Gary Fishman - IR Eric Langan - Chairman, President and CEO Phillip Marshall - CFO

Christopher Brown - Aristides Capital Brian Murphy - Merriman Capital John Rolfe - Argand Capital Gary Abbott - Merriman Capital Adam Mikkelsen - Cooper and Company Mike Morgan - Morgan Capital Management Michael Suh - Wells Fargo Howard Rosencrans - Value Advisory George Catarino - Private investor

Greetings and welcome to the RCI Hospitality Holdings Fiscal 2016 First Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles investor relations for RCI. Thank you. You may begin.

Thank you, Tim. Please turn to Slide 2. I want to remind everybody of our Safe Harbor statement that's posted at the beginning of our conference call presentation to remind you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I urge you to read it. 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 which occur afterwards. Please turn to Slide 3. I also direct you to the explanation of non-GAAP and adjusted EBITDA measurements that we use and that are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area to join us at Rick's Cabaret New York tonight at 6 to meet management and get a first-hand look at one of our flagship clubs. Rick's Cabaret New York is located at 50 West 33rd Street between Fifth and Broadway, around the corner from the Empire State Building. If you haven't RSVPed, ask for me at the door. Now, I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thank you, Gary. Good afternoon, everyone. We are pleased that we were very nicely profitable in the first quarter. We earned $0.25 per share GAAP. That's up from the previous quarter but below last year's record quarter, as we had expected. We also generated strong cash flow and are on track to realize $15 million to $18 million in free cash flow this year. However, I want to be clear that this was a transition quarter and we anticipate the second quarter will be too. We have more work to do with regard to expanding margins and restoring same-store sales growth. In our news release this afternoon, we announced a couple of new developments. First, we plan to open a third club in New York City, one of our best markets. Second, we announced that we are declaring a $0.12 annual cash dividend payable at $0.03 per share per quarter. This is part of our program of returning capital to shareholders recognizing that some of you have been with us for a very long time. I'll have more details on both of these items later. In addition, I'm pleased to announce the latest results of our share buyback program. As of the end of January, we have reduced shares outstanding to 9,948,000 compared with 10,295,000 a year ago. One more thing, as we announced last month, we have adopted new revenue reporting standards as will be required beginning in 2017. We are now reporting revenues net of sales taxes and other related taxes. All past revenue numbers in our presentation today and related calculations have been adjusted accordingly. If you please turn to Slide 5, I know there are a number of new investors on today's call and I wanted to provide a few slides updating our strategies and thinking. For the near-term, we expect revenues to be flattish in fiscal 2016 with maybe one to two new units and no acquisitions on the immediate horizon. To grow earnings per share and build free cash flow beyond this year and beyond, we have implemented a vigorous program to expand margins. Meanwhile, we are using our strong free cash flow to return value to shareholders through share buybacks and now dividends. Longer-term, our strategy is to roll up the best of the adult club industry through selective acquisitions of quality clubs in the right markets and at the right price. Few municipalities these days are issuing new license. So the key to growth is primarily through acquisition. Our other key strategies involve developing our Bombshells Sports Bar/Restaurant concept into a nationally franchised change. Based on other successful brands that we've studied in our category, we believe there is a possibility of reaching 100 or more franchise units. Ultimately, our goal is to improve our Company's valuation. As we can see from the chart on this slide, starting in fiscal 2014, our stock performance began diverting from our revenue and profit growth. By improving our model, initiating a dividend and significantly reducing shares outstanding, we hope to close this gap and rise above it. If you'll please turn to Slide 6, we believe RCI has five key attributes that will help us to achieve our goals. One of the greatest financial features of the adult club business is that it generates significant cash flow. If you set up the business correctly, you don't have major CapEx on an annual basis and inventory, principally liquor, turns quickly. Two, obtaining traditional bank financing has fundamentally changed the Company. We used to struggle to finance even real estate purchases. Now banks are coming to us, inviting us to finance acquisitions of our real estate or to refinance existing higher rate mortgages. For the first time, we can take financial advantage of the fact that we have to own our real estate. Before, owning the property was a burden, now it's a major source of collateral. Three, most clubs in the industry are individually owner-operated. On the other hand, as a national publicly traded company for 21 years with close to 40 clubs in business, we bring a level of professionalism, systems, purchasing and best practices rarely seen in the business. This enables us to maximize the management, marketing and profitability of clubs under our ownership. Four, for all intents and purposes, as the only company in the industry with access to bank financing, we are the acquirer of choice. Five, being in the gentlemen's club industry, we have closely watched the growth of national change in the sports bar and beer business but we found major things missing from their models. They only attract men for a few hours a night and for sporting events. We saw an opportunity to create a bar/restaurant with a much wider appeal. Bombshells attract men, women and families. We're able to generate business from lunch-time through late-night and this enables us to generate 50% of our sales from liquor, maximizing margins for this type of business. If you'll turn to Slide 7, our margin and cash flow expansion program is based on five key areas. One is reducing legal costs. They have increased over the years to 5% of revenues at the end of the last fiscal year. Settling the patron tax on the New York Fair Labor Standards Act issues and claims over our private insurance carrier, from our private insurance carrier, we're significantly reducing the need and cost for outside counsel. At the same time, our actual insurance costs have fallen as we generated better ratings with our new carriers. Another big area is reducing occupancy costs. We define this as rent plus interest as a percent of revenues. Our expanding cash flow plus new access to more favorable bank financing is enabling us to pay down higher cost debt with lower interest cost, extend amortizations and expand free cash flow and buy more the properties where our clubs are located and reduce rents. In fact, we've already put a lot of this in place on a majority of our debt and lowering our rent by buying both the properties where Tootsie's Cabaret in Miami and Rick's Cabaret in New York are located. Currently we have only $8 million of 12% to 13% high-interest debt and we are working on refinancing that to lower the cost even further. Our fourth focus is eliminating non-performing clubs. Over the last two years, we have eliminated six clubs that were not meeting expectations and eating into profitability. Some of this was a natural shakeout from the past or from multi-unit acquisitions. Now however we are examining the performance of every unit and if it's not meeting expectations and we can't fix it, we are definitely considering alternatives. The fifth focus comes into play from Bombshells. We are now in the process of putting together our franchise marketing program. Such sales will generate meaningful higher-margin revenues and we have received approval in most states and started sending out a few packets last week. If you'll turn to Slide 8, guiding our decision-making is our capital allocation policy. We've updated this slide for our current stock price and lower share count. In recent years, we have consistently been generating annual free cash flow of around $15 million. By buying back our own shares, we generate an after tax yield on free cash flow of 18.7% at $8 per share and 15% at $10 per share. We consider this yield risk-free since we are buying our own shares, our own assets which we know very well. Right now the yield in most cases is much higher than the risk adjusted return of buying new clubs, opening new restaurants or paying down debt ahead of schedule. Consequently, we have stepped up the pace of our share acquisition efforts. We plan to continue buying back shares until our stock in our view is more fully valued. While opportunities may arise, such as the new club announced today, we believe that the best allocation of our capital is the risk-adjusted after tax free cash flow yield of buying our own shares versus acquiring or opening new units or paying down debt ahead of schedule, for as long as our stock stays in this low valuation relative to RCI's cash flow. If you'll turn to Slide 9, we look at two factors in assessing our cash generating power. One is adjusted EBITDA. As you will see, at $8.2 million, we generated a fairly high level this quarter. Second is free cash flow. We calculate this as operating cash flow less maintenance CapEx, which translated into about $4 million in the first quarter compared to $5 million in the quarter a year ago. The difference was a little less operating cash flow and a little higher maintenance compared to the strong year ago quarter. If you'll turn to Slide 10, we are using our free cash flow to declare a cash dividend of $0.12 per annum, payable $0.03 per share per quarter. The declared dividend for the fiscal 2016 second quarter will be payable on March 25, 2016 to holders of record as of March 10, 2016. At $8 per share, this equates to a yield of 1.5% and at $12 it's still 1% yield. Some funds require $100 million market cap or 1% yield in order to invest in a microcap stock. With our new dividend, we will always meet one of those two requirements allowing for broader ownership of our Company. We also want to reward shareholders who have remained with us during our transition from a small fast-growing company to a larger company with a new capital allocation strategy. As part of this program, we have significantly increased our share buybacks. To date this fiscal year, we have spent $3.3 million to retire more than 330,000 shares. If you'll turn to Slide 11, now let's look at the first quarter's performance. As I mentioned, we earned $0.25 per share in the first quarter. That's up from the $0.05 a share we earned in the previous quarter but it was down as expected from the $0.32 per share we earned in the quarter a year ago. Compared to the year ago quarter, revenue was down about $700,000. Operating income was generally lower due to the reduced high-margin service revenues and slightly higher costs. In particular, legal costs were still high due to the remaining work related to insurance settlements. Actual settlements were also higher than a year ago quarter. Turning to Slide 12, revenues at $33.5 million, while below the record quarter a year ago still held up well when compared to the last seven quarters. As we already announced, same-store sales fell 6.3%. There were there factors. Bigger spenders spending less per visit at a number of our adult clubs, adult clubs located in energy producing areas in Texas coming down off their peak, and tough comparisons in the Bombshells segment due to strong initial sales which accompanies openings at the two units that we opened in late fourth quarter 2014 and the first quarter of fiscal 2015. Units opened less than a year added approximately $2.3 million in revenues and that came from the November 14th opening of the Bombshells in Houston, the January 15th acquisition of Down in Texas Saloon in Austin, Texas and the May 15 acquisition of The Seville Club in Minneapolis. In terms of revenue breakdown, liquor sales increased $600,000 from the nightclubs in Bombshells segment. Service revenue declined $900,000, reflecting the softer spending trends at some adult clubs. And food and merchandise sales declined $500,000, reflecting tough comparisons in the Bombshells segment. If you turn to Slide 13, this slide covers our non-GAAP operating margin. As part of our margin expansion efforts, rent declined 16.9% year-over-year, partially offset by the increase in depreciation and amortization. This is the result of the August 15th acquisition of the Miami Gardens Square retail plaza where Tootsie’s Cabaret is located. Legal and professional expenses increased 15.2%. We are hopeful these costs should decline in the second half as these cases are closed. Turning to Slide 14, occupancy costs edged up a little from the fourth quarter due to an increase in interest. This was primarily due to a change in the mix of loans in the first quarter. Going forward, we expect a big benefit from the acquisition of the Rick's Cabaret New York real estate in mid-January. The new loan will increase our interest cost as a percentage of revenue but the reduction in rent should be even greater. At the end, the end result should be a total reduction in our rent plus interest expense. Turning to Slide 15, here are our segment results for the nightclubs. The main difference year-over-year in revenues, operating income and margin is the decline in service revenue. Based on news reports, clearly we are in a soft economy but we have significant experience dealing with these situations. We have already begun to test new marketing strategies and tactics with success and are working on how to best implement them at our other units. Based on past cycles, we hope to show improvement as the year progresses and especially by the second half of fiscal 2016. As part of this effort, we closed two gentlemen's clubs in January for re-concepting and we're currently remodeling them to what we believe will be a much better use. Both should reopen in March. Turning to Slide 16, as I mentioned earlier, we plan to open a third club in New York City. It will be a sports themed gentlemen's club in the Madison Square Garden area. It will be the first club of its kind in Manhattan and will complement Rick's Cabaret New York which is positioned as an elegant venue and Vivid Cabaret New York which is positioned as a more cutting-edge venue. Our current timetable calls for the opening of the new club in the second half of fiscal 2016. It was developed through a joint venture with the building's landlord and they are contributing the adult license and most improvements. We are investing about $1.5 million in additional improvements. We believe the club will enable us to leverage the strong management team and existing resources we have in place in New York in addition to our name recognition. We believe the risk-adjusted after-tax return should actually be better than buying back our own shares. Turning to Slide 17, here is our Bombshells segment result. The only real difference in our year-over-year performance is the tough comparisons to Q1 2015. Otherwise, profitability held up well, only off by about $50,000 from the year ago quarter. Please turn to Slide 18. We've added two new slides about debt to our presentation. This is designed to show that about two-thirds of our debt or about $60 million is all real estate related with an average weighted rate of 6.8%. We have $91 million in net land and buildings on our balance sheet as of 12/31/15. Based on conservative estimates, we believe the real estate has a market value of $110 million to $115 million, giving us over $50 million in net real estate equity. Our second largest piece of debt, about $20 million, at an average rate of 10.61%, is secured by stock in three of our subsidiaries. The next piece is $7 million representing what's left on the settlement with the Texas patron tax. For accounting purposes, it had an imputed interest rate of 9.6% but in reality we pay equal monthly instalments of $119,000 without interest. Then there's $3.8 million worth of convertible debt and $3.6 million of debt secured by other assets. We have two large converts. Notes converted of 10.25 and 12.50 will be paid in full or converted by August and October of this year and the associated warrants will expire during that time. Turn to Slide 19. This slide is intended to show that a good portion of our debt maturing over the next five years are real estate amortizations or real estate balloons. We plan to refinance all of this debt other than that which is being amortized away. Any non-realty balloons will be paid out of cash flow or refinanced in some manner. This is what we've been doing in the past and while there's no guarantees, we believe we will continue to be successful in doing so going forward. Turning to Slide 20, to wrap up, we are off to a good start with plans for margins and EPS growth and free cash flow generation this year and we look forward to announcing more details on our third club in Manhattan. The second quarter will be another transition period before our new model should begin to take shape in the second half. Similar to the first quarter, comparisons to a year ago record second quarter will be very challenging. Now looking at our stock price, we are very disappointed with share performance but we have initiated a number of actions to improve our valuation. We are working to improve our internal performance. We're declaring a quarterly cash dividend. We have significantly reduced shares outstanding and plan to continue our share buybacks. We have retained more in capital as part of more vigorous outreach effort to institutional investors. We were at the LD Micro Conference in Los Angeles two months ago and we made reservations to appear to Sidoti Conference in New York at the end of March and we are looking for more venues to present at. One of the more compelling reasons to pay dividend is to reward shareholders while they wait for our new capital allocation strategy to work and increase our stock price. We want long-term shareholders to understand that we are not looking to go private. We want to return to a solid growth company but the growth needs to be much more calculated in relation to our current cash flow generation of the Company. Speaking on behalf of all of RCI's management and that of our subsidiaries, I would like to thank our loyal shareholders for their support. With that, let's open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Chris Brown of Aristides Capital. Please proceed with your question.

First, thank you for the level of detail in the presentation and the financials. It's very helpful.

Thank you. We're trying to put it all out there so that everybody can get an idea of and see what we see when we say our stock is undervalued.

Excellent. I wanted to talk about Texas a little bit. Obviously oil and gas has been hit pretty hard recently. I was curious, is service revenues kind of the most economically sensitive part of your club revenue?

Maybe but what's funny is the service revenues actually not really in Texas is the issue, it's more of Miami, New York, Minneapolis, everywhere, and that what we are seeing is a very reserved high-end customer. It almost reminds me of 2009 when they said, don't go to Vegas because you're being frivolous with your money. And so it's kind of like people are starting to get that mindset again of I got to be careful of what I spend. They are calculating in what they are spending. They are spending money but they are very calculated in it, which really kind of hurts our service revenues. Now hopefully as we move closer into the summer and the second half of this year, people will get I call it the cabin fevering and get back out and start spending money again.

Okay. Is there a big component of that high spender who is like a foreign businessman or is that a small part of it?

It could be small part of it. I mean, I think a lot of it is businesspeople and businesspeople are uncertain of their business and so they are being reserved on their spending.

Okay. You guys had a fairly big drop in the food at the clubs, it looks like a little bit over 10% year over year. Can you give us some color on that?

That's the Bombshells. We had the grand openings last year, and when you have a grand opening, everybody comes. That's how restaurants really work. First three to six months you're just blowing it out. You can't even keep up with the demand. Then you go through a cycle of about a year where you are recovering from that. And then as we hit that 18 months to 24 months, which is really our second half of this year, so I really believe the Bombshells will be very strong in the second half of this year, we get that growth back up. And our Dallas location is key to this. So we've really followed the curve of Dallas and now we're seeing the Austin locations following this curve and we're suspecting – so far both Houston locations have really followed the curve. So now we are going to watch them as we move into May, June, July, we should start seeing those curve back up and that revenue continue to grow like Dallas has done. Dallas has become our most profitable location, our second highest in sales behind our South Houston location which is just incredible. And if South Houston follows that cycle – usually as you get into 18 to 24 months, those sales will start exceeding your beginning sales when you first opened. So I'm really looking forward to seeing if that location continues to follow the trend that we're seeing so far from our other locations.

Okay. I think you talked on previous calls, the clubs about maybe being able to reprioritize or maybe reallocate some marketing spend in order to maybe bring down some of the total marketing cost, if I recall. How is that going and if oil and gas stay bad, which it looks like they will, for a while, are you guys, is there more cost you can take out at the Texas clubs that would offset some potential revenue loss?

Yes, definitely. I mean, we started implementing a few locations, we're using a lot more social media, we hold back on a lot of radio, we've eliminated some billboard marketing that we've done in the past, and we're just really going with more I call it street-level guerrilla marketing. It's worked for us in the past, it worked very well for us in 2009-2010, and we're really kind of moving back towards that deal along with some specialty nights and discount nights. So basically, because of the economy and because of how people are thinking right now, we have to give people reason to come to our clubs again. We are doing more VIP parties and more of that type of stuff, and we tested it in a few markets, it's doing very well in those markets and now we're really working on implementing throughout the entire system right now. It will take us – I think through this quarter we'll probably get most of that done and we should start seeing some nice results from that as we move into the April, May, June quarter and then definitely through going forward from there.

Okay, great. I look forward to seeing you at Sidoti. Thank you very much.

Our next question comes from the line of Andrew D'Silva of Merriman Capital. Please proceed with your question.

This is actually Brian Murphy filling for Andy. I think I'm just relaying some questions here. You actually covered most of them in your commentary, so thanks for, again just echoing the previous comments, thanks for all the detail here. So I think you already talked about the customer flow in Texas clubs being down. Can you talk a little bit about maybe any changes you've seen in venues outside of Texas?

Sure. Even in Texas we're not really seeing a down customer count, other than in the Odessa markets and the Longview market, which is the East Texas and the West Texas oil areas. A little in Lubbock and Abilene maybe, but not too much. Abilene is more Air Force base out there and so we're not as affected in that market by the oil. And then the rest of it I think is basically everywhere, the Dallas market as well as Minneapolis, Houston, Miami, even in Fulshear, we're seeing that high-end customer just more reserved. And they are drinking still. You see people still coming to the cubs, they are still drinking, our alcohol sales are up. They are still coming out and drinking. They are just not spending as much money on VIP rooms, on upgrade stuff like that. We're seeing more people buying the discount bottle instead of the most expensive bottle on the menu. Again very, very similar to what we've seen in 2009-2010, just not to the scale that we've seen in 2009-2010, and I don't suspect we'll get to that level. I don't think we're really in a recession. I think people are just being cautious and that will hopefully wear off here shortly. If not, we are adjusting to it, we're doing things, we're doing promotions, we are bringing the people to the door. Our headcounts are great and you can tell that from the total liquor sales. So it's not headcount, it's just the spend itself. And as long as we're keeping our business, once they start spending, it takes off again.

