What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-12-14 compared with 2020-12-14 · 1490 added, 1507 removed, 714 unchanged (81% of the section changed)

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Report of Independent Registered Public Accounting Firm

Financial Statements:

Consolidated Financial Statements:

Consolidated Balance Sheets at September 30, 2021 and 2020

Consolidated Statements of Operations for the years ended September 30, 2021, 2020, and 2019

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

Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2021, 2020, and 2019

Consolidated Statements of Changes in Equity for the years ended September 30, 2021, 2020, and 2019

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on 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, 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”)

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

(the “Company”) as of September

30, 2021 and 2020, 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, 2021, and the related notes and schedule (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, 2021 and 2020, and the results of its operations and its

cash flows for each of the years in the three-year period ended September 30, 2021, 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”),

the Company’s internal control over financial reporting as of September 30, 2021, 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, 2021 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

with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws

and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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 with the PCAOB

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits

to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether

due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated

financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included

examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the

overall presentation of the consolidated financial statements.

Those standards require that we plan and perform the audits to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether

due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles

used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that

was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material

to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication

of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are

not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or

disclosures to which it relates.

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

discussed in Note 2 to the consolidated financial statements, the Company reviews goodwill and indefinite-lived intangible assets on

an annual basis for impairment, or when events and circumstances indicate that the asset might be impaired.

Additionally, the 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.

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting

unit to its carrying value, and impairment of indefinite-lived intangible assets is recognized in the amount by which the carrying value

of the assets exceed their fair value.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying

amount of the assets to the future undiscounted cash flows expected to be generated by the assets.

If these assets are determined to

be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value.

value is generally determined using forecasted cash flows discounted using an estimated weighted average cost of capital.

As of September

30, 2021, the Company had goodwill of approximately $39.4 million, indefinite-lived intangible assets of approximately $67.4 million.

Long-lived assets consisted of property and equipment, net, intangible assets subject to amortization, and right of use assets, net,

totaling approximately $200.7 million.

During the year ended September 30, 2021 the Company recorded an impairment of these assets of

approximately $13.6 million.

identified the evaluation of the impairment analysis of goodwill, indefinite-lived intangible assets, and long-lived assets as a critical

audit matter.

There was a high degree of subjective auditor judgment in evaluating the estimated undiscounted future cash flows used

to test operating locations for recoverability and the determination of fair value of the relevant assets when required.

Specifically,

a high degree of subjective auditor judgment was required to evaluate future revenues and operating cash flows, including consideration

of the impact of COVID-19.

following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating

effectiveness of certain internal controls related to the Company’s goodwill, indefinite-lived intangible asset, and long-lived

asset impairment process, including controls over the identification of relevant assets at risk of impairment, the determination of estimated

undiscounted future cash flows and the fair value of individual reporting unit, as necessary, and controls over the key assumptions as

Additionally, we:

(1) compared the Company’s historical projected operating location-level cash flows to the actual

operating location-level cash flows to assess management’s ability to accurately estimate, (2) compared the Company’s estimated

future revenue growth rates to the historical trends of the operating locations and, (3) compared the Company’s projected operating

location cash flows as a percentage of revenue to historical actual percentages.

have served as the Company’s auditor since 2019.

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Current portion of notes receivable

Prepaid insurance

Other current assets

Prepaid expenses and other current assets

Assets held for sale

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Interest income

Unrealized loss on equity securities

Non-operating gains (losses), net

Income (loss) before income taxes

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Amount reclassified from accumulated other comprehensive income

Other comprehensive income:

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

Comprehensive income (loss)

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Balance at September 30, 2018

Payment of dividends

Payments to noncontrolling interests

Equity impact of additional investment in TEZ

Change in marketable securities

Reclassification upon adoption of ASU 2016-01

Purchase of treasury shares

Purchase of treasury shares, shares

Canceled treasury shares

Canceled treasury shares, shares

Payment of dividends

Payments to noncontrolling interests

Divestiture in other entities

Balance at September 30, 2019

Balance at September 30, 2018 (as revised)

Reclassification upon adoption of ASU 2016-01

Purchase of treasury shares

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Payments to noncontrolling interests

Divestiture in other entities

Net income (as revised)

Balance at September 30, 2019 (as revised)

Balance at September 30, 2020

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Payment of dividends

Payments to noncontrolling interest

Net income (loss)

Balance at September 30, 2021

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Deferred tax expense (benefit)

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Impairment of assets

Amortization of debt discount and issuance costs

Doubtful accounts expense on notes receivable

Amortization and writeoff of debt discount and issuance costs

Doubtful accounts expense (reversal) on notes receivable

Unrealized loss on equity securities

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Deferred rent expense

Debt prepayment penalty

Gain on debt extinguishment

Changes in operating assets and liabilities:

Accounts receivable

Prepaid insurance, other current assets and other assets

Prepaid expenses, other current assets and other assets

Accounts payable and accrued liabilities

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Payment of loan origination costs

Debt prepayment penalty

Distribution to noncontrolling interests

Net cash provided by (used in) financing activities

Net cash used in financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

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Income taxes paid (net of refunds of $ 2,201 , $ 153 , and $ 42 , in 2021, 2020, and 2019, respectively)

investing and financing transactions:

Non-cash investing and financing transactions:

Ended September 30,

Debt incurred with seller in connection with acquisition of businesses

Notes receivable received as proceeds from sale of assets

Unrealized gain on marketable securities

Accounts receivable converted to notes receivable

Debt incurred

with seller in connection with acquisition of businesses

Notes receivable received

as proceeds from sale of assets

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

Deferred rent liabilities

reclassified upon adoption of ASC 842

Operating lease liabilities

established upon adoption of ASC 842

Unpaid liabilities on capital expenditures

Adjustment to operating lease

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

Unpaid liabilities on capital

accompanying notes to consolidated financial statements.

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Hospitality Holdings, Inc.

(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,

(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,

Tomball, Katy, Pearland, Odessa, Lubbock, Longview, Tye, Aledo, Round Rock, Edinburg, El Paso, Harlingen and Beaumont,

Texas, as well as Minneapolis, Minnesota;

Pittsburgh, Pennsylvania;

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New York, New York;

Pembroke Park and Miami Gardens, Florida;

Pembroke Park and

Miami Gardens, Florida;

Phoenix, Arizona;

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and Chicago, Washington Park, and Kappa, Illinois.

The Company also owns and operates media

businesses for adults.

The Company also

owns and operates media businesses for adults.

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

In relation to

acquisitions that closed in October and November 2021, we now have club locations in Denver, Colorado;

Louisville, Kentucky;

North Carolina;

Portland, Maine;

Indianapolis, Indiana;

Sauget, Illinois;

and Newburgh, New York.

Summary of Significant Accounting Policies

of Accounting

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.

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.

GAAP” or “GAAP”).

of Consolidation

consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is

consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is owned.

Intercompany accounts and transactions have been eliminated in consolidation.

fiscal year ends on September 30.

References to years 2020, 2019, and 2018 are for fiscal years ended September 30, 2020, 2019,

and 2018, respectively.

