Greetings, and welcome to RCI Hospitality Holdings Second Quarter 2025 Earnings Conference Call. You can find the company's presentation on RCI's website. Go to the Investor Relations section, and all the links are at the top of the page. Please turn with me to Slide 2 of our presentation. I'm Mark Moran of Equity Animal, and I'll be hosting our call today. I'm coming to you from Washington, D.C. Eric Langan, President and CEO of RCI Hospitality; and CFO, Bradley Chhay, are in Houston today. Please turn with me to Slide 3. RCI is making this call exclusively on X Spaces. This conference call is being recorded. Please turn with me to Slide 4. I want to remind everybody 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'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Thank you, Mark. Please turn to Slide 6. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year-over-year unless otherwise noted. As we previously announced, revenues reflect the sale divestiture of five underperforming Bombshells segment locations and the effect of severe weather on company same-store sales in January and February. This was offset by improving trends in March and contributions from new and rebranded locations. Profitability reflects the lower same-store sales offset by lower sales of Bombshells-related units and lower operational costs. In addition, during and subsequent to the second quarter, we continued to make progress with our Back to Basics five-year capital allocation plan. We acquired two upscale adult nightclubs, Flight Club in Detroit and Platinum West in South Carolina. Price multiples were in line with our capital allocation strategy. We are also working on another acquisition. We opened a Bombshells in Denver and rebranded and reformatted the Chicas Locas in El Paso. This reduced our list of development projects. And we repurchased 56,875 common shares for $2.9 million, ending the quarter with approximately 8.8 million shares outstanding. Now here's Bradley to review our performance in more detail.

Thank you, Eric. Please turn to Slide 7. All comparisons are year-over-year for the quarter unless otherwise noted. Total revenues were $65.9 million compared to $72.3 million, a difference of $6.4 million, primarily due to closures or divestitures of nonperforming Bombshells and the effect of bad weather, as Eric mentioned. Eighteen club and Bombshells locations had to close 1 or 2 days each. And even if clubs and Bombshells were able to open, they experienced slower business, particularly on weekends when temperatures were below 0 or had heavy snow and ice, for example, in Dallas and Houston. But with warmer temperatures in March, sales began to improve. Impairments and other charges were $2.1 million compared to $8.2 million, a difference of $6.1 million. That was due to lower impairments in nightclubs. As a result, net income attributable to RCIHH common shareholders was $3.2 million compared to $0.8 million, a difference of $2.5 million. GAAP EPS was $0.36 per share compared to $0.08 per share. Net cash provided for operating activities was $8.5 million compared to $10.8 million, a difference of $2.3 million. That was primarily due to reduced operating margins due to lower sales. As a result, free cash flow was $6.9 million compared to $8.8 million. Adjusted EBITDA was $14.2 million compared to $17.2 million, and non-GAAP EPS was $0.65 compared to $0.90. Now please turn to Slide 8. Nightclub revenues totaled $57.5 million, a difference of $1.8 million or negative 3.1% year-over-year. Key factors included a 3.5% decline in same-store sales and the absence of Baby Dolls Fort Worth due to a fire. This was partially offset by $1 million from Flight Club acquisition and four rebranded clubs not in same-store sales. Alcoholic beverage sales declined 5.3%, service declined 2.9%. However, food, merchandise, and other increased 2.4%. Impairment and other charges totaled $2.0 million, with impairments spread across four clubs. This compares to impairments and other charges of $8.2 million in the year-ago quarter. Operating income was $14.6 million compared to $11 million. Margin was 25.4% of revenues versus 18.6%. Results primarily reflected the impairment decline offset by sales decline. Non-GAAP operating income was $17.1 million compared to $19.8 million. Margin was 29.8% of segment revenues versus 33.4%. Non-GAAP results primarily reflected the sales decline. Now please turn to Slide 9. Bombshells revenue totaled $8.2 million, a difference of $4.5 million or 35.6% year-over-year. The key factors here included sale and divestiture of 5 underperforming locations in the fourth quarter of '24 and the first quarter of 2025, which impacted revenues by $3.7 million, a 13.4% decline in same-store sales and bad weather. This was offset by two locations not in same-store sales, consisting of a full quarter of the Stafford, Texas location and a partial quarter of the new Denver location. Operating results were a loss of $227,000 versus an income of $699,000. Margin was negative 2.8% of segment revenues versus a positive 5.5% in the year-ago quarter. On a non-GAAP basis, the segment was virtually breakeven with a loss of $67,000 versus income of $750,000 or negative 0.8% of segment revenues versus positive 5.9%. These results primarily reflected the sales decline from open locations and Bombshells Denver preopening costs, most of which were offset by the sale and divestiture of non-performing locations. Please turn to Slide 10. GAAP expenses totaled $5.5 million, a decline of $1.3 million. Non-GAAP expenses totaled $5.4 million, a decline of about $0.9 million. Expense margin was 8.4% of revenues versus 9.4% GAAP and 8.2% versus 8.8% non-GAAP. This decline primarily reflects lower overhead from fewer locations. Please turn to Slide 11. We have slides in the upcoming deck that discuss free cash flow and adjusted EBITDA, which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents, which are operating income, net cash provided by operations and net income. Please turn to Slide 12. We ended the first quarter with cash and cash equivalents of $32.7 million. During the quarter, we used $6 million as part of the Flight Club acquisition and $2.9 million to buy back shares. As a percentage of revenues, free cash flow was 11%, and adjusted EBITDA was 22%, both primarily reflected lower margins. Please turn to Slide 13. Our debt at March 31 increased $5.9 million from December 31. The increase primarily reflects financing related to the Flight Club acquisition and the construction of Bombshells Roulette and Lubbock, offset by scheduled paydowns. The weighted average interest rate was 6.7% compared to 6.6% in the year-ago quarter. Total occupancy cost was 8.5% of revenue compared to 8% a year ago, reflecting lower second quarter revenues, not higher costs. Debt to trailing 12-month adjusted EBITDA was 3.56 times compared to 3.32 times in the preceding quarter, reflecting the higher debt at March 31 and lower second quarter EBITDA. Debt to trailing 12-month adjusted EBITDA should decline as sales rebound with warmer weather and growth from locations that have come online more recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable. Now here's Eric.

