What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-12-14 compared with 2020-02-13 · 1388 added, 1072 removed, 833 unchanged (75% of the section changed)

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Consolidated Balance Sheets at September 30, 2020 and 2019

Consolidated Statements of Income for the years ended September 30, 2019, 2018, and 2017

Consolidated Statements of Comprehensive Income for the years ended September 30, 2019, 2018, and 2017

Consolidated Statements of Operations for the years ended September 30, 2020, 2019, and 2018

Statements of Comprehensive Income (Loss) for the years ended September 30, 2020, 2019, and 2018

Consolidated Statements of Changes in Equity for the years ended September 30, 2020, 2019, and 2018

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on the Consolidated Financial Statements

have audited the accompanying consolidated balance sheets of RCI Hospitality Holdings, Inc.

(the “Company”) as of

September 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’

and cash flows for each of the years in the three-year period ended September 30, 2019, and the related notes (collectively

referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated

balance sheets of RCI Hospitality Holdings, Inc.

(the “Company”) as of September 30, 2020 and 2019,

and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and

cash flows for each of the years in the three-year period ended September 30, 2020, and the related notes (collectively

referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present

fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of

its operations and its cash flows for each of the years in the three-year period ended September 30, 2019, in conformity with

accounting principles generally accepted in the United States of America.

also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),

RCI Hospitality Holdings, Inc.’s internal control over financial reporting as of September 30, 2019, based on criteria established

in Internal Control –

Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway

Commission (“COSO”) and our report dated February 13, 2020 expressed an adverse opinion.

consolidated financial statements are the responsibility of the Company’s management.

fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the

results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2020, in

conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the

standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), RCI Hospitality Holdings, Inc.’s

internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control

– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)

and our report dated December 14, 2020 expressed an adverse opinion.

consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an

opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered

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We believe that our audits provide a reasonable basis for our opinion.

/s/ Friedman LLP

We have served as the Company’s auditor since 2019.

Marlton, New Jersey

February 13, 2020

have served as the Company’s auditor since 2019.

HOSPITALITY HOLDINGS, INC.

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Property and equipment, net

Operating lease right-of-use assets, net

Notes receivable, net of current portion

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Current portion of long-term debt

Current portion of operating lease liabilities

Total current liabilities

Deferred tax liability, net

Long-term debt, net of current portion and debt discount and issuance costs

Debt, net of current portion and debt discount and issuance costs

Operating lease liabilities, net of current portion

Other long-term liabilities

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20,000 shares authorized;

9,591 and 9,719 shares issued and outstanding as of September 30, 2019 and 2018, respectively

9,075 shares and 9,591 shares issued and outstanding as of September 30, 2020 and 2019, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income

Total RCIHH stockholders’

Total RCIHH stockholders’ equity

Noncontrolling interests

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HOSPITALITY HOLDINGS, INC.

STATEMENTS OF INCOME

STATEMENTS OF OPERATIONS

thousands, except per share data)

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Unrealized loss on equity securities

Income before income taxes

Income (loss) before income taxes

Income tax expense (benefit)

Net income attributable to noncontrolling interests

Net income attributable to RCIHH common shareholders

Earnings per share

Net income (loss)

Net loss (income) attributable to noncontrolling interests

Net income (loss) attributable to RCIHH common stockholders

Earnings (loss) per share

Basic and diluted

Weighted average number of common shares outstanding

Basic and diluted

Dividends per share

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HOSPITALITY HOLDINGS, INC.

STATEMENTS OF COMPREHENSIVE INCOME

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Ended September 30,

Net income (loss)

Amount reclassified from accumulated other comprehensive income

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Unrealized holding gain on available-for-sale securities, net of tax of $ 85 in 2018

Comprehensive income

Comprehensive income attributable to noncontrolling interests

Comprehensive income attributable to RCI Hospitality Holdings, Inc.

Comprehensive income (loss)

Comprehensive loss (income) attributable to noncontrolling interests

Comprehensive income (loss) attributable to RCI Hospitality Holdings, Inc.

accompanying notes to consolidated financial statements.

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Balance at September 30, 2017

Purchase of treasury shares

Canceled treasury shares

Payment of dividends

Payments to noncontrolling interests

Divestiture in Drink Robust

Balance at September 30, 2017

Payment of dividends

Payments to noncontrolling interests

Equity impact of additional investment in TEZ

Change in marketable securities

Net income (as revised)

Reclassification upon adoption of ASU 2016-01

Purchase of treasury shares

Purchase of treasury shares, shares

Canceled treasury shares

Canceled treasury shares, shares

Divestiture in other entities

Balance at September 30, 2018

Balance at September 30, 2018 (as revised)

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Divestiture in other entities

Net income (as revised)

Balance at September 30, 2019 (as revised)

Balance at September 30, 2019

Purchase of treasury shares

Canceled treasury shares

Payment of dividends

Payments to noncontrolling interest

Balance at September 30, 2020

accompanying notes to consolidated financial statements.

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CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

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Amortization of debt discount and issuance costs

Doubtful accounts expense on notes receivable

Unrealized loss on equity securities

Gain on insurance

Gain on settlement of patron tax

Loss (gain) on insurance

Noncash lease expense

Deferred rent expense

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Issuance of notes receivable

Additions to property and equipment

Payments for property and equipment and intangible assets

Acquisition of businesses, net of cash acquired

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Interest paid, net of amounts capitalized

Income taxes paid (net of refunds of $42, $42

and $794 in 2019, 2018 and 2017, respectively)

Income taxes paid (net of refunds of $ 153 , $ 42 , and $ 42 in 2020, 2019, and 2018, respectively)

investing and financing transactions:

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Unrealized gain on marketable securities

Note payable reduction from sale proceeds of property

Accounts receivable converted to notes receivable

Refinanced long-term debt

Net increase in notes payable from trade-in of aircraft

Operating lease right-of-use

assets established upon adoption of ASC 842

Deferred rent liabilities reclassified

upon adoption of ASC 842

Operating lease liabilities

established upon adoption of ASC 842

Unpaid liabilities on capital expenditures

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Hospitality Holdings, Inc.

(the “Company”) is a holding company incorporated in Texas in 1994.

Through its subsidiaries,

the Company currently owns and operates establishments that offer live adult entertainment, restaurant, and/or bar operations.

These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Odessa, Lubbock, Longview, Abilene, Edinburg,

El Paso, Harlingen and Beaumont, Texas, as well as Minneapolis, Minnesota;

(the “Company,” “we,” “us,” or “our”) is a holding

company incorporated in Texas in 1994.

Through its subsidiaries, the Company currently owns and operates establishments that offer

live adult entertainment, restaurant, and/or bar operations.

These establishments are located in Houston, Austin, San Antonio,

Dallas, Fort Worth, Odessa, Lubbock, Longview, Abilene, Edinburg, El Paso, Harlingen and Beaumont, Texas, as well as Minneapolis,

Pittsburgh, Pennsylvania;

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Sulphur, Louisiana;

and Chicago, Washington Park

and Kappa, Illinois.

The Company also owns and operates media businesses for adults.

The Company’s corporate offices are

located in Houston, Texas.

and Chicago, Washington Park and Kappa, Illinois.

The Company also owns and operates media

businesses for adults.

The Company’s corporate offices are located in Houston, Texas.

Summary of Significant Accounting Policies

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accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in

accordance with accounting principles generally accepted in the United States of America (“U.S.

or “GAAP”).

accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP” or “GAAP”).

of Consolidation

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Company maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided

Federal Deposit Insurance Corporation (“FDIC”).

The Company has not experienced any losses related to

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cash in two to five days after a purchase is made.

The media division’s accounts receivable are primarily comprised of receivables

for advertising sales and Expo registration.

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The Company recognizes interest income on notes receivable

based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income

will be collected.

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indicate that accounts or notes receivable will not be collected.

Allowance for doubtful accounts balance was $101,000 and $0

as of September 30, 2019 and 2018, respectively (see Note 5).

Allowance for doubtful accounts balance related to accounts

receivable was $ 261 ,000 and $ 101 ,000 as of September 30, 2020 and 2019, respectively (see Note 6).

Allowance for doubtful accounts

balance related to notes receivable was $ 182 ,000 and $ 0 as of September 30, 2020 and 2019, respectively.

include alcoholic beverages, energy drinks, food, and Company merchandise.

Inventories are carried at the lower of cost (on a

first-in, first-out (“FIFO”) basis), or net realizable value.

Inventories are carried at net realizable value.

and Equipment

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The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off

from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of income of the

respective period.

from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of operations of

the respective period.

Interest expense from related debt incurred during site construction is capitalized, which amounted to

in fiscal 2019, $319,000 in fiscal 2018, and $43,000 in fiscal 2017.

$ 156 ,000 in 2020, $ 597 ,000 in fiscal 2019, and $ 319 ,000 in fiscal 2018.

and Other Intangible Assets

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An impairment

loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

HOSPITALITY HOLDINGS, INC.

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For the year ended September 30, 2020,

we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling $1.6 million.

year ended September 30, 2018, we identified two reporting units that were impaired and recognized a goodwill impairment loss

totaling $834,000.

we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $ 7.9 million.

discussion in Note 3.

For the year ended September 30, 2019, we identified four reporting units that were impaired and recognized

a goodwill impairment loss totaling $ 1.6 million.

For the year ended September 30, 2018, we identified two reporting units that

were impaired and recognized a goodwill impairment loss totaling $ 834 ,000.

indefinite-lived intangibles, specifically SOB licenses, we determine fair value by estimating the multiperiod excess earnings

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the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $178,000 in 2019 related to one club,

$3.1 million in 2018 related to three clubs, and $1.4 million in 2017 related to two clubs, which are included in other charges,

net in the consolidated statements of income.

We recorded impairment charges for SOB licenses amounting to $ 2.3 million in 2020 related to two

clubs (see Note 3), $ 178 ,000 in 2019 related to one club, and $ 3.1 million in 2018 related to three clubs, which are included

in other charges, net in the consolidated statements of operations.

of Long-Lived Assets

Company reviews long-lived assets, such as property, plant, and equipment, and intangible assets subject to amortization, for

impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be

These events or changes in circumstances include, but are not limited to, significant underperformance relative to

historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy

for the overall business, and significant negative industry or economic trends.

Recoverability of assets to be held and used is

measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated

remaining useful life of the primary asset included in the asset group.

If the asset group is not recoverable, the impairment

loss is calculated as the excess of the carrying value over the fair value.

We define our asset group as an operating club or

restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified.

disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less

costs to sell and are no longer depreciated.

For assets held for sale, we measure fair value using an estimation based on quoted

prices for similar items in active or inactive markets (level 2) developed using observable data.

The assets and liabilities of

a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance

During the fourth quarter of fiscal 2019, the Company impaired two clubs for a total of $4.2 million;

during the fourth

quarter 2018, the Company impaired one club and one Bombshells for a total of $1.6 million;

and during the fourth quarter of 2017,

the Company impaired one club for $385,000.

Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use

assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an

asset or asset group may not be recoverable.

These events or changes in circumstances include, but are not limited to, significant

underperformance relative to historical or projected future operating results, significant changes in the manner of use of the

acquired assets or the strategy for the overall business, and significant negative industry or economic trends.

Recoverability

of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted

cash flows over the estimated remaining useful life of the primary asset included in the asset group.

If the asset group is not

recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value.

We define our asset group

as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount

or fair value less costs to sell and are no longer depreciated.

For assets held for sale, we measure fair value using an estimation

based on quoted prices for similar items in active or inactive markets (level 2) developed using observable data.

The assets and

liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections

of the balance sheet.

During fiscal 2020, the Company impaired one club and one Bombshells unit for a total of $ 302 ,000;

during fiscal 2019, the Company impaired two clubs for a total of $ 4.2

and during fiscal 2018,

the Company impaired one club and one Bombshells for a total of $ 1.6

The Company also impaired one

club in fiscal of 2020 for operating lease right-of-use assets amounting to $ 104 ,000.

See Notes 7 and 18.

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Comprehensive

income is the total of net income or loss and all other changes in net assets arising from non-owner sources, which are referred

to as items of other comprehensive income.

An analysis of changes in components of accumulated other comprehensive income is presented

in the consolidated statements of comprehensive income.

“Impact of Recently Issued Accounting Standards”

section below regarding ASC 606 and Note 4.

Income (Loss)

Comprehensive income (loss) is the

total of net income or loss and all other changes in net assets arising from non-owner sources, which are referred to as items

of other comprehensive income (loss).

An analysis of changes in components of accumulated other comprehensive income is

presented in the consolidated statements of comprehensive income (loss).

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 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.

revenues, such as ATM commission, are recognized when the basis for such commission has transpired.

Revenues from the sale of

magazines and advertising content are recognized when the issue is published and shipped.

Revenues and external expenses related

to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during

our fiscal fourth quarter.

Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is

more appropriately covered by guidance under ASC 842, Leases (ASC 840 in prior year).

to Notes 5 and 22 for additional disclosures on revenues and leases, respectively.

and Marketing

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Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative

expenses in the accompanying consolidated statements of income.

expenses in the accompanying consolidated statements of operations.

Company and its subsidiaries are subject to U.S.

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tax benefits in interest expense.

in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost

and adjusted for the Company’s proportionate share of their undistributed earnings or losses.

Investments in companies in

which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for

at cost and reviewed for any impairment.

Cost and equity method investments are included in other assets in the Company’s

consolidated balance sheets.

The Company sold 31% of Drink Robust on September 29, 2016, retaining 20%.

Because the Company had

no ability to direct the management of the investee company or exert significant influence, the investment was accounted

for at cost beginning on the date of sale.

During the fourth quarter of fiscal 2017, we determined our investment in Drink Robust

was impaired and recognized an other-than-temporary impairment totaling $1.2 million which brought our carrying value of this

investment to zero.

In relation to the reacquisition of Drink Robust in 2018, we have consolidated the operations of Drink Robust

and eliminated the investment in consolidation.

earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average

number of common shares outstanding for the period.

Diluted earnings per share reflect the potential dilution of securities that

could share in the earnings of the Company.

Potential common stock shares consist of shares that may arise from outstanding dilutive

common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method) and from

outstanding convertible debentures (the number of which is computed using the if-converted method).

