RCI Hospitality Holdings, Inc. Aktie

Greetings, and welcome to RCI Hospitality Holdings First Quarter Conference Call. My name is Bradley Chhay. You can find the company's presentation on RCI's website. Go to the Investor Relations section. All the links are on the top of the page.

Please turn to Slide 2 of our presentation. Our speakers today are Travis Reese, Interim President and CEO; and Albert Molina, Interim CFO.

Please turn to Slide 3. RCI is making this call exclusively on X Spaces. [Operator Instructions] This conference is being recorded.

Now please turn to Page 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 to Page 5. I also direct you to the explanation of RICK's non-GAAP financial measures. Now I'm pleased to introduce Travis Reese, Interim President and CEO.

Thanks, Brad, and thanks, everyone, for joining us. Please turn to Slide 6. I'm pleased to report we filed our 10-Q today and announced our results for the first quarter ended December 31. All comparisons are year-over-year unless otherwise noted.

Nightclubs revenues were stable. Contributions from newer venues offset the same-store performance and the closure of underperforming locations. Of note, higher-margin club service revenues increased 6.7% year-over-year. This was despite consumer uncertainty as a result of the U.S. government shutdown in October and November. Similarly, newer Bombshells offset most of the segment same-store sales decline, with most of the delta in total sales due to the year ago divestiture or closure of 5 underperforming locations. The decline in net income primarily reflects pretax operating and nonoperating items, most of which were noncash. We had $10.1 million in net charges in the first quarter and $3.2 million in net gains a year ago.

We also continue to move ahead with our Back to Basics 5-year Capital Allocation Plan. We've made some initial progress improving Nightclub sales and margins, and our concept to revitalize the Bombshells in Houston is working well. Year-to-date, we bought back more than 1 million shares.

Now here's Albert to review our performance in more detail.

Thank you, Travis. Turning to Slide 7. I'll start with a review of our consolidated results. All comparisons are year-over-year for the quarter, unless otherwise noted.

Total revenues were $70.8 million compared to $71.5 million. The difference of $0.7 million primarily reflected 5 fewer Bombshells-related locations, partially offset by new Nightclub locations. Pretax income decreased by $14 million. Most of that can be attributed to impairments amounting to $1.2 million this quarter versus none last year, combined gain on sale of businesses and assets and gain on insurance last year amounting to $2.4 million. The first quarter also included a nonoperating charge of $9.9 million compared to a nonoperating gain of $1 million last year.

GAAP loss per share was $0.57 compared to earnings of $1.01. Non-GAAP, it was a profit of $0.74 per share compared to $0.8. Net cash provided by operating activities was $7.8 million compared to $13.3 million. This was largely due to the actual payment of bills from calendar year-end such as legal fees, increased fees related to delayed filings and insurance costs. As a result, free cash flow was $6.7 million compared to $12.1 million. Adjusted EBITDA was level at $15.7 million.

Moving to Slide 8. I will now cover our results by segment, beginning with Nightclub. All comparisons are again year-over-year for the quarter, unless otherwise noted. Revenues totaled $62.3 million, up $0.6 million. This reflected $4.9 million of 5 newly acquired and reopened clubs, $56.9 million from 52 same-store clubs and contributions from two small Texas clubs closed during the quarter.

By revenue side, service increased by 6.7%, food and merchandise increased by 1.8% and LBW declined by 4.6%. I'd like to point out that some clubs stood out such as Baby Dolls Abilene, PT Showclub Indianapolis, Rick's Cabaret in Minneapolis, Hoops Sports Bar and Cabaret in New York City and Jaguars Club in Phoenix.

Other net charges totaled $181,000 compared to gains of $822,000. Operating income was $18.7 million compared to $20.9 million Margin was 30% of segment revenues versus 33.8%. Non-GAAP operating income, which excludes other net charges and gains, was $19.5 million compared to $20.6 million, margin was 31.3% of segment revenue versus 33.4%.

On Slide 9 are the results for Bombshells segment. Revenues totaled $8.4 million, a decrease of $1.2 million. This reflected $1.8 million from 2 newly opened locations, $6.6 million from 9 same-store locations and the absence of $1.2 million in the year-ago quarter from underperforming locations that were divested or closed. There were no meaningful net charges in the first quarter compared to the year ago quarter, which included gains of $1.3 million. There was an operating loss of $139,000 versus income of $1.9 million. On a non-GAAP basis, which excludes impairment and gains, there was an operating loss of $110,000 versus income of $616,000.

Moving to Slide 10, you will see a summary of our Corporate expenses. Expenses totaled $7.4 million compared to $8.8 million or 10.4% of total revenues compared to 12.3%. Most of the year-over-year change reflected lower insurance costs, partially offset by higher accounting and professional fees in the current year due to the delayed filing of our annual report and year-end audit. Non-GAAP expenses totaled $7 million compared to $8.4 million or 9.9% of total revenues compared to 11.8%.

Please turn to Slide 11. We have slides coming up to discuss free cash flow and adjusted EBITDA, which are non-GAAP. In advance of that, we want to present the closest GAAP equivalent, which are operating income, net cash provided by operations and net income.

Slide 12, please. We ended the quarter with cash and cash equivalents of $28.6 million, down $5.1 million from September 30. During the quarter, we used $9.8 million to buy back shares. Free cash flow was $6.7 million or 9% of revenues. Adjusted EBITDA was $15.7 million and returned to 22% of revenues from the 10% level of Q4 of 2025 when we had the $9 million legal accrual.

Turn to Slide 13. Debt increased $20.6 million from September 30, primarily reflecting $22 million in seller financing from the ADW transaction, partially offset by debt paydown. As a result, the weighted average interest rate was 7.16% compared to 6.65% in the year-ago quarter, and total occupancy cost was 8.5% of revenues compared to 8%. Debt to trailing 12-month adjusted EBITDA was 4.86, reflecting the ADW debt combined with the fourth quarter legal accrual. If we take out the fourth quarter legal accrual, debt to EBITDA is 4.16x. Debt maturities continue to remain reasonable and manageable, particularly with our plans to sell non-income-producing properties.

Now back to Travis.

Thanks, Albert. Please turn to Slides 14 and 15 to review our capital allocation strategy and 5-year plan. Our plan remains the same. We allocate approximately 40% of free cash flow to club acquisitions and 60% to debt reduction and dividends. Our goal is to grow free cash flow per share by 10% to 15% annually.

Operationally, we're focusing on our core Nightclub business. We review every club regularly to increase same-store sales. Underperformers will be rebranded, reformatted or divested. We're currently generating about 70% of our income from 20% of our clubs. So there's significant opportunity to optimize our portfolio. Divesting underperformers will help us increase margins, and we can use sale proceeds to repurchase stock, acquire higher-quality locations or reduce debt. Our goal is to add an average of about $6 million of adjusted EBITDA each year through acquisitions. We want to target strong clubs with an occasional strong group of clubs.

Acquisition target metrics remain 3 to 5x adjusted EBITDA for clubs, fair market value for real estate and 100% cash-on-cash return in 3 to 5 years. Purchases may use bank financing, cash or seller notes. We may also use stock when our valuation improves. For Bombshells, we aim to improve existing locations, target 15% operating margins and return to same-store sales growth. We plan to finish the one location still under development. We'd like to sell the chain as a whole, but the market is it right at the moment.

Finally, we'll continue buying back stock, flexing up when prices look undervalued and increasing dividends modestly. Over the 5 years, we plan to generate more than $250 million of free cash flow and repurchase a significant quantity of shares. By fiscal '29 year-end, our targets are $400 million in revenue, $75 million in free cash flow and 7.5 million shares outstanding. This would double free cash flow per share to about $10 versus fiscal '24.

Please turn to Slide 16 for an update on our progress. We've made some initial progress improving Nightclubs and sales margins. Total sales picked up from 1Q '26 to 2Q '26 with sequential improvement in same-store sales. We're also working to optimize newly acquired and opened locations in order to expand margins. As we discussed on our last call, we've gone back to Bombshells roots at a test location, focusing on being a great sports bar with great food. The goal is to drive higher-margin alcohol sales.

