Q3 2025 RCI Hospitality Holdings Inc Earnings Call

Speaker #1: I've received word from Eric Langan. We're going to wait one more minute, so Bradley Chhay can finish using the bathroom, and then we will begin.

Speaker #1: Good afternoon. 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.

Speaker #1: Please turn with me to slide two of our presentation. I'm Mark Moran of Equity Animal and I'll be the host of our call today.

Speaker #1: I'm coming to you from Washington, DC. Eric Langan, President and CEO of RCI Hospitality, and CFO Bradley Chhay are in Houston. Please turn with me to slide three.

Speaker #1: RCI is making this call exclusively on X Spaces. To ask a question, you'll need to join the space with a mobile device. To listen only, you can join the space on a personal computer.

Speaker #1: At this time, all participants are in listen-only mode. The question-and-answer session will follow the presentation. This conference call is being recorded.

Speaker #1: Please turn with me to slide four. I want to remind everybody of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties.

Speaker #1: 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.

Speaker #1: Please turn with me to slide five. 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.

Speaker #1: Eric, take it way.

Speaker #2: Thank you, Mark. Please turn to slide six. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year-over-year unless otherwise noted.

Speaker #2: Nightclub revenues were nearly level despite economic uncertainty related to tariffs and the tax bill, which affected our customer base. Bombshell's revenue reflected the previously announced sale and divestiture of 500 performers.

Speaker #2: But both revenues and margins increased sequentially from the second quarter. Consolidated profitability benefited from the absence of impairment charges partially offset by other factors.

Speaker #2: We continue to make solid progress on our back-to-the-basics capital allocation plan. We acquired two upscale nightclubs, Platinum West and South Carolina, and Platinum Plus in Allentown, Pennsylvania.

Speaker #2: Price multiples were in line with our cap allocation strategy. We opened Rick's cabaret steakhouse I'm sorry, Rick's cabaret and steakhouse in Central City, Colorado.

Speaker #2: 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 Bombshell's location in Lubbock, Texas, which has been doing very well right out of the gate.

Speaker #2: Now, here's Bradley to review our performance in more detail.

Speaker #3: Thank you, Eric. Turning to slide seven, I'll start with a review of our third quarter results. All comparisons are year-over-year for our quarters, unless otherwise noted.

Speaker #3: 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 Bombshell's rated locations late in fiscal '24 and early fiscal '25.

Speaker #3: Impairments and other charges were $2.3 million compared to $18.3 million, a difference of approximately $16 million. Net income attributable to RCIHH common shareholders was $4.1 million compared to a loss of $5.2 million, a difference of $9.3 million.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: Most of the year-over-year difference in non-GAAP EPS was due to slightly lower margins in nightclubs, lower margins in Bombshell's, higher non-cash expenses related to our self-insurance program, and higher taxes.

Speaker #3: Now, moving on to slide eight, I will cover our third quarter results by segment, beginning with nightclubs. Revenues totaled $62.3 million, down less than 1% year-over-year.

Speaker #3: Key factors included a 3.7% decline in same-store sales and the absence of baby doll sport worth due to a fire. This was mostly offset by $2.6 million from newly acquired or rebranded nightclubs.

Speaker #3: 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.

Speaker #3: In the third quarter of fiscal year '25, this included a mostly non-cash lawsuit settlement partially offset by a ain on insurance. In the year-ago quarter, this primarily included impairments.

Speaker #3: There were none in this quarter. Operating income was $17.8 million compared to $13.6 million, with a margin at 28.5% of revenues, versus 21.7%. Results reflected the decline in other net charges and same-store sales, acquisitions not yet fully optimized, and the Central City pre-opening cost.

Speaker #3: Non-GAAP operating income, which excludes other net charges, was $20.7 million compared to $21.9 million, with a margin of 33.2% of segment revenues, versus 34.9%.

Speaker #3: I'd like to point out that while GAAP and non-GAAP operating margin were down year-over-year, they have increased two-quarters in a row sequentially. Turning slide nine.

