What changed in this filing

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Item 1. Financial Statements

2021-08-05 compared with 2021-05-10 · 513 added, 553 removed, 332 unchanged (76% of the section changed)

32 unchanged sentences

20,000 shares authorized;

9,000 and 9,075 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively

9,000 and 9,075 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively

Additional paid-in capital

8 unchanged sentences

For the Three Months

For the Six Months

For the Nine Months

Sales of alcoholic beverages

11 unchanged sentences

Depreciation and amortization

Other charges, net

Other charges (gains), net

Total operating expenses

7 unchanged sentences

Net income (loss)

Net loss attributable to noncontrolling interests

Net loss (income) attributable to noncontrolling interests

Net income (loss) attributable to RCIHH common stockholders

8 unchanged sentences

Noncontrolling

Balance at September 30, 2020

Purchase of treasury shares

Canceled treasury shares

Payment of dividends

Payment to noncontrolling

at September 30, 2020

of treasury shares

treasury shares

income (loss)

Balance at December 31, 2020

Payment of dividends

to noncontrolling interest

at December 31, 2020

income (loss)

Balance at March 31, 2021

Balance at September 30, 2019

Purchase of treasury shares

Canceled treasury shares

Payment of dividends

at March 31, 2021

at June 30, 2021

at September 30, 2019

of treasury shares

treasury shares

to noncontrolling interest

Balance at December 31, 2019

Purchase of treasury shares

Canceled treasury shares

Payment of dividends

Payment to noncontrolling interest

Balance at March 31, 2020

at December 31, 2019

of treasury shares

treasury shares

to noncontrolling interest

at March 31, 2020

income (loss )

at June 30, 2020

accompanying notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months

For the Nine Months

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

Deferred income tax benefit

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Impairment of assets

4 unchanged sentences

Gain on insurance

Doubtful accounts reversal on notes receivable

Doubtful accounts expense (reversal) on notes receivable

Changes in operating assets and liabilities:

17 unchanged sentences

Net cash used in financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

NET INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

7 unchanged sentences

Operating lease liabilities established upon adoption of ASC 842

Adjustment to operating lease right-of-use assets and operating lease liabilities related to renewed lease

Unpaid liabilities on capital expenditures

5 unchanged sentences

(the “Company or “RCIHH”)

have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”

have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or

GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X.

not include all information and footnotes required by GAAP for complete financial statements.

The September 30, 2020 consolidated

balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP.

except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial

statements for the year ended September 30, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the

Securities and Exchange Commission on December 14, 2020.

The interim unaudited condensed consolidated financial statements should

be read in conjunction with those consolidated financial statements included in the Form 10-K.

In the opinion of management, all

adjustments considered necessary for a fair statement of the financial statements, consisting solely of normal recurring adjustments,

have been made.

Operating results for the three and six months ended March 31, 2021 are not necessarily indicative of the results

that may be expected for the year ending September 30, 2021.

Certain reclassifications of cost of goods

sold components with immaterial amounts have been made to prior year’s financial statements to conform to the current year

financial statement presentation.

There is no impact in total cost of goods sold, results of operations, and cash flows in all

periods presented.

They do not include

all information and footnotes required by GAAP for complete financial statements.

The September 30, 2020 consolidated balance sheet data

were derived from audited financial statements but do not include all disclosures required by GAAP.

However, except as disclosed herein,

there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended

September 30, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on

December 14, 2020.

The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated

financial statements included in the Form 10-K.

In the opinion of management, all adjustments considered necessary for a fair statement

of the financial statements, consisting solely of normal recurring adjustments, have been made.

Operating results for the three and nine

months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021.

reclassifications of cost of goods sold components with immaterial amounts have been made to prior year’s financial statements

to conform to the current year financial statement presentation.

There is no impact in total cost of goods sold, results of operations,

and cash flows in all periods presented.

Recent Accounting Standards and Pronouncements

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

June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

This ASU requires, among other things, the measurement of all expected credit losses for financial assets held at the reporting

date based on historical experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 replaces the existing

incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate

credit loss estimates.

It also eliminates the concept of other-than-temporary impairment and requires credit losses related to

available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized

cost basis of the securities.

These changes will result in earlier recognition of credit losses.

The ASU is effective for fiscal

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

Early application will be permitted for

all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

We adopted ASU

2016-13 as of October 1, 2020.

Our adoption of this guidance did not have a significant impact on our consolidated financial statements.

This ASU requires,

among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical

experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 replaces the existing incurred loss impairment

model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates.

It also eliminates

the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded

through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.

These changes will result

in earlier recognition of credit losses.

The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning

after December 15, 2019.

Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal

years, beginning after December 15, 2018.

We adopted ASU 2016-13 as of October 1, 2020.

Our adoption of this guidance did not have a

significant impact on our consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the

Disclosure Requirements for Fair Value Measurement .

ASU 2018-13 modifies the disclosure requirements of Accounting Standards

Codification (“ASC”) Topic 820 with certain removals, modifications, and additions.

Eliminated disclosures that may

affect the Company include (1) transfers between level 1 and level 2 of the fair value hierarchy, and (2) policies related to

valuation processes and the timing of transfers between levels of the fair value hierarchy.

Modified disclosures that may affect

the Company include (1) a requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions

from redemption might lapse if the entity has communicated the timing publicly for investments in certain entities that calculate

net asset value, and (2) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty

in measurement as of the reporting date.

Additional disclosures that may affect the Company include (1) disclosure of changes

in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements

held at the end of the reporting period, and (2) disclosure of the range and weighted average of significant unobservable inputs

used to develop level 3 fair value measurements.

The update is effective for fiscal years, and interim periods within those fiscal

years, beginning after December 15, 2019.

Early adoption is permitted for any removed or modified disclosures upon issuance of

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

Disclosure Framework—Changes to the Disclosure

Requirements for Fair Value Measurement .

ASU 2018-13 modifies the disclosure requirements of Accounting Standards Codification (“ASC”)

Topic 820 with certain removals, modifications, and additions.

Eliminated disclosures that may affect the Company include (1) transfers

between level 1 and level 2 of the fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers

between levels of the fair value hierarchy.

