will continually monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing several of our debt obligations.

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened ~~several~~a number of our locations depending on changing government ~~mandates. As of the release of this report, we have reopened many of our club~~mandates, including operating hour and ~~Bombshells locations with~~ limited occupancy ~~but some of our bigger clubs are still closed.~~restrictions.

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

We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles, and long-lived assets in our clubs and restaurants that are affected. ~~We evaluated forecasted cash flows considering future assumed impact of COVID-19 pandemic on sales.~~ Based on our evaluation, we determined that there is no impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets, except for assets held for sale, as of ~~June 30, 2020, we determined our assets are impaired in a total amount of approximately $9.2~~ ~~million comprised of $6.5~~ ~~million in goodwill, $2.3~~ ~~million in SOB licenses, $302,000 in property and equipment, and $104,000 in right-of-use operating lease assets.~~March 31, 2021.

4. Revenues

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers. Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations. The Company recognizes revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

Commission revenues, such as ATM commission, are recognized when the basis for such commission has transpired. Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter. Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021, hence, 0 Expo-related revenue in fiscal 2020. Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases ~~(ASC 840 in prior year)~~. See Note ~~14.~~13.

1110

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

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note ~~12)~~11), are shown below (in thousands):
Schedule of Disaggregation of Segment Revenues
Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total
Sales of alcoholic beverages $ 1,777 $ 5,846 $ - $ 7,623 $ 14,597 $ 4,973 $ - $ 19,570 $ 12,634 $ 7,639 $ - $ 20,273 $ 11,860 $ 5,059 $ - $ 16,919
Sales of food and merchandise 774 2,678 - 3,452 3,313 3,733 - 7,046 4,082 5,456 - 9,538 2,799 3,680 - 6,479
Service revenues 2,906 1 - 2,907 17,257 42 - 17,299 11,446 56 - 11,502 14,290 58 - 14,348
Other revenues 556 6 177 739 2,722 7 383 3,112 2,625 (16 ) 137 2,746 2,418 6 256 2,680
$ 6,013 $ 8,531 $ 177 $ 14,721 $ 37,889 $ 8,755 $ 383 $ 47,027 $ 30,787 $ 13,135 $ 137 $ 44,059 $ 31,367 $ 8,803 $ 256 $ 40,426

Recognized at a point in time $ 5,781 $ 8,531 $ 175 $ 14,487 $ 37,457 $ 8,755 $ 369 $ 46,581 $ 30,382 $ 13,134 $ 136 $ 43,652 $ 30,977 $ 8,803 $ 252 $ 40,032
Recognized over time 232 * - 2 234 432 * - 14 446 405 * 1 1 407 390 * - 4 394
$ 6,013 $ 8,531 $ 177 $ 14,721 $ 37,889 $ 8,755 $ 383 $ 47,027 $ 30,787 $ 13,135 $ 137 $ 44,059 $ 31,367 $ 8,803 $ 256 $ 40,426

Nine Months Ended June 30, 2020 Nine Months Ended June 30, 2019 Six Months Ended March 31, 2021 Six Months Ended March 31, 2020
Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total
Sales of alcoholic beverages $ 28,321 $ 16,964 $ - $ 45,285 $ 43,547 $ 12,819 $ - $ 56,366 $ 22,268 $ 15,365 $ - $ 37,633 $ 26,544 $ 11,118 $ - $ 37,662
Sales of food and merchandise 6,837 10,541 - 17,378 9,813 9,362 - 19,175 7,505 10,642 - 18,147 6,063 7,863 - 13,926
Service revenues 34,290 158 - 34,448 51,513 96 - 51,609 21,444 118 - 21,562 31,384 157 - 31,541
Other revenues 5,791 21 618 6,430 7,791 18 917 8,726 4,767 16 332 5,115 5,235 15 441 5,691
$ 75,239 $ 27,684 $ 618 $ 103,541 $ 112,664 $ 22,295 $ 917 $ 135,876 $ 55,984 $ 26,141 $ 332 $ 82,457 $ 69,226 $ 19,153 $ 441 $ 88,820

Recognized at a point in time $ 74,192 $ 27,684 $ 605 $ 102,481 $ 111,431 $ 22,295 $ 874 $ 134,600 $ 55,217 $ 26,140 $ 329 $ 81,686 $ 68,411 $ 19,153 $ 430 $ 87,994
Recognized over time 1,047 * - 13 1,060 1,233 * - 43 1,276 767 * 1 3 771 815 * - 11 826
$ 75,239 $ 27,684 $ 618 $ 103,541 $ 112,664 $ 22,295 $ 917 $ 135,876 $ 55,984 $ 26,141 $ 332 $ 82,457 $ 69,226 $ 19,153 $ 441 $ 88,820
* Lease revenue (included in Other Revenues) as covered by ASC ~~842 in the current year (and ASC 840 in the prior year).~~842. All other revenues are covered by ASC 606.

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

Balance at
September 30, 2019
Consideration Received Recognized in Revenue
Balance at
June 30, 2020

Balance at
September 30, 2020
Consideration Received Recognized in Revenue
Balance at
March 31, 2021

Ad revenue $ 76 $ 403 $ (412 ) $ 67 $ 92 $ 356 $ (278 ) $ 170
Expo revenue - 262 - 262 211 105 - 316
Other 7 18 (23 ) 2 33 108 (4 ) 137
$ 83 $ 683 $ (435 ) $ 331 $ 336 $ 569 $ (282 ) $ 623

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

On December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells locations in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in Corpus Christi, New Braunfels, and San Marcos, all in Texas. Upon execution of the agreement, the Company collected $75,000 in development fees representing 100% of the initial franchise fee of the first restaurant and 50% of the initial franchise fee of the second restaurant. Revenue from initial franchise fees is recognized as the performance obligations are satisfied over the term of the franchise agreement.
1211

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

5. Selected Account Information

The components of accounts receivable, net are as follows (in thousands):
Schedule of Accounts Receivable
March 31, 2021 September 30, 2020
Credit card receivables $ 1,354 $ 880
Income tax refundable 599 4,325
ATM in-transit 273 160
Insurance receivable - 191
Other (net of allowance for doubtful accounts of $483 and $261, respectively) 1,404 1,211
Total accounts receivable, net $ 3,630 $ 6,767
Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6% to 9% per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to $124,000 and $182,000 as of March 31, 2021 and September 30, 2020, respectively.
The components of prepaid expenses and other current assets are as follows (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
March 31, 2021 September 30, 2020
Prepaid insurance $ 2,549 $ 4,884
Prepaid legal 715 735
Prepaid taxes and licenses 398 428
Prepaid rent 373 37
Other 985 404
Total prepaid expenses and other current assets $ 5,020 $ 6,488
The components of accrued liabilities are as follows (in thousands):
Schedule of Accrued Liabilities
June 30, 2020 September 30, 2019 March 31, 2021 September 30, 2020
Payroll and related costs $ 3,633 $ 2,419
Sales and liquor taxes 2,580 2,613
Insurance $ 425 $ 4,937 2,399 4,405
Sales and liquor taxes 2,844 3,086
Payroll and related costs 1,972 2,892
Property taxes 1,355 1,675 1,055 2,003
Unearned revenues 623 336
Interest 1,565 508 544 1,390
Patron tax 679 595 386 309
Unearned revenues 331 83
Lawsuit settlement 75 115 228 100
Other 1,040 753 873 998
Accrued liabilities $ 10,286 $ 14,644
Total accrued liabilities $ 12,321 $ 14,573

The components of selling, general and administrative expenses are as follows (in thousands):
Schedule of Selling, General and Administrative Expenses
2020 2019 2020 2019
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2020 2019 2020 2019
Taxes and permits $ 1,187 $ 2,258 $ 6,101 $ 6,809
Advertising and marketing 428 2,083 4,745 6,301
Supplies and services 681 1,493 3,605 4,414
Insurance 1,481 1,367 4,437 4,122
Accounting and professional fees 407 631 2,916 2,559
Lease 1,010 965 3,063 2,941
Charge card fees 146 1,011 2,037 2,830
Legal 841 1,479 3,109 3,310
Utilities 512 756 2,205 2,262
Security 272 757 1,869 2,222
Repairs and maintenance 353 787 1,802 2,095
Other 1,590 1,308 4,000 3,398
Selling, general and administrative expenses $ 8,908 $ 14,895 $ 39,889 $ 43,263
6. ~~Assets Held for Sale~~
~~As of September 30, 2019, the Company had two real estate properties for sale. The aggregate estimated fair value of the properties less cost to sell as of September 30, 2019 was approximately $2.9~~ million and was reclassified to assets held for sale in the Company’s consolidated balance sheet. The assets were measured at the carrying value as adjusted for depreciation, which was lower than the fair value at the date reclassified.
~~During the three months ended December 31, 2019, the Company classified as held-for-sale another real estate property with an aggregate estimated fair value of the property less cost to sell of $1.9~~ million. This property was later reclassified out of held-for-sale assets and back to property and equipment during the three months ended June 30, 2020 due to a change in management’s plan with the property.
~~During the three months ended June 30, 2020, the~~ ~~Company sold one held-for-sale property valued at $853,000 for $1.5million.~~
~~As of June 30, 2020, the Company has a total of one real estate property held for sale with a total value of $2.0~~ ~~million.~~
2021 2020 2021 2020
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2021 2020 2021 2020
Taxes and permits $ 2,084 $ 2,240 $ 4,112 $ 4,914
Supplies and services 1,488 1,390 2,716 2,924
Insurance 1,427 1,473 2,884 2,956
Advertising and marketing 1,384 1,907 2,573 4,317
Lease 972 1,023 1,949 2,053
Utilities 858 798 1,571 1,693
Security 830 749 1,690 1,597
Legal 812 1,072 1,673 2,268
Charge card fees 695 845 1,259 1,891
Repairs and maintenance 677 652 1,250 1,449
Accounting and professional fees 297 1,311 1,012 2,509
Other 1,094 990 2,081 2,410
Total selling, general and administrative expenses $ 12,618 $ 14,450 $ 24,770 $ 30,981

The ~~Company expects the properties held for sale, which~~components of other charges, net are ~~primarily comprised~~as follows (in thousands):
Schedule of ~~land and buildings, to be sold within 12 months through property listings by our real estate brokers.~~Components of Other Charges (Gains), Net
2021 2020 2021 2020
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2021 2020 2021 2020
Impairment of assets $ 1,401 $ 8,210 $ 1,401 $ 8,210
Settlement of lawsuits 1 - 153 24
Loss (gain) on disposal of assets 91 (7 ) 86 (37 )
Gain on insurance (12 ) (13 ) (209 ) (33 )
Total other charges, net $ 1,481 $ 8,190 $ 1,431 $ 8,164

~~NaNliabilities were associated with held-for-sale assets as~~The components of ~~June 30, 2020 and September 30, 2019. Gains or losses on the sale of properties held for sale are included in other charges (gains)~~non-operating gains (losses), net ~~within the unaudited condensed consolidated statements~~are as follows (in thousands):
Components of ~~operations.~~Non-Operating Gains (Losses), Net
2021 2020 2021 2020
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2021 2020 2021 2020
Gain on debt extinguishment $ 380 $ - $ 5,329 $ -
Unrealized loss on equity securities (34 ) (62 ) (67 ) (134 )
Other 85 - 85 -
Total non-operating gains (losses), net $ 431 $ (62 ) $ 5,347 $ (134 )

1312
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Assets Held for Sale
As of March 31, 2021 and September 30, 2020, the Company had net carrying value of assets held for sale at $7.4 million and $0, respectively.
During the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate estimated fair value less cost to sell of $7.4 million after recognizing a Nightclub segment impairment charge of $1.4 million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property. The Company expects the properties, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers. Liabilities that are expected to be paid with the sale of held-for-sale assets were $3.2 million as of March 31, 2021, which is included in current portion of debt obligations in our unaudited condensed consolidated balance sheet. See Note 14.
7. Debt

~~In December 2019,~~On October 31, 2020, the Company ~~amended the~~negotiated extensions to November 1, 2021 on $~~5.0~~1,690,000 ~~million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance~~ of $~~3.0~~1,940,000 ~~million as~~ of ~~the amendment date, extending the maturity date~~notes to individuals that were due on ~~October~~November 1, ~~2022~~2020. The ~~amendment did not have an impact in the Company’s results~~Company paid $250,000 to a certain lender who only extended a portion of ~~operations and cash flows.~~his original note.

~~In February 2020, in relation to a~~On January 25, 2021, the Company borrowed $~~4.0~~2.175 million ~~12%~~ ~~note payable earlier refinanced on~~ ~~August 15, 2018, the Company restructured the note with~~from a ~~private~~bank lender by executing a ~~12%~~ 1020-year promissory note with an initial interest rate of 3.99% per annum. The note is payable $~~57,388~~13,232 ~~monthly, including~~per month for the first five years after which the interest ~~starting March 2020.~~rate will be repriced at the then-current prime rate plus 1.0% per annum, with a floor rate of 3.99%. The ~~restructured~~ note ~~eliminates a scheduled balloon principal payment of $4.0~~ ~~million in August 2021. The refinancing did not have an impact on~~is guaranteed by the Company’s ~~results of operations and cash flows.~~
~~In February 2020, in relation to a $9.9~~ ~~million~~ ~~12%~~ ~~note payable that was partially~~CEO, Eric Langan. See Note 12. The Company paid ~~during the December 2017 Refinancing Loan, the Company restructured the note, which had a balance of $5.2~~ ~~million as of the amendment date, by executing a 12%~~ 10~~-year note payable $74,515~~ ~~monthly, including interest, starting March 2020. The restructured note eliminates a scheduled balloon principal payment of $3.8~~ ~~million in~~ ~~October 2021. As a result of the refinancing, the Company wrote off~~ approximately $~~25,400~~25,000 in ~~unamortized~~ debt issuance ~~cost as interest expense in the unaudited condensed consolidated statement of operations for the quarter ended March 31, 2020.~~costs at closing.

Included in the balance of debt obligations as of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019 is a $500,000~~ ~~note~~2020 are two notes borrowed from a related ~~party~~parties (see Note ~~13)~~12)—one note for $500,000 (from an employee of the Company who is also the brother of our director, Nourdean Anakar) and ~~three~~another note for $100,000 (from a brother of Company CFO, Bradley Chhay)—and two notes totaling $~~600,000 (of which $200,000 was included in the $1,740,000 extension in the succeeding paragraph)~~ 500,000 borrowed from two non-officer ~~employees and a family member~~employees. All four notes are part of a ~~non-officer employee in which~~larger group of private lenders, with the terms of the notes ~~are~~being the same as the rest of the lender ~~groups.~~
~~On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $1,740,000~~ ~~of $2,040,000~~ ~~of notes to individuals that were due on~~ ~~May 1, 2020. The Company paid $300,000~~ ~~to certain lenders and received $200,000~~ ~~in new debt from existing lenders and their affiliates. The aggregate amount of debt due on these notes on~~ ~~November 1, 2020~~ ~~is now $1,940,000~~.group.