Speaker #3: Here are the results of the Bombshell segment. Revenues totaled $8.6 million, a difference of $4.5 million. The key factors here included the sale and divestiture of five underperforming locations in the fourth quarter of '24 and the first quarter of '25.

Speaker #3: Which impacted revenues by 3.8 million and a 13.5% decline in same-store sales. This was partially offset by two new locations not in same-store sales.

Speaker #3: 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 a margin at 1% of segment revenues versus a negative 68%.

Speaker #3: Results primarily reflected the decline in impairments, sales from open locations, and Lubbock's pre-opening cost. Now, on a non-GAAP basis, which excludes impairments, there was an operating income of $100,000 compared to a profit of $1.4 million.

Speaker #3: With a margin of 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.

Speaker #3: Non-GAAP was $8.3 million, an increase of $1.9 million. As we've explained on previous graphs and calls, starting this year, corporate expenses are being affected by an estimated non-cash self-insurance actuarial reserve for the quarter.

Speaker #3: 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.

Speaker #3: In advance of that, we wanted to present the closest GAAP equivalents. Which are operating income, net cash from operations, net cash by operations, and net income.

Speaker #3: 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 two Platinum acquisitions and $3 million to buy back shares.

Speaker #3: 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, returning to where we were two years ago in the third quarter of '23.

Speaker #3: While adjusted EBITDA remained approximately level at 22% for each of the first three quarters of this fiscal year. Please turn to slide 13. Debt at June 30th declined slightly, by $201,000 from March 31st.

Speaker #3: Quarter. This reflected scheduled paydowns, new acquisition-related debt, and construction financing for Bombshell's Roulette and Bombshell's Lubbock. We continue to control the rate paid on our debt, with an average weighted interest rate of 6.68% compared to 6.74% in a year-ago quarter.

Speaker #3: Total occupancy cost was 7.9% of revenues, level with last year. Debt to trailing 12-month adjusted EBITDA was 3.82 times, compared to 3.56 times in the preceding quarter.

Speaker #3: 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 revenues and EBITDA, occupancy costs and debt metrics should improve.

Speaker #3: Debt maturities continue to remain reasonable and manageable. Now, here's Eric.

Speaker #2: Thank you, Bradley. Please turn to slide 14. To review our capital allocation strategy. Our plan calls allocating 40% of free cash to club acquisitions and 60% to share buybacks, debt reduction, and dividends.

Speaker #2: In order to grow free cash flow per share annually at a 10 to 15 percent rate. Please turn to slide 15. Operationally, we are focused on our core nightclub business.

Speaker #2: Reviewing every club to increase same-store sales on a regular basis, and we will rebrand, reposition, or divest underperformers. Our nightclub plan also involves acquisition.

Speaker #2: 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.

Speaker #2: Our target matrix remained the same: three to five times adjusted EBITDA for the club and fair market value for the real estate. Targeting 100% cash-on-cash returns in three to five years.

Speaker #2: Purchases would be made with cash on hand, bank financing, or seller notes. We would also consider using stock when our valuation improves. For Bombshell's, we are working to improve performance at existing location, targeting 15% operating margins, and return to same-store sales growth.

Speaker #2: 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, selecting up if consider the price to be particularly undervalued, we also anticipate modest annual dividend increases.

Speaker #2: Over the five years, we aim to generate more than $250 million in free cash flow and repurchase a significant amount of shares. By fiscal '29, our gets are $400 million in revenue, $75 million in free cash flow, and $7.5 million shares outstanding.

Speaker #2: 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.

Speaker #2: Please turn to slide 16. To give you an idea of the progress we've made on the share buyback: ten years ago, we had about 10.3 million shares outstanding.

Speaker #2: As of last Friday, we had about $8.7 million, which represents a reduction of 15.5%. Turning to slide 17. We have only three remaining projects.

Speaker #2: We are targeting Bombshell's Roulette 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 review and zoning plans for the baby dolls Fort Worth that weren't down last year.

Speaker #2: 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.

Speaker #2: Now, here's Mark to open up the question and answer section.