Modified disclosures that may affect the Company include (1) a requirement to disclose the

timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has communicated

the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that the measurement uncertainty

disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additional disclosures that may

affect the Company include (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income

for recurring level 3 fair value measurements held at the end of the reporting period, and (2) disclosure of the range and weighted average

of significant unobservable inputs used to develop level 3 fair value measurements.

The update is effective for fiscal years, and interim

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

Early adoption is permitted for any removed or modified disclosures

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

We adopted ASU 2018-13 as of October

3 unchanged sentences

Codification Improvements .

ASU 2019-01 aligns the guidance

for fair value of the underlying asset by lessors with existing guidance in Topic 842.

The ASU requires that the fair value of

the underlying asset at lease commencement is its cost reflecting in volume or trade discounts that may apply.

However, if there

has been a significant lapse of time between the date the asset was acquired and the lease commencement date, the definition of

fair value as outlined in Topic 820 should be applied.

In addition, the ASU exempts both lessees and lessors from having to provide

certain interim disclosures in the fiscal year in which a company adopts the new leases standard.

The update is effective for

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

ASU 2019-01 aligns the guidance for

fair value of the underlying asset by lessors with existing guidance in Topic 842.

The ASU requires that the fair value of the underlying

asset at lease commencement is its cost reflecting in volume or trade discounts that may apply.

However, if there has been a significant

lapse of time between the date the asset was acquired and the lease commencement date, the definition of fair value as outlined in Topic

820 should be applied.

In addition, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the

fiscal year in which a company adopts the new leases standard.

The update is effective for fiscal years, and interim periods within those

fiscal years, beginning after December 15, 2019.

We adopted ASU 2019-01 as of October 1, 2020.

Our adoption of this guidance did not have an impact on our consolidated financial statements.

Our adoption of this guidance did not

have an impact on our consolidated financial statements.

December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

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.

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

This ASU simplifies

accounting for income taxes by removing the following exceptions:

(1) exception to the incremental approach for intraperiod tax allocation,

(2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim

period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improves financial statement preparers’

application of income tax related guidance for franchise taxes that are partially based on income;

transactions with a government that

result in a step up in the tax basis of goodwill;

separate financial statements of legal entities that are not subject to tax;

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.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Liquidity and Impact of COVID-19 Pandemic

March 2020, former President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national

public health emergency.

declaration of COVID-19 as a pandemic in March 2020, we have had a major disruption in our business operations that threatened

to significantly impact our cash flow.

The declaration resulted in a significant reduction in customer traffic in our clubs and restaurants

due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions were mandated

or encouraged by federal, state and local governments.

Starting in March 2020, we closed and reopened a number of our clubs and

restaurants and implemented curfew and capacity restrictions as required by local authorities.

We do not know the effects the

pandemic may have on our operations in the future.

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.

To adapt to the situation, we took significant steps to augment an anticipated decline in operating

cash flows, including negotiating deferment of some of our debts, reducing the number of our employees and related payroll costs where

necessary, and deferring or modifying certain fixed and variable monthly expenses, among others.

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

was to open locations and operate in accordance with local and state guidelines.

The COVID-19 pandemic is adversely affecting

the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be

readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

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

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;

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

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

reduced or canceled certain non-essential expenses such as advertising, cable, pest control, point-of-sale system support,

and investor relations coverage, among others.

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

May 8, 2020, the Company received approval and funding under the Paycheck Protection Program (“PPP”) of the

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity

Our strategy is to open

locations and operate in accordance with local and state guidelines.

We believe that we can borrow capital if need be but currently we

do not have unused credit facilities so 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.

May 8, 2020, the Company received approval and funding under the Paycheck

Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for

its restaurants, shared services entity and lounge.

See Notes 7 and 9.

Ten of our restaurant subsidiaries received amounts ranging from $ 271,000 to

$ 579,000 for

an aggregate amount of $ 4.2 million;

our shared-services subsidiary received $ 1.1 million;

and one of our lounges received $ 124,000 .

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

The Company believes it

used the entire loan amount for qualifying expenses.

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

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

The Company utilized all of the PPP funds and

submitted its forgiveness applications.

During the three and six months ended March 31, 2021, we received 1 and 11

Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP

loans granted.

of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $ 380,000 and

$ 5.3 million

in principal and interest during the three and six months ended March 31, 2021, respectively, and were included in

non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.

No assurance can be

provided that the Company will in fact obtain forgiveness of the remaining PPP loan in whole or in part.

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

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

However, we will continually

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

our debt obligations.

We continue to adhere to state and local government

mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing

government mandates, including operating hour and limited occupancy restrictions.

operating restrictions, 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.

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

of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable.

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

1 unchanged sentence

and long-lived assets in our clubs and restaurants that are affected.

Based on our evaluation, we determined that there is no

impairment related to the pandemic in our goodwill, indefinite-lived intangibles, and long-lived assets, except for

assets held for sale, as of March 31, 2021.

Based on our evaluation, we determined that our assets are impaired

in a total amount of approximately $ 1.7 million comprised of $ 245,500 in goodwill and $ 1.4 million in assets held for sale.

Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale

upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified

in implied contracts with customers.

Sales and liquor taxes collected from customers and remitted to governmental authorities

are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations.

The Company recognizes

revenue when it satisfies a performance obligation (point in time of sale) by transferring control over a product or service to

upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied

contracts with customers.

Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a

net basis in the accompanying unaudited condensed consolidated statements of operations.

The Company recognizes revenue when it satisfies

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

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

Revenues from the sale of

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

Revenues and external expenses related

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

our fiscal fourth quarter.

Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021,

hence, no Expo-related revenue in fiscal 2020.

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

over time) and is more appropriately covered by guidance under ASC 842, Leases .

Revenues from the sale of magazines

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

Revenues and external expenses related to the Company’s

annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter.

Due to the pandemic, the Expo convention, initially scheduled in August 2020, was moved to May 2021, hence, no Expo-related revenue in

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

by guidance under ASC 842, Leases .

