RCI Hospitality Holdings, Inc. (RICK) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to RCI Hospitality Holdings Fiscal 2016 Third 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Fishman who handles Investor Relations for RCI.

Thanks Rob. Everybody, if you please turn to Slide 2. Thank you. I want to remind you of our Safe Harbor statement 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. And we disclaim any obligation, to update information disclosed on this call as a result of developments which occur afterwards. And appreciate if you 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. Finally, I’d like to everyone in the New York City Area to join us at Rick's Cabaret in New York tonight at 6 o’clock to meet management to get a firsthand look at one of our flagship clubs. Rick's Cabaret New York is located at 50 West 33rd Street between Fifth Avenue and Broadway, that’s around the corner from the Empire State Building. If you haven’t RSVP yet, ask for me at the door. Now I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Hi Gary. Good afternoon, everyone. Please turn to Slide 4. Results in our third quarter continue to improve. Revenues increased 1.5% year-over-year, that’s the first quarterly increase this fiscal year. EPS came in ahead of expectations at $0.27 which included an additional $1 million tax reserve. This compares with $0.78 last year which included the big gain on the Texas paper tax settlement. More significantly, on a like for like non-GAAP basis, EPS was $0.34 or nearly 10% year-over-year increase. We achieved our third quarter ’16 performance through improvements at existing units and the previously announced elimination of underperforming units. Free cash flow performed well. At $6.4 million, it was up close to 50% over last year. As of the nine months, we have generated free cash flow of $16.7 million, exceeding the low end of our most recent targets. As a result, we are revising our free cash flow target upwards for the second time this year to $19 million to $21 million. We continue to buy back shares. We bought back more than 100,000 shares, returning $1.1 million to shareholders. As of the nine months, we have bought back more than $600,000 shares returning $5.8 million to shareholders. This makes fiscal 2016 buy back the largest annual buy back ever for us. And this leads the Board of Directors to declare the fourth quarter cash dividend of $0.03 per common share. Please turn to Slide 5, for those of you new to RCI we are guided by our capital allocation policy. We’ve updated this slide for our slightly lower share count due to buybacks, the pay down of convertible debt and an increase in our free cash flow run rate to approximately $18 million. Using this as a base, we’ve calculated the after tax yield of buying back our own shares. For example, at 10 to 11 per share where the stock has traded reasonably, buying back shares generates an after tax yield to free cash flow of 16% to 18%. We consider this yield risk free since we are buying our own assets which we know very well. Based on that to adjust for risk we will require return of about twice that, so we decided to buy or open a new unit. For example at $10 to $11 per share, if we decided to buy or open a new unit, we would want to have a return of about 33% to 36%. To be clear, this doesn’t mean we will no longer buy clubs or open new restaurants, but at this time the opportunity has to be exceptional and fit our capital allocation model. Conversely if a unit is under performing in line with our capital allocation policy and efforts to improve that has not worked, we will take action to free up as much invested capital as possible for a more profitable use. After paying down our cost of debt it is only in the $21 to $22 range that it makes sense on a cash adjusted basis to pay down our remaining 13% debt at an accelerated rate simply with no prepayment penalty. Again, this doesn’t mean we wouldn’t do so at this time, it's just that there has to be a very compelling reason for us to do so, having said that, we’re always looking for ways to refinancing our high interest debt at lower rates. Please turn to Slide 6, this slide gives you a SAS report on our share buyback program. As you can see, we have bought back a significant amount every quarter this fiscal year. As for the nine months, we have greatly outpaced what we did last year and in prior years. As of June 30, 2016, we had $5.8 million remaining on our share repurchase authorization. We bought fewer shares in the third quarter than in previous quarters this year. So I’d like to address that. Buying back shares is a long-term strategy for us. We have not changed our policy. When buying shares however, we want to maximize the use of our cash. We do not want to change the stock price. As a result we may buy more shares in some quarters than others. For example in the third quarter there was a big increase in the stock price. We paused our buying once the trading activity began to settle, we resumed our purchases. In line with our buyback policy going forward we are generally going to make repurchase announcements when we announce quarterly and annual results. This is opposed to announcing them in our quarterly sales news releases and then providing another update when we announce quarterly results. We might make an exception