What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-12-14 compared with 2021-12-14 · 1216 added, 1849 removed, 355 unchanged (90% of the section changed)

Financial Statements and Supplementary Data.

information required by this Item begins on page 43.

HOSPITALITY HOLDINGS, INC.

FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

The information required by this Item begins on page 47.

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( Friedman LLP , Marlton, NJ , Auditor Firm ID:

Consolidated Financial Statements:

Consolidated Balance Sheets at September 30, 2022 and 2021

Consolidated Statements of Operations for the years ended September 30, 2022, 2021, and 2020

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

Consolidated Statements of Changes in Equity for the years ended September 30, 2022, 2021, and 2020

1 unchanged sentence

Notes to Consolidated Financial Statements

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

the Board of Directors and Stockholders of

Hospitality Holdings, Inc.

on the Consolidated Financial Statements

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

(the “Company”) as of September

30, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows

for each of the years in the three-year period ended September 30, 2021, and the related notes and schedule (collectively referred to

as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all

material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its

cash flows for each of the years in the three-year period ended September 30, 2021, in conformity with accounting principles generally

accepted in the United States of America.

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

the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal

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

and our report dated December 14, 2021 expressed an adverse opinion.

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

Our responsibility is to express an opinion

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

We are a public accounting firm registered with the PCAOB

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

federal securities laws and the applicable

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

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

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

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

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

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

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

RCI Hospitality Holdings, Inc.

Opinion on the Consolidated Financial Statements

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

(the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended September 30, 2022, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 14, 2022 expressed an adverse opinion.

Basis for Opinion

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

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

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

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

(1) relate to accounts or disclosures that are material

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

The communication

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

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

disclosures to which it relates.

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

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

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

Additionally, the Company

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

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

be recoverable.

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

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

of the assets exceed their fair value.

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

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

If these assets are determined to

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

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

As of September

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

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

totaling approximately $200.7 million.

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

approximately $13.6 million.

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

audit matter.

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

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

Specifically,

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

of the impact of COVID-19.

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

We evaluated the design and tested the operating

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

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

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

Additionally, we:

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

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

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

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

have served as the Company’s auditor since 2019.

HOSPITALITY HOLDINGS, INC.

BALANCE SHEETS

thousands, except per share data)

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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

As discussed in Note 2 to the consolidated financial statements, the Company reviews goodwill and indefinite-lived intangible assets on an annual basis for impairment, or when events and circumstances indicate that the asset might be impaired.

Additionally, the Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value, and impairment of indefinite-lived intangible assets is recognized in the amount by which the carrying value of the assets exceed their fair value.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets.

If these assets are determined to be

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

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

As of September 30, 2022, the Company had goodwill of approximately $67.8 million, and indefinite-lived intangible assets of approximately $117.1 million.

Long-lived assets consisted of property and equipment, right of use assets, and intangible assets subject to amortization totaling approximately $288.6 million.

During the year ended September 30, 2022 the Company recorded an impairment of these assets of approximately $1.9 million.

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

There was a high degree of subjective auditor judgment in evaluating the estimated undiscounted future cash flows used to test operating locations for recoverability and the determination of fair value of the relevant assets when required.

Specifically, a high degree of subjective auditor judgment was required to evaluate future revenues, operating cash flows and the discount rate.

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

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill, indefinite-lived intangible asset, and long-lived asset impairment process, including controls over the identification of relevant assets at risk of impairment, the determination of estimated undiscounted future cash flows and the fair value of individual reporting unit or asset, as necessary, and controls over the key assumptions as noted above.

These procedures also included, among others, (1) testing management’s process for developing the fair value estimates of the reporting units or assets;

(2) evaluating the appropriateness of the underlying discounted and undiscounted cash flow models;

(3) testing the completeness and accuracy of underlying data used in the models;

and (4) evaluating the reasonableness of the significant assumptions used by management, including the future cash flows, growth rates and discount rates.

Evaluating management’s significant assumptions related to future cash flows, growth rates and the discount rates involved, with the assistance of valuation specialists employed by us, evaluating whether the assumptions used by management were reasonable considering (1) the historical performance of the reporting units or operating location;

(2) the consistency with external market data;

and (3) sensitivities over significant inputs and assumptions, including the development of a point estimate.

Fair Value Measurement of consideration and, tangible and intangible assets acquired in business acquisitions

As described in Note 16 to the consolidated financial statements, the Company completed five business acquisitions with an aggregate acquisition price totaling approximately $132.6 million during the year ended September 30, 2022.

The Company accounts for business combinations using the acquisition method, which requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition.

The fair value of the tangible assets acquired were measured using adjusted market prices or costs to construct.

The fair values of intangible assets acquired are typically estimated using an income approach, which is based on the present value of future discounted cash flows.

Management applied significant judgment in estimating the fair value of the consideration and, tangible and intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors.

In addition, the discount for lack of marketability applied to the consideration is estimated using a market approach, which is based on a Black-Scholes option pricing model.

The principal considerations for our determination that performing procedures relating to the fair value measurement of the consideration and assets acquired related to the acquisitions is a critical audit matter are (1) the significant judgment by management, including the use of specialists, when estimating the fair values of assets acquired;

(2) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of assets acquired;

(3) the significant audit effort in evaluating the reasonableness of the significant assumptions relating to the rate of future revenue growth and profitability of the acquired business and the discount rate;

and (4) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included identifying and evaluating the design of controls relating to the acquisition accounting, including controls over management’s valuation of the assets acquired and consideration, and controls over the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and the costs to construct an asset.

These procedures also included, among others, (1) reading the purchase agreement;

and (2) testing management’s process for estimating the fair values of the assets acquired.

Testing management’s process included evaluating the appropriateness of the valuation method, testing the completeness and accuracy of data provided by

management, and evaluating the reasonableness of significant assumptions related to the rate of future revenue growth, profitability of the acquired business, the discount rate, and costs to construct an asset.

Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired business involved considering the historical performance of the acquired businesses and market comparable information, as well as economic and industry forecasts.

The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors.

(3) Developing an independent point estimate for the consideration.

(4) Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow models, the reasonableness of the discount rate, and evaluating the market and cost assumptions for the fair value of the assets;

and in developing a model and independent assumptions for the consideration.

/s/ Friedman LLP

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

Marlton, New Jersey

December 14, 2022

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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

September 30,

Current assets

2 unchanged sentences

Current portion of notes receivable 230 220

Inventories 3,893 2,659

Prepaid expenses and other current assets 1,499 1,928

4 unchanged sentences

Notes receivable, net of current portion 4,691 2,839

Goodwill 67,767 39,379

Intangibles, net 144,049 67,824

Other assets 1,407 1,367

Total assets $ 530,738 $ 364,619

LIABILITIES AND EQUITY

21 unchanged sentences

Noncontrolling interests 489 ( 600 )

Total equity 241,758 179,223

Total liabilities and equity $ 530,738 $ 364,619

accompanying notes to consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

STATEMENTS OF OPERATIONS

thousands, except per share data)

Ended September 30,

See accompanying notes to consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Years Ended September 30,

2022 2021 2020

Sales of alcoholic beverages $ 113,316 $ 86,685 $ 59,080

1 unchanged sentence

Service revenues 93,888 55,461 41,162

Other 16,122 12,001 7,625

Total revenues 267,620 195,258 132,327

14 unchanged sentences

Interest income 411 253 324

Non-operating gains (losses), net

Non-operating gain (loss), net 211 5,330 ( 64 )

Income (loss) before income taxes 60,131 34,139 ( 6,805 )

8 unchanged sentences

Dividends per share $ 0.19 $ 0.16 $ 0.14

accompanying notes to consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Ended September 30,

Net income (loss)

Amount reclassified from accumulated other comprehensive income

Comprehensive income (loss)

Comprehensive loss (income) attributable to noncontrolling interests

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

accompanying notes to consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

STATEMENTS OF CHANGES IN EQUITY

Ended September 30, 2021, 2020, and 2019

Comprehensive

Noncontrolling

See accompanying notes to consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Years Ended September 30, 2022, 2021, and 2020

(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, 2019 9,590,671 $ 96 $ 61,312 $ 108,168 — $ — $ ( 156 ) $ 169,420

Reclassification upon adoption of ASU 2016-01

Purchase of treasury shares — — — — ( 516,102 ) ( 9,484 ) — ( 9,484 )

2 unchanged sentences

Payments to noncontrolling interests — — — — — — ( 31 ) ( 31 )

Divestiture in other entities

Net loss — — — ( 6,085 ) — — ( 227 ) ( 6,312 )

Balance at September 30, 2020 9,074,569 91 51,833 100,797 — — ( 414 ) 152,307

2 unchanged sentences

Payment of dividends — — — ( 1,440 ) — — — ( 1,440 )

Payments to noncontrolling interests

Net income (loss) — — — 30,336 — — ( 186 ) 30,150

Balance at September 30, 2021 8,999,910 90 50,040 129,693 — — ( 600 ) 179,223

Issuance of common shares for business combination 500,000 5 29,928 — — — — 29,933

Purchase of treasury shares — — — — ( 268,185 ) ( 15,097 ) — ( 15,097 )

1 unchanged sentence

Payment of dividends — — — ( 1,784 ) — — — ( 1,784 )

Net income (loss)

Stock-based compensation expense — — 2,353 — — — — 2,353

Investment from noncontrolling partner — — — — — — 1,070 1,070

Net income — — — 46,041 — — 19 46,060

Balance at September 30, 2022 9,231,725 $ 92 $ 67,227 $ 173,950 — $ — $ 489 $ 241,758

accompanying notes to consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

STATEMENTS OF CASH FLOWS

Ended September 30,

See accompanying notes to consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended September 30,

2022 2021 2020

CASH FLOWS FROM OPERATING ACTIVITIES

10 unchanged sentences

Noncash lease expense 2,607 1,729 1,660

Deferred rent expense

Stock-based compensation expense 2,353 — —

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

Changes in operating assets and liabilities:

Changes in operating assets and liabilities, net of business acquisitions:

Accounts receivable ( 175 ) ( 769 ) ( 294 )

Inventories ( 554 ) ( 287 ) 226

Prepaid expenses, other current assets and other assets 387 4,120 1,633

5 unchanged sentences

Proceeds from insurance 648 1,152 945

Issuance of notes receivable

Payments for property and equipment and intangible assets ( 24,003 ) ( 13,511 ) ( 5,736 )

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long-term debt

Payments on long-term debt

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

35,820 38,490 6,503

Payments on debt obligations ( 14,894 ) ( 49,178 ) ( 8,832 )

Purchase of treasury stock ( 15,097 ) ( 1,794 ) ( 9,484 )

2 unchanged sentences

Distribution to noncontrolling interests — — ( 31 )

Net cash used in financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Net cash provided by (used in) financing activities 3,582 ( 15,096 ) ( 13,130 )

NET INCREASE IN CASH AND CASH EQUIVALENTS 294 20,081 1,508

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 35,686 15,605 14,097

3 unchanged sentences

Income taxes paid (net of refunds of $ 2,256 , $ 2,201 , and $ 153 , in 2022, 2021, and 2020, respectively)

$ 9,500 $ 5,389 $ 2,200

Non-cash investing and financing transactions:

Ended September 30,

Debt incurred

with seller in connection with acquisition of businesses

Notes receivable received

as proceeds from sale of assets

Accounts receivable converted

to notes receivable

Years Ended September 30,

2022 2021 2020

Debt incurred with seller in connection with acquisition of businesses $ 49,000 $ — $ —

Debt incurred in connection with purchase of property and equipment $ 9,201 $ — $ —

Notes receivable received as proceeds from sale of assets $ 2,700 $ — $ —

Investment from noncontrolling partner in connection with purchase of property $ 1,070 $ — $ —

Issuance of shares of common stock for acquisition of business:

Number of shares 500,000 — —

Fair value $ 29,933 $ — $ —

Accounts receivable converted to notes receivable $ — $ — $ 122

Refinanced long-term debt $ — $ 62,832 $ 11,292

Operating lease right-of-use

assets established upon adoption of ASC 842

Deferred rent liabilities

reclassified upon adoption of ASC 842

Operating lease liabilities

established upon adoption of ASC 842

Adjustment to operating lease

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

Unpaid liabilities on capital

accompanying notes to consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Operating lease right-of-use assets established upon adoption of ASC 842 $ — $ — $ 27,310

Deferred rent liabilities reclassified upon adoption of ASC 842 $ — $ — $ 1,241

Operating lease liabilities established upon adoption of ASC 842 $ — $ — $ 28,551

Adjustment to operating lease right-of-use assets and operating lease liabilities related to new and renewed leases $ 21,424 $ 491 $ —

Unpaid liabilities on capital expenditures $ 1,503 $ 830 $ 29

Receivable on eminent domain disposition $ 1,047 $ — $ —

See accompanying notes to consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Nature of Business

Hospitality Holdings, Inc.

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

incorporated in Texas in 1994.

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

entertainment, restaurant, and/or bar operations.

These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth,

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

Texas, as well as Minneapolis, Minnesota;

RCI Hospitality Holdings, Inc.

(the “Company,” “we,” “us,” or “our”) is a holding company incorporated in Texas in 1994.

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

These establishments are located in Houston, Austin, San Antonio, Dallas, Fort Worth, Tomball, Katy, Pearland, Odessa, Lubbock, Longview, Tye, Aledo, Round Rock, Edinburg, El Paso, Harlingen, Arlington, and Beaumont, Texas, as well as Denver, Colorado;

Minneapolis, Minnesota;

Pittsburgh, Pennsylvania;

Charlotte, North Carolina;

New York, New York;

Pembroke Park and

Miami Gardens, Florida;

Charlotte and Raleigh, North Carolina;

New York and Newburgh, New York;

Miami, Pembroke Park and Miami Gardens, Florida;

Phoenix, Arizona;

Sulphur, Louisiana;

and Chicago, Washington Park, and Kappa, Illinois.

The Company also

owns and operates media businesses for adults.

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

In relation to

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

Louisville, Kentucky;

North Carolina;

Portland, Maine;

Louisville, Kentucky;

Indianapolis, Indiana;

Sauget, Illinois;

and Newburgh, New York.

and Chicago, Washington Park, Sauget, and Kappa, Illinois.

The Company also owns and operates media businesses for the adult industry.

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

Summary of Significant Accounting Policies

of Accounting

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

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

Basis of Accounting

The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP” or “GAAP”).

of Consolidation

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

Principles of Consolidation

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

Intercompany accounts and transactions have been eliminated in consolidation.

fiscal year ends on September 30.

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

respectively.

Our fiscal year ends on September 30.

References to years 2022, 2021, and 2020 are for fiscal years ended September 30, 2022, 2021, and 2020, respectively.

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

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

GAAP requires management to make estimates and assumptions that

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

Estimates and assumptions are based

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

Use of Estimates

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

GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes.

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

Estimates and assumptions may vary under different circumstances and conditions.