Future maturities of ~~long-term~~ debt obligations as of ~~June 30, 2020~~March 31, 2021 are as follows: $~~17.5~~16.6 million, $~~14.6~~11.7 million, $~~11.6~~8.1 million, $8.4 million, $~~8.5~~8.4 million, and $~~83.5~~80.4 million for the twelve months ending ~~June 30, 2021,~~March 31, 2022, 2023, 2024, 2025, 2026, and thereafter, respectively. Of the maturity schedule mentioned above, $~~6.5~~ ~~million, $2.4~~4.5 million, $3.7 million, $0, $0, $0, and $~~41.7~~42.3 million, respectively, relate to scheduled balloon payments. Unamortized debt discount and issuance costs amounted to $~~1.3~~1.2 million and $~~1.5~~1.2 million as of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, respectively.

Included in the balance of debt obligations as of ~~June~~March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $124,000 and $5.4 ~~million. If~~million, respectively. During the three and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving the forgiveness of 100% of each of the 11 PPP loans amounting to $380,000 and $5.3 million, respectively, in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations. As of the date of the filing of this report, we have not received a forgiveness notice for only one PPP loan that, if not forgiven, under the terms of the loans as provided by the CARES Act, ~~the twelve PPP loans bear~~bears an interest rate of 1%1% per ~~annum and will be payable in 18 equal monthly installments of $305,138~~ ~~starting December 6, 2020.~~annum. See ~~Notes 3 and 9.~~Note 3.

8. Equity

During the three and ~~nine~~six months ended ~~June 30,~~March 31, 2021, the Company purchased and retired 0 and 74,659 common shares, respectively, at a cost of approximately $0 and $1.8 million, respectively. The Company paid $0.04and $0.08per share cash dividend during the three and six months ended March 31, 2021 totaling approximately $360,000 and $720,000, respectively.
During the three and six months ended March 31, 2020, the Company purchased and retired 0132,719 and 465,390 common shares, respectively, at a cost of approximately $02.0 million and $8.5 million, respectively. The Company paid $~~0.03~~0.04 and $~~0.10~~0.07 per share cash ~~dividends~~dividend during the three and ~~nine~~six months ended ~~June 30,~~March 31, 2020 totaling approximately $~~273,000~~368,000 and $~~920,000~~647,000, respectively.

~~During the three and nine months ended June 30, 2019, the Company purchased and retired~~ ~~17,302~~ ~~and~~ ~~102,113~~ ~~common shares, respectively, at a cost of approximately $403,000~~ ~~and $2.4~~ ~~million, respectively. The Company paid a $0.03~~ ~~per share cash dividend per quarter totaling approximately $285,000 and $867,000~~ ~~for the three and nine months ended June 30, 2019, respectively.~~
~~On February 6, 2020, the Company’s Board of Directors authorized an additional $10.0~~ ~~million to repurchase the Company’s common stock. As of August 7, 2020, the Company has $11.8~~ ~~million remaining to purchase additional shares under its share repurchase program.~~
1413

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

9. Income Taxes

Income ~~tax benefit was~~taxes were an expense of $~~1.4~~ 1.9million and $~~1.3~~1.6 million during the three and ~~nine~~six months ended ~~June 30, 2020,~~March 31, 2021, respectively, compared to ~~income tax~~a benefit of $1.4 million and an expense of $~~1.8~~175,000 ~~million and $5.5~~ ~~million~~ during the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, respectively. The effective income tax rate was an expense of 24.3% and 9.1% for the three and six months ended March 31, 2021, respectively, compared to a benefit of ~~20.5%~~ 28.9% and an expense of ~~26.9%~~ 7.6~~during~~% for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2020, ~~respectively, compared to expense rates of~~ ~~24.1%~~ ~~and~~ ~~22.8%~~ ~~during the three and nine months ended June 30, 2019,~~ respectively. Our effective tax rate ~~for both years~~ is affected by the ~~estimate of pre-tax accounting~~statutory federal income ~~(loss) for the year,~~tax rate, state taxes, permanent differences, and tax credits, including the FICA tip ~~credit.~~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.

The Company or one of its subsidiaries ~~file~~files income tax returns ~~for~~in the U.S. federal jurisdiction, and various states. ~~Fiscal years ended September 30, 2017 and thereafter remain open to tax examination.~~ The Company’s federal income tax returns for the years ended September 30, ~~2015, 2014 and~~ 2013 through 2017 have been examined by the Internal Revenue Service with noonly immaterial changes. ~~In July 2020, we have resolved payroll~~Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax ~~audits with the IRS for tax years 2014 through 2017 and have accrued approximately $149,000~~ ~~in payroll taxes and penalties, which are included in accrued liabilities in our unaudited condensed consolidated balance sheet as of June 30, 2020.~~examination.

The Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes. As of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019, the~~2020, there was 0 liability for uncertain tax ~~positions was $~~0 ~~and $~~0~~, respectively.~~positions. The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of operations.

On March 27, 2020, former President Trump signed the ~~Coronavirus Aid, Relief, and Economic Security~~CARES Act ~~(the “CARES Act”)~~ into law. As a result of this, additional avenues of relief ~~may be~~were made available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act ~~includes,~~included, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established athe Paycheck Protection Program, ~~(“PPP”),~~ whereby certain small businesses are eligible for ~~a loan~~loans to fund payroll expenses, rent, and related costs. The ~~loan~~loans may be forgiven if the funds are used for payroll and other qualified expenses. The Company ~~has~~ submitted its application for a PPP loan and on May 8, 2020 ~~has~~ received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000to $579,000for an aggregate amount of $4.2million; our shared-services subsidiary received $1.1million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. ~~There is no certainty~~The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. During the three and six months ended March 31, 2021, we received 1 and 11 Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans granted. All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.No assurance can be provided that the Company will obtain forgiveness of the one remaining PPP loan ~~will qualify for forgiveness.~~in whole or in part. See Note 3.

10. Commitments and Contingencies

Legal Matters

Texas Patron Tax

In 2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club customers. To resolve the issue of taxes owed, the Company agreed to pay $10.0 million in equal monthly installments of $119,000, without interest, over 84 months, beginning in June 2015, for all but two non-settled locations. The Company agreed to remit the Patron Tax on a monthly basis, based on the current rate of $5 per customer. For accounting purposes, the Company ~~has~~ discounted the $10.0 million at an imputed interest rate of ~~9.6%~~9.6%, establishing a net present value for the settlement of $7.2 million. As a consequence, the Company recorded an $8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $7.2 million and the amount previously accrued for the tax.

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

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the ~~unaudited condensed~~ consolidated balance sheets, amounted to $~~2.5~~ 1.5million and $~~3.4~~ 2.2million as of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, respectively.

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

1514

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

Indemnity Insurance Corporation

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

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

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC. The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014. As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC. The Company has retained counsel to defend against and evaluate these claims and lawsuits. We are funding ~~100%~~100% of the costs of litigation and will seek reimbursement from the bankruptcy receiver. The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested; however, there are no assurances of any recovery from these claims. It is unknown at this time what effect this uncertainty will have on the Company. As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date. As of ~~June 30, 2020,~~March 31, 2021, we have 2 unresolved claims out of the original 71 claims.

Shareholder Class and Derivative Actions

In May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc. and certain of its officers in the Southern District of Texas, Houston Division. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management. The complaints seek unspecified damages, costs, and attorneys’ fees. These lawsuits are Hoffman v. RCI Hospitality Holdings, Inc., et al. (filed May 21, 2019, naming the Company and Eric Langan); Gu v. RCI Hospitality Holdings, Inc., et al. (filed May 28, 2019, naming the Company, Eric Langan, and Phil ~~Marshall)~~Marshall (who is no longer an officer of the Company)); and Grossman v. RCI Hospitality Holdings, Inc., et al. ~~(filed~~(filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall). The plaintiffs in all three cases moved to consolidate the purported class actions. On January 10, 2020 an order consolidating the Hoffman, Grossman, and Gu cases was entered by the Court. The consolidated case is styled In re RCI Hospitality Holdings, Inc., No. 4:19-cv-01841. On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder. In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds director ~~Nour-Dean~~Nourdean Anakar and former director Steven Jenkins as defendants. On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. ~~As of July 23, 2020, briefing on~~On March 31, 2021, the court denied defendants’ motion to dismiss ~~is complete,~~the lawsuit. On April 14, 2021, defendants filed their answer and ~~we are currently waiting for the court~~affirmative defenses, denying liability as to ~~rule on the motion.~~all claims. The Company intends to continue to vigorously defend against this action. This action is in its preliminary phase, and a potential loss cannot yet be estimated.

1615

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

On August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against officers and directors Eric S. Langan, Phillip Marshall, ~~Nour-Dean~~Nourdean Anakar, Yura Barabash, Luke Lirot, Travis Reese, former director Steven Jenkins, and RCI Hospitality Holdings, Inc., as nominal defendant. The action alleges that the individual officers and directors made or caused the Company to make a series of materially false and/or misleading statements and omissions regarding the Company’s business, operations, prospects, and legal compliance and engaged in or caused the Company to engage in, inter alia, related party transactions, questionable uses of corporate assets, and failure to maintain internal controls. The action asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks injunctive relief, damages, restitution, costs, and attorneys’ fees. The case, Cecere v. Langan, et al., is in its early stage, and a potential loss cannot yet be estimated.
~~SEC Matter and Internal Review~~
In mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of the Company’s audit committee engaged independent outside counsel to conduct an internal review. Management of the Company fully cooperated with the internal review conducted by the special committee and its outside counsel. The board of directors has implemented the recommendations resulting from the internal review. As of the date hereof, the internal review has been completed subject to any ongoing cooperation with regulatory authorities.
Since the initiation of the informal inquiry by the SEC in early 2019, the Company and its management have fully cooperated and continue to fully cooperate with the SEC matter, which has now converted to a formal investigation and is ongoing. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the investigation. The Company is also unable to predict what, if any, action may be taken as a result of the investigation. Any determination by the SEC that the Company’s activities were not in compliance with federal securities laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, or equitable relief, which could have a material adverse effect on the Company.

Other

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

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

1716

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

On June 23, 2014, Mark H. Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc. (“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County. The suit alleged that Mr. Panameno injured Mr. Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix. The suit alleged that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se. After a jury trial proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share of compensatory damages is approximately $1.4 million and its share of punitive damages is $4 million. In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial. The Court denied this motion in August 2017. In September 2017, JAI Phoenix filed a notice of appeal. In June 2018, the matter was heard by the Arizona Court of Appeals. On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court. It is anticipated that a new trial will occur at some point in the future. JAI Phoenix will continue to vigorously defend itself.

As set forth in the risk factors as disclosed in ~~the Company’s~~our most recent Annual Report on Form 10-K, ~~for the fiscal year ended September 30, 2019,~~ the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees. While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers. Claims are brought under both federal and where applicable, state law. Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit. Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

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

General

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations. We assess the probability that we could incur liability in connection with certain of these lawsuits. Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries. In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

Settlements of lawsuits for the three and ~~nine~~six months ended ~~June 30, 2020 total~~March 31, 2021 amount to approximately $~~50,000~~1,000 and $~~74,000~~153,000, respectively, while for the three and ~~nine~~six months ended ~~June 30, 2019 total~~March 31, 2020 amount to approximately $0 and $~~144,000~~24,000, respectively. As of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, the Company has accrued $~~75,000~~228,000 and $~~115,000~~100,000 in accrued liabilities, respectively, related to settlement of lawsuits.
~~11.~~ ~~Acquisition~~
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.~~
1817
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

~~12.~~11. Segment Information

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

~~Schedule of Segment Reporting Information~~
Below is the financial information related to the Company’s segments (in thousands):
Schedule of Segment Reporting Information
For the Three Months For the Nine Months For the Three Months For the Six Months
Ended June 30, Ended June 30, Ended March 31, Ended March 31,
2020 2019 2020 2019 2021 2020 2021 2020
Revenues
Revenues (from external customers)
Nightclubs $ 6,013 $ 37,889 $ 75,239 $ 112,664 $ 30,787 $ 31,367 $ 55,984 $ 69,226
Bombshells 8,531 8,755 27,684 22,295 13,135 8,803 26,141 19,153
Other 177 383 618 917 137 256 332 441
General corporate - - - -
$ 14,721 $ 47,027 $ 103,541 $ 135,876 $ 44,059 $ 40,426 $ 82,457 $ 88,820

Income (loss) from operations
Nightclubs $ (3,088 ) $ 14,034 $ 13,002 $ 44,499 $ 10,468 $ 2,284 $ 18,963 $ 16,040
Bombshells 1,903 686 4,166 1,543 3,142 688 5,859 2,259
Other (95 ) (111 ) (480 ) (406 ) (139 ) (146 ) (214 ) (331 )
General corporate (3,377 ) (4,635 ) (14,134 ) (13,364 ) (3,630 ) (5,301 ) (8,184 ) (10,757 )
$ (4,657 ) $ 9,974 $ 2,554 $ 32,272 $ 9,841 $ (2,475 ) $ 16,424 $ 7,211

Depreciation and amortization
Nightclubs $ 1,470 $ 1,737 $ 4,426 $ 4,711 $ 1,413 $ 1,486 $ 2,737 $ 2,956
Bombshells 455 370 1,328 1,001 461 456 918 873
Other 103 102 311 312 36 104 72 208
General corporate 207 256 631 694 207 211 413 424
$ 2,235 $ 2,465 $ 6,696 $ 6,718 $ 2,117 $ 2,257 $ 4,140 $ 4,461

Capital expenditures
Nightclubs $ 106 $ 1,935 $ 2,964 $ 3,029 $ 2,201 $ 526 $ 3,331 $ 2,858
Bombshells 136 900 2,473 10,697 3,104 612 3,255 2,337
Other - 2 - 20 (2 ) - 1 -
General corporate - 162 128 3,155 126 127 131 128
$ 242 $ 2,999 $ 5,565 $ 16,901 $ 5,429 $ 1,265 $ 6,718 $ 5,323

June 30, 2020 September 30, 2019 March 31, 2021 September 30, 2020
Total assets
Nightclubs $ 277,707 $ 274,071 $ 280,060 $ 277,960
Bombshells 51,907 44,144 50,832 48,991
Other 1,516 1,773 1,303 1,269
General corporate 29,244 33,649 28,915 32,713
$ 360,374 $ 353,637 $ 361,110 $ 360,933

1918

RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2021 amounting to $2.8 million and $31,000, respectively, and for the six months ended March 31, 2021 amounting to $5.6 million and $141,000, respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2021 amounting to $49,000 and $75,000, respectively. Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and corporate segments for the three months ended March 31, 2020 amounting to $2.8 million and $32,000, respectively, and for the six months ended March 31, 2020 amounting to $5.4 million and $63,000, respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2020 amounting to $32,000 and $54,000, respectively. These intercompany revenue amounts are eliminated upon consolidation.

General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs. Management considers these to be non-allocable costs for segment purposes.

Certain real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment projects. Accordingly, those asset costs have been transferred out of the Bombshells segment.

