What changed in this filing

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Item 1. Financial Statements

2022-02-09 compared with 2021-08-05 · 569 added, 575 removed, 270 unchanged (81% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

thousands, except par value)

thousands, except par value and number of shares)

and cash equivalents

receivable, net

portion of notes receivable

expenses and other current assets

held for sale

current assets

Cash and cash equivalents

Accounts receivable, net

Current portion of notes receivable

Prepaid expenses and other current assets

Assets held for sale

Total current assets

Property and equipment, net

Operating lease right-of-use assets, net

Notes receivable, net of current portion

Intangibles, net

LIABILITIES AND EQUITY

and equipment, net

Operating l ease

right-of-use assets, net

receivable, net of current portion

portion of debt obligations, net

portion of operating lease liabilities

current liabilities

Accounts payable

Accrued liabilities

Current portion of debt obligations, net

Current portion of operating lease liabilities

Total current liabilities

Deferred tax liability, net

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

Operating lease liabilities, net of current portion

Other long-term liabilities

Total liabilities

Commitments and contingencies (Note 10)

Preferred stock, $ 0.10 par value per share;

tax liability, net

net of current portion and debt discount and issuance costs

lease liabilities, net of current portion

long-term liabilities

and contingencies (Note 10)

stock, $ 0.10 par value per share;

1,000,000 shares authorized;

none issued and outstanding

Common stock, $ 0.01 par value per share;

stock, $ 0.01 par value per share;

20,000,000 shares authorized;

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

Additional paid-in capital

Retained earnings

Total RCIHH stockholders’ equity

Noncontrolling interests

Total liabilities and equity

9,499,910 and 8,999,910 shares issued and outstanding as of December

31, 2021 and September 30, 2021, respectively

paid-in capital

RCIHH stockholders’ equity

Noncontrolling

liabilities and equity

accompanying notes to unaudited condensed consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

thousands, except per share data)

For the Three Months

For the Nine Months

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Total revenues

CONSOLIDATED STATEMENTS OF INCOME

thousands, except per share and number of share data)

the Three Months

of alcoholic beverages

of food and merchandise

of goods sold

beverages sold

and merchandise sold

cost of goods sold (exclusive of items shown separately below)

general and administrative

and amortization

operating expenses

Cost of goods sold

Alcoholic beverages sold

Food and merchandise sold

Service and other

Total cost of goods sold (exclusive of items shown separately below)

Salaries and wages

Selling, general and administrative

Depreciation and amortization

Other charges (gains), net

Total operating expenses

Income (loss) from operations

Other income (expenses)

Interest expense

Interest income

Non-operating gains (losses), net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Net loss (income) attributable to noncontrolling interests

Net income (loss) attributable to RCIHH common stockholders

Earnings (loss) per share

Basic and diluted

Weighted average number of common shares outstanding

Basic and diluted

from operations

income (expenses)

Non-operating

before income taxes

tax expense (benefit)

loss attributable to noncontrolling interests

income attributable to RCIHH common shareholders

Earnings per share

Weighted average

number of common shares outstanding

Dividends per share

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

thousands, except number of shares)

Noncontrolling

at September 30, 2021

of treasury shares

treasury shares

income (loss)

to noncontrolling interest

at December 31, 2020

Purchase of treasury

shares , shares

Canceled treasury

shares , shares

Issuance of common

Payment of dividends

income (loss)

at March 31, 2021

at June 30, 2021

at September 30, 2019

of treasury shares

treasury shares

to noncontrolling interest

at December 31, 2019

of treasury shares

treasury shares

to noncontrolling interest

at March 31, 2020

Balance at December

Balance at September

Purchase of treasury

Canceled treasury

Payment of dividends

income (loss)

at June 30, 2020

Balance at December

accompanying notes to unaudited condensed consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

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

Depreciation and amortization

Deferred income tax benefit

Gain on sale of businesses and assets

Impairment of assets

Unrealized loss on equity securities

Amortization of debt discount and issuance costs

Gain on debt extinguishment

Noncash lease expense

Gain on insurance

Doubtful accounts expense (reversal) on notes receivable

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses, other current and other assets