First successful implementation was at Bombshells 59 in Houston. Sales increased 3.6% in the second quarter, making it the best-performing same-store location. We've begun rolling out the concept to other locations. As Albert mentioned, First quarter free cash flow was negatively impacted by paying off year-end legal fees, increased fees related to delayed filings and insurance costs. To help improve cash flow, we're working to drive down SG&A expenses.

Regarding share buybacks, since we began our 5-year plan in the first quarter of 2025, we've reduced shares outstanding by 14.6%. Earlier this month, we increased the amount available under the repurchase program by $20 million. As we discussed last month, we're also in the process of marketing $31.7 million in small clubs and real estate, which have associated debt of about $16.2 million collectively. Converting this to cash and reducing debt will significantly improve our capitalization.

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.

And back to Bradley.

Thank you, Travis and Albert. Eric Langan, RCI's Founder and Head of Mergers and Acquisitions will also be available for the Q&A. [Operator Instructions]Please understand we cannot discuss the legal situation in New York other than to reiterate that the company's statement is that at RCI, the individuals involved and the 3 clubs have pled not guilty all the charges and are taking all necessary actions to defend against themselves.

I'm going to bring up Orchard Wealth.

This is Jason. I just got a couple of quick questions. First one being, with the current expenses behind you, do you think there's any more legal expenses that are going to come up that you haven't set money aside for?

I mean, obviously, we never know because it's a fluid situation. But I think we've definitely set aside plenty of money for the next 12 months for sure. The money we set aside was actually over the estimate of what this case would cost from our attorneys when we began. It's going to be a little strange because if you look at this time, our EBITDA was hit by all of these reserves. And as we move forward, we're going to be paying -- with no cash going out. Now we're going to be paying cash out, but our EBITDA should increase. So it's going to be a little strange try to figure out how everything is going.

So I've kind of gone back to just kind of watching our cash, how much cash we have and what are we doing with it. If you look at -- this is actually an old quarter, right? This has ended through December 31. So we ended September quarter with $33.6 million in cash, I believe. We ended this quarter at $28.7 million. We paid $9 million to ADW between the $8 million down payment and $1 million. We bought $1.8 million worth of stock, I believe. We also paid down our line of credit. We paid a massive amount of our AP, as you'll see the reduction of AP and legal, and we're still sitting at that $28 million.

So the cash generation is fantastic from the club side and the Bombshells are actually starting to come back now. I'm hoping that we get this March 31 quarter out as quickly as possible as well. So we'll be back to current. And everyone will have a really good idea of how things are looking for us currently.

Given the unencumbered real estate that you guys are going to be selling off, do you have any estimation that if you sold the entire bulk of it off after paying all the debt and the obligations to ADL, how much you would be left within cash that you could use for buybacks?

Well, if you figure we're asking $31 million and say we get a 10% discount, which puts us at about $28 million, take 5% of that, about what's that? $700,000 to pay the fees? No, that's not right. I'm sorry. $1.4 million. So we lose another $1 million or so in fees. They pay off the $16 million in debt. You're left with about $10 million or $11 million. ADW -- we pay 50% of that ADW to get rid of that 12% debt. So we'd be like between $5 million and $5.5 million, maybe $6 million in cash left over. We sold everything.

But what we really do is we eliminate a massive amount of carrying costs in $16 million of interest expense annually, property taxes, utilities, maintenance on these properties, things like that. So that's where the real benefit comes in the long term is to eliminate these properties that aren't producing income for us and bring that capital back in and redeploy that capital by drastically lowering our debt, right? Because the $16 million would go down, the $5 million to ADW. You'd eliminate $21 million worth of debt plus on this transaction.

So you'd be getting a multiplier effect that just every time you pay down $1, you're getting much more than just paying down the amount.

Yes, exactly. Because you get rid of the debt and you get rid of the carrying costs for the non-income property, property taxes, insurance, those types of things.

Okay. And then one quick question, this is -- before I go. The accountants made you write down this difference between the agreed to price with ADM (sic) [ ADW ]. And you had to take a hit on that. But had the stock gone up, you couldn't have claimed that as earnings, right? So it only went one way. You could hit you for $9 million, but if they had gone to $50 a share by the time you closed, you couldn't claim it as a gain. Is that right?

Correct. Welcome to GAAP accounting. I mean this is just a GAAP -- it's a GAAP rule. And obviously, the same thing happened to us during COVID, right? Some of the states like New York didn't let us open right away. So we had 12 months where we were massively reduced hours of operation, which reduced our EBITDA, which when they plug into their formula for impairments caused us to impair RICK New York by $8-point-some-odd million or something. We wrote that down to like I think we wrote it down like $6.9 million. RICK's New York made more money than that last year, right?

So this GAAP accounting is -- you guys have heard me call voodoo accounting many times. But we follow the rules, we do what we're supposed to do, and that's how they wanted to book. We booked it that way. We'll just move on. It's noncash. We don't focus on noncash expenses too much. There's no sense in -- we just follow the rules, look it, ride it, move on. We own a lot of our real estate, and we're generating cash, and that's what's important to us in buying back our stock.

Okay. And then one other thing. Since this is filed, you're all caught up with NASDAQ and stuff like that. But the question is, do you think it's going to be much longer before you get the next quarter filed also?

I hope not. We are -- we will be current. We will more than likely file the 12b-25 for an extension on March 11, to give us 5 more days, I think it gives us to the 16 or something like that...

May 11.

Yes, May 11 to the -- so we get to the 16. So that will make us current until the 16, and then if we can get filed by the 16, great. If we can't, then we will be late again, but at least all the time are started over and we'll be -- and it's a Q. So it will be pretty quick.

Thank you. I'm going to bring up Jose Carlos.

Could you hear me, guys?

Yes, we can hear you.

Just two quick questions. In the last conference call, you said that especially among young people, they are pretty much giving up on alcohol or you have to reduce and you have to create new mocktails and create lower alcohol cocktails. I'm wondering if this is something that you see both in Bombshells and clubs. And what -- how is it -- just to get an idea, how does it affect the margin?

I mean I think it's helping revenues in both places. There's still -- the mocktails, of course, are considered a non-alcoholic beverage, so it will go into the non-alcoholic beverage categories. But all of your other stuff will go into alcohol sales exactly the same. So what we hope to do is see a little bit of reduced cost. A lot of those have fruiter drinks or they're canned drinks, which may actually increase our cost a little bit. So -- but I think overall, it will all work out.

And while there's definitely a segment of the population that is cutting back or reducing their alcohol intakes, there's still a very large portion of the population that is out having fun drinking and parting like we always have. So we will continue to monitor it. We'll continue to do what we need to do to stay in front of any changes as best we can and continue to generate cash. But at the end of the day, we'll look at the cash flow and see how that goes. And that's how we'll decide if we're doing things right or not, right?

[Operator Instructions] I'm going to bring up Maxwell next.

A lot of my questions have already been asked, but I do want to say good to see you guys making progress on same-store sales across both Nightclubs and Bombshells. And the one question I do have is any commentary you can provide on the Seville in Minneapolis?

The tenant quit paying rent and as we're in the process of evicting the tenant and hopefully, we'll get a new tenant at some point in the future.

I'm going to make another request for any other questions. If not, I'll close it out in about 10 seconds.

On that note, on behalf of Travis, Albert and Eric, the company and our subsidiaries, thank you, and have a good night. Please visit one of our clubs or sports bars, and have a great time.

Greetings. Gary Fishman is having some technical difficulties. This is Bradley. I just wanted to say welcome to the RCI Hospitality Holdings Fourth Quarter and Year-end Earnings Conference Call. My name is Bradley Chhay.

You can find the company's presentation on the RCI website. Go to Investor Relations section. All the links are on the top of the page. Please turn to Slide 2 of our presentation. Our speakers today are Travis Reese, Interim President and CEO; and Albert Molina, Interim CFO.

Please turn to Slide 3. RCI is making this call exclusively on X Spaces. To ask a question, you will need to join the Space with a mobile device. To listen only, you can join the space on a personal computer. At this time, all participants are on listen-only mode. A Q&A session will follow after the call. The conference is being recorded.

