What changed in this filing

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Item 1. Financial Statements

2022-05-09 compared with 2022-02-09 · 639 added, 751 removed, 88 unchanged (94% of the section changed)

Financial Statements.

HOSPITALITY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and number of shares)

March 31, 2022 September 30, 2021

Current assets

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

Cash and cash equivalents $ 38,067 $ 35,686

Accounts receivable, net 6,262 7,570

Current portion of notes receivable 292 220

Inventories 3,361 2,659

Prepaid expenses and other current assets 6,880 1,928

Assets held for sale 6,126 4,887

Total current assets 60,988 52,950

Property and equipment, net 203,434 175,952

Operating lease right-of-use assets, net 36,180 24,308

Notes receivable, net of current portion 5,411 2,839

Goodwill 54,484 39,379

Intangibles, net 125,284 67,824

Other assets 1,771 1,367

Total assets $ 487,552 $ 364,619

LIABILITIES AND EQUITY

Current liabilities

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;

Accounts payable $ 6,255 $ 4,408

Accrued liabilities 15,576 10,403

Current portion of debt obligations, net 11,177 6,434

Current portion of operating lease liabilities 2,306 1,780

Total current liabilities 35,314 23,025

Deferred tax liability, net 22,040 19,137

Debt, net of current portion and debt discount and issuance costs 166,903 118,734

Operating lease liabilities, net of current portion 35,517 24,150

Other long-term liabilities 355 350

Total liabilities 260,129 185,396

Commitments and contingencies (Note 10)

Preferred stock, $ 0.10 par value per share;

1,000,000 shares authorized;

none issued and outstanding

stock, $ 0.01 par value per share;

Common stock, $ 0.01 par value per share;

20,000,000 shares authorized;

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 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

9,454,267 and 8,999,910 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively

Additional paid-in capital 77,553 50,040

Retained earnings 150,366 129,693

Total RCIHH stockholders’ equity 228,013 179,823

Noncontrolling interests ( 590 ) ( 600 )

Total equity 227,423 179,223

Total liabilities and equity $ 487,552 $ 364,619

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share and number of share data)

For the Three Months Ended

March 31, For the Six Months Ended

2022 2021 2022 2021

Sales of alcoholic beverages $ 27,335 $ 20,273 $ 53,766 $ 37,633

Sales of food and merchandise 11,160 9,538 22,054 18,147

Service revenues 21,501 11,502 42,377 21,562

Other 3,696 2,746 7,331 5,115

Total revenues 63,692 44,059 125,528 82,457

Operating expenses

from operations

income (expenses)

Non-operating

before income taxes

tax expense (benefit)

loss attributable to noncontrolling interests

income attributable to RCIHH common shareholders

Cost of goods sold

Alcoholic beverages sold 4,896 3,730 9,730 6,992

Food and merchandise sold 3,840 3,029 7,797 5,918

Service and other 24 43 124 96

Total cost of goods sold (exclusive of items shown separately below) 8,760 6,802 17,651 13,006

Salaries and wages 16,530 11,200 33,035 22,686

Selling, general and administrative 18,437 12,618 36,923 24,770

Depreciation and amortization 2,877 2,117 5,071 4,140

Other charges (gains), net 7 1,481 ( 144 ) 1,431

Total operating expenses 46,611 34,218 92,536 66,033

Income from operations 17,081 9,841 32,992 16,424

Other income (expenses)

Interest expense ( 2,864 ) ( 2,364 ) ( 5,468 ) ( 4,798 )

Interest income 112 62 218 122

Non-operating gains, net — 431 84 5,347

Income before income taxes 14,329 7,970 27,826 17,095

Income tax expense 3,356 1,938 6,289 1,554

Net income 10,973 6,032 21,537 15,541

Net loss (income) attributable to noncontrolling interests ( 21 ) 59 ( 10 ) 193

Net income attributable to RCIHH common shareholders $ 10,952 $ 6,091 $ 21,527 $ 15,734

Earnings per share

Weighted average

number of common shares outstanding

Basic and diluted $ 1.15 $ 0.68 $ 2.28 $ 1.75

Weighted average number of common shares outstanding

Basic and diluted 9,489,085 8,999,910 9,447,854 9,009,604

Dividends per share $ 0.05 $ 0.04 $ 0.09 $ 0.08

accompanying notes to unaudited condensed consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

thousands, except number of shares)

Noncontrolling

at September 30, 2021

Purchase of treasury

shares , shares

Canceled treasury

shares , shares

Issuance of common

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands, except number of shares)

Common Stock Additional

Capital Retained

Earnings Treasury Stock Noncontrolling

Interests Total

of Shares Amount Number

of Shares Amount

Balance at September 30, 2021

8,999,910 $ 90 $ 50,040 $ 129,693 — $ — $ ( 600 ) $ 179,223

Issuance of common shares 500,000 5 30,357 — — — — 30,362

Payment of dividends — — — ( 380 ) — — — ( 380 )

income (loss)