Diluted earnings per share

considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants

and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted

for interest expense, that would no longer be incurred if the debentures were converted).

in companies in which the company has a 20 %

interest are accounted for using the equity

method, which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or

in companies in which the Company owns less than a 20% interest, or where the Company does not exercise significant influence,

are accounted for at cost and reviewed for any impairment.

and equity method investments are included in other assets in the Company’s consolidated balance sheets.

In relation to

the reacquisition of Drink Robust in 2018, which we partially sold in fiscal 2016, we have consolidated the operations

of Drink Robust and eliminated the investment in consolidation.

Paycheck Protection Program

The Company’s policy is to account for the Paycheck Protection

Program (“PPP”) loan as debt (see Note 10).

The Company will continue to record the loan as debt until either (1) the

loans are partially or entirely forgiven and the Company has been legally released from the obligation, at which point the amount

forgiven will be recorded as income, or (2) the Company pays off the loans.

(Loss) Per Share

Basic earnings (loss) per share includes

no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares

outstanding for the period.

Diluted earnings (loss) per share reflect the potential dilution of securities that could share

in the earnings or losses of the Company.

Potential common stock shares consist of shares that may arise from outstanding

dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method)

and from outstanding convertible debentures (the number of which is computed using the if-converted method).

Diluted earnings

(loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted

stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s

earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).

HOSPITALITY HOLDINGS, INC.

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Summary of Significant Accounting Policies - continued

earnings applicable to common stock and the weighted average number of shares used for basic and diluted earnings (loss) per share

computations are summarized in the table that follows (in thousands, except per share data):

the Year Ended

Net income attributable to RCIHH shareholders - basic

Adjustment to net income from assumed conversion of debentures(1)

Adjusted net income attributable to RCIHH shareholders - diluted

Denominator -

Weighted average number of common shares outstanding - basic

Effect of potentially dilutive convertible debentures

Adjusted weighted average number of common shares outstanding - diluted

Basic earnings per share

Diluted earnings per share

Represents interest expense on dilutive convertible securities that would not occur if they were assumed converted.

There were no outstanding warrants and options to be considered for the EPS computation for all periods presented.

debentures amounting to $0, $0, and $0.9 million were dilutive in 2019, 2018, and 2017, respectively.

During the years ended September 30, 2020,

2019, and 2018, the Company did not have any outstanding dilutive securities that are considered adjustment items to reconcile

the numerator and the denominator in the calculation of basic and diluted earnings (loss) per share.

Company recognizes all employee stock-based compensation as a cost in the consolidated financial statements.

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life and risk-free rate.

September 30, 2019 and 2018, the Company has no stock options outstanding.

September 30, 2020 and 2019, the Company has no stock

options outstanding, and as of September 30, 2020, the Company’s 2010 Stock Option Plan contractually

HOSPITALITY HOLDINGS, INC.

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the Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.

Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims

for workers’

compensation, general liability, property, auto, and business interruption coverage.

Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims

for workers’ compensation, general liability, property, auto, and business interruption coverage.

The Company carries substantial

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our per-occurrence exposure.

The Company believes, and the Company’s

experience has been, that such insurance policies have been sufficient to cover such risks.

The Company believes, and the Company’s experience has been, that such insurance policies have

been sufficient to cover such risks.

Value Accounting

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when measuring fair value.

The Company classifies

its marketable securities as available-for-sale, which are reported at fair value.

Unrealized holding gains and losses, net of

the related income tax effect, if any, on available-for-sale securities were excluded from income and were reported

as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018.

Realized gains and

losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are

included in comprehensive income.

The Company measures the fair value of its marketable securities based on quoted prices for

identical securities in active markets, or Level 1 inputs.

Available-for-sale securities, which are included in other assets in

the consolidated balance sheets, had a balance of $148,000 and $760,000 as of September 30, 2019 and 2018.

Company classifies its marketable securities as available-for-sale, which are reported at fair value.

Unrealized holding gains

and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income and were

reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018.

gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale

are included in comprehensive income (loss).

The Company measures the fair value of its marketable securities based on

quoted prices for identical securities in active markets, or Level 1 inputs.

Available-for-sale securities, which are included

in other assets in the consolidated balance sheets, had a balance of $ 84 ,000

and $ 148 ,000

as of September 30, 2020 and 2019.

HOSPITALITY HOLDINGS, INC.

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If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference

is included in other charges, net in the consolidated statements of income.

is included in other charges, net in the consolidated statements of operations.

and liabilities that are measured at fair value on a nonrecurring basis are as follows (in thousands):

Schedule of Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Value at Reporting Date Using

Property and equipment, net

Property and equipment

Indefinite-lived intangibles

Definite-lived intangibles

Operating lease right-of-use assets *

Operating lease liabilities *

Other assets (equity securities)

Measured at October 1, 2019 upon the adoption of

Value at Reporting Date Using

Property and equipment, net

Property and equipment

Indefinite-lived intangibles

Notes receivable

Definite-lived intangibles

Other assets (equity securities)

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Indefinite-lived intangibles

Assets held for sale

Operating lease right-of-use assets

Other assets (equity securities)

of Recently Issued Accounting Standards

May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2014-09, Revenue from Contracts with Customers (“ASU 2014-09”

and codified as Accounting Standards Codification

606, “ASC 606”), which supersedes nearly all existing revenue recognition guidance under GAAP.

The core principle

of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects

the consideration to which an entity expects to be entitled for those goods or services.

ASU 2014-09 defines a five-step process

to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process

than are required under existing GAAP.

The standard’s effective date has been deferred by the issuance of ASU No.

and is effective for annual periods beginning after December 15, 2017, and interim periods therein.

The guidance permits using

either of the following transition methods:

(i) a full retrospective approach reflecting the application of the standard in each

prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative

effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

Early application is permitted but not before December 15, 2016, the ASU’s original effective date.

The Company adopted

the new revenue recognition standard as of October 1, 2018 using the cumulative effect method, which did not have a material impact

on its consolidated financial statements.

See Note 4 for new disclosures as required by ASC 606.

In January 2016, the

FASB issued ASU No.

2016-01, Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial

Assets and Financial Liabilities , which amends the guidance on the classification and measurement of financial instruments.

Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification

and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities

measured at fair value.

The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.

The amendments of the ASU are effective for us for fiscal years beginning after December 15, 2017, including interim periods within

those fiscal years.

The Company adopted ASU 2016-01 as of October 1, 2018.

Our adoption required the Company to reclassify $220,000

from accumulated other comprehensive income to retained earnings as of the beginning of the quarter ended December 31, 2018.

succeeding unrealized gains or losses related the changes in the market value of our equity securities are included in other

income/expenses in our consolidated statement of income.

February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) , on accounting for leases which requires lessees to

recognize most leases on their balance sheets for the rights and obligations created by 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.

February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

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

We will adopt ASU 2016-02 and related amendments as of the beginning of our fiscal first quarter ending December 31,

We will be electing 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.

We expect our total assets as of October 1, 2019 to have an increase of approximately

$24.5 million due to the recognition of operating lease right-of-use assets, and a corresponding increase in total liabilities

due to the recognition of operating lease liabilities after the reversal of our deferred rent liability balance as of September

We do not expect ASC 842 to have an impact on our consolidated statements of income and cash flows.

As a result of the

adoption of ASC 842, we do not expect our future minimum lease payments for the fiscal first quarter ending December 31, 2019

related to leases existing as of September 30, 2019 to be materially different from the amounts disclosed in future minimum lease

commitments in Note 11.

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 22.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Summary of Significant Accounting Policies - continued

June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses

11 unchanged sentences

December 15, 2018.

We are still evaluating the impact of this ASU, including all related updates, on the Company’s consolidated

financial statements.

February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):

Our evaluation indicates that our consolidated financial statements will not be significantly impacted upon

adoption of this guidance.

February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):

Reclassification

1 unchanged sentence

This ASU provides financial statement preparers with an

option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in

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.

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

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 believe that the adoption

of this ASU will not have a material impact on our consolidated financial statements.

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.

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

2 unchanged sentences

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

9 unchanged sentences

the ASU and delay adoption of the additional disclosures until the effective date.

We are still evaluating the impact of this

ASU on the Company’s consolidated financial statements.

Our evaluation indicates that fair value disclosures

in our consolidated financial statements will be minimally impacted by the requirements of this ASU.

March 2019, the FASB issued ASU No.

12 unchanged sentences

fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

We are still evaluating the impact

of this ASU on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12,

Income Taxes (Topic 740):

Our evaluation indicates that

our consolidated financial statements will not be significantly impacted upon adoption of this guidance.

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

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.

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.

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.

still evaluating the impact of this ASU on the Company’s consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Liquidity and Impact of COVID-19 Pandemic

In March 2020, President Donald Trump declared

the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency.

The declaration resulted

in a significant reduction in customer traffic in our clubs and restaurants due to changes in consumer behavior as social distancing

practices, dining room closures and other restrictions were mandated or encouraged by federal, state and local governments.

March 2020, we have temporarily closed and reopened several of our clubs and restaurants.

temporary closure of our clubs and restaurants caused by the COVID-19 pandemic has presented operational challenges.

strategy is to open locations in accordance with local and state guidelines and it is too early to know when and if they will

generate positive cash flows for us.

Depending on the timing and number of locations we are allowed to open, and their

ability to generate positive cash flow, we may need to borrow funds to meet our obligations or consider selling certain assets.

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.

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

and continue to arrange for deferment of principal and interest payment on certain of our debts;

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

cut for all remaining salaried and hourly employees and deferral of board of director compensation;

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

certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support, and investor relations

coverage, among others.

May 8, 2020, the Company received approval and funding under the PPP of the Coronavirus Aid, Relief, and Economic Security

Act (the “CARES Act”) for its restaurants, shared service entity and lounge.

See Notes 10 and 11.

restaurant subsidiaries received amounts ranging from $ 271 ,000

to $ 579 ,000

for an aggregate amount of $ 4.2 million;

our shared-services subsidiary received $ 1.1 million;

and one of our lounges received $ 124 ,000.

None of our adult nightclub and other non-core business subsidiaries received funding under the PPP.

The Company believes it

has used the entire loan amount for qualifying expenses.

Under the terms of the PPP, certain amounts of the loan may be

forgiven if they are used for qualifying expenses as described in the CARES Act.

The Company has currently utilized all of

the PPP funds and has submitted its forgiveness applications.

As of the filing of this report, we have received ten

Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted.

of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $ 4.9

No assurance can be provided that the Company will in fact obtain forgiveness of the remaining

two PPP loans in whole or in part.

of the release of this report, we do not know the future extent and duration of the impact of COVID-19 on our businesses.

Lower sales, as caused by local, state and national guidelines, could lead to adverse financial results.

However, we will continually

monitor and evaluate the situation and will determine any further measures to be instituted, including refinancing several of

our debt obligations.

continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened

several of our locations depending on changing government mandates.

As of the release of this report, we have reopened many of

our club and Bombshells locations with certain operating hour restrictions and with limited occupancy.

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

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 conducted during the quarters since the pandemic emerged, we

determined that as of September 30, 2020 our assets are impaired in a total amount of approximately $ 10.6

million comprised of $ 7.9

million in goodwill, $ 2.3

million in SOB licenses, $ 302 ,000

in property and equipment, and $ 104 ,000

in operating lease right-of-use assets.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Revision of Prior Year Immaterial Misstatement

During the quarter ended December 31, 2018

(first quarter of fiscal 2019), the Company identified certain mechanical errors in its goodwill impairment analysis that

was performed for its annual impairment testing for fiscal year ended September 30, 2018.

These errors related to the use

of an incorrect income tax rate assumption and the exclusion of certain debt service payments as part of our goodwill impairment

testing for two of our reporting units, which resulted in a goodwill impairment charge of $834,000.

Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined that for

both the quarter and fiscal year ended September 30, 2018, the errors were immaterial.

The Company has decided to correct these

immaterial errors as revisions to our previously issued financial statements and has adjusted this Form 10-K insofar as fiscal

2018 is concerned.

tables below present the impact of the revision in the Company’s consolidated financial statements (in thousands):

Year Ended September 30, 2018

Previously Reported

Statement of Income/Comprehensive Income:

Other charges, net

Total operating expenses

Income from operations

Income before income taxes

During the fourth quarter ended September

30, 2020, the Company identified an error in the calculation of income taxes in relation to a disposed entity during the fiscal

2019 first quarter ended December 31, 2018.

The error related to the recognition of income tax receivable on the disposed entity.

The Company determined the amount of the income tax receivable to be recognized with a consequent credit to income tax expense

as $ 1.1 million.

The Company assessed the materiality of

the error considering both qualitative and quantitative factors and determined that the error was immaterial for fiscal 2019 but

material if recorded as an out-of-period adjustment in fiscal 2020.

Therefore, the Company has decided to correct the error as

a revision to our previously issued financial statements and has adjusted this Form 10-K insofar as fiscal 2019 is concerned.

The tables below present the impact of

the revision in the Company’s consolidated financial statements (in thousands, except per share amounts):

of Impact of Revisions in Financial Statements

Consolidated Statement of Income/Comprehensive Income:

As previously reported —

Income tax expense

Net income attributable to RCIHH common stockholders

Earnings per share - basic

Earnings per share - diluted

Earnings per share - basic and diluted

Comprehensive income

Comprehensive income attributable to RCI Hospitality Holdings, Inc.

Previously Reported

Balance Sheet/Statement of Changes in Equity

Comprehensive income attributable to RCIHH common stockholders

Adjustments —

Income tax expense

Net income attributable to RCIHH common stockholders

Earnings per share - basic and diluted

Comprehensive income

Comprehensive income attributable to RCIHH common stockholders

Income tax expense

Net income attributable to RCIHH common stockholders

Earnings per share - basic and diluted

Comprehensive income

Comprehensive income attributable to RCIHH common stockholders

September 30,

Consolidated Balance Sheet:

As previously reported —

Accounts receivable, net

Total current assets

Retained earnings

Total RCIHH stockholders’

Total liabilities and equity

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Revision of Prior Year Immaterial Misstatement - continued

table below presents the impact of the revision in the Company’s notes to its consolidated financial statements related

to unaudited quarterly results of operations (in thousands):

Ended September 30, 2018

Previously Reported

Income from operations

Net loss attributable to RCIHH common stockholders

Loss per share - basic

Loss per share - diluted

consolidated statements of cash flows are not presented because there is no impact on total cash flows from operating activities,

investing activities and financing activities.