Accounts payable, accrued and other liabilities

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of businesses and assets

Proceeds from insurance

Proceeds from notes receivable

Payments for property and equipment and intangible assets

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from debt obligations

Payments on debt obligations

Purchase of treasury stock

thousands, except number of shares)

the Three Months

FLOWS FROM OPERATING ACTIVITIES

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

and amortization

on sale of businesses and assets

loss on equity securities

of debt discount and issuance costs

on debt extinguishment

lease expense

accounts expense (reversal) on notes receivable

in operating assets and liabilities:

expenses, other current and other assets

payable, accrued and other liabilities

cash provided by operating activities

FLOWS FROM INVESTING ACTIVITIES

from sale of businesses and assets

from insurance

from notes receivable

for property and equipment and intangible assets

of businesses, net of cash acquired

cash used in investing activities

FLOWS FROM FINANCING ACTIVITIES

from debt obligations, including related party proceeds of $ 650 and $ 0 , respectively

on debt obligations

of treasury stock

Payment of dividends

Payment of loan origination costs

Distribution to noncontrolling interests

Net cash used in financing activities

NET INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

CASH AND CASH EQUIVALENTS AT END OF PERIOD

CASH PAID DURING PERIOD FOR:

Interest (net of amounts capitalized of $ 0 and $ 155 , respectively)

Noncash investing and financing transactions:

Principal of Paycheck Protection Program loans forgiven

Operating lease right-of-use assets established upon adoption of ASC 842

Deferred rent liabilities reclassified upon adoption of ASC 842

Operating lease liabilities established upon adoption of ASC 842

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

Unpaid liabilities on capital expenditures

cash provided by (used in) financing activities

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

AND CASH EQUIVALENTS AT END OF PERIOD

PAID DURING PERIOD FOR:

investing and financing transactions:

incurred in connection with acquisition of businesses

Note receivable from sale of property

of shares of common stock for acquisition of businesses:

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

liabilities on capital expenditures

accompanying notes to unaudited condensed consolidated financial statements.

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accompanying unaudited condensed consolidated financial statements of RCI Hospitality Holdings, Inc.

(the “Company or “RCIHH”)

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

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

They do not include

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

The September 30, 2020 consolidated balance sheet data

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

However, except as disclosed herein,

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

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

December 14, 2020.

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

financial statements included in the Form 10-K.

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

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

Operating results for the three and nine

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

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

to conform to the current year financial statement presentation.

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

and cash flows in all periods presented.

(the “Company,” “RCIHH,”

“we,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United

States of America (“GAAP” or “U.S.

GAAP”) for interim financial information and with the instructions to Form

10-Q of Regulation S-X.

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

The September

30, 2021 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by

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

financial statements for the year ended September 30, 2021 included in the Company’s Annual Report on Form 10-K, as filed with

the Securities and Exchange Commission on December 14, 2021.

The interim unaudited condensed consolidated financial statements should

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

In the opinion of management, all adjustments

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

Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for

the year ending September 30, 2022.

Certain reclassifications of cost of goods sold

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

statement presentation.

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

Recent Accounting Standards and Pronouncements

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

Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

This ASU requires,

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

experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 replaces the existing incurred loss impairment

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

It also eliminates

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

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

These changes will result

in earlier recognition of credit losses.

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

after December 15, 2019.

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

years, beginning after December 15, 2018.

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

Our adoption of this guidance did not have a

significant impact on our consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED 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.

We adopted ASU 2018-13 as of October

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

March 2019, the FASB issued ASU No.

2019-01, Leases (Topic 842):

Codification Improvements .

ASU 2019-01 aligns the guidance for

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

The ASU requires that the fair value of the underlying

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

However, if there has been a significant

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

820 should be applied.

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

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

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

fiscal years, beginning after December 15, 2019.

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

Our adoption of this guidance did not

have an impact on our consolidated financial statements.