Net income (loss) — — — 10,575 — — ( 11 ) 10,564

Balance at December 31, 2021 9,499,910 95 80,397 139,888 — — ( 611 ) 219,769

Purchase of treasury shares — — — — ( 45,643 ) ( 2,845 ) — ( 2,845 )

Canceled treasury shares ( 45,643 ) ( 1 ) ( 2,844 ) — 45,643 2,845 — —

Payment of dividends — — — ( 474 ) — — — ( 474 )

Net income — — — 10,952 — — 21 10,973

Balance at March 31, 2022

9,454,267 $ 94 $ 77,553 $ 150,366 — $ — $ ( 590 ) $ 227,423

Balance at September 30, 2020

Purchase of treasury

Canceled treasury

9,074,569 $ 91 $ 51,833 $ 100,797 — $ — $ ( 414 ) $ 152,307

Purchase of treasury shares — — — — ( 74,659 ) ( 1,794 ) — ( 1,794 )

Canceled treasury shares ( 74,659 ) ( 1 ) ( 1,793 ) — 74,659 1,794 — —

Payment of dividends — — — ( 360 ) — — — ( 360 )

income (loss)

Net income (loss) — — — 9,643 — — ( 134 ) 9,509

Balance at December 31, 2020 8,999,910 90 50,040 110,080 — — ( 548 ) 159,662

accompanying notes to unaudited condensed consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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 — — — ( 360 ) — — — ( 360 )

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

Net income (loss) — — — 6,091 — — ( 59 ) 6,032

Balance at March 31, 2021

8,999,910 $ 90 $ 50,040 $ 115,811 — $ — $ ( 607 ) $ 165,334

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except number of shares)

For the Six Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 21,537 $ 15,541

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

Depreciation and amortization 5,071 4,140

Loss (gain) on sale of businesses and assets ( 708 ) 86

Impairment of assets — 1,401

Unrealized loss on equity securities 1 67

Amortization of debt discount and issuance costs 136 101

Gain on debt extinguishment ( 83 ) ( 5,298 )

Noncash lease expense 1,238 848

Gain on insurance ( 321 ) ( 294 )

Doubtful accounts expense (reversal) on notes receivable 53 ( 58 )

Changes in operating assets and liabilities:

Accounts receivable 1,065 3,137

Inventories ( 276 ) ( 31 )

Prepaid expenses, other current and other assets ( 5,360 ) 1,494

Accounts payable, accrued and other liabilities 5,508 ( 3,888 )

Net cash provided by operating activities 27,861 17,246

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of businesses and assets 2,910 8

Proceeds from insurance 485 294

Proceeds from notes receivable 82 61

Payments for property and equipment and intangible assets ( 13,990 ) ( 6,718 )

Acquisition of businesses, net of cash acquired ( 39,302 ) —

Net cash used in investing activities ( 49,815 ) ( 6,355 )

CASH FLOWS FROM FINANCING ACTIVITIES

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

Payments on debt obligations ( 7,290 ) ( 5,977 )

Purchase of treasury stock ( 2,845 ) ( 1,794 )

Payment of dividends ( 854 ) ( 720 )

Payment of loan origination costs ( 418 ) ( 25 )

Net cash provided by (used in) financing activities 24,335 ( 6,340 )

NET INCREASE IN CASH AND CASH EQUIVALENTS 2,381 4,551

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,686 15,605

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,067 $ 20,156

CASH PAID DURING PERIOD FOR:

Interest $ 5,064 $ 5,512

Income taxes $ 4,008 $ 29

Noncash investing and financing transactions:

Debt incurred in connection with acquisition of businesses $ 22,200 $ —

Debt incurred in connection with purchase of property and equipment $ 2,625 $ —

Note receivable from sale of property $ 2,700 $ —

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.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Issuance of shares of common stock for acquisition of businesses:

Number of shares 500,000 —

Fair value $ 30,362 $ —

Adjustment to operating lease right-of-use assets and lease liabilities related to new and renewed leases $ 19,187 $ —

Unpaid liabilities on capital expenditures $ 1,201 $ 98

See accompanying notes to unaudited condensed consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

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

(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.

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

(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.

The September 30, 2021 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, 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 and six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.

Recent Accounting Standards and Pronouncements

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

In 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;

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.

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 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):

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

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.

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.

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.

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.

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

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

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

We evaluated forecasted cash flows considering 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

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.

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.

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

Our strategy was 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.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 8, 2020, the Company received approval and funding under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for its restaurants, shared service entity and lounge.

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

Closures and 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.

We continue to adhere to state and local government mandates regarding the pandemic and, since March 2020, have closed and reopened a number of our locations depending on changing government mandates, including operating hour and limited occupancy restrictions, where applicable.