Certain components of net cash provided by operating activities changed, as caused

by the revision, but the net change amounted to zero for both quarter and fiscal year ended September 30, 2018.

October 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (formerly ASU 2014-09).

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 consolidated statements of income.

The Company recognizes revenue when it satisfies

a performance obligation (point in time of sale) by transferring control over a product or service to a customer.

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.

Other rental revenues are recognized when earned (recognized over time) and are more appropriately

covered by guidance under ASC Topic 840, Leases (under ASC 842 commencing on October 1, 2019) .

Total RCIHH stockholders’ equity

Adjustments —

Accounts receivable, net

Total current assets

Retained earnings

Total RCIHH stockholders’ equity

Accounts receivable, net

Total current assets

Retained earnings

Total RCIHH stockholders’ equity

The consolidated statement of cash flows

are not presented because there is no impact on total cash flows from operating, investing, and financing activities.

components of net cash provided by operating activities changed due to the revision but the net change amounted to zero for both

the quarter ended December 31, 2018 and fiscal year ended September 30, 2019.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Revenues - continued

as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 19), are shown below (in thousands).

Schedule of Disaggregation of Segment Revenues

Sales of alcoholic beverages

16 unchanged sentences

Recognized over time

* Rental revenue (included in Other Revenues)

is covered by ASC Topic 840 until the end of fiscal 2019.

Effective October 1, 2019, rental revenue will be reported under

the guidance of ASC 842.

All other revenues are covered by ASC Topic 606.

Lease revenue (included in Other Revenues) is covered by ASC 842 in the current year (and ASC 840 in the prior years.

revenues are covered by ASC Topic 606.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

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 consolidated balance sheet.

1 unchanged sentence

liabilities with customers, included in accrued liabilities in our consolidated balance sheets, is presented below:

Schedule of Reconciliation of Contract Liabilities with Customers

at September 30, 2018

1 unchanged sentence

at September 30, 2019

Consideration

at September 30, 2020

Selected Account Information

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

Schedule of Accounts Receivable

Credit card receivables

3 unchanged sentences

Other (net of allowance for doubtful accounts of $ 261 and $ 101 , respectively)

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.

Accounts receivable,

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.

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

Schedule of Accrued Liabilities

Payroll and related costs

3 unchanged sentences

Unearned revenues

Accrued liabilities

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

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

Schedule of Selling, General and Administrative Expenses

Ended September 30,

5 unchanged sentences

Repairs and maintenance

Selling, general and administrative

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

of Components of Other Charges, Net

Ended September 30,

2 unchanged sentences

Loss (gain) on sale of businesses and assets

Gain on insurance

Gain on settlement of patron tax

Loss (gain) on insurance

Other charges

Property and Equipment

and equipment consisted of the following (in thousands):

Schedule of Property, Plant and Equipment

Buildings and land

3 unchanged sentences

Property and equipment, net

in buildings and leasehold improvements above are construction-in-progress amounting to $8.9 million and $6.4 million as of September

in buildings and leasehold improvements above are construction-in-progress amounting to $ 20 ,000 and $ 8.9 million as of September

30, 2020 and 2019, respectively, which are mostly related to Bombshells projects.

expense was approximately $ 8.2 million, $ 8.4 million, and $ 7.5 million for fiscal years 2020, 2019, and 2018, respectively.

loss for property and equipment was $4.2 million, $1.6 million, and $385,000 for fiscal 2019, 2018, and 2017, respectively.

loss for property and equipment was $ 302 ,000, $ 4.2 million, and $ 1.6 million for fiscal 2020, 2019, and 2018, respectively.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Assets Held for Sale

As of September 30, 2018, the Company

had five real estate properties for sale.

The aggregate estimated fair value of the properties less cost to sell as of

September 30, 2018 was approximately $2.9 million and 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 fiscal 2019, we sold all the properties

held for sale as of September 30, 2018.

September 2019, the Company classified as held-for-sale two separate parcels of land subdivided from previously constructed Bombshells

pad sites located in Houston, Texas.

The aggregate estimated fair value of the properties less cost to sell as of September 30,

2019 was approximately $2.9 million.

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.

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.

the three months ended June 30, 2020, the Company sold one held-for-sale property valued at $ 853 ,000 for $ 1.5 million.

the three months ended September 30, 2020, the Company reverted the remaining held-for-sale real estate property with a value

of $ 2.0 million as held and used.

Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months

through property listings by our real estate brokers.

assets held for sale do not have liabilities associated with them that need to be directly settled from the proceeds in the event

of a transaction.

The gain or loss on the sale of these properties held for sale is included in other charges, net in our consolidated

statements of income.

liabilities were associated with held-for-sale assets as of September 30, 2019.

Gains or losses on the sale of properties held

for sale are included in other charges (gains), net within the consolidated statements of operations.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

and other intangible assets consisted of the following (in thousands):

Schedule of Goodwill and Other Intangible Assets

Indefinite useful lives:

Definite useful lives:

Discounted leases

Non-compete agreements

Distribution agreement

Total goodwill and other intangible assets

useful lives:

goodwill and other intangible assets

of Indefinite-lived, Definite-lived Intangible Assets and Goodwill

Lived Intangibles

4 unchanged sentences

Ending balance

of September 30, 2019 and 2018, the accumulated impairment balance of indefinite-lived intangibles was $6.1 million and $5.9 million,

respectively, while the accumulated impairment balance of goodwill was $6.3 million and $4.7 million, respectively.

Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2019

of September 30, 2020 and 2019, the accumulated impairment balance of indefinite-lived intangibles was $ 8.4

million and $ 6.1

million, respectively, while the accumulated

impairment balance of goodwill was $ 14.3

million and $ 6.3

million, respectively.

Future amortization

expense related to definite-lived intangible assets that are subject to amortization at September 30, 2020 is:

2021 - $ 263 ,000;

10 unchanged sentences

of these licenses in a business combination, while the relief-from-royalty method was used in calculating the value of tradenames.

During the fiscal year ended September 30, 2019, the Company recognized a $178,000 impairment related to one club’s SOB

license and a $1.6 million impairment related to the goodwill of four reporting units.

During the fiscal year ended September

30, 2018, the Company recognized a $3.1 million impairment related to three clubs’

SOB licenses and an $834,000 impairment

related to the goodwill of two reporting units.

During the year ended September 30, 2017, the Company recognized an impairment

loss of $4.7 million related to the goodwill of four reporting units, including one held for sale, as well as an impairment loss

of $1.4 million related to two locations’

SOB licenses.

During the fiscal year ended September 30, 2020, the Company recognized a $ 2.3 million impairment related to two clubs’

SOB licenses and a $ 7.9 million impairment related to the goodwill of seven reporting units (see Note 3).

During the fiscal year

ended September 30, 2019, the Company recognized a $ 178 ,000 impairment related to one club’s SOB license and a $ 1.6 million

impairment related to the goodwill of four reporting units.

During the fiscal year ended September 30, 2018, the Company recognized

a $ 3.1 million impairment related to three clubs’ SOB licenses and an $ 834 ,000 impairment related to the goodwill of two

reporting units.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Long-term Debt

debt consisted of the following (in thousands):

Notes payable at 5.5%, matures January 2023

Non-interest-bearing debts to State of Texas, mature March 2022 and May 2022, interest

imputed at 9.6%

Note payable at 5.45%, matures December 2027

Note payable at 5.95%, matures December 2027

Note payable at 12%, matures October 2021

Note payable at 4.99%, collateralized by aircraft, paid June 2019

Notes payable at 12%, mature May 2020

Note payable at 8%, matures May 2020, as amended, subsequently extended

Note payable at 8%, matures May 2029

Note payable at 5.75%, matures December 2027

Note payable at 5.99%, matures December 2032

Note payable at 5%, matures August 2029

Note payable at 5%, matures April 2020

Note payable initially at prime plus 0.5% with a 5.5% floor, matures September 2030

Note payable at 8%, matures May 2021

Note payable at 5.95%, matures August 2039

Note payable at 12%, matures August 2021

Note payable at 9%, matures September 2028

Note payable at 6.1%, paid February 2019

Note payable at 5.95%, matures September 2028

Note payable at 7%, paid April 2019

Note payable at 6%, matures February 2040

Note payable at 5.49%, matures December 2038

Note payable at 7%, matures November 2024

Note payable at 7%, matures November 2020

Notes payable at 12%, mature November 2021

Note payable at 8%, matures November 2028

Less unamortized debt discount and issuance costs

Less current portion

Total long-term portion of debt

* Collateralized

by real estate

** Collateralized

by stock in subsidiary

commercial bank debts are guaranteed by the Company’s CEO.

Schedule of Long-term Debt

payable at 5.5 %, matures January 2023

Non-interest-bearing

debts to State of Texas, mature March 2022 and May 2022 , interest imputed at 9.6 %

payable at 5.75 % ,

matures December

2027, as amended

payable at 5.95 %,

matures December

2027 , as amended

*(a)(6iii)(7)

payable at 12 %, matures February 2030 , as amended

payable at 12 %,

mature November

payable at 8 %,

matures October

2022 , as amended

payable at 8 %, matures May 2029

payable at 5.75 %,

matures December

2027 , as amended

*(a)(6i)(7)(8)(9)

payable at 5.99 %,

matures September

2033 , as amended

payable at 5 %, matures August 2029

payable at prime

plus 0.5 % with a 5.5 % floor, matures September

2035 , as amended

payable initially at prime plus 0.5 % with a 5.5 % floor, matures September 2030

payable at 8 %, matures May 2021

payable at 5.95 %,

matures August

2039 , as amended

payable at 12 %, matures February 2030 , as amended

payable at 9 %, matures September 2028

payable at 5.95 %,

matures September

2028 , as amended

payable at 6 %,

matures February

2040 , as amended

payable at 5.49 %, matures March 2039 , as amended

payable at 7 %, matures November 2024

payable at 7 %, matures February 2021 , as amended

payable at 12 %, mature November 2021

payable at 8 %, matures November 2028

Protection Program loans at 1 %, matures May 2022

unamortized debt discount and issuance costs

current portion

long-term portion of debt, net

commercial bank debts are guaranteed by the Company’s CEO.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Long-term Debt - continued

Debt - continued

is a summary of long-term debt at September 30 (in thousands):

Secured by real estate

Secured by stock in subsidiary

Secured by other assets

In connection with the acquisition of Silver

City in January 2012, the Company executed notes to the seller in the amount of $ 1.5 million.

The notes are payable over eleven

years at $12,256 per month including interest and have an adjustable interest rate of 5.5%.

The rate adjusts to prime plus 2.5%

in the 61st month, not to exceed 9%.

In the same transaction, the Company also acquired the related real estate and executed notes

to the seller for $6.5 million.

The notes are also payable over eleven years at $53,110 per month including interest and have

Schedule of Long-term Debt Instruments

(a) Secured by real estate

(b) Secured by stock in subsidiary

(d) Unsecured

In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $ 1.5

The notes are payable over eleven years at $ 12,256 per month including interest and have an adjustable interest rate of 5.5 %.

The rate adjusts to prime plus 2.5 % in the 61st month, not to exceed 9% .

In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $ 6.5

million , which have been paid

off in relation to the December 2017 Refinancing Loan, as discussed below.

The notes are also payable over eleven

years at $ 53,110

per month including interest and have

the same adjustable interest rate of 5.5 % .

The real estate notes, with original principal of $6.5 million, has been fully paid

in relation to the first note of the December 2017 Refinancing Loan, as discussed below.

In 2015, the Company reached a settlement with the State of Texas

over 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 nonsettled locations.

For accounting purposes, the Company has discounted the $10.0 million at an imputed interest rate

of 9.6%, establishing a net present value for the settlement of $7.2 million.

In March 2017, the Company settled with the State

of Texas for one of the two remaining unsettled Patron Tax locations.

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.

forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $5 per customer.

On July 30, 2015, a subsidiary of the Company

acquired the building in which the Company’s Miami Gardens, Florida nightclub operates.

The cost was $15,300,000 and was

purchased with an $11,325,000 note, payable in monthly installments of approximately $78,000 including interest at 5.45% and matures

in five years, and the balance with cash.

The building has several other third-party tenants in addition to the Company’s

There are certain financial covenants with which the Company must be in compliance related to this financing.

note has been fully refinanced in relation to the second note of the December 2017 Refinancing Loan, as discussed below.

In August 2016, the Company refinanced

two notes payable with an aggregate carrying value of $6.1 million with a $9.0 million bank note at an interest rate of 5.95%.

The note matures in 10 years with monthly installments of $100,062 and a balloon payment at maturity for the remaining balance.

This note has been fully refinanced in relation to the third note of the December 2017 Refinancing Loan, as discussed below.

In 2015, the Company reached a settlement with the State of Texas over 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 nonsettled locations.

For accounting purposes, the Company

has discounted the $10.0 million at an imputed interest rate of 9.6 % ,

establishing a net present value for the settlement of $ 7.2

In March 2017, the Company settled

with the State of Texas for one of the two remaining unsettled Patron Tax locations.

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.

In March 2017, the

present value of the second note was approximately $ 390,000 after discounting using an imputed interest rate of 9.6 %.

forward, the Company agreed to remit the Patron Tax on a regular basis, based on the current rate of $ 5

per customer.

On October 5, 2016, the Company refinanced $ 8.0

$8.0 million of long-term debt by borrowing $9.9 million.

The new unsecured debt is payable $118,817 per month, including interest

at 12%, and matures in five years with a balloon payment for the remaining balance at maturity.

This note has been partially paid

in relation to the first note of the December 2017 Refinancing Loan, as discussed below.

In June 2010, the Company borrowed $518,192

from a lender.

The funds were used to purchase an aircraft.

The debt bore interest at 6.30% with monthly principal and interest

payments of $3,803 beginning in July 2010, maturing June 2030.

This note was refinanced with a bank in April 2017 with the borrowing

of $952,690 at 4.99% for 20 years, together with a purchase of a new aircraft.