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

December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

This ASU simplifies

accounting for income taxes by removing the following exceptions:

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

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

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

The ASU also improves financial statement preparers’

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

transactions with a government that

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

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.

and enacted changes in tax

laws in interim periods.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim

periods within those fiscal years.

Early adoption is permitted for public business entities for periods for which financial statements

have not been issued.

An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of

the annual period that includes that interim period.

Additionally, an entity that elects early adoption should adopt all the amendments

in the same period.

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

We adopted ASU 2019-12 on October 1, 2021.

Our adoption of this update did not have a significant impact on our 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 .

This 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 are still evaluating the impact of this ASU but we do not expect it to have a material impact

on our consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity and 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

Ongoing Impact of COVID-19 Pandemic

Since the U.S.

declaration of the COVID-19

pandemic as a national emergency in March 2020, we have had a major disruption in our business operations that threatened to significantly

impact our cash flow.

The pandemic 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.

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

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

Our strategy is to open

locations and operate in accordance with local and state guidelines.

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

do not have unused credit facilities so there can be no guarantee that additional liquidity will be readily available or available on

favorable terms, especially the longer the COVID-19 pandemic lasts.

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

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

its restaurants, shared services entity and lounge.

See Notes 7 and 9.

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

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.

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

5 unchanged sentences

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

consider the COVID-19 pandemic a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles,

consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles,

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

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

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

We evaluated forecasted cash flows considering the future

assumed impact of the COVID-19 pandemic on sales.

Based on the evaluation we conducted during the interim period ended December

31, 2021, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of December

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisitions and Dispositions

October 6, 2021, the Company sold a property classified as held-for-sale with a carrying value of $ 3.0

million for $ 3.2

million, of which $ 2.7

million was in the form of a secured promissory

note receivable has a term of eight years and is collectible in equal monthly installments of $ 21,544

in principal and interest with the remaining

balance to be paid at maturity.

October 8, 2021, the Company sold one of its clubs in South Houston for $ 300,000 .

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, with interest rates

on promissory notes reflective of market yields).

The acquisition was structured by entering into nine asset purchase

agreements, which allowed the Company to acquire from each club all of the tangible and intangible assets and personal property in

that business except certain excluded assets, and two stock purchase agreements, where a newly formed subsidiary purchased 100 %

of the capital stock of two club-owning entities.

Along with the asset and stock purchase agreements, the Company also entered into

a real estate purchase and sale agreement for six real estate properties and an intellectual property purchase agreement for

substantially all of the intellectual property used in the adult entertainment establishment businesses owned and operated by the

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 7), and 500,000 shares

of our common stock.

The preliminary fair value of the consideration transferred is as follows (in thousands):

of Preliminary Fair Value of Consideration

Notes payable

Total consideration fair value

recognized the assets and liabilities for this acquisition based on our estimates of their acquisition date fair values, all in

our Nightclubs reportable segment.

We have not finalized our valuation of the tangible and identifiable intangible assets acquired

in this transaction.

As of the release of this report, the fair value of the acquired tangible and identifiable intangible assets

provisional pending receipt of the final valuations for those assets.

Based on the allocation of the preliminary fair

value of the acquisition price and subject to any working capital adjustments, the amount of goodwill is estimated to be $ 13.8 million.

Goodwill represents the excess of the acquisition price fair value over the fair values of the tangibles and identifiable

intangibles assets acquired and liabilities assumed, which is essentially the forward earnings potential of the acquired

Goodwill will not be amortized but will be tested at least annually for impairment.

Approximately $ 9.3 million

of the recognized goodwill will be deductible for tax purposes.

The following is our preliminary allocation of the fair value of the

acquisition price (in thousands) as of October 18, 2021:

Schedule of Allocation of Fair Values Assigned to Assets at Acquisition

and equipment

Deferred tax liability

net assets acquired

price fair value

and trademarks will not be amortized but will be tested at least annually for impairment.