References to years 2021, 2020, and 2019 are for fiscal years ended September 30, 2021, 2020, and 2019,

respectively.

Our fiscal quarters chronologically end on December 31, March 31, June 30 and September 30.

preparation of consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions

that affect certain reported amounts in the consolidated financial statements and accompanying notes.

Estimates and assumptions

are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under

the circumstances.

GAAP requires management to make estimates and assumptions that

affect certain reported amounts in the consolidated financial statements and accompanying notes.

Estimates and assumptions are based

on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under the circumstances.

Estimates and assumptions may vary under different circumstances and conditions.

We evaluate our estimates

and assumptions on an ongoing basis.

We evaluate our estimates and assumptions on an ongoing

and Cash Equivalents

Company considers as cash equivalents all highly liquid investments with a maturity of three months or less when purchased.

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

amounts in excess of FDIC limits.

maintains deposits in several financial institutions, which may at times exceed amounts covered by insurance provided by the U.S.

Deposit Insurance Corporation (“FDIC”).

The Company has not experienced any losses related to amounts in excess of FDIC limits.

HOSPITALITY HOLDINGS, INC.

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and Notes Receivable

receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to

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.

Accounts receivable also include employee advances, construction advances, and other

miscellaneous receivables.

Long-term notes receivable, which have original maturity of more than one year, include consideration

from the sale of certain investment interest entities and real estate.

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.

The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances

indicate that accounts or notes receivable will not be collected.

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.

receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to 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.

Accounts receivable also include employee advances, construction advances, and other miscellaneous

Long-term notes receivable, which have original maturity of more than one year, include consideration from the sale of certain

investment interest entities and real estate.

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.

The Company recognizes

allowances for doubtful accounts or notes when, based on management judgment, circumstances indicate that accounts or notes receivable

will not be collected.

Allowance for doubtful accounts balance related to accounts receivable was $ 382,000 and $ 261,000 as of September

30, 2021 and 2020, respectively (see Note 5).

Allowance for doubtful accounts balance related to notes receivable was $ 102,000 and $ 182,000

as of September 30, 2021 and 2020, respectively.

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

Inventories are carried at net realizable value.

Inventories are carried at the lower of cost (on a first-in,

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

and Equipment

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useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.

Buildings have estimated useful lives ranging from 29 to 40 years.

Furniture and equipment have estimated useful lives of 5 to

7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life.

for major renewals and betterments that extend the useful lives are capitalized.

Expenditures for normal maintenance and repairs

are expensed as incurred.

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 operations of

the respective period.

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

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

have estimated useful lives ranging from 29 to 40 years.

Furniture and equipment have estimated useful lives of 5 to 7 years, while leasehold

improvements are depreciated at the shorter of the lease term or estimated useful life.

Expenditures for major renewals and betterments

that extend the useful lives are capitalized.

Expenditures for normal maintenance and repairs are expensed as incurred.

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 operations of the respective period.

Interest expense from related debt incurred

during site construction is capitalized, which amounted to $ 0 in fiscal 2021, $ 156,000 in fiscal 2020, and $ 597,000 in fiscal 2019.

and Other Intangible Assets

and other intangible assets with indefinite lives are not amortized but reviewed on an annual basis for impairment.

Definite-lived

intangible assets are amortized on a straight-line basis over their estimated lives.

Definite-lived intangible

assets are amortized on a straight-line basis over their estimated lives.

costs of transferable licenses purchased through open markets are capitalized as indefinite-lived intangible assets.

of obtaining non-transferable licenses that are directly issued by local government agencies are expensed as incurred.

license renewal fees are expensed over their renewal term.

and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter

and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

An impairment

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

The costs of obtaining

non-transferable licenses that are directly issued by local government agencies are expensed as incurred.

Annual license renewal fees

are expensed over their renewal term.

and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and

are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

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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Summary of Significant Accounting Policies - continued

our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely

than not that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors,

including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to

actual and projected results of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting

unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1

quantitative analysis to determine the fair value of the reporting unit.

The fair value is determined using market-related valuation

models, including earnings multiples, discounted cash flows, and comparable asset market values.

We recognize goodwill impairment

in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount

of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2020,

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

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

of the asset.

our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not

that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors, including industry

and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results

of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying

value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the

fair value of the reporting unit.

The fair value is determined using market-related valuation models, including discounted

cash flows and comparable asset market values.

We recognize goodwill impairment in the amount that the carrying value of the reporting

unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the

results of our Step 1 analysis.

For the year ended September 30, 2021, we identified seven reporting units that were impaired

and recognized a goodwill impairment loss totaling $ 6.3 million.

For the year ended September 30, 2020, we identified seven reporting

units that were impaired and recognized a goodwill impairment loss totaling $ 7.9

See related discussion in Note 3.

the year ended September 30, 2019, we identified four reporting units that were impaired and recognized a goodwill impairment loss totaling

$ 1.6 million.

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

For indefinite-lived tradename, we determine fair value by using the relief from royalty method.

The fair value

is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds

the fair value of the asset.

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

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

The fair value is then compared

to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the

We recorded impairment charges for SOB licenses amounting to $ 5.3

million in 2021 related to three clubs,

million in 2020 related to two clubs (see Note

3), and $ 178,000

in 2019 related to one club, 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 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.

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 identified.

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 2021, the Company impaired five clubs (including

one later reclassified as held for sale) for a total of $ 2.0

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.

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

The Company also impaired one club in

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

See Notes 6 and 19.

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Value of Financial Instruments

Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional

information in the notes to consolidated financial statements when the fair value is different than the carrying value of these

financial instruments.

The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their

carrying amounts due to the relatively short maturity of these instruments.

The carrying value of notes receivable and short and

long-term debt also approximates fair value since these instruments bear market rates of interest.

None of these instruments are

held for trading purposes.

Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information

in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments.

The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the

relatively short maturity of these instruments.

The carrying value of notes receivable and short and long-term debt also approximates

fair value since these instruments bear market rates of interest.

None of these instruments are held for trading purposes.

Comprehensive

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).

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.

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).

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 fiscal 2019).

Revenue from initial franchise and area development

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

Franchise royalties and advertising

contributions, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur.

to Notes 4 and 19 for additional disclosures on revenues and leases, respectively.

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and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional

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

expenses in the accompanying consolidated statements of operations.

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

in the accompanying consolidated statements of operations.

Company and its subsidiaries are subject to U.S.

federal income tax and income taxes imposed in the state and local jurisdictions

where we operate our businesses.

federal income tax and income taxes imposed in the state and local jurisdictions where

we operate our businesses.

Deferred income taxes are determined using the liability method.

Deferred tax assets and liabilities

are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of

existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted

tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that

includes the enactment date.

In addition, a valuation allowance is established to reduce any deferred tax asset for which it is

determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

Deferred tax assets and liabilities are recognized

for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities

and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable

income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and

liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In addition, a valuation

allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion

of the deferred tax asset will not be realized.

HOSPITALITY HOLDINGS, INC.

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Summary of Significant Accounting Policies - continued

GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold

a tax position is required to meet before being recognized in the financial statements.