Monthly payments for the new note was at $6,286,

including interest, beginning in May 2017.

This note has been paid off in 2019.

million of long-term debt by borrowing

$ 9.9 million.

The new unsecured debt is payable $ 118,817

per month, including interest at 12 % ,

and matures in five years with

a balloon payment for the remaining balance at maturity.

This note has been partially paid in relation to the first note of the

December 2017 Refinancing Loan, as discussed below.

Also refer to the February 20, 2020 loan restructuring below.

(4) On May 1, 2017, the Company raised

million through the issuance of 12% unsecured promissory notes to certain investors, which notes mature on May 1, 2020.

pay interest-only in equal monthly installments, with a lump sum principal payment at maturity.

On August 15, 2018 and September

26, 2018, the Company refinanced $2.0 million and $500,000 of the notes, respectively.

The $2.0 million note was exchanged for

a $4.0 million 12% note maturing in three years with interest-only payments until maturity, where the full principal is to be

The $500,000 note was exchanged for a $1.35 million 9% note maturing in 10 years with monthly payments of $17,101, including

On November 1, 2018, the Company refinanced two notes with a total principal of $400,000 with certain investors.

succeeding paragraph related to November 1, 2018 financing below.

Included in the balance of long-term debt as of September 30,

2019 and 2018 is a $200,000 note, that is a part of the May 1, 2017 financing, borrowed from a non-officer employee in which the

terms of the note are the same as the rest of the lender group.

On May 8, 2017, in relation to the Scarlett’s

acquisition (see Note 15), the Company executed two promissory notes with the sellers:

(i) a 5% short-term note for $5.0 million

payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8% note for $15.6 million.

The 12-year note

is payable $168,343 per month, including interest.

The Company amended the $5.0 million short-term note payable, which had a remaining

balance of $3.0 million as of amendment date, several times extending the maturity date to October 1, 2022 and increasing the

interest rate to 8% for its remaining term.

million through the issuance of 12 %

unsecured promissory notes to certain investors, which note s mature

The notes pay interest-only in equal monthly installments,

with a lump sum principal payment at maturity.

On August 15, 2018 and September 26, 2018, the Company refinanced $ 2.0

million and $ 500,000

of the notes, respectively.

The $2.0 million note was exchanged

note maturing in three

years with interest-only payments until maturity, where

the full principal is to be paid.

The $500,000 note was exchanged for a $ 1.35

note maturing in 10

years with monthly payments of $ 17,101 ,

including interest.

On November 1, 2018, the Company refinanced two notes with a total principal of $ 400,000

with certain investors.

See succeeding paragraph related

to November 1, 2018 financing below.

Included in the balance of long-term debt as of September 30, 2020 and 2019 is a $ 200,000

note, that is a part of the May 1, 2017 financing, borrowed

from a non-officer employee in which the terms of the note are the same as the rest of the lender group.

Refer to May 1, 2020

extension below.

On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 16), the Company executed two promissory notes with

short-term note for $ 5.0

million payable in lump sum after six

months from closing date and (ii) a 12 -year

amortizing 8 %

note for $ 15.6

The 12-year note is payable $ 168,343

per month, including interest.

amended the $ 5.0

million short-term note payable, which

had a remaining balance of $ 3.0

million as of amendment date, several

times extending the maturity date to October

1, 2022 and increasing the interest rate

for its remaining term.

Refer to December

2019 amendment below.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Long-term Debt - continued

December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank for $81.2

The December 2017 Refinancing Loan fully refinanced 20 of the Company’s notes payable and partially paid down 1

note payable (collectively, “Repaid Notes”) with interest rates ranging from 5% to 12% covering 43 parcels of real

properties the Company previously acquired (“Properties”).

The December 2017 Refinancing Loan consists of three promissory

Debt - continued

On December 14, 2017, the Company entered into a loan agreement (“December 2017 Refinancing Loan”) with a bank for

The December 2017 Refinancing

Loan fully refinanced 20 of the Company’s notes payable and partially paid down 1 note payable (collectively, “Repaid

Notes”) with interest rates ranging from 5 % to 12 % covering 43 parcels of real properties the Company previously acquired

(“Properties”).

The December 2017 Refinancing Loan consists of three promissory notes:

first note amounts to $ 62.5 million with a term of 10 years at a 5.75% fixed interest rate for the first five years , then

2 unchanged sentences

of $ 442,058 , based upon a 20 -year amortization period, with the balance payable at maturity;

second note amounts to $10.6 million with a term of 10 years at a 5.45% fixed interest rate until July 2020, after which to

be repriced at a fixed interest rate of 5.75% until the fifth anniversary of this note, and then to be repriced again at the

then interest rate of the first note.

This note is payable $78,098 monthly for principal and interest until July 2020, based

upon a 20-year amortization period, after which the monthly payment for principal and interest is adjusted accordingly based

on the repricing, with the balance payable at maturity;

second note amounts to $ 10.6

million with a term of 10

years at a 5.45 %

fixed interest rate until

July 2020 , after which to be repriced

at a fixed interest rate of 5.75 %

until the fifth anniversary of this

note, and then to be repriced again at the then interest rate of the first note.

This note was payable $ 78,098

monthly for principal and interest

until July 2020, based upon a 20 -year

amortization period, after which the monthly payment for principal and interest was adjusted accordingly based on the

repricing, with the balance payable at maturity;

third note amounts to $ 8.1 million with a term of 10 years at a 5.95 % fixed interest rate until August 2021 , after which to

3 unchanged sentences

balance payable at maturity.

In addition to the monthly principal and interest

payments as provided above, the Company paid monthly installments of principal of $250,000, applied to the first note,

until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017 Refinancing Loan and

the then current value of the Properties, is not greater than 65%.

The loan-to-value ratio of the Properties fell below 65%

in October 2019, hence, we stopped paying the additional $250,000 monthly.

The December 2017 Refinancing Loan has eliminated

balloon payments of the Repaid Notes worth $2.9 million originally scheduled in fiscal 2018, $19.4 million originally scheduled

in fiscal 2020 and $5.3 million originally scheduled in fiscal 2021.

There are certain financial covenants with which the Company

must be in compliance related to this financing.

In addition to the monthly principal and interest payments as provided above, the Company paid monthly installments of principal of $ 250,000 , applied to the first note, until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017 Refinancing Loan and the then current value of the Properties, is not greater than 65%.

The loan-to-value ratio of the Properties

fell below 65% in October 2019, hence, we stopped paying the additional $250,000 monthly.

The December 2017 Refinancing Loan has eliminated balloon payments of the Repaid Notes worth $ 2.9

million originally scheduled in fiscal

2020 and $ 5.3

million originally scheduled in fiscal

There are certain financial covenants with which the Company must be in compliance related to this financing.

waivers of compliance from the bank lender for financial covenants as of September 30, 2020.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Long-term Debt - continued

In connection with the Repaid Notes, we wrote

off $279,000 of unamortized debt issuance costs to interest expense.

Prior to September 30, 2017, the Company paid a portion of

debt issuance costs amounting to $612,500, which was included in other assets until the closing of the transaction.

the Company paid an additional $764,000 in debt issuance costs, which together with the $612,500 prepayment will be amortized

for the term of the loan using the effective interest rate method.

We also paid prepayment penalties amounting to $543,000 on

the Repaid Notes, which was included in interest expense in our consolidated statement of income for the year ended September

in the $62.5 million first note of the December 2017 Refinancing Loan was $4.6 million that was escrowed at closing due to the

bank lender of one of the Repaid Notes.

The amount was released from escrow in June 2018 when the construction, for which the

original note was borrowed, was completed.

December 7, 2017, the Company borrowed $7.1 million from a lender to purchase an aircraft at 5.99% interest.

The transaction was

partly funded by trading in an aircraft that the Company owned with a carrying value of $3.4 million, with an assumption of the

old aircraft’s note payable liability of $2.0 million.

The aircraft note is payable in 15 years with monthly payments of

Debt - continued

In connection with the Repaid Notes, we wrote off $ 279,000

of unamortized debt issuance costs to

interest expense.

Prior to September 30, 2017, the Company paid a portion of debt issuance costs amounting to $ 612,500 ,

which was included in other assets until the closing of the transaction.

At closing, the Company paid an additional $ 764,000

in debt issuance costs, which together

with the $612,500 prepayment will be amortized for the term of the loan using the effective interest rate method.

prepayment penalties amounting to $ 543,000

on the Repaid Notes, which was included

in interest expense in our consolidated statement of operations for the year ended September 30, 2018.

Included in the $62.5 million first note of the December 2017 Refinancing Loan was $ 4.6

million that was escrowed at closing due

to the bank lender of one of the Repaid Notes.

The amount was released from escrow in June 2018 when the construction, for which

the original note was borrowed, was completed.

In March and August 2020, certain principal and interest payments for the three

notes of the December 2017 Refinancing Loan were deferred to their maturity dates.

On December 7, 2017, the Company borrowed $ 7.1

million from a lender to purchase an aircraft

The transaction was partly funded

by trading in an aircraft that the Company owned with a carrying value of $ 3.4

million, with an assumption of the old

aircraft’s note payable liability of $ 2.0

The aircraft note is payable

years with monthly payments of $ 59,869 ,

which includes interest.

February 15, 2018, the Company borrowed $3.0 million from a bank for the purchase of land at a cost of $4.0 million with the difference

paid by the Company in cash.

The bank note bears interest at 5.25% adjusted after 36 months to prime plus 1% with a floor of 5.2%

and matures on February 15, 2038.

The bank note is payable interest-only during the first 18 months, after which monthly payments

In March 2020, this loan was extended to September 2033 .

February 15, 2018, the Company borrowed $ 3.0

million from a bank for the purchase of land at a cost

of $ 4.0 million

with the difference paid by the Company in cash.

The bank note bears interest at 5.25 % adjusted after 36 months to prime plus

1 % with a floor of 5.2 % and matures on February 15, 2038 .

The bank note is payable interest-only during the first 18 months, after

which monthly payments of principal and interest will be made based on a 20 -year amortization with the remaining balance to be

paid at maturity.

On August 28, 2018, this note was refinanced for additional construction loan having a maximum availability

The new note has an initial interest rate of 5.95 %,subject to a repricing after 72 months to prime plus 1 % with a 5.9 % floor.

The note is payable $ 53,084 per month, including interest, for 72 months, then adjusted based on repriced interest rate until its August 2039 maturity.

In May 2020, certain principal and interest payments for this note were deferred to its maturity date.

On February 20, 2018, the Company refinanced a bank note with a balance of $ 1.9

million, bearing interest of 2 %

over prime with a 5.5 %

floor, with the same bank for a construction

loan with maximum availability of $ 4.7

The construction loan agreement

bears an interest rate of prime plus 0.5 %

with a floor of 5.0 %

and matures on August

During the first 18 months of the construction loan, the Company will make monthly interest-only payments, and after such, monthly payments

of principal and interest will be made based on a 20 -year amortization with the remaining balance to be paid at maturity .

28, 2018, this note was refinanced for additional construction loan having a maximum availability of $7.4 million.

has an initial interest rate of 5.95%, subject to a repricing after 72 months to prime plus 1% with a 5.9% floor.

payable $53,084 per month, including interest, for 72 months, then adjusted based on repriced interest rate until its August 2039

February 20, 2018, the Company refinanced a bank note with a balance of $1.9 million, bearing interest of 2% over prime with

a 5.5% floor, with the same bank for a construction loan with maximum availability of $4.7 million.

The construction loan

agreement bears an interest rate of prime plus 0.5% with a floor of 5.0% and matures on August 20, 2029.

During the first 18

months of the construction loan, the Company will make monthly interest-only payments, and after such, monthly payments of

principal and interest will be made based on a 20-year amortization with the remaining balance to be paid at maturity.

are certain financial covenants with which the Company must be in compliance related to this financing.

April 24, 2018, the Company acquired certain land for future development of a Bombshells in Houston, Texas for $5.5 million, financed

with a bank note for $4.0 million, payable interest only at prime plus 0.5% with a floor of 5% per annum.

The note matures in

24 months, by which date the principal is payable in full.

On September 17, 2018, the Company and the bank lender agreed to carve

out a portion of the loan that relates to the land where the Bombshells location is to be built amounting to $960,000, and added

a construction loan with a maximum availability of $2.9 million.

The new $2.9 million construction loan has an interest rate of

prime plus 0.5%, with a 5.5% floor, and payable in 12 years.

The first 24 months will be interest-only payments, after which monthly

payments of principal and interest will be made based on a 20-year amortization.

There are certain financial covenants with

which the Company must be in compliance related to this financing.

May 25, 2018, the Company acquired a club in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest

The note matures in three years and is payable in monthly installments of $20,276, including interest, based on a five-year

There are certain financial covenants with which the Company must be in compliance related to this financing.

We are in compliance with these financial covenants as of September 30, 2020.

(13) On April 24, 2018, the Company acquired

certain land for future development of a Bombshells in Houston, Texas for $ 5.5

million, financed with a bank note for $ 4.0

million, payable interest only at prime plus 0.5 %

with a floor of 5 %

The note matures in 24 months ,

by which date the principal is payable in full.

In March and July 2020, in view of the pandemic, the bank lender and the Company

agreed to defer the maturity of this note to October 2020.

In September 2020, they further negotiated to refinance the note

with a deferral of maturity to September 2035 with monthly amortization payments of $ 16,396 ,

including interest.

On September 17, 2018, the Company and the bank lender agreed to carve out a portion of the loan that

relates to the land where the Bombshells location is to be built amounting to $ 960,000 ,

and added a construction loan with a maximum availability of $ 2.9

The new $2.9 million construction loan has an interest rate of prime plus 0.5 % ,

floor, and payable in 12

The first 24 months will be interest-only payments, after

which monthly payments of principal and interest will be made based on a 20 -year

amortization.

There are certain financial covenants with which the Company must be in compliance related to this financing.

are in compliance with these financial covenants as of September 30, 2020.

(14) On May 25, 2018, the Company acquired

a club in Kappa, Illinois for $ 1.5

million, financed by a $ 1.0

million seller note with interest at 8 % .

The note matures in three

years and is payable in monthly installments of $ 20,276 ,

including interest, based on a five -year

amortization with the remaining balance to be paid at maturity.