The Company entered into leases with third parties

for certain clubs where the real estate were not part of the acquisition.

connection with the acquisition, we incurred acquisition-related expenses of approximately $ 417,000 ($ 173,000 recognized in fiscal

2021 and $ 244,000 recognized in fiscal 2022), of which $ 0

was expensed in the first quarter of

2021 and $ 244,000 was expensed in the first quarter of 2022, and in those periods included in selling, general and

administrative expenses in our consolidated statements of income.

the date of acquisition until December 31, 2021, the eleven acquired clubs contributed revenues

of $ 6.0 million and income from operations of $ 1.7 million, which are included in our unaudited

condensed consolidated statement of income.

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 amounts and number of shares):

Schedule of Unaudited Pro Forma Combined Results of Operations

the Three Months

forma net income attributable to RCIHH common stockholders

forma earnings per share – basic and diluted

Pro forma weighted

average number of common shares outstanding

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.

unaudited pro forma financial information reflects material, nonrecurring adjustments directly attributable to the acquisition

including acquisition-related expenses, interest expense, and any related tax effects.

Since we do not have a final valuation

of the assets that we acquired yet, the unaudited pro forma financial information only includes preliminary 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 the impact of acquisition-related expenses and

interest expense related to the 28 private lender group notes and 4 seller-financed notes in the acquisition as if they were

incurred as of the first day of fiscal 2021.

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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

acquisition price is preliminarily allocated $ 2.0 million

to real estate, $ 200,000 to

tangible assets, and $ 1.3 million

to goodwill, which is deductible for tax purposes.

The note is payable $ 13,669 per

month, including principal and interest.

From the date of acquisition until December 31, 2021, the acquired club

contributed revenues of $ 289,000 and

income from operations of $ 4,000 ,

which are included in our unaudited condensed consolidated statement of income.

Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the

consolidated operations of the Company.

December 30, 2021, the Company acquired the real estate of one of its clubs in South Florida, which the Company previously leased,

for $ 7.0 million

in an all-cash purchase.

At closing, the Company wrote off the balance of its operating lease right-of-use asset and corresponding operating

lease liability related to the discontinued lease.

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

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

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

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

The Company recognizes revenue when it satisfies

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

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

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

by guidance under ASC 842, Leases .

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

under ASC 842, Leases .

as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 11), are shown below (in thousands):

Schedule of Disaggregation of Segment Revenues

Months Ended June 30, 2021

Months Ended June 30, 2020

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Other revenues

Recognized at a point in time

Recognized over time

Months Ended June 30, 2021

Months Ended June 30, 2020

Sales of alcoholic beverages

Sales of food and merchandise

Service revenues

Other revenues

Recognized at a point in time

Recognized over time

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

Months Ended December 31, 2021

Months Ended December 31, 2020

of alcoholic beverages

of food and merchandise

at a point in time

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

All other revenues are covered by ASC 606.

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Consideration

(including franchise fees)

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

(see also Note 6), while the revenues associated with these contract liabilities are included in other revenues in our unaudited condensed

consolidated statements of operations.

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

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

and San Marcos, all in Texas.

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

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

Revenue from initial

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

consolidated statements of income.

HOSPITALITY HOLDINGS, INC.

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Schedule of Accounts Receivable

Credit card receivables

Income tax refundable

ATM in-transit

Insurance receivable

Other (net of allowance for doubtful accounts of $ 605 and $ 261 , respectively)

Total accounts receivable, net

card receivables

tax refundable

(net of allowance for doubtful accounts of $ 414 and $ 382 , respectively)

accounts receivable, net

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

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

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

amounting to $ 118,000 and $ 102,000 as of December 31, 2021 and September 30, 2021, respectively.