~~13.~~12. Related Party Transactions

Presently, our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company. Mr. Langan receives no compensation or other direct financial benefit for any of the guarantees. The balance of our commercial bank indebtedness, net of debt discount and issuance costs, as of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019 is~~2020, was $~~84.0~~84.6 million and $~~86.8~~83.8 million, respectively.

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

We used the services of Nottingham Creations (formerly Sherwood Forest Creations, LLC), a furniture fabrication company that manufactures tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance. Nottingham Creations is owned by a brother of Eric Langan (as was Sherwood Forest). Amounts billed to us for goods and services provided by Nottingham Creations and Sherwood Forest were $0 114,910and $~~72,809~~ 114,910during the three and ~~nine~~six months ended ~~June 30, 2020,~~March 31, 2021, respectively, and $~~12,990~~ 53,556and $~~120,805~~ 72,809during the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, respectively. As of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, we owed Nottingham Creations and Sherwood Forest $~~13,705~~64,910 and $~~6,588~~0, respectively, in unpaid billings.

TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal ~~2020~~2021 and ~~2019.~~2020. A son-in-law of Eric Langan owns a noncontrolling interest in TW Mechanical. Amounts billed by TW Mechanical to the third-party general contractor were $0and $~~18,758~~ 0for the three and ~~nine~~six months ended ~~June 30, 2020,~~March 31, 2021, respectively, and $0 18,758and $~~435,800~~ 30,585for the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, respectively. Amounts billed directly to the Company were $~~11,363~~ 55,621and $~~37,605~~ 62,751for the three and ~~nine~~six months ended ~~June 30, 2020,~~March 31, 2021, respectively, and $0 24,416and $~~206~~ 26,241for the three and ~~nine~~six months ended ~~June 30, 2019,~~March 31, 2020, respectively. As of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, the Company owed TW Mechanical $~~4,439~~1,545 and $05,700, respectively, in unpaid direct billings.

2019
RCI HOSPITALITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

~~14.~~13. Leases

The Company leases certain facilities and equipment under operating leases. Under ASC 840, lease expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded using the straight-line method over the initial lease term whereby an equal amount of lease expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease expense less than cash payments in the later years. The difference between lease expense recognized and actual lease payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.
Included in lease expense in our unaudited condensed consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $0 ~~and $19,500~~ ~~for the three and nine months ended June 30, 2020, respectively, and $19,500~~ ~~and $58,500~~ ~~for the three and nine months ended June 30, 2019, respectively. This lease terminated on~~ ~~December 31, 2019~~.
~~Schedule of Future Minimum Rental Payments for Operating Leases~~
~~Undiscounted future minimum annual lease obligations as of September 30, 2019 under ASC 840 are as follows (in thousands):~~
September 30, 2019
2020 $ 3,237
2021 3,154
2022 3,057
2023 2,889
2024 2,850
Thereafter 21,038
Total future minimum lease obligations $ 36,225
Included in the future minimum lease obligations are billboard and outdoor sign leases. These leases were recorded as advertising and marketing expenses, and included in selling, general and administrative expenses in our unaudited condensed consolidated statements of operations. Under ASC 840, we recorded lease expense amounting to $~~965,000~~ ~~and $2.9~~ ~~million during the three and nine months ended June 30, 2019.~~
The Company adopted ASC 842 as of October 1, 2019. The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise. This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations.
We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.
~~Our adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor. See Note 4.~~
~~Schedule of Future Maturities of Lease Liabilities~~
~~Future maturities of ASC 842 lease liabilities as of June 30, 2020 are as follows (in thousands):~~

Principal
Payments
Interest
Payments
Total
Payments

July 2020 - June 2021 $ 1,586 $ 1,617 $ 3,203
July 2021 - June 2022 1,719 1,517 3,236
July 2022 - June 2023 1,703 1,412 3,115
July 2023 - June 2024 1,738 1,310 3,048
July 2024 - June 2025 1,906 1,200 3,106
Thereafter 18,797 5,703 24,500
$ 27,449 $ 12,759 $ 40,208
~~Schedule of Lease Expense~~
Total lease expense, under ASC 842, was included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income which was included in other revenue, for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 as follows (in thousands):

Three Months Ended
June 30, 2020

Nine Months Ended
June 30, 2020

Operating lease expense – fixed payments $ 839 $ 2,519
Variable lease expense 158 288
Short-term equipment and other lease expense (includes $12 and $303 recorded in advertising and marketing, and $72 and $297 recorded in repairs and maintenance for the three and nine months ended June 30, 2020, respectively; see Note 5) 97 856
Sublease income (2 ) (8 )
Total lease expense, net $ 1,092 $ 3,655

Other information:
Operating cash outflows from operating leases $ 1,051 $ 3,513
Weighted average remaining lease term 13 years
Weighted average discount rate 6.1 %
Schedule of Lease Expense
2021 2020 2021 2020
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2021 2020 2021 2020
Operating lease expense – fixed payments $ 828 $ 838 $ 1,657 $ 1,680
Variable lease expense 44 65 108 130
Short-term equipment and other lease expense (includes $102 and $145 recorded in advertising and marketing for the three months ended March 31, 2021 and 2020, respectively, and $159 and $291 for the six months ended March 31, 2021 and 2020, respectively; and $116 and $100 recorded in repairs and maintenance for the three months ended March 31, 2021 and 2020, respectively, and $204 and $225 for the six months ended March 31, 2021 and 2020, respectively; see Note 5) 318 365 547 759
Sublease income (1 ) (4 ) (3 ) (6 )
Total lease expense, net $ 1,189 $ 1,264 $ 2,309 $ 2,563

Other information:
Operating cash outflows from operating leases $ 1,162 $ 1,207 $ 2,253 $ 2,462
Weighted average remaining lease term 12 years 13 years
Weighted average discount rate 6.1 % 6.1 %
Future maturities of ASC 842 lease liabilities as of March 31, 2021 are as follows (in thousands):
Schedule of Future Maturities of Lease Liabilities
Principal Payments Interest Payments Total Payments
April 2021 – March 2022 $ 1,692 $ 1,543 $ 3,235
April 2022 – March 2023 1,728 1,438 3,166
April 2023 – March 2024 1,706 1,336 3,042
April 2024 – March 2025 1,860 1,229 3,089
April 2025 – March 2026 2,054 1,111 3,165
Thereafter 17,235 4,881 22,116
$ 26,275 $ 11,538 $ 37,813
14. Subsequent Events
On April 7, 2021, the Company acquired land near the southern boundary of Houston, Texas for $1.3 million.

On May 7, 2021, the Company sold one of the properties held for sale as of March 31, 2021 for $3.1 million. The property had a carrying value of $2.3 million as of March 31, 2021. See Note 6. The Company paid related debt amounting to $2.0 million from the proceeds of the sale.
2120

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, ~~2019.~~2020.

Overview

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

Through our subsidiaries, as of ~~June 30, 2020,~~March 31, 2021, we operated a total of 48 establishments that offer live adult entertainment and/or restaurant and bar ~~operations.~~operations, including one club that is being renovated due to hurricane damage. We also operated a leading business communications company serving the multi-billion-dollar adult nightclubs industry. We have two principal reportable segments: Nightclubs and Bombshells. We combine other operating segments into “Other.” In the context of club and restaurant/sports bar operations, the terms the “Company,” “we,” “our,” “us” and similar terms used in this report refer to subsidiaries of RCIHH. RCIHH was incorporated in the State of Texas in 1994. Our corporate offices are located in Houston, Texas.

~~Pre-COVID-19 Financial Performance~~
During our first quarter ended December 31, 2019, total revenues were $4.4 million, or 9.9%, higher 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, 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~~Starting in March 2020, our businesses were heavily impacted by the COVID-19 pandemic through the temporary closure and reopening of ~~the stay-at-home order~~a number of our clubs and ~~social distancing guidelines put into place, our~~restaurants in adherence to federal, state and local government mandates. Our total revenues for the ~~full nine-month period~~three and six months ended ~~June 30, 2020~~March 31, 2021 increased by 9.0% and declined by ~~23.8%~~7.2%, respectively, versus last year. The increase in the quarter ended March 31, 2021 was mainly caused by Bombshells’ same-store sales increase and revenue from two new units. Though we earned no revenues from our core businesses during the period of closures, we ~~continue~~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~~Temporarily enacted a pay reduction for all remaining salaried and hourly employees and ~~deferral of~~deferred board of director compensation; *
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● ~~Canceled~~Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale-system support, and investor relations coverage, among others.

* As of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.
As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our ~~businesses due to the uncertainty about the spread of the virus.~~businesses. Lower sales, as caused by ~~social distancing~~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.
~~Also see the risk factor in “Item 1A. Risk Factors” regarding risks and uncertainties associated with the COVID-19 pandemic.~~
2221
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, ~~2019~~2020 filed with the SEC on ~~February 13,~~December 14, 2020.
~~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.

During the three and ~~nine~~six months ended ~~June 30, 2020,~~March 31, 2021, 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 three and six months ended March 31, 2021.
Results of Operations

Highlights of the Company’s operating results ~~of the Company during the three and nine months ended June 30, 2020~~ are as follows:

~~Third~~Second Quarter ~~2020~~2021

● Total revenues were ~~$14.7~~$44.1 million compared to ~~$47.0~~$40.4 million during the comparable prior-year period, a ~~68.7% decrease~~9.0% increase (Nightclubs revenue of ~~$6.0~~$30.8 million compared to ~~$37.9~~$31.4 million, ~~an 84.1%~~a 1.8% decrease; and Bombshells revenue of ~~$8.5~~$13.1 million compared to $8.8 million, a ~~2.6% decrease)~~49.2% increase)

● ~~No club nor~~Consolidated same-store sales increased by 26.3% (Nightclubs increased by 3.6% while Bombshells ~~location qualified for~~increased by 48.7%) (refer to the definition of same-store sales in the discussion of Revenues below)
● Gain on forgiven PPP loans amounted to $380,000

● Basic and diluted ~~loss per share of $0.60 compared to basic and diluted~~ earnings per share (“EPS”) of ~~$0.59 (non-GAAP~~$0.68 compared to a basic and diluted loss per share of ~~$0.74 compared to a non-GAAP~~$0.37 (non-GAAP diluted EPS* of ~~$0.59)~~$0.75 compared to $0.47)

● Net cash provided by operating activities of ~~$166,000~~$11.0 million compared to ~~$7.4~~$1.7 million during the comparable prior-year period, a ~~97.8% decrease~~542.4% increase (free cash flow* of ~~$166,000~~$9.0 million compared to ~~$6.5 million,~~$618,000, a ~~97.4% decrease)~~1,354.0% increase)
22

Year-to-Date ~~2020~~2021

● Total revenues were ~~$103.5~~$82.5 million compared to ~~$135.9~~$88.8 million during the comparable prior-year period, a ~~23.8% decline~~7.2% decrease (Nightclubs revenue of ~~$75.2~~$56.0 million compared to ~~$112.7~~$69.2 million, a ~~33.2%~~19.1% decrease; and Bombshells revenue of ~~$27.7~~$26.1 million compared to ~~$22.3~~$19.2 million, a ~~24.2%~~36.5% increase)
● Consolidated same-store sales increased by 6.9% (Nightclubs decreased by 4.4% while Bombshells increased by 27.9%) (refer to the definition of same-store sales in the discussion of Revenues below)
● Gain on forgiven PPP loans amounted to $5.3 million

● Basic and diluted ~~loss per share~~EPS of ~~$0.36~~$1.75 compared to ~~basic and diluted EPS of $1.94~~$0.24 (non-GAAP diluted EPS* of ~~$0.36~~$1.15 compared to ~~$1.83, an 80.3% decrease)~~$1.09)

● Net cash provided by operating activities of ~~$12.1~~$17.2 million compared to ~~$28.4~~$12.0 million during the comparable prior-year period, a ~~57.2% decrease~~43.9% increase (free cash flow* of ~~$10.0~~$14.7 million compared to ~~$26.3~~$9.9 million, a ~~61.9% decrease)~~48.5% increase)

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

23
Three Months Ended ~~June 30, 2020~~March 31, 2021 Compared to Three Months Ended ~~June 30, 2019~~March 31, 2020

The following table summarizes our results of operations for the three months ended ~~June 30, 2020 and 2019~~March 31, 2021 (dollars in thousands):

For the Three Months Ended For the Three Months Ended
June 30, 2020 June 30, 2019 Increase (Decrease) March 31, 2021 March 31, 2020 Better (Worse)
Amount % of Revenues Amount % of Revenues Amount % Amount % of Revenues Amount % of Revenues Amount %
Revenues
Sales of alcoholic beverages $ 7,623 51.8 % $ 19,570 41.6 % $ (11,947 ) (61.0 )% $ 20,273 46.0 % $ 16,919 41.9 % $ 3,354 19.8 %
Sales of food and merchandise 3,452 23.4 % 7,046 15.0 % (3,594 ) (51.0 )% 9,538 21.6 % 6,479 16.0 % 3,059 47.2 %
Service revenues 2,907 19.7 % 17,299 36.8 % (14,392 ) (83.2 )% 11,502 26.1 % 14,348 35.5 % (2,846 ) (19.8 )%
Other 739 5.0 % 3,112 6.6 % (2,373 ) (76.3 )% 2,746 6.2 % 2,680 6.6 % 66 2.5 %
Total revenues 14,721 100.0 % 47,027 100.0 % (32,306 ) (68.7 )% 44,059 100.0 % 40,426 100.0 % 3,633 9.0 %
Operating expenses
Cost of goods sold
Alcoholic beverages sold 1,245 16.3 % 4,015 20.5 % (2,770 ) (69.0 )% 3,730 18.4 % 3,435 20.3 % (295 ) (8.6 )%
Food and merchandise sold 1,125 32.6 % 2,565 36.4 % (1,440 ) (56.1 )% 3,029 31.8 % 2,271 35.1 % (758 ) (33.4 )%
Service and other 20 0.5 % 121 0.6 % (101 ) (83.5 )% 43 0.3 % 76 0.4 % 33 43.4 %
Total cost of goods sold (exclusive of items shown separately below) 2,390 16.2 % 6,701 14.2 % (4,311 ) (64.3 )% 6,802 15.4 % 5,782 14.3 % (1,020 ) (17.6 )%
Salaries and wages 5,421 36.8 % 13,164 28.0 % (7,743 ) (58.8 )% 11,200 25.4 % 12,222 30.2 % 1,022 8.4 %
Selling, general and administrative 8,908 60.5 % 14,895 31.7 % (5,987 ) (40.2 )% 12,618 28.6 % 14,450 35.7 % 1,832 12.7 %
Depreciation and amortization 2,235 15.2 % 2,465 5.2 % (230 ) (9.3 )% 2,117 4.8 % 2,257 5.6 % 140 6.2 %
Other charges (gains), net 424 2.9 % (172 ) (0.4 )% 596 346.5 %
Other charges, net 1,481 3.4 % 8,190 20.3 % 6,709 81.9 %
Total operating expenses 19,378 131.6 % 37,053 78.8 % (17,675 ) (47.7 )% 34,218 77.7 % 42,901 106.1 % 8,683 20.2 %
Income (loss) from operations (4,657 ) (31.6 )% 9,974 21.2 % (14,631 ) (146.7 )% 9,841 22.3 % (2,475 ) (6.1 )% 12,316 497.6 %
Other income (expenses)
Interest expense (2,459 ) (16.7 )% (2,543 ) (5.4 )% (84 ) (3.3 )% (2,364 ) (5.4 )% (2,459 ) (6.1 )% 95 3.9 %
Interest income 80 0.5 % 92 0.2 % (12 ) (13.0 )% 62 0.1 % 85 0.2 % (23 ) (27.1 )%
Unrealized gain (loss) on equity securities 31 0.2 % (38 ) (0.1 )% 69 181.6 %
Non-operating gains (losses), net 431 1.0 % (62 ) (0.2 )% 493 795.2 %
Income (loss) before income taxes (7,005 ) (47.6 )% 7,485 15.9 % (14,490 ) (193.6 )% 7,970 18.1 % (4,911 ) (12.1 )% 12,881 262.3 %
Income tax expense (benefit) (1,437 ) (9.8 )% 1,806 3.8 % (3,243 ) (179.6 )% 1,938 4.4 % (1,418 ) (3.5 )% (3,356 ) (236.7 )%
Net income (loss) $ (5,568 ) (37.8 )% $ 5,679 12.1 % $ (11,247 ) (198.0 )% $ 6,032 13.7 % $ (3,493 ) (8.6 )% $ 9,525 272.7 %