for example if we’re having meetings with investors or making presentations and we believe is appropriate to issue an update. But in general we report just four times a year rather than eight year on pace to do so. Please turn to Slide 7. Revenues continued their sequential improvement. As you can see, total revenues have gone from being down 2.1% year-over-year in the first quarter to being 1.5% in the third quarter. Same store sales have gone from being down 6.3%, posting small increase year-over-year. Sales were up nicely in April and then fell off in May due to heavy rains in Texas, and then rebounded in June. You should note we’ve had two fewer units this year relative to the year ago quarter. In addition, two clubs are going to remodeling or reformatting open midway through the third quarter. Please turn to Slide 8, here is an analysis of our revenues by product line. The top table presents our total results for this fiscal year. The bottom table shows the year-over-year change. As you can see, we maintained our quarterly increase in beverages throughout the year, both clubs and restaurants. With regard to high margin service revenues, we have meaningfully reduced the year-over-year decline. As for food, we have virtually eliminated the quarterly decline we saw at the beginning of the year as our newer Bombshells have come back from their typical post opening fall off. Please turn to Slide 9. Operating margin is continuing to move in the right direction. As you can see, non-GAAP operating margin has risen throughout the fiscal year. After being down 3 percentage points in the first quarter, it is now up close to 2 percentage points in the third quarter. The improvement largely reflects two factors; the increase in sales in particular high margin service revenues and beverage and reduced cost as a percentage of revenues. We want to provide little more detail on taxes. Our effective tax rate this quarter was 43% compared to 35.5% a year ago. This quarter included $1 million reserve established to pay for New York City and state income taxes. In turn there was parcel offset of that of the benefit of $250,000 in lines of credits not previously claims which we discussed last quarter. Please turn to Slide 10. As anticipated, occupancy costs continued to fall in the third quarter. This is one of our largest fixed costs. During the third quarter it declined to 8.1% of revenues as compared to 8.4% in the first quarter of the fiscal year and a year ago quarter. This was primarily due to a full quarter net benefit of the Rick Cabaret New York real-estate acquisition in mid-January. The long use of finance the acquisition increased interest cost as a percentage of revenue, but the saving and ramp were even greater. Occupancy costs as a percentage of revenue should continue to decline due to revenue growth, anticipated refinancing which should help reduce average interest paid on debt and principal pay down. Please turn to Slide 11. This was a good quarter for our cash generating power. Adjusted EBITDA increased close to 7% year over year and free cash flow increased close to 48% year over year to 6.1 million. We calculate free cash flow as operating cash flow less maintenance CapEx. As a result as I mentioned earlier we are raising our fiscal '16 free cash flow target to $19 million to $20 million from $16 million to $19 million. You should note the fourth quarter is typically one of our smaller quarters for cash generation. You will also note that cash in our balance sheet was higher at $10.5 million versus $9.1 million at the end of March. Our practice is to have $6 million to $10 million on the balance sheet at the end of every quarter, so this is nothing more than being at a higher end of that range. Please turn to Slide 12. Here are our nightclub segment results. Sales of $28.3 million were just under the year ago quarter with 38 units in operation compared to 40. Non-GAAP operating income was $9.3 million compared to $9.1 million. As a result non-GAAP operating margins expanded to 32.9% of sales compared to 31.8%, we believe this continues to demonstrate the approved model we've been working on to expand margins. That should benefit as our sales continue to grow. Please turn to Slide 13. Here are our Bombshell segment results. Record sales of $5 million were up 13% compared to the $4.4 million in the year ago quarter with five units in operation in both periods. Operating income was a record $905,000 compared to $370,000. Operating margin was up strongly to a record 18.1% of sales compared to 8.3%. As I mentioned earlier we are seeing the benefit of growing sales from new units after they have worked through the typical fall off after their grand opening. As a result not only are sales growing but margins as well. There are lot of other things that we're doing to grow the business. Our newly redesigned menu and new menu items have been a contributing factor, our new menu recently won Printing Industries of America award for graphic excellence both on a regional and national levels. That put them in competition against major restaurant chains such as Chili's and brands owned by Landry's and Garden. With regard to franchising we are now in the process of putting together franchise marketing sales team. Please turn to Slide 14. We want to give you an update on our debt. During the third