We recognize penalties related to unrecognized

tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized

tax benefits in interest expense.

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.

GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax

position is required to meet before being recognized in the financial statements.

We recognize penalties related to unrecognized tax

benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized 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.

Protection Program

Company’s policy is to account for the Paycheck Protection Program (“PPP”) loans as debt (see Note 9).

will continue to record the loans 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

(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.

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.

to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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.

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).

the years ended September 30, 2021, 2020, and 2019, the Company did not have any

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.

Equity-classified

awards are measured at the grant date fair value of the award and recognized as expense over their requisite service period.

Company estimates grant date fair value using the Black-Scholes option-pricing model.

The critical estimates are volatility, expected

life and risk-free rate.

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

Equity-classified awards

are measured at the grant date fair value of the award and recognized as expense over their requisite service period.

The Company estimates

grant date fair value using the Black-Scholes option-pricing model.

The critical estimates are volatility, expected life and risk-free

September 30, 2021 and 2020, the Company has no

stock options outstanding, since as of

September 30, 2020, the Company’s 2010 Stock Option Plan contractually expired.

HOSPITALITY HOLDINGS, INC.

3 unchanged sentences

Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.

significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.

In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a

material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.

recognizes legal fees and expenses, including those related to legal contingencies, as incurred.

There is significant

judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.

In the opinion of

management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of

a recorded accrual, with respect to loss contingencies for asserted legal and other claims.

The Company recognizes legal fees and expenses,

including those related to legal contingencies, as incurred.

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.

The Company carries substantial

insurance to cover such risks with large deductibles and/or self-insured retention.

These policies have been structured to limit

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.

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 insurance to cover

such risks with large deductibles and/or self-insured retention.

These policies have been structured to limit 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.

Value Accounting

Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to

the extent possible.

The Company determines fair value based on assumptions that market participants would use in pricing an asset

or liability in the principal or most advantageous market.

When considering market participant assumptions in fair value measurements,

the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the

following levels.

GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring

Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent

The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability

in the principal or most advantageous market.

When considering market participant assumptions in fair value measurements, the following

fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels.

GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair

1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

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3 – Unobservable inputs which are supported by little or no market activity.

fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs

when measuring fair value.

fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when

measuring fair value.

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

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 less than $ 1,000

and approximately $ 84,000

as of September 30, 2021 and 2020.

3 unchanged sentences

accordance with U.S.

GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security

below the cost basis is other than temporary.

Should the decline be considered other than temporary, the Company writes down the

cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss.

GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security below

the cost basis is other than temporary.

Should the decline be considered other than temporary, the Company writes down the cost basis

of the security and include the loss in current earnings as opposed to an unrealized holding loss.

No losses or other-than-temporary

2 unchanged sentences

and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill

and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance

and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance sheets.

For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment.

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 operations.

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 operations.

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

1 unchanged sentence

Value at Reporting Date Using

September 30,

Quoted Prices in Active Markets for Identical

Significant Other Observable Inputs

Significant Unobservable Inputs

Property and equipment

2 unchanged sentences

Operating lease liabilities*

Other assets (equity securities)

Measured at October 1, 2019 upon the adoption of

Asset held for sale

Measured at the lease modification dates.

Value at Reporting Date Using

September 30,

Quoted Prices in Active Markets for Identical

Significant Other Observable Inputs

Significant Unobservable Inputs

Property and equipment

Indefinite-lived intangibles

Definite-lived intangibles

Operating lease right-of-use assets **

Operating lease liabilities **

Other assets (equity securities)

** M easured at October

1, 2019, upon the adoption of ASC 842.

HOSPITALITY HOLDINGS, INC.

3 unchanged sentences

Ended September 30,

Property and equipment, net

and equipment, net (including held for sale)

Indefinite-lived intangibles

Operating lease right-of-use assets

Operating lease right-of-use

Other assets (equity securities)

The significant unobservable inputs used in our

level 3 fair value measurements are as follows:

Schedule of Significant Unobservable Inputs Used

in Level 3 Fair Value Measurement

(Weighted Average)

and equipment

Revenue/EBITDA

- 2.5 % ( 1 %)

average cost of capital

- 17 % ( 15 %)

Revenue/EBITDA

- 2.5 % ( 1 %)

average cost of capital

- 17 % ( 15 %)

excess earnings

Revenue/EBITDA

- 2.5 % ( 1 %)

average cost of capital

- 17 % ( 15 %)

asset charges rate

- 8.0 % ( 4 %)

Relief-from-royalty

- 2.5 % ( 2.5 %)

average cost of capital

lease right-of-use assets

- 2.5 % ( 1 %)

average cost of capital

- 17 % ( 15 %)

Reclassification

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.

of Recently Issued Accounting Standards

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 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.

to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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

Measurement of Credit Losses

on Financial Instruments .

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

assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking

information to calculate credit loss estimates.

It also eliminates the concept of other-than-temporary impairment and requires

credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than

as a reduction in the amortized cost basis of the securities.

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.

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

December 15, 2018.

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

of Certain Tax Effects from Accumulated Other Comprehensive Income.

This ASU provides financial statement preparers with an

option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings

in each period in which the effect of the change in the U.S.

federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax

Act”) is recorded.

The ASU requires financial statement preparers to disclose (1) a description of the accounting policy

for releasing income tax effects from AOCI;

(2) whether they elect to reclassify the stranded income tax effects from the Tax

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.

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 an impact

on our consolidated financial statements.

of this guidance did not have a significant 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

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.

Our evaluation indicates that fair value disclosures

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

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 2018-03 as of October

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

March 2019, the FASB issued ASU No.

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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.

Our evaluation indicates that

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

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 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.

In October 2021, the FASB issued ASU 2021-08,

Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in

business combinations.

The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim

periods within those fiscal years.

We have not yet determined the timing of adoption but we do not expect the ASU to have a material

impact on our 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.

Ongoing Impact of COVID-19 Pandemic

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.

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 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.

Our strategy is

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

We believe that we can borrow capital if needed 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 PPP of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES

Act”) for its restaurants, shared service entity and lounge.

See Notes 9 and 10.

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.

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.

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

We evaluated forecasted cash flows considering future assumed impact

of COVID-19 pandemic on sales.

Based on our evaluation we conducted during the interim and annual periods since the pandemic emerged,

we determined that during the year ended September 30, 2020 our assets are impaired in a total amount of approximately $ 10.6

million comprised of $ 7.9

2 unchanged sentences

in property and equipment, and $ 104,00 0

in operating lease right-of-use assets.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Revision of Prior Year Immaterial Misstatement

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 and diluted

Comprehensive income

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’ 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.

in operating lease right-of-use assets, with an additional $ 13.6

million of impairment recognized during the

year ended September 30, 2021 comprised of $ 6.3 million in goodwill, $ 5.3 million in SOB licenses, and $ 2.0 million in

property and equipment, which included one property later reclassified as held for sale.

HOSPITALITY HOLDINGS, INC.

20 unchanged sentences

Recognized over time

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.

Lease revenue (included in Other Revenues) is covered by ASC 842 in fiscal 2021 and 2020, and ASC 840

in fiscal 2019.