As of the date of this report, all COVID-related restrictions affecting our businesses have been lifted.

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

We consider the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, indefinite-lived intangibles, and long-lived assets in our clubs and restaurants that are affected.

We evaluated forecasted cash flows considering the future assumed impact of the COVID-19 pandemic on sales.

Based on the evaluation we conducted during the interim period ended March 31, 2022, we determined that there is no impairment in our goodwill, indefinite-lived intangibles, and long-lived assets as of March 31, 2022.

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.

On 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.

This 7 % 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.

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

On 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 sellers.

The acquisition gives the Company presence in four 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

Cash $ 36,800

Notes payable 21,200

Common stock 30,362

Total consideration fair value $ 88,362

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

We 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 are provisional pending receipt of the final valuations for those assets.

Based on the allocation of the preliminary fair value of the acquisition price, measurement period adjustments and subject to any working capital

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 entities.

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

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:

Current assets $ 386

Property and equipment 19,534

Licenses 50,080

Trademarks 7,460

Deferred tax liability ( 2,903 )

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.

Total net assets acquired 74,557

Goodwill 13,805

Acquisition price fair value $ 88,362

Licenses 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 was not part of the acquisition.

In 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 $ 12,000 and $ 12,000 were expensed during the three and six months ended March 31, 2021 and $ 0 and $ 244,000 were expensed during the three and six months ended March 31, 2022, and in those periods included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income.

From the date of acquisition until March 31, 2022, the eleven acquired clubs contributed revenues of $ 8.4 million and $ 14.4 million and income from operations of $ 2.0 million and $ 3.7 million during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statements of income.

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 amounts and number of shares):

For the Three Months Ended March 31,

For the Six Months Ended March 31,

2022 2021 2022 2021

Pro forma revenues $ 63,692 $ 47,393 $ 127,254 $ 90,777

Pro forma net income attributable to RCIHH common stockholders $ 10,953 $ 5,615 $ 20,945 $ 15,507

Pro forma earnings per share – basic and diluted $ 1.15 $ 0.59 $ 2.22 $ 1.63

Pro forma weighted average number of common shares outstanding 9,489,085 9,499,910 9,447,854 9,509,604

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 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

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

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

contracts with customers.

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

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

The Company recognizes revenue when it satisfies

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

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

Revenues from the sale of magazines

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

Revenues and external expenses related to the Company’s

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

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 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.

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.

On 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 % per annum.

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 March 31, 2022, the acquired club contributed revenues of $ 424,000 and $ 713,000 and loss from operations of $ 28,000 and $ 24,000 during the three and six months ended March 31, 2022, respectively, which are included in our unaudited condensed consolidated statement of income.

The Company is not providing supplemental pro forma disclosures to this acquisition as it does not materially contribute to the consolidated operations of the Company.

On 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.

On March 1, 2022, the Company acquired real estate in Stafford, Texas worth $ 3.5 million for a future Bombshells location.

The Company secured a $ 2.6 million loan in relation to the purchase (see Note 7).

On March 1, 2022, the Company acquired real estate in Lubbock, Texas worth $ 400,000 to transfer one of our existing clubs due to eminent domain.

On March 23, 2022, the Company sold a property classified as held-for-sale with a carrying value of $ 1.9 million for $ 2.1 million in cash.

The Company used $ 816,000 of the proceeds to pay off a loan related to the property.

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, service and other revenues at the point-of-sale upon receipt of cash, check, or credit card charge, net of discounts and promotional allowances based on consideration specified in implied contracts with customers.

Sales and liquor taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying unaudited condensed consolidated statements of income.

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

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

Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped.

Revenues and external expenses related to the Company’s annual Expo convention are recognized upon the completion of the convention, which normally occurs during our fiscal fourth quarter.

Lease revenue (included in other revenues) is recognized when earned (recognized over time) and is more appropriately covered by guidance under ASC 842, Leases .

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 18,673 $ 8,662 $ — $ 27,335 $ 12,634 $ 7,639 $ — $ 20,273

Sales of food and merchandise 4,498 6,662 — 11,160 4,082 5,456 — 9,538

Service revenues 21,501 — — 21,501 11,446 56 — 11,502

Other revenues 3,502 9 185 3,696 2,625 ( 16 ) 137 2,746

$ 48,174 $ 15,333 $ 185 $ 63,692 $ 30,787 $ 13,135 $ 137 $ 44,059

Recognized at a point in time $ 47,722 $ 15,332 $ 185 $ 63,239 $ 30,382 $ 13,134 $ 136 $ 43,652

Recognized over time 452 * 1 — 453 405 * 1 1 407

$ 48,174 $ 15,333 $ 185 $ 63,692 $ 30,787 $ 13,135 $ 137 $ 44,059

Six Months Ended March 31, 2022 Six Months Ended March 31, 2021

Nightclubs Bombshells Other Total Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 36,840 $ 16,926 $ — $ 53,766 $ 22,268 $ 15,365 $ — $ 37,633