quarter we continued to significantly reduce our convertible debt. This has an average weighted rate of 8.3%, at June 30th, we had an outstanding balance of $1.6 million, following a $450,000 cash payment in July the current balance now stands at $1.15 million. We plan to pay off the remaining amount in the fiscal first quarter of 2017. This will eliminate all the possible dilutions from this issue. The only new debt was drawing down 1.6 million on our bank construction loan for our new corporate headquarters. Construction remains on schedule for moving in during the first quarter of fiscal 2017. We continue to work on refinancing two commercial mortgages as part of this transaction we are now looking at rolling over commercial mortgage of $6.2 million at 7.2% and paying off $2.5 million of unsecured debt at 13%. That's a little less than what we had originally anticipated. But nonetheless on a combined basis this refinancing and debt pay down would meaningfully reduce our interest expense. We also have some real estate that is no longer needed and hope to complete their sales in fiscal 2017. Proceeds would be used to buy back stock, finance growth, or pay down debt. Please turn to Slide 15. Here we’ve updated our long-term debt slide. There are few things this quarter I’d like to point out. Compared to March 31st we saw small reductions in balances and rates in total long-term debt. Debt secured by subsidiary stock, the Texas patron tax settlement, debt secured by other assets and a major decline in convertible debt. The only area of debt that went up was debt secured by real estate, but less than $1 million and the rate declined there too. The percentage of long-term debt backed by real estate is now 70% versus 64% six months ago, making our debt position even more secure. The average weighted rate on all of our long term debt has now fallen to 7.53%. Please turn to Slide 16. Here we’ve updated the debt maturity schedules. As we explained last quarter this was intended to show three key elements to our debt management. One, we plan for regular amount currently in $7 million range for amortizations to be paid annually out of cash flow. Two, a good portion of our debt maturing over the next five years is related to real-estate amortizations of our real estate balloons. We plan to refinance all non-amortized debt. Three, any non-realty balloons will be paid out of cash flow or otherwise refinanced. For example, the new refinancing I discussed on Slide 14. The new refinancing will eliminate all balloons in fiscal 2017. And we’ll also eliminate $2.5 million of the 2018 non-realty balloons. We anticipate refinancing the remaining 2018 balloon debt during 2017. Please turn to Slide 17. To wrap up, on our first quarter call, we told you we’re off to a good start with plans for margin and EPS growth and free cash flow generation this year. On our second quarter call, we told you that we’re moving in the right directions. With this call, you can clearly see we continued improvements in our results now on a year-over-year basis reflecting the ongoing information of our new model. This should enable us to close favorable year-over-year comparisons in the fourth quarter. Consequently we believe we are on track to achieve our fiscal 2016 goals and possibly exceed them with regard to free cash flow. For revenues that means we expect the fourth quarter to be up slightly. For margins, that means improvement for the year and an increase in GAAP EPS. For free cash flow, that means reaching our new targets. Looking ahead to fiscal 2017, we’re very encouraged. We’ll have the full year benefit of the reopened clubs. We’ll also have the new club in New York as well as new Bombshells in northwest Houston. We’re pushing the opening out of quarter, no major issues just the timing of the few final things. In addition, we believe we’ll benefit from a strong sports line up. The NBA is not [indiscernible] a game in Charlotte as originally scheduled. However, in the first quarter the Minnesota Vikings will be returning to new stadium in downtown Minneapolis where we own three major clubs. In the second quarter, the super bowl will be held in Houston where we will have seven locations, both clubs and Bombshells. In addition, mixed marshal art events are coming to Madison Square Garden for the first time. These events based on their location we anticipate could add significant incremental [technical difficulty] margin sales. With our capital allocation policy, improved operating per, continued share buyback, dividend and contributions for our investment banking and Investor Relations teams, we hope to see further recognition of our shares in the market. The stock is up more than 4% from our last call, more than 5% year -to-date and 38% from our year low of 760 on February 9, 2016. We believe this is a good indication that our strategy is working. We've had productive meetings with institutional investors in New York in May and Dallas in June, but we're there is still more work to do and we're dedicated to making it happens. Speaking on behalf of all of RCIs management and that our subsidiaries, I'd like to thank our loyal shareholders for their support. With that, let's open the line for questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Desilva with Merriman Capital. Please proceed with your question.