All other revenues are covered by ASC Topic 606.

HOSPITALITY HOLDINGS, INC.

4 unchanged sentences

transferred to the customer is included in accounts receivable, net in our consolidated balance sheet.

A reconciliation of contract

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

A reconciliation of contract liabilities

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

Schedule of Reconciliation of Contract Liabilities with Customers

4 unchanged sentences

at September 30, 2021

Other (including franchise fees, see below)

liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note

5), while the revenues associated with these contract liabilities are included in other revenues in our 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.

Selected Account Information

6 unchanged sentences

Other (net of allowance for doubtful accounts of $ 382 and $ 261 , respectively)

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.

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 %

per annum and having original terms ranging from 1

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

Schedule of Components of Prepaid Expenses and Other Current Assets

Prepaid insurance

Prepaid legal

Prepaid taxes and licenses

Total prepaid expenses and other current assets

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

Schedule of Accrued Liabilities

of Accrued Liabilities

Payroll and related costs

16 unchanged sentences

Repairs and maintenance

Selling, general and administrative

Selling, general and administrative expenses

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

of Components of Other Charges, Net

Schedule of Components of Other Charges, Net

Ended September 30,

1 unchanged sentence

Settlement of lawsuits

Loss (gain) on sale of businesses and assets

Gain on sale of businesses and assets

Loss (gain) on insurance

8 unchanged sentences

Property and equipment, net

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 $ 302 ,000, $ 4.2 million, and $ 1.6 million for fiscal 2020, 2019, and 2018, respectively.

in buildings and leasehold improvements above are construction-in-progress amounting to $ 3.4

million and $ 20,000

as of September 30, 2021 and 2020, respectively,

which are mostly related to Bombshells projects.

expense was approximately $ 8.0 million,

$ 8.2 million,

and $ 8.4 million

for fiscal years 2021, 2020, and 2019, respectively.

Impairment loss for property and equipment, including those later reclassified to

assets held for sale, was $ 2.0

million, $ 302,000 ,

and $ 4.2 million

for fiscal 2021, 2020, and 2019, respectively.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Assets Held for Sale

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.

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.

to Consolidated Financial Statements

of September 30, 2020, the Company had no properties classified as held for sale.

fiscal 2021, the Company classified as held-for-sale three real estate properties with an aggregate carrying value of $ 8.6

million, which was later remeasured at lower of carrying value and net realizable value less cost to sell of $ 7.2

In May 2021, the Company sold one property

with a carrying value of $ 2.3

million for $ 3.1

million (see Note 15).

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.

of September 30, 2021, liabilities associated with held-for-sale assets amounted to $ 1.1 million.

Gains or losses on the sale of properties

held for sale are included in other charges (gains), net within the consolidated statements of operations (see Note 5).

Goodwill and Other Intangible Assets

2 unchanged sentences

Indefinite useful lives:

useful lives:

goodwill and other intangible assets

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

Tradename and domain name

Indefinite Intangible

Assets, Net, Total

Amortization Period

Definite useful lives:

Discounted leases

Non-compete agreements

Distribution agreement

Total goodwill and other intangible assets

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

Lived Intangibles

10 unchanged sentences

million, respectively.

Future amortization

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

Future amortization expense

related to definite-lived intangible assets that are subject to amortization at September 30, 2021 is:

2022 - $ 138,000 ;

5 unchanged sentences

Indefinite-lived

intangible assets consist of sexually oriented business licenses and tradename, which were obtained as part of acquisitions.

licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which

intangible assets consist of sexually oriented business licenses and tradenames, which were obtained as part of acquisitions.

These licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which

are done at minimal costs to the Company.

The discounted cash flow of the income approach method was used in calculating the value

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, 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.

The discounted cash flow of the income approach method was used in calculating the value of

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

the fiscal year ended September 30, 2021, the Company recognized a $ 5.3 million impairment related to SOB licenses of three clubs and

a $ 6.3 million related to goodwill of seven clubs.

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

million impairment related to the goodwill of

four reporting units.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

debt consisted of the following (in thousands):

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

consisted of the following (in thousands):

of Long-term Debt

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 5.75 %, matures December 2027 , as amended

Note 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 %,

Note payable at 12 % , matures February 2030 , as amended

Notes payable at 12 % , mature November 2021 , as amended

Note payable at 8 % ,

matures October

2027 , as amended

payable at 8 %, matures May 2029

payable at 5.75 %,

matures December

2027 , as amended

Note payable at 8 % , matures May 2029

Note 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

Note payable at 5.99 % , matures September 2033 , as amended

Note payable at 5 % , matures August 2029

Note payable at prime plus 0.5 % with a 5.5 % floor, matures September 2035 , as amended

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 , as amended

Note payable at 12 % , matures February 2030 , as amended

Note payable at 9 % , matures September 2028

Note payable at 5.95 % , matures September 2028 , as amended

Note payable at 6 % , matures February 2040 , as amended

Note payable at 5.49 % , matures March 2039 , as amended

Note payable at 7 % , matures November 2024

Note payable at 7 % , matures February 2021 , as amended

Notes payable at 12 % , mature November 2021

Note payable at 8 % , matures November 2028

Note payable at 3.99 % , matures January 2041

Note payable at 5.25 % , matures September 2031

Paycheck Protection Program loans at 1 % , matures May 2022

Less unamortized debt discount and issuance costs

Less current portion

Total long-term portion of debt, net

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

3 unchanged sentences

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

Schedule of Long-term Debt Instruments

of Long-term Debt Instruments

(a) Secured by real estate

2 unchanged sentences

(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

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 , 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 % .

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

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

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

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.

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.

In March 2017, the present value of the second note was approximately $ 390,000 after discounting using an imputed interest

rate of 9.6 %.

Going 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

million of long-term debt by borrowing $ 9.9

$ 9.9 million.

The new unsecured debt is payable $ 118,817

2 unchanged sentences

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.

This note was 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 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

This note was paid off entirely

on September 30, 2021.

On May 1, 2017, the Company raised $ 5.4 million through the issuance of 12 % unsecured promissory notes to certain investors, which notes

mature on May 1, 2020 .

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

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

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.

See succeeding

paragraph related to November 1, 2018 financing below.

Included in the balance of long-term debt as of September 30, 2020 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.

These notes were paid off on September 30, 2021.

On May 8, 2017, in relation to the Scarlett’s acquisition (see Note 15), the Company executed two promissory notes with the sellers:

short-term note for $ 5.0

million payable in lump sum after six

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

amortizing 8 %

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

note is payable $ 168,343

per month, including interest.

The Company has

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

million short-term note payable several times,

which has a remaining balance of $ 3.0

million, extending the maturity date and increasing

the interest rate.

Presently, the maturity date is October

1, 2027 and the interest rate is

for its remaining term.

Refer to December

2019 amendment below.

Refer to December 2019 amendment below.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

On 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 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

repriced one time at the then current U.S.

Treasury rate plus 3.5 % , with a floor rate of 5.75 % , and payable in monthly installments

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

second note amounts to $ 10.6

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 %

covering 43 parcels of real properties the Company previously acquired (“Properties”).