Speaker #1: Thank you very much, Eric and Bradley. If you would like to ask a question, please raise your hand in the X space. When you finish, please mute your microphone to eliminate any background noise.

Speaker #1: We've eliminated a of speaker spaces today. After your question, we may move you to the back of the audience to free up space. First off, we have Orchid Wealth.

Speaker #1: Please take it away.

Speaker #4: Hey, guys. Can you hear me?

Speaker #2: Yes, I can hear you.

Speaker #4: Hey, I just got a question. How much in real estate do you guys have that you think you could be selling off that's, you know, non-performing or just, you ow, holding in general?

Speaker #2: Oh, as we've said in the ious calls, about $28 million is our estimated value of it. We have some contracts on a couple of pieces.

Speaker #2: 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, which will actually be fiscal first quarter, fiscal '26, I think we'll seeing some of those closings happen.

Speaker #2: 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.

Speaker #4: And if you were to liquidate all, let's say, $28 million, how much of that would have to go to just payback debt, and what do you think you guys would be left over with?

Speaker #2: I'm not sure. The main piece is a property that we bought for about $2 million—$150,000 in cash—and then we re-zoned it.

Speaker #2: It's worth somewhere between $8 and $14 million. And we 't really owe anything on it. So that would be a big chunk of cash.

Speaker #2: The rest of it would be about, you ow, less than 60%.

Speaker #4: Would go to debt?

Speaker #2: Because all of our original loans were 60%. Or 65% loan-to-value. And those were based on appraisals from a few years back. So I would say somewhere around 40 to 45 percent would go to cash and the rest would go to service debt.

Speaker #2: Other than a few pieces that are worth considerably more than what we paid for them, that’d probably be the opposite. About 60 to 65 percent would go to cash and 30 to 35 percent to debt.

Speaker #4: Okay. And then the thing about the insurance, you ow, 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?

Speaker #2: And 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.

Speaker #2: It's based on actuarials and it's based on, you know, when we settle claims from the past, when new claims are made, so it's a constantly changing number for us.

Speaker #2: 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?

Speaker #2: Because we have to wait through certain statutes of limitations and certain other things, this reserve number could become a very large number over time.

Speaker #2: 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 hoping we can get that operational soon.

Speaker #4: Okay.

Speaker #2: So then we'll

Speaker #2: then we'll be able to wer those questions because we'll we'll have a we'll have a policy through a captive that we'll own, but at least we'll ow what the what the what the fees are.

Speaker #4: Okay. Is this one these things?

Speaker #2: Yeah.

Speaker #4: Is this one of those things that, like, it's got a lot of startup costs in the beginning, and then you kind of taper down and then reach a run rate for every quarter?

Speaker #2: Well, we thought that because we had 4.1 in one quarter, then the next quarter was 1.4. But then we just hit 3.9 in this last quarter.

Speaker #2: We cannot figure out the math of it. The problem is that the math is ever-changing. Based on claims, based on loss runs, and with our other insurance companies, they have to take those claims and put them out.

Speaker #2: And since we're not ing the insurance companies anymore, they're all setting you know, 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.

Speaker #2: Until that case is actually settled and we know actly what we pay on it, then they'll revamp and the next quarter we might not pay anything.

Speaker #2: Right? I mean, it's like I said, it's it's a lot of math and it's it's all guesswork, so.

Speaker #4: Okay. All right. Thanks.

Speaker #2: Yep.

Speaker #1: Fantastic. Thank you so much for those questions. Next, we have D&D Realty. Please take it away.

Speaker #5: Hey, Eric. Thanks for taking my estion. I really want to commend you guys on your pace of acquisitions. I think that that's a really a real a ice tailwind for the for the company.

Speaker #5: And you guys are sticking to plan, so I think that's great. My question, I kind of have two. One pertaining to the acquisitions, which is, when you guys go out and you bid on these assets, who are you competing with?

Speaker #5: 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?

Speaker #5: I'm just kind of curious around that dynamic. And then my second question pertains to, I think in a prior call, you ioned a potential tailwind from some of the tax policy that would get that has now since gotten reworked under the Trump administration.