Just a few quick questions here, first of as it relates to the dynamic of patrons you're seeing in the club business, are you still currently seeing big spenders continuing to gain during the percentage of your overall sales and have recently changes in oil prices or Brexit changes anything in your view at this point?

The bigger spenders were still at the club. As I have said past call, what we're seeing is that piece of idea which are they -- the big service revenue items. As you can see in this quarter and in the last quarter, we're starting to see that spend come back, it's still not a 100%, but I am certainly hoping if not in this fourth quarter definitely the October to March period I really expect to see a lot of that come back. As far as the oil goes, but we were expected in a couple of areas just in Odessa and Logie, Texas other than that we haven't really seen much, we've kind absorbed everywhere we're seeing in fact we've absorbed it. Overall sales seem to be seemed to be coming back, obviously the restaurants in Houston, Dallas were unaffected right at this point and unless it’s helped them because people have we have more money because gas is cheaper but as part of the [indiscernible] industry itself is not having an effect.

And then as far as the new location, do you feel the location can generate between 5 million and 7 million in annual revenue and then 1.0 million to 1.5 million initial EBITDA for you guys annually.

Yes, I do have, still our projections at this time.

And just last question as far as M&A activity for Gentlemen’s Club, has that changed much since last quarter and if not are you seeing that clubs are looking to exit at lower multiples since there hasn't been much activity and is it getting closer to your capital allocations strategy targeted return?

Well, if we were still doing 15 million, I would say yes, but with the new -- we're raised the model to 18 because we think that’s a more likely run rate at this point. So it’s getting proper again to find acquisitions that meet that. However depending on the leverage -- because we’re right on our cash-on-cash return, so depending on the leverage, yes, we're starting to see some things that are appealing to us, but at this time we haven’t moved on any of those.

Has there been any M&A activity in the market that you're aware of at this point, even the smaller clubs or is it still pretty dry right now.

You know pretty much it's pretty dry, unless you're -- I’ve seen some other finance stuff out there for some small locations, but nothing significant at this time.

Got it, got it, alright, that's all I had for right now, thanks and good luck going forward.

Thank you.

Our next question comes from Adam Mikkelsen with Cutter & Company, please proceed with your question.

I got a few questions. Just on the restaurant margins and I guess they come up quite a bit, is there any particular reasons why they're still high and what do you expect to see those getting [ph] at as you bring on more units?

The reason they are so high is we have two stores that are performing extremely well. They actually will be higher, we have one location that we're not real happy with right now. We do some hours there trying to change some stuff up to see if we can make that store profitable. If not we'll probably end up closing that location at some point, which will increase the margins. But our sales have been really good, the new menu has been real strong for us as you can see from the increase in food sales from few quarters ago. We're just very happy with the overall and of course the fixed cost of the thing. So as we add that to additional revenue especially on the liquor side of it, so much of it make it to the bottom line, and that's why you're seeing the margins increase so much.

So with that, that other unit and they’ve lost what kind of margins which we target?

Over 20%.

Okay, and just in general what are you seeing in Texas, how's the -- what do you see in the economy there.

You know home prices are still crazy, construction is still crazy, one of the issues that we're having right now both with the New York and that thing you know is just getting all of our inspections done. Cities are getting backed up again on inspections, so we’re getting inspections in three days now taking you know five-seven-ten days to get our inspections, taking longer to get our permits, approvals, you know push through. So especially in Texas, we’re seeing it everywhere in Texas, even if we try to do a little remodel permits or anything we’re trying to do down there. We're seeing that time lag out. So if the Tex economic is hurting, somebody forgot to tell people in Texas.

Okay, hey and my final question is just on the buybacks, so you had $6.4 million of free cash flow in the quarter, you had $1.1 million of buybacks, you know the volume hasn't been great in term of the stock and terms of your ability to buy it back I guess. But you know you’ve a company which on the equity side is running at about a 20% free cash flow margin with your upgraded guidance, so is there any ability to accelerate the buy backs just given the cheapness of the stock, could you look at a tender offer are there other ways to accelerate what you've done.

I'm sure there is, you know right now we've just kind of been in the market when we think the stock is cheap and it doesn't look like there's any other bargain. It may look like a lot after the conference call, a lot of buyers moved in. We're not trying to compete with other people that want to own part of our company and so we kind of stepped out of the market in May. As that -- as the volume dwindled back down and the price you know started coming back down you know we got back in the market pretty heavily and bought quite a bit of stocks, especially at the end of June. As you’ve seen from our slight mistake on our slides and our spreadsheets because we bought so much at the end that didn’t carry right at something. But we’ve corrected that and got that information out to you. We’ve been active in July. We’ve been active in August. Any time the stock is under 150, we’re going to be very active out there. With the new numbers, we’re probably going to be active up -- even if decides to jumps up, this time we’ll probably stay active in August. So we just think it's supposed to -- it's the point where it's just goes cheap again. We use $18 million and I think we’re going to exceed $18 million, I mean that would only be another 1.3 million in cash flow in the quarter we might have done that in July. So, I am just going to have to just to watch it and we’re at the top end of our cash, we’re trying to keep our cash on hand and in place just in case an opportunity for a block or something comes up, we might sort of make a move on something like that. There is a lot of other -- lot of opportunities out there for us to buyback the stock and I said we’re looking at didn’t [indiscernible] New York open we’re also looking at some of our underperforming or I wouldn’t say underperforming, but units that’s just based on the investment are not returning high enough returns for us and we may divest ourselves of a couple of locations, because those locations takes time for management, they take time and effort and we’re really -- but the capital allocation policy with the strategy in the map we’re able to really sit down and use the map on that and we’ll see if we get cash this for this, we could take it and put it someplace else and get higher returns.

So we certainly support the results that this capital allocation strategies are revealing for you and keep it up.

Our next question comes from Kevin Tracey with Tracey Capital. Please proceed with your questions.

I noticed your map to figure out what level it takes to pay off debt, the management move just from like the high teens to the 20s. What are the drivers for that?

When we rate the base on 15 million to 18 million and we lower the share count from 10.3 million to just under 9.9 million and you figure the free cash flow you will have while buying back the stock it becomes much higher. And so therefore it would take a much higher stock price to lower the free cash flow yield on buying back stock to the after tax yield of paying off the debt.

So if we see flowing in the share counts to where it exists and it keeps goes higher [ph]?

If the price stays the same, yes.

Right.

The yield is going to become higher and higher.

And then can you talk a little bit more about Bombshells, how many more locations do you need to start franchising, where are you with franchising partners, are these going to be like one or two locations, are you talking to people more like five locations?

We’re in the early stages right now. We’ve been talking with two groups. Really what we’ve discovered is we need a sales team or a sales person who specializes in selling $3 million franchises, because with a franchise fee of $50,000, but you still got to build out and do everything. So it's about -- $3 million investment in average is what we’re going to get. And so we’ve got to find somebody who’s got experience doing that. We’re in talks with someone at this time. Hopefully we’ll know more shortly. If we hire this person I am sure we’ll do a press release on it. If it doesn’t work out then we’ve got a couple of backups that we are starting to work on as well. But we’re aware of what we need to do and we need to get that person out into the franchising shows and on the circuit and just get our brand. So we're in the process of putting all that together now. [Multiple speakers] We can franchise them all [indiscernible] sales person who can close to deal and I think when we open our new store it’s actually going to help a lot as well, we're going to be able to show another deal of course, when we update our franchise we’ll be able to put some more financial data out there as well.

And can you talk about, why, I guess two locations are just killing on the upside and then you talk about the one that struggling, kind of what the puts and takes from the successful location versus the non-successful one?

The non-successful locations are the second locations of B locations. We've talking about issues at that locations for several months like two calls now and we've been very unhappy with the performance there. Two of our locations are performing kind of within or around what we wanted to do one of the $60,000 to $80,000 a week in sales which is what we -- $3 million to $4 million annually. But we have one unit is probably in the high 6s and now second which is older of the first we open, we opened we put [indiscernible] in there about a year ago and they’ve really taken that location to a new level, doing very, very high numbers and we're very happy to see that sales are up, I think we've had months are up 70% year-over-year. Overall I think we're up over 50% year-over-year in that location. And now we're seeing two -- the two older stores coming back and then of course our number one store actually even it has declined, but we're still profitable, but even had a small decline from it's opening and now it's building back up and trying to surpass the opening numbers as well and that what do you see in this quarter when four of our locations doing very-very well and what that mean to the bottom line numbers.

And next talk about CapEx for the rest of the year and next, so far the numbers?

Right in line with where it's been, in fact it may even be a little less, we have fewer unit, I don’t expect anything major with sequentially [ph] profitably now and then and shares every now and then may be units, so this just not a tone of CapEx out there.

Our next question comes from Richard Karn with Kensington Management. Please proceed with your question.

Nice number however, how come legal is so up in, when you were talking about it coming down?

I noticed at this quarter, we’ve had some activity in a couple of suite. Remember, we still have the several of those insurance suites out there from insurance that we went bankrupt. I think it was right, it wasn't up much, wasn't up significantly but it was up a little, but it's still in the line with the percentage of revenue that our target is right now.

Are going to take some limit to being ledger [ph] down or is it going to stay at this relatively high level.

We feel what we can do, we keep the cost in line as much as we possibly can, but you know I think right now at least for you know the next couple of quarters we're probably in this range. June was a very active month for few of our losses and that just jumped the numbers up a little bit. But they're staying in line, I mean typically you know I guess we’re running around 180,000 to 225,000 for our actual legal stuff, our standard stuff that we have no control over it. We're going to have those fees every quarter for just being a public company.

Okay, and second question was New York, right now I think you said, I think you said it's an open in the fourth calendar quarter moving to first quarter of your new year is that --?

But no -- in this quarter that we're in now, hopefully before the end of September. So it'd be the fourth quarter, it'll be our fourth quarter fiscal '16 and we're moving the other. No, no, you're right.

I'm sorry, we did move it didn't we?

Well we were hoping to open by the end of September but it could be the first of October. I guess that's the confusing, I think that's why we pushed it a month on seeing as we're trying to open before the end of September, but just in case we pushed it a quarter to early October.

Are you essentially done accepted it in the decision.

Well there's some minor construction that you can't do until, you know some of the inspections are done, but I mean we're ready to go, basically everything's done, you know the final finishes have to be done after the last inspection. So we’re waiting for an inspection now then we'll do the final finishing then we'll get our, our certificate by the team inspection [ph].

Okay so Eric if I said to you, your inspections are done today, when could you open?

It'll probably take them about two to three weeks to finish out the final finish out and then whenever we get that last inspection again.

Okay, thanks and good luck and keep up the good work.

Thank you.

Our next question comes from John Rolfe with Argand Capital, please proceed with your question.

Hey guys, I was hoping you could maybe put a little more color around the increase in your free cash flow guidance. It looks to me and I think before the year started you said you expected the top line to be flattish and it looks like it will come in in that range. So if the increase in free cash flow is a function of margin coming in better than you expected, is it a function of you know better working capital management, lower CapEx or all of the above. I mean what are sort of the components that have driving those improvements in your expectations there.

I think we can, we really kind of got a handle on all the costs so we can get, get our minds wrapped around, we can kind of control, which is helping. We're seeing an increase in the service revenues which is definitely going to help margins and we got rid of the underperforming units, you know units that we were sharing that were costing us you know a lot of cash just to keep those units open. So by eliminating those units and keeping the numbers, so the growth is flat but we’re doing out of less units, so our costs are lower on generating that revenue and then of course we’re not paying to keep clubs open. When you get a double bank it works that way.

Okay great, just one other question, I you know you mentioned that the tax rates for the quarter was higher as a result of some accruals for New York, what should we be thinking going forward in terms of a sort of fully loaded tax rate in one off going basis as we look into next year?

I think still we’re going to grow back to that 35% to 36% range, is that --.

Yes, I think we’ll be, it’ll be more like 36% or 37%.

We hired a -- given an idea we brought in some tax experts at the beginning of the year and they’ve gone through all of our return and started looking through everything and basically we just wanted to double check everything. We’ve grown very large and have out grew the ability of the earlier company and these are just some of the things -- well actually two of the things that they found that one was in our favor and one wasn’t and they’re correcting it and we’ll get it fixed and everything gets back to normal in 2017.

Our next question comes from Stephen Hart [ph] with John Rolfe Capital. Please proceed with your questions.

I just have a forward-looking question, in an ideal world if everything went your way in terms of business plans and let’s say 2, 2.5 years out for now. What is the mix of Bombshells versus the night clubs from a revenue as a contribution? And roughly how many clubs, how many stores of each, I am just trying to get a sense of where you’re trying to drive this thing to next two or three years?

The reality of it, is it all depends on where our stock price trades at because we’re going to follow our capital allocation policy. If our stock moves up we’re going to have more of that free cash flow, we’re going to invest, we’re going to end up building more units and we’ll probably make more acquisitions and grow the Company. If the stock price stays where it's at, we’ll probably add a club a year and few restaurants possibly a year, the thing on franchising, franchising could blow that up. In a perfect world as you’re saying, you have me all dreaming for now, like Apple is going to give me $3 billion, they’re offering everybody else out there these days [multiple speakers].