The December 2017 Refinancing Loan

consisted of three promissory notes:

first note amounted to $ 62.5

million with a term of 10

years at a 5.75 %

fixed interest rate for the first

five years , then repriced one time at the

then current U.S.

Treasury rate plus 3.5 %,

with a floor rate of 5.75 %,

and payable in monthly installments of $ 442,058 ,

based upon a 20 -year

amortization period, with the balance payable at maturity;

second note amounted 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.

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 amounted to $ 8.1 million

with a term of 10 years

fixed interest rate until

August 2021 , after which to be repriced at 5.75 %

until the fifth anniversary of this note, and then to be repriced again at the then interest of the first note.

This note was payable

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

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

This note is payable $ 100,062 monthly for principal and interest until August 2021, 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.

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

$ 100,062 monthly

for principal and interest until August 2021, 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.

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.

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

million originally scheduled in fiscal 2018,

2020 and $ 5.3

million originally scheduled in fiscal 2020 and

million originally scheduled in fiscal 2021.

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.

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

All three notes in the preceding paragraph were

refinanced as part of the September 2021 Refinancing Note (see below).

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

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.

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.

We also paid 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

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 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 $ 59,869 , which includes interest.

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

On 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.

The bank note bore interest at 5.25 %

adjusted after 36 months to

prime plus 1 %

with a floor of 5.2 %

and matures on February 15,

The bank note was payable

interest-only during the first 18 months, after which monthly payments of principal and interest were to 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 an

additional construction loan having a maximum availability of $ 7.4 million.

The new note had an initial interest rate of 5.95 %,

subject to a repricing after 72 months

to prime plus 1 %

The note was 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.

This note was paid off in relation to the

September 2021 Refinancing Note.

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

1 unchanged sentence

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 %

floor, with the same bank for a construction loan with maximum availability of $ 4.7

The construction loan agreement bore

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 .

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

and was to mature on August

the first 18 months of the construction loan, the Company made 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 .

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

This note was

paid off in relation to the September 2021 Refinancing Note.

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

1 unchanged sentence

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 ,

The note was to mature in 24 months,

by which date the principal was to be 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 ,

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 % ,

The new $ 2.9

million construction loan had 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

The first 24 months were to be

interest-only payments, after which monthly payments of principal and interest were to 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

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

These notes were paid off in relation to the September 2021 Refinancing Note.

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 ,

The note was to mature in three

years and was payable in monthly installments

of $ 20,276 ,

including interest, based on a five-year

amortization with the remaining balance to be paid at maturity.

amortization with the remaining balance to be

paid at maturity.

This note was fully paid in May 2021.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

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.

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.

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

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.

February 20, 2020 extension below.

This note was paid off on September 30, 2021.

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.

note payable had 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 %

Monthly payments of $ 11,138 ,

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

Company paid approximately $ 40,000 in

debt issuance costs at closing.

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

maturity date.

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

This note was paid off in relation to the September 2021 Refinancing Note.

On 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.

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

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

The notes paid interest-only

in equal monthly installments, with a lump sum principal payment at maturity.

Among the promissory notes were 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

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 .

and $ 100,000

borrowed from related parties (see Note 18) 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.

These notes were paid off in relation to the September 2021 Refinancing

On 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 related to the acquisition in Note 15.

This note was paid off in relation to the September 2021 Refinancing Note.

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

note for $ 2.0

million and the second is a 10 -year

note for $ 5.5

See additional details related to the

acquisition in Note 15.

On September 30, 2020, the maturity date for the first note was extended

to and fully paid off in February 2021 .

The second note was paid off in relation to the September 2021 Refinancing Note.

On December 11, 2018, the Company purchased an aircraft for $ 2.8

$ 2.8 million

with a $ 554,000 down

payment and financed the remaining $ 2.2

million with a $ 554,000

down payment and financed for 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

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

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 %

with a construction loan with another bank, which had an interest rate of 6.0 %

adjusted after five years to prime plus 0.5 %

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 new construction loan, which had a maximum availability of $ 4.1

million, was to mature in 252 months from

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

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

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 were certain financial covenants with which the Company was to be

in compliance related to this financing.

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

This note was paid off in relation to the September 2021 Refinancing Note.

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.

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

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

The restructured note eliminated a scheduled balloon principal payment of $ 4.0

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

The refinancing did not

have an impact on the Company’s results of operations and cash flows.

This note was paid off in relation to the September 2021

Refinancing Note.

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

million as of the amendment date, by

1 unchanged sentence

monthly, including interest, starting March 2020.

The restructured note eliminates a scheduled balloon principal payment

The restructured note eliminated a scheduled balloon principal payment of $ 3.8

million in October 2021.

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

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

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 30, 2020.

This note was paid off in relation

to the September 2021 Refinancing Note.

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

3 unchanged sentences

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

The aggregate amount of debt due on these notes was then $ 1,940,000 .

On October 31, 2020, the Company negotiated extensions

to November 1, 2021 on $ 1,690,000

of the $ 1,940,000

that were due on November 1, 2020.

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

The remaining balance of these notes were paid off

in relation to the September 2021 Refinancing Note.

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 %

As of September 30, 2021, we have received eleven Notices of PPP Forgiveness Payment from the Small Business

Administration out of the twelve of our PPP loans granted.

All of those notices received forgave 100% of each of the eleven

PPP loans totaling the amount of $5.3 million in principal and interest.

In November 2021, we received a partial forgiveness

of the remaining $ 124,000

PPP loan for $ 85,000

in principal and interest.

The remaining

unforgiven portion of approximately $ 41,000 in principal will be repaid as debt plus accrued interest.

See Notes 3 and 10.

2 unchanged sentences

Debt – continued

On 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 Company paid approximately $ 25,000 in debt issuance

costs at closing.

On September 30, 2021, we entered into a $ 99.1

million term loan refinancing $ 85.7

million of existing bank and seller-financed

real estate debt and to provide $ 12.3

million in cash that will be used to pay off

existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing

for the acquisition of 11 clubs and related real estate (see Note 15).

million note has a term of 10

years with an initial interest rate of 5.25 %

per annum for the first five

years , then adjusted to a rate equal to the then

weekly average yield of U.S.

Treasury Securities plus 350 basis points, with a floor rate of 5.25 %.

The note is payable in monthly payments of principal and interest of $ 668,051 ,

based on a 20 -year

amortization period, with the balance paid at maturity.

In connection with the transaction, we wrote off to interest expense approximately

of unamortized debt issuance costs related to

the paid-off debts.

We also paid approximately $ 1.0

million in loan costs, approximately $ 567,000

of which is capitalized and will be amortized

together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using

the effective interest method.

maturities of debt obligations as of September 30, 2021 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,

for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to

reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods.

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 operations for the

fiscal year ended September 30, 2018.