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

Schedule of Prepaid Expenses and Other Current Assets

Prepaid insurance

Prepaid legal

Prepaid taxes and licenses

Total prepaid expenses and other current assets

Schedule of Components of Prepaid Expenses and Other Current Assets

taxes and licenses

prepaid expenses and other current assets

A reconciliation of goodwill as of December 31,

2021 and September 30, 2021 is as follows (in thousands):

of Reconciliation of Goodwill

Accumulated Impairment

Balance at September 30, 2021

Balance at December 31, 2021

components of intangible assets, net are as follows (in thousands):

of Components of Intangible Assets

Indefinite-lived:

Definite-lived:

intangible assets, net

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

Schedule of Accrued Liabilities

Payroll and related costs

Sales and liquor taxes

Property taxes

Unearned revenues

Lawsuit settlement

Total accrued liabilities

and liquor taxes

and related costs

accrued liabilities

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

Schedule of Selling, General and Administrative Expenses

For the Three Months

For the Nine Months

Taxes and permits

Supplies and services

Advertising and marketing

Charge card fees

Repairs and maintenance

Accounting and professional fees

Total selling, general and administrative expenses

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

Schedule of Components of Other Charges (Gains), Net

For the Three Months

For the Nine Months

Impairment of assets

Settlement of lawsuits

Gain on disposal of businesses and assets

Gain on insurance

Total other charges (gains), net

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

the Three Months

and marketing

and professional fees

and maintenance

selling, general and administrative expenses

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

Components of Non-Operating Gains (Losses), Net

For the Three Months

For the Nine Months

Gain on debt extinguishment

Unrealized gain (loss) on equity securities

Total non-operating gains (losses), net

the Three Months

on debt extinguishment

loss on equity securities

Non-operating

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets Held for Sale

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

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

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

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

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

The property had a carrying value of $ 2.3 million

as of March 31, 2021.

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

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

property listings by our real estate brokers.

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

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

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

due on November 1, 2020 .

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

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

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 12 % per annum.

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 1,

The remaining amount of the financing is $ 7.5 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 12, 2024 .

Included in the $ 17.0 million borrowing are two notes for $ 500,000 and $ 150,000 borrowed

from related parties (see Note 12) 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.

October 18, 2021, in relation to an acquisition (see Note 4), the Company executed four seller-financed promissory notes.

The first promissory

note was a 10 -year

secured note payable in 120

equal monthly payments of $ 122,123

in principal and interest.

The second promissory

note was a 20 -year

secured note payable in 240

equal monthly payments of $ 57,314

in principal and interest.

The third promissory

note was a 10 -year

million 5.25 %

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 4), the Company executed a $ 1.0 million 7 -year promissory note with an interest

rate of 4.0 % per annum.

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

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

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

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

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

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

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

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

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

The note is payable $ 13,669 per month, including principal and interest.

maturities of long-term debt as of December 31, 2021 are as follows:

million, $ 7.4

3 unchanged sentences

million and $ 109.6

million for the twelve months ending June 30,

million for the twelve months ending December

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

1 unchanged sentence

million, $ 0 ,

million, respectively, relate to scheduled balloon

million, respectively, relate to scheduled

balloon payments.

Unamortized debt discount and issuance costs amounted to $ 1.6

million and $ 1.6

million as of June 30, 2021 and September 30,

million as of December 31, 2021 and September

30, 2021, respectively.

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

January 25, 2022, the Company borrowed $ 18.7 million

from a bank lender for working capital purposes by executing a 10 -year

promissory note with an initial interest rate of 5.25 %

per annum to be adjusted after five years to a rate equal to the weekly average yield on U.S.

Treasury securities plus 3.98 %

with a floor of 5.25 %.

The note is payable in monthly payments of $ 126,265 in

principal and interest to be adjusted after five years.

The promissory note is secured by eleven real estate properties and is personally guaranteed by the Company CEO, Eric Langan (see Note 12).

After the 10 -year

term, the remaining balance of principal and interest are payable at maturity date.

are certain financial covenants with which the Company is to be in compliance related to this loan, among which is to maintain a

debt service coverage of not less than 1.4 times, reviewed annually.

the quarters ended December 31, 2021 and 2020, the Company purchased and retired 0

common shares at a cost of approximately $ 0

million, respectively.

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

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

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

As of the date of the

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

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

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

of approximately $ 0 and $ 1.8 million, respectively.

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

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

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

of approximately $ 0 and $ 8.5 million, respectively.

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

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

The Company paid a $ 0.04

per share cash dividend during the quarters

ended December 31, 2021 and 2020 totaling approximately $ 380,000

and $ 360,000 ,

respectively.