Thank you, Bradley. Please turn to Slide 14 to review our capital allocation strategy. Our plan calls for allocating our free cash flow in the following manner: 40% to capital allocation or club acquisitions and 60% share buybacks, debt reduction, and dividends, with the goal of growing free cash flow per share at 10% to 15% annually. Please turn to Slide 15. Operationally, we are focused on our core nightclub business, reviewing every club to increase same-store sales regularly; we'll rebrand, reformat, or divest our underperformers. Our nightclubs plan also involves acquisitions. Our goal is to acquire an average of $6 million of adjusted EBITDA per year, focused on the best clubs, buying base hits with an occasional home run. Our target matrix remains the same, 3 to 5 times adjusted EBITDA for the club and fair market value for the real estate, targeting 100% cash-on-cash returns in 3 to 5 years. Purchases would be made with cash on hand, bank financing, or seller notes. We would also consider using stock if our valuation improves. For Bombshells, we are working to improve existing locations, targeting 15% operating margins and a return to same-store sales growth. We also plan to complete 2 new locations in development. The final part of our plan is regularly buying back our stock, flexing up if we consider the price to be particularly undervalued. We also anticipate modest annual dividend increases. Over the five years, we aim to generate more than $250 million in free cash flow and repurchase a significant amount of shares. By fiscal '29, our targets are $400 million in revenue, $75 million in free cash flow, 7.5 million shares outstanding, and the end result would be doubling free cash flow per share to approximately $10 from last year's. Please turn to Slide 16. To give you an idea of the progress we've made on the share buyback, 10 years ago, we had about 10.3 million shares outstanding. As of last Friday, we had about 8.8 million shares, which is about a 15% drop. Please turn to Slide 17. With Bombshells Denver and Chicas Locas now open, we have 5 remaining developments. Three are very close to completion. We are targeting Bombshells Lubbock for the opening later this month or early June and Rick's Cabaret Central City for early next month as well. And Bombshells Roulette sometime this summer. We are still awaiting construction permits for Baby Dolls West Fort Worth, and we are awaiting engineering review and zoning plans for Baby Dolls Fort Worth that was burned in the fire. We have also sold our Aurora Colorado property, which we were going to use for Bombshells and listed the other properties for sale in Austin and Huntsville. As we've continued to make progress with Favoritely.com, our social media fan site for adult nightclub entertainers and staff. We are out of beta now, and we have added a few more clubs and entertainers since our news release last month. I'd like to thank all of our loyal and dedicated team members for all their hard work and efforts and all of our shareholders who believe and make our success possible. Now here's Mark.