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

2423
Revenues

Consolidated revenues ~~decreased~~increased by ~~$32.3~~approximately $3.6 million, or ~~68.7%~~9.0%, due primarily to ~~lost sales~~the timing of closures caused by the COVID-19 pandemic. ~~No club or Bombshells location qualified for~~Consolidated same-store sales ~~since all~~increased by 26.3%. The 9.0% increase in consolidated revenues was primarily from the 8.7% impact of the same-store increase and a 2.6% increase from new Bombshells units, ~~exceeded~~partially offset by a 2.0% decrease due to closures from COVID-19 and a 0.3% decline in other revenues.
We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the ~~number~~first full quarter of ~~closure days~~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 ~~considered not comparable~~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 ~~prior year.~~renovations or remodels. Acquired units are included in the same-store sales calculation as long as they qualify, based on the definition stated above. Revenues outside of our Nightclubs and Bombshells reportable segments are excluded from same-store sales calculation.

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

For the Three Months For the Three Months
Ended June 30, Ended March 31,
2020 2019 2021 2020
Nightclubs $ 6,013 $ 37,889 $ 30,787 $ 31,367
Bombshells 8,531 8,755 13,135 8,803
Other 177 383 137 256
$ 14,721 $ 47,027 $ 44,059 $ 40,426

~~Changing state and local government restrictions caused~~Nightclubs revenues decreased by ~~COVID-19 have kept our larger~~1.8% for the quarter ended March 31, 2021 compared to the prior-year quarter. For Nightclubs ~~particularly~~that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in ~~Florida and New York,~~the preceding paragraph), sales increased by 3.6%. The remaining decline in revenues reflects lower sales for clubs in states where the number of days closed did not qualify them for ~~most of the quarter. Although our Texas clubs were able to reopen in May, sales were kept to a minimum due to social distancing and occupancy requirements.~~same-store sales.

Bombshells ~~locations were able to reopen in May 2020, but sales were limited~~revenues increased by 49.2%, of which 37.1% was due to ~~indoor dining occupancy restrictions.~~the impact of the same-store sales increase with the remaining 12.1% increase generated by two new locations.

Operating Expenses

Total operating expenses, as a percent of revenues, ~~increased~~decreased to ~~131.6%~~77.7% from ~~78.8%~~106.1% from ~~year-ago,~~last year’s second quarter, with a ~~$17.7~~$8.7 million decrease, or ~~47.7%~~20.2%, which is mainly caused by ~~fixed overhead expenses~~the higher impairment in ~~relation to significantly lower sales.~~the prior year. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold ~~decreased~~increased by ~~$4.3~~$1.0 million, or ~~64.3%~~17.6%, mainly due to ~~COVID-19-related closures and indoor dining occupancy restrictions.~~higher sales in the current quarter. As a percent of total revenues, cost of goods sold increased to ~~16.2%~~15.4% from ~~14.2%~~14.3% mainly due to ~~sales mix. Higher-margin service revenues dropped in~~the sales mix ~~year-over year~~shifting from ~~36.8% to 19.7%.~~higher-margin service revenues.

Salaries and wages decreased by ~~$7.7~~$1.0 million, or ~~58.8%~~8.4%. As a percent of total revenues, salaries and wages were ~~36.8%~~lower at 25.4% from ~~28.0%~~30.2% mainly due to fixed salaries paid on ~~significantly~~ lower sales ~~due to COVID-19.~~during the prior-year quarter.

Selling, general and administrative expenses decreased by ~~approximately $6.0~~$1.8 million, or ~~40.2%~~12.7%, primarily due to decreased audit and legal fees from prior year’s SEC matters and controlled advertising and marketing expenses due to uncertainty brought about by the pandemic. As a percent of total revenues, selling, general and administrative expenses decreased to 28.6% from 35.7% due to the lower expenses from the above-cited reasons leveraged on higher sales ~~activity during~~in the ~~quarter partially offset by fixed overhead costs.~~current quarter.

Our ~~adoption~~total occupancy costs, defined as the sum of ~~ASC 842 as of October 1, 2019 did not have an impact in our results of operations~~lease expense and ~~cash flows~~interest expense (see below), were $3.3 million and $3.5 million for the ~~three months~~quarter ended ~~June 30, 2020. See Note 2~~March 31, 2021 and 2020, respectively. As a percentage of revenue, total occupancy costs were 7.6% and 8.6% during the quarter ended March 31, 2021 and 2020, respectively, primarily due to ~~our unaudited condensed consolidated financial statements.~~higher sales base in the current quarter.

Depreciation and amortization decreased by ~~$230,000,~~$140,000, or ~~9.3%~~6.2% partly due to ~~higher prior-year catch-up depreciation from properties moved out of held-for-sale classification.~~fully depreciated real estate and software assets.

Other charges, net decreased to $1.5 million from $8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million during the quarter ended March 31, 2021 and 2020, respectively.
2524
Other charges/gains, net of $424,000 in net charge during the current quarter compared to a net gain of $172,000 in the prior-year quarter. The current quarter net charge was mainly from approximately $982,000 in impairment charge, partially offset by net gains of $608,000 on sale of one held-for-sale property and another property held and used. Last year’s quarter’s net gain was from the sale of two real estate properties and an aircraft amounting to $265,000, partially offset by $93,000 in insurance loss.

Income (Loss) from Operations

For the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ our consolidated operating margin was ~~(31.6%)~~22.3% and ~~21.2%~~(6.1)%, respectively. The main ~~driver~~drivers for the ~~decrease~~increase in operating margin isare the ~~COVID-19-related closures.~~current quarter’s higher sales and the impairment charges in both quarters.

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

For the Three Months For the Three Months
Ended June 30, Ended March 31,
2020 2019 2021 2020
Nightclubs $ (3,088 ) $ 14,034 $ 10,468 $ 2,284
Bombshells 1,903 686 3,142 688
Other (95 ) (111 ) (139 ) (146 )
General corporate (3,377 ) (4,365 ) (3,630 ) (5,301 )
$ (4,657 ) $ 9,974 $ 9,841 $ (2,475 )

Operating margin for the Nightclubs segment was ~~(51.4%)~~34.0% and ~~37.0%~~7.3% for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, while operating margin for Bombshells was ~~22.3%~~23.9% and 7.8%, respectively. The ~~decrease~~increase in Nightclubs operating margin was mainly due to ~~fixed operating costs and expenses in relation to lower sales from~~last year’s impairment charges as triggered by the ~~pandemic plus the impairment charges.~~pandemic. The increase in Bombshells operating margin was mainly from higher sales and a decrease in pre-opening expenses from several Bombshells openings in ~~the prior-year quarter.~~ prior periods.
25
Excluding ~~impairment charges, amortization of intangibles, settlement of lawsuits, loss on insurance,~~certain items, non-GAAP operating income (loss) and ~~gain on disposal of assets, Nightclubs would have had~~ non-GAAP operating margin ~~of (43.7%) and 36.6% for~~are computed in the ~~three months ended June 30, 2020 and 2019, respectively. Excluding loss on disposal of assets and amortization of intangibles, Bombshells would have had non-GAAP operating margin of 22.5% and 7.8% for~~table below (dollars in thousands). See further discussion in the ~~three months ended June 30, 2020 and 2019.~~“Non-GAAP Financial Measures” section below.
For the Three Months Ended March 31, 2021 For the Three Months Ended March 31, 2020
Nightclubs Bombshells Other Corporate Total Nightclubs Bombshells Other Corporate Total
Income (loss) from operations $ 10,468 $ 3,142 $ (139 ) $ (3,630 ) $ 9,841 $ 2,284 $ 688 $ (146 ) $ (5,301 ) $ (2,475 )
Amortization of intangibles 47 3 29 - 79 57 4 96 - 157
Settlement of lawsuits (4 ) - 5 - 1 - - - - -
Impairment of assets 1,401 - - - 1,401 7,965 245 - - 8,210
Loss (gain) on sale of businesses and assets 14 47 - 30 91 (3 ) - - (4 ) (7 )
Loss (gain) on insurance 32 - - (44 ) (12 ) - - - (13 ) (13 )
Non-GAAP operating income (loss) $ 11,958 $ 3,192 $ (105 ) $ (3,644 ) $ 11,401 $ 10,303 $ 937 $ (50 ) $ (5,318 ) $ 5,872

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

Non-Operating Items

~~Interest expense decreased by $84,000, or 3.3%.~~During the quarter ended March 31, 2021, we received one notice of forgiveness for one PPP loan, which forgave 100% of the PPP loan’s principal and interest amounting to $380,000.

~~Our total occupancy costs, defined as the sum of lease~~Interest expense and interest expense, were $3.5 million in both current-year and prior-year third quarters but due to the significantly lower revenue in the current year, as a percentage of revenue 23.6% and 7.5% during the three months ended June 30, 2020 and 2019, respectively.decreased by $95,000, or 3.9%.

Income Taxes

Income ~~tax~~taxes were an expense of $1.9 million during the quarter ended March 31, 2021 compared to a benefit ~~was~~of $1.4 million during the ~~current-year third~~ quarter ~~compared to an income tax expense of $1.8 million during the prior-year third quarter.~~ended March 31, 2020. The effective income tax rate was an expense of 24.3% and a benefit of ~~20.5%~~28.9% for the quarter ended March 31, 2021 and ~~an expense of 24.1%,~~2020, respectively. ~~We revised our annual forecast of pretax book income for fiscal 2020 which revised our annual effective income tax rate, for which impact was recognized in the current-year third quarter.~~ Our effective tax rate ~~for both years~~ is affected by the ~~estimate of pre-tax accounting~~statutory federal income ~~(loss) for the year,~~tax rate, state taxes, permanent differences, and tax credits, including the FICA tip ~~credit.~~credit, for both years, and the impact of the forgiveness of the PPP loans in the current period, as presented below.
For the Three Months
Ended March 31,
2021 2020
Statutory federal income tax rate 21.0 % 21.0 %
State income taxes, net of federal benefit 7.0 % 4.2 %
Permanent differences (5.9 )% 1.3 %
Tax credits 2.2 % 2.3 %
Effective income tax rate 24.3 % 28.9 %

26
~~Nine~~Six Months Ended ~~June 30, 2020~~March 31, 2021 Compared to ~~Nine~~Six Months Ended ~~June 30, 2019~~March 31, 2020

The following table summarizes our results of operations for the ~~nine~~six months ended ~~June 30, 2020 and 2019~~March 31, 2021 (dollars in thousands):

For the Nine Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019 Increase (Decrease) March 31, 2021 March 31, 2020 Better (Worse)
Amount % of Revenues Amount % of Revenues Amount % Amount % of Revenues Amount % of Revenues Amount %
Revenues
Sales of alcoholic beverages $ 45,285 43.7 % $ 56,366 41.5 % $ (11,081 ) (19.7 )% $ 37,633 45.6 % $ 37,662 42.4 % $ (29 ) (0.1 )%
Sales of food and merchandise 17,378 16.8 % 19,175 14.1 % (1,797 ) (9.4 )% 18,147 22.0 % 13,926 15.7 % 4,221 30.3 %
Service revenues 34,448 33.3 % 51,609 38.0 % (17,161 ) (33.3 )% 21,562 26.1 % 31,541 35.5 % (9,979 ) (31.6 )%
Other 6,430 6.2 % 8,726 6.4 % (2,296 ) (26.3 )% 5,115 6.2 % 5,691 6.4 % (576 ) (10.1 )%
Total revenues 103,541 100.0 % 135,876 100.0 % (32,335 ) (23.8 )% 82,457 100.0 % 88,820 100.0 % (6,363 ) (7.2 )%
Operating expenses
Cost of goods sold
Alcoholic beverages sold 8,826 19.5 % 11,541 20.5 % (2,715 ) (23.5 )% 6,992 18.6 % 7,581 20.1 % 589 7.8 %
Food and merchandise sold 5,917 34.0 % 6,857 35.8 % (940 ) (13.7 )% 5,918 32.6 % 4,846 34.8 % (1,072 ) (22.1 )%
Service and other 205 0.5 % 307 0.5 % (102 ) (33.2 )% 96 0.4 % 131 0.4 %
35
26.7 %
Total cost of goods sold (exclusive of items shown separately below) 14,948 14.4 % 18,705 13.8 % (3,757 ) (20.1 )% 13,006 15.8 % 12,558 14.1 % (448 ) (3.6 )%
Salaries and wages 30,866 29.8 % 37,168 27.4 % (6,302 ) (17.0 )% 22,686 27.5 % 25,445 28.6 % 2,759 10.8 %
Selling, general and administrative 39,889 38.5 % 43,263 31.8 % (3,374 ) (7.8 )% 24,770 30.0 % 30,981 34.9 % 6,211 20.0 %
Depreciation and amortization 6,696 6.5 % 6,718 4.9 % (22 ) (0.3 )% 4,140 5.0 % 4,461 5.0 % 321 7.2 %
Other charges (gains), net 8,588 8.3 % (2,250 ) (1.7 )% 10,838 (481.7 )%
Other charges, net 1,431 1.7 % 8,164 9.2 % 6,733 82.5 %
Total operating expenses 100,987 97.5 % 103,604 76.2 % (2,617 ) (2.5 )% 66,033 80.1 % 81,609 91.9 % 15,576 19.1 %
Income from operations 2,554 2.5 % 32,272 23.8 % (29,718 ) (92.1 )% 16,424 19.9 % 7,211 8.1 % 9,213 127.8 %
Other income (expenses)
Interest expense (7,403 ) (7.1 )% (7,709 ) (5.7 )% (306 ) (4.0 )% (4,798 ) (5.8 )% (4,944 ) (5.6 )% 146 3.0 %
Interest income 263 0.3 % 218 0.2 % 45 20.6 % 122 0.1 % 183 0.2 % (61 ) (33.3 )%
Unrealized loss on equity securities (103 ) (0.1 )% (408 ) (0.3 )% 305 74.8 %
Income (loss) before income taxes (4,689 ) (4.5 )% 24,373 17.9 % (29,062 ) (119.2 )%
Income tax expense (benefit) (1,262 ) (1.2 )% 5,547 4.1 % (6,809 ) (122.8 )%
Net income (loss) $ (3,427 ) (3.3 )% $ 18,826 13.9 % $ (22,253 ) (118.2 )%
Non-operating gains (losses), net 5,347 6.5 % (134 ) (0.2 )% 5,481 4,090.3 %
Income before income taxes 17,095 20.7 % 2,316 2.6 % 14,779 638.1 %
Income tax expense 1,554 1.9 % 175 0.2 % (1,379 ) (788.0 )%
Net income $ 15,541 18.8 % $ 2,141 2.4 % $ 13,400 625.9 %

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

27
Revenues

Consolidated revenues decreased by ~~$32.3~~approximately $6.4 million, or ~~23.8%~~7.2%, ~~for~~due primarily to the ~~nine months ended June 30, 2020 compared to prior year~~closures caused by the COVID-19 pandemic. Consolidated same-store sales increased by 6.9%. The 7.2% decrease in consolidated revenues was primarily from the 13.5% decrease due to closures from COVID-19 and a 0.1% decline in other revenues, partially offset by the ~~COVID-19 pandemic.~~3.4% impact of the same-store increase and a 3.0% increase from new Bombshells units.
We calculate same-store sales by comparing year-over-year revenues from nightclubs and restaurants/sports bars starting in the first full quarter of 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 Nine Months
Ended June 30,
2020 2019
Nightclubs $ 75,239 $ 112,664
Bombshells 27,684 22,295
Other 618 917
$ 103,541 $ 135,876
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For the Six Months
Ended March 31,
2021 2020
Nightclubs $ 55,984 $ 69,226
Bombshells 26,141 19,153
Other 332 441
$ 82,457 $ 88,820

Nightclubs ~~total~~revenues decreased by 19.1% for the six-month period ended March 31, 2021 compared to the prior-year period. For Nightclubs that were open enough days to qualify for same-store sales (refer to the definition of same-store sales in the preceding paragraph), sales decreased by 4.4%. The remaining decline in revenues reflects lower sales for clubs in states where the ~~nine months ended June 30, 2020 declined by 33.2% compared to a year ago because~~number of ~~COVID-19-related closures since March 2020.~~days closed did not qualify them for same-store sales.

Bombshells ~~total sales for the nine months ended June 30, 2020~~revenues increased by ~~24.2% compared to a year ago mainly due to sales from two new Bombshells location, partially offset by closures~~36.5%, of which 22.5% was due to the ~~COVID-19 pandemic.~~impact of the same-store sales increase with the remaining 14.0% increase generated by two new locations.

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Operating Expenses

Total operating expenses, as a percent of revenues, ~~increased~~decreased to ~~97.5%~~80.1% from ~~76.2%~~91.9% from ~~year-ago,~~the comparable period last year, with a ~~$2.6~~$15.6 million decrease, or ~~2.5%.~~19.1%, which is mainly caused by the higher impairment in the prior year, a $6.2 million decrease in selling, general and administrative expenses, and a $2.8 million decrease in salaries and wages. Significant contributors to the changes in operating expenses are explained below.

Cost of goods sold increased by $448,000, or 3.6%, mainly due to a shift in sales mix from higher-margin service revenues to alcohol and food sales in the current six-month period. As a percent of total revenues, cost of goods sold increased to 15.8% from 14.1% mainly due to the shift in sales mix.
Salaries and wages decreased by ~~$3.8~~$2.8 million, or ~~20.1%~~10.8%, mainly due to COVID-19-related closures. As a percent of total revenues, ~~cost of goods sold increased to 14.4% from 13.8% mainly due to perishable inventory spoilage and sales mix. Higher-margin service revenues dropped in sales mix year-over year from 38.0% to 33.3%.~~
~~Salaries and wages decreased by $6.3 million, or 17.0%. As a percent of total revenues,~~ salaries and wages were ~~29.8%~~lower at 27.5% from ~~27.4%~~28.6% mainly due to fixed salaries paid on ~~significantly~~ lower sales ~~due to COVID-19.~~during the prior-year period.

Selling, general and administrative expenses decreased by ~~$3.4~~$6.2 million, or ~~7.8%~~20.0%, primarily due to decreased ~~sales activity during the nine-month period partially offset by fixed overhead costs.~~
~~Our adoption of ASC 842 as of October 1, 2019 did not have an impact in our results of operations~~audit and ~~cash flows for the nine months ended June 30, 2020. See Note 2 to our unaudited condensed consolidated financial statements.~~
~~Other charges/gains, net of $8.6 million in net charge in the current year compared to a net gain of $2.3 million in the~~legal fees from prior year. The current year net charge was mainly from approximately $9.2 million in impairment charges, partially offset by $645,000 of net gains in the sale of real estate properties. Last year benefited from the gain on the sale of several real estate properties amounting to $2.5 million.
~~Income from Operations~~
~~For the nine months ended June 30, 2020~~year’s SEC matters, controlled advertising and ~~2019, our operating margin was 2.5% and 23.8%, respectively. The main driver for the decrease in operating margin is the COVID-19-related closures.~~
~~Segment contribution to income from operations is presented in the table below (in thousands):~~
For the Nine Months
Ended June 30,
2020 2019
Nightclubs $ 13,002 $ 44,499
Bombshells 4,166 1,543
Other (480 ) (406 )
General corporate (14,134 ) (13,364 )
$ 2,554 $ 32,272
28
Operating margin for the Nightclubs segment was 17.3% and 39.5% for the nine months ended June 30, 2020 and 2019, respectively, while operating margin for Bombshells was 15.0% and 6.9%, respectively. The decrease in Nightclubs operating margin was mainlymarketing expenses due to ~~fixed operating costs~~uncertainty brought about by the pandemic, and ~~expenses in relation~~lower taxes and permits and charge card fees due to lower ~~sales~~sales. As a percent of total revenues, selling, general and administrative expenses decreased to 30.0% from the pandemic plus the impairment charges. The increase in Bombshells operating margin was caused by early gains from reduction in pre-opening expenses partially offset by COVID-19-related closures plus the impairment charges. Excluding impairment charges, amortization of intangibles, gain on disposal of assets, gain on insurance34.9% due to legal and ~~settlement of lawsuits, Nightclubs would have had non-GAAP operating margin of 28.6%~~accounting fees and ~~37.6% for the nine months ended June 30, 2020~~advertising and 2019, respectively. Excluding impairment charges, amortization of intangibles, settlement of lawsuits and loss on sale of assets, Bombshells would have had non-GAAP operating margin of 16.0% and 6.9% for the nine months ended June 30, 2020 and 2019, respectively.
~~Non-Operating Items~~
~~Interest expense decreased by $306,000, or 4.0%.~~marketing expenses.

Our total occupancy costs, defined as the sum of lease expense and interest expense ~~decreased to $10.5~~(see below), were $6.7 million ~~from $10.7~~and $7.0 million infor the ~~prior year, but due to the significantly lower revenue in the current year, our total occupancy cost as~~six months ended March 31, 2021 and 2020, respectively. As a percentage of revenue, ~~increased~~total occupancy costs were 8.2% and 7.9% during the six months ended March 31, 2021 and 2020, respectively, primarily due to ~~10.1%~~lower sales base in the current six-month period.
Depreciation and amortization decreased by $321,000, or 7.2% partly due to fully depreciated real estate and software assets.
Other charges, net decreased to $1.4 million from ~~7.8%~~$8.2 million, which was primarily caused by impairment charges of $1.4 million and $8.2 million during the six months ended March 31, 2021 and 2020, respectively.
Income from Operations
For the six months ended March 31, 2021 and 2020, our consolidated operating margin was 19.9% and 8.1%, respectively. The main drivers for the increase in operating margin are the current period’s lower sales and gain on debt extinguishment, and the prior-year period’s higher impairment charges.
Segment contribution to income (loss) from operations is presented in the table below (in thousands):
For the Six Months
Ended March 31,
2021 2020
Nightclubs $ 18,963 $ 16,040
Bombshells 5,859 2,259
Other (214 ) (331 )
General corporate (8,184 ) (10,757 )
$ 16,424 $ 7,211
Operating margin for the Nightclubs segment was 33.9% and 23.2% for the six months ended March 31, 2021 and 2020, respectively, while operating margin for Bombshells was 22.4% and 11.8%, respectively. The increase in Nightclubs operating margin was mainly due to last year’s impairment charges as triggered by the pandemic. The increase in Bombshells operating margin was mainly from higher sales and a decrease in pre-opening expenses from several Bombshells openings in prior periods.
29
Excluding certain items, non-GAAP operating income (loss) and non-GAAP operating margin are computed in the table below (dollars in thousands). See further discussion in the “Non-GAAP Financial Measures” section below.
For the Six Months Ended March 31, 2021 For the Six Months Ended March 31, 2020
Nightclubs Bombshells Other Corporate Total Nightclubs Bombshells Other Corporate Total
Income (loss) from operations $ 18,963 $ 5,859 $ (214 ) $ (8,184 ) $ 16,424 $ 16,040 $ 2,259 $ (331 ) $ (10,757 ) $ 7,211
Amortization of intangibles 94 7 57 - 158 114 8 191 - 313
Settlement of lawsuits 114 34 5 - 153 24 - - - 24
Impairment of assets 1,401 - - - 1,401 7,965 245 - - 8,210
Loss (gain) on sale of businesses and assets 14 47 - 25 86 - - - (37 ) (37 )
Gain on insurance (165 ) - - (44 ) (209 ) (20 ) - - (13 ) (33 )
Non-GAAP operating income (loss) $ 20,421 $ 5,947 $ (152 ) $ (8,203 ) $ 18,013 $ 24,123 $ 2,512 $ (140 ) $ (10,807 ) $ 15,688

GAAP operating margin 33.9 % 22.4 % (64.5 )% (9.9 )% 19.9 % 23.2 % 11.8 % (75.1 )% (12.1 )% 8.1 %
Non-GAAP operating margin 36.5 % 22.7 % (45.8 )% (9.9 )% 21.8 % 34.8 % 13.1 % (31.7 )% (12.2 )% 17.7 %
Non-Operating Items
During the six months ended March 31, 2021, we received 11 notices of forgiveness for a PPP loan, which forgave 100% of the PPP loans’ principal and interest amounting to $5.3 million.
Interest expense decreased by $146,000, or 3.0%.

Income Taxes

Income tax ~~benefit~~expense was ~~$1.3~~$1.6 million during the ~~current nine-month period~~six months ended March 31, 2021 compared to ~~an income tax expense of $5.5 million~~$175,000 during the ~~prior year.~~six months ended March 31, 2020. The effective income tax rate was ~~a benefit of 26.9%~~9.1% and ~~an expense of 22.8%,~~7.6% for the six months ended March 31, 2021 and 2020, respectively. ~~We revised our annual forecast of pretax book income for fiscal 2020 due to the forecasted financial impact of the COVID-19 pandemic, which revised our annual effective income tax rate.~~ Our effective tax rate ~~for both years~~ is affected by the ~~estimate of pre-tax accounting~~statutory federal income ~~(loss) for the year,~~tax rate, state taxes, permanent differences, and tax credits, including the FICA tip ~~credit.~~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 Six Months
Ended March 31,
2021 2020
Statutory federal income tax rate 21.0 % 21.0 %
State income taxes, net of federal benefit 5.0 % 4.5 %
Permanent differences (7.1 )% 0.3 %
Change in valuation allowance (7.5 )% -
Tax credits (2.3 )% (18.3 )%
Effective income tax rate 9.1 % 7.6 %
30

Non-GAAP Financial Measures

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

Non-GAAP Operating Income and Non-GAAP Operating Margin. We calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: (a) amortization of intangibles, (b) gains or losses on sale of businesses and assets, (c) gains or losses on insurance, (d) impairment of assets, and (e) settlement of ~~lawsuits, and (e) impairment of assets.~~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) impairment of assets, (f) settlement of lawsuits, ~~(f) impairment of assets,~~(g) gain on debt extinguishment, and ~~(g)~~(h) the income tax effect of the above described adjustments. Included in the income tax effect of the above adjustments is the net effect of the non-GAAP provision for income taxes, calculated at ~~26.9%~~24.2% and ~~22.8%~~7.6% effective tax rate of the pre-tax non-GAAP income before taxes for the ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 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) impairment of assets, (h) settlement of lawsuits, and ~~(h) impairment of assets.~~(i) gain on debt extinguishment. We believe that adjusting for such items helps management and investors better understand our operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

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

2931

The following tables present our non-GAAP performance measures for the three and ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands, except per share amounts and percentages):

For the Three Months For the Nine Months For the Three Months For the Six Months
Ended June 30, Ended June 30, Ended March 31, Ended March 31,
2020 2019 2020 2019 2021 2020 2021 2020
Reconciliation of GAAP net income (loss) to Adjusted EBITDA
Net income (loss) attributable to RCIHH
common stockholders $ (5,474 ) $ 5,638 $ (3,292 ) $ 18,717 $ 6,091 $ (3,452 ) $ 15,734 $ 2,182
Income tax expense (benefit) (1,437 ) 1,806 (1,262 ) 5,547 1,938 (1,418 ) 1,554 175
Interest expense, net 2,379 2,451 7,140 7,491 2,302 2,374 4,676 4,761
Settlement of lawsuits 50 - 74 144 1 - 153 24
Impairment of assets 982 - 9,192 - 1,401 8,210 1,401 8,210
Gain on sale of businesses and assets (608 ) (265 ) (645 ) (2,487 )
Unrealized loss (gain) on equity securities (31 ) 38 103 408
Loss (gain) on insurance - 93 (33 ) 93
Loss (gain) on sale of businesses and assets 91 (7 ) 86 (37 )
Gain on debt extinguishment (380 ) - (5,329 ) -
Unrealized loss on equity securities 34 62 67 134
Gain on insurance (12 ) (13 ) (209 ) (33 )
Depreciation and amortization 2,235 2,465 6,696 6,718 2,117 2,257 4,140 4,461
Adjusted EBITDA $ (1,904 ) $ 12,226 $ 17,973 $ 36,631 $ 13,583 $ 8,013 $ 22,273 $ 19,877