Got you. Thanks for that clarification. And maybe just one more, you talked about the difference between the value of your real estate and what's shown on the balance sheet, maybe talk about when was the last time those properties were appraised or what gives you kind of confidence in that $110 million estimate?

Some of it, I mean because we've refinanced so much of it recently, we have new appraisal on a lot of it. We have appraisals for our properties at $3 million that we paid $2 million for and we've been depreciating it for X amount of years, a lot of property we bought in 2008. Now of course the two new properties we bought, Miami and New York, we know that the appraisal was $15.3 million and we put $4 million down, we have $11 million note. So it's kind of easy, you know there's $4 million in equity there pretty much. And then of course the New York location, when the appraisal came in at $14.9 million, we had the option to buy it at $10 million. So it's basically on our books at $10 million where the appraisal is higher. So we know there's some extra there. And you go back to just like little clubs in Dallas and Houston and the Philadelphia properties and Minneapolis properties we've owned for long periods of time, it's pretty easy to kind of get the valuation. So, all three of the Minnesota clubs were recently appraised at a much higher than book value because we certainly [indiscernible] when we bought [indiscernible]. So most of them are – not every property is recent. Some we use tax, some we just use marketing, other comparable price net, but we are very confident that we are in a conservative range at $110 million to $115 million. It could be higher. We're just using a nice conservative range of where we believe that it's not going to come in less than that.

[Operator Instructions] Our next question comes from the line of John Rolfe of Argand Capital. Please proceed with your question.

A few questions for you. You mentioned that second quarter compares will be difficult given that you had a strong second quarter a year ago. In terms of how the quarter might look on a sequential basis, second quarter versus first quarter, how would you kind of characterize that trend? I mean have the clubs been reasonably steady quarter to date versus first quarter, do you expect to see continued sort of sequential decline after the bump up in 1Q versus 4Q, how should we be thinking about that?

I think we're going to see a little better bottom line and a little better top line from what I've seen so far. It's been five weeks here, pretty decent. The numbers are steady, they are good. We had a really bad November. So October was good or okay, November was bad and then December was great, and that's where you got that balanced out. I think we're going to see similar probably a 6% or so decline in total revenues, maybe a little more because we closed two locations that are going to be closed for about six weeks total during the remodel period here as we get them back open in early March. So you might see a little bit, but I don't suspect it to be more than that 6%. But I do believe that – I don't see, based on our caseloads right now, I don't see any big settlements coming between now and so in this quarter I don't think you're going to see any big settlements. So our legal should be down a little bit more, our settlement cost should be down this quartet as well barring something jumping out at us where somebody calls us out of the blue and says, hey, we want to settle this case and make an offer we can't refuse type deal. But I think overall that's what we're looking at right now. There's not really, there's only a handful of cases left right now that we don't have insurance for. So it's nice to see that finally going away. The other stuff is kind of on the backburner. So overall, I think we're going to see better bottom line and a little bit better top line probably in this quarter than we've seen in the last quarter, but compared to year ago, that's going to be, those are very tough comparisons. That was the biggest quarter we ever had in the history of the Company and the economy was a little different, people were thinking a little different back then. But overall, I think we are progressing forward with our strategy and our plan and I think we're going to continue to see that working for us as we move into the next quarter and the next quarter, and hopefully get back to growing revenues again year-over-year starting hopefully in the June quarter, but I think definitely in the September quarter.

Okay great. With respect to the new club in New York City, you mentioned that you expect a return better than what you get buying back stock, which is impressive given that the stock today is probably trading at something like 5x free cash per share and who knows maybe 7x earnings by anyone's guess, but could you give any more color on sort of how that deal came about and whether there is opportunity for other similar deals going forward because it certainly seems that if there's the ability to do this sort of joint venture structure going forward with the sort of returns you are talking about that that would be something that would be a really attractive option for you guys?

If you had told me we could find two more clubs in New York City a few years ago, I would have thought you were crazy. I thought Davidoff was the proverbial needle in the haystack, but obviously someone else found it. I can't take credit for finding it but they found it, they came to us, they said, look, we got this, we can do it on our own but we'd rather do it with you and we worked out a deal for us to buy 51% control of it. So we control the management, we control the investment. They had already done a lot of the buildout. So all we have to do is really decorate and we changed it up a little bit because we didn't like some of their flows. They are not experienced in the club industry, so some of their flow patterns were up, they didn't have an elevator. So we are putting an elevator, we're making some flow pattern changes. We're tearing out a roof and extending and giving us about 900 more square feet than their original plan called for, which will cost about $1.5 million. I think that the location will come in probably in the $7 million plus in annual revenue with about $3 million net with our 51%, would be 100% cash on cash in the first year.

Okay, that's great.

So it's very exciting. And even if we miss and we only do half of that, we're still at a 50% cash on cash return, which is still better than the 20% return or 18.7% return that our stock is going to return at $8. So it's still much better. Those are the kind of deals we're going to look for if we're making acquisition. And we want to, we want to make expansion, we want to be a growth company, but we just don't see the point of growing and taking risk when we've got an 18.7%, or actually better, I think the stock is $7.60 today, it's even better than probably getting [indiscernible] close to a 20% return just buying back our own stock.

Okay. Last question, I think on the last quarterly call, you had indicated that you hope to have a national distribution in place for a nationwide launch for Robust at some point in the first half of the fiscal year or maybe the calendar year. Any update there, is that still your hope or expectation and has any progress been made in that regard?

Sure. We're working on it. We have launched in Minneapolis with Southern Wine & Spirits. We are currently launching in Nevada in March. So we'll get those two under the belt and hopefully Southern will line up in next state and eventually hopefully Southern with their new deal will now have distribution in all 50 states, so hopefully at some point as we add these markets, we are working to the point where we're in all 50 markets with Southern would be great.

Our next question comes from the line of Gary Abbott of Merriman Capital. Please proceed with your question.

For starters, let me applaud you on the dividend. I think it shows good confidence. I completely agree with you, I think it's going to open up a wider investor base. If I were to look at your guidance for free cash flow being $15 million to $18 million, your dividend at $0.12 about $1.2 million, your current share buyback rate about $3 million a quarter and understanding that that scales up and down based on the return on invested capital versus other opportunities, but with that said, you've allocated a good chunk of the free cash flow towards shareholders. My question to you is on the Bombshells side, as you are trying to grow out that business, how much will you need to allocate toward Bombshells and what's your plan for, how many units do you expect to open during 2016?

I think we'd only open one more unit this year because we've already bought everything. We had that unit planned in Houston where we had an issue with the landlord. And so we can probably open another unit for around $1 million or less, just basically the buildout. All the equipment is bought. Everything is set in storage right now. So we're pretty much ready to go on that. Plus we had closed the Ricky Bobby's location. So we have a lot of equipment in that location that can be moved as well. So it's possible we could do two, but more than likely one location, one more location. [Indiscernible] locations, New York being one of the locations in additional Bombshells. The real growth in Bombshells is to start selling these franchise agreements and bringing these franchisees in where they're going to make the majority of the investments. So it's not a lot of out of pocket cash for the Company and then it creates the royalty revenue as we move forward. We sent a packet out to a group in San Diego who is very interested. We are in the process of talking with a couple of other operators and we'll probably launch a real marketing program here in the next few weeks, including through some franchising Web-sites, some magazine stuff. Bar and nightclub is the first or actually second week of March, the 7 to 9 of March. Our guys are going out there. We are going to be talking with some people and meeting some people out there as well. So we're in the beginning infancy stages of it but I hope to see some progress definitely in the next quarter on that front as well. It's going to take about – it typically takes six to eight months to build out a location and get it open from the time you start. So I'm really kind of hoping that we can sign some agreements hopefully in March which would put us some stores opening that could be as early as October but definitely by December on a franchise type basis. So we've still got time to actually meet that goal that we want to do if we can sign some people up. And that's really what's it's about, it's just getting out there, talk to people, get them interested, showing them more locations, showing them some of our numbers and saying, get onboard with us.

Are the franchisees, are they guys that are going to open one unit or maybe two units in a city or do you have…?

Our goal is to sell territories at three to five units. That's typically how most of our competitors do it. We're kind of following that mould as well. But depending on who the operator is, we're being very selective in operating. We want people with some restaurant experience. We're actually marketing to some multi-restaurant franchisees that have other franchisees besides ours. That's our goal in the beginning. But we are talking with everyone right now and basically we want to make sure they have the financial wherewithal to get through what I call the down-cycle. You go through your big honeymoon and then you go through your down-cycle, then you build back up. That's what we've seen with these. And so we want to make sure they have the financial wherewithal to absorb the cycle.

Okay. And then the last question I had was on the bankability point. We talked about that briefly before but I just kind of wanted to, if you could sort of highlight how you talked about being a public company for as long as you were and the ability to make acquisitions and to do joint ventures like this, can you talk about how basically being bankable facilitates growth over the longer term?

I mean, it allows us to buy the real estate with bank financing. So when we do an acquisition of something, we can pay them cash for the real estate and then finance out and pay over time on the club, versus the old days we were paying cash out of our own cash flow for the business and then financing the real estate separately. I think this way we'll need less cash at hands to do acquisitions because the cash will come from the bank on the real estate side and we'll carry the paper on the club side, making it cheaper and faster and making our return on investment on the company side much higher.

Philosophically, that would allow you to do more, right? So should we look to that over the long term? I realize right now the primary use of capital is the risk-free buyback and the dividend, but as…

Once our stock is more fairly valued and we're getting a recognition for the cash flow that we are already generating, we'll be able to grow cash flow returns at a very rapid rate.

Our next question comes from the line of Adam Mikkelsen of Cooper and Company. Please proceed with your question.

Just a couple of modeling questions. So [taxes and permits] [ph] came down from $5.4 million to $3.3 million or $3.2 million this quarter. Does that reflect the settlement of the patron tax?

I don't know. Oh, since last year. Oh yes, last year we were including the patron tax in cash flow. I'll have Phil look at that and see what effect that had. That was probably a big chunk. It was about $1 million a quarter was patron tax.

Yes. So it has come down $2 million a quarter. I mean it's a big drop. I just sort of wanted to, I can take it off-line but I just wanted to get a sense of what that will look like going forward. And then the second thing is, now that you've got these legal settlements behind you, what do you expect like a normalized level of legal to be going forward?

It's going to take one more quarter before I can really get to that. We've just got a couple of other cases that we're working on right now. I don't know how much they're going to heat up in as far as legal costs. We've got some depositions and we've got some motions and stuff to file in a couple of cases. I was just talking with the lawyer past week and it looks like it's going to be pretty moderate, but we're watching. I'm hoping that we get it down under 3%, that's where I'd like to see it at, at least for the next, for the time being and then drop it down even more.

Okay. I'll just follow up with Phil on that other question.

All right, sounds great.

Our next question comes from the line of Mike Morgan of Morgan Capital Management. Please proceed with your question.

First of all, a comment for Eric. I personally like the stock at $8 or below.

Because you're buying, sir. We like it but we'd really like to see it trade for fair value so we go back to being a growth company instead of…

Yes, but I'm just saying since you're buying the stock, whenever I buy a stock, I want it to be cheap not expensive. So you're buying it. Let's say it stays here for two years. You're going to privatize a lot more of your company by doing it at this price than if it was at $12 or $13. But anyway, I'm just saying the low price doesn't bother me in the least. But I do have a question on, you always in the past, not always but many times in the past, have talked about the size of the industry and all that stuff, by you kind of going back and not opening the stores, is there another national company out there that can kind of go in there and kind of take over the leadership of the industry or are you risking something there by not expanding is my question?

We haven't seen it yet because no one else has the access to capital. The capital has been really tight. There's a couple of clubs that are chained out there that are definitely trying to grow and they pick up a unit here and there, usually on sometimes – like we did in the beginning, the owner financed this or owner financed that and they go in and use their expertise to go in and build up the location. And like we were doing in 2008, you get two or three winners and you get two or three duds and you just kind of flow through it and go. And that's what we're seeing out there but not a lot of it. I don't think we're really risking a lot unless a bunch of capital comes into our industry all of a sudden and it's not going through us and one of our competitors finds the access to large amounts of capital, goes out and starts rolling up, then we have an issue, but as of right now you are not really seeing many clubs trading it.

Our next question comes from the line of Michael Suh of Wells Fargo. Please proceed with your question.

I just had a quick question that kind of builds on the last one about the stock price and I was wondering if you could comment at all about on the pace of share buybacks or potential for a tender offer.

We've talked about it. In order to do a tender offer, we have to have a large amount of cash. Our problem is this, we have free cash, we are buying in the market right now. Last couple of weeks we haven't been in the market a lot because we had to pay, on the 31st we had to pay $1.48 million worth of property taxes. So that cash has gone out and now we're letting our cash kind of build back to what I consider our safety net levels. But every penny over our safety net levels, we are going to be putting into the market, minus a little money that's going into the new club in New York and maybe possibly another Bombshells just because we think the cash on cash return that we can generate will be greater than the free cash risk-return of buying back our stock, but the tender offer is hard unless we go and take a big loan out and draw a bunch of cash to buy back our stock. Of course at these levels it's starting to get pretty inspiring and tempting to go out and do something like that, that we talked to a group a while back about a $20 million or $30 million loan. And we'll see what the stock does here over the next few weeks, and I mean if it continues to fell off like it is, at some point, yes, I think we're going to have to go, the return is too great not to do a big offering. But right now we're just buying it back as fast we can.

Got it. I mean do you find the low volume in the stock to be constraining at all in terms of the buyback?

No, because we don't have – we can buy back about 15,000 shares a day right now and we don't have 75,000 in free cash a day at this point with some of the things and what we are doing right now. Probably by March, that could end up being an issue again. At that point, we'll stock up some cash so we get a big lump sum. Maybe we'll do 1 million share tender offer or something.

Our next question comes from the line of Howard Rosencrans of Value Advisory. Please proceed with your question.

Thanks for the color. Couple of quick questions regarding – just wanted to get a little more specificity, how much of the revenue base would you say is in oil sensitive regions and what would you sort of generalize, no specificity, just sort of ballpark, is the comps you're running there?

The comps we're running in Longview and Odessa are minus 30% to 40%. I haven't really done the total percent of revenue. I know Texas is about 50%. It runs 48% to 52% based on how some of the other clubs do out of state. I would probably say Odessa and Longview might be 6%. That might be high. It's not a lot.

So it's very little?

Yes, it's very little compared to – now you consider Texas is 50%, around 50%, so if you take all of Texas…

But the oil regions are only six. So the sort of 6% negative pump you experienced in the first quarter, and which sounds like it's the level you're sort of guiding to for the second quarter, that's largely a function, and I'm not trying to put words in your mouth, that's largely a function of a general slowing throughout your clubs generally, it's really not, it's de minimis, the impact of oil?

Exactly. I don't think we have a lot of oil exposure. I think we have – the problem we have is that oil exposure has now created a stock market exposure which has taken our high-end customer and made him go, I don't know if I want to go out and blow $2,000 at a strip club tonight. I might want to wait and see what happens with this stuff. And that's really what we're seeing. If you just go to the clubs, we have customers, the customers are there, they're spending money. The high-end, the $15,000 blowout nights and the VIP room have come down. The amount of $1,000 plus tabs have come way down. The $200 spend, the $300 spend customers, they are there, they're spending money, and the $50 spend customers we're getting lots of them, they're getting more visits because they're getting cheap gas. So we're not seeing any promise. You see the liquor sales are up but that service revenue is down, and that's what we're citing.

So this may be discernible based on what you provided. I don't see it easily. Do you have – I would like to reconcile from – and again I don't need the exact numbers – is there a way for me easily to get from just an EBITDA or net income to free cash flow?

We're using a different model than we had in the past. We're using a model that basically is operating income minus CapEx. Am I saying that right, Phil? Maintenance CapEx.

Yes, that's right.

Operating cash flow minus maintenance CapEx for free cash flow, yes.

I'm sorry, so you're saying, is operating income, is that adjusted EBITDA, is that what that is?

No, it's operating cash flow, if you look at the statement of changes in cash flow.

Okay. So could you just tell me what the starting number is please? What was it for Q1 that starting number before I have to subtract CapEx, could you just share that number please?

Hang on one second. That would be 4.2 million.

Okay. And that's here on the press release or that's…

No, it's in the statement of financial. It's in the consolidated statement of cash flows.

Our next question comes from the line of [George Catarino] [ph], a private investor. Please proceed with your question.

This is regarding Bombshells. I have looked at a lot of restaurants and I find it difficult to find restaurants at a forward P/E that are less than 15, which is far, far higher than your P/E, but fast growth restaurants have even much higher P/E. So it appears to me that if you want to get the higher P/Es of the restaurants that you need to build more restaurants and it appears that you're leaving dollars on the table, and so my takeaway is that since you are not growing those restaurants quickly, they must not be doing well.

It actually has to do with, A, best use of our cash. We do agree that we went into the restaurants because we thought we'll get some multiple expansion and hopefully at some point we will. The reality of it is, we had to pay a very large lawsuit settlement. And then we look at, okay, if these restaurants are returning us say, 20%, 25% free cash flow, cash on cash return, do we really want to spend that or do we want to buy back stock which is returning us 18.7% risk free, because not every restaurant has been successful. But we've now got the formula down. The last two that we've done have been very, very successful for us. We now know, we've got our location down, we've got our demographics down and we're going to continue to operate and build more restaurants out company-wide but we also want to franchise those locations because we get less investment, higher-margin returns. It has nothing to do with the restaurants themselves that you can see the numbers. They are profitable, they are making money. In fact we have a location that's actually losing money right now out of the four, which was the second location we opened. We're doing some stuff there to see if we can bring that location back to profitability or at some point we may close that location and then you'll see the overall income increase even more from the other four locations that are profitable for us. The second location was in a B shopping center and we've learned that we've got to be in A shopping centers, we've got to be around lots of other restaurants because we need that drive-by and that late-night traffic. You may not want to eat at our restaurants, but you'll go to the other restaurant and eat that's right besides us and then come over and have a few drinks on our patio and listen to our DJs or watch our bands. And that's been very successful for us. George, any other questions?

No. I appreciate your answer but my takeaway is unchanged that if that P/E is so much higher, that you should be opening as many restaurants as you can because the market will at some point give you benefit of that higher P/E.

Okay. Thank you, George.

There are no further questions in the audio portion of this conference. I will now like to turn the conference back over to Gary Fishman for closing remarks.

Thank you everybody. Please turn to Slide 21. Here's our reporting calendar for fiscal 2016. Tonight you can meet management at Rick's Cabaret New York from 6 to 8. If you haven't RSVPed, ask for me at the door. Tomorrow we'll have a series of one-on-one meetings with institutional investors in the city. March 31, we'll be at the Sidoti Emerging Growth Convention in New York City. And in April, we report second quarter club and restaurant sales. Please note we might change the date for reporting third quarter results in order to work around the 23rd Annual Gentlemen's Club Expo which is being held in New Orleans again this year. On behalf of Eric, the Company and our subsidiaries, thank you and good night, and as always please visit one of our clubs or restaurants and have a good time. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.