Sales of food and merchandise 9,087 12,967 — 22,054 7,505 10,642 — 18,147

Service revenues 42,185 192 — 42,377 21,444 118 — 21,562

Other revenues 6,843 19 469 7,331 4,767 16 332 5,115

$ 94,955 $ 30,104 $ 469 $ 125,528 $ 55,984 $ 26,141 $ 332 $ 82,457

Recognized at a point in time $ 94,066 $ 30,102 $ 468 $ 124,636 $ 55,217 $ 26,140 $ 329 $ 81,686

Recognized over time 889 * 2 1 892 767 * 1 3 771

$ 94,955 $ 30,104 $ 469 $ 125,528 $ 55,984 $ 26,141 $ 332 $ 82,457

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

All other revenues are covered by ASC 606.

Company does not have contract assets with customers.

The Company’s unconditional right to consideration for goods and services

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

A reconciliation

of contract liabilities with customers is presented below (in thousands):

Schedule of Reconciliation of Contract Liabilities with Customers

The Company does not have contract assets with customers.

The Company’s unconditional right to consideration for goods and services transferred to the customer is included in accounts receivable, net in our unaudited condensed consolidated balance sheet.

A reconciliation of contract liabilities with customers is presented below (in thousands):

September 30, 2021

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 income.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Received Recognized in

Revenue Balance at

March 31, 2022

Ad revenue $ 84 $ 450 $ ( 330 ) $ 204

Expo revenue 151 178 — 329

Other (including franchise fees) 119 9 ( 20 ) 108

$ 354 $ 637 $ ( 350 ) $ 641

Contract 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 income.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Selected Account Information

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

Schedule of Accounts Receivable

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 $ 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 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

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

March 31, 2022 September 30, 2021

Credit card receivables $ 2,152 $ 1,447

Income tax refundable 2,148 4,472

Insurance receivable 21 185

ATM in-transit 443 277

Other (net of allowance for doubtful accounts of $ 517 and $ 382 , respectively)

Total accounts receivable, net $ 6,262 $ 7,570

Notes receivable consist primarily of secured promissory notes executed between the Company and various buyers of our businesses and assets with interest rates ranging from 6 % to 9 % per annum and having terms ranging from 1 to 20 years, net of allowance for doubtful notes amounting to $ 154,000 and $ 102,000 as of March 31, 2022 and September 30, 2021, respectively.

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

March 31, 2022 September 30, 2021

Prepaid insurance $ 4,712 $ 277

Prepaid legal 25 112

Prepaid taxes and licenses 565 380

Prepaid rent 471 309

Other 1,107 850

Total prepaid expenses and other current assets $ 6,880 $ 1,928

A reconciliation of goodwill as of March 31, 2022 and September 30, 2021 is as follows (in thousands):

Gross Accumulated Impairment Net

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

$ 59,967 $ 20,588 $ 39,379

Acquisitions (see Note 4) 15,105 — 15,105

Balance at March 31, 2022

$ 75,072 $ 20,588 $ 54,484

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

March 31, 2022 September 30, 2021

Indefinite-lived:

Licenses $ 115,266 $ 65,186

Trademarks 9,675 2,215

Domain names 23 23

Definite-lived:

intangible assets, net

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

Schedule of 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

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

the Three Months

on debt extinguishment

loss on equity securities

Non-operating

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Noncompete agreements 92 182

Discounted leases 82 86

Software 146 132

Total intangible assets, net $ 125,284 $ 67,824

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

March 31, 2022 September 30, 2021

Insurance $ 4,558 $ 54

Sales and liquor taxes 2,270 2,261

Payroll and related costs 4,470 3,220

Property taxes 1,063 2,178

Interest 411 145

Patron tax 399 452

Unearned revenues 641 354

Lawsuit settlement 301 378

Other 1,463 1,361

Total accrued liabilities $ 15,576 $ 10,403

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

For the Three Months Ended March 31, For the Six Months Ended March 31,

2022 2021 2022 2021

Taxes and permits $ 2,361 $ 2,084 $ 4,597 $ 4,112

Advertising and marketing 2,248 1,384 4,631 2,573

Supplies and services 2,175 1,488 4,155 2,716

Insurance 2,481 1,427 4,876 2,884

Legal 898 812 1,958 1,673

Lease 1,572 972 3,212 1,949

Charge card fees 1,466 695 2,797 1,259

Utilities 1,108 858 2,043 1,571

Security 1,050 830 2,137 1,690

Accounting and professional fees 622 297 1,968 1,012

Repairs and maintenance 903 677 1,628 1,250

Other 1,553 1,094 2,921 2,081

Total selling, general and administrative expenses $ 18,437 $ 12,618 $ 36,923 $ 24,770