Please turn to Page 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 to Page 5. I also direct you to the explanation of RICK's non-GAAP financial measures. Now I'm pleased to introduce Travis Reese, Interim President and CEO. Take it away, Travis.

Thank you, Bradley. Thank you all for joining us. Please turn to Slide 6. I'm pleased to report that we filed our 10-K today and announced our fourth quarter and year-end results. All comparisons are year-over-year unless otherwise noted.

Looking at the fourth quarter, Nightclub revenues were nearly level despite continued economic uncertainty. Bombshells revenues primarily reflected the previously announced divestiture/closure of 5 underperforming locations. Profitability primarily reflected higher noncash legal accrual, increased income taxes, and lower impairments.

We also continue to make progress with our Back to Basics 5-Year Capital Allocation Plan. Since we initiated the plan in 4Q '24, we divested of 4 Bombshells in leased locations, acquired 3 nightclubs, opened 4 new clubs in the Bombshells, attracted outside investment in 1 nightclub, sold 2 small underperforming clubs, and continued to buy back shares. As of March 13th, we've reduced the share count to approximately 7.7 million, about 14% lower than at year-end September 30, 2024.

Now here's Albert to review our performance in more detail.

Thanks, Travis. Turning to Slide 7. I'll start with a review of our fourth quarter results. All comparisons are year-over-year for the quarter, unless otherwise noted. Total revenues were $70.9 million compared to $73.2 million. A difference of $2.3 million primarily reflected 5 fewer Bombshells-related locations, partially offset by new nightclub locations.

Corporate expenses totaled $15.4 million compared to $7.1 million. The difference of approximately $8.3 million primarily reflected the establishment of a legal reserve. Impairments and other charges were $3.7 million compared to $10.1 million, a difference of $6.4 million. Income tax was $1 million expense compared to $0.8 million benefit.

Net income attributable to RCIHH common shareholders was a loss of $5.5 million compared to a profit of $244,000. Loss per share was $0.63 compared to a positive EPS of $0.03, while net cash provided by operating activities was $13.7 million compared to $15.7 million. Free cash flow was virtually level at $13.1 million due to the lower maintenance CapEx in the current quarter. Adjusted EBITDA was $7.4 million compared to $17.9 million. Non-GAAP loss per share was $0.12 compared to a profit of $1.63.

Moving to Slide 8. I will now cover our fourth quarter results by segment, beginning with Nightclubs. Again, all comparisons are year-over-year for the quarter, unless otherwise noted. Revenues totaled $60.9 million, up 0.4%. Key factors included contributions from 4 new clubs acquired or opened in the second and third quarters, and sales from 2 smaller rebranded and/or reformatted Texas clubs, not in same-store sales base. This was partially offset by the decline in same-store sales and reduced sales from closing Dallas Showclub in the fourth quarter of '25 for reformatting and from Baby Dolls Fort Worth due to the fire.

By revenue type, food, merchandise, and other increased 4.3%; service increased 1.5%; and LBW declined 2%. I'd like to point out that some clubs stood out, such as Rick's Cabaret in Fort Worth, one of the star locations of the Landman TV series, Rick's Cabaret and Hoops Sports Bar in New York City, Rick's Cabaret in Pittsburgh, and Jaguars Club in Phoenix. Other net charges totaled $2.1 million compared to $6.9 million. This primarily reflected impairments in both periods. Operating income was $16.3 million compared to $13 million, and margin was 26.8% of segment revenues compared to 21.5%. Non-GAAP operating income, which excludes other net charges, was $19.1 million compared to $20.5 million. Margin was 31.3% of segment revenues compared to 33.8%.

On Slide 9 are the results of the Bombshells segment. Revenues totaled $9.4 million, a decrease of $2.6 million. Key factors included fewer locations and the decline in same-store sales. This was partially offset by the opening of new locations in Denver, Colorado in January of '25 and Lubbock, Texas in early July '25. Other net charges totaled $1.6 million compared to $3.2 million, which primarily reflected impairments in both periods. There was an operating loss of $1.6 million compared to a loss of $2.6 million.

On a non-GAAP basis, which excludes impairments, there was an operating income of $29,000 compared to $649,000. I'd like to point out that our main focus for Bombshells is profitability, not sales. While same-store sales are down, profitability is improving.

Moving to Slide 10. You will see a summary of our corporate expenses. As I mentioned, GAAP expenses totaled $15.4 million, with non-GAAP slightly less. Both reflected the noncash legal accrual. GAAP corporate expense margin was 21.8% of revenue. Excluding legal accrual, it was about 9%.

Please turn to Slide 11. We have slides coming up 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.

Slide 12, please. We ended the fourth quarter with cash and cash equivalents of $33.7 million, up $4.4 million from June 30. During the quarter, we used $2.7 million to buy back shares. Free cash flow continued in the $13 million range for the second quarter in a row. As a percentage of revenues, free cash flow margin was 18%, virtually level with the year ago quarter. The adjusted EBITDA margin was 10% of revenues. Excluding legal accrual, it was about 23%.

Turn to Slide 13. Debt declined $5.5 million from June 30, primarily reflecting scheduled paydowns. We continue to control the rate paid on our debt with a weighted average interest rate of 6.64% compared to 6.67% in the year ago quarter. Total occupancy cost was 8.1% of revenues, virtually the same as a year ago.

Debt to trailing 12 months adjusted EBITDA was 4.48x, mainly reflecting the impact of the fourth quarter legal accrual. But excluding that, it was about 3.83x. Debt maturities continue to remain reasonable and manageable, particularly in our plans to sell nonincome-producing properties. Note that the first quarter of fiscal '26 will include $22 million in 2-year seller financing note from the ADW transaction.

Now back to Travis.

Thank you, Albert. Please turn to Slides 14 and 15 to review our capital allocation strategy and 5-year plan. Our plan remains the same. We allocate approximately 40% of free cash flow to club acquisitions and 60% to share buybacks, debt reduction, and dividends. Our goal is to grow free cash flow per share by 10% to 15% annually.

Operationally, we're focusing on our core nightclub business. We review every club regularly to increase same-store sales. Underperformers will be rebranded, reformatted, or divested. We're currently generating about 70% of our income from 20% of our clubs, so there's significant opportunity to optimize our portfolio.

Divesting underperformers will help us increase margins, and we can use sale proceeds to repurchase stock, acquire higher-quality locations, or reduce debt. Our goal is to add an average of about $6 million of adjusted EBITDA each year through acquisitions. We want to target strong clubs with an occasional strong group of clubs. Acquisition target metrics remain 3x to 5x adjusted EBITDA for clubs, fair market value for real estate, and 100% cash-on-cash return in 3 to 5 years. Purchases may use bank financing, cash, or seller notes. We may also use stock when our valuation improves.

For Bombshells, we aim to improve existing locations, target 15% operating margins, and return to same-store sales growth. We plan to finish the 1 location still under development. We'd like to sell the chain as a whole, but the market isn't right at the moment. Finally, we'll continue buying back stock, flexing up when prices look undervalued, and increasing dividends modestly. Over the 5 years, we plan to generate more than $250 million of free cash flow and repurchase a significant quantity of shares.

By fiscal '29, our targets are $400 million in revenue, $75 million in free cash flow, and 7.5 million shares outstanding. This would double free cash flow per share to about $10 versus fiscal '24.

Please turn to Slide 16 for an update on our progress. Some of these we've already reported. Divesting or closing underperforming Bombshells locations, acquiring 3 nightclubs, opening 2 new Bombshells and 2 new nightclubs, outside investment in Rick's Cabaret, Austin, and selling a club in Harlingen, Texas.

To date, in fiscal '26, we sold a club in Edinburg, Texas for $1.1 million, recognizing a small loss and paying down debt. Excluding the ADW transaction, we bought back approximately 153,000 shares in the open market since fiscal '25 year-end through March 13, 2026. Currently, we're marketing 3 small nonperforming clubs and their real estate. They have a combined estimated value of $7.5 million and associated debt of $3 million. We're also marketing 8 nonincome-producing properties. This group has a combined estimated value of $24.2 million and associated debt of $13.2 million. We're working to finish or build 3 more locations in the greater Dallas area, including a Bombshells in Rowlett, a new Baby Dolls in West Fort Worth, and a rebuilt Baby Dolls Fort Worth.