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

of Maturities of Long-term Debt

maturities of long-term debt, net of debt discount

On October 12, 2021, we closed a debt financing transaction with 28

investors for unsecured promissory notes with a total principal amount of $ 17.0

million, all of which bear interest at a rate

Of this amount, $ 9.5

million are promissory notes, payable interest

only monthly (or quarterly) in arrears, with a final lump sum payment of principal and accrued and unpaid interest due on October

The remaining amount of the financing

million in promissory notes, payable in monthly

payments of principal and interest based on a 10 -year

amortization period, with the balance of the entire principal amount together with all accrued and unpaid interest due and payable in

full on October

Included in the $ 17.0

million borrowing are two notes for $ 500,000

and $ 150,000

borrowed from related parties (see Note

18) and two notes for $ 500,000

and $ 300,000

borrowed from two non-officer employees

in which the terms of the notes are the same as the rest of the lender group.

On October 18, 2021, in relation to an acquisition (see Note 15),

the Company executed four seller-financed promissory notes.

The first promissory note was a 10 -year $ 11.0 million 6 % note

payable in 120 equal monthly payments of $ 122,123 in principal and interest.

The second promissory note was a 20 -year $ 8.0 million 6 %

note payable in 240 equal monthly payments of $ 57,314 in principal and interest.

The third promissory note was a 10 -year

$ 1.2 million

note payable in monthly payments of $ 8,086 in principal and interest based on a 20 -year

amortization period, with the balance payable at maturity date.

The fourth note was a 20 -year

note payable in 240 equal monthly payments of $ 7,215 in principal and interest.

November 8, 2021, in relation to an acquisition (see Note 15), the Company executed a $ 1.0

million 7 -year

promissory note with an interest rate of 4.0 %

The note is payable $ 13,669 per

month, including principal and interest.

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

2 unchanged sentences

State and local

Total current income tax expense (benefit)

Total current income tax expense

State and local

6 unchanged sentences

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):

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 (benefit)

Federal statutory income tax expense (benefit)

State income taxes, net of federal benefit

Deferred taxes on subsidiaries acquired/sold

Permanent differences

Change in deferred tax liability rate

Change in state tax rate

Change in valuation allowance

2 unchanged sentences

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):

The significant components of the Company’s deferred tax assets

and liabilities were as follows (in thousands):

Schedule of Deferred Tax Assets and Liabilities

1 unchanged sentence

Capital loss carryforwards

Net operating loss carryforwards

Valuation allowance

Net deferred tax assets

deferred tax assets

Deferred tax liabilities:

Property and equipment

Deferred tax liabilities

Net deferred tax liability

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

tax liabilities

deferred tax liability

in the Company’s deferred tax liabilities at September 30, 2021 and 2020 is the tax effect of indefinite-lived intangible assets

from club acquisitions amounting to approximately $ 17.1

million and $ 14.9

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.

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

1 unchanged sentence

The tax benefits recognized

in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty

percent likelihood of being realized upon settlement with the taxing authorities.

We recognize accrued interest related to unrecognized

tax benefits as a component of accrued liabilities.

We recognize penalties related to unrecognized tax benefits as a component

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

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 the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent

likelihood of being realized upon settlement with the taxing authorities.

We recognize accrued interest related to unrecognized tax benefits

as a component of accrued liabilities.

We recognize penalties related to unrecognized tax benefits as a component of selling, general

and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense.

In fiscal 2019,

the Company released the remaining amount accrued when the examination was closed.

HOSPITALITY HOLDINGS, INC.

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Ended September 30,

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.

The Company does not expect any changes that will significantly impact its uncertain tax positions within

the next twelve months.

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

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 federal

tax benefits.

The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve

The Company or one of its

subsidiaries files income tax returns in the U.S.

federal jurisdiction, and various states.

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

The Company’s federal income tax returns

for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service (“IRS”) with

The Company ordinarily goes through various federal and state reviews and examinations for various tax matters.

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.

On March 27, 2020,

former 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 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

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and one of our lounges received $124,000.

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

received funding under the PPP.

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.

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 fiscal 2021, we received 11 Notices

of PPP Forgiveness Payment 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 $5.3 million in principal and

interest and were included in non-operating gains (losses), net in our consolidated statement of operations for the fiscal year

ended September 30, 2021.

In November 2021, we received a partial forgiveness of the remaining $ 124,000 PPP

loan for $ 85,000 in

principal and interest.

The remaining unforgiven portion of approximately $ 41,000 in principal will be repaid as debt plus accrued

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 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.

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 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.

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 $ 2.2 million and $ 3.4 million as of September 30, 2020 and 2019, 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 long-term debt in the consolidated balance sheets, amounted

to approximately $ 813,000 and $ 2.2 million as of September 30, 2021 and 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.

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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.

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.

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

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, 2021, we had 2 remaining unresolved claims out of

the original 71 claims.

One of the two remaining claims was settled in November 2021.

Class and Derivative Actions

In May and June 2019, three putative securities

class action complaints were filed against RCI Hospitality Holdings, Inc.

and certain of its officers in the Southern District

of Texas, Houston Division.

The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934

and 10b-5 promulgated thereunder based on alleged materially false and misleading statements made in the Company’s SEC filings

and disclosures as they relate to various alleged transactions by the Company and management.

The complaints seek unspecified

damages, costs, and attorneys’ fees.

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

and certain of

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

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

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

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

The complaints

seek unspecified damages, costs, and attorneys’ fees.

These lawsuits are Hoffman v.

RCI Hospitality Holdings, Inc., et al.

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

(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);

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 Marshall).

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

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.

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.

and Phil Marshall, the amended complaint also adds former directors Nourdean Anakar and 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.

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 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

Langan, Phillip Marshall, Nourdean Anakar (who is no longer a director), 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.

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.

In response, 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.

HOSPITALITY HOLDINGS, INC.

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Matters – continued

Matter and Internal Review

mid- and late 2018, a series of negative articles about the Company was anonymously published in forums associated with the short-selling

Subsequently in 2019, the SEC initiated an informal inquiry.

In connection with these events, a special committee of

the Company’s audit committee engaged independent outside counsel to conduct an internal review.

Management of the Company

fully cooperated with the internal review conducted by the special committee and its outside counsel.

The board of directors has

implemented the recommendations resulting from the internal review.

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

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

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.

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

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

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

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

was under renovation in 2015.

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

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

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

Plaintiff also asserts RCI Hospitality

Holdings, Inc.

is liable as guarantor of the lease.

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

Shopping Center in Houston, Texas.

The Plaintiff alleged 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 failed to provide Plaintiff with proposed plans before beginning construction.

Plaintiff asserted RCI Hospitality Holdings, Inc.

was also liable as the guarantor of the lease.

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

in Houston, Texas.

Both RCI Hospitality Holdings, Inc.

and BMB Dining Services (Willowbrook), Inc.

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

denied liability and asserted that

Plaintiff 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 September 30, 2020 and 2019.

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

asserted that Plaintiff affirmatively

represented that construction of the patio was permitted under the lease and accordingly, pursued counter claims against Plaintiff and

Plaintiff’s manager for breach of the parties’ agreement.

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

judgment was entered in January 2019 in an amount totaling more than $ 1.15

million, including damages, costs, attorney fees,

and interest.

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

The appeal process required that funds

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 the consolidated balance sheet as of September 30, 2020.