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

For the Three Months Ended March 31, For the Six Months Ended March 31,

2022 2021 2022 2021

Impairment of assets $ — $ 1,401 $ — $ 1,401

Settlement of lawsuits 385 1 577 153

Loss (gain) on disposal of businesses and assets ( 58 ) 91 ( 400 ) 86

Gain on insurance ( 320 ) ( 12 ) ( 321 ) ( 209 )

Other charges (gains), net $ 7 $ 1,481 $ ( 144 ) $ 1,431

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

For the Three Months Ended March 31, For the Six Months Ended March 31,

2022 2021 2022 2021

Gain on debt extinguishment $ — $ 380 $ 85 $ 5,329

Unrealized loss on equity securities — ( 34 ) ( 1 ) ( 67 )

Other — 85 — 85

Non-operating gains, net $ — $ 431 $ 84 $ 5,347

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 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, 2024.

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

On 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 $ 11.0 million 6 % secured 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 % secured 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 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 $ 1.0 million 6 % note payable in 240 equal monthly payments of $ 7,215 in principal and interest.

On 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 $ 13,669 per month, including principal and interest.

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

million, $ 7.4

million, $ 22.7

million, $ 7.1

million, $ 7.5

million and $ 109.6

million for the twelve months ending December

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

Of the maturity schedule mentioned above, $ 0 ,

million, $ 0 ,

million, respectively, relate to scheduled

balloon payments.

Unamortized debt discount and issuance costs amounted to $ 1.6

million and $ 1.6

million as of December 31, 2021 and September

30, 2021, respectively.

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.

On 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.

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 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.

After the 10 -year term, the remaining balance of principal and interest are payable at maturity date.

There 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.

On March 1, 2022, the Company borrowed $ 2.6 million from a bank lender in relation to a purchase of real estate (see Note 4).

The 21 -year promissory note has an initial interest rate of 4.25 % per annum, repriced after five years and then again annually to prime plus 1 % with a floor rate of 4.25 %.

The note is payable interest only during the first 12 months;

then the next 48 months with $ 16,338 equal monthly payments of principal and interest;

then the next 191 months at an equal monthly payment based on a 20 -year amortization;

with the balance of principal and interest payable at the 252nd month.

Future maturities of long-term debt as of March 31, 2022 are as follows:

$ 11.4 million, $ 7.5 million, $ 23.4 million, $ 7.9 million, $ 8.4 million and $ 121.4 million for the twelve months ending March 31, 2023, 2024, 2025, 2026, 2027, and thereafter, respectively.

Of the maturity schedule mentioned above, $ 651,000 , $ 0 , $ 15.6 million, $ 0 , $ 0 and $ 71.9 million, respectively, relate to scheduled balloon payments.

Unamortized debt discount and issuance costs amounted to $ 1.9 million and $ 1.6 million as of March 31, 2022 and September 30, 2021, respectively.

On 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.

On February 9, 2022, the board of directors approved a grant of 50,000 stock options each to six members of management subject to the approval of the 2022 Plan.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense was $ 3.4 million and $ 6.3 million during the three and six months ended March 31, 2022, respectively, compared to $ 1.9 million and $ 1.6 million during the three and six months ended March 31, 2021, respectively.

The effective income tax expense rate was 23.4 % and 22.6 % for the three and six months ended March 31, 2022, respectively, compared to 24.3 % and 9.1 % for the three and six months ended March 31, 2021, respectively.

Our effective income 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.

For the Three Months Ended March 31, For the Six Months Ended March 31,

2022 2021 2022 2021

Federal statutory income tax expense 21.0 % 21.0 % 21.0 % 21.0 %

State income taxes, net of federal benefit 2.9 % 7.0 % 2.9 % 5.0 %

Permanent differences 0.5 % ( 5.9 ) % 0.4 % ( 7.1 ) %

Change in valuation allowance — % — % — % ( 7.4 ) %

Tax credits ( 3.1 ) % 2.2 % ( 2.6 ) % ( 2.3 ) %

Other 2.1 % — % 0.8 % — %

Total income tax expense 23.4 % 24.3 % 22.6 % 9.1 %

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

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 no changes.

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 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

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;

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 became available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration.

The CARES Act included, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act also established a Paycheck Protection Program, whereby certain small businesses were 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 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 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

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 utilized all of the PPP funds and 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 interest.

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

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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.

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 $ 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

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.

Legal Matters

Texas Patron Tax

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

To resolve the issue of taxes owed, the Company agreed to pay $ 10.0 million in equal monthly installments of $ 119,000 , without interest, over 84 months, beginning in June 2015, for all but two non-settled locations.

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

For accounting purposes, the Company 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.