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

Schedule of Disaggregation of Segment Revenues

Months Ended March 31, 2021

Months Ended March 31, 2020

Months Ended June 30, 2021

Months Ended June 30, 2020

Sales of alcoholic beverages

4 unchanged sentences

Recognized over time

Months Ended March 31, 2021

Months Ended March 31, 2020

Months Ended June 30, 2021

Months Ended June 30, 2020

Sales of alcoholic beverages

4 unchanged sentences

Recognized over time

revenue (included in Other Revenues) as covered by ASC 842.

revenue (included in Other Revenues) is covered by ASC 842.

All other revenues are covered by ASC 606.

6 unchanged sentences

Consideration

liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance

sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our

unaudited condensed consolidated statements of operations.

December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells

locations in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in

Corpus Christi, New Braunfels, and San Marcos, all in Texas.

Upon execution of the agreement, the Company collected $ 75,000

in development fees representing 100 %

of the initial franchise fee of the first restaurant and 50 %

of the initial franchise fee of the second restaurant.

Revenue from initial franchise fees is recognized as the performance

obligations are satisfied over the term of the franchise agreement.

liabilities with customers are included in accrued liabilities as unearned revenues in our unaudited condensed consolidated balance sheets

(see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed

consolidated statements of operations.

December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells locations

in San Antonio, Texas over a period of five years, and the right of first refusal for three more locations in Corpus Christi, New Braunfels,

and San Marcos, all in Texas.

Upon execution of the agreement, the Company collected $ 75,000 in development fees representing 100 % of

the initial franchise fee of the first restaurant and 50 % of the initial franchise fee of the second restaurant.

Revenue from initial

franchise fees is recognized as the performance obligations are satisfied over the term of the franchise agreement.

HOSPITALITY HOLDINGS, INC.

9 unchanged sentences

Total accounts receivable, net

receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and

assets with interest rates ranging from 6 % to 9 % per annum and having terms ranging from 1 to 20 years , net of allowance for doubtful

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

receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets

with interest rates ranging from 6 % to 9 % per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes

amounting to $ 160,000 and $ 182,000 as of June 30, 2021 and September 30, 2020, respectively.

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

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For the Three Months

For the Six Months

For the Nine Months

Taxes and permits

6 unchanged sentences

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

of Components of Other Charges (Gains), Net

Schedule of Components of Other Charges (Gains), Net

For the Three Months

For the Six Months

For the Nine Months

Impairment of assets

Settlement of lawsuits

Loss (gain) on disposal of assets

Gain on disposal of businesses and assets

Gain on insurance

Total other charges, net

Total other charges (gains), net

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

1 unchanged sentence

For the Three Months

For the Six Months

For the Nine Months

Gain on debt extinguishment

Unrealized loss on equity securities

Unrealized gain (loss) on equity securities

Total non-operating gains (losses), net

2 unchanged sentences

Assets Held for Sale

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

the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate

estimated fair value less cost to sell of $ 7.4 million after

recognizing a Nightclub segment impairment charge of $ 1.4

million, included in other charges, net in our unaudited condensed consolidated statement of operations, on one property.

Company expects the properties, which are primarily comprised of land and buildings, to be sold within 12 months through property

listings by our real estate brokers.

of June 30, 2021 and September 30, 2020, the Company had net carrying value of assets held for sale at $ 4.9 million and $ 0 , respectively.

the three months ended March 31, 2021, the Company classified as held-for-sale three real estate properties with an aggregate estimated

fair value less cost to sell of $ 7.4 million after recognizing a Nightclub segment impairment charge of $ 1.4 million, included in other

charges, net in our unaudited condensed consolidated statement of operations, on one property.

May 7, 2021, the Company sold one of the properties held for sale for $ 3.1 million.

The property had a carrying value of $ 2.3 million

as of March 31, 2021.

The Company paid related debt amounting to $ 2.0 million from the proceeds of the sale.

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

property listings by our real estate brokers.

Liabilities that are expected to be paid with the sale of held-for-sale assets were $ 1.1

million as of March 31, 2021, which is included in current portion of debt obligations in our unaudited condensed

consolidated balance sheet.

October 31, 2020, the Company negotiated extensions to November 1, 2021 on $ 1,690,000 of $ 1,940,000 of notes to individuals that

were due on November 1, 2020 .

million as of June 30, 2021, which is included in current portion of debt obligations in our unaudited condensed consolidated balance

October 31, 2020, the Company negotiated extensions to November 1, 2021 on $ 1,690,000 of $ 1,940,000 of notes to individuals that were

due on November 1, 2020 .

The Company paid $ 250,000 to a certain lender who only extended a portion of his original note.

January 25, 2021, the Company borrowed $ 2.175 million from a bank lender by executing a 20 -year promissory note with an initial

interest rate of 3.99 % per annum.

The note is payable $ 13,232 per month for the first five years after which the interest rate

will be repriced at the then-current prime rate plus 1.0 % per annum, with a floor rate of 3.99 %.

The note is guaranteed by the

Company’s CEO, Eric Langan.

January 25, 2021, the Company borrowed $ 2.175 million from a bank lender by executing a 20 -year promissory note with an initial interest

rate of 3.99 % per annum.

The note is payable $ 13,232 per month for the first five years after which the interest rate will be repriced

at the then-current prime rate plus 1.0 % per annum, with a floor rate of 3.99 %.

The note is guaranteed by the Company’s CEO, Eric

The Company paid approximately $ 25,000 in debt issuance costs at closing.

in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are two notes borrowed from related parties (see

Note 12)—one note for $ 500,000

(from an employee of the Company who is

also the brother of our director, Nourdean Anakar) and another note for $ 100,000

(from a brother of Company CFO, Bradley

Chhay)—and two notes totaling $ 500,000

borrowed from two non-officer employees.

All four notes are part of a larger group of private lenders, with the terms of the notes being the same

as the rest of the lender group.

maturities of debt obligations as of March 31, 2021 are as follows:

in the balance of debt obligations as of June 30, 2021 and September 30, 2020 are two notes borrowed from related parties (see Note 12)—one

note for $ 500,000 (from an employee of the Company who is also the brother of our director, Nourdean Anakar) and another note for $ 100,000

(from a brother of Company CFO, Bradley Chhay)—and two notes totaling $ 500,000 borrowed from two non-officer employees.

notes are part of a larger group of private lenders, with the terms of the notes being the same as the rest of the lender group.

maturities of debt obligations as of June 30, 2021 are as follows:

million, $ 11.5

3 unchanged sentences

million, and $ 78.2

million for the twelve months ending

March 31, 2022, 2023, 2024, 2025, 2026, and thereafter, respectively.

million for the twelve months ending June 30,

2022, 2023, 2024, 2025, 2026, and thereafter, respectively.