October 18, 2021, we partially paid for an acquisition using 500,000

shares of our common stock with a fair value

of $ 30.4 million at issuance.

On February 7, 2022, our board of directors approved

the 2022 Stock Option Plan (the “2022 Plan”).

The board’s adoption of the 2022 Plan is subject to approval of

shareholders, and in the event that the 2022 Plan is not approved by the shareholders within one year of the date of adoption of the

2022 Plan by the board, or less than the required amount of votes of shareholders are received in favor of approval of the 2022 Plan

at a duly held meeting of shareholders within one year of the board’s adoption of the 2022 Plan, then we will unwind and terminate

the 2022 Plan, and all outstanding stock options granted under the 2022 Plan will be cancelled.

The 2022 Plan provides that the maximum

aggregate number of shares of common stock underlying options that may be granted under the 2022 Plan is 300,000 .

The options granted

under the 2022 Plan may be either incentive stock options or non-qualified options.

The 2022 Plan is administered by the compensation

committee of the board of directors.

The compensation committee has the exclusive power to select individuals to receive grants, to establish

the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price not less

than the fair market value of the common stock covered by the option on the grant date, and to make all determinations necessary or advisable

under the 2022 Plan.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The effective income tax rate was

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

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

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

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

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

taxes were an expense of $ 2.9

million during the quarter ended December 31, 2021 compared

to a benefit of $ 384,000 during

the quarter ended December 31, 2020.

The effective income tax rate was an expense of 21.7 %

and a benefit of 4.2 %

for the quarters ended December 31, 2021 and 2020, respectively.

Our effective tax rate is affected by state taxes, permanent

differences, and tax credits, including the FICA tip credit, for both years, and the change in the deferred tax asset valuation allowance

and the impact of the forgiveness of the PPP loans in the prior period, as presented below.

Schedule of Effective Income Tax Rate Reconciliation

the Three Months

statutory income tax expense/benefit

income taxes, net of federal benefit

in valuation allowance

income tax expense (benefit)

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

2 unchanged sentences

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

only immaterial changes.

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

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

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

there was no liability for uncertain tax positions.

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

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

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

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, former President Trump signed the CARES Act into law.

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

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

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

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

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

The Company submitted its application

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

Ten of our restaurant

subsidiaries received amounts ranging from $ 271,000

for an aggregate amount of $ 4.2

our shared-services subsidiary received

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

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

shared service entity and lounge.

Ten of our restaurant subsidiaries received amounts ranging from $ 271,000 to $ 579,000 for an aggregate

amount of $ 4.2 million;

our shared-services subsidiary received $ 1.1 million;

and one of our lounges received $ 124,000 .

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

The Company believes it has used

the entire loan amount for qualifying expenses.

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

for qualifying expenses as described in the CARES Act.

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

forgiveness applications.

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

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

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

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

condensed consolidated statement of operations .

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

remaining PPP loan in whole or in part.

None of our adult

nightclub and other non-core business subsidiaries received funding under the PPP.

The Company believes it has used the entire loan amount

for qualifying expenses.

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

as described in the CARES Act.

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

During fiscal 2021, we received 11 Notices of PPP Forgiveness Payment from the Small Business Administration out of the 12 of our PPP

loans granted.

All of the notices received forgave 100% of each of the 11 PPP loans totaling the amount of $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

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

Commitments and Contingencies

4 unchanged sentences

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

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

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.

6 unchanged sentences

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

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

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

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

to $ 398,000 and $ 813,000 as of December 31, 2021 and September 30, 2021, respectively.

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

41 unchanged sentences

liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date.

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

As of December

31, 2021, we have 1 remaining unresolved claim out of the original 71 claims.

Class and Derivative Actions

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

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.

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 alleged 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 sought unspecified damages, costs, and attorneys’

These lawsuits were Hoffman v.

RCI Hospitality Holdings, Inc., et al.

1 unchanged sentence

RCI Hospitality Holdings, Inc., et al.