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

To resolve the issue of taxes owed, the Company agreed to pay a total of $ 687,815 with $ 195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $ 8,200 without interest.

The aggregate balance of Patron Tax settlement liability, which is included in long-term debt in the condensed consolidated balance sheets, amounted to $ 130,000 and $ 813,000 as of March 31, 2022 and September 30, 2021, respectively.

A declaratory judgment action was brought by five operating subsidiaries of the Company to challenge a Texas Comptroller administrative rule related to the $ 5 per customer Patron Tax Fee assessed against Sexually Oriented Businesses.

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

The administrative rule was challenged on both constitutional and statutory grounds.

On November 19, 2018, the Court issued an order that a key aspect of the administrative rule is invalid based on it exceeding the scope of the Comptroller’s authority.

On March 6, 2020, the U.S.

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.

District Court for the Western District of Texas, Austin Division, ruled that the Texas Patron Tax is unconstitutional as it has been applied and enforced by the Comptroller.

The State of Texas has filed an appeal.

We will continue to vigorously defend the matter through the

appeals process.

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Insurance Corporation

previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,

RRG (“IIC”) through October 25, 2013.

We will continue to vigorously defend the matter through the appeals process.

Indemnity Insurance Corporation

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

The Company and its subsidiaries changed insurance companies on that date.

November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation

Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance

Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”).

The Rehabilitation

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

as necessary.

On November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”).

The Rehabilitation Order empowered the Commissioner to rehabilitate IIC through a variety of means, including gathering assets and marshaling those assets as necessary.

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

April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation

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

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;

On April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by IIC.

The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close of business on January 16, 2015 and that all pending lawsuits involving IIC as the insurer were further stayed or abated until October 7, 2014.

As a result, the Company and its subsidiaries no longer have insurance coverage under the liability policy with IIC.

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

We are funding 100 % of the costs of litigation and will seek reimbursement from the bankruptcy receiver.

The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015 deadline and has provided updates as requested;

however, there are no assurances of any recovery from these claims.

It is unknown at this time

what effect this uncertainty will have on the Company.

As previously stated, since October 25, 2013, the Company has obtained general

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

As of December

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

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 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’

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

As previously stated, since October 25, 2013, the Company has obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions after that date.

As of March 31, 2022, we have 1 remaining unresolved claim out of the original 71 claims.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Shareholder Class and Derivative Actions

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

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

The complaints 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’ fees.

These lawsuits were Hoffman v.

2 unchanged sentences

RCI Hospitality Holdings, Inc., et al.

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

an officer of the Company));

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

and Grossman v.

RCI Hospitality Holdings, Inc., et al.

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

and Phil Marshall).

(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,

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

The consolidated case is styled In re RCI Hospitality Holdings, Inc., No.

4:19-cv-01841.

On February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing

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

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 February 24, 2020, the plaintiffs in the consolidated case filed an Amended Class Action Complaint, continuing to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 10b-5 promulgated thereunder.

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

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.

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.

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

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.

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.

On January 24, 2022, a Joint Notice of Settlement was filed.

On April 15, 2022, counsel for Plaintiffs filed an Unopposed Motion for (I) Preliminary Approval of Class Action Settlement;

(II) Certification of the Settlement Class;

and (III) Approval of the Notice of Settlement.

On April 28, 2022, the Court entered an Order preliminarily approving the Class Action Settlement and Notice.

The Court set the final approval hearing for June 24, 2022.

Plaintiffs have sought to extend the hearing until August to comply with certain potential notice and related obligations to the purported class, and Defendants concur with the request.

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.

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

as nominal defendant.

2 unchanged sentences

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.

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

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.

On April 2, 2022, the Company and its current and former officers and directors named in the shareholder derivative complaint filed their Motions to Dismiss.

Briefing should be concluded within the next 30 days and the Motions will be ripe for consideration.

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

Plaintiffs allege that their images were misappropriated, intentionally altered and published without their consent by clubs affiliated with the Company.

The causes of action asserted in Plaintiffs’ Complaint include alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories.

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

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

At this time, this disagreement remains unresolved.

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

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

HOSPITALITY HOLDINGS, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 23, 2014, Mark H.

Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services

(Phoenix) Inc.

The Company has denied all allegations, continues to vigorously defend against the lawsuit and continues to believe the matter is covered by insurance.

On June 23, 2014, Mark H.

Dupray and Ashlee Dupray filed a lawsuit against Pedro Antonio Panameno and our subsidiary JAI Dining Services (Phoenix) Inc.

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

The suit alleged that Mr.

Panameno injured

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

alleged that Mr.

Panameno injured Mr.

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

The suit alleged that JAI Phoenix

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

After a jury trial proceeded to a verdict

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

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

In May 2017, JAI Phoenix filed

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

The 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 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.

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

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

JAI Phoenix will continue to vigorously defend itself.

