RICK

Greetings, 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 two of our presentation. Our speakers today are Travis Reese, Interim President and CEO, and Albert Molina, Interim CFO. Please turn to slide three. RCI is making this call exclusively on X Spaces. To ask a question, 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 a listen-only mode. A Q&A session will follow.

This conference is also being recorded. Please turn to page four. I want to remind everyone of our safe harbor statement. You may hear or see forward-looking statements that involve risk 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 five. I also direct you to the explanation of Rick's non-GAAP financial measures. I'm pleased to introduce Travis Reese, Interim President and CEO.

Thanks, Brad, thanks everyone for joining us. Please turn to slide six. I'm pleased to report we filed our 10-Q today and announced our results for the first quarter ended December 31st. 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 five underperforming locations. The decline in net income primarily reflects pre-tax operating and non-operating items, most of which were non-cash.

We had $10.1 million in net charges in the first quarter and $3.2 million in net gains a year ago. We also continued to move ahead with our back to basics five-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've bought back more than one million shares. Here's Albert to review our performance in more detail.

Thank you, Travis. Turning to slide seven. 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 five fewer Bombshells-related locations, partially offset by new nightclub locations. Pre-tax 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 non-operating charge of $9.9 million compared to a non-operating 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 $0.80. Net cash provided by operating activities was $7.8 million compared to $13.3 million. This was largely due to the actual payments 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 eight, I will now cover our results by segment, beginning with Nightclubs. 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 from five 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 type, 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 Mavis Dance Abilene, PT's 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 nine are the results for Bombshells segment. Revenues totaled $8.4 million, a decrease of $1.2 million. This reflected $1.8 million from two newly opened locations, $6.6 million from nine 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 impairments 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 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 that 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 30th, primarily reflecting $22 million in seller financing from the ADW transaction, partially offset by debt pay downs. As a result, the weighted average interest rate was 7.16% compared to 6.65% in the year-ago quarter. 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 five-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%-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-5x adjusted EBITDA for clubs, fair market value for real estate, and 100% cash on cash return in three to five 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 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 five years, we plan to generate more than $250 million of free cash flow and repurchase a significant quantity of shares. By fiscal 2029 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 2024. 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 2026 to 2Q 2026, with sequential improvement in same-store sales. We're also working to optimize newly acquired and open 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 SGA expenses. Regarding share buybacks, since we began our five-year plan in the 1st 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. Back to Bradley.

Thank you, Travis and Albert. Eric Langan, RCI's Founder and Head of Mergers and Acquisitions, will also be available on the Q&A. If you would like to ask a question, please raise your hand in the X Spaces. When you finish, mute your microphone to eliminate background noise, please. We have a limited number of speaker spaces. After your question, we may move you to the back of the audience to free up space. Please understand we cannot discuss the legal situation in New York other than to reiterate that the company's statement that is at RCI, the individuals involved, and the three clubs have pled not guilty to all the charges and are taking all necessary actions to defend themselves. I'm gonna bring up Orchard Wealth. You have to unmute your microphone.

Hello.

Hey there.

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

I mean, obviously we never know, 'cause it's a fluid situation, but I think we've definitely set aside plenty of money for the next, you know, 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, it's gonna be a little strange 'cause if you look at this time, our EBITDA's hit, you know, all of these reserves, and as we move forward, we're gonna be paying with no cash going out. Now we're gonna be paying cash out while our EBITDA should increase. It's, it's gonna be a little strange to try to figure out how everything's going.

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. You know, if you look at this is, this is actually an old quarter, right? This is end through December 31st. You know, 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 the $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. We're still sitting at that $28 million. 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 31st quarter out.

Trust

As quickly as possible as well, so we'll be back to current and, you know, everyone will have a really good idea of how things are looking for us currently.

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

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. It'd be $2.8, be $1.4. We'd 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. We pay 50% of that to ADW to get rid of that 12% debt. We'd be left with like between $5 million and $5.5 million, maybe $6 million in cash left over if we sold everything.

Great.

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

All right.

With these transactions.

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.

Um-

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

Okay. One quick question, this is Before I go. You know, the accountants made you write down this difference between the agreed to price with ADW, and you had to take a hit on that. Had the stock gone up, you couldn't have claimed that as earnings, right? It only went one way. They could hit you for $9 million, if it had gone to $50 a share by the time you closed, you couldn't claim it as a gain. Is that right?

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

You know, This GAAP accounting is, you know, you guys have heard me call it voodoo accounting many times. 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, you know. We'll just move on. It's non-cash. We don't focus on non-cash expenses as too much. There's no sense in, you know, we just follow the rules, book it, write it, move on. We own a lot of our real estate and we're generating cash, and that's what's important to us, and buying back our stock.

Okay. One other thing. Since this is filed, you're all caught up with Nasdaq and stuff like that, the question is do you think it's gonna be much longer before you get the next quarter filed also?

I hope not. We will be current. We will more than likely, you know, file the 12B25 for an extension on March 11th to give us five more days, which I think gives us to the 16th or something like that.

May 11th.

Yeah, May 11th to the, so we get to the 16th. That'll make us current till the 16th, and then if we can get filed by the 16th, great. If we can't, then we will be late again, but at least all the timers started over and we'll be, you know. It's a queue, so it'll be pretty quick.

All right.

Yeah.

Well, good job, guys. Thanks a lot.

Thank you.

Thank you. I'm gonna bring up Jose Carlos. Jose Carlos, you have to unmute your microphone.

Yes. Hi. Could you hear me, guys?

Yes, we can hear you.

Thank you. Just two quick questions. Last, 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. How is it, just to get an idea, how does it affect the margin? Thank you.

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

You know, 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 partying like we always have. We will continue to monitor it. We'll continue to do what we need to do to stay in front of any of any changes as best we can, and continue to generate cash. In the end of the day we'll look at the cash flow and see how that goes and that's how we'll, you know, decide if we're doing things right or not, right?

Thank you very much.

Yeah. Thank you.

If you would like to speak or ask a question, please raise your hand and I'll call on you. I'm gonna bring up Maxwell next. Maxwell, unmute your microphone and take it away.

Thank you. 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. 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.

Wonderful. Well, again, keep up the great work. I appreciate it. Thank you.

Yeah. Thank you.

I'm gonna 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 day.