Please turn to Slide 17 to review our long-term performance. Since we implemented our capital allocation strategy at the end of fiscal '15, we believe we've generated above-average performance for a mature publicly traded company. The standout is free cash flow compounding annually at about 11.8%, combined with buybacks that have reduced shares outstanding by approximately 1.6% on a compound annual basis.

Now that we filed our 10-K, we hope to file our 10-Q relatively soon. Our agenda this year is continuing with our capital allocation plan, improving club and restaurant operations, selling excess real estate and underperforming locations, and deploying our cash to acquire additional clubs, reduce debt, or repurchase shares.

I'd like to thank our dedicated team members for their efforts and hard work, and all of our shareholders who believe in us and make our success possible. Now back to Bradley.

Thank you, Travis and Albert. If you would like to ask a question, please raise your hand in the X Space. When you are finished, mute your microphone to eliminate background noise. We have a limited number of speaker spaces. After your question, we may move you back to the audience to free up space. Eric Langan, RCI's Founder and Head of M&A, will also be available on the Q&A.

Please understand that we cannot discuss the legal situation in New York, other than to reiterate that the company's statement that RCI, the individuals involved, and the 3 clubs have pled not guilty to all of the charges and are taking all necessary actions to defend themselves against the charges.

On behalf of Travis, Albert, and Eric, the company, and our subsidiaries, thank you. Goodnight. Oops, sorry.

We might want to do some Q&A first before you tell everybody good night, Bradley.

Right, exactly. Hold on. I'm bringing on Orchard Wealth as a speaker.

Obviously it's been a long time since I spoke with you guys. Question for you guys is, when do you think you'll be able to give us a ballpark when you'll be able to file the next quarterly for the first quarter?

We want to file as soon as possible. We were obviously waiting on auditors. They're in their prime season because this is their -- if you have a 12/31 year-end, their 75-day and 90-day filers are all coming up right now. So they're in their prime work season. So I'm going to guess sometime in April, we will hopefully file the 10-Q based on their availability. I think most of our work is done, but we have to get their work done as well.

Okay. So for April, we've got the first quarter numbers will come out, plus the sales numbers for the second quarter will be announced at some point during the month.

Yes, that should be the case, we hope.

Right.

Obviously, I can't guarantee...

No, no. I mean...

The Q will be filed. But, yes, I believe at this point that that's a good outline. We'll definitely get the sales numbers out, though.

Okay. And then your overall feeling in the space right now with just the environment as it is right now, what's your feel or your read on the clubs and on Bombshells?

We've been doing very well. March Madness starts up today, so there's some games going on. We've had a pretty solid January and February so far. Obviously, last quarter, we only did $70.3 million in revenue, I believe, and we were drastically affected by the 42-day close down. The close down is starting to hurt us now, though. As you know, if you've read in the papers and stuff, that the airplane travel, so we do have a lot of business travelers.

But at the same time, some business travelers are getting stuck in cities and they're ending up at our clubs because they're stuck overnight because their planes or flights got canceled, they can't get through security in time. So it's unknown how that's going to play out if this continues long term. Hopefully, our government will become functional again at some period and get these TSA agents paid and back to work.

But overall, it's been good. There might be a little concern with oil prices, but oil is great for a lot of our markets, especially in Texas. So that's, I think, almost a zero-sum game for us, not going to change a lot in that regard. But we are seeing prices come down on some food items and whatnot. The liquor companies are getting more competitive because less people are drinking, so they're getting more competitive. That's always good for our business and our costs.

As you see, our costs fell down to like 13.1%, I think, cost of goods for this past quarter, and I'm hoping we'll continue to see that as we move into the next 6 months because this data is a little bit old, but it has continued.

Okay. And then the auditors made you guys do some minor impairments and then obviously have a large set aside in reserves for this legal thing. But there's...

If you want, I'd like to -- give me a second. I'd like to talk about the reserves because the reserves have drastically affected the numbers for this quarter. And I'd like to keep everybody's focus. If you remember, we always say our focus needs to be on free cash flow because we think that's the best metric for how we're performing. And our free cash flow was $45.4 million approximately.

Legal reserve is about $9 million. But I would like to remind everybody also, we had no insurance last year. So we had to do all these reserves for insurance, which we don't normally do. And normally, insurance costs us about $5.5 million a year, and we reserved $9.5 million for last year. So total reserves in 2025 were $18.5 million. So compared to a cost last year, probably about $5.5 million -- for the previous year, $5.5 million for the insurance for the G&L and liquor liability insurances. So there's significant room there.

If these reserves aren't used, we will see those -- we'll see that add back in future quarters as well. So -- and if they are expensed, then -- if expenses do come out, then they're already reserved for, so they won't affect -- they won't negatively affect forward-going earnings.

Okay. So the idea basically is the reserves that you put aside in this quarter, we're not probably going to see any sort of -- or at least it doesn't look like we'll see any surprises that will come in 2026. So that's kind of in the background now.

I think so. I mean, I don't know, $9 million reserve -- legal reserve is a huge number to me. But that's the estimates that everybody gave, and I think that's going to go through trial and everything. So I don't disagree with the number. I think it's strong. But like you said, it will eliminate any possible -- I think any possible surprises in legal expenses or insurance costs for 2025 in the future.

All right. Next up, we're going to take Maxwell Ellis, handlebar @EightfoldPath65. Make sure you unmute your microphone. You should be on a speaker now, Maxwell. You just have to unmute.

First off, I'd like to say I think we're all wishing you guys the best of luck in your trial case. I think we're all crossing our fingers and rooting for you. Got 2 questions. The first one is on the capital allocation strategy. Just given where the current share price is, how do you guys balance between acquiring clubs, paying down debt, and buying back shares given in today's environment, I think buying back shares might make a little bit more sense than acquiring clubs or paying down debt.

Well, as you can see from Albert's announcement that since the end of the fiscal year, we've bought another 153,000 shares in addition to buying back 820,000 shares in the ADW Capital transaction. We're using 100% of our free cash flow to buy back our shares because why set aside 40% to make club acquisitions at a higher valuation than we can buy back our existing is my philosophy on it.

So we are pouring our cash into the stock buyback when it's down here at these levels. Anything under what we paid ADW Capital, I think we just buy stock. We think that's -- we had a fairness opinion done on that ADW Capital transaction. And so that's a fair value for the company. Then why would we go out and buy other stuff? We'll just use all of our cash we can to buy back our stock.

Fantastic. That is exactly what I was hoping you'd say. And I'm using all my cash to buy stock, too. So I think we're in the same boat.

I think in the long run, we're both going to come out way, way ahead, so.

Second question. Last earnings call, I believe some figures were discussed in between, call it, $65 million to $85 million of real estate value. I know you guys have had a couple of press releases on the real estate transactions. Is the total number to think about still in the $65 million to $85 million range? Or is it, hey, this year, it's going to be closer to $32 million to $34 million?

Well, I think you're confusing the nonincome-producing assets with the Bombshells sales. We have somewhere between -- I think it was in there, they listed at $24 million left in real estate and about $7 million in underperforming clubs that we have for sale. So call that $30 million on the round side. The $65 million to $85 million is the valuation for the entirety of the Bombshells operations, real estate that we were -- that we've been shopping with certain private equity groups in that range, in that $65 million to $85 million range.

This is Bradley. If you would like to speak, raise your hand and I'll pull you up. Just give it a few seconds. We got nobody else. Eric, do you want to say anything in closing?

Yes, I just have one final thing. I'd just like to bring up that if you look at our nightclub mix, it's been fairly consistent between alcohol sales. I know there's been a lot of articles out there that people aren't drinking anymore. I would beg to differ with those things. They may be spending less on alcohol, but they are still fairly consistent at our clubs in alcohol between 40% and 43% alcohol sales with about 17%, 18% for food and other, and service revenues in the 40%, 42% range as well.