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

to classify adult entertainers as independent contractors, not employees.

While we take steps to ensure that our adult entertainers are

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

As set forth in the risk factors as disclosed in our most recent Annual Report on Form 10-K, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees.

While we take steps to ensure that our adult entertainers are deemed independent contractors, from time to time, we are named in lawsuits related to the alleged misclassification of entertainers.

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

Based on the industry standard, the manner in which the independent

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

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

Lawsuits are handled by attorneys with an expertise in the relevant

law and are defended vigorously.

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 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.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

In the regular course of business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state, and local environmental, labor, health and safety laws and regulations.

We assess the probability that we could incur liability in connection with certain of these lawsuits.

Our assessments are made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its subsidiaries.

In certain cases that are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability.

In matters where there is insurance coverage, in the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

Settlements of lawsuits for the three and six months ended March 31, 2022 amount to approximately $ 385,000 and $ 577,000 , respectively, and for the three and six months ended March 31, 2021 amount to approximately $ 1,000 and $ 153,000 , respectively.

As of March 31, 2022 and September 30, 2021, the Company has accrued $ 301,000 and $ 378,000 in accrued liabilities, respectively, related to settlement of lawsuits.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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.

assets are those assets controlled by each reportable segment.

The Other category below includes our media and energy drink divisions

that are not significant to the consolidated financial statements.

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

Schedule of Segment Reporting Information

the Three Months

(from external customers)

(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 unaudited condensed consolidated financial statements.

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

For the Three Months Ended March 31, For the Six Months Ended March 31,

2022 2021 2022 2021

Revenues (from external customers)

Nightclubs $ 48,174 $ 30,787 $ 94,955 $ 55,984

Bombshells 15,333 13,135 30,104 26,141

Other 185 137 469 332

$ 63,692 $ 44,059 $ 125,528 $ 82,457

Income (loss) from operations

and amortization

Nightclubs $ 19,126 $ 10,468 $ 37,862 $ 18,963

Bombshells 3,468 3,142 6,270 5,859

Other ( 34 ) ( 139 ) ( 77 ) ( 214 )

General corporate ( 5,479 ) ( 3,630 ) ( 11,063 ) ( 8,184 )

$ 17,081 $ 9,841 $ 32,992 $ 16,424

Depreciation and amortization

Nightclubs $ 2,206 $ 1,413 $ 3,753 $ 2,737

Bombshells 454 461 883 918

Other 7 36 13 72

General corporate 210 207 422 413

$ 2,877 $ 2,117 $ 5,071 $ 4,140

Capital expenditures

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 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 .

Nightclubs $ 1,662 $ 2,201 $ 10,890 $ 3,331

Bombshells 1,901 3,104 2,205 3,255

Other 359 ( 2 ) 548 1

General corporate 218 126 347 131

$ 4,140 $ 5,429 $ 13,990 $ 6,718

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 September 30, 2021

Nightclubs $ 396,560 $ 280,561

Bombshells 55,382 52,073

Other 2,418 1,573

General corporate 33,192 30,412

$ 487,552 $ 364,619

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2022 amounting to $ 3.2 million and $ 31,000 , respectively, and for the six months ended March 31, 2022 amounting to $ 6.5 million and $ 199,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2022 amounting to $ 53,000 and $ 122,000 , respectively.

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs and Corporate segments for the three months ended March 31, 2021 amounting to $ 2.8 million and $ 31,000 , respectively, and for the six months ended March 31, 2021 amounting to $ 5.6 million and $ 141,000 , respectively, and intercompany sales of Robust Energy Drink included in Other segment for the three and six months ended March 31, 2021 amounting to $ 49,000 and $ 75,000 , respectively.

These intercompany revenue amounts are eliminated upon consolidation.

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

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

and travel costs.

General corporate expenses include corporate salaries, health insurance and social security taxes for officers, legal, accounting and information technology employees, corporate taxes and insurance, legal and accounting fees, depreciation and other corporate costs such as automobile and travel costs.

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

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

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

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

Related Party Transactions

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

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 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 50 %

interest in TW Mechanical.

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.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company leases certain facilities and equipment under operating leases.

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

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

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 March 31, 2022 and September 30, 2021, was $ 116.7 million and $ 99.7 million, respectively.

Included 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.

We 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 $ 3,112 and $ 27,149 during the three and six months ended March 31, 2022, respectively, and $ 114,910 and $ 114,910 during the three and six months ended March 31, 2021, respectively.

As of March 31, 2022 and September 30, 2021, we owed Nottingham Creations and Sherwood Forest $ 1,299 and $ 12,205 , respectively, in unpaid billings.

TW Mechanical LLC (“TW Mechanical”) provided plumbing and HVAC services to both a third-party general contractor providing construction services to the Company, as well as directly to the Company during fiscal 2022 and 2021.