1 unchanged sentence

to Consolidated Financial Statements

Long-term Debt - continued

On August 15, 2018, the Company refinanced

a $2.0 million note payable for $4.0 million from a private lender by executing a 12% 3-year note payable $40,000 monthly starting

September 15, 2018, with the remaining principal and interest balance payable at maturity.

September 6, 2018, the Company borrowed $1.55 million from a bank lender to finance the acquisition of the remaining not-owned

interest in a joint venture.

The 10-year note payable has an initial interest rate of 5.95% until after five years when the interest

rate is adjusted to the U.S.

Debt - continued

On August 15, 2018, the Company refinanced a $ 2.0

million note payable for $ 4.0

million from a private lender by executing

note payable $ 40,000

monthly starting September 15, 2018, with

the remaining principal and interest balance payable at maturity.

See February 20, 2020 extension below.

On September 6, 2018, the Company borrowed $ 1.55

million from a bank lender to finance

the acquisition of the remaining not-owned interest in a joint venture.

The 10 -year note payable has an initial interest rate

of 5.95 % until after five years when the interest rate is adjusted to the U.S.

Treasury rate plus 3.5 %, with a 5.95 % floor.

Monthly payments of $11,138, including interest, is

due for five years until an adjustment in monthly payments based on the interest rate repricing.

The Company paid approximately

payments of $ 11,138 ,

including interest, is due for five years until an adjustment in monthly payments based on the interest rate repricing.

paid approximately $ 40,000

in debt issuance costs at closing.

September 14, 2018, the Company acquired land worth $2.75 million for a future Bombshells location by executing a note with a

bank lender for $1.5 million and paying the remainder in cash.

The 6.1% one-year note has monthly interest-only payments

of $7,625 with the full principal payable at maturity.

The Company paid approximately $22,000 in debt issuance costs at closing.

On September 25, 2018, the Company borrowed

$5.0 million through a credit facility with a bank lender.

The loan has a 7% fixed interest rate.

The loan was payable

$200,000 weekly, which included interest, until maturity.

This loan was fully paid in April 2019.

September 26, 2018, the Company refinanced a $500,000 12% note payable for $1.35 million from a private lender by executing a

9% 10-year note payable $17,101 monthly, including interest, until maturity.

November 1, 2018, the Company raised $2.35 million through the issuance of 12% unsecured promissory notes to certain investors,

which notes mature on November 1, 2021.

The notes pay interest-only in equal monthly installments, with a lump sum principal payment

Among the promissory notes are two notes with a principal of $450,000 and $200,000.

The $450,000 note was in exchange

for a $300,000 12% note and the $200,000 note was in exchange for a $100,000 note, both of which were included in the May 1, 2017

financing to acquire Scarlett’s Cabaret in Miami.

Also included in the $2.35 million borrowing is a $500,000 note borrowed

from a related party (see Note 20) and two notes totaling $400,000 borrowed from a non-officer employee and a family member of

a non-officer employee in which the terms of the notes are the same as the rest of the lender group.

November 1, 2018, we acquired a club in Chicago that was partially financed by a $4.5 million 6-year 7% seller note.

See additional

details in Note 15.

November 5, 2018, we acquired a club in Pittsburgh that was partially financed by two seller notes payable.

See additional details

December 11, 2018, the Company purchased an aircraft for $2.8 million with a $554,000 down payment and financed the remaining

$2.2 million with a 5.49% promissory note payable in 20 years with monthly payments of $15,118, including interest.

February 8, 2019, the Company refinanced a one-year bank note with a balance of $1.5 million, bearing an interest rate of 6.1%,

with a construction loan with another bank, which has an interest rate of 6.0% adjusted after five years to prime plus 0.5% with

a 6.0% floor per annum.

The new construction loan, which has a maximum availability of $4.1 million, matures in 252 months from

closing date and is payable interest-only for the first 12 months, then principal and interest of $29,571 monthly for the next

48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate.

paid approximately $69,000 in loan costs of which approximately $19,600 was capitalized as debt issuance costs on the new construction

loan with the remaining charged to interest expense.

The Company also wrote off the remaining unamortized debt issuance costs

of the old bank note to interest expense.

There are certain financial covenants with which the Company must be in compliance

related to this financing.

March and August 2020, certain principal and interest payments for this note were deferred to its maturity date.

There are certain financial covenants with which the Company must be in compliance related to this note.

obtained a waiver of compliance from the bank lender for financial covenants as of September 30, 2020.

(17) On Septem ber

26, 2018, the Company refinanced a $ 500,000

note payable for $ 1.35

million from a private lender by executing a 9 %

note payable $ 17,101

monthly, including interest, until maturity.

(18) On November 1, 2018, the Company

raised $ 2.35

million through the issuance of 12 %

unsecured promissory notes to certain investors, which notes mature on November

The notes pay interest-only in equal monthly installments, with a lump sum principal payment at maturity.

the promissory notes are two notes with a principal of $ 450,000

and $ 200,000 .

The $450,000 note was in exchange for a $ 300,000

12% note and the $200,000 note was in exchange for a $ 100,000

note, both of which were included in the May 1, 2017 financing to acquire Scarlett’s Cabaret in Miami.

Also included

in the $ 2.35

million borrowing are two notes for $ 500,000

and $ 100,000 borrowed from related parties (see Note 21) and one note for $ 300,000

borrowed from a non-officer employee in which the terms of the notes

are the same as the rest of the lender group.

On November 1, 2018, we acquired a club in Chicago that was

partially financed by a $ 4.5

million 6 -year

See additional details related

to the acquisition in Note 16.

On November 5, 2018, we acquired a club in Pittsburgh that was

partially financed by two seller notes payable.

The first note is a 2 -year 7 % note for $ 2.0 million and the second is a 10 -year

8 % note for $ 5.5 million.

See additional details related to the acquisition in Note 16.

On September 30, 2020, the

maturity date for the first note was extended to February 2021 .

On December 11, 2018, the Company purchased an aircraft for

$ 2.8 million

with a $ 554,000 down

payment and financed the remaining $ 2.2

million with a 5.49 %

note payable in 20 years with monthly payments of

including interest.

Certain principal and interest payments during the quarter ended June 30, 2020 were deferred until maturity

On February 8, 2019, the Company refinanced a one-year bank note with a balance of $ 1.5

million, bearing an interest rate of 6.1 %,

with a construction loan with another

bank, which has an interest rate of 6.0 %

adjusted after five years to prime plus

floor per annum.

The new construction loan, which has a maximum availability of $ 4.1 million, matures in 252 months from closing date and is payable interest-only for the first 12 months, then principal and interest of $ 29,571

monthly for the next 48 months, and the remaining term monthly payments of principal and interest based on the adjusted interest rate.

The Company paid approximately $ 69,000

in loan costs of which approximately $ 19,600

was capitalized as debt issuance costs

on the new construction loan with the remaining charged to interest expense.

The Company also wrote off the remaining unamortized

debt issuance costs of the old bank note to interest expense.

There are certain financial covenants with which the Company must

be in compliance related to this financing.

In March 2020, certain principal and interest payments for this note were deferred

to its maturity date.

We are in compliance with these financial covenants as of September 30, 2020.

(23) In December 2019, the Company amended

the $ 5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $ 3.0

million as of the amendment date, extending the maturity date to October 1, 2022.

The amendment did not have an impact in the

Company’s results of operations and cash flows.

(24) On February 20, 2020, in

relation to a $ 4.0

note payable earlier refinanced on August 15, 2018, the

Company restructured the note with a private lender by executing a 12% 10-year note payable $ 57,388

monthly, including interest, starting March 2020.

The restructured note eliminates a scheduled balloon principal payment

million in August 2021.

The refinancing did not have an impact on the Company’s results of operations and cash flows.

(25) On February 20, 2020, in

relation to a $ 9.9

note payable that was partially 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

million in October 2021.

As a result of the refinancing, the Company wrote off approximately $ 25,400

in unamortized debt issuance cost as interest expense in our consolidated statement of operations for the year ended September

(26) 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 is now $ 1,940,000 .

In October 2020, $ 1,690,000 of these notes were again extended

to November 2021 .

(27) On May 8, 2020, the Company received

approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge amounting to $5.4

If not forgiven, under the terms of the loans as provided by the CARES Act, the

twelve PPP loans bear an interest rate of 1% per annum.

As of the filing of this report, we have received ten

Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted.

of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $ 4.9

See Notes 3 and 11.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Long-term Debt –

maturities of long-term debt consist of the following (in thousands):

Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in

the federal corporate income tax rate from 35% to 21% effective January 1, 2018.

Our federal corporate income tax rate for fiscal

2018 was 24.5% percent and represents a blended income tax rate for the current fiscal year.

For fiscal 2019, our federal corporate

income tax rate was 21%.

Debt – continued

maturities of debt obligations as of September 30, 2020 consist of the following (in thousands):

Schedule of Maturities of Long-term Debt

Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in

the federal corporate income tax rate from 35% to 21 %

January 1, 2018 .

Our federal corporate income

tax rate for fiscal 2018 was 24.5 %

and represents a blended income tax rate

for that fiscal year.

For fiscal 2020 and 2019, our federal corporate income tax rate was 21 % .

Additionally,

2 unchanged sentences

The remeasurement

resulted in a $8.8 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance

sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for

the fiscal year ended September 30, 2018.

We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin

resulted in a $ 8.8 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet

as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of operations for the

fiscal year ended September 30, 2018.

We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin No.

tax expense (benefit) consisted of the following (in thousands):

Schedule of Income Tax Expense (Benefit)

Ended September 30,

State and local

Total current income tax expense

Total current income tax expense (benefit)

State and local

5 unchanged sentences

Income Taxes - continued

tax expense (benefit) differs from the “expected”

income tax expense computed by applying the U.S.

tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S.

federal statutory

rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

Schedule of Components of Income Tax Expense (Benefit)

Ended September 30,

Computed expected income tax expense

Computed expected income tax expense (benefit)

State income taxes, net of federal benefit

2 unchanged sentences

Change in deferred tax liability rate

Reserve for uncertain tax position

Change in valuation allowance

Total income tax expense (benefit)

1 unchanged sentence

reporting purposes and the amounts used for income tax purposes.

The significant components of the Company’s deferred tax

assets and liabilities were as follows (in thousands):

Schedule of Deferred Tax Assets and Liabilities

Deferred tax assets:

Capital loss carryforwards

Valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Property and equipment

Deferred tax liabilities

Net deferred tax liability

Included in the Company’s deferred tax

liabilities at September 30, 2019 and 2018 is approximately $19.3 million and $17.3 million, respectively, representing

the tax effect of indefinite-lived intangible assets from club acquisitions which are not deductible for tax purposes.

in the Company’s deferred tax liabilities at September 30, 2020 and 2019 is the tax effect of indefinite-lived intangible

assets from club acquisitions amounting to approximately $ 14.9

million and $ 19.3

million , respectively, which are not deductible for tax purposes.

These deferred

tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.

Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position

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of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest

During the year ended September 30, 2019 and 2018, the Company has accrued $0 and $165,000, respectively, (all related

to previous years’

taxes) in uncertain state tax positions.

In fiscal 2018, the Company released $700,000 of uncertain tax

positions due to a settlement with New York state.

In fiscal 2019, the Company released the remaining amount accrued when the

examination was closed.

In fiscal 2018, the Company released $ 700,000

of uncertain tax positions due to a settlement

with New York state.

In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Income Taxes - continued

following table shows the changes in the Company’s uncertain tax positions (in thousands):

Schedule of Uncertain Tax Positions

Ended September 30,

Balance at beginning of year

Additions for tax positions of prior years

Decrease related to settlements with taxing authorities

Reduction due to lapse from closed examination

Balance at end of year

full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any

at beginning of year

for tax positions of prior years

related to settlements with taxing authorities

due to lapse from closed examination

at end of year

full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any

federal tax benefits.

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the next twelve months.

The Company or one of its subsidiaries files

income tax returns in the U.S.

Company or one of its subsidiaries files income tax returns in the U.S.

federal jurisdiction, and various states.

Fiscal year ended September 30, 2016 and subsequent

years remain open to tax examination.

The Company’s federal income tax returns for the years ended September 30, 2015,

2014 and 2013 have been examined by the Internal Revenue Service with no changes.

These years are now under examination for payroll

The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.

The Company’s

federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue

Service with only immaterial changes.

Fiscal year ended September 30, 2018 and subsequent years remain open to federal

tax examination.

The Company is also being examined for state income taxes, the outcome of which may occur within the next

twelve months.

March 27, 2020, President Trump signed the CARES Act into law.

As a result of this, additional avenues of relief may be

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, 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 a Paycheck Protection Program, whereby certain small businesses are eligible

for a loan to fund payroll expenses, rent, and related costs.

The loan may be forgiven if the funds are used for payroll and

other qualified expenses.

The Company 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 $ 271,000 to

$ 579,000 for

an aggregate amount of $ 4.2 million;

our shared-services subsidiary received $ 1.1 million;

and one of our lounges received $124,000 .

None of our adult nightclub and other non-core business subsidiaries

received funding under the PPP.

The Company believes it has used the entire loan amount for qualifying expenses.

terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the

The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications.

the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small Business Administration out

of the twelve of our PPP loans granted.

of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $ 4.9

No assurance can be provided

that the Company will in fact obtain forgiveness of the remaining two PPP loans in whole or in part.

Commitments and Contingencies

The Company leases certain equipment and facilities

under operating leases, of which rent expense was approximately $3.9 million, $3.8 million, and $3.3 million for the years ended

September 30, 2019, 2018, and 2017, respectively.

These leases include 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 rent expense totaled $78,000, $55,250, and $0

for the years ended September 30, 2019, 2018, and 2017, respectively (this lease terminated on December 31, 2019).

Rent 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 rent expense is attributed to each period during the

term of the lease, regardless of when actual payments are made.

Generally, this results in rent expense in excess of cash payments

during the early years of a lease and rent expense less than cash payments in the later years.

The difference between rent expense

recognized and actual rental payments is accumulated and included in other long-term liabilities in the consolidated balance sheets.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Commitments and Contingencies - continued

future minimum annual lease obligations as of September 30, 2019 are as follows (in thousands):

Total future minimum lease obligations

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 consolidated statements of income, in the amount

of $255,000, $254,000, and $106,000 for the fiscal year ended September 30, 2019, 2018, and 2017, respectively.