Speaker #5: And I'm just curious, is you know do you are you early days. Play, are you seeing an uptick in in activity potentially due to that, or you know is it is do you still feel that the economy and kind of some of your service charge would you would you call that last quarter is still muted?

Speaker #5: Thanks.

Speaker #2: Sure. Well, from the acquisition side, I an, there's lots of you know competitors for acquisitions in that you know their own management team you got LVOs, you've other operators that would like to expand in local markets.

Speaker #2: That they're operating in. I do think we're the choir of choice. They know we have cash. They know we can come up with large sums of cash.

Speaker #2: We've cut multiple times through the last two decades. They know if they want to carry paper and create an annuity for themselves or for their family or for their trusts, we're we have an unbelievable track record and unmatched ck record from other operators of making all of our payments.

Speaker #2: 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.

Speaker #2: 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 a grandfathered in.

Speaker #2: And then we use a three to five times multiple based on what we believe the protection of that license is. And that's how we've always done it.

Speaker #2: 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.

Speaker #2: And I think right now, especially in this environment, the most important thing we can do is not make not make mistakes. And then your second part, the the tax bump, I mean, I ink that you know the tax bill just passed.

Speaker #2: I think companies are starting to realize they've got to, I guess, what we're in August now. So you have five months left. If you want to make a major purchase and get it closed by December 31st, you better get on it.

Speaker #2: 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 by some major companies.

Speaker #2: You know, I know we've been hearing all manufacturers saying $600 billion here, and a trillion dollars there, and $500 billion here, and new plants and whatnot.

Speaker #2: You know, 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 31st unless they owe taxes for this year.

Speaker #2: But I do believe that as we are going to see some of that look. Our s do very well when there's new money or money's really moving.

Speaker #2: You know the pace of money has slowed down considerably, right? I mean, record numbers in money market accounts, a lot of people sitting on the sidelines.

Speaker #2: Only the top stocks in these indexes are really performing well. So I think there's, like I said, a lot of money still on the sidelines.

Speaker #2: As that new money starts moving into things, as we move forward, I think that'll a considerable bonus for our company. As far as you know liquor sales were down 3.9%, but our service revenues were actually up just a little bit over last year.

Speaker #2: I would say service revenues are coming back a little bit. We'll see what happens as we move through these next two quarters. Hopefully, we'll continue to see the service revenues increase.

Speaker #2: They are our best margin revenues for sure.

Speaker #1: Thanks so much for that question. And next up, we Adam Wyden. And I'd like to encourage anyone who has a question to raise their hand, and we'll ing you up.

Speaker #1: Adam, take it away. Hey, Adam, you're on mute.

Speaker #5: Can you hear now?

Speaker #1: Yes.

Speaker #5: Yes. So on this for Bradley. So on the insurance reserve, you guys have $9 million year to date. And I guess you'll have some in the fourth quarter, but you're not paying for insurance anymore.

Speaker #5: 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 non-cash.

Speaker #5: 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 ect it to be going forward?

Speaker #5: 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 filings, it looks like you're it's costing you money, over year.

Speaker #5: So I'm just trying to understand, you know, at some point, you build enough reserve that eventually you don't have to reserve anymore in some capacity or the reserves go down.

Speaker #5: I mean, how should we be thinking about that?

Speaker #3: From a net income standpoint and adjusted EBITDA standpoint, these charges are very real. From a GAAP basis and non-GAAP basis. So technically, yes, it's hurting EPS.

Speaker #3: 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 costs us money.

Speaker #3: 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.

Speaker #3: We just don't know. Every quarter, we have an actuarial expert, and they go and they look at all our claims, all our losses, any new claims, and any closed claims. They do what's called the true-up or true-down.

Speaker #3: So on a normalized run rate, call it somewhere between 10 to 12 million, based upon this year's year to date actuarial estimates, and that's all there is.

Speaker #3: As far as the actual captive insurance program, once that's live and operational, we would be paying ourselves somewhere between $400,000 to $500,000 a month for the premiums.