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 $ 3,809 and $ 3,809 for the three and six months ended March 31, 2022, respectively, and $ 0 and $ 0 for the three and six months ended March 31, 2021, respectively.

Amounts billed directly to the Company were $ 3,704 and $ 84,700 for the three and six months ended March 31, 2022, respectively, and $ 55,621 and $ 62,751 for the three and six

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

months ended March 31, 2021, respectively.

As of March 31, 2022 and September 30, 2021, the Company owed TW Mechanical $ 0 and $ 7,500 , respectively, in unpaid direct billings.

The Company leases certain facilities and equipment under operating leases.

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.

Total lease expense included in selling, general and administrative expenses in our unaudited condensed consolidated statements of income for the three and six months ended March 31, 2022 and 2021 is as follows (in thousands):

Three Months Ended

March 31, 2022 Three Months Ended

March 31, 2021 Six Months Ended

March 31, 2022 Six Months Ended

March 31, 2021

Operating lease expense – fixed payments $ 1,136 $ 828 $ 2,267 $ 1,657

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

January - December 2022

January - December 2023

January - December 2024

January - December 2025

January - December 2026

Future maturities of lease liabilities

Variable lease expense 233 44 567 108

Short-term equipment and other lease expense (includes $ 58 and $ 102 recorded in advertising and marketing for the three months ended March 31, 2022 and 2021, respectively, and $ 130 and $ 159 for the six months ended March 31, 2022 and 2021, respectively;

and $ 107 and $ 116 recorded in repairs and maintenance for the three months ended March 31, 2022 and 2021, respectively, and $ 190 and $ 204 for the six months ended March 31, 2022 and 2021, respectively;

368 318 698 547

Sublease income ( 1 ) ( 1 ) ( 3 ) ( 3 )

Total lease expense, net $ 1,736 $ 1,189 $ 3,529 $ 2,309

Other information:

Operating cash outflows from operating leases $ 1,690 $ 1,162 $ 3,439 $ 2,253

Weighted average remaining lease term – operating leases 12 years 12 years

Weighted average discount rate – operating leases 5.6 % 6.1 %

Future maturities of operating lease liabilities as of March 31, 2022 are as follows (in thousands):

Principal Payments Interest Payments Total Payments

April 2022 - March 2023 $ 2,306 $ 2,080 $ 4,386

April 2023 - March 2024 2,503 1,938 4,441

April 2024 - March 2025 2,712 1,789 4,501

April 2025 - March 2026 2,957 1,627 4,584

April 2026 - March 2027 3,118 1,452 4,570

Thereafter 24,227 5,906 30,133

$ 37,823 $ 14,792 $ 52,615

The above table of maturities of operating lease liabilities does not include future payments of an assigned lease executed in April 2022 related to the October 18, 2021 acquisition, which has a total of approximately $ 2.6 million of future lease payments until August 2027.

RCI HOSPITALITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events

On April 20, 2022, the Company finally settled all of its remaining Patron Tax liability.

On May 2, 2022, the Company completed an acquisition of a club in Miami, Florida for a total acquisition price of $ 16.0 million.

The acquisition price includes $ 3.0 million for the real estate property covered in a stock purchase agreement payable in cash at closing, and $ 13.0 million for the adult entertainment business covered in a separate stock purchase agreement payable as follows:

(1) $ 2.0 million in cash at closing;

(2) $ 6.0 million under a 10 % three-year promissory note payable in 35 equal monthly payments of $ 79,290 in principal and interest based on a ten-year amortization schedule, with a balloon payment for the remaining principal plus accrued interest due at maturity;

and (3) $ 5.0 million under a 10 % ten-year interest-only promissory note payable in 119 equal monthly payments of $ 41,667 in interest, with a balloon payment of the total $ 5.0 million in principal plus accrued interest due at maturity.

The Company acquired 100 % of the capital stock of the acquired companies in each of the stock purchase agreements mentioned above.

The $ 5.0 million promissory note may be earlier canceled if there are any regulatory changes that would prohibit the business from operating as an adult entertainment establishment within ten years of the closing date of the stock purchase agreement.

Due to the proximity of the closing date to the filing date of this report, we have not completed our valuation analysis and related calculations in sufficient detail necessary to arrive at the fair values of the net assets acquired, along with the determination of any goodwill or gain on the transaction.

The seller has not maintained historical U.S.

GAAP financial data and it is impracticable to prepare them, therefore we could not provide supplemental pro forma information of the combined entities.

On May 2, 2022, the Company signed a franchise development agreement with a private investor to open three Bombshells locations in the state of Alabama over a period of five years .

Upon execution of the agreement, the Company received $ 50,000 in development fees representing 100 % of the initial franchise fee of the first restaurant.

Subsequent to the reporting date until May 6, 2022, the Company purchased 37,700 shares of its own common stock at a cost of $ 2.4 million.

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