2015, the Company reached a settlement with the State of Texas over the payment of the state’s Patron Tax on adult club

To resolve the issue of taxes owed, the Company agreed to pay $ 10 .0 million in equal monthly installments of $ 119,000 ,

4 unchanged sentences

the $ 10 .0 million at an imputed interest rate of 9.6 %, establishing a net present value for the settlement of $ 7.2 million.

a consequence, the Company has recorded an $8.2 million pre-tax gain for the third quarter ending June 30, 2015, representing

the difference between the $7.2 million and the amount previously accrued for the tax.

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.

March 2017, the Company settled with the State of Texas for one of the two remaining unsettled Patron Tax locations.

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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.

Constitutional challenges

remain and will be resolved at trial.

of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority.

On March 6, 2020,

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.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters –

Matters – continued

Insurance Corporation

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.

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”).

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

2 unchanged sentences

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% 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 September 30, 2019,

we have 2 unresolved claims out of the original 71 claims.

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

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

The Company has retained counsel to defend against and evaluate these claims and lawsuits.

We are funding 100 % of the costs

of litigation and will seek reimbursement from the bankruptcy receiver.

The Company filed the appropriate claims against IIC with

the Receiver before the January 16, 2015 deadline and has provided updates as requested;

however, there are no assurances of any

recovery from these claims.

It is unknown at this time what effect this uncertainty will have on the Company.

As previously stated,

since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will

cover any claims arising from actions after that date.

As of September 30, 2020, we have 2 unresolved claims out of the original

Class and Derivative Actions

4 unchanged sentences

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’

damages, costs, and attorneys’ fees.

These lawsuits are Hoffman v.

9 unchanged sentences

The plaintiffs in all three cases moved to consolidate the purported class

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.

On January 10, 2020 an order consolidating the Hoffman , Grossman , and Gu cases was entered by the

The consolidated case is styled In re RCI Hospitality Holdings, Inc.

4:19-cv-01841.

The Company intends to vigorously defend against

This action is in its preliminary phase, and a potential loss cannot yet be estimated.

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 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’

On February 24, 2020, the

plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b)

and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder.

In addition to naming the Company, Eric Langan,

and Phil Marshall, the amended complaint also adds director Nourdean Anakar and former director Steven Jenkins as defendants.

On April 24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim

upon which relief can be granted.

As of December 12, 2020, briefing on the motion to dismiss is complete, and we are currently

waiting for the court to rule on the motion.

The Company intends to continue to vigorously defend against this action.

is in its preliminary phase, and a potential loss cannot yet be estimated.

August 16, 2019, a shareholder derivative action was filed in the Southern District of Texas, Houston Division against officers

and directors Eric S.

Langan, Phillip Marshall, Nourdean Anakar, Yura Barabash, Luke Lirot, Travis Reese, former director

Steven Jenkins, and RCI Hospitality Holdings, Inc., as nominal defendant.

The action alleges that the individual officers and

directors made or caused the Company to make a series of materially false and/or misleading statements and omissions regarding

the Company’s business, operations, prospects, and legal compliance and engaged in or caused the Company to engage in, inter

alia, related party transactions, questionable uses of corporate assets, and failure to maintain internal controls.

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.

, is in its early stage, and

a potential loss cannot yet be estimated.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters –

Matters – continued

Matter and Internal Review

2 unchanged sentences

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

3 unchanged sentences

As of the date hereof, the internal review has been completed.

subject to any ongoing cooperation with regulatory authorities.

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.

Since the initiation of the informal inquiry

in early 2019 and the investigation conducted by the SEC thereafter, the Company and its management have fully cooperated

with the SEC.

September 21, 2020, the SEC concluded its investigation and reached a settlement with the Company, Eric Langan, and Phil Marshall.

Separately, the SEC also reached a settlement with a former director.

As part of the settlement, the Company, Eric Langan, and

Phil Marshall agreed, without admitting or denying the allegations, to an order instituting cease-and-desist proceedings regarding

certain sections of the Securities Exchange Act of 1934 and certain rules promulgated thereunder.

The SEC’s order as to the Company,

Eric Langan, and Phil Marshall found that, from fiscal 2014 through 2019, the Company failed to disclose a total of $ 615,000 in

executive compensation in the form of perquisites.

According to the order, these undisclosed perquisites included the cost of

the personal use of the Company’s aircraft and Company-provided vehicles, reimbursements for personal airline flights, charitable

corporate contributions to the school two of Mr.

Langan’s children attended, and housing costs and meal allowance for Mr.

In addition, the order found that the Company failed to disclose related party transactions involving Mr.

father and brother and a director’s brother.

The order further found that the Company failed to keep books and records that

allowed it to report, and lacked sufficient internal controls concerning, these executive perquisites and related party transactions.

The SEC’s order as to the Company,

Langan, and Mr.

Marshall found that the Company and Mr.

Langan violated, and Mr.

Langan and Mr.

Marshall caused the Company

to violate, the proxy solicitation provisions of Section 14(a) of the Securities Exchange Act of 1934 and Rules 14a-3 and 14a-9

The order further found that the Company violated, and Mr.

Langan and Mr.

Marshall caused the Company to violate,

the reporting provisions of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder, the books and records provisions

of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and the disclosure controls provision of Rule 13a-15(a) under the

Exchange Act.

The Company, Mr.

Langan, and Mr.

Marshall have agreed, without admitting or denying the SEC’s findings, to

a cease-and-desist order and to pay civil penalties in the amounts of $ 400,000 , $ 200,000 , and $ 35,000 , respectively.

March 26, 2016, an image infringement lawsuit was filed in federal court in the Southern District of New York against the Company

2 unchanged sentences

without their consent by clubs affiliated with the Company.

The causes of action asserted in Plaintiffs’

Complaint include

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.

7 unchanged sentences

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

10 unchanged sentences

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.

3 unchanged sentences

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 our consolidated balance sheet as of September 30, 2019.

Management believes

that the case has no merit and is vigorously defending itself in the appeal.

in April 2019 and included in other current assets in both consolidated balance sheets as of September 30, 2020 and 2019.

believes that the case has no merit and is vigorously defending itself in the appeal.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters –

Matters – continued

June 23, 2014, Mark H.

1 unchanged sentence

(Phoenix) Inc.

(“JAI Phoenix”) in the Superior Court of Arizona for Maricopa County.

The suit alleged that Mr.

4 unchanged sentences

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.

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.

3 unchanged sentences

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.

2 unchanged sentences

defend itself.

set forth in the risk factors included elsewhere in this Annual Report on Form 10-K, the adult entertainment industry standard

is to classify adult entertainers as independent contractors, not employees.

While we take steps to ensure that our adult entertainers

are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers.

Claims are brought under both federal and where applicable, state law.

Based on the industry standard, the manner in which the

independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s

work at the clubs, the Company believes that these lawsuits are without merit.

Lawsuits are handled by attorneys with an expertise

in the relevant law and are defended vigorously.

set forth in the risk factors as disclosed in this report, 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.

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.

the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party

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these claims in excess of our insurance coverage.

of lawsuits for the years ended September 30, 2019, 2018, and 2017 total $225,000, $1.7 million, and $317,000, respectively.

As of September 30, 2019 and 2018, the Company has accrued $115,000 and $230,000 in accrued liabilities, respectively, related

to settlement of lawsuits.

of lawsuits for the years ended September 30, 2020, 2019, and 2018 total $ 174,000 , $ 225,000 , and $ 1.7 million, respectively.

of September 30, 2020 and 2019, the Company has accrued $ 100,000 and $ 115,000 in accrued liabilities, respectively, related to

settlement of lawsuits.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

the year ended September 30, 2017, the following common stock transactions occurred:

Company acquired 89,685 shares of its own common stock at a cost of $1.1 million.

These shares were subsequently retired.

Company paid quarterly dividends of $0.03 per share for an aggregate amount of $1.2 million.

the year ended September 30, 2018, the Company paid quarterly dividends of $ 0.03 per share for an aggregate amount of $ 1.2 million.

4 unchanged sentences

amount of $ 1.3 million.

to September 30, 2019 through the filing date of this report, we purchased 332,671 shares of the Company’s common stock

for a total of $6.4 million.

On February 6, 2020, the Board of Directors increased the repurchase authorization by an

additional $10.0 million.

the year ended September 30, 2020, the following common stock transactions occurred:

Company acquired 516,102 shares of its own common stock at a cost of $ 9.5 million.

These shares were subsequently retired.

Company paid quarterly dividends of $ 0.03 per share, except for the second and fourth quarters when $ 0.04 per share was paid,

for an aggregate amount of $ 1.3 million.

to September 30, 2020 through the filing date of this report, we purchased 74,659 shares of the Company’s common

stock for a total of $ 1.8 million.

Employee Retirement Plan

The Company sponsors a Simple IRA plan (the

“Plan”), which covers all of the Company’s corporate employees.

The Plan allows corporate employees to contribute

up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3% of the employee’s salary.

Expenses related to matching contributions to the Plan approximated $164,000, $160,000, and $131,000 for the years

ended September 30, 2019, 2018, and 2017, respectively.

Company sponsors a Simple IRA plan (the “Plan”), which covers all of the Company’s corporate employees.

Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution

of up to 3 % of the employee’s salary.

Expenses related to matching contributions to the Plan approximated $ 171,000 , $ 164,000 ,

and $ 160,000 for the years ended September 30, 2020, 2019, and 2018, respectively.

Insurance Recoveries

1 unchanged sentence

in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2018.

We wrote off the net carrying value of the

assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid

us or where contingencies relating to the insurance claims have been resolved.

During the fourth quarter of 2020, one

club in Sulphur, Louisiana incurred damage from a hurricane.

We wrote off the net carrying value of the assets destroyed in

the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies

relating to the insurance claims have been resolved.

relation to these casualty events, we recorded the following in our consolidated financial statements (in thousands):

Schedule of Business Insurance Recoveries

the Year Ended September 30,

balance sheets (period end)

receivable, net

statements of income

property insurance claims

statements of cash flows

from property insurance claims

The net property insurance claims amount in fiscal 2019 is net of

assets written off and expenses amounting to $629,000.

The $1.2 million balance of insurance receivable

as of September 30, 2019 was collected in October and November 2019.

Acquisitions and Dispositions

April 26, 2017, subsidiaries of the Company acquired the assets of the Hollywood Showclub in the Greater St.

Louis area, as well

as the club’s building and land, adjacent land, and a nearby building and land that can be used for another gentlemen’s

The total purchase price for all the acquired assets and real properties was $4.2 million, paid in cash at closing.

following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

Land and building

Furniture and equipment

Accrued liability

believes that the recorded goodwill represents the Company’s expansion into the Greater St.

Goodwill is not

amortized but is tested at least annually for impairment.

The goodwill amount of $1.5 million, which was recognized in the Nightclubs

segment, is deductible for tax purposes.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Acquisitions and Dispositions - continued

May 8, 2017, a subsidiary of the Company acquired the company that owns Scarlett’s Cabaret Miami in Pembroke Park, Florida

along with certain related intellectual property for a total consideration of $26.0 million, payable $5.4 million at closing,

$5.0 million after six months through a short-term 5% note, and $15.6 million through a 12-year amortizing 8% note.

following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

Leasehold improvements

Furniture and equipment

believes that the recorded goodwill represents the Company’s strong market positioning in the South Florida area and with

its different clientele from Tootsie’s Cabaret, which is five miles away, the two are complementary to each other including

management synergies.

Goodwill for this acquisition is not amortized but is tested at least annually for impairment.

amount of $1.2 million, which was recognized in the Nightclubs segment, is deductible for tax purposes.

conjunction with the acquisition, the Company made an election under IRS Code 338(h)10 to treat the acquisition as an asset purchase

for tax purposes.

As a result, no deferred taxes were recorded upon acquisition.

Company’s pro forma results of operations for the 2017 acquisitions have not been presented because it is impracticable

for management to provide assumptions and estimates in pre-acquisition prior periods without undue cost and effort, notwithstanding

the effect of the acquisitions was not material to our consolidated financial statements.

Since the acquisition dates, the two

acquisitions generated combined revenues of $5.6 million and combined income from operations of $2.2 million that are included

in the Company’s consolidated statements of income for the year ended September 30, 2017.

We estimate their combined revenues

to be $14.6 million and combined income from operations to be $6.5 million for the year ended September 30, 2017

if the acquisitions occurred at the beginning of the fiscal year.

January 13, 2017, we closed the sale on one of our non-income-producing properties, included in assets held for sale in our consolidated

balance sheet as of September 30, 2016, for $2.2 million in cash, recognizing approximately $116,000 loss on the sale.

were used to pay off the remaining $1.5 million of a related 11% balloon note, which was due in 2018.

The Company paid a $75,000

prepayment penalty to pay off the debt.

June 6, 2017, the Company closed on the sale of another non-income-producing property, which was included in assets held for sale

on the Company’s consolidated balance sheet as of September 30, 2016, for $1.5 million, recognizing approximately $0.9 million

gain on the sale.

The buyer owned one of the Company’s notes payable, hence, the Company exchanged the property for a $1.5

million reduction in its note payable.

Consolidated balance sheets (period end)

Insurance receivable

Account receivable, net

Consolidated statements of operations – loss (gain)

Business interruption

Other charges, net

Consolidated statements of cash flows

Proceeds from business interruption insurance claims

Operating activity

Proceeds from property insurance claims

Investing activity

net property insurance gain/loss amount in fiscal 2020, 2019, and 2018 was net of assets written off and expenses

amounting to $ 728,000,

respectively.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Acquisitions and Dispositions - continued

At September 30, 2017, the Company held a

$2.0 million note receivable related to the Drink Robust, Inc.

(“Drink Robust”) disposition that occurred in September

The note required interest-only monthly payments at a per annum rate of 4% beginning January of 2017 and principal and interest

payments due monthly commencing in January 2018 and ending December 2032.

Interest payments from January 2017 through December

2017 were made in the form of shares of the common stock of a manufacturing company.