(filed May 28, 2019, naming

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

(filed May 28, 2019, naming the Company, Eric Langan, and Phil Marshall (who is no longer

an officer of the Company));

and Grossman v.

RCI Hospitality Holdings,

(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.

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 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,

4:19-cv-01841.

24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections

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

In addition to naming the Company, Eric Langan,

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

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

can be granted.

On 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.

to naming the Company, Eric Langan, and Phil Marshall, the amended complaint also added 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.

On April 14, 2021, defendants filed

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

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

setting January 9, 2023 as the trial date.

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

This action is in

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

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.

On December 22, 2021, an amended scheduling order was entered,

extending the trial date to April 7, 2023 and extending all other case deadlines.

The Company vigorously defended against this action.

In January 2022, the parties engaged in settlement discussions beginning with a formal mediation on January 13, 2022, which resulted

in an agreement-in-principle to resolve the matter.

The parties are in the process of negotiating a long-form settlement agreement, subject

to preliminary and final court approval.

On January 24, 2022, a Joint Notice of Settlement was filed, informing the District Court of

the agreement-in-principle and the anticipation of executing a formal stipulation of settlement within 30 calendar days.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Langan, Phillip Marshall, Nourdean Anakar, Yura Barabash, Luke Lirot, Travis Reese, former director Steven Jenkins, and RCI Hospitality

Holdings, Inc., as nominal defendant.

The action, styled Cecere v.

Langan, et al.

, 4:19-cv-03080, alleged that the individual

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

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

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

The action asserted claims

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

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

The complaint sought injunctive relief, damages, restitution,

costs, and attorneys’ fees.

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

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

the plaintiff filed a motion to voluntarily dismiss his claims.

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

dismissing this lawsuit in its entirety, without prejudice.

On January 21, 2022, Shiva Stein and Kevin McCarty

filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura

Barabash, former director Steven L.

Jenkins, Eric Langan, Luke Lirot, former CFO Phillip K.

Marshall, Elaine J.

Martin, Allan Priaulx,

and Travis Reese as defendants, as well as against RCI Hospitality Holdings, Inc.

as nominal defendant.

The action, styled Stein v.

Anakar, et al.

4:22-mc-00149 (S.D.

Tex.), alleges claims for breach of fiduciary duty based on alleged dissemination of inaccurate

information, alleged failure to maintain internal controls, and alleged failure to properly manage company property.

This action is in

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

These allegations are substantively similar to claims asserted in

the class action and a prior derivative action that was dismissed in June of 2021.

RCI intends to vigorously defend against the action.

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

10 unchanged sentences

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

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

renovation in 2015.

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

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

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

Plaintiff also asserts RCI Hospitality Holdings,

is liable as guarantor of the lease.

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

Houston, Texas.

Both RCI Hospitality Holdings, Inc.

and BMB Dining Services (Willowbrook), Inc.

have denied liability and assert that

Plaintiff has failed to mitigate its claimed damages.

Further, BMB Dining Services (Willowbrook), Inc.

asserts that Plaintiff affirmatively

represented that the patio could be constructed under the lease and has filed counter claims and third-party claims against Plaintiff

and Plaintiff’s manager asserting that they committed fraud and that the landlord breached the applicable agreements.

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

million, which includes damages, attorney fees

and interest.

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

The appeal process required that a check

be deposited in the registry of the court in the amount of $ 690,000 ,

which was deposited in April 2019 and is included in other current assets in both consolidated balance sheets as of June 30, 2021 and

September 30, 2020.

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

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

Management believes

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

HOSPITALITY HOLDINGS, INC.

31 unchanged sentences

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

8 unchanged sentences

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

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

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

As of June 30, 2021 and September

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

of lawsuits for the quarters ended December 31, 2021 and 2020 amount to approximately $ 192,000

and $ 152,000 ,

respectively.

As of December 31, 2021 and September 30, 2021, the Company has accrued $ 245,000

and $ 378,000

in accrued liabilities, respectively, related

to settlement of lawsuits.

HOSPITALITY HOLDINGS, INC.