Now first, we have Orchid Wealth. Please take it away.

Hi guys. Just a couple of quick questions about financing. Obviously, with the market being where it is today, you'll probably encounter a lot of possible sellers. If you guys could use seller financing, what do you feel like is the average rate of return that you're going to have to pay these sellers? And if you have to resort to using bank financing, what's that rate?

No, they're both pretty close to the same about 6% to 7% right now in the current market.

Okay. So you guys are essentially paying what people pay on a 30-year fixed mortgage, right? That's kind of crazy.

That's the going rate.

Yes, that's great. Have you noticed any changes in the approach of the people you're dealing with regarding deals compared to a year or two ago, especially since you weren't making acquisitions then?

A few years back, everyone was focused on the extremely high numbers from 2022. This year has been quite challenging for the industry. While we have seen a decline, I've spoken with others who are experiencing even larger drops. As a result, there is an effort to find an average or a mix of numbers because they don’t want to rely on the low figures from this year. We are developing solutions for various deals, as shown by our completed acquisitions in South Carolina and Detroit. We are currently working on several more opportunities. It’s really about reaching agreements that are beneficial for us. We are not rushed to finalize anything unless the conditions are favorable; then we will act quickly.

As a side note, what do you think the average age range is of the club owners? Are we dealing with individuals in their 50s, 60s, or 70s? I'm trying to understand the demographics of the clubs out there, especially since some owners are considering selling because their children or relatives are not interested in taking over the business. So, is there a typical age group you encounter?

I mean the majority of the guys in their late 60s to 80s to low 80s that we've been talking with so far. There are some guys in their 40s we're talking to right now as well. They are trying to decide if they want to stay in this business or they want to go do something else, which we've had a few buyouts of guys like that in the past. They get married, they have kids. They decide that the adult entertainment business is not something they want to stay in. So we see that sometimes. But I would say the majority are between the ages of probably 65 and 80.

Next up, we have Aaron. Aaron, please take it away. Next up, we'll bring Adam Wyden up. Adam, once you're connected, please take it away. While we're waiting for Adam to unmute, I will pull up Jayson.

I still show unmuted on my end. Both him and Jayson are still muted.

Jayson or Adam, whoever unmutes first can have the next question.

Thank you, Mark. I just wanted to ask Eric about the new acquisition in Detroit with the new Flight Club and what rebranding and new improvements you have made to the Flight Club and how the Detroit market is treating you guys?

It's been a great experience for us. We really appreciate the market there. We received our usual welcome where everyone told the entertainers and customers exaggerated stories about what we were going to do, which we haven't done before. This caused a bit of a rough start because many entertainers were hesitant to come to work, thinking about those stories, which were quite amusing. However, that only lasted about two weeks, and word got out. Our customers started coming in, especially as we welcomed some of our VIP guests from other states who recognized it as an RCI club. We quickly moved past that obstacle. Additionally, we encountered some tough weather, including significant ice storms in Detroit during our initial takeover. Now, everything is going really well. We made some minor upgrades, and the club is in excellent condition. We improved the point-of-sale systems and made changes in how they interacted with and hired entertainers, which previously didn't align with our approach. We addressed those issues, and since then, our performance has been strong. We're on track with the forecasts we made.

Good to hear. Good to hear. What do you think was the biggest operational change that you guys had to do from the previous owners down there?

Just treating the way they treat guests. I mean they wanted everyone to be a VIP. If you weren't spending $200 or $300 when you walked in the door, you weren't treated very well, I don't think. That's kind of our take of it. And so we wanted to make it a place where the average guy can come in and have a good time. And if you want to be a VIP, there's plenty of space in the club for VIPs as well. And so we kind of created that all-around encompassing club like we do in the majority of our markets. I think that was the biggest change we made.

Okay. Nice. And then one last question. With the adult entertainment business being very popular on the 8-mile road. Are you guys looking at any other adult entertainment clubs on 8 Mile? Or are you guys just going to stay more in the suburbs of Metro Detroit?