Of the maturity schedule mentioned above, $ 4.0

1 unchanged sentence

million, $ 0 ,

million, respectively, relate to scheduled

balloon payments.

million, respectively, relate to scheduled balloon

Unamortized debt discount and issuance costs amounted to $ 1.1

million and $ 1.2

million as of March 31, 2021 and September

million as of June 30, 2021 and September 30,

2020, respectively.

in the balance of debt obligations as of March 31, 2021 and September 30, 2020 are PPP loans amounting to approximately $ 124,000

million, respectively.

During the three

and six months ended March 31, 2021, we received 1 and 11 notices, respectively, approving the forgiveness of 100 %

of each of the 11 PPP loans amounting to $ 380,000

million, respectively,

in principal and interest, which are included in non-operating gains (losses), net in our unaudited condensed consolidated

statement of operations.

As of the date of the filing of this report, we have not received a forgiveness notice for only one PPP

loan that, if not forgiven, under the terms of the loans as provided by the CARES Act, bears an interest rate of 1% per annum.

the three and six months ended March 31, 2021, the Company purchased and retired 0 and 74,659

common shares, respectively, at a cost

of approximately $ 0

in the balance of debt obligations as of June 30, 2021 and September 30, 2020 are PPP loans amounting to approximately $ 124,000 and $ 5.4

million, respectively.

The Company paid

share cash dividend during the three and six months ended March 31, 2021 totaling approximately $ 360,000

and $ 720,000 ,

respectively.

the three and six months ended March 31, 2020, the Company purchased and retired 132,719 and 465,390 common shares, respectively,

at a cost of approximately $ 2.0 million and $ 8.5 million, respectively.

The Company paid $ 0.04 and $ 0.07 per share cash dividend

during the three and six months ended March 31, 2020 totaling approximately $ 368,000 and $ 647,000 , respectively.

During the three and nine months ended June 30, 2021, we received 0 and 11 notices, respectively, approving the

forgiveness of 100 % of each of the 11 PPP loans amounting to $ 0 and $ 5.3 million, respectively, in principal and interest, which are

included in non-operating gains (losses), net in our unaudited condensed consolidated statement of operations.

As of the date of the

filing of this report, we have not received a forgiveness notice for only one PPP loan that, if not forgiven, under the terms of the

loans as provided by the CARES Act, bears an interest rate of 1% per annum.

the three and nine months ended June 30, 2021, the Company purchased and retired 0 and 74,659 common shares, respectively, at a cost

of approximately $ 0 and $ 1.8 million, respectively.

The Company paid $ 0.04 and $ 0.12 per share cash dividend during the three and nine

months ended June 30, 2021 totaling approximately $ 360,000 and $ 1.1 million, respectively.

the three and nine months ended June 30, 2020, the Company purchased and retired 0 and 465,390 common shares, respectively, at a cost

of approximately $ 0 and $ 8.5 million, respectively.

The Company paid $ 0.03 and $ 0.10 per share cash dividend during the three and nine

months ended June 30, 2020 totaling approximately $ 273,000 and $ 920,000 , respectively.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

taxes were an expense of $ 1.9

million and $ 1.6

million during the three and six months ended

March 31, 2021, respectively, compared to a benefit of $ 1.4

million and an expense of $ 175,000

during the three and six months ended March 31,

2020, respectively.

The effective income tax rate was an expense of 24.3 %

for the three and six months ended March 31, 2021, respectively, compared

to a benefit of 28.9 %

and an expense of 7.6 %

for the three and six months ended March 31, 2020, respectively.

Our effective tax rate is affected by the statutory federal income

tax rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the

deferred tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current period.

taxes expense was $ 4.0 million and $ 5.5 million during the three and nine months ended June 30, 2021, respectively, compared to a benefit

of $ 1.4 million and $ 1.3 million during the three and nine months ended June 30, 2020, respectively.

The effective income tax rate was

an expense of 24.4 % and 16.6 % for the three and nine months ended June 30, 2021, respectively, compared to a benefit of 20.5 % and 26.9 %

for the three and nine months ended June 30, 2020, respectively.

Our effective tax rate is affected by the statutory federal income tax

rate, state taxes, permanent differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred

tax asset valuation allowance and the impact of the forgiveness of the PPP loans in the current year-to-date period.

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

1 unchanged sentence

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.

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.

Company accounts for uncertain tax positions pursuant to ASC Topic 740, Income Taxes .

As of March 31, 2021 and September

As of June 30, 2021 and September 30, 2020,

there was no liability for uncertain tax positions.

The Company recognizes interest accrued related to uncertain tax

positions in interest expense and penalties in selling, general and administrative expenses in our consolidated statements of

The Company recognizes interest accrued related to uncertain tax positions in interest

expense and penalties in selling, general and administrative expenses in our consolidated statements of operations.

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

As a result of this, additional avenues of relief were made

available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs

administered by the Small Business Administration.

The CARES Act included, among other items, provisions relating to payroll tax

credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax

depreciation methods for qualified improvement property.

The Company is currently evaluating the impact of the provisions of the

The CARES Act also established the Paycheck Protection Program, whereby certain small businesses are eligible for loans

to fund payroll expenses, rent, and related costs.

The loans may be forgiven if the funds are used for payroll and other qualified

The Company submitted its application for a PPP loan and on May 8, 2020 received approval and funding for its restaurants,

shared service entity and lounge.

Ten of our restaurant subsidiaries received amounts ranging from $ 271,000

As a result of this, additional avenues of relief were made available

to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the

Small Business Administration.

The CARES Act included, among other items, provisions relating to payroll tax credits and deferrals, net

operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified

improvement property.

The Company is currently evaluating the impact of the provisions of the CARES Act.

The CARES Act also established

the Paycheck Protection Program, whereby certain small businesses are eligible for loans to fund payroll expenses, rent, and related

The loans may be forgiven if the funds are used for payroll and other qualified expenses.