So I'm not too worried. I've been getting a lot of questions and calls recently about are people drinking, are people drinking because of all the media. But I would add that we've also added mocktails, we've added a lot of specialty, not as high alcohol content, like 1/3 alcohol content drinks and stuff like that to our menus and to some of the clubs, and we're doing very well in that regards with it.

Also on the Bombshells, we've made some major changes in January, February, March, and I think you're going to see some of those results as we get the May financials out, but definitely in the April, May, June, after we open Rowlett, which will be a flagship location for us. And we continue to -- I call it a conversion, because for about the last 3 years, the Bombshells management team really turned Bombshells from a sports bar and restaurant into a restaurant that had a sports bar in it. And our concept now is going back to its roots where we are a sports bar that has good food, not a restaurant that has a mediocre sports bar.

And with that focus, we're seeing our percent of alcohol sales increase in Bombshells back to where it used to be around 60% to 65%, up from, I think, this year was 52%. And so I think we're going to see that continue to increase. And my internal goal is to get that to at least a 60-40 split. And the ultimate goal will be to be at a 65-35 for Bombshells. At that point, they become very highly profitable again.

As I've studied and got into this, as we -- especially as we started looking to sell the overall concept, the biggest change in net incomes and in operating [ deal ] and times of sales, so going into the POS data, is that we've really lost our bar business. And so we're going to -- that's what we do best. We're in the bar business. And so we're going to be back focused on that. That focus started in mid-January, and we're seeing some pretty good results at the 2 locations that we started the -- changed the concept in. And as of the first week of March, we're now pushing all of those changes across the entire chain.

So I'm very hopeful that when we put some numbers out and we talk in May, that we're going to have some pretty good news for everybody on that front. That's all I got, Bradley.

On behalf of Travis, Albert, and Eric, the company, and our subsidiaries, thank you, and good night. Please visit one of our clubs or restaurants and have a great time. Thank you so much.

Greetings, and welcome to RCI Hospitality Holdings Third 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 the host of 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.

Please turn with me to Slide 3. RCI is making this call exclusively on X Spaces. [Operator Instructions] 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 may 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. Nightclub revenues were nearly level despite economic uncertainty related to tariffs and the tax bill, which affected our customer base. Bombshells revenue reflected the previously announced sale and divestiture of 5 underperformers, but both revenues and margin increased sequentially from the second quarter. Consolidated profitability benefited from the absence of impairment charges partially offset by other factors. We continue to make solid progress on our back to the basics cap allocation plan. We acquired 2 upscale night clubs, Platinum West in South Carolina and Platinum Plus in Allentown, Pennsylvania. Price multiples were in line with our capital allocation strategy. We opened Rick's Cabaret Steakhouse -- I'm sorry, Rick's Cabaret and Steakhouse in Central City, Colorado.

We also purchased more than 75,000 shares of common stock for $3 million and ended the quarter with approximately 8.76 million shares outstanding. Subsequent to the quarter, we opened a Bombshells location in Lubbock, Texas, which has been doing very well right out of the gate.

Now here is Bradley to review our performance in more detail.

Thank you, Eric. Turning to Slide 7. I'll start with a review of our third quarter results. All comparisons are year-over-year for our quarter -- for the quarter, unless otherwise noted. Total revenues were $71.1 million compared to $76.2 million, a difference of $5 million. This primarily reflected the sale and divestiture of underperforming Bombshells locations late in fiscal '24 and early fiscal '25.

Impairments and other charges were $2.3 million compared to $18.3 million, a difference of approximately $60 million. Net income attributable to RCIHH common shareholders was $4.1 million compared to the loss of $5.2 million, a difference of $9.3 million, and GAAP EPS was $0.46 per share compared to a loss of $0.56 per share.

Net cash provided by operating activities was $13.8 million compared to $15.8 million, a difference of $2 million, and free cash flow was about level at $13.3 million compared to $13.8 million. Adjusted EBITDA was $15.3 million compared to $20.1 million, and non-GAAP EPS was $0.77 compared to $1.35. Most of the year-over-year difference in non-GAAP EPS was due to slightly lower margins in Nightclubs, lower margins in Bombshells, higher noncash expenses related to our self-insurance program with higher taxes.

Now moving on to Slide 8. I will now cover our third quarter results by segment, beginning with Nightclubs. Revenues totaled $62.3 million, down less than 1% year-over-year. Key factors included a 3.7% decline in same-store sales and the absence of Baby Dolls Fort Worth due to a fire. This was mostly offset by $2.6 million from newly acquired or rebranded Nightclubs.

By revenue type, food, merchandise and other increased 5.1%, service increased 0.3% and alcoholic beverages declined 3.9%. Other net charges totaled $2.3 million compared to $7.7 million. In the third quarter of fiscal year '25, this included a mostly noncash lawsuit settlement partially offset by a gain on insurance. In the year ago quarter, this primarily included impairments. There were none in this quarter.

Operating income was $17.8 million compared to $13.6 million with the margin at 28.5% of revenues versus 21.7%. Results reflected the decline in other net charges and same-store sales, acquisitions not fully optimized and the Central City preopening costs. Non-GAAP operating income, which excludes other net charges, was $20.7 million compared to $21.9 million with the margin at 33.2% of segment revenues versus 34.9%. I'd like to point out that while GAAP and non-GAAP operating margin were down year-over-year, they have increased 2 quarters in a row sequentially.

Turning to Slide 9. Here are the results of the Bombshells segment. Revenues totaled $8.6 million, a difference of $4.5 million. The key factors here included the sale and divestiture of 5 underperforming locations in the fourth quarter of '24 and the first quarter of '25, which impacted revenues by $3.8 million and a 13.5% decline in same-store sales. This was partially offset by 2 new locations not in same-store sales.

Other net charges were minimal in the third quarter of '25 versus $10.3 million in impairments last year. There was an operating income of $87,000 compared to a loss of $8.9 million with the margin at 1% of segment revenues versus a negative 68%. Results primarily reflected the decline in impairments, sales from open locations and Lubbock's preopening costs. Now on a non-GAAP basis, which excludes impairment, there was an operating income of $100,000 compared to $1.4 million profit with the margin at 1.2% of segment revenues versus 10.8%.

Moving to Slide 10. You will see a summary of our corporate expenses. GAAP expenses totaled $8.7 million, an increase of $1.5 million. Non-GAAP was $8.3 million, an increase of $1.9 million. As we've explained on previous calls, starting this year, corporate expenses are being affected by an estimated noncash self-insurance actuarial reserve for the quarter. That's why expenses were higher year-over-year in the first quarter, lower in the second and higher in the third.

Please turn to Slide 11. We have slides coming up that discuss free cash flow and adjusted EBITDA, which are non-GAAP. And [ as that's that ], we wanted to present the closest GAAP equivalents, which are operating income, net cash from operations, net cash by operations and net income.

So please turn to Slide 12. We ended the third quarter with cash and cash equivalents of $29.3 million. During the quarter, we used $5.25 million as part of our 2 Platinum acquisitions and $3 million to buy back shares. While they were down year-over-year, I'd like to note that both free cash flow and adjusted EBITDA increased sequentially. As a percentage of revenues, free cash flow margin increased from 11% in the second quarter to 19% in the third and back to where we were 2 years ago in the third quarter of '23, while adjusted EBITDA remained approximately level at 22% for each of the first 3 quarters this fiscal year.

Please turn to Slide 13. Debt at June 30 declined slightly $201,000 from March 31 quarter. This reflects the scheduled paydowns, new acquisition-related debt and construction financing for Bombshells Rowlett and Bombshells Lubbock. We continue to control the rate paid on our debt with an average weighted interest rate of [ 6.8% ] compared to 6.74% in the year ago quarter. Total occupancy cost was 7.9% of revenues, level with last year, and debt to trailing 12-month adjusted EBITDA was 3.82x compared to 3.56x in the preceding quarter. While debt stayed approximately level because of the recent acquisitions and adjusted EBITDA increased sequentially, adjusted EBITDA for the trailing 12 months declined. As new locations generate revenue and EBITDA, occupancy costs and debt metrics should improve. 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 40% of free cash to club acquisitions and 60% to share buybacks, debt reduction and dividends in order to grow free cash flow share annually at a 10% to 15% rate.