12 unchanged sentences

Schedule of Segment Reporting Information

For the Three Months

For the Nine Months

Revenues (from external customers)

the Three Months

(from external customers)

(loss) from operations

Income (loss) from operations

General corporate

and amortization

Depreciation and amortization

General corporate

Capital expenditures

General corporate

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

These intercompany revenue

amounts are eliminated upon consolidation.

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

31, 2021 amounting to $ 3.2 million and $ 168,000 , respectively, and intercompany sales of Robust Energy Drink of Other segment amounting

to $ 69,000 .

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

quarter ended December 31, 2020 amounting to $ 2.8 million and $ 110,000 , respectively, and intercompany sales of Robust Energy Drink of

Other segment amounting to $ 26,000 .

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

9 unchanged sentences

The balance of our commercial bank indebtedness, net of

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

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

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

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

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

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

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

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

Amounts billed to us for goods and services provided by Nottingham

Creations and Sherwood Forest were $ 3,182

and $ 118,092

during the three and nine months ended June 30,

2021, respectively, and $ 0

during the three and nine months ended June 30,

2020, respectively.

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

respectively, in unpaid billings.

debt discount and issuance costs, as of December 31, 2021 and September 30, 2021, was $ 98.5 million and $ 99.7 million, respectively.

in the $ 17.0 million borrowing on October 12, 2021 (see Note 7) are notes borrowed from related parties—one note for $ 500,000 (Ed

Anakar, an employee of the Company and brother of our former director Nourdean Anakar) and another note for $ 150,000 (from a brother

of Company CFO, Bradley Chhay) 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 $ 24,037 and $ 0 during the three months ended December 31, 2021 and 2020, respectively.

As of December 31, 2021

and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $ 0 and $ 12,205 , respectively, in unpaid billings.

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

services to the Company, as well as directly to the Company during fiscal 2022 and 2021.

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

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 $ 0 and $ 0 for the three and nine

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

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

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

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

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

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

for the three months ended December 31, 2021

and 2020, respectively.

Amounts billed directly to the Company were $ 80,996

for the three months ended December 31, 2021

and 2020, respectively.

As of December 31, 2021 and September 30, 2021, the Company owed TW Mechanical $ 752

and $ 7,500 ,

respectively, in unpaid direct billings.

HOSPITALITY HOLDINGS, INC.

1 unchanged sentence

Company leases certain facilities and equipment under operating leases.

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

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

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

In relation to an acquisition that was completed on October

18, 2021 (see Note 4), the Company entered into leases with third parties for certain clubs where the real estate locations were not

part of the acquisition.

lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income

for the three months ended December 31, 2021 and 2020 is as follows (in thousands):

Schedule of Lease Expense

For the Three Months

For the Nine Months

Operating lease expense – fixed payments

Variable lease expense

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

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

Sublease income

Total lease expense, net

Other information:

Operating cash outflows from operating leases

Weighted average remaining lease term

Weighted average discount rate

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

lease expense

equipment and other lease expense (includes $ 72

recorded in advertising and marketing, and $ 83

recorded in repairs and maintenance for the three months ended

December 31, 2021 and 2020, respectively;

lease expense, net

cash outflows from operating leases

Weighted average

remaining lease term – operating leases

Weighted average

discount rate – operating leases

maturities of operating lease liabilities as of December 31, 2021 are as follows (in thousands):

Schedule of Future Maturities of Lease Liabilities

July 2021 – June 2022

July 2022 – June 2023

July 2023 – June 2024

July 2024 – June 2025

July 2025 – June 2026

Subsequent Events

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

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

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

property for a total acquisition price of $ 88.0

million (the “Acquisition”).

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

and one Stock Purchase Agreement.

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

four of which we do not currently have a presence.

Closing of the Acquisition is subject to transfer of all necessary

permits, licenses, and other authorizations;

closing on the bank financing;

and other customary closing conditions.

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

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

Since the initial accounting of the acquisition

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

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

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

January - December 2022

January - December 2023

January - December 2024

January - December 2025

January - December 2026

Future maturities of lease liabilities

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements