Gary Fishman – Investor Relations Eric Langan – President and Chief Executive Officer Phillip Marshall – Chief Financial Officer

Marco Rodriguez – Stonegate Capital Markets Frank Camma – Sidoti James Anderson – R.F. Lafferty Steven Martin – Slater Peter Siris – private investor Ishfaque Faruk – WestPark Capital Ian McMillan – private investor

Greetings, and welcome to the RCI Hospitality Holdings Fiscal 2017 Fourth Quarter Conference Call and Webcast. [Operator Instructions] 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, Devon, and thank you, everybody, for joining us today. I want to remind everybody, our safe harbor statement is posted at the beginning of our conference call presentation. It reminds 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 that occur afterwards. Please turn to Slide 3. I also direct you to the explanation of non-GAAP measurements that we use and that are included in our presentation and news release. And now I’m pleased to introduce, Eric Langan, President and CEO of RCI Hospitality.

Thanks, Gary. Good afternoon, everyone. Please turn to Slide 4. First of all, we want to thank everyone for being on the call with such short notice, and we want to thank our shareholders who have stuck with us through all this, who have believed in us and have helped maintain the value of our stock. We have worked really hard in the last 3 years building shareholder trust and confidence. We have worked hard to learn from the lessons of the past mistakes and have led our capital allocation strategy to ensure we continue to increase free cash flow and long-term shareholder value. We believe the efforts have begun to really pay off, and we plan to work even harder for you in the years ahead. And now let’s turn to today’s news. We are pleased to finally file our 2017 10-K. We are working diligently to file our first quarter Q in order to get back on schedule by the second quarter. This is the first time since I’ve been CEO that we have been late, and I have been as frustrated as all of you. There was 1 item that didn’t have much bottom line impact but it took a tremendous amount of time to figure out, and I’ll tell you about that in a minute. While our year-end audit with the new accounting firm took longer than anticipated, the good news is that our new financial reporting system, we now have a modern, easily scalable financial IT backbone. GAAP results for the fourth quarter were a loss of $0.23 per share. This reflects non-cash impairments and additional tax provision. However, core results for the fourth quarter were strong, with non-GAAP EPS at $0.36. Importantly, free cash flow for the year came in at $19.3 million, exceeding our initial target by more than 7%. The strong core performance is continuing in fiscal 2018. We are definitely feeling a more confident, stronger growing economy, aided by the enthusiasm generated by Tax Cut bonuses. As a result, we have increased our fiscal year 2018 free cash flow target by 9.5% to $23 million. This incorporates our preliminary estimate of the impact of the tax reduction. The new law is expected to significantly reduce our rate and also result in a non-cash gain. And once the first quarter Q is filed, we’ll get back to the active vision trail. Please turn to Slide 5 for an analysis of our fourth quarter 2017 GAAP and non-GAAP operating income. Revenues were very good, up close to 19% in both our Nightclub and Bombshells segments and up close to 19% on a total company-wide basis. Key factors were growth in same-store sales of 6.5% as well as new acquisitions of new Bombshells and strong marketing related to televised pro baseball, football, boxing and mixed martial arts sporting events. All core revenue lines also grew, with higher-margin service revenues, beverage and food up in double digits. GAAP operating income increased 87% to $1.4 million. As I mentioned, this included $6.2 million in impairments versus the year-ago quarter, which included $5.2 million in items. Looking at the quarter on a non-GAAP basis. Operating income increased more than 26% to $7.7 million. By order of magnitude, the key drivers of this increase were the Nightclubs segment, which reflected higher sales from acquisitions, in particular, Scarlett’s Cabaret Miami, increased same-store sales, expanded margin due to better operating leverage and a better lineup of clubs in general versus the year before. The Other segment, which saw a big improvement as a result of our divestiture of Robust last year, and the Bombshells segment benefited from higher sales, expanded margins, also due to better operating leverage and improved restaurant lineup. During the fourth quarter, we successfully launched our new, larger Bombshells on Highway 290 in Houston. This replaced a smaller, more distant unit in Webster, which closed at the end of the year-ago quarter. Also worth noting, during the quarter, we successfully dealt with severe hurricanes in Houston and South Florida, 2 of our major markets. While we don’t have a specific dollar amount, we believe the hurricanes resulted in a relatively small amount of loss to operating profits and additional expenses. Please turn to Slide 6. Fourth quarter 2017 impairments totaled $6.2 million, about $3 million was for 2 clubs in East and West Texas, and another was for $1 million for our Fort Worth club. All of these clubs are profitable but less so in fiscal 2017. Another $1 million was for the remaining investment in Robust. The remainder was spread among 3 other properties, one of them non-income-producing. The other item affecting GAAP results was $1.3 million in additional non-cash taxes. This resulted from the tax effect of a 2% increase in our tax rate on our October 1, 2016, timing differences between booked and past accounting. As a result, our fourth quarter 2017 effective tax rate was a $1.1 million tax expense on a pretax loss, making our fiscal year 2017 effective tax rate 43.4%. This compares to a $1.3 million tax benefit in the fourth quarter of 2016 on a pretax profit, making our fiscal year 2016 effective tax rate 18.5%, which included the benefit of about $2 million in tax credits. The big item that required the most amount of time during the audit was the review and resolution of non-cash deferred taxes we announced at the end of December and to a lesser extent, the non-cash depreciation item that we discussed at the same time. Resolution of the tax and depreciation items resulted in net after-tax effect of increasing fiscal year 2016 net income by $129,000, reducing fiscal year 2015 net income by $98,000 and corresponding adjustments in the 10-K to the fiscal year 2016 and fiscal year 2015 income statements and balance sheets. So please turn to Slide 7. Fiscal 2018 is off to a great start. As previously announced, first quarter 2018 club and restaurant sales increased 22% year-over-year and same-store sales grew 7% year-over-year. Nightclubs increased 20% in total sales and 7% on a same-store basis, while Bombshells grew 36% in total sales and close to 6% on a same-store basis. New units added more than $5 million in sales, primarily due to Scarlett’s Cabaret Miami posting the best quarter results since we acquired it in the first full quarter of the Bombshells 290. Positive trends have continued to date into the second quarter. In January, we had good business even though tough weather in some markets. In February, we had good sales related to the pro football championship in multiple markets. We will announce full quarter – second quarter 2018 results for club and restaurant sales on April 10. Bombshells celebrates its fifth anniversary in March. We have 3 new units in various stages of development in the Houston area. This would give us a total of 8 units in Texas, of which 6 will be in Greater Houston. The first of the new units is scheduled to open in the rapidly growing suburb of Pearland in the current quarter as soon as we can connect gas lines and pave the parking lot. This will be our largest Bombshells to date, with 13,000 square feet in seating capacity, in excess of 400. The other 2 Bombshells, on I-10 and the Southwest Freeway, are scheduled to open in the fourth quarter of fiscal 2018 and the first quarter of fiscal 2019. We also have a new menu rolling out with the first price increases we’ve implemented in several years. The new federal tax legislation will definitely enhance our results, but that might be mitigated to some degree by a pressure to increase salary and wages. Our effective tax rate is expected to fall to approximately 23% in fiscal year 2018. It will also result in a non-cash gain of approximately $10 million in the first quarter of 2018 due to lowering the rate of our deferred taxes. As I mentioned, it should also enhance free cash flow as well as our club businesses. Please turn to Slide 8. Another major plus in our new real estate – is our new real estate consolidation loan with Centennial Bank for $81.2 million that we signed late in the first quarter. It simplifies our debt structure, locks in an attractive rate, pays off a significant amount of higher-rate non-real estate debt and eliminates multiple balloons over the next 4 years. This includes the one on our prized Miami Gardens location, where Tootsie’s Cabaret is located. The new loan stabilizes debt-servicing cash outlays drop to $9.84 million in each of the first 2 years. That represents a savings of $1.57 million in principal payments and $612,000 of interest in year 1. Starting in year 3, debt-servicing cash outlays drop to $6.84 million per year for the balance of the loan. Initial loan-to-value was 75% and by month 24, drops to 64% with the additional principal payment. Putting together this loan required extensive independent documentation. This included surveys, environmental study, appraisals of all the parcels and facilities involved, providing thorough third-party due diligence of our real estate. Although we believe many of the valuations were on the low side, based on our experience, having this type of third-party analysis is beneficial to the company and its shareholders. And there are no restrictions on using debt to acquire new clubs that are accretive to earnings. Please turn to Slide 9. This slide shows the estimated effect of the new loan on our long-term debt. There are 3 major changes compared to what we’ve showed on our last conference call. Real estate debt went up by about $13 million, reflecting how we use the bank loan to unlock equity and existing real estate to refinance higher-priced parent-level debt and the Jaguars seller financing as a result. Parent-level debt is down by about 1/3, and the Jaguars debt, which was $7.5 million at the end of the quarter, has been eliminated. Please turn to Slide 10. This slide also shows the effect of the new loan on debt maturities. The main thing I’d like to point out is the significant reduction in realty balloons compared to what we showed you on our past conference call. In particular, a $19.4 million realty balloon mainly related to the Tootsie’s Cabaret in 2020 is gone. Now please turn to Slide 11. We continue to demonstrate good cash-generating power. For the quarter, adjusted EBITDA increased more than 17% to $9.6 million. Year-over-year, it’s up more than 8% to a record $37.3 million. Cash was $10 million at September 30 or about $1 per share. This is down a little from June 30, but mainly due to higher prepaid expenses. Fiscal 2017 free cash flow at $19.3 million exceeded our original expectations for the year by about 7%. As I mentioned earlier, based on the strength of our business and a preliminary analysis of the impact of the new Tax Cut Act, we have increased our fiscal year free cash flow target by 9.5% to $23 million, which would represent a 19% year-over-year growth. Please turn to Slide 12. Here’s a review of our capital allocation strategy. With an estimated free cash flow of $23 million and a market cap of about $27 million, we currently have an after-tax yield of about 8.5% on our equity. This is what we consider our risk-free return for buying back our own assets in the open market. At that yield, we are more likely to use capital for club acquisitions or to open Bombshells. To compensate for the added risk, our hurdle rate continues to be at least 25% to 33% cash-on-cash return, unless there is a significant strategic rationale. And if we are – if an existing unit is not generating a sufficient return, we are inclined to dispose of it, free up as much capital as possible and use that for more productive purposes. Should our free cash flow rise or our stock price reach a point where the yield is in double- digit percentage range, we would seriously look at returning our focus to buying back shares. And with the lower tax rate, the after-tax yield of paying down debt increases. So if we can’t find the right acquisition as cash builds and our stock yields stay below the after- tax yield of paying down our 12% debt, we will look to retire higher interest loans. Please turn to Slide 13. Looking ahead, we have a great future built on four pillars. One, our free cash flow per share at 10% to 15% year – on average and grow our total free cash flow to approximately $30 million. Acquire more great clubs in the right markets. On average, over the years, we have made more than one club acquisition per year. We are currently in discussions with multiple potential candidates. Regarding organic growth, we continue to expand Bombshells' company-owned stores. Our target is three per year. Over the next three to five years, that would give us a total of 14 to 20 units. And fourth, while we are in growth mode, we are not – we will not be pressured into deals that we don’t like just for the sake of growth. We are not in a hurry. We will work to make sure that each new acquisition of restaurant is right for us. It has to meet, one, our – it has to meet our requirements, add to achieving our long- term goal and not add undue risk or stress to our systems. We will be focused, analytical, careful in everything we do for our shareholders. Thank you for listening, and thank you to our staff across the country for all their hard work, volunteering during the hurricane and all those that were involved in closing out this year. Now let’s open the call for questions.

[Operator Instructions] Our first question is with Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Good afternoon guys. Thank you for taking my questions. I’m wondering if maybe we can kind of start on the impairments you guys took in Q4 2017. I’m just trying to get a little bit of clarification here. Those five operating units where you took the impairment charges, are they still in operation or have you exited them?

Yes, they are. The main was three units, one in East Texas, one in West Texas. Those are very affected by the oil. And then one in far west Fort Worth, which – we just had an off year. We’ve made some adjustments. And I think that 2018 would be better, but we have to use the formulas and do the snapshot as of 9/30/17.

Okay. So you exited those clubs, or you just took a charge because

We took a charge, we took a charge. They’re profitable, they just weren’t as profitable as the year before. And so based on the rules, we have to run the calculations and impair when necessary.

Okay. I understand that. And then the other three properties, one of which was non-income-producing, what exactly were those other three that were income-producing?

I believe they are just a tenant property then. It was due based on certain appraisals mainly in Texas and mainly due to, I believe, just the oil effect that happened in 2017.

Got you. Got you. Okay. And then kind of moving here, just to kind of the bigger picture items here on Bombshells. It looks like in your presentation, Q1 same-store sales were pretty strong at 6%. I was wondering if maybe you could talk a little bit about that, that rate right there compared to Q4 2017, where you were at a 3% same- store sales. What were kind of the big drivers there that you saw?

Well, the sports lineup was much better. Of course, the Houston Astros going to the World Series, that certainly didn’t hurt. And I think we also got a nice benefit, I hate to say anybody benefits from a hurricane, but we were one of the first restaurants reopened, we were very active with first responders and whatnot. And I think we just got a nice boost from that. That helped our numbers by – by doing the right thing, we benefited.

Got you. And I know you commented that you don’t have exact figures as far as the impact from the hurricane. But do you think that there’s any meaningful impact to the same- store sales in your Q4 2017?

No, not particularly. I just think we had a strong quarter.

Got you. Got you. Okay. And then moving along here to the franchise opportunity on Bombshells. Can you kind of provide us with an update there, where you guys are in terms of opportunities, to selling some franchises out there in the states?

The market hasn’t really changed. The casual dining is still a very tough market. And we’re not seeing a ton of interest. We talk to people here and there, but nothing solid at this point. Right now, I think, we’re just going to stay focused on building out these next three company stores, which will push us all the way through the first quarter of 2019, so about a year from now. And as we look into the next few months, we will start figuring out, probably when the Q comes out or definitely by May, we’ll be able to give you a nice update on our plans as we move toward expansion in 2019.

Got you. Are there any sort of, I don’t know, strategic reevaluations in terms of how you guys approach the franchise opportunity?

Not really. I mean, I think right now it’s just tough. We’re talking about approximately a $3 million investment in the casual dining space, and it’s just a tough sale currently. I do believe as certain franchisees of other operations are in long-term leases and starting to look for exit strategies from failing franchises, that maybe we’ll get some more interest. We’ll just have to see. Or as the economy comes back and kicks up, that maybe casual dining will pick back up and we’ll see interest at that point.

Got you. Okay. And then a question here on the Nightclubs segments, same-store sales growth also pretty positive here in Q4/Q1. Obviously, you’ve called out some sporting events, maybe the Grammys also helped you guys a little bit here in Q4, I believe, it was. Were those the primary drivers for the same- store sales increases there? Or did you have any sort of promotional activities or marketing activities that maybe kind of helped that as well?

No, I just get a feel that there’s more optimism out there, especially in small business owners. The talk of the tax cuts, the – and that type of stuff, I think, people are just more optimistic in October, November, December. And we’ve seen that in the sales, and we’ve definitely seen it in the – in that quarter. For the fourth quarter, I mean, we were just – we just had good sales as well. I mean, things seem to be turning more positive.

Got you. Got you. Okay. And last quick question, just kind of a housekeeping item. If I’m looking at this correctly, it looked like your SG& A in Q4 2017 was at roughly $13 million and some change. A decent uptick sequentially and year-over-year compared to where your SG&A has been historically. Were there any sort of onetime items in there? Can you kind of talk a little bit about that? Or is that kind of a new run rate level?

There are – I do believe there’s added expenses, so we did put our ERP system in place, so there was a lot of consulting on that. Of course, we switched auditors, we had some other stuff, I believe, in legal that picked up just a little bit. But I mean, overall, I think that we’re going to probably normalize down from this level, if not in this next quarter, the October-December quarter, then – or through this March quarter, I think definitely we will normalize more in the April to June quarter. So expect a little fluctuation here as we settle into the new normal, especially the new accounting systems and whatnot.

Got you.

Thanks Marco I appreciate your time.

Thank you.

Our next question is with Frank Camma with Sidoti. Please proceed with your question.

I think one of your best moves if rates continue to rise here might be the debt, what you did there. So I have a couple of questions around that. One is, is this – this is substantially all of your real estate, is that correct?

I would say it’s about 90%. I’d have to get – I mean, I don’t know the exact numbers. I’d have to really kind of lay out, but it’s about 90%. It’s the majority of our real estate.

That’s fair. But you make a comment about no restrictions on using debt to acquire further clubs which are accretive. That’s a little bit different. I mean, typically, you see like a leverage covenant or something like that. So can you explain that? Where do they look for there? Just sort of in the cash flow metric or

Is it 1.25, it’s 1.25 to 1. Is that correct, Phil?

Yes. 1.25.

Yes. Okay.

Okay. Is that what – that’s the metric you’re looking for? Okay. Okay, good. All right, good. My other question’s on the club business. Given – this is more from an acquisition standpoint, this question is coming from. Given sort of the increase what you’ve seen in sort of consumer confidence, small business confidence, the tax cuts and obviously, the improvements in your business, do you get a sense, and I know you talked to a lot of club owners out there, do you get a sense that they may want an elevated valuation in the short term? Or how are they thinking about their business? Do they think differently or on the

I think we’ve typically been around three times EBITDA. In special situations, with grandfather’s licensing, we’ve gotten as high as four, similar to the Scarlett’s deal. I mean, we’ll look at – we’ll take a trailing 12- month adjusted EBITDA-type deal. If we believe there is some additional upside, we can make an adjustment for that, and it might seem like we pay a little bit more around the trailing 12- month basis. But I don’t see us exceeding that 3% to 4% range regardless on a trailing 12-month basis. We can never be certain on what the future is going to be. So we basically look at the cash flow we generated from the past, and that’s how we’ve been negotiating. I think we’re one of the real – only real cash buyers out there. We haven’t done much acquisitions since Scarlett’s, and we’re starting to build a significant amount of cash on the balance sheet. As you’ll see, once we get the Q out here, hopefully by early – end of the month, early March and get back in, and then in May, you’ll see it nice and solid if we haven’t made an acquisition and our cash is definitely building right now.

Okay. Well, that multiple leaves you a decent bit of margin as safety, I guess, that 3x to 4x. I guess where I was going with that is are they feeling a – are the sellers feeling a little more comfortable or maybe even does the lower tax rate get them sort of off the margin, not that they really save on the capital gains, but I guess some of these guys would have embedded when they sell

And we can adjust for their tax. We can adjust.

Right. Right. It might net them more is, I guess, what I’m saying under the new tax law. Okay

So most of the guys we’re talking to who are selling are looking to get out of the industry. And they retire and they’re looking, so of course, they’re always trying to get the most value they can get, but they also want to make sure they get paid. And that’s one of the things that RCI as a public company and our past history and our track record, they have the confidence in us that they will get their money, not all at once. They will get their money based on the terms that we negotiate

That’s not necessarily a bad thing for them if you’re able to give them a note and pay them over time, right, because they can get like an installment sale, for example, on their side.

Exactly. They save on their taxes, they get additional guaranteed interest versus having to take a lump sum of cash and try to invest it and match the 6%, 8% or 10%, depending on how we do the notes. So yes, there’s definite benefits in dealing with us on a long-term basis for them as well.

Okay. And I appreciate your comments on the franchise, and it doesn’t totally surprise me. But if you could boil it down to like a couple of things, I mean, you did call out a couple of things, but I’m just wondering like do you – because your approach at the size of these that you’re looking for your – I think you’re approaching sort of experienced investors or operators. Do you find that they come across any common themes, like whether it’s the size of the investment or the track record, like which is more important to them?

I think the big thing right now is we only have a few stores in the Houston market. And as we continue to dominate in Houston and we can show that when you open up more stores in a market – because we really are trying to do area agreements, and I think as the new Houston stores open, our old stores are staying solid. We’re seeing the sales growth and the excitement of the new stores throughout the chain. And as we open more stores, then we’re going to be harder and harder to ignore, the success. When you do it once or twice or three times, it’s one thing, but as we start getting 8, 9, 10, 11, 12 stores open, I really think we’re going to start seeing some really solid players, especially as we move into 2019. I really was hoping to do it sooner, but that maybe we jumped the gun a little bit, got ahead of ourselves. And we just need more time under our belts, more total revenues under our belt. When we’re doing $50 million of revenues from the restaurants, a $3 million investment looks a little different when we are talking about a company that’s doing $20 million of revenues on – their existing stores. So I think that we’re building that confidence. We’re staying in front of them, that’s the main thing right now. So when people are ready to look for new stuff, I think we’re going to be on their list to visit for sure.

Okay. And my last question is just if you can refresh my memory here. I know you put out the new free cash flow target. And I see that operating cash obviously went up. Was the maintenance CapEx the same at $2.5 million, or did that go down? Can you just remind me?

Yes. We’ve held that at about two-point – it was a little less than that last year, but I believe, on a go-forward basis, $2.5 million is a solid number.

Okay. So there’s no clubs that need any – I mean, that number doesn’t seem strikingly high to me. So there’s no clubs that need any major…

You know what, we redo an entire club for about $200,000. Typically – we have typical – a typical, what I call, update runs for $100,000. So we can redo 25 of the 45 locations.

Right. Except for the club in New York which will probably cost you that whole amount.

Update. Exactly. We’ve just recently done an update on the whole entrance way. We just redone the entryway. We’re redoing some other stuff in New York right now. And probably, I’d have to check with Ed to get the total numbers, but from what I’ve seen going out right now, probably about $28,000 or $30,000 so far. Yes, it’s – you’d be surprised. I mean, chairs, furniture, carpet, paint, it’s not extremely expensive. You have to replace the whole kitchen, right? I mean, it’s operational. The – we might replace a few of the lights, but we don’t have to rewire the system. Now the expensive stuff is there, it’s just minor upkeep.

Okay, great. Thanks guys.

Thank you.

[Operator Instructions] Our next question is with Ishfaque Faruk with WestPark Capital. Our next question is with James Anderson with R.F. Lafferty. Please proceed with your question.

Congratulations on some pretty strong results here. It’s a shame that the auditor caused so much trouble for you guys and I think the little perception in the market, but very impressive stuff here.

We really don’t blame the auditor completely. It was a very complicated tax issue that took a lot of time to figure out, and we had to get it right. So it wasn’t something you could – break out my calculator on my iPhone and do, so it was – there was a lot to it. The good news is it’s out and our numbers are right and had very little effect on any of our numbers or cash flow, which was just the metric we use.

Yes. And definitely better to get it right the first time, I think. So I noticed in several of your segments, post-Bombshell and your Nightclub, that you had really strong same-store sales growth. I think somebody else commented on that, sort of pretty far outside or above what you would expect in other casual dining or a consumer discretionary chain growth. Is that because – I mean, the 6.9% growth obviously can’t continue indefinitely. So where do you see that leveling off to, where do you see it moderating a little bit, and what’s really driving that?

I mean, I think if we say at 3%, we’re great right now. Of course, inflation starts are jumping up. Again, then, of course, we want to say ahead of inflation, right? I mean, that’s the key to it. It’s hard to say. We’ve always had cycles. If you look at our history, we’ll have a 6%, 8%, 10% up-cycle quarters, a minimum half, three or four, five down quarters, minimum half, another cycle of six, eight up-quarters, so it’s always fluctuated. We are affected by sporting events. We are affected by business travel and certain other things and of course, consumer confidence, people, especially small businesses.

Yes. Yes. So now that you are sort of shifting a little bit – or not shifting, but including restaurant sales and food sales as a larger portion of your overall revenue with the growth of the Bombshells segments, have you guys noticed any sort of price pressure from inflation on your supply side in terms of food, chicken or anything like that?

I’m thinking we – things got expensive for a little while. But we’re starting to become a larger and larger buyer, so we’re getting better and better pricing. We put out new menus, we’ve updated our menus and increased some prices where we needed to. Sure, overall, we’ve seen food and beer squeezed a little here and there, but our guys are on top of it and we work through it. And when we have to make price increases to cover it, we’ll get it done. So we may see a point here and a point there for a quarter, and then we’ll adjust it and get it back on track the other way.

Okay. That’s good to hear. So I’d like to talk about the Bombshells again a little bit. Obviously, when you own and operate, sort of GAAP profitability is a little different than when you franchise. So what do you see is the, like breakeven time on a GAAP basis for a new Bombshell? Is it sort of 16 months because it seems like you’re going to be continuing to add three new Bombshells a year, and you have the older units sort of starting to really…

If you’re talking about total investment, you’re probably talking three to five years based on about a $3 million investment. But we’re leveraging that now through bank financing, where we only have to put up about $750,000 to $2 million of our own cash to open it up. So on a cash-on-cash basis, it was just how we really look at our returns. We’re looking at a year, 18 months and maybe – and some of them even quicker. I think our Pearland location will be a very fast cash-on-cash return for us once we get it opened, probably less than 1 year.

And just sort of more generally, do you see – I mean, obviously, you guys can’t have a perfect clarity to your acquisitions that you’re in talks with various operators, but it seems like you are pretty committed to growing Bombshells by around three a year. Is there a sort of corollaries with the Nightclub growth? Or is that something where Nightclubs could stay between 40 and 45 for the next two or three years as long as you guys are getting that Bombshell growth? Or do you have a sort of target you’re looking to hit with the Nightclub growth?

No. We definitely are looking to grow our target. Our target, of course, is to grow free cash flow at 10% to 15% per year. And so we look at how much revenue we’re going to need to buy or how many shares we’re going to have to buy back or where we can cut expenses to make sure that we maintain that free cash flow growth. The majority of that growth is going to have to come through acquisitions. The restaurants are going to help. What the restaurants are going to do is help us steady growth at a minimum level, and then the real growth will come when we make the club acquisitions as it did with Scarlett’s in Miami.

Okay. That makes sense. So – and you had mentioned previously that your cash flow growth year-over-year was around 10%, free cash flow per share. Are you now potentially increasing that? Or do you just think there’s more upside range between 10% and 15%? Or is 15% something you could see going forward?

Well, I mean, it’s between 10% and 15% is what we’re shooting for. We could see 25% if we make the right acquisition. And we could see 8% if we don’t find the right acquisitions and things get tight and we just spend our cash power because you’re not making a lot of money on cash right now. It will fluctuate throughout the cycle. What we’re really starting to look at now is a three-to five-year cycle and saying, during that three-to five-year cycle, we want to see our growth average 10% to 15% per year of free cash flow.

Okay. And so CapEx, we have about $2.5 million projected in CapEx expenditures going forward. How should we be more thinking about that growing in relation to unit count? Obviously, the Nightclubs, it’s – you spread a few of the Nightclubs and the Bombshells, but how should we think of that growing going forward.

Well, we’ll kind of update as we move along. A lot of it was camera system updating. We are updating electronics and POS systems, camera systems, those types of things. A lot of that work is done. We have a few locations left. We’re also – so now we’re looking at – we’re redoing some parking lots. We added a parking lot lighting last year in certain locations. I mean, it’s just going to fluctuate. We’re going to kind of keep an eye on it and watch it. If we start getting to the point where we spent the whole $2.5 million early, then we may give you an adjustment. But this year is going to run $0.5 million higher because we’re making these changes and we’re going to make these improvements that we think will return. And we don’t spend money if we don’t think we can make it back. We want to see a return on investment. Even our CapEx expenditures, we pay attention to our capital allocation strategy.

So it sounds like if there’s a good deal, sort of just almost discretionary CapEx going on there, or maybe you could have put off upgrading cameras or – is not – there is some margin there, I guess.

Yes and no. I mean, we’ve got to get – for security purposes and – we’ve got to have these systems in place. But yes, I mean, why did we do them in the month of April when we do them in the month of May is based on – and a lot of it is also based on when we can schedule and get the people to actually install the systems as well and get the equipment, so we have to wait for equipment sometimes. There’s going to be a little bit more – some of the Bombshells are aging, so we’ve spent some significant money on the Dallas location recently, redoing it. And we’re going to see audio, video stuff for the Bombshells to start coming in. So I think that’s why I said even though we’re a little less than $2.5 million, I think $2.5 million is a good number as of right now for 2018.

Okay. And I just want to speak briefly about the impairments. Obviously, you had some sort of onetime stuff this quarter, and I think you had mentioned there were some at the end of 2016 as well. I mean, do you think we – with those, with the recent audits for Centennial and for the, obviously, the earnings, do you we’ve pretty much gotten most of the impairments out of the way? Or is that something we should just continue…

I certainly hope so. Yes, I mean, at some point, we’ll have no goodwill left, and then it won’t matter if we keep writing it all down. I mean, we are in a business that different markets and different clubs have cycles. Every year, we’re required under GAAP to run these analysis and impair if it’s required under the rules. At some point, I was looking at some of these announcements. This time, I think that the – we took pretty aggressive write-downs this year, and so I’m hoping that, that will cover everything and that the markets that they’re in, we’re seeing – I know we’ve seen Odessa come back, so hopefully, we’ll see the other West Texas and East Texas towns stabilized. I don’t think the numbers will go down anymore, but of course, just you never know, it’s just business. And we’ll work through it. But I think, yes, to answer your question short, yes, I think we’ve pretty much touched it.

Okay. Great. And touching on Texas and the Bombshells. Most of your locations have been in Texas to date. Have you – I believe that’s correct. Have you looked at other states or other areas potentially in the south or maybe even farther up north where you might want to expand the Bombshells that you see as sort of fertile areas? At whatever point do you finish with expansion in Texas?

We’re going to finish Houston in 2018. So our last Houston location that I have planned right now will probably open in early 2019. Over the next three months, we’re going to be exploring where to go next. We are looking in Miami, we are looking in Phoenix, Scottsdale area. We are looking in San Antonio, Texas, if we stay in Texas. And so we’re going to be meeting with the team. Probably, we’ll be updating you when the next Q comes out, or definitely, by the May Q, we’ll have an update on our plans moving forward for 2019 on Bombshells.

Okay. Great, thanks. Langan.

Thank you.

Our next question is with Steven Martin with Slater. Please proceed with your question.

Hi, guys. Most of my questions have been answered, but can you talk about the real estate you have available for sale in total dollars and what it looks like?

I think the two pieces we have left are the Dallas Onyx location, which is about – and that’s two different pieces of property, one is a parking lot with about 6.8 acres, and the other is the club and direct parking for the club. That’s another 6, 6-point something acres. Currently, it’s listed with a broker. Our ask price is $6.7 million. We’re negotiating on that. And then our old corporate office building is also within the assets for sale right now. It is also listed. We have some people looking at it here and there – or excuse me, we’ve only received one offer on it. It was an extremely low offer that we passed on. And we’re waiting to see as we move into the year here if we get more activity on that. Once the Bombshells in Pearland opens, we will be listing the 2- pad sites on each side of it for sale, probably in the April-May quarter. We also are talking with a group on our I-10 property. We have some pad sites there that we’re currently developing. We’ve got to get the retention walls in, but we’re currently negotiating a contract right now on about 1.5 acres, a little over 1.5 acres on that side as well. So we will see some activity on that, especially as we move into this summer, I believe. That’s one that we’ll get active on the roll end.

So if you aggregated all of that for sale, what would you guess would be the – a conservative value for all of it?

I have to look at what we put in the K. Off the top of my head, I’ve read that thing about 4 million times in the last two weeks. You think I would – that the number would pop into my head right now. But roughly, I believe we have a little over $6 million right now, not counting – we don’t – because we don’t have the Pearland land or the I-10 land actually listed with a broker or actively trying to sell it, it’s not in assets held-for-sale, it’s still in long-term assets. Once we list those properties, we’ll move those over, but if you take – if we sold everything, probably it – well in excess of $10 million.

Okay. If you talked about the club business and broke it down into sort of four markets, your major markets, New York, Florida, Minneapolis and Texas, how would you characterize each one of those?

Florida and New York are fantastic for us. Minnesota, with the Super Bowl, has been great this last quarter and this current quarter. We’ve done a lot of exciting stuff going on in Minneapolis. Moving forward, if there’s a weakness in the market, it’s probably some of the Texas markets, not overall Texas because Texas is such a large – I think it’s hard to say Texas is a market by itself. Texas has a lot of submarkets, with the Austin area, with the – I say Austin and San Antonio as a market, Houston as a market, Dallas- Fort Worth area as a market and then, of course, I call Outer East and West Texas markets are strengthening as oil is stabilizing at $60. If oil goes up more, I think they will get stronger. If oil goes back down, they may get a little weaker. The Dallas-Fort Worth market is a solid market for us. Houston, really it’s Bombshells, and it’s been – again, it’s a restaurant market. We don’t have a lot of clubs in that market, and it’s been great for us. In the Austin/ San Antonio market, the Bombshells hasn’t been as strong as we’d like, but the club market in Austin and San Antonio are fantastic. So it’s kind of there’s a lot of tech in Austin, a lot of new companies moving to that area, and we’re seeing very good strength in the clubs in Austin and San Antonio.

Alright, thanks a lot.

Our next question is with Peter Siris, private investor. Please proceed with your question.

Hi, Peter Siris. I have a comment to make, not so much a question, but a comment and an apology. In about 10.5 years, almost 11 years ago, I recommended in an interview on Baron’s, RICK’s, and I said that the company had some really good properties, great brands, and if there was a weakness, it could – it needed a – it needed to strengthen its management team and debt. And I would like to say, I don’t know many people who have owned your stock for a longer period of time than I had, but I find it remarkable, Eric, how you have grown in this job. And the – from where you started, to where you are now in terms of a manager, in terms of a decision-maker or how you allocate capital, how you make acquisitions, it’s like night and day. And I’m – I just want to say that I am – leaving aside the stock price, the earnings and anything else, I’m just so impressed by the – your growth as an individual, as a leader and as a manager. And I just wanted to make that statement.

Well, thank you very much. And you’ve been a big part of it. You gave me a lot of advice throughout the years, and you are the first guy that taught me to really get out there and listen to the right shareholders and the long-term guys that are going to stick with us throughout the deal and that really have the company’s best interest and the overall shareholders' best interest at heart instead of their own short- term plays. And that’s what we’re really focused on now. And it wasn’t easy. It took me a while for sure. And I made some mistakes, and I really appreciate you believing in me and staying with me through that time and really helping me understand that I needed a team and I built the team. And then my team is really building itself now. It’s amazing how quickly when you – especially as we really put this capital allocation strategy together and start to think in those terms, how quickly it’s come together for us. And I really appreciate it, Peter. Thank you.

Well, the other comment I wanted to make is when you look at a multiple for a company, what do you want to – how you evaluate a company is not just by its current growth but its sustainable growth. And what I will say is that this company’s maturity, the way this company has matured, the way the management has matured. You deserve and hopefully will continue to get a higher and higher multiple because you deserve it.

I appreciate that. And we’ll put it to good use if we get it. And we’ve been very fortunate throughout the years. And we tried to stay on top of everything, and we’re very focused. I think we’re probably the most focused we’ve ever been. We’re seeing the best opportunities that we’ve seen come up, and I’m going to take advantage of it at this time and try to avoid any of the mistakes and pitfalls we’ve made in the past.

Our next question is with Ishfaque Faruk with WestPark Capital. Please proceed with your question.

Hi, good afternoon guys. Sorry I think I’ve got – my lines got cut-off earlier before.

How you doing?

Good, good. A couple of questions from me. I think most of the questions have been answered. Okay. Eric, I think you guys updated your capital allocation strategy. In the new one, it shows that you’re like more comfortable buying shares at a lower free cash flow yield than prior slides. Is that a right way to make that assessment?

Yes. We were looking at double digits. I mean, if we’re over 10%, if the yield gets over 10%, I think currently that’s around the $22 range, yes, we’re going to be looking at equity pretty hard. We’re generating a lot of cash, and guaranteed 10% yields in this market, there’s not a lot of them.

Yes. Yes. exactly.

We were borrowing money at 5%, so we’re getting double the yield on buying back our stock that we’re getting on borrowing money, I think it just makes sense.

Yes. And so my point was that in prior quarters, you didn’t buy back stock when the – was at 11%, 12%, so you’re more comfortable at this level to buy back at say 10%?

Yes. And part of that is I think that we’re going to continue to see significant growth in free cash flow. So if the stock gets behind, so we’re using $23 million as a run rate. As we increase that run rate, we make acquisitions. If we don’t see the stock price increase, and we – so at 10%, the real run rate may be higher as we’ve done acquisitions, and we haven’t updated, so we may be in that 12% range when we’re buying based on a $23 million run rate if the actual run rate is running closer to 24%. And so that’s – those are the kind of things, as the market fluctuates, we’ll be looking at and making analysis kind of on a on-the-fly basis and also, I mean, what acquisitions are out there and what kind of returns we can get on those acquisitions.

Yes. Okay. A quick question on the Bombshells. As you briefly alluded to, a price increase on some of your menu items on Bombshells. Would some of the fast casual restaurants see significant decline in their same-store sales? Do you think it’s the right time to implement the price increase?

Well, we basically have no choice. Even those restaurants are increasing their prices because their food costs have gone up. Certain items, especially chicken wings and certain other items have gone up in cost. You have to increase your prices when you can’t sell stuff at a loss. It has to fit our market, and if we don’t sell as much of a particular item because the cost is up, then hopefully, people will move into our other items on our menu that are a better price for them. We’ll just have to see. Our business has been very strong, so I don’t think – they’re not significant price increases. It’s not – it’s percentage points to cover costs. So I think we’ll be fine with it. We’ll know more as we move into the next few quarters. And if we start seeing issues, we’ll worry about it at that point. At this point, I don’t see it being a major issue. It’s very – like entree items that we raised. Most of our appetizers and desserts and all that stuff, most of that stuff stayed the same. So I’m not overly concerned with losing any business at this point.

Okay. So it’s more of a function of food price inflation, right?

Yes, exactly. And we weren’t at the top of the chain, either. I mean, we are not the most expensive – not the most extensive dining out there right now either. So we were probably pretty middle of the road. Other companies have raised their prices quicker than we have. And so we basically are – basically, our price increases are just catch-ups.

Okay. Got it. Okay. So my last question is so are you currently looking at like sizable acquisitions, the size of the Scarlett’s Cabaret right now?

We’re all – I mean, there’s multiple acquisitions – candidates out there right now. Lots of people we’re talking to in early stages. Obviously, we’ve kind of put off a lot of the talks until we’ve got the K caught up and get the Q out. We told people that we’ll call you back, give us – we’ll call you in March, that we talked to here in December and January. So look, we’ll call you back, we know you’re interested, we’ve got you on our list, and yes, we’re interested. But the timing is a little off for us right now. We will get out there, and from all sizes. I mean, from very small acquisitions, strategic small acquisitions but that meet our guidelines and coming to our capital, meet the requirements for capital allocation strategy. It’s a very, very large acquisition and in fact, a couple of large, multi-unit acquisitions that would actually be larger than the Scarlett’s acquisition. So there’s stuff out there. We just got to be careful, and we want to make sure we have the right people. We do not want to put stress on our systems right now. We want to have a nice, smooth, steady – our growth for 2018 is already built in. So really, what we’re looking for is anything that’s going to bring us in line for our 10% to 15% growth for 2019. And that – those are the things we’re looking at. And like I said, we’re not in a hurry. We’re not going to rush, but we are going to grow. I mean, you’re going to see growth and you will see us making acquisitions probably in the near future.

Yes. Okay. So following up on the acquisition front, you briefly mentioned that you’re still open to making debt – fueled acquisitions. Are you still comfortable with like your balance sheet with a debt of like almost $128 million right now?

Sure. It’s cost me less to service the $128 million I have now than it would cost me to service the $100 million I had before. I’ve just refinanced it all on 20-year terms. My debt becomes more and more manageable. It’s all 20-year 5%, 5.75% debt before I had 7-year terms, 12% debt, and year terms on an 11% debt. We have no balloons for – I say no balloons, I have very few balloons in the next 10 years now with what we’ve just done. I’m very, very comfortable with our debt. Our debt is just our rents. We’ve always talked about – what you really have to do is look at our cost of occupancy, right? Maybe we need to get that back in some of these presentations and kind of discuss it a little bit again. But as a percentage of revenue, what is our rents and interest expense as a percentage of revenue? And that’s the cost of occupancy. And I think we need to put it back in, we’ll look at it here in the Q probably and kind of update that. But our cost of occupancy has declined with all these new loans, I banked. Now we do have some development costs out there, but as these new restaurants open, we’re building 3 restaurants at one time right now. So there’s several million dollars of real estate that we’ve got, and there’s debt against that real estate. But as we open those restaurants and that cash flow comes flowing in, it’s going to look really, really good.

Got it. Okay. Eric, last question. So you laid out in your 3- to 5-year strategy that you’re looking to grow free cash flow of 10% to 15%, and I know some of the callers also mentioned that. So like isn’t that very conservative considering that your current guidance is more than that?

If we’re finding the right acquisitions, yes, that’s conservative. But if I have to go back – my stock goes down and I’m just buying back stock all of a sudden with my cash, 10% to 15% growth, it’s a lot of stock I got to buy back. So the growth will be different. But yes, as we’re in acquisitions and growth mode of the restaurants, it might be conservative. But at the same time, I’m not going to get crazy and say we got to go open 6 restaurants now because we want to do 22% growth. So I got to – I have to go buy something because now I want to do 22% or 25% growth. I think we’re just going to continue to do what we’ve been doing. It’s been working very well for us over the last couple of years. The growth is solid, and I think we’re getting close to $116 million run rate for this year on total revenues without any acquisitions. If we make acquisitions, of course, that number could increase. We’re just going to take it quarter-by-quarter and watch and make sure we’re on track.

Alright that’s it from me. Thank a lot.

Thank you.

Our next question is with Ian McMillan, private investor. Please proceed your question.

I wanted to follow up with the guy from a couple ago where he complimented you very much. And I’ve been a shareholder for about 8 years, and it’s never even crossed my mind to sell the stock. And I’m glad I’ve held on. With that in mind, I’m in Myrtle Beach, South Carolina, and we’ve got a few club operators here. But we really could use the premium operator, so just take that as a hint.

We’ve looked at that market, it’s very seasonal, it’s a tough, tough market. I don’t know how those guys do it when you’re getting about 6 months, 7 months out of the year and the other 5, you’re starving. But we have a look down there. We’re bigger now, we probably could do a more seasonal- type location. It’s been a while since I’ve been in that market. I do like South Carolina, North Carolina. It is the East Coast type of growth that we’re looking for. So yes, we’ll take a look and see what’s down there, like I said, it’s been a long time.

You did lightly touch on possible ways of pressures early on in your interim. We never really touched back on that when it comes to the employee pressure, employee wage pressures. I know there’s a lot of gratuities that go on in the clubs. But how does RICK’s or RCI actually take the wage pressures into account with the talents? How do they get paid and what actually – how much are we actually talking here? I mean, $1.23 I mean, how – what’s going on?

I mean, it just depends, I mean, at the club level, it’s more a – we’re worried about management. We are looking at some, what we call – a longevity initiative, basically, is what I’m in the process of evaluating, where instead of right now, if you work for me – if you work in a club level as a bartender for – if you get hired today or you’ve been there for 10 years, pretty much, your base pay is the same. We pay all bartenders, a set minimum, we pay door staff a set minimum. And very, very little fluctuation ever goes into that. One of the things that we’re exploring right now is if like taking wage, I’d have to say, okay, you get a tipped credit wage of x if you’ve been here for 1 year, if – or if you’ve been – when you first start. When you’ve been here for 6 months, we give you a base bump of x per hour. If you’ve been here for a year, you get a base bump. When you’ve been for 2 years or when you’ve been here for 5 years, stuff like that – and trying to keep some of that longevity and not losing long term – And we’re rewarding people for being with us and staying loyal to the company, that’s something we’re currently in negotiations on amongst ourselves, a bunch of management, and doing some analysis on what we think the benefit will be versus what the costs will be and seeing if there’s – if it makes sense to – if we start a program like that. So that’s one of the things we’re talking about because we hate losing good employees out to competitors for any reason. And especially if our competitor is going to give them $0.50 more an hour or something like that. Why would we lose an employee over – so those are the kind of things that we’re currently looking at. And a lot of it started with the Tax Cut Act, to saying, look, we’re going to have this extra cash. Other companies are starting to do these things. Maybe we should look at doing these things. And how are we going to keep our management, how are we going to keep our top bar staff and our top waiters? Now they make tips. And our clubs – in a lot of markets, we’re the one clubs. But there’s a lot of markets where we’re not the one club. We may be the 3 club in that market. And what are we doing to attract the best employees in that market and how are we working to become the one club? And so those are a lot of the questions that have been brought up at management level in the last, so I’d say, 2, 3 months. And we’re working on that, and hopefully, by this summer, I know a lot of stuff I keep pushing to the summer, but there’s a lot of stuff we’re working on. We’ve got to get the Q out. We finally got this K done. So there’s a lot of them, a little distraction with financials, and with it switched to our new accounting system, moving to our new corporate office in the last year. But these things are not getting passes. We are starting to look at them and like I said, taking our capital allocation strategy to every level of our business. If we invest at the employee level, what is our return of capital, right? And those are hard questions to answer. But we’re in the process of doing that, and we’re in the process of saying, okay, are our top waitresses, ones that have been with us the longest, are they the newest ones? Are our top bartenders, the ones that have been with us the longest, as far as producing, or are they ones that are – are they the new ones? And kind of figuring out that balance and kind of saying, okay, what makes sense and what doesn’t make sense? And so we’re in that process right now, and I think we’re going to really push through it here in the next, I’d say, the next 60 to 90 days. And maybe it’s not something we’ve really talked to about with our shareholders, but it’s something we’ve talked about internally. And maybe it’s a conversation we need to get out there and get feedback on and do some testing in certain markets. The tips go up and down by how many customers we put through the door and how the customers spend it. If our sales are up, you can bet our employees are getting more tips. And that’s just the way the system works. And so – and our employees are very happy from the ones we talk to or the majority. I mean, you can never keep all the people happy all the time. But from the majority of the situations and from the clubs I did and the people I talked to and the feedback I get online, overall, I think we’re doing a really good job of keeping our employees happy. I think in our corporate level we had less and less turnover, especially since we moved into the new office building, and we’re getting a better quality employee because our workspace environment is so much better than when we had 40 people working in 6,000 square feet. We’re getting there. So

Well, Eric, let me tell you, personnel matters, and so do CEOs and management. And I want to tell you, you’re still doing a great job, and I’m not selling the stock anytime soon. And I look forward to the next many years.

We appreciate that. Thank you very much.

[:

Thank you, Devon. In our deck today, we’ve included a couple of supplemental slides in our appendix. Slide 15 is our calendar. A few things coming up, as Eric mentioned, in March. We celebrate the fifth anniversary of Bombshells. At the end of March, we’re scheduled to present at the Sidoti Conference in New York City. And on April 10, we’ll be reporting second quarter club and restaurant sales. I just wanted to make a note that Broward County is one of our big markets in Florida and just our hearts go out to those who are affected by what happened there today. So to conclude, on behalf of Eric and the company, our subsidiaries, everybody who works for the company, thank you and good night. And as always, please visit one of our clubs or restaurants.