Greetings, and welcome to RCI Hospitality Holdings First Quarter 2024 Earnings Conference Call. You can find the company's presentation on the RCI website. Go to the Investor Relations section and you'll find all the necessary links at the top of the page. Please turn with me to Slide 2 of our presentation. I'm Mark Moran, CEO of Equity Animal. I'll be the host of our call today. I'm coming to you from New York. Eric Langan, President and CEO of RCI Hospitality; and CFO, Bradley Chhay are in Houston. Please turn with me to Slide 3. If you aren't already doing so, it is easy to participate in the call on X Spaces. Log into X, formerly known as Twitter, go to @RicksCEO and select space titled $Rick RCI Hospitality Holdings, Inc. 1Q '24 Earnings Call. To ask a question, you will need to join the X Space with a mobile device. To listen only, you can join the X space on a personal computer. RCI is also making this call available for listen-only through a traditional landline and webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow. This conference call is being recorded. Please turn with me to Slide 4. I want to remind everyone of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Please turn with me to Slide 5. I also direct you to the explanation of Rick's non-GAAP financial measures. Now, I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Thank you, Mark, and thanks everyone for joining us today. If you'll please turn to Slide 6. Our first quarter revenues were in line with what most people were expecting. They totaled $73.9 million, up 5.6% compared to last year. This was primarily due to club acquisitions, which more than offset a consolidated same-store sales decline of 9.8%. The fundamental nightclub business remained solid. We believe nightclub same-store sales reflect the macroeconomic uncertainty everybody is talking about. Margins were lower than what we had been expecting, mainly on Bombshells side of the business. Bradley will go into that in more detail later. EPS was $0.77 per share with non-GAAP at $0.87. Net cash from operating activities and free cash flow held up very well. They declined only 8% and 3%, respectively. Please turn to Slide 7 for other key takeaways. We are pleased to report that during the quarter and after the quarter, we continue to make progress toward our key initiatives. We have a solid plan to lower costs, increase revenue and return our margins to their target goals. The newest development is an agreement to re-launch AdmireMe with a strategic partner already in the online and mobile adult entertainment business. During the first quarter, we also continued to buy back shares and we remain confident we have access to sufficient cash resources to implement our plans. Please turn to Slide 8 to review Nightclubs development plans. We continue to add value to our Baby Dolls and Chicas acquisition. Sales in the first quarter were up 10% from the fourth quarter and have improved every quarter since we've owned them. In addition, our margin improvement program resulted in a 130 basis point improvement on a sequential quarter basis and a 260 basis point improvement versus the acquisition performance in fiscal '23. Looking at new clubs, the replacement location in Lubbock, Texas, is nearing completion. Due to the success of the Baby Dolls brand, we are converting the Abilene location to that format, which is awaiting installation of its audio and video systems and furniture delivery. The planned Baby Dolls in West Fort Worth is simply awaiting the building permit to begin construction. Chicas Locas brand has also been successful for us and as a result, we have decided to remodel and convert our BYOB locations in Arlington, Texas, into a Chicas Locas, and we are currently awaiting the issuance of the liquor license. Regarding acquisitions, we are evaluating a sizable number of targets. The hardest part we face is coming up with fair value because owners want to be awarded for post-COVID highs during 2021 and 2022, and we typically buy on a two-year historical performance. You please turn to Slide 9. We continue to be excited about our Central City Colorado casinos, Rick's Cabaret Steakhouse & Casino and our Bombshells sports casino. In the few weeks since Christmas and New year's, there have been no new developments with our gaming license. Meanwhile, interior construction on the Rick's casino has been progressing on schedule, and we anticipate completion in June of 2024. We will then await issuance of our gaming license so that we can install, test and configure the devices and systems in order to open the casino. For the Bombshells casino, we are awaiting the building permit. We continue to anticipate both casinos to open in fiscal 2024, and that they will represent a significant free cash flow opportunity. In Colorado's most recent fiscal year, Central City slots averaged $131 adjusted gross proceeds per day and nearby Black Hawk does $307, mainly because they run 24/7 as we plan to do. Please turn to Slide 10. AdmireMe is a service we've been developing to help club entertainers monetize their content and develop stronger relationships with their customers. Based on the agreement that we've recently signed, we worked out we will retain 75% ownership, our new partner will own 25%, and the service will be re-launched later in the June quarter under a new name. This partner has an existing Internet platform with domestic and international traffic, safety controls, credit card processing, and all necessary technology we need at a far less cost than if we did it alone. This includes highly valued live video streaming. The result is that overnight we obtained access to a strong technology infrastructure with significant distribution and proven revenue collection and disbursement capabilities. This will provide club entertainers with even greater potential to make money, and RCI will become the largest publicly traded entity owning a worldwide interactive social media adult platform with streaming video, both live and pre-recorded. Our vision is to create a digital extension of our physical brands, connecting tens of thousands of contractors and workers on the front lines, the entertainers and waitresses, etc., and the customers who come through our door so that they can continue to interact or receive content. We want it to be an easy and seamless way for entertainers and waitresses to monetize their relationships 24 hours a day, seven days a week, 365 days a year. You walk into the club, the entertainers are on the platform promoting themselves, getting customers to sign up and subscribe to them and then come back and visit them in the club. Please turn to Slide 11 to review our Bombshells development program. Our newest location, Stafford, a suburb of Houston, opened in mid-November. Construction is continuing in our Raleigh location, which we plan to open in late June or July of this year, and the Lubbock location construction is well underway and we plan to open that in the fourth quarter of '24 as well. We are getting ready to begin the remodeling of downtown Denver location as soon as we receive our building permits. Since this is a simple remodel of an existing restaurant location, it should be a quick turnaround to get this site open. As for future developments, we have decided to list our Aurora, Colorado, site for sale or lease and to put our second Austin location on hold. Both moves are intended to help us better focus on other opportunities. The Huntsville franchisee is still awaiting his building permits. The bigger issue is Bombshells' performance. After we've seen the results from the quarter, we have made major structural management changes in Bombshells team, and we are also considering any and all options to improve performance that potentially includes seeking an operational partner or selling the business. Now here's Bradley to go into more details on our results.

Thanks, Eric. Please refer to Slide 12 to examine our Nightclubs segment. In the fourth quarter, revenues grew by $4.7 million compared to the previous year. This increase was mainly driven by an $8.9 million rise from acquisitions, along with a $4 million drop in same-store sales. By revenue type, sales of alcoholic beverages rose by 18.7%, food by 14.1%, and other revenues by 8.2%, while service revenues decreased by 1.6%. The varying growth rates were influenced by a higher concentration of alcohol and food sales from the newly acquired Heartbreakers, Baby Dolls, and Chicas-Locas clubs. GAAP operating income stood at $20.4 million, accounting for 33.4% of revenues, while non-GAAP operating income was $21 million, or 34.3% of revenues. Margins were impacted by a different sales mix from the newly acquired clubs, a decline in service revenues, and wage inflation. Now, please look at Slide 13 for our Bombshells segment. Fourth quarter revenues fell by $700,000 compared to last year, primarily due to a $2.7 million decrease in same-store sales, despite a $2.1 million increase from newly acquired and newly opened locations. The acquired venues include Bombshells San Antonio and Cherry Creek Food Hall with its Bombshells kitchen, and the new site is Bombshells Stafford, which started operations in mid-November. GAAP operating income showed a profit of $86,000, or 0.7% of revenues, while non-GAAP profit was $149,000, or 1.2%. Now, please turn to Slide 14. The combined operating loss from our Other and Corporate segments was $400,000 lower than last year, and on a non-GAAP basis, it was about $100,000 less. Additionally, the effective tax rate for the year was 19.9%, down from 22.8%, influenced by state taxes, permanent differences, and tax credits, including the FICA tip credit. Now please look at Slide 15. We have a couple of upcoming slides that will cover free cash flow and adjusted EBITDA, which are non-GAAP metrics. Before that, we wanted to provide you with the closest GAAP equivalents, which are operating and net income. Please proceed to Slide 16 to review some of our key metrics. We concluded the quarter with cash and cash equivalents totaling $21.2 million. In the first quarter, we used $2.1 million for share buybacks. First quarter free cash flow stood at $12.7 million, representing 17% of revenues, while adjusted EBITDA reached $17.5 million, or 24% of revenues. Our recent free cash flow and adjusted EBITDA conversion rates reflect a reduced percentage of service revenues within our Nightclub business. Now let’s examine Slide 17 to assess our debt metrics. As of December 31st, debt decreased by $5.8 million since September 30th due to scheduled repayments. The average interest rate remained at 6.61%, consistent with our previous rates. Total occupancy cost was at 8.2%, which increased slightly from the previous quarter, but still falls within our comfort range of 6% to 9%. At 2.9 times, the debt-to-trailing 12-month adjusted EBITDA ratio also saw a slight uptick, but remains in our preferred range of below 3. Both occupancy costs and the debt-to-adjusted EBITDA ratio reflect ongoing project developments. As these projects commence operations and generate revenues and EBITDA, we expect both metrics to improve. Debt maturities are still manageable. We are also closing on a $20 million cash-out bank loan, utilizing $30 million of our unencumbered real estate. Now, please look at Slide 18 for our debt pie chart. We continue to reduce all segments of our debt, with the percentage share of our different types of debt remaining relatively unchanged since the fourth quarter. Now, I’ll hand the presentation back to Eric.

Thanks, Bradley. Please turn to Slide 19 before we go into Q&A. For our new investors, I want you to know that everything we do is centered around our capital allocation strategy. We employ three different approaches, subject to whether there is a compelling rationale to do otherwise: mergers and acquisitions, organic growth, and buying back shares when the yield on our free cash flow per share is more than 10%. All this is being done with the ultimate goal of driving shareholder value by increasing free cash flow per share by at least 10% to 15% on a compound annual basis. To see more about this strategy, please visit our new website @rcihh.com. Please turn to Slide 20. By sticking to our capital allocation strategy since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for revenues, 12.1% for adjusted EBITDA, and 17.2% for free cash flow. We also reduced our fully diluted share count, including shares used for acquisitions. But nothing goes up in a straight line. The key point is, we have the plans, tools, resources, and expertise to get the job done. We'll make more acquisitions. While taking a little longer to get projects up and running, the drag will be behind us, the doors will open and our numbers will improve. We will get our free cash flow and adjusted EBITDA margins back to the 20% and 30% as we have in the past. Unfortunately, in the current environment, it has taken us a little longer to open new locations, but we have dealt with economic downturns before. I know that these numbers are a little disappointing to some and they are disappointing to us, but I ask you to have faith in our team's ability, as I do, that we will reach our future targets. Thank you to our loyal and dedicated team members for all their hard work and effort and all of our shareholders who believe and make our success possible. Now, here's Mark.

Thank you very much, Eric and Bradley. To start off, we'd like to take questions from Rick's analysts and some of its larger shareholders before moving into general Q&A. First up, we have Anthony of Sidoti & Company. Anthony, please proceed.

Can you hear me now?

Yes. We can hear you. We can hear you. So, we'll stay on Anthony. Anthony, take it away.

I apologize for the issue with my new phone. Thank you for your questions. I would like to discuss the same-store sales figures, particularly in relation to traffic and average ticket size. Also, Eric, in your January sales release, you mentioned the hope that we might have seen the worst of the same-store sales declines in light of the uncertain macro conditions. Do you still believe that to be the case? I have a few other questions as well.

Yes, of course. The same-store sales declines haven't changed much since the last call. December numbers were decent, and January started off okay, but we faced some weather challenges for a few weeks in the middle. However, we finished strongly. The first week of February has been promising. I don't have detailed same-store sales numbers for January and February yet, as it's still too early, but I expect to have them soon. I believe the worst is behind us, although Bombshells remains a challenge. We've had to implement some cost adjustments and restructure management at those locations, and I hope to see results as we approach March Madness. We're planning a significant push for March Madness, and we started our launch rate Thursdays today to introduce more initiatives. We're looking to make the Bombshells concept a bit more adventurous. The team has been too focused on restaurant operations, and we need to return to basics, particularly maintaining our alcohol sales around the 60% mark. Those have dipped slightly, and I want to bring them back to normal while ensuring the atmosphere is enjoyable, especially in the evenings. That's our current focus.

Got you. Okay. Thanks for that. And then, I know you recently hired a new assistant of Director of Operations for Bombshells. What has he done so far and kind of what are your plans? Can you share any specifics as to what you're doing as far as to get that segment in better shape?

We've implemented some cost-cutting measures at the management level by repositioning our regional managers to work directly at individual stores. This restructuring has allowed us to let go of some underperforming general managers and not replace others who have left due to attrition. The new manager has been training in Houston and is now in Dallas, where he will oversee both the Dallas and Arlington locations, which are our biggest decliners. Our focus is on ensuring that staff promotes well, prioritizes customer service, and creates an enjoyable atmosphere. Previously, the emphasis was too heavily on restaurant operations rather than on alcohol sales, which we see as essential. We've also made significant changes to music formats and DJs after assessing the stores through visits and secret shoppers, identifying areas that needed improvement under the current management. By shifting regional managers into direct store roles, we expect greater accountability, especially as we approach the March, April, and May periods, and we will make further management changes if necessary.

Got you. Okay. And then, switching gears. You talked about the AdmireMe re-launch with a new strategic partner. How should we think about this from a financial perspective and what it could mean for you? If you could provide any additional insights, that would be great.

Hi, Eric, are you speaking?

I'm sorry for the interruption. Our new partner has the software operational on another site, allowing us to white label that software. We are currently waiting for the designs to be completed, which we expect by April. We will start early testing and aim for a full launch in the next quarter. This transition significantly reduces our costs, as we were previously spending about $40,000 a month on programmers for AdmireMe. This change will save us around $500,000 annually, contributing to our goal of cutting over $2 million in expenses this quarter. This will be a key component of that effort. We will also proceed with the launch of the new site featuring video streaming, which AdmireMe lacked and would have taken time and considerable expense to implement. This advancement propels the software forward, while maintaining our concept of enabling entertainers, wait staff, and employees interested in content creation to do so effectively.

All right. Well, thank you very much. I'll pass it on to others and best of luck.

Thanks, Anthony.

Fantastic. Thank you so much. And next up, we'll bring Scott Buck of H.C. Wainwright. Scott, take it away.

Hi, good afternoon, guys. Thanks for taking my questions. Eric, I'm curious on the licensing. I know you don't have an update for us, but I'm curious, at what point do you start to get a little nervous in your ability to get the properties open by year end fiscal '24?

We need to be on the agenda for approval by May. If we're not on by May, it will be very challenging. It will take about three to four months, so roughly 90 to 120 days, to complete all the installation testing and secure the necessary certifications from gaming to obtain the final go-live approval. Therefore, if we want to open in September, we must have that licensing approval by the end of May. We have quarterly updates with them, and the next update is in about a week. Hopefully, we'll have more information on their progress after that update. As for my concerns, I don’t worry overall unless they start issuing many licenses to others. If all the other licenses being applied for in Central City start getting approved while ours doesn't make it on the agenda, I would become concerned. However, at this moment, I'm not worried. I believe it's just the usual flow of operations and how the Colorado Department of Gaming conducts their investigations.

No, understood. I appreciate that. I'm curious about the remaining capital expenditures on the two properties to get them open.

It really depends on how we proceed with certain tasks. Currently, we have spent about $2.5 million. From my last update, we just signed a $3 million contract for all the construction at Rick's, which includes significant changes to the overall deal, and the HVAC systems are currently in Denver. They will be installed as soon as the weather allows and everything is organized, as we are replacing the roof while the units are being installed. Essentially, they will remove the existing units from the roof, install new curbs and other necessary components for the roofing, set the new units, and then re-roof the building. This work should be completed by the end of March at the latest. In six or seven weeks, we will have all new heating in that building and everything operational. We expect that final construction, aside from the gaming machines, will be finished sometime in June.

Hi, Scott. We can't hear you, if you have another question.

Yes, sorry about that. Went back on mute. Yes, so, on Bombshells and the strategic review, you talk about a potential sale or at least exploration. You guys hired some outside help to kind of speed that process along, or, at this point, are you still kind of looking at opportunities internally to do something?

We are currently collaborating with an external group while also working on a few initiatives internally. When we mention that we're exploring all possibilities, we truly mean it—we're engaging with many people and examining various options. However, we haven't progressed to the point of listing anything for sale yet because we are optimistic about finding the right partner, similar to our experience with AdmireMe, or we are making internal changes to see if they can yield results in a timeframe that meets my expectations.

All right, great.

So, that's where we're at with it.

That's helpful, Eric. And then just last thing, quickly, what's the timing look like on the cash-out loan? And are you, you know, kind of in conversations with folks already about potential acquisitions?

We're pushing the loan because we have been in talk with several outside operators and would need significant cash-down payments. So, we're going to just try to get that cash sitting on our books. We've been working on this for about five weeks. We had to get appraisals and environmental studies on a couple of the properties because they weren't current. That's all updated, and we should be going to loan committee in the next week or so.

Perfect.

So, I would look for our hope to close sometime in either the last week of February or the first week of March for the loan. Hopefully, we can stay on that timeline as long as nothing unexpected arises or nothing comes out of committee that was previously overlooked. We have been operating casinos in Black Hawk and Central City for over 20 years and have extensive knowledge and a good reputation with the Department of Gaming as well as among many other operators and employees in the Central City and Black Hawk area.

Great. I'm sorry, you were breaking up earlier, but can you discuss your budget for the casinos, specifically what you anticipate the budget will be upon completion of the casinos?

I'm sorry. Can you repeat that? I'm sorry.

Can you give us an idea of what the budget will look like to complete the casinos? I believe you mentioned that earlier, but I didn't catch it all.

The budget for the casinos is around $20 million for both properties, including real estate purchases. We have spent about $2.5 million on the deal, and the real estate purchases amount to another $8 million. This leaves us with approximately $10 million more to spend, but this will depend on how we handle the machines. If we opt to pay in cash for the machines, that would require a significant investment. However, we are looking into terms that allow for 12 months, same as cash, meaning we wouldn't need to start making payments until after the machines are installed. We also have the option to work with some operators on a revenue sharing basis, which would help in managing our cash outlay. While we will still have to make payments, we will have more time to arrange for those payments.

Great. Thanks, Eric. Lastly, regarding the macroeconomic uncertainty you've mentioned, can you confirm if it's still affecting blue-collar sectors? How are your white-collar customers managing? In general, what do you think is needed for us to move past this period of macroeconomic uncertainty?

We need to eliminate the uncertainty in the marketplace. It's interesting because while the media reports that things are great and that jobs are plentiful, when you talk to people on the street, there's a sense of uncertainty. Even those who are currently doing well in their jobs are questioning whether their positions will still be secure in three months and if their performance will remain stable. There's concern about future interest rates as well. We're witnessing customers trading down, which indicates a typical recessionary behavior. Consequently, we're noticing that our customers are visiting less frequently, resulting in slower Mondays and Wednesdays. We plan to implement what I consider recessionary discounting on certain days, similar to dynamic pricing, rather than applying it all the time. As we move forward, we will see these changes take effect. We already have many initiatives in place, and until customer confidence returns, we need to find ways to attract them and encourage continued spending.

Thank you. That's it for me.

Thanks so much, Rob. We appreciate the questions. Next, we have Orchid Wealth, and I encourage everyone with a question to raise their hand. Orchid Wealth, please go ahead.

Hi, guys. Let's go into the AdmireMe 2.0 that you guys are going to be doing. How long have you been dealing or engaging with this partner that you're bringing on?

I apologize, let me unmute myself. We began our discussions at the Expo in Vegas back in August, and we've built a relationship since then. We needed to establish mutual comfort and have set clear expectations on both sides. I believe we signed the agreement about three weeks ago, and they have been working on some design concepts and determining how everything will look, including registering and purchasing the necessary domains. Everything is in place for the new launch, and they are very enthusiastic. As I mentioned, we aim to conduct some testing, although we don't anticipate needing extensive testing. The primary goal is to ensure that the design functions smoothly, avoiding issues like clicking on a link that unexpectedly directs you to content from their previous site. Essentially, we will verify that everything is functioning as it should, and then we will be ready to launch. We'll start with a few specific clubs featuring entertainers from those clubs to get the momentum going, followed by a full company-wide launch, ideally by May and June.

And then how long has this partner been in the business of doing this, in terms of like, they're going to handle the credit card processing or all that aspect of the business, you're basically supplying the performers or the entertainers?

Yes, it will still be through our company, handling our processing, but we will be collaborating with different banks than we currently work with for AdmireMe, with whom they have significantly longer and stronger relationships, along with other vendors they have worked with. They've been in the industry since the early 2000s, and it's interesting because we had discussions with various people in the industry back when Rick's had dancer dorms in '99, and we all knew the same individuals. It's amusing that we were both in the industry at the same time and didn't connect back then. I’m very optimistic and excited to see how the concept will progress with the right software because I believe we have the right idea; we just lacked the proper medium to connect entertainers with customers. With their software, we will be able to do that, especially with full video streaming, which seems to be very popular right now. I'm really looking forward to when that will launch.

How many entertainers do you think you're going to be able to at least offer this as an option by being an independent contractor within the firm? You know, how many.

In 2023, we had over 25,000 contracted entertainers across the country. If we can engage just 5% of them, that equates to 1,250, and at 10%, that would be 2,500, and so on. This number does not include waitresses or other front-of-house staff like bartenders or door personnel who may also be interested in joining the platform. Additionally, there are opportunities with other clubs and external individuals. I believe the growth will be relatively swift. We were seeing good progress when we made efforts to promote AdmireMe, but we encountered bugs and issues whenever we started to onboard users, which forced us to pause and fix the software. The advantage of our software is that it is now operational and capable of managing hundreds of users at once, which will significantly help us in our expansion efforts.

Are any other clubs in the marketplace doing something like this? Or are you guys going to be at the forefront of this? Where other clubs that are maybe, you know, competitors or not competitors in other markets would want to join on board and this becomes like, this is the entertainers-only fans, you know, one-stop shop because it seems like a lot of this stuff is really about just being first to market.

Given our previous attempts, I am aware of the costs involved, and as far as I know, no other operators are currently trying to pursue this. I haven’t heard of anyone else making similar efforts, and once they evaluate the expenses, I believe they will find it too high to proceed. Therefore, I don’t expect them to move forward. We have reached a point where, at our current pace, we could invest another $3 million trying to make this work. However, we have a partner who possesses all the necessary resources. We could relinquish 25% of the deal and make significant progress much faster. Achieving first-mover advantage is crucial. I wanted to ensure that no one else attempts to consolidate these opportunities before us. While there are other sites that have ventured into the entertainer market, I doubt they have the same level of direct engagement with entertainers that we do. Moreover, we can provide incentives for entertainers to join our platform, allowing them to earn residual income through referral programs. The new operator and software will be exceptional. Our primary task is to get our entertainers on board; if they show up, they will handle the rest.

And then just one last question. I know OnlyFans typically does an 80%-20% revenue share with 80% to the entertainers and 20% to, you know, the OnlyFans platform. Is yours going to be similar to that?

It's the same setup as you've seen from AdmireMe. We might use part of our 20% for referral fees initially and may also bring in some prominent influencers from other platforms in the entertainment field, possibly offering them a higher percentage. So, we could earn slightly less than the 20% at the start, but eventually those promotions will cease. At that point, it will just be marketing expenses, and we will return to the standard structure.

Well, fantastic. I mean, I think, this venture, obviously, has been something I've been hoping for years. So, good luck with that and look forward to the next call.

Thank you.

Thank you so much for the questions. Next up, we will have Evan Tindell. Evan, please take it away.

Hi, thanks for taking my call. The way you discussed the same-store sales performance in the Nightclubs segment makes me think that you believe a similar situation is occurring.

I'm sorry, this is Bradley. Can you repeat the question? We missed the first part of it.

Oh, sorry. I think the first part was just me thanking you for taking the call. So, obviously, you guys have talked about kind of the macro-environment at the clubs, and it makes me think that you guys are of the opinion that the results at other clubs are kind of similarly negative in terms of same-store sales. So, I was just wondering if that's kind of, you know, poor results at other clubs are kind of increasing the inbound offers you guys have in terms of acquisitions or might make the multiples that you guys can pay a little lower given the recent performance.

Yes. I've talked with several other club operators. In fact, I'm going to be, this weekend, one-to-one with a club operator that basically, between him and some of his partners, about 65 clubs around the country. They're all, you know, very similar in declines, a lot of their declines are even higher than ours. You know, I'm hearing from some people as much as 20% and 30% at certain locations in declines from their highs. And so, that is definitely going to be an issue. But as far as more offers, yes, we are talking with several acquisition targets. The biggest problem we have is everybody wants to sell based on their 2023 numbers, and, you know, don't we all? The reality of it is there was a lot of free cash out there, and there was a lot of pent-up demand that doesn't exist today, and higher interest rates, more economic uncertainty. And so, I can't be buying at a five times multiple of 2022 when we're in 2024. And I know that, you know, those numbers aren't repeatable.

Thank you. I have another question. I noticed some discussions on Twitter regarding the warnings in the 10-Qs and 10-Ks over the years about internal controls. I'm curious about one warning related to goodwill impairments and another concerning user access to IT systems. Could you address these concerns or provide an explanation for those who may not be familiar or are reading the financials for the first time?

Yes, absolutely. If you look closely, these issues are constantly evolving. Our auditors are always on the lookout for new material weaknesses each year, and typically when they are identified—whether by us, our independent third-party auditors, or even by ourselves—we promptly make the necessary adjustments and corrections. The challenge we face is that to receive a clean bill of health, everything must be resolved for the entire year. Even if there is just a single day where something is amiss, it results in a material weakness. We are committed to addressing these challenges. I remain optimistic; all we can do is continuously strive to improve and fix the issues as they arise. Notably, none of the weaknesses identified have led to restatements of our financials, and they have never indicated fraud or anything of that nature. It's the classic "what if" scenario. For instance, consider a bank vault in a home equipped with a security system to prevent theft. If an intruder discovers a way to circumvent all the security measures but ultimately does not steal anything, it would still be labeled a material weakness, compelling us to address this hypothetical risk. As a growing company, we initially focused solely on software. Over time, we implemented an ERP system that resolved many of these concerns. Ultimately, it's crucial to have someone in IT who is responsible for monitoring the system, ensuring its uptime, and running backups. This requires a highly compensated employee with the necessary access, similar to how a CEO has to make critical decisions. The issue was that one individual had significant authority to make alterations without proper checks in place. We have since addressed this by implementing notifications for certain personnel whenever changes are made. However, we often remain unaware of potential issues until they are pointed out, even if those issues have never materialized. Luckily, whenever we have encountered a problem, we have always managed to fix and adjust the systems. Nonetheless, it’s impossible to preemptively anticipate every minor detail or hypothetical scenario, especially when they have never occurred or have not been experienced by others. These are the challenges we continuously tackle.

Okay, thanks guys.

Fantastic. Thank you so much, Evan. Next up, we have Adam Wyden of ADW Capital.

I'm here. A couple of things. You know, it was encouraging that you wrote in the press release that you thought you've seen the bottom in the same-store sales and think consistent with other people's commentary and sort of live entertainment. Dave and Buster's Bowl, all this stuff. It seems like, you know, that you're doing more promoting and stuff like that, but, you know, people are still willing to spend, maybe spend differently, but people are still willing to spend. So, that's good. And, I guess, this is your seasonally weakest quarter anyways. It's like, you know, about 20% of EBITDA, at least historically. So, you know, it sort of gives you a nice baseline of sort of where you are. But a couple of sort of procedural questions. You mentioned $2 million of cost annualized per quarter. That's roughly $8 million of EBITDA. Is that in Bombshells, Nightclubs, corporate? Can you talk a little bit about where you think that cost is going to come from?

We're currently conducting a thorough review of our expenses, which I refer to as the COVID sweep. When we were shut down due to COVID, we had to assess every potential expense and identify areas where we could eliminate costs or make adjustments, including assessing non-income generating properties and assets for divestment. We are continuing this process, which involves evaluating over 70 operating subsidiaries. We began this review based on the results from the previous quarter and expect to identify many opportunities for improvement. A significant part of this effort involves the recent partnership with AdmireMe, which will substantially reduce our costs going forward. We are critically analyzing all selling, general, and administrative expenses across our operations, including employee costs and security, to determine where we can make necessary cuts similar to those we implemented in 2020 during the onset of the pandemic.

Yes, well, you guys did an excellent job cutting costs during COVID. So, you know, obviously, you know, you guys have shown that you guys can make margin with lower revenues. So, you know, look, you know, another $8 million to $10 million of cost, if you can do it, would be well welcomed, you know, from a cash flow perspective as it relates to being able to allocate capital to share repurchase or more clubs. Secondly, you know, obviously, you expect to get the casinos open, but you talked a lot about non-income-producing properties. You've got, I don't know, three or so clubs, I can't keep it all straight, that are sort of being remodeled to, you know, being reopened. You know, those are obviously not. You know, you're not sort of waiting on same-store sales to come back. Do you mind like trying to sort of enumerate sort of what you think that is in revenue and potential EBITDA contribution? I mean, I'm just sort of trying to sort of give people an understanding of, you know, look, if the company does nothing from here, same-store sales don't improve, you know, you get the $8 plus million of EBITDA from cost, and you get another x million dollars of revenue in EBITDA from the clubs reopening and that sort of gives you a baseline assuming things don't get worse, which you don't think they are, you know, what's sort of not in the numbers today. You know, so, you can sort of take the $18 million, multiply it by 5, gets you to $90 million, you know, if it's 20%. And then you add the $8 million of cost reduction plus club sort of gives you a sense of what normalized EBITDA is at the casinos. You understand where I'm going?

Yes. I'm following your math, but yes, I think we do have to have same-store sales bottom out, and we have to have same-store sales.

Yes. If you consider $7 million from the two smaller clubs and $8 million from the larger club, that totals $15 million at a 35% to 40% margin, resulting in an additional $6 million of EBITDA. Then, adding another $8 million from cost reductions brings it to about $14 million. This isn't something you would see this year, but on a normalized basis, if I take around $17.5 million to $18 million and multiply it by 5, you arrive at a figure close to $105 million, excluding casinos, M&A, and improvements to Bombshells. This is just to provide a baseline perspective. Assuming no changes in capital allocation or operational improvements, such as stagnant same-store sales and simply reopening the clubs post-COVID, you would be looking at approximately $105 million of EBITDA, not counting casinos or M&A. Do you understand my calculations?

Yes. I'm following your math, but yes, I think we do have to have same-store sales bottom out, and we have to have same-store sales.

Hi, Eric, you're cutting out.

Yes. You said we have to have same-store sales, and then we lost you.

Can you hear me now? I believe we need to see same-store sales stabilize and return to a growth rate of 3% to 5% in order to move forward. We clearly need to address the Bombshells situation and improve their margins significantly, aiming for 15% to 22% instead of just 1%. If we can achieve that, then a figure of around $100 million seems quite reasonable. Currently, we are likely at about $80 million without any new stores opening. With the addition of these two new locations, provided this was our most challenging quarter, reaching those numbers is definitely achievable, though it requires some key developments. I anticipate that, similar to the trends of 2017 to 2019, March should be a significant recovery month for us, with March Madness expected to boost our performance. We should also witness the usual spring surge in March, especially since we have five weekends this month. While January might have appeared somewhat sluggish, last January also had five weekends, contributing to that perception. Additionally, we experienced challenging weather conditions in January this year that were notably different compared to the previous year's weather in February. We will need to assess how all of this unfolds as we approach the end of February. Overall, I feel very positive that this quarter will surpass the previous one.

What I was trying to do, Eric, is just bridge for the audience that this last quarter is your seasonally weakest. So, if you say it's 20% of EBITDA, and then consider all the things we are doing today, whether you get full credit for them for the year. I know you prefer to think about things in years, and I believe many in the audience want to think about them in a normalized run rate basis. When you contemplate $8 million of annualized costs and having those clubs open, what does the business look like in a normalized state exiting the year? That’s all I’m saying; I think everyone understands you won't even have the big club open until the end of the year. I’m just indicating that if the cost cuts occur and same-store sales stabilize, and these clubs open, what does the business look like? Obviously, getting the casinos open too, which isn’t included in the numbers. I'm just trying to clarify.

From the club perspective, our clubs have performed quite well. We have experienced a slight decline in same-store sales over the past couple of quarters, primarily driven by Bombshells. While it constitutes a smaller portion of overall sales, the significant declines of 15% to 20% are notable and need to be addressed. We have implemented significant changes and believe we have reached the bottom at Bombshells. I even held an important meeting today, emphasizing that it’s difficult to fall further when you're already at the bottom. Therefore, we need to take risks and make necessary changes. We have introduced Lingerie Thursdays and have additional promotions set to launch on Monday, Tuesday, and Wednesday. We have plans for substantial promotions on Tuesday and Wednesday nights to bolster weaker performance in those days, similar to what we achieved back in 2009 and 2010. We aim to initiate these efforts in the next two weeks, which should help improve our Tuesday and Wednesday numbers. Overall, I believe we can reach $100 million with a 25% EBITDA margin, as everything appears to be aligned. This quarter was slightly disappointing, but the upcoming projects that currently impact costs and EBITDA will begin to contribute positively by March, June, and July. Instead of being a financial drain, they will start generating revenue, allowing us to improve our financial performance.