We evaluate our estimates and assumptions on an ongoing

and Cash Equivalents

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

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

Deposit Insurance Corporation (“FDIC”).

We evaluate our estimates and assumptions on an ongoing basis.

Cash and Cash Equivalents

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

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

Federal Deposit Insurance Corporation (“FDIC”).

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Accounts and Notes Receivable

Accounts receivable for club and restaurant operations are primarily comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made.

The media division’s accounts receivable are primarily comprised of receivables for advertising sales and Expo registration.

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

Long-term notes receivable, which have original maturity of more than one year, include consideration from the sale of certain investment interest entities and real estate.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

and Notes Receivable

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

two to five days after a purchase is made.

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

advertising sales and Expo registration.

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

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

investment interest entities and real estate.

The Company recognizes interest income on notes receivable based on the terms of the agreement

and based upon management’s evaluation that the notes receivable and interest income will be collected.

The Company recognizes

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

will not be collected.

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

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

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

as of September 30, 2021 and 2020, respectively.

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

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

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

and Equipment

and equipment are stated at cost.

Provisions for depreciation and amortization are made using straight-line rates over the estimated

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

have estimated useful lives ranging from 29 to 40 years.

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

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

Expenditures for major renewals and betterments

that extend the useful lives are capitalized.

recognizes interest income on notes receivable based on the terms of the agreement and based upon management’s evaluation that the notes receivable and interest income will be collected.

The Company recognizes allowances for doubtful accounts or notes when, based on management judgment, circumstances indicate that accounts or notes receivable will not be collected.

Allowance for doubtful accounts balance related to accounts receivable was $ 30,000 and $ 382,000 as of September 30, 2022 and 2021, respectively (see Note 5).

Allowance for doubtful accounts balance related to notes receivable was $ 0 and $ 102,000 as of September 30, 2022 and 2021, respectively.

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

Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.

Property and Equipment

Property and equipment are stated at cost.

Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets, and the shorter of useful lives or terms of the applicable leases for leasehold improvements.

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

Furniture and equipment have estimated useful lives of 5 to 7 years, while leasehold improvements are depreciated at the shorter of the lease term or estimated useful life.

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

Expenditures for normal maintenance and repairs are expensed as incurred.

The cost of assets

sold, retired or abandoned and the related accumulated depreciation are written off from the accounts, and any gains or losses are charged

or credited in the accompanying consolidated statement of operations of the respective period.

Interest expense from related debt incurred

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

and Other Intangible Assets

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

Definite-lived intangible

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

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

The costs of obtaining

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

Annual license renewal fees

are expensed over their renewal term.

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

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

An impairment loss is

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

The cost of assets sold, retired or abandoned and the related accumulated depreciation are written off from the accounts, and any gains or losses are charged or credited in the accompanying consolidated statement of operations of the respective period.

Interest expense from related debt incurred during site construction is capitalized, which amounted to $ 0 in fiscal 2022, $ 0 in fiscal 2021, and $ 156,000 in fiscal 2020.

Goodwill and Other Intangible Assets

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

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

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

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

Annual license renewal fees are expensed over their renewal term.

Goodwill and other intangible assets that have indefinite useful lives are tested annually for impairment during our fourth fiscal quarter and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

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

For our goodwill impairment review, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value.

This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit.

The fair value is determined using market-related valuation models, including discounted cash flows and comparable asset market values.

We recognize goodwill impairment in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of our Step 1 analysis.

For the year ended September 30, 2022, we identified one reporting unit that was impaired and recognized a goodwill impairment loss of $ 566,000 .

For the year ended September 30, 2021, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $ 6.3 million.

For the year ended September 30, 2020, we identified seven reporting units that were impaired and recognized a goodwill impairment loss totaling $ 7.9 million.

For indefinite-lived intangibles, specifically sexually-oriented business ("SOB") licenses, we determine fair value by estimating the multiperiod excess earnings of the asset.

For indefinite-lived tradename, we determine fair value by using

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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

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

This assessment is based on several factors, including industry

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

of prior periods.

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

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

fair value of the reporting unit.

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

cash flows and comparable asset market values.

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

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

results of our Step 1 analysis.

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

and recognized a goodwill impairment loss totaling $ 6.3 million.

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

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

See related discussion in Note 3.

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

$ 1.6 million.

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

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

The fair value is then compared

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

We recorded impairment charges for SOB licenses amounting to $ 5.3

million in 2021 related to three clubs,

million in 2020 related to two clubs (see Note

3), and $ 178,000

in 2019 related to one club, which are included

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

of Long-Lived Assets

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

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

group may not be recoverable.

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

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

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

Recoverability of assets to be held and used

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

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

If the asset group is not recoverable, the impairment loss is calculated

as the excess of the carrying value over the fair value.

We define our asset group as an operating club or restaurant location, which

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

Assets to be disposed of are separately presented

in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

For assets held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or inactive markets

(level 2) developed using observable data.

The assets and liabilities of a disposal group classified as held for sale are presented separately

in the appropriate asset and liability sections of the balance sheet.

During fiscal 2021, the Company impaired five clubs (including

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

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

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

The Company also impaired one club in

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

the relief from royalty method.

The fair value is then compared to the carrying value and an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

We recorded impairment charges for SOB licenses amounting to $ 293,000 in 2022 related to one club, $ 5.3 million in 2021 related to three clubs, $ 2.3 million in 2020 related to two clubs, which are included in other charges, net in the consolidated statements of operations.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group.

If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value.

We define our asset group as an operating club or restaurant location, which is also our reporting unit or the lowest level for which cash flows can be identified.

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

For assets held for sale, we measure fair value using an estimation based on quoted prices for similar items in active or inactive markets (level 2) developed using observable data.

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

During fiscal 2022, the Company impaired one club and one Bombshells for a total of $ 1.0 million;

during fiscal 2021, the Company impaired five clubs (including one later reclassified as held for sale) for a total of $ 2.0 million;

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

The Company also impaired one club in fiscal of 2020 for operating lease right-of-use assets amounting to $ 104,000 .

See Notes 6 and 20.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Value of Financial Instruments

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

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

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

relatively short maturity of these instruments.

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

fair value since these instruments bear market rates of interest.

Fair Value of Financial Instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments.

The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments.

The carrying value of notes receivable and short and long-term debt also approximates fair value since these instruments bear market rates of interest.

None of these instruments are held for trading purposes.

Comprehensive

Income (Loss)

Comprehensive

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

to as items of other comprehensive income (loss).

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

in the consolidated statements of comprehensive income (loss).

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

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

contracts with customers.

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

net basis in the accompanying consolidated statements of operations.

The Company recognizes revenue when it satisfies a performance obligation

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

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

Revenues from the sale of magazines

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

Revenues and external expenses related to the Company’s

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

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

under ASC 842, Leases (ASC 840 in fiscal 2019).

Revenue from initial franchise and area development

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

Franchise royalties and advertising

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

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

and Marketing

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

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

in the accompanying consolidated statements of operations.

Company and its subsidiaries are subject to U.S.

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

we operate our businesses.

Deferred income taxes are determined using the liability method.

Deferred tax assets and liabilities are recognized

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

and their respective tax bases.

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

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

The effect on deferred tax assets and

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

In addition, a valuation

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

of the deferred tax asset will not be realized.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Revenue Recognition

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 consolidated statements of operations.

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

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 .

Revenue from initial franchise and area development fees are recognized as the performance obligations are satisfied over the term of the franchise agreement.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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

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

We recognize penalties related to unrecognized tax

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

in interest expense.

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

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

Investments in companies in which the

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

for any impairment.

Refer to Notes 4 and 20 for additional disclosures on revenues and leases, respectively.

Advertising and Marketing

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

Advertising and marketing expenses are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

The Company and its subsidiaries are subject to U.S.

federal income tax and income taxes imposed in the state and local jurisdictions where we operate our businesses.

Deferred income taxes are determined using the liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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

In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

GAAP creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense.

Investments in companies in which the company has a 20% to 50% interest are accounted for using the equity method, which are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses.

Investments in companies in which the Company owns less than a 20% interest, or where the Company does not exercise significant influence, are accounted for at cost and reviewed for any impairment.

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

Protection Program

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

will continue to record the loans as debt until either (1) the loans are partially or entirely forgiven and the Company has been

legally released from the obligation, at which point the amount forgiven will be recorded as income, or (2) the Company pays off the

(Loss) Per Share

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

number of common shares outstanding for the period.

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

could share in the earnings or losses of the Company.

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

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

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

Diluted earnings (loss) per share

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

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

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

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

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

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

Equity-classified awards

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

The Company estimates

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

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

September 30, 2021 and 2020, the Company has no

stock options outstanding, since as of

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Paycheck Protection Program

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

The Company will continue to record the loans as debt until either (1) the loans are partially or entirely forgiven and the Company has been legally released from the obligation, at which point the amount forgiven will be recorded as income, or (2) the Company pays off the loans.

Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted earnings (loss) per share reflect the potential dilution of securities that could share in the earnings or losses of the Company.

Potential common stock shares consist of shares that may arise from outstanding dilutive common restricted stock, stock options and warrants (the number of which is computed using the treasury stock method) and from outstanding convertible debentures (the number of which is computed using the if-converted method).

Diluted earnings (loss) per share considers the potential dilution that could occur if the Company’s outstanding common restricted stock, stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings or losses (as adjusted for interest expense, that would no longer be incurred if the debentures were converted).

During the years ended September 30, 2022, 2021, and 2020, the Company did not have any adjustment items to reconcile the numerator and the denominator in the calculation of basic and diluted earnings (loss) per share.

For fiscal 2022, we

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

and Other Contingencies

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

There is significant

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

In the opinion of

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

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

The Company recognizes legal fees and expenses,

including those related to legal contingencies, as incurred.

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

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

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

The Company carries substantial insurance to cover

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

These policies have been structured to limit our per-occurrence exposure.

The Company believes, and the Company’s experience has been, that such insurance policies have been sufficient to cover such risks.

Value Accounting

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

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

in the principal or most advantageous market.

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

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

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

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

2 – Include other inputs that are directly or indirectly observable in the marketplace.

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

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

measuring fair value.

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

Unrealized holding gains and losses,

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

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

Realized gains and losses (and unrealized

gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are included in comprehensive income

The Company measures the fair value of its marketable securities based on quoted prices for identical securities in active markets,

or Level 1 inputs.

Available-for-sale securities, which are included in other assets in the consolidated balance sheets, had a balance

of less than $ 1,000

and approximately $ 84,000

as of September 30, 2021 and 2020.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

excluded 300,000 stock options from the calculation of diluted earnings per share because the effect was anti-dilutive.

There were no other potentially dilutive securities outstanding during fiscal 2021 and 2020.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting, which requires the recognition of acquired tangible and identifiable intangible assets and assumed liabilities at their acquisition date fair values.

The excess of the acquisition price over the fair value of assets acquired and liabilities assumed is recorded as goodwill.

Results of operations related to acquired entities are included prospectively beginning with the date of acquisition.

Acquisition-related costs are expensed as incurred.

Share Repurchases

The Company accounts for treasury stock transactions using the cost method.

When treasury shares are retired, we charge the excess of the repurchase price over the par value of the repurchased shares to additional paid-in capital.

Stock-based Compensation

The Company recognizes all employee stock-based compensation in selling, general and administrative expenses in our consolidated statements of operations.

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

The Company estimates grant date fair value of stock options using the Black-Scholes option-pricing model.

The following table provides the significant assumptions used in determining the estimated grant date fair value of the stock options granted in fiscal 2022.

No grants were awarded in fiscal 2021 and 2020.

Expected term (in years) 4.45

Expected volatility 64.42 %

Expected dividend yield 0.20 %

Risk-free rate 3.23 %

The expected term was estimated using the historical exercise and post-vesting expiration behavior of grantees on stock options awarded prior to the 2022 Plan.

The expected volatility was based on historical volatility of the Company's stock price for a period equal to the award's expected term.

The expected dividend yield is based on the current dividend payout activity and the exercise price (that is, the expected dividends that would likely be reflected in an amount at which the stock option would be exchanged).

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant.

We recognize forfeitures when they occur.

Legal and Other Contingencies

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

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

In the opinion of management, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.

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

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

The Company maintains insurance that covers claims arising from risks associated with the Company’s business including claims for workers’ compensation, general liability, property, auto, and business interruption coverage.

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

These policies have

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

accordance with U.S.

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

the cost basis is other than temporary.

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

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

No losses or other-than-temporary

impairments in our marketable securities portfolio were recognized during the years ended September 30, 2021, 2020, and 2019.

and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

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

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

been structured to limit our per-occurrence exposure.

The Company believes, and the Company’s experience has been, that such insurance policies have been sufficient to cover such risks.

Fair Value Measurement

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

The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.

When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels.

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

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

• Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.

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

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

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

Unrealized holding gains and losses, net of the related income tax effect, if any, on available-for-sale securities were excluded from income and were reported as accumulated other comprehensive income in equity until our adoption of ASU 2016-01 as of October 1, 2018.

Realized gains and losses (and unrealized gains and losses upon the adoption of ASU 2016-01) from securities classified as available-for-sale are included in comprehensive income (loss).

The Company measures the fair value of its marketable securities based on quoted prices for identical securities in active markets, or Level 1 inputs.

In accordance with U.S.

GAAP, the Company reviews its marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary.

Should the decline be considered other than temporary, the Company writes down the cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss.

No losses or other-than-temporary impairments in our marketable securities portfolio were recognized during the years ended September 30, 2022, 2021, and 2020.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value in the consolidated balance sheets.

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

If it is determined

that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in other charges,

net in the consolidated statements of operations.

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

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

Value at Reporting Date Using

September 30,

Quoted Prices in Active Markets for Identical

Significant Other Observable Inputs

Significant Unobservable Inputs

If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in other charges, net in the consolidated statements of operations.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

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

Fair Value at Reporting Date Using

Description September 30,

2022 Quoted Prices in Active Markets for Identical Asset

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

Property and equipment* $ 32,904 $ — $ — $ 32,904

Property and equipment** 3,432 — — 3,432

Indefinite-lived intangibles* 50,454 — — 50,454

Operating lease right-of-use assets*

Operating lease liabilities*

Asset held for sale

Measured at the lease modification dates.

Value at Reporting Date Using

September 30,

Quoted Prices in Active Markets for Identical

Significant Other Observable Inputs

Significant Unobservable Inputs

Definite-lived intangibles* 27,986 — — 27,986

Goodwill* 20,608 — — 20,608

Goodwill** 663 — — 663

Current assets* 681 — — 681

* Certain assets and liabilities measured at the acquisition dates.

** Measured at year-end impairment testing.

Fair Value at Reporting Date Using

Description September 30,

2021 Quoted Prices in Active Markets for Identical Asset

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

Property and equipment $ 2,044 $ — $ — $ 2,044

Indefinite-lived intangibles 2,008 — — 2,008

Goodwill 2,096 — — 2,096

Asset held for sale 3,007 — 3,007 —

Unrealized Gain (Loss/Impairments) Recognized

Years Ended September 30,

Description 2022 2021 2020

Goodwill $ ( 566 ) $ ( 6,307 ) $ ( 7,944 )

Property and equipment, net (including held for sale) ( 1,029 ) ( 2,202 ) ( 302 )

Indefinite-lived intangibles ( 293 ) ( 5,296 ) ( 2,265 )

Operating lease right-of-use assets — — ( 104 )

Operating lease liabilities **

Other assets (equity securities) — ( 84 ) ( 64 )

** M easured at October

1, 2019, upon the adoption of ASC 842.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

Gain (Loss/Impairments) Recognized

Ended September 30,

and equipment, net (including held for sale)

Indefinite-lived intangibles

Operating lease right-of-use

Other assets (equity securities)

The significant unobservable inputs used in our

level 3 fair value measurements are as follows:

Schedule of Significant Unobservable Inputs Used

in Level 3 Fair Value Measurement

(Weighted Average)

and equipment

Revenue/EBITDA

The significant unobservable inputs used in our level 3 fair value measurements are as follows:

Range (Weighted Average)

Areas Valuation Techniques Unobservable Input 2022 2021

Property and equipment Discounted cash flow EBITDA multiple 9 x - 10 x ( 10 x)

Revenue/EBITDA growth rate 0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

average cost of capital

Weighted average cost of capital 12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Revenue/EBITDA

Goodwill Discounted cash flow EBITDA multiple 8 x - 10 x ( 9 x)

Revenue/EBITDA growth rate 0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

average cost of capital

Weighted average cost of capital 12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

excess earnings

Revenue/EBITDA

SOB licenses Multiperiod excess earnings EBITDA multiple 9 x - 10 x ( 10 x)

Revenue/EBITDA growth rate 0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

average cost of capital

Weighted average cost of capital 12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

asset charges rate

Contributory asset charges rate 0.5 % - 7.4 % ( 2.3 %)

1.4 % - 8.0 % ( 4 %)

Relief-from-royalty

Tradename Relief-from-royalty method Revenue growth rate 0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 2.5 %)

average cost of capital

lease right-of-use assets

Terminal multiple 9 x - 10 x ( 9 x)

Royalty rate 3.5 % - 4.5 % ( 4 %)

Weighted average cost of capital 12.5 % ( 12.5 %)

Operating lease right-of-use assets Discounted cash flow EBITDA growth rate 0 % - 2.5 % ( 1.5 %)

0 % - 2.5 % ( 1 %)

average cost of capital

Weighted average cost of capital 12.5 % ( 12.5 %)

13 % - 17 % ( 15 %)

Reclassification

Certain reclassifications of cost of goods sold

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

statement presentation.

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

of Recently Issued Accounting Standards

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

Measurement of Credit Losses on Financial

Instruments .

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

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

ASU 2016-13 replaces the

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

credit loss estimates.

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

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

These changes will result in earlier recognition of credit losses.

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

those fiscal years, beginning after December 15, 2019.

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

periods within those fiscal years, beginning after December 15, 2018.

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

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

August 2018, the FASB issued ASU No.

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

Disclosure Framework—Changes to the Disclosure

Requirements for Fair Value Measurement .

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

Topic 820 with certain removals, modifications, and additions.

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

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

between levels of the fair value hierarchy.

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

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

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

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

Additional disclosures that may

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

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

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

The update is effective for fiscal years, and interim

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

Early adoption is permitted for any removed or modified disclosures

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

We adopted ASU 2018-03 as of October

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

March 2019, the FASB issued ASU No.

2019-01, Leases (Topic 842):

Codification Improvements .

ASU 2019-01 aligns the guidance for

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

The ASU requires that the fair value of the underlying

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

However, if there has been a significant

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

820 should be applied.

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

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

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

fiscal years, beginning after December 15, 2019.

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

Our adoption did not have an impact on

our consolidated financial statements.

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

Business combinations Various* Growth rate 2.5 % - 10 % ( 4.8 %)

Weighted average cost of capital 15 % - 19.5 % ( 18.1 %)

Internal rate of return 15 % - 21.5 % ( 19.4 %)

Contributory asset charges rate 8.5 % - 10.2 % ( 9.3 %)

* Includes all of the valuation techniques for each of the fair valued assets above.

Impact of Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

This ASU simplifies

accounting for income taxes by removing the following exceptions:

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

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

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

The ASU also improves financial statement preparers’

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

transactions with a government that

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

This ASU simplifies accounting for income taxes by removing the following exceptions:

(1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income;

transactions with a government that result in a step up in the tax basis of goodwill;

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

changes in tax laws in interim periods.

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

2020, and interim periods within those fiscal years.

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

statements have not been issued.

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

of the annual period that includes that interim period.

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

in the same period.

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

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

Business Combinations (Topic 805):

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Summary of Significant Accounting Policies - continued

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

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

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

business combinations.

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

periods within those fiscal years.

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

impact on our consolidated financial statements.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

This ASU amends Accounting Standards Codification ("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.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .

The amendments in this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction.

The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value.

The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted.

We have not yet evaluated the impact of this ASU on our consolidated financial statements.

Ongoing Impact of COVID-19 Pandemic

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

to significantly impact our cash flow.

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

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

by federal, state and local governments.

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

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

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

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

Our strategy is

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

We believe that we can borrow capital if needed but

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

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

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

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

See Notes 9 and 10.

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 future assumed impact

of COVID-19 pandemic on sales.

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

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

million comprised of $ 7.9

million in goodwill, $ 2.3

million in SOB licenses, $ 302,000

in property and equipment, and $ 104,00 0

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

million of impairment recognized during the

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

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 17), are shown below (in thousands).

Schedule of Disaggregation of Segment Revenues

Our fiscal 2020 was the period hard hit by the COVID-19 pandemic caused by 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.

In fiscal 2021, our businesses started to recover from the initial effects of the pandemic when government restrictions eased.

Stimulus money also flowed to the economy at that time which prompted discretionary spending.

In fiscal 2022, several coronavirus variants threatened to bring back tight restrictions.

Along with the pandemic, geopolitical and macroeconomic events started to affect the U.S.

economy in general, with global inflation and supply chain disruption impacting our businesses the most.

Geopolitical and macroeconomic events are still developing.

In the event global inflation leads to a major economic downturn, our business operations and cash flow could be significantly affected.

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

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

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

Going forward, because of the illness' anticipated permanence, we will no longer consider it as a triggering event for impairment purposes.

Based on the evaluation we conducted during the interim and annual periods since the pandemic emerged, we determined that during the year ended September 30, 2020 our assets were impaired in a total amount of approximately $ 10.6 million comprised of $ 7.9 million in goodwill, $ 2.3 million in SOB licenses , $ 302,000 in property and equipment , and $ 104,000 in operating lease right-of-use assets.

We recognized an additional $ 13.6 million of impairment during the year ended September 30, 2021 comprised of $ 6.3 million in goodwill, $ 5.3 million in SOB licenses , and $ 2.0 million in property and equipment , which included one property later reclassified as held for sale.

During the year ended September 30, 2022, we recorded total impairment charges of $ 1.9 million comprised of $ 566,000 in goodwill, $ 293,000 in SOB license , and $ 1.0 million in property and equipment .

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Revenues, as disaggregated by revenue type, timing of recognition, and reportable segment (see also Note 18), are shown below (in thousands).

Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 80,001 $ 33,315 $ — $ 113,316

2 unchanged sentences

Other revenues 14,480 198 1,444 16,122

$ 206,251 $ 59,925 $ 1,444 $ 267,620

Recognized at a point in time $ 204,644 $ 59,918 $ 1,443 $ 266,005

Recognized over time 1,607 7 1 1,615

$ 206,251 $ 59,925 $ 1,444 $ 267,620

Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 54,305 $ 32,380 $ — $ 86,685

2 unchanged sentences

Other revenues 10,676 36 1,289 12,001

$ 137,348 $ 56,621 $ 1,289 $ 195,258

Recognized at a point in time $ 135,799 $ 56,617 $ 1,284 $ 193,700

Recognized over time 1,549 4 5 1,558

$ 137,348 $ 56,621 $ 1,289 $ 195,258

Nightclubs Bombshells Other Total

Sales of alcoholic beverages $ 31,950 $ 27,130 $ — $ 59,080

2 unchanged sentences

Other revenues 6,858 28 739 7,625

$ 88,373 $ 43,215 $ 739 $ 132,327

Recognized at a point in time $ 87,049 $ 43,215 $ 725 $ 130,989

Recognized over time 1,324 — 14 1,338

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

in fiscal 2019.

All other revenues are covered by ASC Topic 606.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

$ 88,373 $ 43,215 $ 739 $ 132,327

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 consolidated balance sheet.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Revenues - continued

Company does not have contract assets with customers.

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

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

A reconciliation of contract liabilities

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

Schedule of Reconciliation of Contract Liabilities with Customers

at September 30, 2019

Consideration

at September 30, 2020

Consideration

at September 30, 2021

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

Balance at September 30, 2020 Consideration Received Recognized in Revenue Balance at September 30, 2021 Consideration Received Recognized in Revenue Balance at September 30, 2022

Ad revenue $ 92 $ 593 $ ( 601 ) $ 84 $ 611 $ ( 613 ) $ 82

Expo revenue 211 393 ( 453 ) 151 426 ( 569 ) 8

Other (including franchise fees, see below) 33 94 ( 8 ) 119 33 ( 8 ) 144

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

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

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

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

and San Marcos, all in Texas.

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

in development fees representing 100 %

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

of the initial franchise fee of the second restaurant.

$ 336 $ 1,080 $ ( 1,062 ) $ 354 $ 1,070 $ ( 1,190 ) $ 234

Contract liabilities with customers are included in accrued liabilities as unearned revenues in our consolidated balance sheets (see also Note 5), while the revenues associated with these contract liabilities are included in other revenues in our consolidated statements of operations.

On December 22, 2020, the Company signed a franchise development agreement with a group of private investors to open three Bombshells locations in San Antonio, Texas over a period of five years , and the right of first refusal for three more locations in Corpus Christi, New Braunfels, and San Marcos, all in Texas.

Upon execution of the agreement, the Company collected $ 75,000 in development fees representing 100 % of the initial franchise fee of the first restaurant and 50 % of the initial franchise fee of the second restaurant.

The first Bombshells franchised location opened in June 2022.

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.

Selected Account Information

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

Schedule of Accounts Receivable

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

September 30,

Credit card receivables $ 2,687 $ 1,447

4 unchanged sentences

Total accounts receivable, net $ 8,510 $ 7,570

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

with interest rates ranging from 6 %

per annum and having original terms ranging from 1

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

Schedule of Components of Prepaid Expenses and Other Current Assets

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 original terms ranging from 1 to 20 years.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Selected Account Information - continued

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

September 30,

Prepaid insurance $ 191 $ 277

1 unchanged sentence

Prepaid taxes and licenses 391 380

Prepaid rent 296 309

Other 560 850

Total prepaid expenses and other current assets $ 1,499 $ 1,928

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

of Accrued Liabilities

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

September 30,

Payroll and related costs $ 3,186 $ 3,220

1 unchanged sentence

Sales and liquor taxes 2,227 2,261

Insurance 30 54

Interest 499 145

Patron tax 467 452

Lawsuit settlement 246 378

Unearned revenues 234 354

Accrued liabilities

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Selected Account Information - continued

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

Schedule of Selling, General and Administrative Expenses

Ended September 30,

Other 1,821 1,361

Total accrued liabilities $ 11,328 $ 10,403

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

2022 2021 2020

Taxes and permits $ 9,468 $ 8,701 $ 8,071

1 unchanged sentence

Supplies and services 8,614 6,190 4,711

Insurance 10,152 5,676 5,777

Lease 6,706 3,942 4,060

Legal 1,995 3,997 4,725

Utilities 4,585 3,366 2,945

Charge cards fees 6,292 3,376 2,382

Security 4,404 3,892 2,582

Accounting and professional fees 3,909 2,031 3,463

Repairs and maintenance 3,754 2,767 2,289

Selling, general and administrative expenses

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

Schedule of Components of Other Charges, Net

Ended September 30,

Stock-based compensation 2,353 — —

Other 6,755 3,994 5,320

Total selling, general and administrative expenses $ 78,847 $ 54,608 $ 51,692

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Selected Account Information - continued

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

2022 2021 2020

Impairment of assets $ 1,888 $ 13,612 $ 10,615

2 unchanged sentences

Loss (gain) on insurance ( 463 ) ( 1,253 ) 420

Other charges

Total other charges, net $ 467 $ 13,186 $ 10,548

Property and Equipment

and equipment consisted of the following (in thousands):

Schedule of Property, Plant and Equipment

Property and equipment consisted of the following (in thousands):

September 30,

Buildings and land $ 206,424 $ 162,217

Equipment 45,648 38,046

Leasehold improvements 30,729 28,681

Furniture 12,391 10,207

Total property and equipment 295,192 239,151

1 unchanged sentence

Property and equipment, net $ 224,615 $ 175,952

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

million and $ 20,000

as of September 30, 2021 and 2020, respectively,

which are mostly related to Bombshells projects.

expense was approximately $ 8.0 million,

$ 8.2 million,

and $ 8.4 million

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

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

assets held for sale, was $ 2.0

million, $ 302,000 ,

and $ 4.2 million

for fiscal 2021, 2020, and 2019, respectively.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Included in buildings and leasehold improvements above are construction-in-progress amounting to $ 1.5 million and $ 3.4 million as of September 30, 2022 and 2021, respectively, which are mostly related to Bombshells development projects.

Depreciation expense was approximately $ 10.3 million, $ 8.0 million, and $ 8.2 million for fiscal years 2022, 2021, and 2020, respectively.

Impairment loss for property and equipment, including those later reclassified to assets held for sale, was $ 1.0 million, $ 2.0 million, and $ 0.3 million for fiscal 2022, 2021, and 2020, respectively.

Assets Held for Sale

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

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

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

In May 2021, the Company sold one property

with a carrying value of $ 2.3

million for $ 3.1

million (see Note 15).

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

property listings by our real estate brokers.

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

Gains or losses on the sale of properties

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

As of September 30, 2021, the Company had two properties classified as held for sale with an aggregate net realizable value less cost to sell of $ 4.9 million with associated liabilities amounting to $ 1.1 million.

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.

The 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 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.

On May 17, 2022, the Company sold a property classified as held-for-sale during the first quarter of fiscal 2022 with a carrying value of $ 1.1 million for $ 1.7 million in cash.

The Company used $ 1.6 million of the proceeds to pay off a loan related to the property.

The Company expects the properties held for sale, which are primarily comprised of land and buildings, to be sold within 12 months through property listings by our real estate brokers.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Assets Held for Sale - continued

As of September 30, 2022, there were no liabilities associated with held-for-sale assets amounting to $ 1.0 million.

Gains or losses on the sale of properties held for sale are included in other charges, net within the consolidated statements of operations (see Note 5).

Goodwill and Other Intangible Assets

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

Schedule of Goodwill and Other Intangible Assets

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

September 30,

Indefinite useful lives:

Goodwill $ 67,767 $ 39,379

Licenses 103,972 65,186

Tradename and domain name 13,142 2,238

Indefinite Intangible

Assets, Net, Total

184,881 106,803

Amortization Period

Definite useful lives:

Discounted leases

Non-compete agreements

Distribution agreement

Discounted leases 18 & 6 years

Non-compete agreements 5 years 55 182

Software 5 years 723 132

Licenses Lease term 25,962 —

Leases acquired in-place Lease term 117 —

Total goodwill and other intangible assets $ 211,816 $ 107,203

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

Lived Intangibles

Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill Definite- Lived Intangibles Indefinite- Lived Intangibles Goodwill

Beginning balance $ 400 $ 67,424 $ 39,379 $ 530 $ 72,547 $ 45,686

Acquisitions 28,653 50,453 28,954 128 173 —

Impairment — ( 293 ) ( 566 ) — ( 5,296 ) ( 6,307 )

Dispositions — ( 470 ) — — — —

Amortization ( 2,118 ) — — ( 258 ) — —

Ending balance $ 26,935 $ 117,114 $ 67,767 $ 400 $ 67,424 $ 39,379

of September 30, 2021 and 2020, the accumulated impairment balance of indefinite-lived intangibles was $ 13.7

million and $ 8.4

million, respectively, while the accumulated

impairment balance of goodwill was $ 20.6

million and $ 14.3

million, respectively.

Future amortization expense

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

2022 - $ 138,000 ;

2023 - $ 60,000 ;

2024 - $ 11,000 ;

2025 - $ 8,000 ;

2026 - $ 7,000 ;

and thereafter - $ 176,000 .

Indefinite-lived

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

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

are done at minimal costs to the Company.

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

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

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

a $ 6.3 million related to goodwill of seven clubs.

During the fiscal year ended September 30, 2020, the Company recognized a $ 2.3

million impairment related to two clubs’

SOB licenses and a $ 7.9

million impairment related to the goodwill of

seven reporting units (see Note 3).

During the fiscal year ended September 30, 2019, the Company recognized a $ 178,000

impairment related to one club’s SOB license

million impairment related to the goodwill of

four reporting units.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

consisted of the following (in thousands):

of Long-term Debt

Definite-lived intangible assets consist of the following (in thousands):

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Goodwill and Other Intangible Assets - continued

September 30,

Licenses $ 27,725 $ —

Software 1,671 1,004

Leases acquired in-place 261 —

Discounted leases 297 297

Non-compete agreements 1,100 1,100

Distribution agreements 317 317

Total definite-lived intangibles 31,371 2,718

Less accumulated amortization ( 4,436 ) ( 2,318 )

Definite-lived intangibles, net $ 26,935 $ 400

As of September 30, 2022 and 2021, the accumulated impairment balance of indefinite-lived intangibles was $ 11.4 million and $ 13.7 million, respectively, while the accumulated impairment balance of goodwill was $ 21.2 million and $ 20.6 million, respectively.

Future amortization expense related to definite-lived intangible assets that are subject to amortization at September 30, 2022 is:

2023 - $ 2.8 million;

2024 - $ 2.7 million;

2025 - $ 2.6 million;

2026 - $ 2.4 million;

2027 - $ 2.3 million;

and thereafter - $ 14.2 million.

Indefinite-lived intangible assets consist of SOB licenses and tradenames, which were obtained as part of acquisitions.

These licenses are the result of zoning ordinances, thus are valid indefinitely, subject to filing annual renewal applications, which are done at minimal costs to the Company.

We considered certain licenses that are associated with leased locations as definite-lived.

The discounted cash flow of the income approach method was used in calculating the value of these licenses in a business combination, while the relief-from-royalty method was used in calculating the value of tradenames.

During the fiscal year ended September 30, 2022, the Company recognized a $ 293,000 impairment related to the SOB license of one club and a $ 566,000 impairment related to goodwill of one reporting unit.

During the fiscal year ended September 30, 2021, the Company recognized a $ 5.3 million impairment related to three clubs’ SOB licenses and a $ 6.3 million impairment related to the goodwill of seven reporting units (see Note 3).

During the fiscal year ended September 30, 2020, the Company recognized a $ 2.3 million impairment related to two clubs’ SOB licenses and a $ 7.9 million impairment related to the goodwill of seven reporting units.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt consisted of the following (in thousands):

September 30,

Notes payable at 5.5 %, matures January 2023

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

Note payable at 5.75 %, matures December 2027 , as amended

Note payable at 5.95 %, matures December 2027 , as amended

*(a)(6iii)(7)

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

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

Note payable at 8 % ,

matures October

2027 , as amended

Note payable at 8 % , matures May 2029

Note payable at 5.75 % , matures December 2027 , as amended

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

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

Note payable at 5 % , matures August 2029

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

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

(d)(1) $ 678 $ 785

Non-interest-bearing debts to State of Texas, paid in April 2022, interest imputed at 9.6 %

Note payable at 8 %, matures October 2027, as amended

(b)(3)(10) 3,025 3,025

Note payable at 8 %, matures May 2029

Note payable at 5.95 % , matures August 2039 , as amended

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

Note payable at 9 % , matures September 2028

(b)(3) 10,412 11,549

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

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

Note payable at 9 %, paid in March 2022

(a)(5) — 1,063

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

Note payable at 7 % , matures November 2024

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

Notes payable at 12 % , mature November 2021

(c)(6) 2,008 2,075

Paycheck Protection Program loans at 1 %, paid in May 2022

Note payable at 3.99 %, paid in January 2022

*(a)(8) — 2,127

Note payable at 5.25 %, matures September 2031

*(a)(9) 92,062 99,146

Notes payable at 12 %, matures October 2024

(d)(11) 9,500 —

Notes payable at 12 %, matures October 2024

(d)(11) 3,561 —

Notes payable at 12 %, matures October 2024

(d)(11) 3,561 —

Note payable at 5.25 % matures October 2031

(a)(12) 1,172 —

Note payable at 6 % matures October 2031

(b)(12) 10,321 —

Note payable at 6 % matures October 2041

(b)(12) 7,828 —

Note payable at 6 % matures October 2041

(b)(12) 978 —

Note payable at 4 % matures November 2028

(b)(13) 895 —

Note payable at 5.25 % matures January 2032

Note payable at 5.25 % , matures September 2031

Paycheck Protection Program loans at 1 % , matures May 2022

*(a)(14) 18,391 —

Note payable at 4.25 % matures February 2043

*(a)(15) 2,625 —

Note payable at 10 % matures May 2025

(b)(16) 5,881 —

Note payable at 10 % matures May 2032

(b)(16) 5,000 —

Note payable at 5 % matures November 2023

*(a)(17) 2,195 —

Note payable at 6 % matures July 2029

(b)(18) 785 —

Note payable at 6 % matures July 2032

(b)(19) 9,880 —

Note payable at 6 % matures August 2032

(a)(19) 4,970 —

Note payable at 5.25 % matures August 2023

*(a)(20) 1,575 —

Note payable at 4.79 % matures October 2042

(c)(21) 2,806 —

Total debt 205,840 126,796

Less unamortized debt discount and issuance costs ( 3,377 ) ( 1,628 )

1 unchanged sentence

Total long-term portion of debt, net $ 190,567 $ 118,734

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

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

of Long-term Debt Instruments

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

(a) Secured by real estate $ 122,990 $ 102,336

2 unchanged sentences

(d) Unsecured 17,301 1,722

$ 205,840 $ 126,796

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

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

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

In the same transaction, the Company also acquired the related real estate

and executed notes to the seller for $ 6.5 million, which have been paid off in relation to the December 2017 Refinancing Loan, as discussed

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

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

In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $ 6.5 million, which have been paid off in relation to the December 2017 Refinancing Loan, as discussed below.

The notes were also payable over eleven years at $ 53,110 per month including interest and have the same adjustable interest rate of 5.5 %.

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

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

over 84 months, beginning in June 2015, for all but two nonsettled locations.

For accounting purposes, the Company has discounted the

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

In March 2017,

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

The Company agreed to pay a

total of $ 687,815 with $ 195,815 paid at the time the settlement agreement was executed followed by 60 equal monthly installments of $ 8,200

without interest.

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

rate of 9.6 %.

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

For accounting purposes, the Company has discounted the $ 10.0 million at an imputed interest rate of 9.6 %, establishing a net present value for the settlement of $ 7.2 million.

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

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

In March 2017, the present value of the second note was approximately $ 390,000 after discounting using an imputed interest rate of 9.6 %.

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

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

On October 5, 2016, the Company refinanced $ 8.0

million of long-term debt by borrowing $ 9.9

The new unsecured debt is payable $ 118,817

per month, including interest at 12 %,

and matures in five years with

a balloon payment for the remaining balance at maturity.

This note was partially paid in relation to the first note of the December

2017 Refinancing Loan, as discussed below.

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

This note was paid off entirely

on September 30, 2021.

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

mature on May 1, 2020 .

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

15, 2018 and September 26, 2018, the Company refinanced $ 2.0 million and $ 500,000 of the notes, respectively.

The $ 2.0 million note was

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

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

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

See succeeding

paragraph related to November 1, 2018 financing below.

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

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

the same as the rest of the lender group.

Refer to May 1, 2020 extension below.

These notes were paid off on September 30, 2021.

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

short-term note for $ 5.0

million payable in lump sum after six months

from closing date and (ii) a 12-year amortizing 8 %

note for $ 15.6

note is payable $ 168,343

per month, including interest.

The Company has

amended the $ 5.0

million short-term note payable several times,

which has a remaining balance of $ 3.0

million, extending the maturity date and increasing

the interest rate.

Presently, the maturity date is October

1, 2027 and the interest rate is

for its remaining term.

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

(i) a 5 % short-term note for $ 5.0 million payable in lump sum after six months from closing date and (ii) a 12-year amortizing 8 % note for $ 15.6 million.

The 12-year note is payable $ 168,343 per month, including interest.

The Company has amended the $ 5.0 million short-term note payable several times, which has a remaining balance of $ 3.0 million, extending the maturity date and increasing the interest rate.

Presently, the maturity date is October 1, 2027 and the interest rate is 8 % for its remaining term.

Refer to December 2019 amendment below.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Debt - continued

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

The December 2017 Refinancing Loan fully

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

with interest rates ranging from 5 %

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

The December 2017 Refinancing Loan

consisted of three promissory notes:

first note amounted to $ 62.5

million with a term of 10

years at a 5.75 %

fixed interest rate for the first

five years , then repriced one time at the

then current U.S.

Treasury rate plus 3.5 %,

with a floor rate of 5.75 %,

and payable in monthly installments of $ 442,058 ,

based upon a 20 -year

amortization period, with the balance payable at maturity;

second note amounted to $ 10.6

million with a term of 10

years at a 5.45 %

fixed interest rate until

July 2020 , after which to be repriced at

a fixed interest rate of 5.75 %

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

This note was

payable $ 78,098

monthly for principal and interest until

July 2020, based upon a 20 -year

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

with the balance payable at maturity;

third note amounted to $ 8.1 million

with a term of 10 years

fixed interest rate until

August 2021 , after which to be repriced at 5.75 %

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

This note was payable

$ 100,062 monthly

for principal and interest until August 2021, based upon a 20 -year

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

the balance payable at maturity.

In addition to the monthly principal and interest payments as provided above, the

Company paid monthly installments of principal of $ 250,000 ,

applied to the first note, until the loan-to-value ratio of the Properties, based upon reduced principal balance of the December 2017

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

The loan-to-value ratio of the Properties fell

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

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

million originally scheduled in fiscal 2018,

million originally scheduled in fiscal 2020 and

million originally scheduled in fiscal 2021.

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

All three notes in the preceding paragraph were

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Debt - continued

In connection with the Repaid Notes, we wrote off $ 279,000 of unamortized debt issuance costs to interest expense.

Prior to September

30, 2017, the Company paid a portion of debt issuance costs amounting to $ 612,500 , which was included in other assets until the closing

of the transaction.

At closing, the Company paid an additional $ 764,000 in debt issuance costs, which together with the $ 612,500 prepayment

will be amortized for the term of the loan using the effective interest rate method.

We also paid prepayment penalties amounting to $ 543,000

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

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

bank lender of one of the Repaid Notes.

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

note was borrowed, was completed.

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

2017 Refinancing Loan were deferred to their maturity dates.

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

The transaction was partly

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

note payable liability of $ 2.0 million.

The transaction was partly funded by trading in an aircraft that the Company owned with a carrying value of $ 3.4 million, with an assumption of the old aircraft’s note payable liability of $ 2.0 million.

The aircraft note is payable in 15 years with monthly payments of $ 59,869 , which includes interest.

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

On February 15, 2018, the Company borrowed $ 3.0 million

from a bank for the purchase of land at a cost of $ 4.0 million

with the difference paid by the Company in cash.

The bank note bore interest at 5.25 %

adjusted after 36 months to

prime plus 1 %

with a floor of 5.2 %

and matures on February 15,

The bank note was payable

interest-only during the first 18 months, after which monthly payments of principal and interest were to be made based on a 20 -year

amortization with the remaining balance to be paid at maturity.

On August 28, 2018, this note was refinanced for an

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

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

subject to a repricing after 72 months

to prime plus 1 %

The note was payable $ 53,084 per

month, including interest, for 72

months , then adjusted based on repriced

interest rate until its August

2039 maturity.

In May 2020, certain

principal and interest payments for this note were deferred to its maturity date.

This note was paid off in relation to the

September 2021 Refinancing Note.

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

million, bearing interest of 2 %

over prime with a 5.5 %

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

The construction loan agreement bore

an interest rate of prime plus 0.5 %

with a floor of 5.0 %

and was to mature on August

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

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

amortization with the remaining balance to be paid at maturity .

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

This note was

paid off in relation to the September 2021 Refinancing Note.

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

million, financed with a bank note for $ 4.0

million, payable interest only at prime plus

with a floor of 5 %

The note was to mature in 24 months,

by which date the principal was to be payable in full.

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

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

In September 2020, they further negotiated to refinance the note with

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

including interest.

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

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

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

The new $ 2.9

million construction loan had an interest

rate of prime plus 0.5 %,

floor, and payable in 12

The first 24 months were to be

interest-only payments, after which monthly payments of principal and interest were to be made based on a 20 -year

amortization.

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

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

On May 25, 2018, the Company acquired a club in Kappa, Illinois for $ 1.5

million, financed by a $ 1.0

million seller note with interest at 8 %.

The note was to mature in three

years and was payable in monthly installments

of $ 20,276 ,

including interest, based on a five-year

amortization with the remaining balance to be

paid at maturity.

This note was fully paid in May 2021.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Debt - continued

On August 15, 2018, the Company refinanced a $ 2.0 million note payable for $ 4.0 million from a private lender by executing a 12 % 3 -year

note payable $ 40,000 monthly starting September 15, 2018, with the remaining principal and interest balance payable at maturity.

February 20, 2020 extension below.

This note was paid off on September 30, 2021.

On September 6, 2018, the Company borrowed $ 1.55 million

from a bank lender to finance the acquisition of the remaining not-owned interest in a joint venture.

note payable had an initial interest rate of 5.95 %

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

Treasury rate plus 3.5 %,

with a 5.95 %

Monthly payments of $ 11,138 ,

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

Company paid approximately $ 40,000 in

debt issuance costs at closing.

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

maturity date.

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

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

On September 26, 2018, the Company refinanced a $ 500,000 12 % note payable for $ 1.35 million from a private lender by executing a 9 % 10 -year

note payable $ 17,101 monthly, including interest, until maturity.

On November 1, 2018, the Company raised $ 2.35

million through the issuance of 12 %

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

The notes paid interest-only

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

Among the promissory notes were two notes with a

principal of $ 450,000

and $ 200,000 .

The $ 450,000

note was in exchange for a $ 300,000

12% note and the $ 200,000

note was in exchange for a $ 100,000

note, both of which were included in the May

1, 2017 financing to acquire Scarlett’s Cabaret in Miami.

Also included in the $ 2.35

million borrowing are two notes for $ 500,000

and $ 100,000

borrowed from related parties (see Note 18) and

one note for $ 300,000

borrowed from a non-officer employee in which

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

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

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

See additional

details related to the acquisition in Note 15.

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

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

The first note is a 2 -year

note for $ 2.0

million and the second is a 10 -year

note for $ 5.5

See additional details related to the

acquisition in Note 15.

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

to and fully paid off in February 2021 .

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

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

million with a $ 554,000

down payment and financed for the remaining

$ 2.2 million

with a 5.49 %

note payable in 20 years with monthly payments of

including interest.

(5) On September 26, 2018, the Company refinanced a $ 500,000 12 % note payable for $ 1.35 million from a private lender by executing a 9 % 10-year note payable $ 17,101 monthly, including interest, until maturity.

In relation to a sale of a held-for-sale property (see Note 7), this note was fully paid in March 2022.

(6) On December 11, 2018, the Company purchased an aircraft for $ 2.8 million with a $ 554,000 down payment and financed for the remaining $ 2.2 million with a 5.49 % promissory note payable in 20 years with monthly payments of $ 15,118 , including interest.

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

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

million, bearing an interest rate of 6.1 %,

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

adjusted after five years to prime plus 0.5 %

floor per annum.

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

million, was to mature in 252 months from

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

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

The Company paid approximately $ 69,000

in loan costs of which approximately $ 19,600

was capitalized as debt issuance costs on the

new construction loan with the remaining charged to interest expense.

The Company also wrote off the remaining unamortized debt issuance

costs of the old bank note to interest expense.

There were certain financial covenants with which the Company was to be

in compliance related to this financing.

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

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

In December 2019, the Company amended the $ 5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017,

which had a balance of $ 3.0 million as of the amendment date, extending the maturity date to October 1, 2022.

The amendment did not have

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

On February 20, 2020, in relation to a $ 4.0

note payable earlier refinanced on August 15, 2018, the

Company restructured the note with a private lender by executing a 12 %

10-year note payable $ 57,388

monthly, including interest, starting March 2020.

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

million in August 2021.

The refinancing did not

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

This note was paid off in relation to the September 2021

Refinancing Note.

On February 20, 2020, in relation to a $ 9.9

note payable that was partially paid during the December 2017 Refinancing Loan, the Company restructured the note, which had a balance

million as of the amendment date, by

executing a 12% 10-year note payable $ 74,515

monthly, including interest, starting March 2020.

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

million in October 2021.

As a result of the refinancing,

the Company wrote off approximately $ 25,400

in unamortized debt issuance cost as interest

expense in our consolidated statement of operations for the year ended September 30, 2020.

This note was paid off in relation

to the September 2021 Refinancing Note.

On May 1, 2020, the Company negotiated extensions to November 1, 2020 on $ 1,740,000

of $ 2,040,000

of notes to individuals that were due

on May 1, 2020 .

The Company paid $ 300,000

to certain lenders and received $ 200,000

in new debt from existing lenders and their affiliates.

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

On October 31, 2020, the Company negotiated extensions

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

of the $ 1,940,000

that were due on November 1, 2020.

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

The remaining balance of these notes were paid off

in relation to the September 2021 Refinancing Note.

On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and

lounge amounting to $ 5.4

If not forgiven, under the terms of

the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1 %

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

Administration out of the twelve of our PPP loans granted.

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

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

In November 2021, we received a partial forgiveness

of the remaining $ 124,000

PPP loan for $ 85,000

in principal and interest.

The remaining

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

See Notes 3 and 10.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

(7) On May 8, 2020, the Company received approval and funding under the PPP of the CARES Act for its restaurants, shared service entity and lounge amounting to $ 5.4 million.

Under the terms of the loans as provided by the CARES Act, the twelve PPP loans bear an interest rate of 1 % per annum.

As of September 30, 2022, we have received eleven

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

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

rate of 3.99 % per annum.

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

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

The Company paid approximately $ 25,000 in debt issuance

costs at closing.

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

million term loan refinancing $ 85.7

million of existing bank and seller-financed

real estate debt and to provide $ 12.3

million in cash that will be used to pay off

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

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

million note has a term of 10

years with an initial interest rate of 5.25 %

per annum for the first five

years , then adjusted to a rate equal to the then

weekly average yield of U.S.

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

All of those notices received forgave 100 % of each of the eleven PPP loans totaling the amount of $ 5.3 million in principal and interest.

In November 2021, we received a partial forgiveness of the remaining $ 124,000 PPP loan for $ 85,000 in principal and interest.

The remaining unforgiven portion of approximately $ 41,000 in principal was fully paid in May 2022 as debt plus accrued interest.

(8) On January 25, 2021, the Company borrowed $ 2.175 million from a bank lender by executing a 20-year promissory note with an initial interest rate of 3.99 % per annum.

The note is payable $ 13,232 per month for the first five years after which the interest rate will be repriced at the then-current prime rate plus 1.0 % per annum, with a floor rate of 3.99 %.

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

This note was fully paid with proceeds from the January 25, 2022 borrowing.

(9) On September 30, 2021, we entered into a $ 99.1 million term loan refinancing $ 85.7 million of existing bank and seller-financed real estate debt and to provide $ 12.3 million in cash that will be used to pay off existing high-interest unsecured debt (“September 2021 Refinancing Note”), enabling those creditors to provide financing for the acquisition of 11 clubs and related real estate (see Note 16).

The $ 99.1 million note has a term of 10 years with an initial interest rate of 5.25 % per annum for the first five years , then adjusted to a rate equal to the then weekly average yield of U.S.

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

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

based on a 20 -year

amortization period, with the balance paid at maturity.

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

of unamortized debt issuance costs related to

the paid-off debts.

We also paid approximately $ 1.0

million in loan costs, approximately $ 567,000

of which is capitalized and will be amortized

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

the effective interest method.

maturities of debt obligations as of September 30, 2021 consist of the following (in thousands):

of Maturities of Long-term Debt

maturities of long-term debt, net of debt discount

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

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

million, all of which bear interest at a rate

Of this amount, $ 9.5

million are promissory notes, payable interest

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

The remaining amount of the financing

million in promissory notes, payable in monthly

payments of principal and interest based on a 10 -year

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

full on October

Included in the $ 17.0

million borrowing are two notes for $ 500,000

and $ 150,000

borrowed from related parties (see Note

18) and two notes for $ 500,000

and $ 300,000

borrowed from two non-officer employees

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

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

the Company executed four seller-financed promissory notes.

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

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

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

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

The third promissory note was a 10 -year

$ 1.2 million

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

amortization period, with the balance payable at maturity date.

The fourth note was a 20 -year

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

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

million 7 -year

promissory note with an interest rate of 4.0 %

The note is payable $ 13,669 per

month, including principal and interest.

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

Schedule of Income Tax Expense (Benefit)

Ended September 30,

The note is payable in monthly payments of principal and interest of $ 668,051 , based on a 20-year amortization period, with the balance paid at maturity.

In connection with the transaction, we wrote off to interest expense approximately $ 103,000 of unamortized debt issuance costs related to the paid-off debts.

We also paid approximately $ 1.0 million in loan costs, approximately $ 567,000 of which is capitalized and will be amortized together with the remaining unamortized debt issuance costs of some of the existing refinanced debts for the term of the new note using the effective interest method.

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

(10) On October 12, 2021, the Company amended the $ 5.0 million short-term note payable related to the Scarlett’s acquisition in May 2017, which had a balance of $ 3.0 million as of the amendment date, extending the maturity date to October 1, 2027.

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

(11) On October 12, 2021, we closed on 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 19) 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.

(12) On October 18, 2021, in relation to an acquisition (see Note 16), the Company executed four seller-financed promissory notes.

The first promissory note was a 10-year $ 11.0 million 6 % note payable in 120 equal monthly payments of $ 122,123 in principal and interest.

The second promissory note was a 20-year $ 8.0 million 6 % note payable in 240 equal monthly payments of $ 57,314 in principal and interest.

The third promissory note was a 10-year $ 1.2 million 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.

(13) On November 8, 2021, in relation to an acquisition (see Note 16), 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.

(14) 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 %.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

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 19).

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.

(15) On March 1, 2022, the Company borrowed $ 2.6 million from a bank lender in relation to a purchase of real estate (see Note 16).

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.

(16) On May 2, 2022, in relation to a club acquisition (see Note 16), the Company executed two seller-financed notes totaling $ 11.0 million, comprised of (1) $ 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 (2) $ 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.

(17) On May 23, 2022, the Company borrowed $ 2.2 million from a bank lender in relation to a purchase of real estate (see Note 16).

The 18-month promissory note has an initial interest rate of 4.5 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 1 % with a floor of 4.5 %.

The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity.

The Company paid loan costs amounting to $ 25,000 for this note.

(18) On July 21, 2022, the Company executed an $ 800,000 6 % seller-financed promissory note in relation to an acquisition of a club in Odessa, Texas (see Note 16).

The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest.

(19) On July 27, 2022, in relation to an acquisition of a club in Hallandale Beach, Florida (see Note 16), the Company executed two seller-financed promissory notes:

(1) $ 10.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest.

(20) On August 18, 2022, in relation to a purchase of real estate for a future Bombshells location amounting to $ 2.1 million (see Note 16), the Company borrowed $ 1.6 million from a bank lender.

The 5.25 % mortgage note is payable interest-only for eleven months and on its August 18, 2023 maturity date payable with the entire principal balance plus accrued interest.

(21) On September 23, 2022, in connection with the purchase of an aircraft worth $ 3.5 million (see Note 16), the Company entered into a financing transaction for $ 2.8 million.

The financing agreement bears an interest of 4.79 % per annum and payable in 240 monthly installments of principal and interest amounting to $ 18,298 .

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Debt - continued

Future maturities of debt obligations as of September 30, 2022 consist of the following (in thousands):

Regular Amortization Balloon Payments Total Payments

2023 $ 10,216 $ 2,226 $ 12,442

2024 9,663 2,195 11,858

2025 9,527 20,457 29,984

2026 9,825 — 9,825

2027 10,424 — 10,424

Thereafter 56,447 74,860 131,307

$ 106,102 $ 99,738 $ 205,840

(22)On October 10, 2022, in relation to a real estate purchase (see Note 16), the Company borrowed $ 2.3 million from a bank lender.

The 18-month promissory note bears an initial interest rate of 6 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5 % with a floor of 6 %.

The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity.

The Company paid approximately $ 26,000 in debt issuance cost at closing.

This promissory note is secured by the purchased real estate property.

(23)On October 26, 2022, in relation to a club acquisition, the Company executed a promissory note for $ 5.0 million with the seller.

The 6 % 15-year promissory note is payable in 180 equal monthly payments of $ 42,193 in principal and interest.

This promissory note is secured by the purchased real estate property.

(23)On November 18, 2022, in relation to a real estate purchase on September 12, 2022, the Company borrowed $ 1.5 million from a bank lender.

The 18-month promissory note bears an initial interest rate of 6 % per annum to be adjusted daily to a rate equal to the Wall Street Journal prime rate plus 0.5 % with a floor of 6 %.

The promissory note is payable in 17 monthly interest-only installments with the full principal and accrued interest payable at maturity.

This promissory note is secured by the purchased real estate property.

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

Years Ended September 30,

2022 2021 2020

Federal $ 8,335 $ 4,598 $ 215

State and local 2,656 644 560

Total current income tax expense 10,991 5,242 775

Federal 2,080 ( 161 ) ( 1,248 )

State and local 1,000 ( 1,092 ) ( 20 )

1 unchanged sentence

Total income tax expense (benefit) $ 14,071 $ 3,989 $ ( 493 )

Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Income Taxes - continued

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

federal statutory rate

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

Schedule of Components of Income Tax Expense (Benefit)

Ended September 30,

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

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

2022 2021 2020

Federal statutory income tax expense (benefit) $ 12,628 $ 7,169 $ ( 1,429 )

3 unchanged sentences

Change in valuation allowance 343 ( 632 ) 1,273

Tax credits ( 1,796 ) ( 1,207 ) ( 945 )

Other 103 ( 819 ) ( 40 )

Total income tax expense (benefit) $ 14,071 $ 3,989 $ ( 493 )

income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial

reporting purposes and the amounts used for income tax purposes.

The significant components of the Company’s deferred tax assets

and liabilities were as follows (in thousands):

Schedule of Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

September 30,

Deferred tax assets:

Capital loss carryforwards

Net operating loss carryforwards $ 1,022 $ 664

Capital loss carryforwards 234 899

Right-of-use assets 626 335

Accrued expenses 240 148

Stock-based compensation 569 —

Valuation allowance ( 984 ) ( 641 )

deferred tax assets

Deferred tax liabilities:

Intangibles ( 21,927 ) ( 12,174 )

Property and equipment ( 10,119 ) ( 8,132 )

tax liabilities

deferred tax liability

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

from club acquisitions amounting to approximately $ 17.1

million and $ 14.9

million, respectively, which are not deductible

for tax purposes.

These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs

are sold or impaired.

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

will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized

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

likelihood of being realized upon settlement with the taxing authorities.

We recognize accrued interest related to unrecognized tax benefits

as a component of accrued liabilities.

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

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

In fiscal 2019,

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Prepaid expenses ( 205 ) ( 242 )

Other ( 18 ) —

( 32,269 ) ( 20,548 )

$ ( 30,562 ) $ ( 19,137 )

Included in the Company’s deferred tax liabilities at September 30, 2022 and 2021 is the tax effect of indefinite-lived intangible assets from club acquisitions amounting to approximately $ 32.9 million and $ 17.1 million, respectively, which are not deductible for tax purposes.

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

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities.

We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Income Taxes - continued

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

Schedule of Uncertain Tax Positions

Ended September 30,

Balance at beginning of year

Additions for tax positions of prior years

Decrease related to settlements with taxing authorities

Reduction due to lapse from closed examination

Balance at end of year

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

tax benefits.

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

The Company or one of its

subsidiaries files income tax returns in the U.S.

related to unrecognized tax benefits in interest expense.

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

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

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

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 (“IRS”) 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 (“IRS”) with no changes.

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

Fiscal year ended September 30, 2019 and subsequent years remain open to federal tax examination.

The Company is also being examined

for state income taxes, the outcome of which may occur within the next twelve months.

On March 27, 2020,

former President Trump signed the CARES Act into law.

As a result of this, additional avenues of relief may be available to workers

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

Business Administration.

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

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

qualified improvement property.

The CARES Act

also established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses,

rent, and related costs.

The 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 were 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 are eligible for a loan to fund payroll expenses, rent, and related costs.

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

The Company has

submitted its application for a PPP loan and on May 8, 2020 has received approval and funding for its restaurants, shared service

entity and lounge.

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

$ 579,000 for

an aggregate amount of $ 4.2 million;

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.

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

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

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

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

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

During 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 was fully paid as debt plus accrued interest in fiscal 2022.

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 approximately $ 813,000 and $ 2.2 million as of September 30, 2021 and 2020, respectively.

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

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

An administrative rule attempted to

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

The administrative rule

was challenged on both constitutional and statutory grounds.

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

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

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.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

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.

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

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.

The State of Texas has filed an appeal.

We will continue to vigorously defend the matter through the

appeals process.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters – continued

Insurance Corporation

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

RRG (“IIC”) through October 25, 2013.

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 appealed to the Fifth Circuit Court of Appeals, who affirmed that the Texas Patron Fee is unconstitutional as applied.

The State of Texas next sought review from the Supreme Court, but the high court declined to take the case.

That lawsuit is now back before the trial court for post-trial proceedings but is final for purposes of determining the Texas Patron Fee is unconstitutional as applied to clubs featuring dancers using latex cover.

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;

however, there are no assurances of

any recovery from these claims.

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

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

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

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

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

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

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

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

As previously stated,

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

any claims arising from actions after that date.

As of September 30, 2021, we had 2 remaining unresolved claims out of

the original 71 claims.

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

Class and Derivative Actions

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

and certain of

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

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

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

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

The complaints

seek unspecified damages, costs, and attorneys’ fees.

These lawsuits are Hoffman v.

RCI Hospitality Holdings, Inc., et al.

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

RCI Hospitality Holdings, Inc., et al.

(filed May 28, 2019, naming

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

and Grossman v.

RCI Hospitality Holdings,

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

The plaintiffs in all three cases moved to

consolidate the purported class actions.

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

was entered by the Court.

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

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

As of September 30, 2022, we had 1 remaining unresolved claim out of the original 71 claims.

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 and directors 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 cases were consolidated as In re RCI Hospitality Holdings, Inc., No.

4:19-cv-01841.

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

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

In addition to naming the Company, Eric Langan,

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

as defendants.

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

a claim upon which relief can be granted.

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

14, 2021, defendants filed their answer and affirmative defenses, denying liability as to all claims.

On June 14, 2021, a scheduling

order was entered in the case, setting January 9, 2023 as the trial date.

The Company intends to continue to vigorously defend against

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 28, 2022, the Court preliminarily approved the settlement and form of class

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

On August 12, 2022, the Court issued an order finally approving the settlement, which was funded by insurance carrier.

No appeal was filed and hence the litigation has concluded.

On January 21, 2022, Shiva Stein and Kevin McCarty filed a shareholder derivative action in the Southern District of Texas, Houston Division against former director Nourdean Anakar, Yura Barabash, former director Steven L.

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

Marshall, Elaine J.

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

as nominal defendant.

The action, styled Stein v.

Anakar, et al., No.

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.

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

Langan, Phillip Marshall, Nourdean Anakar (who is no longer a director), Yura Barabash, Luke Lirot, Travis Reese, former

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

The action, styled Cecere v.

Langan, et al.

4:19-cv-03080, alleged that the individual officers and directors made or caused the Company to make a series of materially false and/or

misleading statements and omissions regarding the Company’s business, operations, prospects, and legal compliance and engaged in

or caused the Company to engage in, inter alia, related party transactions, questionable uses of corporate assets, and failure to maintain

internal controls.

The action asserted claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement,

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

The complaint sought

injunctive relief, damages, restitution, costs, and attorneys’ fees.

On June 1, 2021, the Company and the individual defendants

moved to dismiss the lawsuit based on the plaintiff’s failure to make a pre-suit demand prior to filing of the derivative action,

as is required under Texas law.

In response, the plaintiff filed a motion to voluntarily dismiss his claims.

On June 21, 2021, the court

granted that motion and entered an order dismissing this lawsuit in its entirety, without prejudice.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters – continued

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

several of its subsidiaries.

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

consent by clubs affiliated with the Company.

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

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

The Company contends that there

is insurance coverage under an applicable insurance policy.

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

At this time, this disagreement remains unresolved.

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

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

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

was under renovation in 2015.

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

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

and failed to provide Plaintiff with proposed plans before beginning construction.

Plaintiff asserted RCI Hospitality Holdings, Inc.

was also liable as the guarantor of the lease.

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

in Houston, Texas.

Both RCI Hospitality Holdings, Inc.

and BMB Dining Services (Willowbrook), Inc.

denied liability and asserted that

Plaintiff failed to mitigate its claimed damages.

Further, BMB Dining Services (Willowbrook), Inc.

asserted that Plaintiff affirmatively

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

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

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

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

million, including damages, costs, attorney fees,

and interest.

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

The appeal process required that funds

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

which was deposited in April 2019 and is included in other current assets in the consolidated balance sheet as of September 30, 2020.

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

A motion to reconsider this decision was

This matter was subsequently settled for $ 1.0

million in exchange for a full and complete release

of all claims.

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

with interest, and a wire transfer of the remaining

This settlement will fully resolve this matter.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Matters – continued

June 23, 2014, Mark H.

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

(Phoenix) Inc.

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.

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 and the derivative plaintiffs have responded.

The Motions now have been fully briefed for the Court's 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 included alleged violations of the Federal Lanham Act, the New York Civil Rights Act, and other statutory and common law theories.

The Company contended that there was insurance coverage under an applicable insurance policy.

The insurer raised several issues regarding coverage under the policy.

This matter was settled at mediation in August 2022.

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

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

as independent contractors, not employees.

While we take steps to ensure that our adult entertainers are deemed independent contractors,

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

Claims are brought under both federal

and where applicable, state law.

Based on the industry standard, the manner in which the independent contractor entertainers are treated

at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these

lawsuits are without merit.

As set forth in the risk factors as disclosed in this report, the adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees.

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

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

Based on the industry standard, the manner in which the independent contractor entertainers are treated at the clubs, and the entertainer license agreements governing the entertainer’s work at the clubs, the Company believes that these lawsuits are without merit.

Lawsuits are handled by attorneys with an expertise in the relevant law and are defended vigorously.

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

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

We assess the probability that we could incur

liability in connection with certain of these lawsuits.

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

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

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

to determine a range of reasonably possible liability.

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

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

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

As of September

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

Company acquired 128,040 shares of its own common stock at a cost of $ 2.9 million.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Commitments and Contingencies - continued

Settlement of lawsuits for the years ended September 30, 2022, 2021, and 2020 total $ 1.4 million, $ 1.3 million, and $ 174,000 , respectively.

As of September 30, 2022 and 2021, the Company has accrued $ 246,000 and $ 378,000 in accrued liabilities, respectively, related to settlement of lawsuits

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

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

These shares were subsequently retired.

Company paid quarterly dividends of $ 0.03 per share, except for the fourth quarter when $ 0.04 per share was paid, for an aggregate

amount of $ 1.3 million.

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

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

• The Company paid quarterly dividends of $ 0.03 per share, except for the second and fourth quarters when $ 0.04 per share was paid, for an aggregate amount of $ 1.3 million.

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

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

These shares were subsequently retired.

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

an aggregate amount of $ 1.3 million.

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

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

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

During the year ended September 30, 2022, the following common stock transactions occurred:

• The Company acquired 268,185 shares of its own common stock at a cost of $ 15.1 million.

These shares were subsequently retired.

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

On October 18, 2021, we partially paid for an

acquisition using 500,000 shares of our common stock.

• The Company paid quarterly dividends of $ 0.05 per share, except for the first quarter when $ 0.04 per share was paid, for an aggregate amount of $ 1.8 million.

• On October 18, 2021, we partially paid for an acquisition using 500,000 shares of our common stock.

Stock-based Compensation

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 was approved by the shareholders during the annual stockholders' meeting on August 23, 2022.

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.

Stock-based compensation expense for fiscal 2022, which is included in corporate segment selling, general and administrative expenses, amounted to $ 2.4 million with related tax benefit amounting to $ 569,000 .

No stock-based compensation was recognized during fiscal 2021 and 2020.

As of September 30, 2022, we had unrecognized compensation cost amounting to $ 7.1 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 4.4 years.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Stock-based Compensation - continued

The February 9, 2022 stock options vest over four years with the first 20 % having vested on the approval of the 2022 Plan at the 2022 annual stockholders' meeting on August 23, 2022, and 20% vesting on February 9 of each year thereafter, provided however that the options will be subject to earlier vesting under certain events set forth in the Plan, including without limitation a change in control.

All of the options will expire, if not vested, at the end of five years .

The weighted average grant-date fair value of the stock options was $ 31.37 .

No stock options were exercised in fiscal 2022.

The following table summarizes information about stock option activity under the 2022 Plan:

Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands)

Outstanding at September 30, 2021 —

Granted 300,000 $ 100.00

Outstanding at September 30, 2022 300,000 $ 100.00 4.4 $ —

Exercisable at September 30, 2022 60,000 $ 100.00 4.4 $ —

Employee Retirement Plan

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

The Plan allows

corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3 %

of the employee’s salary.

Expenses related to matching contributions to the Plan approximated $ 209,000 , $ 171,000 , and $ 164,000

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

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

The Plan allows corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of up to 3 % of the employee’s salary.

Expenses related to matching contributions to the Plan approximated $ 258,000 , $ 209,000 , and $ 171,000 for the years ended September 30, 2022, 2021, and 2020, respectively.

Insurance Recoveries

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

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

During the fourth quarter of 2020, one club in Sulphur,

Louisiana incurred damage from a hurricane.

We wrote off the net carrying value of the assets destroyed in the said events and recorded

corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the insurance claims

have been resolved.

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

Schedule of Business Insurance Recoveries

the Year Ended September 30,

One of our clubs in Washington Park, Illinois was temporarily closed due to a fire during the third quarter of 2019, and another club in Fort Worth, Texas sustained weather-related damage toward the end of fiscal 2019.

Both of these casualties received insurance recoveries in subsequent fiscal years.

During the fourth quarter of 2021, one club in Sulphur, Louisiana incurred damage from a hurricane.

We wrote off the net carrying value of the assets destroyed in the said events and recorded corresponding recovery of losses or gains in as much as the insurers have paid us or where contingencies relating to the insurance claims have been resolved.

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

Included in 2022 2021 2020

Consolidated balance sheets (period end)

Insurance receivable

Account receivable, net

Insurance receivable Account receivable, net $ — $ 186 $ 191

Consolidated statements of operations – loss (gain)

Business interruption

Other charges, net

Business interruption Other charges, net $ — $ — $ ( 176 )

Property Other charges, net $ ( 463 ) $ ( 1,337 ) $ 596

Consolidated statements of cash flows

Proceeds from business interruption insurance claims

Operating activity

Proceeds from property insurance claims

Investing activity

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

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Proceeds from business interruption insurance claims Operating activity $ — $ 106 $ 384

Proceeds from property insurance claims Investing activity $ 648 $ 1,152 $ 945

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Insurance Recoveries – continued

The net property insurance gain/loss amount in fiscal 2022, 2021, and 2020 was net of assets written off and expenses amounting to $ 0 , $ 88,000 , and $ 728,000 , respectively.

Acquisitions and Dispositions

November 1, 2018, the Company acquired the stock of a club in Chicago for $ 10.5 million with $ 6.0 million cash paid at closing and the

$ 4.5 million in a 6-year seller-financed note with interest at 7 % .

The Company paid approximately $ 37,000 in acquisition-related costs

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

In fiscal 2019, the club generated revenue of approximately $ 5.0 million since acquisition date.

In relation to this acquisition, on

September 25, 2018, the Company borrowed $ 5.0 million through a credit facility with a bank lender.

The loan has a 7 % fixed interest

rate with a maturity date in May 2019 .

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

Goodwill and SOB license for the Chicago acquisition

are not amortized but are tested at least annually for impairment.

Goodwill recognized for this transaction is not deductible for tax

Noncompete is amortized on a straight-line basis over five years from acquisition date.

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

Schedule of Allocation of Fair Values Assigned to Assets at Acquisition

Land and building

Furniture and equipment

Deferred tax liability

November 5, 2018, the Company acquired the assets of a club in Pittsburgh for $ 15.0 million, with $ 7.5 million cash paid at closing and

two seller notes payable.

The first note is a 2-year 7 % note for $ 2.0 million, and the second is a 10-year 8 % note for $ 5.5 million.

The Company paid acquisition-related costs for this transaction of approximately $ 134,000 , which is included in selling, general and

administrative expenses in our consolidated statement of operations.

The club generated revenue of approximately $ 4.6 million since acquisition

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

Goodwill recognized for

this transaction is deductible for tax purposes.

Noncompete is amortized on a straight-line basis over five years from acquisition date.

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

Schedule of Allocation of Fair Values Assigned to Assets at Acquisition

Land and building

Furniture and equipment

October 2018, the Company sold its nightclub in Philadelphia for a total sales price of $ 1.0 million, payable $ 375,000 in cash at closing

and a $ 625,000 9 % note payable to us over a 10-year period.

The note is payable interest-only for twelve months at the conclusion of

which time a balloon payment of $ 250,000 is due, and then the remainder of the principal and interest is payable in 108 equal installments

of $ 5,078 per month until October 2028.

The buyer will lease the property from the Company’s real estate subsidiary under the following

$ 36,000 per month lease payments for ten years ;

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

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

recorded a gain on the sale transaction of approximately $ 879,000 , which is included in other charges (gains), net in our consolidated

statement of operations during the quarter ended December 31, 2018.

In July 2019, the Company and the buyer agreed to modify the promissory

note to include in principal (i) rental payments from April to September 2019, (ii) accrued property taxes, (iii) accrued occupancy taxes,

and (iv) two months of outstanding interest payments for a total principal balance of $ 879,085 .

The note, as modified, still bears interest

at 9 % and is payable in 108 equal monthly installments of $ 11,905 , including principal and interest, until July 2028.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Acquisitions and Dispositions - continued

November 2018, the Company sold two assets held for sale in Houston and San Antonio, Texas for a combined sales price of $ 868,000 .

gain on the two transactions amounted to $ 273,000 after closing costs.