The Company submitted its application

for a PPP loan and on May 8, 2020 received approval and funding for its restaurants, shared service entity and lounge.

Ten of our restaurant

subsidiaries received amounts ranging from $ 271,000

for an aggregate amount of $ 4.2

our shared-services subsidiary

received $ 1.1

our shared-services subsidiary received

and one of our lounges received $ 124,000 .

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

The Company believes it has

used the entire loan amount for qualifying expenses.

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

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

The Company has currently utilized all of the PPP funds and

has submitted its forgiveness applications.

During the three and six months ended March 31, 2021, we received 1 and 11

Notices of PPP Forgiveness Payment, respectively, from the Small Business Administration out of the 12 of our PPP loans

All of the notices received forgave

100% of each of the 11 PPP loans totaling the amount of $380,000 and $5.3 million in principal and interest during the

three and six months ended March 31, 2021, respectively, and were included in non-operating gains (losses), net

in our unaudited condensed consolidated statement of operations.

assurance can be provided that the Company will obtain forgiveness of the one remaining PPP loan in whole or in part.

The Company believes it has used

the entire loan amount for qualifying expenses.

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used

for qualifying expenses as described in the CARES Act.

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

forgiveness applications.

During the three and nine months ended June 30, 2021, we received 0 and 11 Notices of PPP Forgiveness Payment,

respectively, from the Small Business Administration out of the 12 of our PPP loans granted.

of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $0 and $5.3 million in principal and interest

during the three and nine months ended June 30, 2021, respectively, and were included in non-operating gains (losses), net in our unaudited

condensed consolidated statement of operations .

No assurance can be provided that the Company will obtain forgiveness of the $ 124,000

remaining PPP loan in whole or in part.

Commitments and Contingencies

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 ,

without interest, over 84 months, beginning in June 2015, for all but two non-settled locations.

The Company agreed to remit the

Patron Tax on a monthly basis, based on the current rate of $ 5 per customer.

For accounting purposes, the Company discounted the

$ 10.0 million at an imputed interest rate of 9.6 %, establishing a net present value for the settlement of $ 7.2 million.

As a consequence,

the Company recorded an $ 8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between

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

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

To resolve the issue of taxes owed, the Company agreed to pay $ 10.0 million in equal monthly installments of $ 119,000 , without interest,

over 84 months, beginning in June 2015, for all but two non-settled locations.

The Company agreed to remit the Patron Tax on a monthly

basis, based on the current rate of $ 5 per customer.

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

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

As a consequence, the Company recorded an

$ 8.2 million pre-tax gain for the third quarter ended June 30, 2015, representing the difference between the $ 7.2 million and the amount

previously accrued for the tax.

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

the issue of taxes owed, the Company agreed to pay a total of $ 687,815 with $ 195,815 paid at the time the settlement agreement

was executed followed by 60 equal monthly installments of $ 8,200 without interest.

aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the consolidated balance sheets,

amounted to $ 1.5 million and $ 2.2 million as of March 31, 2021 and September 30, 2020, respectively.

To resolve the issue

of taxes owed, the Company agreed to pay a total of $ 687,815 with $ 195,815 paid at the time the settlement agreement was executed followed

by 60 equal monthly installments of $ 8,200 without interest.

aggregate balance of Patron Tax settlement liability, which is included in debt in the consolidated balance sheets, amounted

to $ 1.2 million and $ 2.2 million as of June 30, 2021 and September 30, 2020, respectively.

declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative

rule related to the $ 5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses.

An administrative rule attempted

to expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment.

The administrative

rule was challenged on both constitutional and statutory grounds.

On November 19, 2018, the Court issued an order that a key aspect

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

On March 6, 2020,

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.

An administrative rule attempted to

expand the fee to cover venues featuring dancers using latex cover as well as traditional nude entertainment.

The administrative rule

was challenged on both constitutional and statutory grounds.

On November 19, 2018, the Court issued an order that a key aspect of the

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

On March 6, 2020, the U.S.

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.

We will continue to vigorously defend the matter through the

appeals process.

HOSPITALITY HOLDINGS, INC.

8 unchanged sentences

The Rehabilitation

Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those

assets as necessary.

Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets

as necessary.

Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

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 March 31, 2021, we have 2 unresolved claims out of the original 71

Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC.

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.

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.

30, 2021, we have 2 unresolved claims out of the original 71 claims.

Class and Derivative Actions

May and June 2019, three putative securities class action complaints were filed against RCI Hospitality Holdings, Inc.

of its officers in the Southern District of Texas, Houston Division.

The complaints allege violations of Sections 10(b) and 20(a)

of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements

made in the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management.

The complaints seek unspecified damages, costs, and attorneys’ fees.

and certain of

its officers in the Southern District of Texas, Houston Division.

The complaints allege violations of Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934 and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in

the Company’s SEC filings and disclosures as they relate to various alleged transactions by the Company and management.

The complaints

seek unspecified damages, costs, and attorneys’ fees.

These lawsuits are Hoffman v.

RCI Hospitality Holdings,

RCI Hospitality Holdings, Inc., et al.

(filed May 21, 2019, naming the Company and Eric Langan);

RCI Hospitality Holdings, Inc., et al.

(filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall (who is no longer an officer of the Company));

(filed May 28, 2019, naming

the Company, Eric Langan, and Phil Marshall (who is no longer an officer of the Company));

and Grossman v.

RCI Hospitality Holdings, Inc., et al.

(filed June 28, 2019, naming the Company, Eric Langan, and Phil

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

On January 10, 2020 an order consolidating

the Hoffman , Grossman , and Gu cases was entered by the Court.

The consolidated case is styled In re RCI

Hospitality Holdings, Inc.

RCI Hospitality Holdings,

(filed June 28, 2019, naming the Company, Eric Langan, and Phil Marshall).

The plaintiffs in all three cases moved to

consolidate the purported class actions.

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

was entered by the Court.

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

4:19-cv-01841.

On February 24, 2020, the plaintiffs in the consolidated case filed an Amended

Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and

10b-5 promulgated thereunder.

In addition to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also adds

director Nourdean Anakar and former director Steven Jenkins as defendants.

On April 24, 2020, the Company and the individual defendants

moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted.

On March 31, 2021, the

court denied defendants’ motion to dismiss the lawsuit.