Speaker #5: But, okay, I think, mean, again, I'm just going back in time, and then I got another question. My understanding was that you guys had never ally paid out more than a few million dollars in any given year for settlements.

Speaker #5: So the idea was you were paying like 10 or 12 million in insurance, but the actual settlements on average never really were more than 3 million.

Speaker #5: So I guess the question I have is, you know, you're reserving as if it's $12 million, but I, and you've never paid out $12 million in a year.

Speaker #5: So like some this can't like sort of continue, right? I mean, that's just sort of like right logically? You've never paid out $12 million in lawsuits in year, right, ever?

Speaker #3: Correct. Well, there are some years, like the New York one, that was, you know, about a decade ago that, yes, some settlements are large, a lot bigger.

Speaker #3: That wasn't insured. Okay, that isn't insured.

Speaker #5: Yeah. So, that's sort of my question. If we’re running a reserve of $12 million for insurance, that would imply that we would pay $12 million in lawsuits a year.

Speaker #5: So I just, you know, 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.

Speaker #5: So that's why I'm just trying to reconcile those two, because if I sort of just think about it, like you guys don't want to pay insurance anymore.

Speaker #5: 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.

Speaker #5: So it's sort of like, presumably, at some point after you build a big enough buffer with these charges, right? At some point, you would expect them to go down, right?

Speaker #5: I mean, like, realistically? You know.

Speaker #3: 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 ever went into any type of self-insurance mode to where we're today.

Speaker #3: It just took the state 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.

Speaker #3: We just want to make sure we do it right in the first time because we don't want to set up a captive that then goes bankrupt.

Speaker #3: So we believe we have the formulas down. We're working on them. But when it comes to these actuarials, this is a completely different math.

Speaker #3: It's, you know, a GAAP principle that has to be followed. To do these actuarials and to do these accruals, and I mean, you know, you've heard me say it before.

Speaker #3: I don't think it's rooted in any type of reality of what it It's always what ifs. And all of your GAAP stuff, when you're accruing stuff and doing these things, must take into account the absolute worst-case scenarios.

Speaker #3: 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 ou look at an average, you know, for the last 15 years of actuarials where we've had what we've actually paid out, versus you know at we paid in premiums, we would have come out way ahead if we had self-insured all of those years.

Speaker #3: In fact, I think there's only one 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, you know, settling the case for a reasonable amount.

Speaker #3: And so that particular year we had some high stuff, but that was many years ago. And of recent years, it's been much more realistic.

Speaker #3: And then the problem is when we got our insurance quote this year, they wanted, you know, between the fees and everything, we would have paid almost $9 million for $10 million worth of insurance.

Speaker #3: And to me, that just did not make any economic sense whatsoever. When we could not do that, we could do this captive or accrual system where we put the money in, part of the actuarial system is you don't get any return on what you put into reserves, right?

Speaker #3: So it's just basically held in reserves and it's not growing. Whereas you, when you have a captive or an insurance company, they take the premiums and invest those premiums, which then help offset the costs and expenses.

Speaker #3: And so the actuarials are very, very different in 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 1st, if at all possible.

Speaker #3: I think we're definitely working towards that date, whether we'll be successful or not, I don't know. But I ink by calendar year end, we should be able to have everything in place for it.

Speaker #3: 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.

Speaker #3: Not and their claims, not past ones.

Speaker #5: Right. So is, yeah, I get it. So the idea is, is like long story short, like when you ys get the captive set up, the the non-cash charge to EBITDA will be a lot less because you're going to you basically they're they're it's a separate insurance company that you're going to pay premiums to that you control.

Speaker #5: And so all of this, you know, $12 million a year stuff is probably going to go away. Because if you look at slide 12, you see that the free cash flow is basically flat year on year.

Speaker #5: And for most of the quarters, it's more or less been flat. So EBITDA, in this case, the way you reported it, is sort of not a great reflection of financial performance because you're not actually paying out the money, if that makes any sense.

Speaker #3: Makes a lot of sense for for fiscal 2025.

Speaker #5: Yeah. So it's so, I mean, all I'm all I'm trying to say is next year when ou get the captive set up, you uld get a reversal on reported EBITDA because you're not going to be taking these types insurance reserve charges, realistically.

Speaker #2: 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.

Speaker #2: And then they'll run actuarials every quarter going forward. If there's X reserves, they would be put back in. If more reserves are needed, we'd have to expense more.

Speaker #2: The other thing we could possibly do is buy an insurance policy once we know all the claims. There's a two-year statute of ations, I think.

Speaker #2: But we could figure out what claims are. A lot of insurance companies do this, where they will take 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.

Speaker #2: And what they do is they hope to settle those cases for less than less than reserves. And if the reserve, if we if we can sell let's say we've got $12 million in reserves, what we can sell the book for 8.5 million dollars, then maybe we sell that book for 8.5 million dollars and we get the other you know 3.5 million dollars as an income back in on our books.

Speaker #2: So there's lots of there's lots of things as we move through the future of this and and figure out this insurance math, let's call it you ow in a much better format and, of course, our actuarials I mean, as we get the actuals we'll be able actual costs will be able to have a much better idea as well, so.

Speaker #2: 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.

Speaker #2: And since we've only been doing this for nine months, you ow it's all guesswork. It's literally 100% guesswork everyone's part.

Speaker #5: Two other questions you should be asier. One is on the startup cost, Bradley, you know, you guys talked about Roulette or said Lubbock, Central City, and some other stuff.

Speaker #5: I mean, obviously, that's not being added back. But I mean, what do ou think the burden on EBITDA is in terms of startups and you know other stuff that you would expect to sort of go down?

Speaker #5: I mean, I think we covered the insurance thing pretty closely, but on the on sort of the startup costs, like what do you ink we're pre-opening costs?

Speaker #5: at do you think that sort of cost you in the quarter?

Speaker #2: It's typically a couple hundred thousand dollars per unit Adam. And it's just you know we have to put people up. We have to train.

Speaker #2: We start by sending people out two to three weeks ahead of time. They start training, hire staff, and secure hotel rooms. You've got training costs.

Speaker #2: You've got you ow the hourly wages with no revenue coming in yet. Things ike that.

Speaker #5: So, like, so like a half a million of EBITDA on the arter, basically. Is that fair?

Speaker #2: Yeah, 400 to 500 thousand is what I'd guess, yeah.

Speaker #5: Okay. So we got the insurance. We got the the startup costs. And then on the real estate, you talked about in the past you know potentially selling bombshells.

Speaker #5: 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.

Speaker #5: I guess that includes does that include the Grange, or does that not include the Grange?

Speaker #2: That does not include the Grange. Grange is gone. We actually have 11 locations open with Lubbock. As of July, no, it didn't open in this last quarter.

Speaker #2: That's that's you ow after the June quarter ended of it opened. So for the for this quarter that we're in right , fourth quarter of 2025, we'll 11 bombshells locations open.

Speaker #5: Not not including Roulette?

Speaker #2: Not including Roulette ause Roulette's not open yet. Now, if Roulette opens before September 30th, then that will change. But I don't suspect that Roulette will make September 30th.

Speaker #2: Based on some of the construction reports I got yesterday, so. I ink it's going to be a little bit longer.

Speaker #5: So so I guess the question is now you've sort of got it cleaned up. You got rid of the lease locations. You know you got a lot of big expanding restaurant chains, Texas Roadhouse, and a bunch of groups are looking for locations.

Speaker #5: I mean, I think one of the gest issues, as you've countered, 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.

Speaker #5: 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 you know how valuable you know I don't know, 65, 75 million dollars of real estate is in terms of getting capital, I mean, how do you think sort of going all in on the stock and and you know nightclubs you know given that you know there's you know the restaurant real estate is still trading at a relatively low cap rate?

Speaker #5: And you know, ou have you know, you sort of have control of the whole all the locations now.