Reconciliation of GAAP net income (loss) to non-GAAP net income (loss)
Net income (loss) attributable to RCIHH common stockholders $ (5,474 ) $ 5,638 $ (3,292 ) $ 18,717 $ 6,091 $
(3,452
) $ 15,734 $ 2,182
Amortization of intangibles 149 165 462 474 79 157 158 313
Settlement of lawsuits 50 - 74 144 1 - 153 24
Impairment of assets 982 - 9,192 - 1,401 8,210 1,401 8,210
Gain on sale of businesses and assets (608 ) (265 ) (645 ) (2,487 )
Unrealized loss (gain) on equity securities (31 ) 38 103 408
Loss (gain) on insurance - 93 (33 ) 93
Loss (gain) on sale of businesses and assets 91 (7 ) 86 (37 )
Gain on debt extinguishment (380 ) - (5,329 ) -
Unrealized loss on equity securities 34 62 67 134
Gain on insurance (12 ) (13 ) (209 ) (33 )
Net income tax effect (1,840 ) (6 ) (2,499 ) 327 (522 ) (633 ) (1,741 ) (659 )
Non-GAAP net income (loss) $ (6,772 ) $ 5,663 $ 3,362 $ 17,676 $ 6,783 $ 4,324 $ 10,320 $ 10,134

Reconciliation of GAAP diluted earnings (loss) per share to non-GAAP diluted earnings (loss) per share
Diluted shares 9,125 9,620 9,224 9,671 9,000 9,225 9,010 9,274
GAAP diluted earnings (loss) per share $ (0.60 ) $ 0.59 $ (0.36 ) $ 1.94 $ 0.68 $ (0.37 ) $ 1.75 $ 0.24
Amortization of intangibles 0.02 0.02 0.05 0.05 0.01 0.02 0.02 0.03
Settlement of lawsuits 0.01 - 0.01 0.01 0.00 - 0.02 0.00
Impairment of assets 0.11 - 1.00 - 0.16 0.89 0.16 0.89
Gain on sale of businesses and assets (0.07 ) (0.03 ) (0.07 ) (0.26 )
Unrealized loss (gain) on equity securities (0.00 ) 0.00 0.01 0.04
Loss (gain) on insurance - 0.01 (0.00 ) 0.01
Loss (gain) on sale of businesses and assets 0.01 (0.00 ) 0.01 (0.00 )
Gain on debt extinguishment (0.04 ) - (0.59 ) -
Unrealized loss on equity securities 0.00 0.01 0.01 0.01
Gain on insurance (0.00 ) (0.00 ) (0.02 ) (0.00 )
Net income tax effect (0.20 ) (0.00 ) (0.27 ) 0.03 (0.06 ) (0.07 ) (0.19 ) (0.07 )
Non-GAAP diluted earnings (loss) per share $ (0.74 ) $ 0.59 $ 0.36 $ 1.83
Non-GAAP diluted earnings per share $ 0.75 $ 0.47 $ 1.15 $ 1.09

Reconciliation of GAAP operating income (loss) to non-GAAP operating income (loss)
Income (loss) from operations $ (4,657 ) $ 9,974 $ 2,554 $ 32,272 $ 9,841 $ (2,475 ) $ 16,424 $ 7,211
Amortization of intangibles 149 165 462 474 79 157 158 313
Settlement of lawsuits 50 - 74 144 1 - 153 24
Impairment of assets 982 - 9,192 - 1,401 8,210 1,401 8,210
Loss (gain) on insurance - 93 (33 ) 93
Gain on sale of businesses and assets (608 ) (265 ) (645 ) (2,487 )
Gain on insurance (12 ) (13 ) (209 ) (33 )
Loss (gain) on sale of businesses and assets 91 (7 ) 86 (37 )
Non-GAAP operating income (loss) $ (4,084 ) $ 9,967 $ 11,604 $ 30,496 $ 11,401 $ 5,872 $ 18,013 $ 15,688

Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin (31.6 )% 21.2 % 2.5 % 23.8 % 22.3 % (6.1 )% 19.9 % 8.1 %
Amortization of intangibles 1.0 % 0.4 % 0.4 % 0.3 % 0.2 % 0.4 % 0.2 % 0.4 %
Settlement of lawsuits 0.3 % - 0.1 % 0.1 % 0.0 % - 0.2 % 0.0 %
Impairment of assets 6.7 % - 8.9 % - 3.2 % 20.3 % 1.7 % 9.2 %
Loss (gain) on insurance - 0.2 % (0.0 )% 0.1 %
Gain on sale of businesses and assets (4.1 )% (0.6 )% (0.6 )% (1.8 )%
Gain on insurance (0.0 )% (0.0 )% (0.3 )% 0.0 %
Loss (gain) on sale of businesses and assets 0.2 % (0.0 )% 0.1 % 0.0 %
Non-GAAP operating margin (27.7 )% 21.2 % 11.2 % 22.4 % 25.9 % 14.5 % 21.8 % 17.7 %

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

The adjustments to reconcile net income attributable to RCIHH common stockholders to non-GAAP net income exclude the impact of adjustments related to noncontrolling interests, which is immaterial.

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Liquidity and Capital Resources

At ~~June 30, 2020,~~March 31, 2021, our cash and cash equivalents were approximately ~~$14.8~~$20.2 million compared to ~~$14.1~~$15.6 million at September 30, ~~2019.~~2020. Because of the large volume of cash we handle, we have very stringent cash controls. As of ~~June 30, 2020,~~March 31, 2021, we had ~~negative~~positive working capital of ~~$6.7 million~~$175,000 compared to a negative working capital of ~~$2.3~~$5.9 million as of September 30, ~~2019,~~2020, excluding ~~net~~ assets held for sale (net of ~~$2.0~~associated liabilities of $3.2 million and ~~$2.9~~$0, respectively) amounting to $4.2 million and $0 as of ~~June 30, 2020~~March 31, 2021 and September 30, ~~2019,~~2020, 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 iswas to open locations and operate 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 get open, and their ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets.guidelines. Based upon the ~~small sampling~~current state of ~~early~~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.~~terms.

~~We now currently forecast our cash flows to fall significantly lower than the levels that we initially targeted.~~ 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; *
● ~~Pay cut~~Temporarily enacted a pay reduction for all remaining salaried and hourly employees and ~~deferral of~~deferred board of director compensation; *
● Deferred or modified certain fixed monthly expenses such as insurance, rent, and taxes, among others;
● ~~Canceled~~Temporarily reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations coverage, among others.
* As of the date of this report, we have recalled all furloughed employees and reinstated the pay for all salaried and hourly employees.

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

As of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our ~~businesses due to the uncertainty about the spread of the virus.~~businesses. Lower sales, as caused by ~~social distancing~~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~~a number of our locations depending on changing government ~~mandates. As of the release of this report, we have reopened many of our club~~mandates, including operating hour and ~~Bombshells locations with~~ limited occupancy ~~but some of our bigger clubs are still closed.~~restrictions.

We have not recently raised capital through the issuance of equity securities. Instead, we use debt financing to lower our overall cost of capital and increase our return on stockholders’ equity. We have a history of borrowing funds in private transactions and from sellers in acquisition transactions and 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, the near-term outlook for our business remains strong, and we~~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 Nine Months For the Six Months
Ended June 30, Ended March 31,
2020 2019 2021 2020
Operating activities $ 12,147 $ 28,414 $ 17,246 $ 11,981
Investing activities (1,024 ) (25,608 ) (6,355 ) (3,870 )
Financing activities (10,425 ) (9,576 ) (6,340 ) (12,383 )
Net increase (decrease) in cash and cash equivalents $ 698 $ (6,770 ) $ 4,551 $ (4,272 )

Cash Flows from Operating Activities

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

For the Nine Months For the Six Months
Ended June 30, Ended March 31,
2020 2019 2021 2020
Net income (loss) $ (3,427 ) $ 18,826
Net income $ 15,541 $ 2,141
Depreciation and amortization 6,696 6,718 4,140 4,461
Deferred income tax expense (benefit) (1,517 ) 1,237
Deferred income tax benefit - (1,155 )
Gain on debt extinguishment (5,298 ) -
Impairment of assets 9,192 - 1,401 8,210
Net change in operating assets and liabilities (51 ) 3,324 712 (2,695 )
Other 1,254 (1,691 ) 750 1,019
Net cash provided by operating activities $ 12,147 $ 28,414 $ 17,246 $ 11,981

Net cash provided by operating activities ~~decreased~~increased from year to year due primarily to ~~the impact of the COVID-19 pandemic~~higher income from operations and ~~higher~~lower income taxes paid, partially offset by ~~lower~~higher interest expense paid.

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Cash Flows from Investing Activities

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

For the Nine Months
Ended June 30,

For the Six Months
Ended March 31,

2020 2019 2021 2020
Payments for property and equipment and intangible assets $ (5,565 ) $ (16,901 ) $ (6,718 ) $ (5,323 )
Acquisition of businesses, net of cash acquired - (13,500 )
Proceeds from sale of businesses and assets 2,041 5,106 8 105
Proceeds from insurance 945 - 294 945
Proceeds from notes receivable 1,555 107
Issuance of note receivable - (420 )
Proceeds from note receivable 61 403
Net cash used in investing activities $ (1,024 ) $ (25,608 ) $ (6,355 ) $ (3,870 )

Following is a breakdown of our payments for property and equipment and intangible assets for the ~~nine~~six months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands):

For the Nine Months
Ended June30, For the Six Months
Ended March 31,
2020 2019 2021 2020
New facilities, equipment and software $ 3,454 $ 14,829
New facilities, equipment and intangible assets $ 4,127 $ 3,212
Maintenance capital expenditures 2,111 2,072 2,591 2,111
Total capital expenditures $ 5,565 $ 16,901 $ 6,718 $ 5,323

~~The capital~~Capital expenditures for new facilities during the ~~nine~~six months ended ~~June 30,~~March 31, 2021 were composed primarily of real estate and construction of one new Bombshells location, a newly renovated club that was damaged by hurricane, and a liquor license purchase. Capital expenditures for new facilities during the six months ended March 31, 2020 were composed primarily of construction and development costs for two new Bombshells locations that opened in the first and ~~the rehabilitation~~second quarters of a club that was damaged by fire, while the capital expenditures during the nine months ended June 30, 2019 were composed primarily of construction and development costs for four new Bombshells locations.fiscal 2020. 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.

~~Prior year acquisitions of $13.5 million relate to $7.5 million cash paid on the Pittsburgh club acquisition and the $6.0 million cash paid on the Chicago club acquisition.~~
Cash Flows from Financing Activities

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

For the Nine Months
Ended June 30,
2020 2019
Proceeds from debt obligations $ 6,503 $ 12,330
Payments on debt obligations (7,489 ) (18,634 )
Purchase of treasury stock (8,488 ) (2,364 )
Payment of dividends (920 ) (867 )
Payment of loan origination costs - (20 )
Distribution to noncontrolling interests (31 ) (21 )
Net cash used in financing activities $ (10,425 ) $ (9,576 )
~~Included in the $6.5 million proceeds from debt obligations for the nine months ended June 30, 2020 are $5.4 million in PPP loans as provided by the CARES Act.~~
For the Six Months
Ended March 31,
2021 2020
Proceeds from debt obligations $ 2,176 $ 880
Payments on debt obligations (5,977 ) (4,097 )
Purchase of treasury stock (1,794 ) (8,488 )
Payment of dividends (720 ) (647 )
Payment of loan origination costs (25 ) -
Distribution to noncontrolling interests - (31 )
Net cash used in financing activities $ (6,340 ) $ (12,383 )

We purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the ~~nine months ended June 30, 2020, while we purchased 102,113 shares of our common stock at an average price of $23.15 during the~~ same period last year. We paid quarterly dividends of $0.04 per share during the six months ended March 31, 2021 compared to $0.03 per share ~~during each of~~in the ~~current-~~first quarter and ~~prior-year quarters, except~~$0.04 in the second quarter ~~of 2020 where we paid $0.04 per share.~~during 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 ~~$166,000~~$17.2 million and ~~$12.1~~$12.0 million during the ~~three and nine~~six months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $7.4 million and $28.4 million during the three and nine months ended June 30, 2019,~~ respectively. Maintenance capital expenditures were $0$2.6 million and $2.1 million during the ~~three and nine~~six months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $955,000 and $2.1 million during the three and nine months ended June 30, 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 Nine Months For the Six Months
Ended June 30, Ended March 31,
2020 2019 2021 2020
Net cash provided by operating activities $ 12,147 $ 28,414 $ 17,246 $ 11,981
Less: Maintenance capital expenditures 2,111 2,072 2,591 2,111
Free cash flow $ 10,036 $ 26,342 $ 14,655 $ 9,870

Our free cash flow for the current ~~year decreased~~six-month period increased by ~~61.9%~~48.5% compared to the comparable prior-year period primarily due to ~~the impact of the COVID-19 pandemic~~higher income from operations and lower income taxes paid, partially offset by higher interest expense paid and higher maintenance capital ~~expenditures on remodeling of an older Bombshells unit and on upgrades in our Miami clubs in preparation for the pro football championship.~~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.

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The following table presents a summary of such indicators for the ~~nine~~six months ended ~~June 30~~March 31 (in thousands, except percentages):

Increase Increase Increase Increase
2020 (Decrease) 2019 (Decrease) 2018 2021 (Decrease) 2020 (Decrease) 2019

Sales of alcoholic beverages $ 45,285 (19.7 )% $ 56,366 6.7 % $ 52,835 $ 37,633 (0.1 )% $ 37,662 2.4 % $ 36,796
Sales of food and merchandise 17,378 (9.4 )% 19,175 13.4 % 16,906 18,147 30.3 % 13,926 14.8 % 12,129
Service revenues 34,448 (33.3 )% 51,609 6.8 % 48,338 21,562 (31.6 )% 31,541 (8.1 )% 34,310
Other 6,430 (26.3 )% 8,726 24.8 % 6,993 5,115 (10.1 )% 5,691 1.4 % 5,614
Total revenues 103,541 (23.8 )% 135,876 8.6 % 125,072 82,457 (7.2 )% 88,820 (0.0 )% 88,849
Net cash provided by operating activities $ 12,147 (57.2 )% $ 28,414 26.8 % $ 22,411 $ 17,246 43.9 % $ 11,981 (42.9 )% $ 20,971
Adjusted EBITDA* $ 17,973 (50.9 )% $ 36,631 3.4 % $ 35,432 $ 22,273 12.1 % $ 19,877 (18.6 )% $ 24,405
Free cash flow* $ 10,036 (61.9 )% $ 26,342 28.1 % $ 20,564 $ 14,655 48.5 % $ 9,870 (50.3 )% $ 19,854
Long-term debt (end of period) $ 142,736 (4.7 )% $ 146,579 11.7 % $ 131,255
Debt (end of period) $ 132,412 (5.7 )% $ 140,440 (6.3 )% $ 149,818

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

Share Repurchase

We purchased 74,659 shares of our common stock at an average price of $24.03 during the six months ended March 31, 2021, while we purchased 465,390 shares of our common stock at an average price of $18.24 during the ~~nine months ended June 30, 2020, while we purchased 102,113 shares of our common stock at an average price of $23.15 during the~~ same period last year. ~~In February 2020, the Company’s Board of Directors authorized an additional $10.0 million to repurchase the Company’s common stock.~~ As of ~~June 30, 2020,~~March 31, 2021, we have ~~$11.8~~approximately $9.0 million remaining to purchase additional ~~shares under our share repurchase program.~~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.