Please turn to Slide 15. Operationally, we are focused on our core nightclub business, reviewing every club to increase same-store sales on a regular basis, and we will rebrand, reformat or divest underperformers. Our nightclub plan also involves acquisition. Our goal is to acquire an average of about $6 million of adjusted EBITDA per year, focusing on the best clubs, buying base hits with an occasional home run. Our target matrix remain the same: 3 to 5x 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 will be made with cash on hand, bank financing or seller notes. We would also consider using stock when our valuation improves.

For Bombshells, we are working to improve performance at existing locations, targeting 15% operating margins and return to same-store sales growth. We also plan to complete the one remaining location currently under development. The final part of our plan is to regularly buy back our stock. Select enough if we consider the price to be particularly undervalued, we also anticipate modest annual dividend increases. Over the 5 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 and 7.5 million shares outstanding. The end result would be doubling our free cash flow per share to approximately $10 per share compared to what we did in fiscal '24.

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 have about 8.7 million, which represents a reduction of 15.5%.

Turning to Slide 17. We have only 3 remaining projects. We are targeting Bombshells Rowlett for opening late this summer, early fall. We are also still awaiting construction permits for Baby Dolls West Fort Worth, and we are awaiting engineering view and zoning plans for the Baby Dolls Fort Worth that burned down last year. I would 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 to open up the question-and-answer section.

Thank you very much, Eric and Bradley. [Operator Instructions] First off, we have [ Orchid Wealth ].

Can you hear me?

Yes.

I just got a question. How much in real estate do you guys have that you think you could be selling off that's nonperforming or just holding in general?

As we've said in the previous calls, about $28 million is our estimated value of it. We have some contracts on a couple of pieces. We're in negotiation on a couple more. So I think -- as I've said by the end of this year, I think we'll start -- will actually be fiscal -- first quarter fiscal '26, I think we'll start seeing some of those closings happen, and I think we'll see more offers if the Fed cuts rates or if the economy picks back up again for commercial real estate.

And if you were to liquidate all, let's say, $28 million, how much of that would have to go to just pay back debt? And what do you think you guys would be left over with?

I'm not sure. The main piece is a piece that we bought for about $2.150 million in cash and then rechanged zoning on it. It's worth somewhere between $8 million and $14 million, and we don't really owe anything on it. So that would be a big chunk of cash. The rest of it would be about less than 60% would go to debt as all of our original loans were 60% or 65% loan to value. Those were based on appraisals from a few years back. So I would say somewhere around 40% to 45% go to cash and the rest would go to service debt, other than a few pieces that are worth considerably more than what we paid for them. And that would be the opposite. 60% to 65% would go to cash and 30%, 35% to debt.

Okay. And then the thing about the insurance, you guys are now not buying insurance. You're self-insuring. How much should we basically be modeling that you guys are going to be setting aside for this particular self-insurance going forward?

There's no way for us to really know that number at this point. I can tell you year-to-date, we're at $9.4 million is based on actuarials, and it's based on when we settle claims from the past, when new claims are made. But it's a constantly changing number for us. So at this point, we can't really say what they're going to reserve. And then to me, the real key is when will those reserves come back to us if they're not used because we have to wait through certain statute of limitations and certain other things. So -- and this reserve number could become a very large number over time. We're in the process of initiating a captive that we would have set prices. We know exactly what we'd be paying for the insurance. And I'm hopeful we can get that operational soon. So they won't be able to answer those questions because we'll have a policy through a captive that we'll own, but at least we'll know what the fees are on an annual basis.

Is this one of these things that like it's got a lot of start-up costs in the beginning and then you kind of taper down and then reach a run rate for every quarter?

Well, we thought that because we had $4.1 million in one quarter, then the next quarter we had $1.4 million, but then we just had $3.9 million in this last quarter. We cannot figure out the math of it. The problem is the math is ever changing based on claims, based on loss runs with our other insurance companies because they have to take those claims and put them out. And since we're not using insurance companies anymore, they're all setting -- they may change -- we may get a claim and they may put some high reserve on it, which that reserve then affects our reserves going forward. Until that case is actually settled and we know exactly what we pay on it, then they'll revamp in the next quarter, we might not pay anything, right? I mean it's -- I guess that it's -- it's a lot of math, and it's all guesswork. So...

Next, we have [ D&D Realty ].

I really want to commend you guys on your pace of acquisitions. I think that, that's a really -- a nice tailwind for the company, and you guys are sticking to plan. So I think that's great. My question -- I kind of -- I have 2, one pertaining to the acquisitions, which is when you guys go out and bid on these assets, who are you competing with? Are there other groups out there that are bidding against you? Are you bidding against yourself? Are you the only real exit capital that exists for a lot of people? I'm just kind of curious around that dynamic.

And then my second question pertains to -- I think in a prior call, you mentioned a potential tailwind from some of the tax policy that would get -- that has now since gotten reworked under the Trump administration. I'm just curious, is -- are you -- early days obviously. Are you seeing an uptick in activity potentially due to that? Or is -- do you still feel that the economy and kind of some of your service charge, which you called out last quarter is still muted?

Well, from the acquisition side, I mean, there are lots of competitors for acquisitions and that their own management team, you've got LBOs, you've got other operators that would like to expand in local markets that they're operating in. I do think we're the acquirer of choice. They know we have cash. They know we can come up with large sums of cash. We've multiple times through the last 2 decades. They know if they want to carry paper and create an annuity for themselves or for their family or for their trusts. We have an unbelievable track record and unmatched track record from other operators on making all of our payments on time, even through COVID. So I think those things weigh in.

We don't really bid against anybody or against ourselves. We kind of have a set formula. We ask for their numbers. What we do is we evaluate what we believe is the longevity of that cash flow, whether it's licensing restrictions in the area, how easy competition can open up, whether the license has court protections or grandfathered in. And then we use a 3 to 5x multiple based on what we believe the protection of that license is. And that's how we've always done it. And that's, I think, how we'll continue to do it. It can slow the process sometimes, but it also saves us from making big mistakes. And I think right now, especially in this environment, the most important thing we can do is not make mistakes.

And then your second part, the tax pump. I mean I think that the tax bill just passed. I think companies are starting to realize they've got, I guess, what, we're in August now. So you got 5 months left. You want to make a major bet to close by December 31, you better get on it. So I think those transactions are -- I think companies are starting to look at that. I think you're going to start seeing some capital improvements done at some major companies. I know we've been hearing all these manufacturers that -- saying $600 billion here and $1 trillion there and $500 million here and new plants and whatnot. I don't know if those will all hit this year. They did make the tax cuts permanent, so it's not like they have to rush out and do it by December 31, unless they owe taxes for this year.

But I do believe that as -- we are going to see some of that. Look, our club do very well when there's new money or money is really moving. The pace of money has slowed down considerably, right? There are record numbers in money market accounts, a lot of people sitting on the sidelines. Only the top stocks in these indexes are performing well. So I think there's -- like I said, a lot of money is sitting on the sidelines. As that new money starts moving into things as we move forward, I think that will be a considerable bonus for our company. As far as -- liquor sales were down 3.9%, but our service revenues were actually up just a little bit over last year. So I would say service revenues are coming back a little bit. We'll see what happens as we move through these next 2 quarters. Hopefully, we'll continue to see the service revenues increase. They are our highest margin revenues here.

Next up, we have Adam Wyden. [Operator Instructions]

This is for Bradley. So on the insurance reserve, you guys have $9 million year-to-date, and I guess you'll have some on the fourth quarter. But you're not paying for insurance anymore. So the question I have is, at some point, I know it's going to normalize. I mean can you sort of quantify how much -- I mean, because it's obviously noncash. You're taking this charge, but the cash is sitting in your -- on your balance sheet. It's in treasuries or somewhere. I don't know if it's -- but like how should we think about sort of the total sort of weight on EBITDA this year relative to what you would expect it to be going forward? I mean is there any way we can try and do that? I mean I think the goal in this was to save money. So -- and at least from when I read the files, it looks like you're -- it's costing you money year-over-year. So I'm just trying to understand, at some point, you build enough reserve that eventually you don't have to reserve any more in some capacity or the reserves go down. I mean how should we be thinking about that?