Speaker #2: I mean, look, we've been talking with with different groups for past year or so. More groups in in in recent last last month or two were getting more calls.

Speaker #2: So, I'm guessing that you own a restaurant, especially a Prime A restaurant space, which is what most of our Bombshells locations are. They are being sought after because we are getting lots of calls.

Speaker #2: Of course, you have every leaseback group in the world trying to call us, which we're not interested in doing sale-leasebacks. We are interested in the possibility that, if we were to sell the real estate, you'd have to buy the operating businesses as well.

Speaker #2: But we would put together a a package of the operating businesses and the real estate for for the right price. We're just not looking to you know sell at the bottom of of of the bottom the of the range.

Speaker #2: We would want a fair price for our shareholders. And if somebody comes and makes us that offer, then we'll we'll consider it.

Speaker #5: Yeah. I mean, look, obviously, given where your stock is and, you know, the fact that I suspect the nightclub stuff is going to ramp up because, you know, you did some deals this year, and you didn't do any in '23 or '24.

Speaker #5: I suspect there are probably more nightclubs to buy. But you know, I sort of do the math and I say, you know, I don't know what is it, $100,000 of net income or GAAP non-GAAP income.

Speaker #5: And I don't know what that what that works out in terms of EBITDA, but let's say for a minute that you know EBITDA at bombshells is you know I 't know, a million bucks.

Speaker #5: I don't know. I don't know what the DNA is now, but let's just call it a dollars and let's say you get a little bit of EBITDA from Lubbock and a little bit of EBITDA from Roulette.

Speaker #5: I mean, you know, even in the best case, you know it's four or five million. I mean, if you could sell the real estate for $65 million, $70 million, you know, $75 million, I mean, it would go a long way, you know, in terms of buying nightclubs and buying stock.

Speaker #5: And.

Speaker #2: Yeah. I an, I don't you know right , I will tell you my number has been about 85 million. Would I take 75? I don't know.

Speaker #2: No one's offered it me yet. If someone comes in with an 85 million dollar offer, it's something we definitely have to you know put the pencils to and see if we make it work.

Speaker #2: I can tell you that at 65 million, I wouldn't be interested. I think the real estate alone will appraise somewhere around 65 to 67 million.

Speaker #2: Our current debt load on that real estate is about 35 million. Our current book value is around 45 million. So you know if somebody comes in at 85 million, I I don't think there's much to think .

Speaker #2: That would be about a 40 million overbook. Yeah, think we would probably jump on that pretty ickly. At 75 million, we're ing to sit down and put the pencils to it.

Speaker #2: See if it makes sense. See what our stock price is. I mean, you know if I could buy a million shares of stock back, in exchange for the bombshells segment, that's what is that?

Speaker #2: What, 8.7 divided by 1 million divided by 8.7 is? 1 divided by 8.7. About 12%. Yeah, almost 12% of the company. Yeah, no, yeah, I think I'd have to think real hard about that.

Speaker #2: So I think those are things we just, like I said, we have to put the pencils to and see if we can make work.

Speaker #5: So the 60 the 67 million includes Roulette and Lubbock, even though they haven't have those been reappraised at market yet or not? Or does that include the?

Speaker #2: No, those are those are bucket costs. Both of those would those would it's about 65 million. That's why I said it's between 65 and 67.

Speaker #2: I ink both those appraised for about a million more than than cost. They typically do.

Speaker #5: Got it. And so at that point, you'll sort of see how much EBITDA those things are doing, and you know if one, you know, because basically, those will be making money.

Speaker #5: Do you think that the other locations will start making more money? I mean, do you think that you, uh, you know, you're...

Speaker #2: We have three locations that are pretty solid right now. Lubbock is doing fantastic. Lubbock's averaging between 190 and 200 thousand a week right .

Speaker #2: If that continues for the 12 weeks that'll be open, you ow you're talking 12 times I won't say 12 times 180 even. It's 1.2 plus 80 times 12, 9.6, a little over 10 dollars.

Speaker #2: They do $2 million. At that point, they're probably running 20-plus percent margins. I mean, you know that that store alone could make 400 or 500 thousand dollars in a quarter.