I mean we've looked in Detroit. We've looked at about 4 or 5 clubs up there. We were actually on a hunt. In fact, I posted on my X and posted some pictures of some of the clubs and some of the flight, taking the flight up there and some of those things. We have talked with other owners. We haven't been able to come to terms with any of them that we agreed to at this point, but we're always open. I mean we are always looking for sure.

Next up, we have Adam Wyden. Adam, feel free.

Can you guys hear me?

We can.

Perfect. Okay. I have three questions. The first question is about the insurance accrual. You established your captive, and I know there was a charge of over $5 million in the previous quarter. Can you provide some clarity on how much of the insurance accrual impacted your EBITDA this quarter, particularly in terms of cash that is affecting your EBITDA?

The accrual for this quarter was $1.3 million, Adam. We look at it on an annualized basis. Our first quarter annualized run rate was about $9 million. And given the actualization of run rates and whatnot, it reduced to about $8.8 million. So we won't know until any of these claims come in, any invoices and things like that. But it is a non-cash, you're correct. It is a noncash, just a purely accrual charge. So about $1.3 million.

Right. But you took a big charge in the first quarter. So we wouldn't expect basically huge accruals going forward. Is that right?

Correct. I just told you, I think the annualized is $8.8 million. So from that, you guys can speculate what the next two quarters could be based upon our current trends. Now if we have massive claims coming through our invoices or new lawsuits coming in, that can change it. But it just depends on what falls off and what gets added by the actuaries.

Got it. We had a significant charge in the first quarter, around $5 million, correct?

That's correct.

Got it. Okay. That makes sense. Can you tell me if there's any way to quantify how much EBITDA we lost in the first quarter due to the weather? A lot of restaurants have been complaining about the weather, and you mentioned that bad weather kept you from operating because of snow. I know it's challenging, but do you have an estimate of the impact on revenue or EBITDA based on scenarios like closing a location instead of keeping it open? What do you think the weather cost us in terms of comparable store sales or EBITDA?

Yes. While it's difficult to know precisely, I believe there was a sales decline of about $700,000 per week over an 8-week period. During the first 8 weeks of January and February, we were generating between $4.9 million and $5.1 million, while by March, our sales improved to between $5.7 million and $5.9 million weekly. This suggests that our real average should have been around $5.7 million to $5.9 million, resulting in an approximation of a $700,000 weekly decline during that period. Overall, that translates to about $5.6 million in lost sales, which could lead to an impact of roughly $3 million in EBITDA, potentially more since we still incurred costs without the corresponding revenue. It was significant. I expect to have a clearer picture as we finish this quarter, as I don't anticipate much weather disruption in April, May, or June. This year, Easter falls in April instead of March, and while Mother’s Day weekend had some impact, it wasn't severe. I hope to see our average around $5.7 million per week this quarter, unless we experience a surge toward the end of May and in June. We’ll see how that develops.

Okay. I have two more questions. Regarding the M&A pipeline, you mentioned another club. Can you discuss what you believe has contributed to EBITDA so far from Detroit, the other one in South Carolina, and the one you're currently working on, as well as the overall pipeline? It appears that you're averaging more than $6 million in EBITDA right now.

South Carolina did not contribute anything, as we didn't close until April, but it will make a contribution this quarter. Detroit also had a minimal contribution last quarter because we closed in January, and we faced severe weather in January and February while we were still taking over. This led to increased operating costs as we settled in before revenues picked up. However, it is performing very well for us and is expected to meet the $2 million run rate we estimated upon purchase. Therefore, I believe this quarter, particularly April, May, and June, will provide a clearer picture of our performance. Additionally, we just recently closed the Bombshells and made changes in leadership by letting go of the Director of Operations for the Restaurant division and promoting someone from within. The new team has started to implement improvements and reduce costs significantly. Our Denver location is now open, and we expect Lubbock to open by May 29, or by June 5 at the latest. This quarter will bring substantial changes for Bombshells, allowing us to evaluate its performance more effectively. Bombshells faced significant challenges due to weather, and with the Houston Rockets in the playoffs this year, there has been some positive impact. We hope that the NBA playoffs will continue to benefit us, along with the return of Astros Baseball. By June 30, we should have a much clearer understanding of Bombshells' trajectory. As I mentioned in a previous conversation, I anticipate it will take until the end of June to assess the effectiveness of the changes we've made and have the other locations operational to eliminate any negative impact on Bombshells.