From a net income standpoint and an adjusted EBITDA standpoint, these charges are very real from a GAAP basis and a non-GAAP basis. So technically, yes, it's hurting EPS. It looks like a negative charge. But we don't get to add it back because it's normal and reoccurring. Now you're saying it cost us money. It doesn't really cost us money because it's not impacting free cash flow. So those are the clarifying points I wanted to make. As far as the run rate, like Eric once mentioned, I hate to just lean back on this, we just don't know. It's -- every quarter, we have an actuarial expert, and they go and they look at all our claims, all our losses, any new claims, any claims and they do what's called a true-up or true-down. So on a normalized run rate, call it, somewhere between $10 million to $12 million based upon this year's year-to-date actuarial estimates, and that's all that is.

As far as the actual captive insurance program, once that's live and operational, we would be paying ourselves somewhere between like $400,000 to $500,000 a month for the premiums.

Okay. But I think -- I mean, again, I'm just going back in time, then I got another question. My understanding was that you guys have never really paid out more than a few million dollars in a given year for settlement. So the idea was you were paying like $10 million or $12 million in insurance, but the actual settlements on average never really were more than $3 million. So I guess the question I have is you're basically reserving as if it's $12 million, but that -- I mean, you've never paid out $12 million in a year. So like this can't like sort of continue, right? I mean that's just sort of like, right, real logically. You never paid out $12 million in losses in a year, right, ever?

Correct. Well, there are some years like the New York one, that was about a decade ago that -- yes, some settlements [indiscernible].

That wasn't insured.

Okay. That wasn't insured.

Yes. So that's sort of my question. I mean if we're run rating $12 million of insurance reserves, that would imply that we would pay $12 million in lawsuits a year. So I just -- because again, the EBITDA number -- the free cash flow looks great, right, obviously, in light of what's going on, but the EBITDA number doesn't make a whole lot of sense. So that's why I'm just trying to reconcile those 2. Because if I sort of just think about it, like you guys don't want to pay insurance anymore. You are run rating $12 million of reserves. You're not paying it out in cash, obviously, because we can see it in the free cash flow. So it's sort of like presumably at some point after you build a big enough buffer, right, with these charges, at some point, you would expect them to go down, right, I mean, like realistically.

I hope so, Adam, to be honest. I just don't have enough data on it. We really thought our captive would be active before we [indiscernible] to any type of self-insurance mode that we're at today. It just took the stage a long time to get it done, and now we're really working on our policy. The more we study it, the more we learn about it. We just want to make sure we do it right this time because we don't want to set up a captive that then goes bankrupt. So we believe we have the formulas down. We're working on them. When it comes to these actuarials, these are -- this is a completely different math. It's a GAAP principle that has to be followed to do these actuarials and do these accruals. And I mean you've heard me say it before, I don't think it's rooted in any type of reality of what is. It's always what if. And all of your GAAP stuff when you're accruing stuff and doing these things must take into account the absolute worst case scenarios, not best case scenarios. So what you want to look at is best case scenarios and what they have to look at is worst case scenarios. If you look at average for the last 15 years of actuarials where we have what we've actually paid out versus what we paid in premiums, we would have come out way ahead if we had self-insured all of those years. In fact, I think there's only 1 year where we wouldn't have. And that's because we allowed someone to sell us way too much insurance and then we couldn't settle any cases because everybody would rather try their luck in court and go after the big lottery ticket versus settling the case for a reasonable amount. And so that particular year, we had some high stuff, but that was many years ago. Of recent years, it's been much more realistic.

And then the problem was when we got our insurance quote this year or for this year, they wanted -- between the fees and everything, we would have paid almost $9 million for $10 million worth of insurance. And to me, that just did not make any economic sense whatsoever. When we could not do that, we could do this captive referral system where we put the money in. Part of the actuarial system is you don't get any return on what you put in the reserves, right? So it's just basically how reserves and is not growing, whereas you when you have a cap or an insurance company, they take the premiums and invest those premiums, which then help offset the cost and expenses. And so the actuarial is very, very different in a self-insurance versus a captive. So hopefully, we'll have this captive set up soon. I would like to see it set up by October 1, if at all possible. I think we're definitely working towards that date. Whether we'll be successful or not, I don't know. But I think by calendar year-end, we should be able to have everything in place for it. And then we'll have the actual insurance costs because we'll be paying insurance costs not accruing an actuarial. The insurance company will accrue actuarials, but they'll do that based on their premiums and whatnot, not -- and their claims, not past ones.

Right. So I get it. So the idea is like long story short, like when you guys get the captive set up, the noncash charge to EBITDA will be a lot less because you're going to -- you basically -- they're -- it's a separate insurance company that you're going to have the premiums to that you control. And so all of this $12 million a year stuff is probably going to go away. Because if you look at -- on the Slide 12, if you look at the free cash flow, it's basically flat year-on-year. And most of the quarters, it's more or less been flat. So EBITDA in this case, the way you reported is sort of not a great reflection of financial performance because you're not actually paying out the money, if that makes any sense.

It makes a lot of sense for fiscal 2025.

Yes. So it's so -- I mean all I'm trying to say is next year, when you get the captive set up, you should get a reversal on reported EBITDA because you're not going to be taking these types of insurance reserve charges realistically.

There are a few things we can possibly do when that time comes. And that is we can leave this 2025 as a self-insured year, and then they'll run actuarials every quarter going forward. If there's extra reserves, they would be put back in. If more reserve are needed, we have to expense more. The other thing we could possibly do is buy an insurance policy. Once we know all the claims, there's a 2-year statute of limitations, I think, but we could figure out what the claims are. A lot of insurance companies do this where they will then -- what's called selling the book. So we would take all the potential liability and sell that book for a set dollar amount where basically, we would pay a company x amount of dollars and then they would take all the liability on a go-forward basis for those deals. And what they do is they hope to settle those cases for less than reserves. And if the reserve -- if we can sell -- let's say we've got $12 million in reserves but we can sell the book for $8.5 million, then maybe we sell that book for $8.5 million and we get the other $3.5 million as an income back in on our books.

So there's lots of things as we move through the future of this and figure out this insurance math, let's call it, in a much better format. And of course, our actuarials, I mean, as we get the actuals, we'll be able to -- actual costs will be able to have a much better idea as well. So and we may have no claims, right? I mean we just -- right now, you don't know. Typically, a claim in an insurance year usually takes anywhere from 18 to 24 months to be made. And since we've only been doing this for 9 months, it's all guesswork. This is literally 100% guesswork, everyone's part.

Two other questions. These should be easier. One is on the start-up cost, Bradley, you guys talked about Rowlett or Lubbock, Central City and some other stuff. I mean, obviously, that's not being added back. But I mean what do you think the burden on EBITDA is in terms of start-ups and other stuff that you would expect to sort of go down? I mean I think we covered the insurance thing pretty closely. But on the sort of the start-up costs, like what do you think -- or preopening costs, what do you think that sort of cost you in the quarter?

It's typically a couple of hundred thousand dollars per unit, Adam. And it's just we have to put people up. We have to train. We start -- we send people out 2 to 3 weeks ahead of time. They start training. They hire staff. So we've got hotel rooms, you've got training costs. You've got hourly wages with no revenue coming in yet. Things like that.

So like $0.5 million of EBITDA in the quarter, basically. Is that fair?

$400,000 to $500,000 is what I'd guess, yes.

Okay. So we got the insurance, we got the startup costs. And then on the real estate, you talked about in the past potentially selling Bombshells. I mean I think you got rid of all the lease locations because you didn't control the real estate. You now have, I guess, 10 locations. I guess that includes -- does that include the Grange? Or does that not include the Grange?

That does not include the Grange. The Grange is gone. We actually have 11 locations open with Lubbock. As of July, it didn't open in this last quarter. That's after the June quarter ended of it opened. So for this quarter that we're in right now, fourth quarter of 2025, we'll have 11 Bombshells locations open.

Not including Rowlett.

Not including Rowlett because Rowlett's not open yet. Now if Rowlett opens before September 30, then that will change, but I don't suspect that Rowlett will make September 30 based on some of the construction reports I got yesterday. So I think it's going to be a little bit longer.

So I guess the question is now you've sort of got it cleaned up. You got rid of all the lease locations. You've got a lot of big expanding restaurant chains, Texas Roadhouse and a bunch of groups that are looking for locations. I mean I think one of the biggest issues as you've encountered is basically building a restaurant is taking a very, very long time, and you've got basically 12 locations that have more or less been open for not that long. I mean the oldest ones I think you closed. So I guess my question to you is like, given where your stock is and given how valuable, I don't know, $65 million, $75 million of real estate is in terms of getting capital, I mean, how do you think about sort of going all in on the stock and Nightclubs, given that there's -- the restaurant real estate is still trading at a relatively low cap rate and you have -- you sort of have control of the whole -- all the locations now.

I mean, look, we've been talking with different groups for the past year or so. more groups in recent last month or 2. We're getting more calls. So I'm guessing that restaurant, especially prime A restaurant space, which is what most of our Bombshells locations are, are being sought after because we are getting lots of calls. Of course, you've got every leaseback group in the world trying to call us, which we're not interested in doing sale leasebacks. We are interested if we were to sell the real estate, you'd have to buy the operating businesses as well. But we would put together a package of the operating businesses and the real estate for the right price. We're just not looking to sell at the bottom of the range. We would want a fair price for our shareholders. And if somebody comes and makes us that offer, then we'll consider it.

Yes. I mean, look, obviously, given where your stock is and given the fact that I suspect the Nightclubs stuff is going to ramp up because you did some deals this year, you didn't do any in '23 or '24. I suspect there's probably more Nightclubs to buy. But I sort of do the math and I say, I don't know, what is it, $100,000 of net income or non-GAAP income. And I don't know what that works out in terms of EBITDA. But let's say for a minute that EBITDA at Bombshells is, I don't know, $1 million. I don't know what the D&A is now, but let's just call it $1 million, and let's say you get a little bit of EBITDA from Lubbock and a little bit of EBITDA from Rowlett. I mean, even best case, it's $4 million, $5 million. I mean, if you could sell the real estate for $65 million, $70 million, $75 million, I mean, it would -- I mean, it would go a long way in terms of buying Nightclubs and buying stock. And I just...

I mean I don't -- right now, I will tell you my number has been about $85 million. Would I take $75 million? I don't know, no one's offered it to me yet. Someone comes in with an $85 million offer, it's something we definitely have to put the pencils to and see if we make it work. I can tell you that at $65 million, I wouldn't be interested. I think the real estate alone will appraise somewhere around $65 million to $67 million. Our current debt load on that real estate is about $35 million. Our current book value is around $45 million. So if somebody comes in at $85 million, I don't think there's much to think about. That would be about a $40 million over book. I think we would probably jump on that pretty quickly. At $75 million, we're going to sit down and put the pencils to it, see if it makes sense, see what our stock price is. I mean if I could buy 1 million shares of stock back in exchange for the Bombshells segment, that's -- what does that -- 8.7 divided by -- 1 million divided by 8.7 is, 1 million divided 8.7, about 12% of the company. Yes, I think I have to think real hard about that. So I think those are things we just -- like I said, we have to put the pencils to and see if we can make it work.

So the $67 million includes Rowlett and Lubbock, even though they haven't -- have those been reappraised at market yet or not? Or does that include...

Those are both at cost. Both of those were -- it's about $65 million. That's why I said it's between $65 million and $67 million. I think both those will appraise for about $1 million more than cost. They typically do.

Got it. And so at that point, you'll sort of see how much EBITDA those things are doing. And if someone -- because basically those will be making money and the other ones -- do you think that the other locations will start making more money? I mean do you think that your...

We have 3 locations that are pretty solid right now. Lubbock is fantastic. Lubbock is averaging between $190,000 and $200,000 a week right now. If that continues for the 12 weeks that will be open, you're talking 12x, say, 12 times 180 even, 1.2 plus 80 times 12, $9.6 million, a little over $10 million. They do $10 million, at that point, they're probably running 20-plus percent margins. I mean that store alone can make $400,000, $500,000 in a quarter. So let's see how we do. Like I said, we're talking with groups. We're talking with a private equity group. We're talking with a restaurant operator. And we're talking with a few just -- I don't know what they want to do with -- the real estate guys that we've been talking with. And we'll see what comes of it. But I'll make it perfectly clear on the call so maybe I won't get as many calls over the next week, we are not interested in sale leasebacks. So we know we could do that at any time we want it. We could pull probably $30 million in equity out of the Bombshells real estate at any time that we did a sale leaseback. But it's just not something we're really interested in doing. We'd rather just hold onto the assets until we can sell everything as a whole. We believe that it makes the -- by owning the real estate, it makes the operations much easier to sell to someone who wants to turn around and grow the concept because what they'll do is they'll come in, they'll buy it from us. They'll turn around, do the sale leaseback, well, their cash back and expand the concept is what we're told by brokers that we've been talking to. So...

Well, they'll do that after they fix it. But the reality is, is they own it, they control it, they fix it, then they do it.

They can do anything they want once they write me the check, I don't care.

And about -- and what about the club -- the backlog for M&A for clubs? I mean are you seeing that backlog increase? I mean are you -- I mean, I know you've done a little bit this year, you did whatever Detroit in that whatever those ones, but you're only what that were...

We bought 3 locations so far. I mean we're looking -- we're actually looking to sell a couple of our clubs. So we've got a few clubs that we're negotiating with some local operators that are very interested in a couple of our underperforming locations, which we were talking about rebranding. And we're thinking maybe instead of rebranding, we'll just sell those locations off, put some more cash on the balance sheet. Take that and buy other clubs someplace else in markets that are more competitive and more profitable for us and definitely easier to operate for us. Most of the clubs we're talking about someone picked up in acquisitions where they were not the core acquisition we were trying to buy, but they were just I'd love that was part of the deal and thinking that our thinking on that is that sets our regional management to have to travel all those extra miles and for small amounts of income. Holding a club that's 600 miles from any one of our other clubs that generates us $200,000 a year in income. Let's go convert that into $1 million, $1.5 million in cash and take that $1.5 million in cash and maybe buy back stock or go invest it in a market that's easier for us to occupate that doesn't stretch our regional management teams. So those are the things we're looking at. Those are the things we've been working on. As you'll see -- I mean, if you go back and look at 2016 when we first started the capital allocation strategy, we were up a little bit. If you look at '24 when we started the capital allocation, we're up a little bit. And then in '17, we -- our revenues actually declined because we sold off and got rid of underperformers. I think you're seeing that same thing happen right now. It's just in a condensed year. We're much better at it than we were in 2016 because we've done it before. So we didn't wait a full year or 1.5 years to start divesting assets. We started doing that within 9 months of adopting a new capital allocation strategy as we closed Bombshells immediately that we're underperforming that we leased. Now we're doing the same thing with a few of the clubs that we're looking at right now and then, of course, trying to buy more clubs that make economic sense for us.

So Expo is in, what, 14 days, 2 weeks from now. We'll be out in Vegas with lots and lots of club owners. And I'm very optimistic to have some good meetings set up to talk with a few people. I've got a couple of brokers, club brokers that want to sit down with me and go over some inventory that supposedly, not public information right now. I find hard to believe it's not my public information, but I understand that there's -- there are deals that sometimes brokers bring to us. So we'll definitely sit down and talk to them. We have been looking at lots of locations around the country right now and trying to find the ones that make the most sense for us to make our next investment in.

On behalf of Eric, Bradley and the company and our subsidiaries, thank you, and good night. Please visit one of our clubs or restaurants to have a great time.