On April 14, 2021, defendants filed their answer and affirmative

defenses, denying liability as to all claims.

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.

24, 2020, the Company and the individual defendants moved to dismiss the amended complaint for failure to state a claim upon which relief

can be granted.

On March 31, 2021, the court denied defendants’ motion to dismiss the lawsuit.

On April 14, 2021, defendants filed

their answer and affirmative defenses, denying liability as to all claims.

On June 14, 2021, a scheduling order was entered in the case,

setting January 9, 2023 as the trial date.

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

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

This action is in

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

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

and directors Eric S.

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

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

The action alleges that the individual officers and directors

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

business, operations, prospects, and legal compliance and engaged in or caused the Company to engage in, inter alia, related party

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

The action asserts claims for

breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations

of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934.

The complaint seeks injunctive relief, damages, restitution,

costs, and attorneys’ fees.

The case, Cecere v.

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

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, styled Cecere v.

Langan, et al.

, is in its early stage, and a potential loss cannot

yet be estimated.

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

and several of its subsidiaries.

Plaintiffs allege that their images were misappropriated, intentionally altered and published

without their consent by clubs affiliated with the Company.

The causes of action asserted in Plaintiffs’ Complaint include

alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories.

Company contends that there is insurance coverage under an applicable insurance policy.

The insurer has raised several issues

regarding coverage under the policy.

, 4:19-cv-03080, alleged 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 asserted 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 sought injunctive relief, damages, restitution,

costs, and attorneys’ fees.

On June 1, 2021, the Company and the individual defendants moved to dismiss the lawsuit based on the

plaintiff’s failure to make a pre-suit demand prior to filing of the derivative action, as is required under Texas law.

the plaintiff filed a motion to voluntarily dismiss his claims.

On June 21, 2021, the court granted that motion and entered an order

dismissing this lawsuit in its entirety, without prejudice.

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

several of its subsidiaries.

Plaintiffs allege that their images were misappropriated, intentionally altered and published without their

consent by clubs affiliated with the Company.

The causes of action asserted in Plaintiffs’ Complaint include alleged violations

of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories.

The Company contends that there

is insurance coverage under an applicable insurance policy.

The insurer has raised several issues regarding coverage under the policy.

At this time, this disagreement remains unresolved.

The Company has denied all allegations,

continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.

Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which

was under renovation in 2015.

The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook),

Inc., breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping

center, and by failing to provide Plaintiff with proposed plans before beginning construction.

Plaintiff also asserts RCI Hospitality

Holdings, Inc.

The Company has denied all allegations, continues to vigorously defend against the

lawsuit and continues to believe the matter is covered by insurance.

Company has been sued by a landlord in the 333rd Judicial District Court of Harris County, Texas for a Houston Bombshells which was under

renovation in 2015.

The plaintiff alleges RCI Hospitality Holdings, Inc.’s subsidiary, BMB Dining Services (Willowbrook), Inc.,

breached a lease agreement by constructing an outdoor patio, which allegedly interfered with the common areas of the shopping center,

and by failing to provide Plaintiff with proposed plans before beginning construction.

Plaintiff also asserts RCI Hospitality Holdings,

is liable as guarantor of the lease.

The lease was for a Bombshells restaurant to be opened in the Willowbrook

Shopping Center in Houston, Texas.

The lease was for a Bombshells restaurant to be opened in the Willowbrook Shopping Center in

Houston, Texas.

Both RCI Hospitality Holdings, Inc.

and BMB Dining Services (Willowbrook), Inc.

liability and assert that Plaintiff has failed to mitigate its claimed damages.

have denied liability and assert that

Plaintiff has failed to mitigate its claimed damages.

Further, BMB Dining Services (Willowbrook), Inc.

asserts that Plaintiff affirmatively represented that the patio could be constructed under the lease and has filed counter claims

and third-party claims against Plaintiff and Plaintiff’s manager asserting that they committed fraud and that the landlord

breached the applicable agreements.

The case was tried to a jury in late September 2018 and an adverse judgment was entered in

January 2019 in the amount totaling $ 1.0 million, which includes damages, attorney fees and interest.

The matter is being appealed.

The appeal process required that a check be deposited in the registry of the court in the amount of $ 690,000 , which was deposited

in April 2019 and included in other current assets in both consolidated balance sheets as of March 31, 2021 and September 30,

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

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.

was tried to a jury in late September 2018 and an adverse judgment was entered in January 2019 in the amount totaling $ 1.0

million, which includes damages, attorney fees

and interest.

The matter was appealed to the Court of Appeals for the First District of Texas.

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 is included in other current assets in both consolidated balance sheets as of June 30, 2021 and

September 30, 2020.

On June 3, 2021, the Court of Appeals issued a decision affirming the lower court’s judgment in the case.

motion for rehearing en-banc will be requested to ask the full court to reconsider the June 3rd decision.

Management believes

that the case has no merit and will continue to vigorously defend itself throughout the appeal.

HOSPITALITY HOLDINGS, INC.

5 unchanged sentences

The suit alleged that Mr.

Panameno injured

Dupray in a traffic accident after being served alcohol at an establishment operated by JAI Phoenix.

The suit alleged

that JAI Phoenix was liable under theories of common law dram shop negligence and dram shop negligence per se.

After a jury trial

proceeded to a verdict in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which

JAI Phoenix’s share of compensatory damages is approximately $ 1.4 million and its share of punitive damages is $ 4 million.

In May 2017, JAI Phoenix filed a motion for judgment as a matter of law or, in the alternative, motion for new trial.

denied this motion in August 2017.

In September 2017, JAI Phoenix filed a notice of appeal.

In June 2018, the matter was heard

by the Arizona Court of Appeals.

On November 15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case

to the trial court.

It is anticipated that a new trial will occur at some point in the future.

JAI Phoenix will continue to vigorously

defend itself.

set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard

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

While we take steps to ensure that our adult entertainers

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

The suit alleged that JAI Phoenix

was liable under theories of common law dram shop negligence and dram shop negligence per se.

After a jury trial proceeded to a verdict

in favor of the plaintiffs against both defendants, in April 2017 the Court entered a judgment under which JAI Phoenix’s share

of compensatory damages is approximately $ 1.4 million and its share of punitive damages is $ 4 million.

In May 2017, JAI Phoenix filed

a motion for judgment as a matter of law or, in the alternative, motion for new trial.

The Court denied this motion in August 2017.

September 2017, JAI Phoenix filed a notice of appeal.

In June 2018, the matter was heard by the Arizona Court of Appeals.

15, 2018 the Court of Appeals vacated the jury’s verdict and remanded the case to the trial court.

It is anticipated that a new

trial will occur at some point in the future.

JAI Phoenix will continue to vigorously defend itself.

set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard is

to classify adult entertainers as independent contractors, not employees.

While we take steps to ensure that our adult entertainers are

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

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

Based on the industry standard, the manner in which the

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

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

Lawsuits are handled by attorneys with an expertise

in the relevant law and are defended vigorously.

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

litigation and federal, state, and local environmental, labor, health and safety laws and regulations.

We assess the probability

that we could incur liability in connection with certain of these lawsuits.

Our assessments are made in accordance with generally

accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company

or any of its subsidiaries.

In certain cases that are in the early stages and in light of the uncertainties surrounding them,

we do not currently possess sufficient information to determine a range of reasonably possible liability.

In matters where there

is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with

these claims in excess of our insurance coverage.

of lawsuits for the three and six months ended March 31, 2021 amount to approximately $ 1,000 and $ 153,000 , respectively, while

for the three and six months ended March 31, 2020 amount to approximately $ 0 and $ 24,000 , respectively.

As of March 31, 2021 and

September 30, 2020, the Company has accrued $ 228,000 and $ 100,000 in accrued liabilities, respectively, related to settlement

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 litigation

and federal, state, and local environmental, labor, health and safety laws and regulations.

We assess the probability that we could incur

liability in connection with certain of these lawsuits.

Our assessments are made in accordance with generally accepted accounting principles,

as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries.

cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information

to determine a range of reasonably possible liability.

In matters where there is insurance coverage, in the event we incur any liability,

we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

of lawsuits for the three and nine months ended June 30, 2021 amount to approximately $ 127,000 and $ 280,000 , respectively, while for

the three and nine months ended June 30, 2020 amounted to approximately $ 50,000 and $ 74,000 , respectively.

As of June 30, 2021 and September

30, 2020, the Company has accrued $ 103,000 and $ 100,000 in accrued liabilities, respectively, related to settlement of lawsuits.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

Company owns and operates adult nightclubs and Bombshells Restaurants and Bars.

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

in geographical areas served as all operations are in the United States.

The Company measures segment profit (loss) as income

(loss) from operations.

Segment assets are those assets controlled by each reportable segment.

The Other category below includes

our media and energy drink divisions that are not significant to the consolidated financial statements.

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 in geographical areas

served as all operations are in the United States.

The Company measures segment profit (loss) as income (loss) from operations.

assets are those assets controlled by each reportable segment.

The Other category below includes our media and energy drink divisions

that are not significant to the consolidated financial statements.

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

of Segment Reporting Information

Schedule of Segment Reporting Information

For the Three Months

For the Six Months

For the Nine Months

Revenues (from external customers)

8 unchanged sentences

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months

ended March 31, 2021 amounting to $ 2.8

million and $ 31,000 ,

respectively, and for the six months ended March 31, 2021 amounting to $ 5.6

million and $ 141,000 ,

respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2021

amounting to $ 49,000

and $ 75,000 ,

respectively.

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and corporate segments

for the three months ended March 31, 2020 amounting to $ 2.8

million and $ 32,000 ,

respectively, and for the six months ended March 31, 2020 amounting to $ 5.4

million and $ 63,000 ,

respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and six months ended March 31, 2020

amounting to $ 32,000

and $ 54,000 ,

respectively.

These intercompany revenue amounts are eliminated upon consolidation.

corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and

information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs

such as automobile and travel costs.

from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended

June 30, 2021 amounting to $ 2.8 million and $ 31,000 , respectively, and for the nine months ended June 30, 2021 amounting to $ 8.4 million

and $ 173,000 , respectively, and intercompany sales of Robust Energy Drink of Other segment for the three and nine months ended June 30,

2021 amounting to $ 20,000 and $ 95,000 , respectively.

Excluded from revenues in the table above are intercompany rental revenues of the

Nightclubs and Corporate segments for the three months ended June 30, 2020 amounting to $ 2.8 million and $ 31,000 , respectively, and for

the nine months ended June, 2020 amounting to $ 8.2 million and $ 94,000 , respectively, and intercompany sales of Robust Energy Drink of

Other segment for the three and nine months ended June 30, 2020 amounting to $ 3,000 and $ 57,000 , respectively.

These intercompany revenue

amounts are eliminated upon consolidation.

corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information

technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile

and travel costs.

Management considers these to be non-allocable costs for segment purposes.

real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or

investment projects.

real estate assets previously wholly assigned to Bombshells have been subdivided and allocated to other future development or investment

Accordingly, those asset costs have been transferred out of the Bombshells segment.

1 unchanged sentence

our Chairman and President, Eric Langan, personally guarantees all of the commercial bank indebtedness of the Company.

receives no compensation or other direct financial benefit for any of the guarantees.

The balance of our commercial bank indebtedness,

net of debt discount and issuance costs, as of March 31, 2021 and September 30, 2020, was $ 84.6 million and $ 83.8 million, respectively.

in the $ 2.35 million borrowing on November 1, 2018 (included in debt obligations as of March 31, 2021 and September 30, 2020)

were notes borrowed from related parties—one note for $ 500,000 (from an employee of the Company who is also the brother

of our director Nourdean Anakar) and another note for $ 100,000 (from a brother of Company CFO, Bradley Chhay) as part of a larger

group of private lenders.

The terms of these related party notes are the same as the rest of the lender group in the November

1, 2018 transaction.

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).

Langan receives

no compensation or other direct financial benefit for any of the guarantees.