Cash was received for the January 2018 principal

and interest payment;

however, in April of 2018, the Company was informed that the note holder did not intend to make any future

principal or interest payments due on the note.

The Company had recourse to the personal assets of the note holder in the amount

of $500,000 and entered into negotiations for settlement of the note in April 2018.

Acquisitions and Dispositions

September 30, 2017, the Company held a $ 2.0

million note receivable related to the

Drink Robust, Inc.

(“Drink Robust”) disposition that occurred in September 2016.

The note required interest-only monthly

payments at a per annum rate of 4 % beginning January of 2017 and principal and interest payments due monthly commencing in January

2018 and ending December 2032 .

Interest payments from January 2017 through December 2017 were made in the form of shares of the

common stock of a manufacturing company.

Cash was received for the January 2018 principal and interest payment;

however, in April

of 2018, the Company was informed that the note holder did not intend to make any future principal or interest payments due on

The Company had recourse to the personal assets of the note holder in the amount of $ 500,000

and entered into negotiations for settlement

of the note in April 2018.

On April 26, 2018, the Company forgave the $ 500,000

$500,000 guaranteed portion of the note for 750,000 shares of common stock of the manufacturing company.

Additionally, as part

of the settlement, the Company acquired 78.5% of the remaining 80% ownership interest in Drink Robust, bringing its ownership

interest to 98.5% with the payment of an outstanding liability to the Drink Robust distributor of $250,000.

As a result of the

payment, Drink Robust also obtained a three-year exclusive right of distribution for the Robust Energy Drinks in the United States.

The Company estimated of the fair value of the shares of the manufacturing company and the interest acquired in Drink Robust.

The estimated fair value totals $450,000, which is net of the consideration of $250,000 owed to the Drink Robust distributor.

As a result of the transaction, the Company impaired $1.55 million of the note receivable during the quarter ended March 31, 2018,

with a remaining balance of $450,000 recorded within long-term assets at June 30, 2018.

The Company accounted for the acquisition

in the third quarter of 2018, when the transaction was executed and has finalized its estimate of the fair value of the shares

acquired in the transaction, as well as its accounting for such ownership.

The Company then acquired the remaining 1.5% interest

in Drink Robust from an individual investor to complete its 100% ownership.

On May 25, 2018, the Company acquired a club

in Kappa, Illinois for $1.5 million, financed by a $1.0 million seller note with interest at 8%.

The transaction provides for

the purchase of the real estate for $825,000 and other non-real estate business assets for $180,000, with goodwill amounting to

$495,000, which is deductible for tax purposes.

Since the acquisition date, the acquired club generated revenues of approximately

$442,000 that are included in the Company’s consolidated statements of income for the year ended September 30, 2018.

On September 6, 2018, a subsidiary acquired

the remaining 49% of TEZ Real Estate that it did not own for $1,550,000 in cash.

The acquisition was principally funded by a loan

on the property from a commercial bank.

The Company accounted for the transaction as an equity transaction in accordance with

The difference between the fair value of the consideration paid and the amount by which the noncontrolling interest was

adjusted, in the amount of approximately $759,000 (net of tax), was recognized in additional paid-in capital.

2018 Disposition

On December 11, 2017, the Company sold

one of the properties held for sale for $675,000, recognizing a gain of $481,000.

During the quarter ended June 30, 2018, the

Company decided to offer for sale a real estate property in Dallas, Texas, which was a location of a recently closed club, with

an estimated fair value of $2.0 million.

During the quarter ended September 30, 2018, the Company reclassified two properties

held for sale with an aggregate carrying value of $7.2 million into held and used property and equipment, net in the consolidated

balance sheet as of September 30, 2018.

Also, during the quarter ended September 30, 2018, the Company decided to offer four real

estate properties for sale, with an aggregate fair value less cost to sell of approximately $2.5 million.

November 1, 2018, the Company acquired the stock of a club in Chicago for $10.5 million with $6.0 million

cash paid at closing and the $4.5 million in a 6-year seller-financed note with interest at 7%.

guaranteed portion of the note for 750,000

shares of common stock of the manufacturing

Additionally, as part of the settlement,

the Company acquired 78.5% of the remaining 80% ownership interest in Drink Robust, bringing its ownership interest to 98.5% with

the payment of an outstanding liability to the Drink Robust distributor of $ 250,000 .

As a result of the payment, Drink Robust also obtained a three-year exclusive right of distribution for the Robust Energy Drinks

in the United States.

The Company estimated the fair value of the shares of the manufacturing company and the interest acquired

in Drink Robust.

The estimated fair value totals $ 450,000 ,

which is net of the consideration of $ 250,000

owed to the Drink Robust distributor.

As a result of the transaction, the Company impaired $ 1.55

million of the note receivable during

the quarter ended March 31, 2018, with a remaining balance of $ 450,000

recorded within long-term assets at June

The Company accounted for the acquisition in the third quarter of 2018, when the transaction was executed and has finalized

its estimate of the fair value of the shares acquired in the transaction, as well as its accounting for such ownership.

then acquired the remaining 1.5 %

interest in Drink Robust from an individual investor to complete its 100 %

May 25, 2018, the Company acquired a club in Kappa, Illinois for $ 1.5 million, financed by a $ 1.0 million seller note with interest

The transaction provides for the purchase of the real estate for $ 825,000 and other non-real estate business assets for

$ 180,000 , with goodwill amounting to $ 495 ,000 , which is deductible for tax purposes.

Since the acquisition date, the acquired

club generated revenues of approximately $ 442,000 that are included in the Company’s consolidated statements of operations

for the year ended September 30, 2018.

September 6, 2018, a subsidiary acquired the remaining 49 % of TEZ Real Estate that it did not own for $ 1,550,000 in cash.

acquisition was principally funded by a loan on the property from a commercial bank.

The Company accounted for the transaction

as an equity transaction in accordance with ASC 505.

The difference between the fair value of the consideration paid and the amount

by which the noncontrolling interest was adjusted, in the amount of approximately $ 759,000 (net of tax), was recognized in additional

paid-in capital.

December 11, 2017, the Company sold one of the properties held for sale for $ 675,000 , recognizing a gain of $ 481,000 .

quarter ended June 30, 2018, the Company decided to offer for sale a real estate property in Dallas, Texas, which was a location

of a recently closed club, with an estimated fair value of $ 2.0 million.

During the quarter ended September 30, 2018, the Company

reclassified two properties held for sale with an aggregate carrying value of $ 7.2 million into held and used property and equipment,

net in the consolidated balance sheet as of September 30, 2018.

Also, during the quarter ended September 30, 2018, the Company

decided to offer four real estate properties for sale, with an aggregate fair value less cost to sell of approximately $ 2.5 million.

November 1, 2018, the Company acquired the stock of a club in Chicago for $ 10.5

million with $ 6.0

million cash paid at closing and the $ 4.5

million in a 6-year seller-financed note

with interest at 7 %.

The Company paid approximately $ 37,000

$37,000 in acquisition-related costs for this transaction, which is included in selling, general and administrative expenses in

our consolidated statement of income.

The club generated revenue of approximately $5.0 million since acquisition date.

In relation to this acquisition, on September 25, 2018, the Company borrowed $5.0 million through a credit facility with a bank

The loan has a 7% fixed interest rate with a maturity date in May 2019.

in acquisition-related costs for this

transaction, which is included in selling, general and administrative expenses in our consolidated statement of operations.

fiscal 2019, the club generated revenue of approximately $ 5.0

million since acquisition date.

to this acquisition, on September 25, 2018, the Company borrowed $ 5.0

million through a credit facility with

a bank lender.

The loan has a 7 %

fixed interest rate with a maturity date in May

The loan was fully paid as of June

and SOB license for the Chicago acquisition are not amortized but are tested at least annually for impairment.

Goodwill recognized

for this transaction is not deductible for tax purposes.

Noncompete is amortized on a straight-line basis over five years from

acquisition date.

Goodwill and SOB license for the Chicago acquisition are not amortized but are tested at least annually for impairment.

Goodwill recognized for this transaction is not deductible for tax purposes.

is amortized on a straight-line basis over five years from acquisition date.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

Schedule of Allocation of Fair Values Assigned to Assets at Acquisition

Land and building

1 unchanged sentence

Deferred tax liability

November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $15.0 million, with $7.5

million cash paid at closing and two seller notes payable.

The first note is a 2-year 7% note for $2.0 million, and the second

is a 10-year 8% note for $5.5 million.

The Company paid acquisition-related costs for this transaction of approximately $134,000,

which is included in selling, general and administrative expenses in our consolidated statement of income.

The club generated

revenue of approximately $4.6 million since acquisition date.

Goodwill for the Pittsburgh acquisition is not amortized

but is tested at least annually for impairment.

November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $ 15.0 million, with $ 7.5 million cash paid at closing

and two seller notes payable.

The first note is a 2-year 7 % note for $ 2.0 million, and the second is a 10-year 8 % note for $ 5.5

The Company paid acquisition-related costs for this transaction of approximately $ 134,000 , which is included in selling,

general and administrative expenses in our consolidated statement of operations.

The club generated revenue of approximately $ 4.6

million since acquisition date.

Goodwill for the Pittsburgh acquisition is not amortized but is tested at least annually for impairment.

Goodwill recognized for this transaction is deductible for tax purposes.

is amortized on a straight-line basis over five years from acquisition date.

Noncompete is amortized on a straight-line basis over

five years from acquisition date.

following information summarizes the allocation of fair values assigned to the assets at acquisition date (in thousands):

and equipment

Schedule of Allocation of Fair Values Assigned to Assets at Acquisition

Land and building

Furniture and equipment

October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $ 1.0 million, payable $ 375,000 in cash

at closing and a $ 625,000 9 % note payable to us over a 10-year period.

The note is payable interest-only for twelve months

at the conclusion of which time a balloon payment of $250,000 is due, and then the remainder of the principal and interest is

payable in 108 equal installments of $5,078 per month until October 2028.

The buyer will lease the property from the Company’s

real estate subsidiary under the following terms:

The note is payable interest-only for twelve months at

the conclusion of which time a balloon payment of $ 250,000 is due, and then the remainder of the principal and interest is payable

in 108 equal installments of $ 5,078 per month until October 2028.

The buyer will lease the property from the Company’s real

estate subsidiary under the following terms:

$ 36,000 per month lease payments for ten years ;

renewal option for a succeeding

ten years at a minimum of $48,000 per month;

lessee has option to purchase the property for $6.0 million during a term beginning

November 2023 and expiring in October 2028.

The Company recorded a gain on the sale transaction of approximately $879,000, which

is included in other charges (gains), net in our consolidated statement of income during the quarter ended December 31, 2018.

In July 2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from

April to September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest

payments for a total principal balance of $879,085.

The note, as modified, still bears interest at 9% and is payable in 108 equal

monthly installments of $11,905, including principal and interest, until July 2028.

renewal option for a succeeding ten

years at a minimum of $ 48,000 per month;

lessee has option to purchase the property for $ 6.0 million during a term beginning November

2023 and expiring in October 2028.

The Company recorded a gain on the sale transaction of approximately $ 879,000 , which is included

in other charges (gains), net in our consolidated statement of operations during the quarter ended December 31, 2018.

2019, the Company and the buyer agreed to modify the promissory note to include in principal (i) rental payments from April to

September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes, and (iv) two months of outstanding interest payments

for a total principal balance of $ 879,085 .

The note, as modified, still bears interest at 9 % and is payable in 108 equal monthly

installments of $ 11,905 , including principal and interest, until July 2028.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Acquisitions and Dispositions - continued

In November 2018, the Company sold two

assets held for sale in Houston and San Antonio, Texas for a combined sales price of $868,000.

Net gain on the two transactions

amounted to $273,000 after closing costs.

The Company used the proceeds to pay down $945,000 in loans related to the properties.

On January 24, 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 8% note payable over a three-year period.

The note is payable $9,619

per month, principal and interest, for the first 35 months with the remaining balance payable at maturity.

The buyer has the option

to extend the maturity date by one year at least 60 days prior to maturity, as long as the buyer is not in default.

recorded a gain on the sale transaction of approximately $383,000.

On March 21, 2019, the Company sold a held-for-sale

property adjacent to our Bombshells 249 location for a total sales price of $1.4 million in cash.

Net gain on the transaction

amounted to approximately $628,000 after closing costs.

The Company used $980,000 of the proceeds to pay off a loan related to

the property.

In April 2019, the Company sold another

held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of $1.1 million in cash.

Net gain on the

transaction amounted to approximately $331,000 after closing costs.

The Company used $942,000 of the proceeds to pay off a loan

related to the property.

In June 2019, the Company sold a property

located in Lubbock, Texas for $350,000 in cash.

Net loss on the transaction amounted to $376,000 after closing costs.

used $331,000 of the proceeds from the sale to pay down debt.

In June 2019, the Company sold an aircraft

for $690,000 in cash.

November 2018, the Company sold two assets held for sale in Houston and San Antonio, Texas for a combined sales price of $ 868,000 .

Net gain on the two transactions amounted to $ 273,000 after closing costs.

The Company used the proceeds to pay down $ 945,000

in loans related to the properties.

January 24, 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 8 % note payable over a three-year

The note is payable $ 9,619 per month, principal and interest, for the first 35 months with the remaining balance payable

The buyer has the option to extend the maturity date by one year at least 60 days prior to maturity, as long as the

buyer is not in default.

The Company recorded a gain on the sale transaction of approximately $ 383,000 .

March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales price of $ 1.4

million in cash.

Net gain on the transaction amounted to approximately $ 628,000 after closing costs.

The Company used $ 980,000

of the proceeds to pay off a loan related to the property.

April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of

$ 1.1 million in cash.

Net gain on the transaction amounted to approximately $ 331,000 after closing costs.

The Company used $ 942,000

of the proceeds to pay off a loan related to the property.

June 2019, the Company sold a property located in Lubbock, Texas for $ 350,000 in cash.

Net loss on the transaction amounted to

$ 376,000 after closing costs.

The Company used $ 331,000 of the proceeds from the sale to pay down debt.

June 2019, the Company sold an aircraft for $ 690,000 in cash.

Net loss on the transaction amounted to $ 9,000 after closing costs.

The Company used $666,000 of the proceeds

from the sale to pay down related debt.