Right. But we are not expanding outside of what you mentioned with the sale of Aurora and Huntsville.

We have not sold Huntsville. We sold Aurora. We have the Huntsville property listed. We have the Austin property listed where we were going to build Bombshells locations. Both those properties are being listed for sale or lease right now. So we are working on all that.

The Grange.

The Grange is closed. It's been for sale. We've got people looking at it, but this is a tough restaurant environment right now. So I think it will take a little bit. Maybe by the end of the summer, I suspect that we'll see some movement on those.

It seems like you have mostly eliminated the problematic Bombshells locations. You have two remaining that are in the process of opening, and it appears your current focus is on achieving positive comparisons for those and determining whether to divest or decide on an appropriate course of action.

If we receive a reasonable offer, we would consider selling it. Initially, when we put it up for sale, the offers we received were outrageous. Some wanted us to give them $80 million worth of our assets with no upfront payment, pay us $20 million for half of them, while keeping all the liabilities on our side and having full operational control. We can't agree to that, as it would not be in our best interests. If I did that, I would be stuck with whatever decisions they made. This way, we can finalize and sell our properties, and we still have many options available. This is the first quarter in over 14 years that Bombshells has experienced a loss, mainly due to the startup costs of opening in Denver. I remain hopeful that we will get Bombshells to a point where they stabilize the industry. Even Twin Peaks reported negative same-store sales for the first time this past quarter, indicating a challenging market for restaurants. We are also observing a slight decline in spending at the clubs, although foot traffic remains steady. I'm optimistic that as we move into summer and the tariff disputes resolve and we gain more certainty from the Republicans' new tax plan, the economy could thrive, which would be beneficial for us.

I would think gas prices and all the inflation factors they're considering, like gas and milk prices, should be beneficial for you. Additionally, don't the comparisons become easier for you in the upcoming quarters? I believe you didn't see positive comparisons in nightclubs until the fourth quarter of last year.

In the fourth and first quarters, we saw a decline again, resulting in a net flat performance with a 3% increase and a 3% decrease, essentially keeping our numbers unchanged for six months in 2025. This was largely due to weather conditions on the club side, with some impact from VIP spending, but we are seeing improvement. We are successfully attracting more customers, which is beneficial, as evidenced by our rising food and merchandise sales. However, customers are spending less on drinks, particularly high-end bottles, opting for individual drinks instead. Consequently, bottle service and VIP spending have decreased, contributing to nearly a 30% drop in our service revenue. This is an area we need to monitor closely. With the New York Knicks in the playoffs, our club there is performing exceptionally well, with strong attendance, including sold-out events at Madison Square Garden for watch parties, even when the team was away. Miami's performance has slightly dipped, but we hope to see improvement as summer approaches. Our staffing levels are good, but we need to boost spending. Much of the hesitance seems to stem from uncertainties, particularly among our clients, many of whom are small business owners with fluctuating incomes. When they feel more confident about their financial situation, I believe we will see our numbers rebound.

Thank you so much for the question, Adam. Next up, we have an unidentified analyst. Please take it away.

Thank you for taking my question. I really appreciate this opportunity to talk with you. With the new administration making a lot of noise and headlines, as part of their Project 2025, pornography was mentioned as something they wanted to outlaw. I was wondering if you have heard anything about this and if there's anything you would like to add?

No, we haven't heard anything. We haven't had any issues. I don't think we are technically in the pornography business. We're not really making videos or anything like that. Our biggest challenges are always related to human trafficking, and we are strong advocates against it. We are a founding member of COAST, which stands for club owners against sex trafficking. We have done and will continue to do everything we can to combat sex trafficking and human trafficking in all forms. Our training program has received congressional recognition, and we will keep working with that program. Real studies show that less than 0.1% of all human trafficking involves adult nightclubs or has any connections to them, despite some people trying to distort these facts. I believe the data from legitimate studies is quite clear, so I'm not overly concerned about these issues.

Fantastic. Thank you very much for the question. And thank you, Eric and Bradley. On behalf of the company and our subsidiaries, thank you, and good night. Please visit one of our clubs or restaurants to have a great time.