The Company used the proceeds to pay down $ 945,000 in loans related

to the properties.

January 24, 2019, the Company sold a held-for-sale property in Dallas, Texas for a total sales price of $ 1.4 million, payable $ 163,000

in cash at closing, net of closing costs and property taxes of $ 87,000 , and a $ 1.15 million 8 % note payable over a three-year period.

The note is payable $ 9,619 per month, principal and interest, for the first 35 months with the remaining balance payable at maturity.

The buyer has the option to extend the maturity date by one year at least 60 days prior to maturity, as long as the buyer is not in default.

The Company recorded a gain on the sale transaction of approximately $ 383,000 .

March 21, 2019, the Company sold a held-for-sale property adjacent to our Bombshells 249 location for a total sales price of $ 1.4 million

Net gain on the transaction amounted to approximately $ 628,000 after closing costs.

The Company used $ 980,000 of the proceeds

to pay off a loan related to the property.

April 2019, the Company sold another held-for-sale property adjacent to our Bombshells I-10 location for a total sales price of $ 1.1

million in cash.

Net gain on the transaction amounted to approximately $ 331,000 after closing costs.

The Company used $ 942,000 of the

proceeds to pay off a loan related to the property.

June 2019, the Company sold a property located in Lubbock, Texas for $ 350,000 in cash.

Net loss on the transaction amounted to $ 376,000

after closing costs.

The Company used $ 331,000 of the proceeds from the sale to pay down debt.

June 2019, the Company sold an aircraft for $ 690,000 in cash.

Net loss on the transaction amounted to $ 9,000 after closing costs.

Company used $ 666,000 of the proceeds from the sale to pay down related debt.

July 23, 2019, the Company sold an aircraft for a total sales price of $ 382,000 for net gain of $ 16,000 .

Proceeds were used to pay off

the remaining note payable balance of approximately $ 217,000 .

September 30, 2019, the Company sold its Bombshells Webster location for a total sales price of $ 85,000 in cash.

Net loss on the transaction

amounted to approximately $ 156,000 .

April 1, 2020, the Company sold a corporate housing property to an employee for $ 375,000 in cash with an approximate gain of $ 20,000 .

May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $ 1.5 million in cash.

Net gain on the

transaction was $ 583,000 after closing costs.

2020 Dispositions

On April 1, 2020, the Company sold a corporate housing property to an employee for $ 375,000 in cash with an approximate gain of $ 20,000 .

On May 22, 2020, the Company sold land adjacent to one of our Bombshells locations in Houston for $ 1.5 million in cash.

Net gain on the transaction was $ 583,000 after closing costs.

The net proceeds of $ 1.4 million were used to pay down related debt.

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

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

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

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

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

2021 Acquisitions

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

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

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

The Company paid approximately

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

interest rate of 3.99 % per annum.

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

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

The Company plans to build

a warehouse on that land in the coming months.

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

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

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

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

The Company paid approximately $ 754,000 in cash including closing costs and financed $ 2.175 million with a bank lender for a 20-year promissory note with an initial interest rate of 3.99 % per annum.

On March 10, 2021, the Company acquired approximately 57,000 -square foot of land across the street from our corporate office for $ 475,000 in cash.

The Company plans to build a warehouse on that land.

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

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

2021 Dispositions

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

The property had a carrying value of $ 2.3 million.

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

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

after closing costs.

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

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

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

2022 Acquisitions

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 $ 87.9 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).

We used the Finnerty Model to estimate the discount on stock marketability.

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,

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

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

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

a total consideration preliminary fair value of $ 88.4

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

The acquisition

gives the Company presence in six additional states.

We paid for the acquisition with $ 36.8 million

in cash, $ 21.2 million

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

of our common stock.

We have not completed

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

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

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

expenses in our consolidated statement of operations.

The following table presents the unaudited pro

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

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

Schedule of Unaudited Pro Forma Combined Results of Operations

For the Fiscal

September 30, 2021

and an intellectual property purchase agreement for substantially all of the intellectual property used in the adult entertainment establishment business 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 9), and 500,000 shares of our common stock.

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

Cash $ 36,800

Notes payable 21,200

Common stock 29,933

Total consideration fair value $ 87,933

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 adjustments, the amount of goodwill is estimated at $ 15.4 million.

Goodwill represents the excess of the acquisition price fair value over the fair values of the tangible and identifiable intangible 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 $ 7.1 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 19,273

Licenses 47,390

Tradenames 6,934

Leases acquired in-place 261

Deferred tax liability ( 1,741 )

Total net assets acquired 72,503

Goodwill 15,430

Acquisition price fair value $ 87,933

Licenses and tradenames, except for those associated with certain leased locations, will not be amortized but will be tested at least annually for impairment.

The Company entered into leases with third parties for certain acquired clubs where the real estate was not part of the acquisition.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 414,000 , of which $ 173,000 was recognized in fiscal 2021 and $ 241,000 was recognized in fiscal 2022, and in both periods included in selling, general and administrative expenses in our consolidated statements of operations.

We recorded $ 1.8 million in measurement period adjustments related to amortization of definite-lived intangibles and debt discount during fiscal 2022.

From the date of acquisition until September 30, 2022, the eleven acquired clubs contributed revenues of $ 35.4 million and income from operations of $ 12.5 million, which are included in our consolidated statement of operations for the year ended September 30, 2022.

The following table presents the unaudited pro forma combined results of operations of the Company

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

and the eleven acquired clubs and related assets as though the acquisition occurred at the beginning of fiscal 2021 (in thousands, except per share amount and number of shares):

Pro forma revenues $ 269,347 $ 217,996

2 unchanged sentences

Pro forma weighted average number of common shares outstanding - basic and diluted 9,383,445 9,504,744

The above unaudited pro forma financial information

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

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

The unaudited pro forma financial information reflects material,

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

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

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

amortization and related tax effects.

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

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

and 4 seller-financed notes in the acquisition.

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

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

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

million, by which $ 2.5

million was paid in cash at closing and $ 1.0

million through a seller-financed 7 -year

promissory note with an interest rate of 4.0 %

The note is payable $ 13,669

per month, including principal and interest.

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

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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 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, of 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 $ 2.1 million to real estate, $ 200,000 to tangible assets, and $ 1.2 million to goodwill, which is deductible for tax purposes.

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

The Company incurred approximately $ 21,000 of acquisition-related costs for this acquisition, of which $ 11,000 was incurred in fiscal 2021 and $ 10,000 was incurred in fiscal 2022, both of which were included in selling, general and administrative expenses in our consolidated statements of operations.

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 1.6 million and income from operations of $ 276,000 , which are included in our consolidated statement of operations for the year ended September 30, 2022.

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 assets and corresponding operating lease liability related to the discontinued lease, both of which amounted to $ 5.9 million.

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

The Company secured a $ 2.6 million loan in relation to the purchase.

On March 1, 2022, the Company acquired real estate in Lubbock, Texas for $ 400,000 to move one of our existing clubs due to eminent domain on the current location.

See 2023 Disposition below.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

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.

Based on recent renewals of licenses of similar businesses in the region where the club operates, the Company believes that the probability of any changes to the regulatory environment is low as of the reporting date and would not materially impact the fair value of the debt.

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 and the fair value of the contingent debt consideration are provisional pending receipt of the final valuations for those items.

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

The recognized goodwill will not be deductible for tax purposes.

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of May 2, 2022:

Current assets $ 172

Property and equipment 5,336

Licenses 4,900

Tradenames 1,460

Deferred tax liability ( 2,627 )

Total net assets acquired 9,241

Goodwill 6,759

Acquisition price fair value $ 16,000

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

In connection with the acquisition, we incurred acquisition-related expenses of approximately $ 28,000 , which is included in selling, general and administrative expenses in our consolidated statement of operations for the year ended September 30, 2022.

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 2.8 million and income from operations of $ 1.4 million, which are included in our consolidated statement of operations for the year ended September 30, 2022.

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 23, 2022, the Company acquired real estate in Rowlett, Texas for $ 3.3 million for a future Bombshells location.

The Company secured a $ 2.2 million loan in relation to the purchase.

On July 21, 2022, the Company acquired a club in Odessa, Texas for a total acquisition price of $ 1.8 million, of which $ 1.0 million was for the real estate and $ 800,000 for the adult entertainment business.

The Company paid $ 1.0 million in cash at closing for the real estate and executed an $ 800,000 6 % seller-financed promissory note for the business.

The promissory note matures in seven years and is payable in 84 equal monthly installments of $ 11,687 of principal and interest.

The $ 1.8 million acquisition price is preliminarily allocated $ 11,000 to current assets, $ 1.1 million to property and equipment, and $ 684,000 to licenses.

From the date of acquisition until September 30, 2022, the acquired club contributed very minimal revenues and income from operations.

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.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

On July 27, 2022, the Company completed the acquisition of a club in Hallandale Beach, Florida for a total acquisition price of $ 25.0 million.

The acquisition includes (1) $ 20.0 million for the adult entertainment business covered in a stock purchase agreement paid $ 10.0 million in cash at closing and $ 10.0 million under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 111,020 in principal and interest, and (2) $ 5.0 million for the real estate property covered in an asset purchase agreement payable under a 6 % ten-year promissory note payable in 120 equal monthly payments of $ 55,510 in principal and interest.

In the stock purchase agreement, the Company acquired 100 % of the capital stock of the company which owned the adult entertainment business.

The total preliminary fair value of the consideration transferred is $ 23.4 million, which includes a discount on the $ 10.0 million promissory note to reflect market participant yield expectations.

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.

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

The recognized goodwill will not be deductible for tax purposes.

The following is our preliminary allocation of the fair value of the acquisition price (in thousands) as of July 27, 2022:

Current assets $ 71

Property and equipment 4,921

Licenses 16,810

Deferred tax liability ( 3,979 )

Total net assets acquired 17,823

Goodwill 5,577

Acquisition price fair value $ 23,400

From the date of acquisition until September 30, 2022, the acquired club contributed revenues of $ 2.0 million and income from operations of $ 802,000 , which are included in our consolidated statement of operations for the year ended September 30, 2022.

In connection with this acquisition, we incurred acquisition-related expenses of approximately $ 161,000 , which was included in selling, general and administrative expenses in our consolidated statements of operations of fiscal 2022.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 August 18, 2022, the Company purchased real estate in Hunstville, Alabama amounting to $ 2.1 million for a future Bombshells location.

The Company paid $ 525,000 in cash at closing and entered into a bank financing for the $ 1.6 million remainder (see Note 9).

On September 12, 2022, the Company entered into a joint venture with a private investment company to acquire real estate in Austin, Texas amounting to $ 2.2 million for a future Bombshells location.

The Company has a 51 % interest in the joint venture and paid its $ 1.1 million share for the real estate purchase while the investment of the private investment company was recorded as noncontrolling interest in our consolidated balance sheet.

2022 Dispositions

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

On July 12, 2022, the Company received $ 6.0 million from the Philadelphia Regional Port Authority for one of the Company's rental properties, with a carrying value of $ 4.9 million, due to eminent domain.

The Company paid the current

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Acquisitions and Dispositions – continued

lessee a termination fee of $ 250,000 , which is included in other charges/gains, net in our consolidated statement of operations.

The Company used $ 2.1 million of the proceeds to pay down a loan related to the property.

See also Note 7 for dispositions of real estate properties that had been classified as held-for-sale.

2023 Acquisitions

On October 10, 2022, the Company purchased real estate in Lubbock, Texas amounting to $ 3.4 million for a future Bombshells location.

The Company paid $ 1.1 million in cash at closing and entered into a bank financing for the $ 2.3 million remainder (see Note 9).

The site includes extra land that will be listed for sale once the Bombshells unit is completed.

On October 11, 2022, the Company purchased a hangar in Arcola, Texas amounting to $ 754,000 in cash.

On October 26, 2022, the Company completed the acquisition of a club in Dickinson, Texas for a total acquisition price of $ 9.0 million.

The acquisition includes (1) $ 2.5 million for the adult entertainment business covered in a stock purchase agreement paid fully in cash at closing and (2) $ 6.5 million for the real estate property covered in a real estate purchase agreement paid $ 1.5 million in cash at closing and $ 5.0 million under a 6 % 15-year promissory note (see Note 9).

In the stock purchase agreement, the Company acquired 100 % of the capital stock of the company which owned the adult entertainment business.

Due to the proximity of the closing date to the filing 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 and the debt consideration, 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 November 8, 2022, the Company purchased real estate in Aurora, Colorado amounting to $ 850,000 in cash for a future Bombshells location.

On December 5, 2022, the Company purchased real estate in Central City, Colorado amounting to $ 2.4 million in cash for the development of a Rick's Cabaret Steakhouse and Casino business.

On December 12, 2022, we and certain subsidiaries entered into definitive agreements to acquire five gentlemen's clubs, five related real estate properties, associated intellectual properties, and certain automated teller machines for a total purchase price of $ 66.5 million, payable with a total of $ 25.0 million in cash, a total of $ 25.5 million in seller financing, and 200,000 restricted shares of common stock based on an $ 80 per share price, subject to lock-up, leak out restrictions.

The five clubs, which are all located in Texas, are being purchased through five different asset purchase agreements, under which a newly formed wholly-owned subsidiary of the Company will acquire from each club-owning entity all of the tangible and intangible assets and personal property used in the business of that club, except for certain excluded assets.

2023 Disposition

On November 4, 2022, the Company received $ 1.0 million from the Texas Department of Transportation for one of the Company's club properties in Lubbock, Texas due to eminent domain.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Quarterly Results of Operations (Unaudited)

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

Schedule of Quarterly Financial Information

the Three Months Ended

The following tables summarize unaudited quarterly data for fiscal 2022, 2021, and 2020 (in thousands, except share and per share data):

For the Three Months Ended

December 31, 2021 March 31,

2022 June 30,

2022 September 30, 2022

$ 61,836 $ 63,692 $ 70,714 $ 71,378

Income from operations (1)

$ 15,911 $ 17,081 $ 20,507 $ 17,960

Net income attributable to RCIHH stockholders (1)

$ 10,575 $ 10,952 $ 13,902 $ 10,612

Earnings per share (1)

2 unchanged sentences

Basic and diluted 9,407,519 9,489,085 9,389,675 9,249,864

the Three Months Ended

Income (loss) from operations (2)

Net income (loss) attributable to RCIHH stockholders (2)

Earnings (loss) per share (2)

Basic and diluted

Weighted average number of common shares outstanding

Basic and diluted

the Three Months Ended

For the Three Months Ended

December 31, 2020 March 31,

2021 June 30,

2021 September 30, 2021

$ 38,398 $ 44,059 $ 57,860 $ 54,941

Income from operations (2)

$ 6,583 $ 9,841 $ 18,507 $ 3,617

Net income attributable to RCIHH stockholders (2)

$ 9,643 $ 6,091 $ 12,302 $ 2,300

Earnings per share (2)

2 unchanged sentences

Basic and diluted 9,019,088 8,999,910 8,999,910 8,999,910

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

lockdowns and social restrictions of the COVID-19 pandemic.