On July 23, 2019, the Company sold an aircraft

for a total sales price of $382,000 for net gain of $16,000.

Proceeds were used to pay off the remaining note payable balance of

approximately $217,000.

On September 30, 2019, the Company sold its

Bombshells Webster location for a total sales price of $85,000 in cash.

Net loss on the transaction amounted to approximately $156,000.

2020 Acquisition

November 5, 2019, the Company announced that its 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.

of the filing of this report, closing of this transaction is still pending subject to certain conditions.

Under the terms of

the agreements, Company subsidiaries will pay $7.2 million for the club and $7.8 million for the real estate using $4.0

million in seller financing at 6.0% for the club with the balance of cash from an anticipated $11.0 million bank loan at a

blended rate of 6.25%.

The Company used $ 666,000 of the proceeds from the sale to pay down related debt.

July 23, 2019, the Company sold an aircraft for a total sales price of $ 382,000 for net gain of $ 16,000 .

Proceeds were used to

pay off the remaining note payable balance of approximately $ 217,000 .

September 30, 2019, the Company sold its Bombshells Webster location for a total sales price of $ 85,000 in cash.

Net loss on the

transaction amounted to approximately $ 156,000 .

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

The agreements terminated prior

We provided the sellers notice of the termination in April 2020.

April 1, 2020, the Company sold a corporate housing property to an employee for $ 375,000

in cash with an approximate gain of $ 20,000 .

May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $ 1.5 million in cash.

on the transaction was $ 583,000 after closing costs.

The net proceeds of $ 1.4 million were used to pay down related debt.

August 6, 2020, the Company sold another corporate housing property for $ 176,000

in cash with an approximate gain of $ 26,000 .

The net proceeds of $ 160,500 were used

to pay down related debt.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

following tables summarize unaudited quarterly data for fiscal 2020, 2019, and 2018 (in thousands, except per share data):

Schedule of Quarterly Financial Information

the Three Months Ended

Income from operations(1)

Net income attributable to RCIHH shareholders(1)

Earnings per share(1)

Income (loss) from operations (1)

Net income (loss) attributable to RCIHH stockholders (1)

Earnings (loss) per share (1)

Basic and diluted

3 unchanged sentences

Income from operations (2)

Net income (loss) attributable to RCIHH shareholders(2)

Earnings (loss) per share(2)

Net income attributable to RCIHH stockholders (2)

Earnings per share (2)

Basic and diluted

3 unchanged sentences

Income from operations (3)

Net income (loss) attributable to RCIHH shareholders(3)

Net income (loss) attributable to RCIHH stockholders (3)

Earnings (loss) per share (3)

Basic and diluted

Weighted average number of common shares outstanding

Basic and diluted

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

year 2019 income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact

year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic.

(loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included

the impact of a $ 10.6

million in asset impairments ($ 8.2

million in the second quarter, $ 982,000

in the third quarter, and $ 1.4

million in the fourth quarter).

Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter

was also affected by the $ 1.3

million valuation allowance on our deferred tax assets.

Quarterly effective income tax expense (benefit) rate was 22.0 % ,

( 20.5 )% , and 36.3 %

from first to fourth quarter, respectively.

year 2019 income from operations, net income attributable to RCIHH stockholders, and earnings per share included the impact

of a $ 6.0 million in asset impairments in the fourth quarter, a $ 2.9 million net gain on sale of businesses and assets ($ 1.2

4 unchanged sentences

first to fourth quarter, respectively.

year 2018 income from operations, net income attributable to RCIHH shareholders, and

earnings per share included the impact of a $1.6 million loss on disposition in the second

quarter, a $5.6 million in asset impairments ($1.6 million in the second quarter and

$4.0 million in the fourth quarter), and a $8.8 million deferred income tax benefit

related to the revaluation of deferred tax assets and liabilities ($9.7 million credit

in the first quarter, $38,000 expense in the second quarter, and $827,000 expense

in the fourth quarter).

See Note 4 related to revision of prior year immaterial misstatement.

year 2018 income from operations, net income attributable to RCIHH stockholders, and earnings per share included the impact

of a $ 1.6 million loss on disposition in the second quarter, a $ 5.6 million in asset impairments ($ 1.6 million in the second

quarter and $ 4.0 million in the fourth quarter), and a $ 8.8 million deferred income tax benefit related to the revaluation

of deferred tax assets and liabilities ($ 9.7 million credit in the first quarter, $ 38,000 expense in the second quarter, and

$ 827,000 expense in the fourth quarter).

Quarterly effective income tax expense (benefit) rate was ( 134.3 )% , 24.2 %, 25.3 %,

and 103.8 % from first to fourth quarter, respectively.

Note 3 related to revision of prior year immaterial misstatement.

year 2017 income from operations, net income attributable to RCIHH shareholders, and earnings per share included the impact

of $7.6 million in asset impairment ($1.4 million in the third quarter and $6.2 in the fourth quarter) and $1.3 million additional

income tax expense due to change in deferred tax liability rate in the fourth quarter.

Quarterly effective income tax expense

rate was 33.3%, 33.7%, 32.9%, and 99.6% from first to fourth quarter, respectively.

nightclub operations are affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September

(our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal

first and second quarters).

Our revenues in certain markets are also affected by sporting events that cause unusual changes in

sales from year to year.

nightclub operations are normally affected by seasonal factors.

Historically, we have experienced reduced revenues from April

through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through

March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through

the fourth quarter were significantly reduced.

Our revenues in certain markets are also affected by sporting events that cause

unusual changes in sales from year to year.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Impairment of Assets

the year ended September 30, 2017, we recorded aggregate impairment charges of $7.6 million comprised of $4.7 million for the

goodwill of four club locations, including one that we have put up for sale during the fiscal year, $385,000 for property and

equipment of one club, $1.4 million for SOB license of two club locations, and $1.2 million of investment impairment.

the year ended September 30, 2018, we recorded aggregate impairment charges of $5.6 million comprised of $1.6 million for long-lived

assets of one club and one Bombshells, $834,000 for goodwill impairment of two clubs, and $3.1 million for SOB licenses of three

the year ended September 30, 2018, we recorded aggregate impairment charges of $ 5.6 million comprised of $ 1.6 million for property

and equipment of one club and one Bombshells, $ 834,000 for goodwill impairment of two club reporting units, and $ 3.1 million for

SOB licenses of three clubs.

the year ended September 30, 2019, we recorded aggregate impairment charges of $ 6.0 million comprised of $ 1.6 million for the

goodwill of four club locations, $4.2 million for property and equipment of two clubs, and $178,000 for SOB license of one club.

goodwill of four club reporting units, $ 4.2 million for property and equipment of two clubs, and $ 178,000 for SOB license of one

the year ended September 30, 2020, we recorded aggregate impairment charges of $ 10.6

million comprised of $ 7.9

million for goodwill of seven club reporting

million for SOB licenses of two clubs,

for long-lived assets of one club and

one Bombshells unit ($ 302,000

for property and equipment and $ 104,000

for operating lease right-of-use assets).

The impairment charges for fiscal 2020 were mainly due to lower cash flow projections and uncertainty risk caused by the pandemic.

Segment Information

1 unchanged sentence

The Company has identified such segments based

on management responsibility and the nature of the Company’s products, services and costs.

There are no major distinctions

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Segment Information - continued

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

Schedule of Segment Reporting Information

Revenues (from external customers)

Income (loss) from operations(1)

Income (loss) from

General corporate

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Total assets (1)

Nightclubs (1)

Bombshells (1)

General corporate (1)

See Note 3 for a discussion of revision of prior year immaterial misstatement.

See Note 4 for a discussion of revision of prior

year immaterial misstatement.

from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $ 11.1 million, $ 10.0

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amounting to $ 70 ,000 , $ 140 ,000 , and $ 26 ,000 for the same respective years.

These revenue items are eliminated upon consolidation.

These intercompany revenue amounts are eliminated upon

consolidation.

corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and

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Management considers these to be non-allocable costs for segment purposes.

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.

HOSPITALITY HOLDINGS, INC.

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Noncontrolling Interests

Noncontrolling interests represent the portion

of equity in a consolidated entity held by owners other than the consolidating parent.

Noncontrolling interests are reported in

the consolidated balance sheets within equity.

Revenue, expenses and net income attributable to both the Company and the

noncontrolling interests are reported in the consolidated statements of income.

September 2018, our consolidated financial statements included noncontrolling interests related to the Company’s

ownership of 51% of an entity which owns the real estate for the Company’s nightclub in Philadelphia.

The Company acquired

the remaining not-owned portion of the entity in September 2018.

consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51%

of an entity which owns one of the Company’s nightclubs in New York City.

Noncontrolling

interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent.

Noncontrolling

interests are reported in the consolidated balance sheets within equity.

Revenue, expenses and net income attributable to both

the Company and the noncontrolling interests are reported in the consolidated statements of operations.

September 2018, our consolidated financial statements included noncontrolling interests related to the Company’s ownership

of 51 % of an entity which owns the real estate for the Company’s nightclub in Philadelphia.

The Company acquired the remaining

not-owned portion of the entity in September 2018.

consolidated financial statements include noncontrolling interests related principally to the Company’s ownership of 51 %

of an entity which owns one of the Company’s nightclubs in New York City.

Related Party Transactions

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The balance of our commercial bank indebtedness,

net of debt discount and issuance costs, as of September 30, 2019 and 2018 is $86.8 million and $90.4 million, respectively.

in the $2.35 million borrowing on November 1, 2018 (see Note 9) was a $500,000 note borrowed from a related party (Ed Anakar,

an employee of the Company and brother of our director Nourdean Anakar).

The terms of this related party note are the same as

the rest of the lender group in the November 1, 2018 transaction.

used the services of Sherwood Forest Creations, LLC (“Sherwood Forest”) and its predecessor, Creative Steel Designs

(“Creative Steel”), furniture fabrication companies that manufacture tables, chairs and other furnishings for our

Bombshells locations, as well as providing ongoing maintenance.

Sherwood Forest is owned by a brother of Eric Langan, and Creative

Steel was owned by his father.

Amounts billed to us for goods and services provided by Sherwood Forest were approximately $134,000

in fiscal 2019, $321,000 in fiscal 2018, and an aggregate of $135,000 by Sherwood Forest and Creative Steel in fiscal 2017.

As of September 30, 2019 and 2018, we owed Sherwood Forest $6,588 and $73,377, 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 2018 and 2019.

TW Mechanical is 20% owned by the son-in-law of Eric Langan.

billed by TW Mechanical to the third-party general contractor were $452,000, $120,000, and $0 for the fiscal years ended

2019, 2018 and 2017 respectively.

Amounts billed directly to the Company were $47,000, $7,000 and $0 for the fiscal years ended

2019, 2018, and 2017 respectively.

As of September 30, 2019 and 2018, we owed TW Mechanical $0 and $0, respectively, in unpaid

direct billings.

net of debt discount and issuance costs, as of September 30, 2020 and 2019 was $ 83.8 million and $ 86.8 million, respectively.

in the $ 2.35 million

borrowing on November 1, 2018 (see Note 10) were notes borrowed from related parties—one note for

$ 500,000 (Ed Anakar, an employee of the Company and brother of our director Nourdean Anakar) and another note for $ 100,000

(Allen Chhay, brother of Company CFO, Bradley Chhay) as part of a larger group of private lenders.

The terms of this related

party note are the same as the rest of the lender group in the November 1, 2018 transaction.

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 approximately $ 59,000 in fiscal 2020, $ 134,000 in fiscal 2019, and $ 321,000 in fiscal 2018.

As of September 30, 2020 and 2019, we owed Nottingham Creations and Sherwood Forest $ 0 and $ 6,588 , respectively, in unpaid billings.

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 and 2019.

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 approximately

$ 19,000 , $ 452,000 , and $ 120,000 for the fiscal years 2020, 2019, and 2018, respectively.

Amounts billed directly to the Company

were approximately $ 62,000 , $ 47,000 , and $ 7,000 for the fiscal years 2020, 2019, and 2018, respectively.

As of September 30, 2020

and 2019, the Company owed TW Mechanical approximately $ 5,700 and $ 0 , respectively, in unpaid direct billings.

840 (Related to Fiscal 2019 and 2018)

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated

Financial Statements

in lease expense in our consolidated statements of operations (see Note 6) 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 $ 19,500 , $ 78,000 , and $ 55,250 for the years ended September 30, 2020, 2019, and 2018, respectively.

This lease terminated

on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.

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 consolidated statements of operations.

840, we recorded lease expense amounting to $ 3.9 million and $ 3.8 million for the years ended September 30, 2019 and 2018, respectively.

842 (Related to Fiscal 2020)

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.

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 consolidated statement

of operations.

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.

adoption of ASC 842 did not have a material impact on our lease revenue accounting as a lessor.

maturities of ASC 842 lease liabilities as of September 30, 2020 are as follows (in thousands):

Schedule of Future Maturities of Lease Liabilities

2020 - September 2021

2021 - September 2022

2022 - September 2023

2023 - September 2024

2024 - September 2025

lease expense, under ASC 842, was included in selling, general and administrative expenses in our consolidated statement of operations,

except for sublease income which was included in other revenue, for the year ended September 30, 2020 as follows (in thousands):

Schedule of Lease Expense

Operating lease expense – fixed payments

Variable lease expense

Short-term equipment and other lease expense (includes $ 315 recorded in advertising and marketing, and $ 372 recorded in repairs and maintenance;

Sublease income

Total lease expense, net

Other information:

Operating cash outflows from operating leases

Weighted average remaining lease term

Weighted average discount rate

In relation to certain rent concessions

that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral

of payments as if the lease is unchanged.

Any reduction in total lease expense during the period caused by either an extension

of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

HOSPITALITY HOLDINGS, INC.

of Valuation and Qualifying Accounts

in Thousands)

Valuation and Qualifying Accounts

Balance at beginning of

to costs and expenses (1)

Deductions (2)

Balance at end of year

Allowance for doubtful accounts receivable

Allowance for doubtful notes receivable

Deferred tax asset

valuation allowance (3)

Charged to bad debts expense (under other selling,

general and administrative expenses) in the consolidated statements of operations.

Written off against gross receivable and allowance.

Included in deferred tax liability, net in the consolidated

balance sheets.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data