The balance of our commercial bank indebtedness, net of

debt discount and issuance costs, as of June 30, 2021 and September 30, 2020, was $ 81.6 million and $ 83.8 million, respectively.

in the $ 2.35 million borrowing on November 1, 2018 (included in debt obligations as of June 30, 2021 and September 30, 2020) were notes

borrowed from related parties—one note for $ 500,000 (from an employee of the Company who is also the brother of our director Nourdean

Anakar) and another note for $ 100,000 (from a brother of Company CFO, Bradley Chhay) as part of a larger group of private lenders.

terms of these related party notes are the same as the rest of the lender group in the November 1, 2018 transaction.

used the services of Nottingham Creations, and previously Sherwood Forest Creations, LLC, both furniture fabrication companies

that manufacture tables, chairs and other furnishings for our Bombshells locations, as well as providing ongoing maintenance.

Creations is owned by a brother of Eric Langan (as was Sherwood Forest).

Amounts billed to us for goods and services provided by Nottingham

Creations and Sherwood Forest were $ 114,910 and $ 114,910 during the three and six months ended March 31, 2021, respectively, and

$ 53,556 and $ 72,809 during the three and six months ended March 31, 2020, respectively.

As of March 31, 2021 and September 30,

2020, we owed Nottingham Creations and Sherwood Forest $ 64,910 and $ 0 , respectively, in unpaid billings.

Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing

construction services to the Company, as well as directly to the Company during fiscal 2021 and 2020.

A son-in-law of Eric Langan

owns a noncontrolling interest in TW Mechanical.

Amounts billed by TW Mechanical to the third-party general contractor were $ 0

and $ 0 for the three and six months ended March 31, 2021, respectively, and $ 18,758 and $ 30,585 for the three and six months ended

March 31, 2020, respectively.

Amounts billed directly to the Company were $ 55,621 and $ 62,751 for the three and six months ended

March 31, 2021, respectively, and $ 24,416 and $ 26,241 for the three and six months ended March 31, 2020, respectively.

31, 2021 and September 30, 2020, the Company owed TW Mechanical $ 1,545 and $ 5,700 , respectively, in unpaid direct billings.

Creations and Sherwood Forest were $ 3,182

and $ 118,092

during the three and nine months ended June 30,

2021, respectively, and $ 0

during the three and nine months ended June 30,

2020, respectively.

As of June 30, 2021 and September 30, 2020, we owed Nottingham Creations and Sherwood Forest $ 12,205

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 2021 and 2020.

A son-in-law of Eric Langan owns a noncontrolling

interest in TW Mechanical.

Amounts billed by TW Mechanical to the third-party general contractor were $ 0 and $ 0 for the three and nine

months ended June 30, 2021, respectively, and $ 0 and $ 18,758 for the three and nine months ended June 30, 2020, respectively.

billed directly to the Company were $ 325,425 and $ 388,176 for the three and nine months ended June 30, 2021, respectively, and $ 11,363

and $ 37,605 for the three and nine months ended June 30, 2020, respectively.

As of June 30, 2021 and September 30, 2020, the Company

owed TW Mechanical $ 14,239 and $ 5,700 , respectively, in unpaid direct billings.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

Total lease expense, under ASC 842, was included in selling,

general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income

which was included in other revenue, for the three and six months ended March 31, 2021 and 2020 as follows (in thousands):

general and administrative expenses in our unaudited condensed consolidated statement of operations, except for sublease income which

was included in other revenue, for the three and nine months ended June 30, 2021 and 2020 as follows (in thousands):

Schedule of Lease Expense

For the Three Months

For the Six Months

For the Nine Months

Operating lease expense – fixed payments

Variable lease expense

Short-term equipment and other lease expense (includes $ 102 and $ 145 recorded in advertising and marketing for the three months ended March 31, 2021 and 2020, respectively, and $ 159 and $ 291 for the six months ended March 31, 2021 and 2020, respectively;

and $ 116 and $ 100 recorded in repairs and maintenance for the three months ended March 31, 2021 and 2020, respectively, and $ 204 and $ 225 for the six months ended March 31, 2021 and 2020, respectively;

Short-term equipment and other lease expense (includes $ 73 and $ 12 recorded in advertising and marketing for the three months ended June 30, 2021 and 2020, respectively, and $ 232 and $ 303 for the nine months ended June 30, 2021 and 2020, respectively;

and $ 106 and $ 72 recorded in repairs and maintenance for the three months ended June 30, 2021 and 2020, respectively, and $ 310 and $ 297 for the nine months ended June 30, 2021 and 2020, respectively;

Sublease income

4 unchanged sentences

Weighted average discount rate

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

maturities of ASC 842 lease liabilities as of June 30, 2021 are as follows (in thousands):

Schedule of Future Maturities of Lease Liabilities

April 2021 – March 2022

April 2022 – March 2023

April 2023 – March 2024

April 2024 – March 2025

April 2025 – March 2026

July 2021 – June 2022

July 2022 – June 2023

July 2023 – June 2024

July 2024 – June 2025

July 2025 – June 2026

Subsequent Events

On April 7, 2021, the Company acquired

land near the southern boundary of Houston, Texas for $ 1.3 million.

On May 7, 2021, the Company sold one

of the properties held for sale as of March 31, 2021 for $ 3.1 million.

The property had a carrying value of $ 2.3 million as of

March 31, 2021.

The Company paid related debt amounting to $ 2.0 million from the proceeds of the sale.

On July 23, 2021, we and certain of our subsidiaries

entered into definitive agreements (the “Agreements”) to acquire eleven gentlemen’s clubs, nine of which are

controlled by club entrepreneur Troy Lowrie of Lakewood, Colorado, six related real estate properties, and associated intellectual

property for a total acquisition price of $ 88.0

million (the “Acquisition”).

The Agreements for the eleven clubs being purchased include ten Asset Purchase Agreements

and one Stock Purchase Agreement.

The sellers collectively own and operate adult entertainment clubs in six states,

four of which we do not currently have a presence.

Closing of the Acquisition is subject to transfer of all necessary

permits, licenses, and other authorizations;

closing on the bank financing;

and other customary closing conditions.

have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the

assets acquired, along with the determination of any goodwill or gain on the transaction.

Since the initial accounting of the acquisition

is incomplete, we also could not provide supplemental pro forma information of the combined entities as of this time.

of the filing of this report, we are in negotiations with our bank lender to refinance most of our existing real estate debt and

to partially finance the real estate purchases related to the Acquisition.

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-Q

Item 1. Financial Statements