On June 3, 2021, the Court of Appeals affirmed the lower court’s judgment in the case.

A motion to reconsider this decision was

This matter was subsequently settled for $ 1.0

million in exchange for a full and complete release

of all claims.

The settlement funds are comprised of the funds on deposit in the court registry, which total $ 705,876

with interest, and a wire transfer of the remaining

This settlement will fully resolve this matter.

HOSPITALITY HOLDINGS, INC.

6 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.

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 this report, the adult entertainment industry standard is to classify adult entertainers

2 unchanged sentences

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 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.

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.

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 years ended September 30, 2021, 2020, and 2019 total $ 1.3 million, $ 174,000 , and $ 225,000 , respectively.

As of September

30, 2021 and 2020, the Company has accrued $ 378,000 and $ 100,000 in accrued liabilities, respectively, related to settlement of lawsuits.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

the year ended September 30, 2019, the following common stock transactions occurred:

6 unchanged sentences

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.

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.

the year ended September 30, 2021, the following common stock transactions occurred:

Company acquired 74,659 shares of its own common stock at a cost of $ 1.8 million.

These shares were subsequently retired.

Company paid quarterly dividends of $ 0.04 per share for an aggregate amount of $ 1.4 million.

On October 18, 2021, we partially paid for an

acquisition using 500,000 shares of our common stock.

Employee Retirement Plan

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.

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 $ 209,000 , $ 171,000 , and $ 164,000

for the years ended September 30, 2021, 2020, and 2019, respectively.

Insurance Recoveries

of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club

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

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.

of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club in

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

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):

13 unchanged sentences

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.

net property insurance gain/loss amount in fiscal 2021, 2020, and 2019 was net of assets written off and expenses amounting to $ 88,000 ,

$ 728,000 , and $ 629,000 , respectively.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

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

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

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

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 in acquisition-related costs

for this transaction, which is included in selling, general and administrative expenses in our consolidated statement of operations.

In fiscal 2019, 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 lender.

The loan has a 7 % fixed interest

rate with a maturity date in May 2019 .

The loan was fully paid as of June 30, 2019.

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.

to Consolidated Financial Statements

Acquisitions and Dispositions - continued

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

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):

3 unchanged sentences

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

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.

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 operations.

The club generated revenue of approximately $ 4.6 million since acquisition

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.

Noncompete is amortized on a straight-line basis over

five years from acquisition date.

Goodwill recognized for

this transaction is deductible for tax purposes.

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):

2 unchanged sentences

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:

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

$ 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 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.

renewal option for a succeeding ten years at a minimum of $ 48,000 per month;

has option to purchase the property for $ 6.0 million during a term beginning November 2023 and expiring in October 2028.

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.

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.

HOSPITALITY HOLDINGS, INC.

2 unchanged sentences

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.

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

$ 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.

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.

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.

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

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.

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

1 unchanged sentence

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.

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.

4 unchanged sentences

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.

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 .

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 .

Net loss on the transaction

amounted to approximately $ 156,000 .

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.

Net gain 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.

August 6, 2020, the Company sold another corporate housing property for $ 176,000 in cash with an approximate gain of $ 26,000 .

proceeds of $ 160,500 were used to pay down related debt.

December 28, 2020, the Company acquired the real estate and other business assets of a club in Centerville, Illinois for $ 500,000 in

The Company is leasing out this property to a club operator for $ 48,000 annually.

January 26, 2021, the Company acquired land for a future Bombshells location in Arlington, Texas for $ 2.9 million.

The Company paid approximately

$ 754,000 in cash including closing costs and financed $ 2.175 million with a bank lender for a 20 -year promissory note with an initial

interest rate of 3.99 % per annum.

March 10, 2021, the Company acquired approximately 57,000 -square

foot of land across the street from our corporate office for $ 475,000

The Company plans to build

a warehouse on that land in the coming months.

March 22, 2021, the Company acquired land adjacent to a Bombshells location in Houston, Texas for $ 1.04 million in cash.

April 7, 2021, the Company acquired land near our Bombshells location in Pearland, Texas for $ 1.275 million in cash.

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.

We recorded a net gain of approximately $ 657,000 after closing costs and we paid related debt amounting to $ 2.0 million from the proceeds

September 21, 2021, the Company sold land where a club used to be operated for $ 2.25 million with a net gain of approximately $ 54,000

after closing costs.

We paid $ 1.2 million of related debt with the proceeds of the sale.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Acquisitions and Dispositions - continued

October 18, 2021, we and certain of our subsidiaries completed our acquisition of eleven gentlemen’s clubs, six related real

estate properties, and associated intellectual property for a total agreed acquisition price of $ 88.0 million (with

a total consideration preliminary fair value of $ 88.4

million based on the Company’s stock price at acquisition date and discounted due to the lock-up period).

The acquisition

gives the Company presence in six additional states.

We paid for the acquisition with $ 36.8 million

in cash, $ 21.2 million

in four seller-financed notes (see Note 9), and 500,000 shares

of our common stock.

We have not completed

our valuation of the assets acquired, therefore, we do not have an allocation of the acquisition price at this time.

connection with the acquisition, we incurred acquisition-related expenses of approximately $ 347,000 , of which $ 174,000 was expensed

in fiscal 2021 and $ 173,000 will be expensed in fiscal 2022, and in both periods included in selling, general and administrative

expenses in our consolidated statement of operations.

The following table presents the unaudited pro

forma combined results of operations of the Company and the eleven acquired clubs and related assets as though the acquisition occurred

at the beginning of fiscal 2021 (in thousands, except per share amount):

Schedule of Unaudited Pro Forma Combined Results of Operations

For the Fiscal

September 30, 2021

Pro forma revenues

Pro forma net income attributable to RCIHH common stockholders

Pro forma earnings per share - basic and diluted

Pro forma weighted average number of common shares outstanding - basic and diluted

The above unaudited pro forma financial information

is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved

if the acquisition had taken place at the beginning of fiscal 2021.

The unaudited pro forma financial information reflects material,

nonrecurring adjustments directly attributable to the acquisition including acquisition-related expenses, interest expense, and any related

Since we do not have a valuation of the assets that we acquired yet, the unaudited pro forma financial information does

not have adjustments related to changes in recognized expenses caused by the fair value of assets acquired, such as depreciation and

amortization and related tax effects.

Pro forma net income and pro forma earnings per share include acquisition-related expenses that

will be recorded in fiscal 2022 amounting to $ 173,000 and interest expense of $ 3.3 million related to the 28 private lender group notes

and 4 seller-financed notes in the acquisition.

Pro forma weighted average number of common shares outstanding includes the impact of

500,000 shares of our common stock issued as partial consideration for the acquisition.

November 8, 2021, the Company acquired a club and related real estate in Newburgh, New York for a total purchase price of $ 3.5

million, by which $ 2.5

million was paid in cash at closing and $ 1.0

million through a seller-financed 7 -year

promissory note with an interest rate of 4.0 %

The note is payable $ 13,669

per month, including principal and interest.