Speaker #2: So yeah, let's let's see how let's see how we do. Like said, we're we're talking with groups. We're talking with the a private equity group or we're talking with a restaurant operator.

Speaker #2: We're talking with a few... I don't know what they want to do with their real estate. They're real estate guys that we've been talking with.

Speaker #2: And you ow we'll see what we'll see what comes of it. But you know make a perfectly fair on the call. So maybe I won't get as many calls over the next week.

Speaker #2: We are not interested in sale-lease backs. So, you know, we know we could do that at any time we wanted. We could pull, you know, probably $30 million in equity out of the Bombshells real estate at any time if we did a sale-lease back.

Speaker #2: But you know it's just not something we're really interested in doing. We'd rather just hold on to the assets until we can sell everything as a whole.

Speaker #2: We believe that 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 all they'll do is they'll come in, they'll buy it from us, and then they'll turn around and do the sale-leaseback.

Speaker #2: Well, they're cash back in. And and and expand the concept is is what we're is what we're told by brokers that we've been talking to, so.

Speaker #5: 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.

Speaker #2: They can do anything they want once they write me the check. I don't e.

Speaker #5: And and and and about the and what about the club, the backlog for M&A for clubs? I mean, are you are you seeing that backlog increase?

Speaker #5: I mean, are you I an, I know you've done a little this year. You did the whatever Detroit and that whatever those ones. But you're only I don't know what that works out to e.

Speaker #2: We've got three locations so far. I mean, we're oking. We're actually looking to sell a couple of of our of our clubs. So we've got a few clubs that we're and negotiating with some local operators.

Speaker #2: They're very interested in a couple of our underperforming locations, which we were talking rebranding. And we're thinking maybe instead of rebranding, we'll sell those locations off.

Speaker #2: Put some more cash on the balance sheet, take that and buy other clubs someplace else. And if markets that are are more competitive and and more profitable for us.

Speaker #2: And definitely easier to operate for us. Most of the clubs we're talking about, some we picked up in acquisitions. Where you know they were not the core acquisition we were trying to buy, but they were just at a club that was part of the deal.

Speaker #2: And thinking that our thinking on that is that you know we it stretches our regional management to have to travel all those extra miles and you know for for for a small amounts of income.

Speaker #2: You know why are we holding a club that's 600 miles from any one of our other clubs that you ow generates us $200,000 a year in income?

Speaker #2: Let's go convert that into a million million and a half dollars in cash and and take that million and a half dollars in cash and either buy back stock or go invest it in a in a market that's easier for us to operate that doesn't stretch our regional management teams.

Speaker #2: So those are things we're looking at. Those are things we've been 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.

Speaker #2: If you look at '24, when we started the capital allocation, we were up a little bit. And then in '17, our revenues actually declined.

Speaker #2: Because we sold off and and got rid of underperformers. I I think you're eing that same thing happen right . It's just in a condensed year.

Speaker #2: We're much better at it than we were in 2016 because we've done it before. So we didn't wait you know a full year or a year and a half to start divesting assets.

Speaker #2: We started doing that within nine months of adopting the new capital allocation strategy. We know when we closed the bombshells immediately that we're underperforming, and now we're doing the same thing with a few of the clubs that we're looking at right now.

Speaker #2: And then, of course, trying to buy more clubs that make make economic sense for us. So expo is in what, 14 days, two weeks from now?

Speaker #2: We'll be out in Vegas with lots and lots of club owners, and we are very optimistic about having some good meetings set up to talk with a few people.

Speaker #2: 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 , which I find hard to believe it's not my public information, but I understand that there's there are there are deals that sometimes brokers bring to us.

Speaker #2: So, we'll definitely sit down and talk to them. We have been looking at lots of locations around the country, right? And trying to find the ones that make the most sense for us to make our next investment in.

Speaker #1: Fantastic. Thank ou so much, Adam, for those questions. And on behalf of Eric, Bradley, and the company, and our subsidiaries, thank you. And good night.