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Seasonality

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

Capital Allocation Strategy

Our capital allocation strategy provides us with disciplined guidelines on how we should use our free cash flows; provided however, that we may deviate from this strategy if ~~the circumstances warrant.~~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 ~~buying back~~acquiring or developing our own ~~stock if~~clubs or restaurants that we believe have the ~~after-tax yield~~potential to provide a minimum cash on ~~free~~ cash ~~flow is above 10%;~~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 ~~acquiring or developing~~buying back our own ~~clubs or restaurants that we believe have~~stock if the ~~potential to provide a minimum~~after-tax yield on free cash ~~on cash return of 25%-33%, absent an otherwise strategic rationale;~~flow is above 10%;

● We consider paying down our most expensive debt if it makes sense on a tax adjusted basis, or there is an otherwise strategic rationale.

Growth Strategy

~~We believe that our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential.~~ Our growth strategy involves the following: (i) to acquire existing units in locations that are consistent with our growth and income targets and which appear receptive to the upscale club formula we have developed; (ii) to open new units after market analysis; (iii) to franchise our Bombshells brand; (iv) to form joint ventures or partnerships to reduce start-up and operating costs, with us contributing equity in the form of our brand name and management expertise; (v) to develop new club concepts that are consistent with our management and marketing skills; (vi) to develop and open our restaurant concepts as our capital and manpower allow; and (vii) to control the real estate in connection with club operations, although some units may be in leased premises.

Nightclubs
We believe that ~~Bombshells~~our nightclub operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. All ten of the existing Bombshells as of June 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.
~~We opened two new Bombshells units during the current year, one during the first quarter ended December 31, 2019, and another during the second quarter ended March 31, 2020.~~
On November 5, 2019, we announced that our subsidiaries have 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.

Bombshells
We believe that Bombshells can grow organically and through careful entry into markets and demographic segments with high growth potential. All ten of the existing Bombshells as of March 31, 2021 are located in Texas. Part of our growth strategy is to continue to appeal to men, women, families, friends, singles, couples, and millennials through better quality of food, service and experience that is more upscale than a traditional sports bar.
We continue to search for suitable markets where we can open new Bombshells and are currently in the process of development in several of these locations. We have also increased our efforts on Bombshells franchising and have recently signed our first franchisee for Bombshells restaurants in the San Antonio, Texas area.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of ~~June 30, 2020,~~March 31, 2021, there were no material changes to the information provided in Item 7A of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, ~~2019.~~2020.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that the information required to be filed or submitted with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management of the company with the participation of its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2020,~~March 31, 2021, an evaluation was performed under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on their evaluation, they have concluded that our disclosure controls and procedures were not effective as of ~~June 30, 2020.~~March 31, 2021. This determination is based on the previously reported material weakness management previously identified in our internal control over financial reporting, as described below. We are in the process of remediating the material weakness in our internal control, as described below. We believe the completion of these processes should remedy our disclosure controls and procedures. We will continue to monitor these issues.

Previously Reported Material Weakness in Internal Control Over Financial Reporting

In our Annual Report for the year ended September 30, ~~2019,~~2020, filed with the SEC on ~~February 13,~~December 14, 2020, management concluded that our internal control over financial reporting was not effective as of September 30, ~~2019.~~2020. In the evaluation, management identified a material weakness in internal control related to ~~ineffective financial statement close~~the proper design and ~~reporting~~implementation of controls ~~in the areas of management~~over our income tax provision, specifically over management’s review of ~~financial statement information, independent review of journal entries, disclosure of related party transactions, and accounting for loss contingencies.~~the income tax provision.

Remediation Efforts to Address Material Weakness

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

~~To address~~Management will enhance our risk assessment process over the ~~material weakness,~~design and implementation of internal controls over the income tax provision, including enhanced review controls to be performed by senior accounting management. In addition, management has ~~completed, or is~~retained the services of a new third-party income tax consultant to assist in the ~~process of:~~preparation and review of the income tax provision.

● ~~developing policies and procedures to enhance the precision of management review of financial statement information;~~
● ~~implementing policies and procedures to enhance independent review of journal entries;~~
● ~~developing and implementing procedures to ensure the completeness of related party disclosures; and~~
● ~~developing and implementing procedures related to the identification and accounting for loss contingencies.~~
~~We believe~~It is our belief that these actions will effectively remediate the existing material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control Over Financial Reporting

Other than as described above, no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~June 30, 2020~~March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

3537

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019,~~2020, except for such risks and uncertainties that may result from the additional disclosure in the “Legal Matters” section within Note 10 of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q, which information is incorporated herein by reference, as well as such risks and uncertainties associated with ~~the COVID-19 pandemic,~~franchising operations, as disclosed below. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition or results of operations.

~~The novel coronavirus (COVID-19) pandemic has disrupted~~We face a variety of risks associated with doing business with franchisees and ~~is expected to continue to disrupt our business, which has and could continue to materially affect our operations, financial condition and results of operations for an extended period of time.~~licensees
.
The COVID-19 pandemic has had an adverse effect that is material on our business. The COVID-19 pandemic, federal, state and local government responses to COVID-19, our customers’ responses to the pandemic, and our Company’s responses to the pandemic have all disrupted and will continue to disrupt our business. In the United States, as well as globally, individuals are being encouraged to practice social distancing, restricted from gathering in groups and, in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 pandemic and these changing conditions, we temporarily closed all of our clubs and restaurants on March 18, 2020. We furloughed club and restaurant employees, except for a limited number of unit managers, and implemented cost savings measures throughout our operations. We have since reopened many of our club and Bombshells locations with limited occupancy but some of our bigger clubs are still closed. The COVID-19 pandemic’s impact on the economy in general could also adversely affect our customers’ financial condition, resulting in reduced spending at our clubs and restaurants. The COVID-19 pandemic and these responses have affected and will continue to adversely affect our customer traffic, sales and operating costs and we cannot predict how long the pandemic will last or what other government responses may occur.
If the business interruptions 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 club and restaurant operations could be further disrupted if any of our employees are diagnosed with COVID-19 and the circumstances require quarantine of some or all of a club or restaurant’s employees and disinfection of the facilities. If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations. Those employees might seek and find other employment during our business interruption, which could materially adversely affect our ability to properly staff and reopen our clubs and restaurants with experienced team members when permitted to do so by governments.
Our suppliers could be adversely impacted by the COVID-19 pandemic. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply interruptions.
~~The equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and the Company’s stock price has fluctuated significantly.~~

We ~~cannot predict how soon~~have started franchising Bombshells. We believe that we ~~will be able to reopen all our clubs~~have selected highly competent operating partners and ~~restaurants, as our ability to reopen our locations will depend~~franchisees with significant experience in ~~part~~restaurant operations, and we are providing them training and support on the ~~actions~~Bombshells brand. However, the probability of opening, ultimate success and quality of any franchise or licensed restaurant rests principally with the franchisee. If the franchisee does not successfully open and operate its restaurants in a ~~number of governmental bodies over which we~~manner consistent with our standards, or if guests have no control. Moreover, once restrictions are lifted, it is unclear how quickly customers will return to our clubs and restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentimentnegative experiences due to issues with food quality or operational execution, our brand values could suffer, which could have an adverse ~~economic conditions, including job losses. Considering the significant uncertainty as to when we can reopen some or all of~~impact on our locations and the uncertain customer demand environment, in addition to the actions described above, we have taken action to reduce our cash expenditures, which may impact our future growth, refer to Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further information.business.

If we are unable to maintain compliance with certain of our debt covenants, we may be unable to make additional borrowings and be declared in default where our debt will be made immediately due and payable. In addition, global economic conditions may make it more difficult to access new credit facilities.
Our liquidity position is, in part, dependent upon our ability to borrow funds from financial institutions and/or private individuals. Certain of our debts have financial covenants that require us to maintain certain operating income to debt service ratios. As of June 30, 2020, we were in compliance with all covenants. However, as a result of the COVID-19 outbreak, our total revenues have decreased significantly, and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our operations. Due to the impact of COVID-19, our financial performance in future fiscal quarters will be negatively impacted. A failure to comply with the financial covenants under our credit facility would give rise to an event of default under the terms of certain of our debts, allowing the lenders to accelerate repayment of any outstanding debt.
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In September 2008, our Board of Directors authorized us to repurchase up to $5.0 million worth of our common stock in the open market or in privately negotiated transactions. As of April 2013, we completed the repurchase of all $5.0 million in stock authorized under this plan. In April 2013, our Board of Directors authorized us to repurchase up to an additional $3.0 million worth of our common stock, and in May 2014, our Board of Directors increased the repurchase authorization by another $7.0 million. In May 2016, the Board of Directors increased the repurchase authorization by an additional $5.0 million. In January 2019, the Board of Directors increased the repurchase authorization by an additional $10.0 million. During the ~~quarter ended December 31, 2019, we purchased 332,671 shares of our common stock in the open market at prices ranging from $18.30 to $20.80 per share. During the quarter~~three months ended March 31, ~~2020,~~2021, we purchased 132,719 shares of our common stock in the open market at prices ranging from $8.31 to $22.65 per share. In February 2020, the Board of Directors increased the repurchase authorization by an additional $10.0 million. We did not ~~purchase~~repurchase any shares of our common ~~stock during the quarter ended June 30, 2020.~~stock. As of ~~August 7, 2020,~~May 6, 2021, we have ~~$11.8~~approximately $9.0 million remaining to purchase additional shares.

3738

Item 6. Exhibits.

Exhibit No. Description

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

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

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

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

3839

SIGNATURES

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

RCI HOSPITALITY HOLDINGS, INC.

Date: ~~August~~May 10, ~~2020~~2021 By: /s/ Eric S. Langan
Eric S. Langan
Chief Executive Officer and President

Date: ~~August~~May 10, ~~2020~~2021 By: /s/ ~~Phillip K. Marshall~~Bradley Chhay
~~Phillip K. Marshall~~Bradley Chhay
Chief Financial Officer and Principal Accounting Officer
3940

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

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

	●	~~Canceled~~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.

	Three Months Ended June 30, 2020									Three Months Ended June 30, 2019									Three Months Ended March 31, 2021										Three Months Ended March 31, 2020
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells			Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	1,777		$	5,846	$	-	$	7,623	$	14,597		$	4,973	$	-	$	19,570	$	12,634		$	7,639		$	-	$	20,273	$	11,860		$	5,059	$	-	$	16,919
Sales of food and merchandise		774			2,678		-		3,452		3,313			3,733		-		7,046		4,082			5,456			-		9,538		2,799			3,680		-		6,479
Service revenues		2,906			1		-		2,907		17,257			42		-		17,299		11,446			56			-		11,502		14,290			58		-		14,348
Other revenues		556			6		177		739		2,722			7		383		3,112		2,625			(16	)		137		2,746		2,418			6		256		2,680
	$	6,013		$	8,531	$	177	$	14,721	$	37,889		$	8,755	$	383	$	47,027	$	30,787		$	13,135		$	137	$	44,059	$	31,367		$	8,803	$	256	$	40,426

Recognized at a point in time	$	5,781		$	8,531	$	175	$	14,487	$	37,457		$	8,755	$	369	$	46,581	$	30,382		$	13,134		$	136	$	43,652	$	30,977		$	8,803	$	252	$	40,032
Recognized over time		232	*		-		2		234		432	*		-		14		446		405	*		1			1		407		390	*		-		4		394
	$	6,013		$	8,531	$	177	$	14,721	$	37,889		$	8,755	$	383	$	47,027	$	30,787		$	13,135		$	137	$	44,059	$	31,367		$	8,803	$	256	$	40,426

	Nine Months Ended June 30, 2020									Nine Months Ended June 30, 2019									Six Months Ended March 31, 2021									Six Months Ended March 31, 2020
	Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total		Nightclubs			Bombshells		Other		Total
Sales of alcoholic beverages	$	28,321		$	16,964	$	-	$	45,285	$	43,547		$	12,819	$	-	$	56,366	$	22,268		$	15,365	$	-	$	37,633	$	26,544		$	11,118	$	-	$	37,662
Sales of food and merchandise		6,837			10,541		-		17,378		9,813			9,362		-		19,175		7,505			10,642		-		18,147		6,063			7,863		-		13,926
Service revenues		34,290			158		-		34,448		51,513			96		-		51,609		21,444			118		-		21,562		31,384			157		-		31,541
Other revenues		5,791			21		618		6,430		7,791			18		917		8,726		4,767			16		332		5,115		5,235			15		441		5,691
	$	75,239		$	27,684	$	618	$	103,541	$	112,664		$	22,295	$	917	$	135,876	$	55,984		$	26,141	$	332	$	82,457	$	69,226		$	19,153	$	441	$	88,820

Recognized at a point in time	$	74,192		$	27,684	$	605	$	102,481	$	111,431		$	22,295	$	874	$	134,600	$	55,217		$	26,140	$	329	$	81,686	$	68,411		$	19,153	$	430	$	87,994
Recognized over time		1,047	*		-		13		1,060		1,233	*		-		43		1,276		767	*		1		3		771		815	*		-		11		826
	$	75,239		$	27,684	$	618	$	103,541	$	112,664		$	22,295	$	917	$	135,876	$	55,984		$	26,141	$	332	$	82,457	$	69,226		$	19,153	$	441	$	88,820

	Balance at September 30, 2019		Consideration Received		Recognized in Revenue			Balance at June 30, 2020		Balance at September 30, 2020		Consideration Received		Recognized in Revenue			Balance at March 31, 2021
Ad revenue	$	76	$	403	$	(412	)	$	67	$	92	$	356	$	(278	)	$	170
Expo revenue		-		262		-			262		211		105		-			316
Other		7		18		(23	)		2		33		108		(4	)		137
	$	83	$	683	$	(435	)	$	331	$	336	$	569	$	(282	)	$	623

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

		September 30, 2019
2020	$	3,237
2021		3,154
2022		3,057
2023		2,889
2024		2,850
Thereafter		21,038
Total future minimum lease obligations	$	36,225

	Principal Payments		Interest Payments		Total Payments
July 2020 - June 2021	$	1,586	$	1,617	$	3,203
July 2021 - June 2022		1,719		1,517		3,236
July 2022 - June 2023		1,703		1,412		3,115
July 2023 - June 2024		1,738		1,310		3,048
July 2024 - June 2025		1,906		1,200		3,106
Thereafter		18,797		5,703		24,500
	$	27,449	$	12,759	$	40,208

	Three Months Ended June 30, 2020			Nine Months Ended June 30, 2020
Operating lease expense – fixed payments	$	839		$	2,519
Variable lease expense		158			288
Short-term equipment and other lease expense (includes $12 and $303 recorded in advertising and marketing, and $72 and $297 recorded in repairs and maintenance for the three and nine months ended June 30, 2020, respectively; see Note 5)		97			856
Sublease income		(2	)		(8	)
Total lease expense, net	$	1,092		$	3,655

Other information:
Operating cash outflows from operating leases	$	1,051		$	3,513
Weighted average remaining lease term					13 years
Weighted average discount rate					6.1	%