Net income attributable to RCIHH stockholders and earnings per share

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

million in the first

quarter and $ 380,000

in the second quarter),

asset impairments totaling $ 13.6

million ($ 1.4

million in the second

quarter, $ 271,000

in the third quarter,

million in the

fourth quarter), and gain on insurance totaling $ 1.3

million ($ 197,000

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

million in the

fourth quarter).

Quarterly effective income tax

expense (benefit) rate was ( 4.2 )% ,

and ( 210.4 )%

from first to fourth

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

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

Income (loss)

from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included the impact of a $ 10.6

million in asset impairments ($ 8.2 million in the second quarter, $ 982,000 in the third quarter, and $ 1.4 million in the fourth quarter).

Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter was also affected by the $ 1.3 million valuation

allowance on our deferred tax assets.

Quarterly effective income tax expense (benefit) rate was 22.0 % , ( 28.9 )% , ( 20.5 )% , and 36.3 %

from first to fourth quarter, respectively.

year 2019 income from operations, net income attributable to RCIHH stockholders, and earnings per share included the impact of a

$ 6.0 million in asset impairments in the fourth quarter, a $ 2.9 million net gain on sale of businesses and assets ($ 1.2 million in

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

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Quarterly Results of Operations (Unaudited) – continued

For the Three Months Ended

December 31, 2019 March 31,

2020 June 30,

2020 September 30, 2020

Revenues $ 48,394 $ 40,426 $ 14,721 $ 28,786

Income (loss) from operations (3)

$ 9,686 $ ( 2,475 ) $ ( 4,657 ) $ 192

Net income (loss) attributable to RCIHH stockholders (3)

$ 5,634 $ ( 3,452 ) $ ( 5,474 ) $ ( 2,793 )

Earnings (loss) per share (3)

Basic and diluted $ 0.60 $ ( 0.37 ) $ ( 0.60 ) $ ( 0.31 )

Weighted average number of common shares outstanding

Basic and diluted 9,321,933 9,224,960 9,125,281 9,124,214

(1) Fiscal year 2022 results of operations were significantly higher than prior year due to the fifteen acquired clubs and one new Bombshells.

Net income attributable to RCIHH stockholders and earnings per share were impacted by $ 1.9 million in asset impairments ($ 1.7 million in the third quarter and $ 166,000 in the fourth quarter) and $ 2.4 million gain on sale or disposition of businesses and assets ($ 342,000 in the first quarter, $ 58,000 in the second quarter, $ 266,000 in the third quarter, and $ 1.7 million in the fourth quarter).

Quarterly effective income tax expense rate was 21.7 %, 23.4 %, 21.3 %, and 27.1 % from first to fourth quarter, respectively, including the impact of the $ 343,000 deferred tax asset valuation allowance in the fourth quarter.

(2) Fiscal year 2021 revenues were significantly higher compared to prior year, except for the first quarter, which was still affected by the lockdowns and social restrictions of the COVID-19 pandemic.

Net income attributable to RCIHH stockholders and earnings per share were heavily impacted by the gain on debt extinguishment ($ 4.9 million in the first quarter and $ 380,000 in the second quarter), asset impairments totaling $ 13.6 million ($ 1.4 million in the second quarter, $ 271,000 in the third quarter, and $ 11.9 million in the fourth quarter), and gain on insurance totaling $ 1.3 million ($ 197,000 in the first quarter, $ 12,000 in the second quarter, and $ 1.0 million in the fourth quarter).

Quarterly effective income tax expense (benefit) rate was ( 4.2 )%, 24.3 %, 24.4 %, and ( 210.4 )% from first to fourth quarter, respectively, including the impact of the release of a $ 462,000 deferred tax asset valuation allowance in the fourth quarter.

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

Income (loss) from operations, net income (loss) attributable to RCIHH stockholders, and earnings (loss) per share included the impact of a $ 10.6 million in asset impairments ($ 8.2 million in the second quarter, $ 982,000 in the third quarter, and $ 1.4 million in the fourth quarter).

Net loss attributable to RCIHH stockholders and loss per share during the fourth quarter was also affected by the $ 1.3 million valuation allowance on our deferred tax assets.

Quarterly effective income tax expense (benefit) rate was 22.0 %, ( 28.9 )%, ( 20.5 )%, and 36.3 % from first to fourth quarter, respectively.

nightclub operations are normally affected by seasonal factors.

Historically, we have experienced reduced revenues from April through

September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal

first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were

significantly reduced.

Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from

year to year.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

Our nightclub operations are normally affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September (our fiscal third and fourth quarters) with the strongest operating results occurring during October through March (our fiscal first and second quarters), but in fiscal 2020, due to the COVID-19 pandemic, revenues during the second through the fourth quarter were significantly reduced.

Our revenues in certain markets are also affected by sporting events that cause unusual changes in sales from year to year.

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 reportable segments (in thousands):

Schedule of Segment Reporting Information

Segment assets are those assets controlled by each reportable segment.

The Other category below includes our media and energy drink divisions that are not significant to the consolidated financial statements.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Segment Information – continued

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

2022 2021 2020

Revenues (from external customers)

Nightclubs $ 206,251 $ 137,348 $ 88,373

Bombshells 59,925 56,621 43,215

Other 1,444 1,289 739

$ 267,620 $ 195,258 $ 132,327

Income (loss) from operations

Nightclubs $ 82,798 $ 43,815 $ 13,056

Bombshells 11,504 13,264 9,237

Other 57 35 ( 614 )

General corporate ( 22,900 ) ( 18,566 ) ( 18,933 )

$ 71,459 $ 38,548 $ 2,746

Capital expenditures

Nightclubs $ 17,477 $ 6,890 $ 3,477

Bombshells 3,586 5,895 2,114

Other 841 157 —

General corporate 2,099 569 145

$ 24,003 $ 13,511 $ 5,736

Depreciation and amortization

Nightclubs $ 9,604 $ 5,494 $ 5,799

Bombshells 1,783 1,824 1,785

Other 85 87 415

General corporate 919 833 837

$ 12,391 $ 8,238 $ 8,836

September 30, 2022 September 30, 2021

Nightclubs $ 428,104 $ 280,561

Bombshells 62,021 52,073

Other 2,635 1,573

General corporate 37,978 30,412

from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $ 11.5 million, $ 11.1 million,

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

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

$ 530,738 $ 364,619

Excluded from revenues in the table above are intercompany rental revenues of the Nightclubs segment amounting to $ 14.0 million, $ 11.5 million, and $ 11.1 million for 2022, 2021, and 2020, respectively, and intercompany sales of Robust Energy Drink of Other segment amounting to $ 261,000 , $ 141,000 , and $ 70,000 for the same respective years.

These intercompany revenue amounts are eliminated upon consolidation.

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

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

and travel costs.

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

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Segment Information – continued

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.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

in the $ 2.35 million

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

(Ed Anakar, an employee of the Company and brother

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

(from a brother of Company CFO, Bradley Chhay)

as part of a larger group of private lenders.

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

November 1, 2018 transaction.

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

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

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

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

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

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

Nottingham Creations is

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

Amounts billed to us for goods and services provided by Nottingham Creations

and Sherwood Forest were approximately $ 118,000 in fiscal 2021, $ 59,000 in fiscal 2020, and $ 134,000 in fiscal 2019.

As of September

30, 2021 and 2020, we owed Nottingham Creations and Sherwood Forest $ 12,205 and $ 0 , respectively, in unpaid billings.

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

services to the Company, as well as directly to the Company during fiscal 2021, 2020, and 2019.

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

interest in TW Mechanical.

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

and $ 452,000

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

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

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

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

and $ 5,700 ,

respectively, in unpaid direct billings.

840 (Related to Fiscal 2019)

Company leases certain facilities and equipment under operating leases.

Under ASC 840, lease expense for the Company’s operating

leases, which generally have escalating rentals over the term of the lease, is recorded using the straight-line method over the initial

lease term whereby an equal amount of lease expense is attributed to each period during the term of the lease, regardless of when actual

payments are made.

Generally, this results in lease expense in excess of cash payments during the early years of a lease and lease expense

less than cash payments in the later years.

The difference between lease expense recognized and actual lease payments is accumulated

and included in other long-term liabilities in the consolidated balance sheets.

HOSPITALITY HOLDINGS, INC.

to Consolidated Financial Statements

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

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

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

This lease terminated on December 31, 2019 and was scoped

out upon adoption of ASC 842 on October 1, 2019.

in the future minimum lease obligations are billboard and outdoor sign leases.

These leases were recorded as advertising and marketing

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

Under ASC 840, we

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

842 (Related to Fiscal 2021 and 2020)

Company adopted ASC 842 as of October 1, 2019.

The Company’s adoption of ASC 842 included renewal or termination options for varying

periods which we deemed reasonably certain to exercise.

This determination is based on our consideration of certain economic, strategic

and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance

and tax payments.

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 September 30, 2022 and 2021 was $ 115.1 million and $ 99.7 million, respectively.

Included in the $ 17.0 million borrowing on October 12, 2021 (see Note 9) are notes borrowed from related parties—one note for $ 500,000 (Ed Anakar, see above) and another note for $ 150,000 (from a brother of Company CFO, Bradley Chhay, see above) in which the terms of the notes are the same as the rest of the lender group.

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 approximately $ 207,000 in fiscal 2022, $ 118,000 in fiscal 2021, and $ 59,000 in fiscal 2020.

As of September 30, 2022 and 2021, we owed Nottingham Creations and Sherwood Forest $ 92,808 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, 2021, and 2020.

A son-in-law of Eric Langan owns a 50 % interest in TW Mechanical.

Amounts billed by TW Mechanical to the third-party general contractor were approximately $ 3,809 , $ 0 , and $ 19,000 for the fiscal years 2022, 2021, and 2020, respectively.

Amounts billed directly to the Company were approximately $ 133,000 , $ 425,000 , and $ 62,000 for the fiscal years 2022, 2021, and 2020, respectively.

As of September 30, 2022 and 2021, the Company owed TW Mechanical approximately $ 9,338 and $ 7,500 , respectively, in unpaid direct billings.

The Company leases certain facilities and equipment under operating leases per ASC 842, which the Company adopted on October 1, 2019.

The Company’s adoption of ASC 842 included renewal or termination options for varying periods which we deemed reasonably certain to exercise.

This determination is based on our consideration of certain economic, strategic and other factors that we evaluate at lease commencement date and reevaluate throughout the lease term.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments and additional lease payments contingent on sales.

The variable portion of lease payments is not included in our right-of-use assets or lease liabilities.

Rather, variable

payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included

in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.

have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases.

leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the

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

not included within our operating leases.

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

Schedule of Future Maturities of Lease Liabilities

Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling, general and administrative expenses in our consolidated statement of operations.

We have elected to apply the short-term lease exception for all underlying asset classes, which mainly includes equipment leases.

That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term.

We do not include significant restrictions or covenants in our lease agreements, and residual value guarantees are generally not included within our operating leases.

Included in lease expense in our consolidated statements of operations (see Note 5) were lease payments for a house that the Company’s CEO rented to the Company for corporate housing for its out-of-town Bombshells management and trainers, of which lease expense totaled $ 19,500 for the year ended September 30, 2020.

This lease terminated on December 31, 2019 and was scoped out upon adoption of ASC 842 on October 1, 2019.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

Leases – continued

Future maturities of operating lease liabilities as of September 30, 2022 are as follows (in thousands):

Portion Interest

Portion Total

October 2022 - September 2023 $ 2,795 $ 2,100 $ 4,895

3 unchanged sentences

October 2026 - September 2027 3,522 1,373 4,895

lease expense under ASC 842 was included in selling, general and administrative expenses in our consolidated statement of operations,

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

Schedule of Lease Expense

Thereafter 22,696 5,246 27,942

$ 38,796 $ 13,993 $ 52,789

Total lease expense under ASC 842 was included in selling, general and administrative expenses in our consolidated statement of operations, except for sublease income which was included in other revenue, for the years ended September 30, 2022, 2021, and 2020 as follows (in thousands):

2022 2021 2020

Operating lease expense – fixed payments $ 4,738 $ 3,325 $ 3,244

1 unchanged sentence

Short-term equipment and other lease expense (includes $ 258 , $ 298 and $ 315 recorded in advertising and marketing for fiscal 2022, 2021 and 2020, respectively, and $ 435 , $ 397 and $ 372 recorded in repairs and maintenance, respectively;

1,264 955 1,122

Sublease income ( 4 ) ( 6 ) ( 9 )

2 unchanged sentences

Operating cash outflows from operating leases $ 7,200 $ 4,522 $ 4,562

Weighted average remaining lease term

Weighted average remaining lease term 11 years 12 years 13 years

Weighted average discount rate 5.6 % 6.0 % 6.1 %

relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for

those rent concessions as deferral of payments as if the lease is unchanged.

Any reduction in total lease expense during the period caused

by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

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

and 2019, respectively.

HOSPITALITY HOLDINGS, INC.

of Valuation and Qualifying Accounts

in Thousands)

In relation to certain rent concessions that we received from certain of our lessors in view of the COVID-19 pandemic, we accounted for those rent concessions as deferral of payments as if the lease is unchanged.

Any reduction in total lease expense during the period caused by either an extension of the lease term or a forgiveness of certain lease payments is accounted for as variable lease payment adjustments.

We recorded impairment charges of operating lease right-of-use assets amounting to $ 0 , $ 0 , and $ 104,000 during fiscal years 2022, 2021, and 2020, respectively.

RCI HOSPITALITY HOLDINGS, INC.

Schedule of Valuation and Qualifying Accounts

at beginning of year

to costs and expenses (1)

(Amounts in Thousands)

Balance at beginning of year Charged to costs and expenses (1)

Deductions (2)

at end of year

Balance at end of year

Allowance for doubtful accounts receivable

Fiscal 2020 $ 101 $ 347 $ ( 187 ) $ 261

Fiscal 2021 $ 261 $ 215 $ ( 94 ) $ 382

Fiscal 2022 $ 382 $ 191 $ ( 543 ) $ 30

Allowance for doubtful notes receivable

Fiscal 2020 $ — $ 602 $ ( 420 ) $ 182

Fiscal 2021 $ 182 $ ( 80 ) $ — $ 102

Fiscal 2022 $ 102 $ 753 $ ( 855 ) $ —

Deferred tax asset valuation allowance (3)

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

off against gross receivable and allowance.

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

Fiscal 2020 $ — $ 1,273 $ — $ 1,273

Fiscal 2021 $ 1,273 $ — $ ( 632 ) $ 641

Fiscal 2022 $ 641 $ 343 $ — $ 984

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

(2) Written off against gross receivable and allowance.

(3) Included in deferred tax liability, net in the consolidated balance sheets.

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

have been no disagreements with accountants on accounting and financial disclosure.

There have been no disagreements with accountants on accounting and financial disclosure.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data