You also need to consider that the casinos are not included in these figures. If the casinos are operating at 25%, we should likely exceed $100 million. These could achieve margins of 40% to 50%. Therefore, having both of these operational will make a substantial impact as well.

Yes. You know, I remain very, I think that we can get those casinos open by September, provided that gaming issues our licenses. I mean, we're sitting here, you know, basically you're at the will of the state. Until the state issues our licenses, there's not a whole lot we can do. We will have the Rick's Casino ready to go in June. And I think that the construction will probably be completed provided the building permits come in in the next few weeks, like we think. For the Bombshells, we're very close, you know, going back and forth with the city's third-party company that does all the plan reviews. We're very close on that as well. I think we will get that, hopefully, and that casino should be built and ready to go maybe in June, but probably closer to August. So, if we can get the licenses issued in the next three months, you know, we'll be good to go. I just don't know where they're at because they just don't tell you anything, right. They tell you if they need something and they tell you when they're going to come visit you and those types of things. But they really don't give you any real feedback on where they're at in the process or when they think the process will be completed.

You mentioned the changes in senior management at Bombshells. Is the senior leadership, specifically the head of Bombshells, still in place? On the nightclub side, RCI Management Company has managed them for a long time and many of the managers participate in the tip pool, creating an entrepreneurial culture. Have you thought about bringing someone in from a place like Twin Peaks or another similar business to create a program where someone with experience has a revenue or profit share that aligns their earnings with the business's performance? It seems like this entrepreneurial approach has been effective in the nightclubs. Have you considered applying a similar strategy at Bombshells by bringing in someone with a genuine financial stake in the business's success? Though there might be challenges, other restaurant businesses have maintained their margins despite some weaknesses, indicating potential opportunities. Is this something you've explored, and could you share any insights on that matter? This could also potentially simplify the decision to either sell or hold onto the business if you find someone capable of consistently achieving a 20% margin.

We are currently exploring all our options and working through the process that we began in December. After making a few changes, we were unsatisfied with the outcome at the end of that quarter, so we made additional adjustments. As we began seeing the results from Bombshells in January, we implemented more changes. Our operations in Texas were impacted by severe weather, including freezing days and two weeks of rain and flooding. Now, we are assessing whether the changes made in early January are effective, and we will have clarity over the next couple of weeks leading up to Super Bowl Sunday. Ed is currently assisting with Bombshells, and I am actively monitoring sales, making calls, visiting locations, and ensuring the changes we’ve made are yielding immediate results. Part of the challenge has been that the management team in place from October to December did not grasp the urgency required. However, they now clearly understand the need for immediate results rather than waiting until March or May. We expect to see results this week and in the following weeks, and if those results aren't aligning with our goals, we will implement further changes until we find the right approach. The concept and food are strong, but we have underperformed in a few areas, primarily service and customer interactions. The current team's focus has been limited to the restaurant aspect, neglecting bar sales, which are our highest profit margin. This lapse became evident last quarter, as some necessary changes we requested in music formats and DJ selections were not implemented, but those are now being closely monitored. I'm no longer being lenient; the urgency is urgent today, not tomorrow. If the team fails to grasp this urgency quickly, I will make additional changes to correct the course. I have experience in turnarounds, having previously revitalized struggling clubs and businesses by placing the right people in the right positions, and I'm applying that same approach to Bombshells now.

Thank you for the questions, Adam. We will address one final question. Please go ahead.

Hello? Can you all hear me?

We can hear you.

Yes. Cool. Well, thanks for having me on, Eric, Mark, Bradley, big time supporter, long-time fan of Rick's and RCI. But I have a question for you, Eric. In two years, what does that ideal quarter look like for you?

In the next two years, I want to continue growing our free cash flow at a rate of 10% to 15%. I expect the casinos to open, and I would like us to make another significant acquisition, targeting about 10 to 20 clubs at once, similar to our previous major acquisitions like Birch Management and BCGH. Our first large acquisition was in 2012 when we bought the Jaguars chain, and I hope to acquire another major chain in the next two years. I also anticipate having operational results from the casinos, which will help us determine if we can expand the entertainment/casino model to other markets such as Iowa, Indiana, Mississippi, and potentially small regional casinos outside of Las Vegas but within Nevada. Additionally, I'm eager to see if the Bombshells brand can develop into a sizable franchise or if we may need to consider selling it to private equity so we can focus our efforts elsewhere. That's my vision for us in two years.

Yes. Thank you. I really love that.

Fantastic. Thank you so much for that question. And thank you, Eric and Bradley. On behalf of Eric and Bradley, the company and our subsidiaries, thank you and good night. As always, please visit one of our clubs or restaurants, say hi to Bridget at the door, and have a great evening. Until next time.