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

	●	Total revenues were ~~$14.7~~$44.1 million compared to ~~$47.0~~$40.4 million during the comparable prior-year period, a ~~68.7% decrease~~9.0% increase (Nightclubs revenue of ~~$6.0~~$30.8 million compared to ~~$37.9~~$31.4 million, ~~an 84.1%~~a 1.8% decrease; and Bombshells revenue of ~~$8.5~~$13.1 million compared to $8.8 million, a ~~2.6% decrease)~~49.2% increase)

	●	~~No club nor~~Consolidated same-store sales increased by 26.3% (Nightclubs increased by 3.6% while Bombshells ~~location qualified for~~increased by 48.7%) (refer to the definition of same-store sales in the discussion of Revenues below)

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

	●	Basic and diluted ~~loss per share of $0.60 compared to basic and diluted~~ earnings per share (“EPS”) of ~~$0.59 (non-GAAP~~$0.68 compared to a basic and diluted loss per share of ~~$0.74 compared to a non-GAAP~~$0.37 (non-GAAP diluted EPS* of ~~$0.59)~~$0.75 compared to $0.47)

	●	Net cash provided by operating activities of ~~$166,000~~$11.0 million compared to ~~$7.4~~$1.7 million during the comparable prior-year period, a ~~97.8% decrease~~542.4% increase (free cash flow* of ~~$166,000~~$9.0 million compared to ~~$6.5 million,~~$618,000, a ~~97.4% decrease)~~1,354.0% increase)

	●	Total revenues were ~~$103.5~~$82.5 million compared to ~~$135.9~~$88.8 million during the comparable prior-year period, a ~~23.8% decline~~7.2% decrease (Nightclubs revenue of ~~$75.2~~$56.0 million compared to ~~$112.7~~$69.2 million, a ~~33.2%~~19.1% decrease; and Bombshells revenue of ~~$27.7~~$26.1 million compared to ~~$22.3~~$19.2 million, a ~~24.2%~~36.5% increase)

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

	●	Gain on forgiven PPP loans amounted to $5.3 million

	●	Basic and diluted ~~loss per share~~EPS of ~~$0.36~~$1.75 compared to ~~basic and diluted EPS of $1.94~~$0.24 (non-GAAP diluted EPS* of ~~$0.36~~$1.15 compared to ~~$1.83, an 80.3% decrease)~~$1.09)

	●	Net cash provided by operating activities of ~~$12.1~~$17.2 million compared to ~~$28.4~~$12.0 million during the comparable prior-year period, a ~~57.2% decrease~~43.9% increase (free cash flow* of ~~$10.0~~$14.7 million compared to ~~$26.3~~$9.9 million, a ~~61.9% decrease)~~48.5% increase)

	For the Three Months Ended																		For the Three Months Ended
	June 30, 2020						June 30, 2019						Increase (Decrease)						March 31, 2021						March 31, 2020						Better (Worse)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%			Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	7,623			51.8	%	$	19,570			41.6	%	$	(11,947	)		(61.0	)%	$	20,273			46.0	%	$	16,919			41.9	%	$	3,354			19.8	%
Sales of food and merchandise		3,452			23.4	%		7,046			15.0	%		(3,594	)		(51.0	)%		9,538			21.6	%		6,479			16.0	%		3,059			47.2	%
Service revenues		2,907			19.7	%		17,299			36.8	%		(14,392	)		(83.2	)%		11,502			26.1	%		14,348			35.5	%		(2,846	)		(19.8	)%
Other		739			5.0	%		3,112			6.6	%		(2,373	)		(76.3	)%		2,746			6.2	%		2,680			6.6	%		66			2.5	%
Total revenues		14,721			100.0	%		47,027			100.0	%		(32,306	)		(68.7	)%		44,059			100.0	%		40,426			100.0	%		3,633			9.0	%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		1,245			16.3	%		4,015			20.5	%		(2,770	)		(69.0	)%		3,730			18.4	%		3,435			20.3	%		(295	)		(8.6	)%
Food and merchandise sold		1,125			32.6	%		2,565			36.4	%		(1,440	)		(56.1	)%		3,029			31.8	%		2,271			35.1	%		(758	)		(33.4	)%
Service and other		20			0.5	%		121			0.6	%		(101	)		(83.5	)%		43			0.3	%		76			0.4	%		33			43.4	%
Total cost of goods sold (exclusive of items shown separately below)		2,390			16.2	%		6,701			14.2	%		(4,311	)		(64.3	)%		6,802			15.4	%		5,782			14.3	%		(1,020	)		(17.6	)%
Salaries and wages		5,421			36.8	%		13,164			28.0	%		(7,743	)		(58.8	)%		11,200			25.4	%		12,222			30.2	%		1,022			8.4	%
Selling, general and administrative		8,908			60.5	%		14,895			31.7	%		(5,987	)		(40.2	)%		12,618			28.6	%		14,450			35.7	%		1,832			12.7	%
Depreciation and amortization		2,235			15.2	%		2,465			5.2	%		(230	)		(9.3	)%		2,117			4.8	%		2,257			5.6	%		140			6.2	%
Other charges (gains), net		424			2.9	%		(172	)		(0.4	)%		596			346.5	%
Other charges, net																				1,481			3.4	%		8,190			20.3	%		6,709			81.9	%
Total operating expenses		19,378			131.6	%		37,053			78.8	%		(17,675	)		(47.7	)%		34,218			77.7	%		42,901			106.1	%		8,683			20.2	%
Income (loss) from operations		(4,657	)		(31.6	)%		9,974			21.2	%		(14,631	)		(146.7	)%		9,841			22.3	%		(2,475	)		(6.1	)%		12,316			497.6	%
Other income (expenses)
Interest expense		(2,459	)		(16.7	)%		(2,543	)		(5.4	)%		(84	)		(3.3	)%		(2,364	)		(5.4	)%		(2,459	)		(6.1	)%		95			3.9	%
Interest income		80			0.5	%		92			0.2	%		(12	)		(13.0	)%		62			0.1	%		85			0.2	%		(23	)		(27.1	)%
Unrealized gain (loss) on equity securities		31			0.2	%		(38	)		(0.1	)%		69			181.6	%
Non-operating gains (losses), net																				431			1.0	%		(62	)		(0.2	)%		493			795.2	%
Income (loss) before income taxes		(7,005	)		(47.6	)%		7,485			15.9	%		(14,490	)		(193.6	)%		7,970			18.1	%		(4,911	)		(12.1	)%		12,881			262.3	%
Income tax expense (benefit)		(1,437	)		(9.8	)%		1,806			3.8	%		(3,243	)		(179.6	)%		1,938			4.4	%		(1,418	)		(3.5	)%		(3,356	)		(236.7	)%
Net income (loss)	$	(5,568	)		(37.8	)%	$	5,679			12.1	%	$	(11,247	)		(198.0	)%	$	6,032			13.7	%	$	(3,493	)		(8.6	)%	$	9,525			272.7	%

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

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

	For the Nine Months Ended																		For the Six Months Ended
	June 30, 2020						June 30, 2019						Increase (Decrease)						March 31, 2021						March 31, 2020						Better (Worse)
	Amount			% of Revenues			Amount			% of Revenues			Amount			%			Amount			% of Revenues			Amount			% of Revenues			Amount			%
Revenues
Sales of alcoholic beverages	$	45,285			43.7	%	$	56,366			41.5	%	$	(11,081	)		(19.7	)%	$	37,633			45.6	%	$	37,662			42.4	%	$	(29	)		(0.1	)%
Sales of food and merchandise		17,378			16.8	%		19,175			14.1	%		(1,797	)		(9.4	)%		18,147			22.0	%		13,926			15.7	%		4,221			30.3	%
Service revenues		34,448			33.3	%		51,609			38.0	%		(17,161	)		(33.3	)%		21,562			26.1	%		31,541			35.5	%		(9,979	)		(31.6	)%
Other		6,430			6.2	%		8,726			6.4	%		(2,296	)		(26.3	)%		5,115			6.2	%		5,691			6.4	%		(576	)		(10.1	)%
Total revenues		103,541			100.0	%		135,876			100.0	%		(32,335	)		(23.8	)%		82,457			100.0	%		88,820			100.0	%		(6,363	)		(7.2	)%
Operating expenses
Cost of goods sold
Alcoholic beverages sold		8,826			19.5	%		11,541			20.5	%		(2,715	)		(23.5	)%		6,992			18.6	%		7,581			20.1	%		589			7.8	%
Food and merchandise sold		5,917			34.0	%		6,857			35.8	%		(940	)		(13.7	)%		5,918			32.6	%		4,846			34.8	%		(1,072	)		(22.1	)%
Service and other		205			0.5	%		307			0.5	%		(102	)		(33.2	)%		96			0.4	%		131			0.4	%		35			26.7	%
Total cost of goods sold (exclusive of items shown separately below)		14,948			14.4	%		18,705			13.8	%		(3,757	)		(20.1	)%		13,006			15.8	%		12,558			14.1	%		(448	)		(3.6	)%
Salaries and wages		30,866			29.8	%		37,168			27.4	%		(6,302	)		(17.0	)%		22,686			27.5	%		25,445			28.6	%		2,759			10.8	%
Selling, general and administrative		39,889			38.5	%		43,263			31.8	%		(3,374	)		(7.8	)%		24,770			30.0	%		30,981			34.9	%		6,211			20.0	%
Depreciation and amortization		6,696			6.5	%		6,718			4.9	%		(22	)		(0.3	)%		4,140			5.0	%		4,461			5.0	%		321			7.2	%
Other charges (gains), net		8,588			8.3	%		(2,250	)		(1.7	)%		10,838			(481.7	)%
Other charges, net																				1,431			1.7	%		8,164			9.2	%		6,733			82.5	%
Total operating expenses		100,987			97.5	%		103,604			76.2	%		(2,617	)		(2.5	)%		66,033			80.1	%		81,609			91.9	%		15,576			19.1	%
Income from operations		2,554			2.5	%		32,272			23.8	%		(29,718	)		(92.1	)%		16,424			19.9	%		7,211			8.1	%		9,213			127.8	%
Other income (expenses)
Interest expense		(7,403	)		(7.1	)%		(7,709	)		(5.7	)%		(306	)		(4.0	)%		(4,798	)		(5.8	)%		(4,944	)		(5.6	)%		146			3.0	%
Interest income		263			0.3	%		218			0.2	%		45			20.6	%		122			0.1	%		183			0.2	%		(61	)		(33.3	)%
Unrealized loss on equity securities		(103	)		(0.1	)%		(408	)		(0.3	)%		305			74.8	%
Income (loss) before income taxes		(4,689	)		(4.5	)%		24,373			17.9	%		(29,062	)		(119.2	)%
Income tax expense (benefit)		(1,262	)		(1.2	)%		5,547			4.1	%		(6,809	)		(122.8	)%
Net income (loss)	$	(3,427	)		(3.3	)%	$	18,826			13.9	%	$	(22,253	)		(118.2	)%
Non-operating gains (losses), net																				5,347			6.5	%		(134	)		(0.2	)%		5,481			4,090.3	%
Income before income taxes																				17,095			20.7	%		2,316			2.6	%		14,779			638.1	%
Income tax expense																				1,554			1.9	%		175			0.2	%		(1,379	)		(788.0	)%
Net income																			$	15,541			18.8	%	$	2,141			2.4	%	$	13,400			625.9	%

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

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

	For the Nine Months Ended June 30,						For the Six Months Ended March 31,
	2020			2019			2021			2020
Payments for property and equipment and intangible assets	$	(5,565	)	$	(16,901	)	$	(6,718	)	$	(5,323	)
Acquisition of businesses, net of cash acquired		-			(13,500	)
Proceeds from sale of businesses and assets		2,041			5,106			8			105
Proceeds from insurance		945			-			294			945
Proceeds from notes receivable		1,555			107
Issuance of note receivable		-			(420	)
Proceeds from note receivable								61			403
Net cash used in investing activities	$	(1,024	)	$	(25,608	)	$	(6,355	)	$	(3,870	)

	For the Nine Months Ended June30,				For the Six Months Ended March 31,
	2020		2019		2021		2020
New facilities, equipment and software	$	3,454	$	14,829
New facilities, equipment and intangible assets					$	4,127	$	3,212
Maintenance capital expenditures		2,111		2,072		2,591		2,111
Total capital expenditures	$	5,565	$	16,901	$	6,718	$	5,323

			Increase					Increase							Increase					Increase
	2020		(Decrease)			2019		(Decrease)			2018		2021		(Decrease)			2020		(Decrease)			2019

Sales of alcoholic beverages	$	45,285		(19.7	)%	$	56,366		6.7	%	$	52,835	$	37,633		(0.1	)%	$	37,662		2.4	%	$	36,796
Sales of food and merchandise		17,378		(9.4	)%		19,175		13.4	%		16,906		18,147		30.3	%		13,926		14.8	%		12,129
Service revenues		34,448		(33.3	)%		51,609		6.8	%		48,338		21,562		(31.6	)%		31,541		(8.1	)%		34,310
Other		6,430		(26.3	)%		8,726		24.8	%		6,993		5,115		(10.1	)%		5,691		1.4	%		5,614
Total revenues		103,541		(23.8	)%		135,876		8.6	%		125,072		82,457		(7.2	)%		88,820		(0.0	)%		88,849
Net cash provided by operating activities	$	12,147		(57.2	)%	$	28,414		26.8	%	$	22,411	$	17,246		43.9	%	$	11,981		(42.9	)%	$	20,971
Adjusted EBITDA*	$	17,973		(50.9	)%	$	36,631		3.4	%	$	35,432	$	22,273		12.1	%	$	19,877		(18.6	)%	$	24,405
Free cash flow*	$	10,036		(61.9	)%	$	26,342		28.1	%	$	20,564	$	14,655		48.5	%	$	9,870		(50.3	)%	$	19,854
Long-term debt (end of period)	$	142,736		(4.7	)%	$	146,579		11.7	%	$	131,255
Debt (end of period)													$	132,412		(5.7	)%	$	140,440		(6.3	)%	$	149,818

	●	We consider ~~buying back~~acquiring or developing our own ~~stock if~~clubs or restaurants that we believe have the ~~after-tax yield~~potential to provide a minimum cash on ~~free~~ cash ~~flow is above 10%;~~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 ~~acquiring or developing~~buying back our own ~~clubs or restaurants that we believe have~~stock if the ~~potential to provide a minimum~~after-tax yield on free cash ~~on cash return of 25%-33%, absent an otherwise strategic rationale;~~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.

	●	~~developing policies and procedures to enhance the precision of management review of financial statement information;~~
	●	~~implementing policies and procedures to enhance independent review of journal entries;~~
	●	~~developing and implementing procedures to ensure the completeness of related party disclosures; and~~
	●	~~developing and implementing procedures related to the identification and accounting for loss contingencies.~~

Exhibit No.		Description

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

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

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

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

	RCI HOSPITALITY HOLDINGS, INC.

Date: ~~August~~May 10, ~~2020~~2021	By:	/s/ Eric S. Langan
		Eric S. Langan
		Chief Executive Officer and President

Date: ~~August~~May 10, ~~2020~~2021	By:	/s/ ~~Phillip K. Marshall~~Bradley Chhay
		~~Phillip K. Marshall~~Bradley Chhay
		Chief Financial Officer and Principal Accounting Officer