Since this acquisition is not material, we are not providing supplemental pro forma disclosures.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Quarterly Results of Operations (Unaudited)

following tables summarize unaudited quarterly data for fiscal 2020, 2019, and 2018 (in thousands, except per share data):

following tables summarize unaudited quarterly data for fiscal 2021, 2020, and 2019 (in thousands, except per

Schedule of Quarterly Financial Information

the Three Months Ended

Income from operations (1)

Net income attributable to RCIHH stockholders (1)

Earnings per share (1)

Basic and diluted

Weighted average number of common shares outstanding

Basic and diluted

the Three Months Ended

Income (loss) from operations (2)

11 unchanged sentences

Basic and diluted

the Three Months Ended

Income from operations (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 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 % ,

year 2021 revenues were significantly higher compared to prior year, except for the first quarter, which was still affected by the

lockdowns and social restrictions of the COVID-19 pandemic.

Net income attributable to RCIHH stockholders and earnings per share

were heavily impacted by the gain on debt extinguishment ($ 4.9

million in the first

quarter and $ 380,000

in the second quarter),

asset impairments totaling $ 13.6

million ($ 1.4

million in the second

quarter, $ 271,000

in the third quarter,

million in the

fourth quarter), and gain on insurance totaling $ 1.3

million ($ 197,000

in the first quarter, $ 12,000 in the second quarter,

million in the

fourth quarter).

Quarterly effective income tax

expense (benefit) rate was ( 4.2 )% ,

and ( 210.4 )%

from first to fourth

quarter, respectively, including the impact of the release of a $ 462,000 deferred tax asset valuation allowance in the fourth

year 2020 revenues during the second through the fourth quarter were significantly affected by the COVID-19 pandemic.

Income (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 % , ( 28.9 )% , ( 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

million in the first quarter, $ 1.1 million in the second quarter, $ 0.3 million in the third quarter, and $ 0.4 million in the

fourth quarter), and a $ 0.8 million net gain on insurance ($ 0.1 million net loss in the third quarter and $ 0.9 million net

gain in the fourth quarter).

Quarterly effective income tax expense (benefit) rate was 8.4 %, 22.3 %, 24.1 %, and ( 371.7 )% from

first to fourth quarter, respectively.

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.

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 million in

the first quarter, $ 1.1 million in the second quarter, $ 0.3 million in the third quarter, and $ 0.4 million in the fourth quarter),

and a $ 0.8 million net gain on insurance ($ 0.1 million net loss in the third quarter and $ 0.9 million net gain in the fourth quarter).

Quarterly effective income tax expense (benefit) rate was 8.4 % , 22.3 % , 24.1 % , and ( 371.7 )% from first to fourth quarter, respectively.

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.

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.

to Consolidated Financial Statements

Impairment of Assets

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 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

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.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Segment Information - continued

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 reportable segments (in thousands):

1 unchanged sentence

Revenues (from external customers)

Income (loss) from

Income (loss) from operations

General corporate

3 unchanged sentences

General corporate

Total assets (1)

Nightclubs (1)

Bombshells (1)

General corporate

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

million, and $ 9.0 million for 2020, 2019, and 2018, respectively, and intercompany sales of Robust Energy Drink of Other segment

amounting to $ 70 ,000 , $ 140 ,000 , and $ 26 ,000 for the same respective years.

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 segment amounting to $ 11.5 million, $ 11.1 million,

and $ 10.0 million for 2021, 2020, and 2019, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to

$ 141,000 , $ 70,000 , and $ 140,000 for the same respective years.

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

to Consolidated Financial Statements

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 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

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 September 30, 2020 and 2019 was $ 83.8 million and $ 86.8 million, respectively.

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 September 30, 2021 and 2020 was $ 99.7 million and $ 83.8 million, respectively.

in the $ 2.35 million

borrowing on November 1, 2018 (see Note 9) were notes borrowed from related parties—one note for $ 500,000

$ 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

(Ed Anakar, an employee of the Company and brother

of our former director Nourdean Anakar) and another note for $ 100,000

(from a brother of Company CFO, Bradley Chhay)

as part of a larger group of private lenders.

The terms of this related party note are the same as the rest of the lender group in the

November 1, 2018 transaction.

These notes were paid off in relation to the September 2021 Refinancing Note (see Note 9).

in the $ 17.0 million borrowing on October 12, 2021 (see Note 9) are notes borrowed from related parties—one note for $ 500,000 (Ed

Anakar, see above) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the

notes are the same as the rest of the lender group.

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.

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.

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 $ 118,000 in fiscal 2021, $ 59,000 in fiscal 2020, and $ 134,000 in fiscal 2019.

As of September

and 2019, the Company owed TW Mechanical approximately $ 5,700 and $ 0 , respectively, in unpaid direct billings.

840 (Related to Fiscal 2019 and 2018)

30, 2021 and 2020, we owed Nottingham Creations and Sherwood Forest $ 12,205 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, 2020, and 2019.

A son-in-law of Eric Langan owns a 50%

interest in TW Mechanical.

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

and $ 452,000

for the fiscal years 2021, 2020, and 2019, respectively.

Amounts billed directly to the Company were approximately $ 425,000 ,

for the fiscal years 2021, 2020, and 2019, respectively.

As of September 30, 2021 and 2020, the Company owed TW Mechanical approximately $ 7,500

and $ 5,700 ,

respectively, in unpaid direct billings.

840 (Related to Fiscal 2019)

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.

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.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

in lease expense in our consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO

rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $ 19,500

and $ 78,000 for the years ended September 30, 2020 and 2019, 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.

1 unchanged sentence

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)

Under ASC 840, we

recorded lease expense amounting to $ 3.9 million for the year ended September 30, 2019.

842 (Related to Fiscal 2021 and 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 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.

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.

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

We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally

not included within our operating leases.

maturities of ASC 842 lease liabilities as of September 30, 2021 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

October 2021 - September 2022

October 2022 - September 2023

October 2023 - September 2024

October 2024 - September 2025

October 2025 - September 2026

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):

except for sublease income which was included in other revenue, for the year ended September 30, 2021 and 2020 as follows (in thousands):

Schedule of Lease Expense

1 unchanged sentence

Variable lease expense

Short-term equipment and other lease expense (includes $ 315 recorded in advertising and marketing, and $ 372 recorded in repairs and maintenance;

Short-term equipment and other lease expense (includes $ 298 and $ 315 recorded in advertising and marketing for fiscal 2021 and 2020, respectively, and $ 397 and $ 372 recorded in repairs and maintenance, respectively;

Sublease income

4 unchanged sentences

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.

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.

recorded impairment charges of operating lease right-of-use assets amounting to $ 0 , $ 104,000 , and $ 0 during fiscal years 2021, 2020,

and 2019, respectively.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

in Thousands)

Valuation and Qualifying Accounts

Balance at beginning of

Schedule of Valuation and Qualifying Accounts

at beginning of year

to costs and expenses (1)

Deductions (2)

Balance at end of year

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.

Deferred tax asset valuation allowance (3)

to bad debts expense (under other selling, general and administrative expenses) in the consolidated statements of operations.

off against gross receivable and allowance.

in deferred tax liability, net in the consolidated balance sheets.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

1 unchanged sentence

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