Right after Zuckerberg gives me $2 billion, so dare to dream.

Yes sur. I mean I think we’re going to see -- we’re going to try to continue to keep this at a steady growth rate in addition to buying back shares. And the shares are going to continue to see a growth rate in the bottom line EPS. So we’ll just have to kind of watch how the market goes. We’re going to continue to follow the strategy. I think eventually the market will catch on we’ll start being rewarded for managing our cash in a much better way than we’ve done in the past and be an being conscious of those returns and I think we’ll start being rewarded for those returns and as we’re rewarded for them we’ll be able to go out and grow and do more clubs. But we’re going to be doing them under a more disciplined strategy then we did in the past.

Good to hear. I guess if things did work out well, the stock responds well, also the capital allocation policy and just the future results you’re having. Do you see the potential of eventually just moving the restaurants into B-shells and keeping the clubs erect and spinning off or doing something like that, create almost like [multiple speakers].

I think we’re going to do -- we’re going to try to create the most value we can create from our assets and from our cash flow. So, the market at some point doesn’t give any value for the restaurants and we think we can get more valuation from the restaurants by spinning them off and they become significant size as they sell and we’ll spin them off to our shareholders and let people benefit in that way.

Our next question comes from Norman Sarafian with RBC Wealth Management. Please proceed with your question.

The thing that concern me a little bit though in general just general, is that incident down in Orlando, Florida. I got nervous because I was thinking I wondered how safe we are in terms of going anywhere, it's kind of a weird feeling. What is the method or how do you think about this or do you, with respect of the clubs and the restaurants and that just in general? I mean is it an issue at all?

We have armed security. It's always on our minds like everyone else in the world I think now a days, I was reading about the London stabbing this morning. It's just doesn't matter guns, knives or the problems are the crazy people. We have armed securities at most of our large locations, outside security, we use police detail and we can use police detail, so we actually have police officers from the community that guard our properties when they're available. Obviously, all cities won't work with us in that regards, but the ones that do we’re very-very thanks for, those are the locations we have to least the amount of problems at because we have professionals handling our security. Even our third party security guards, I mean, they do very well at keeping our places safe, and we put in camera and monitoring systems and some clubs have check points and some clubs we have pat-downs and metal detectors like you’re going to the airport. You just do what you can do and plans for the worst and hope for the best.

Our next question comes from Alex Hardman [ph], a private investor. Please proceed with your question.

First question, you guys have special [ph] that addition does go to the legal and professional on top category ticket [ph]?

I would believe so right that is where that tags you correct, Bill?

I am sorry I missed, what was the question?

[Indiscernible] legal and professional, the tax experts will -- their book are legal and professional correct?

They are.

That would probably be why that comp hasn't really that much this quarter. I mean it's pretty much amount of the last year.

Yes, there is some new cost in there, but I think we're being protected much better than -- now that we learned from the past, we just -- we wanted to bring in some exercise bit to work with the multi-club and multi-state jurisdictions and make sure that we're doing everything right everywhere.

Understandable and then this might have asked earlier but I just wondered if you could get an update on robust [ph]?

There has a lot of been going on with Robust [ph], that's one of the things we may look at divesting soon. We just don't know we're looking at everything look, we've looking at our capital allocation, we're applying it in different things, we've got some club units that we think we can you know depending on if we can find a buyer for them, we may sell a couple of club units. We may close one of the restaurant units. We're evaluating our non-club and non-restaurant assets as well, and you know we're going to see through the end of this year and figure out you know the best things to go, on a move forward basis and what we're going to do with those things.

Have you looked at any attraction outside, I know you guys have locked the interest in that company, you're talking about basically taking forward our energy drink usage and stuff, have you got any tractions outside of your own clubs?

You know they launched in Florida, they launched in Minnesota, they launched in a few other markets now, picked up some extra distributors, we've gone with one single company is now distributing Texas, the majority of Texas proceed the major cities for us, so I mean we're seeing some traction, but we're working on doing all the manufacturing here in the US. We got the bag in the box product now, so you know it’s not all bad news, it’s not all good news, it's kind of you know the mix right now and we just got to decide whether it fits our capital allocation policy on a go forward base or not and decide what to do with those assets.

Okay, I appreciate it, thank you very much.

Thank you.

Ladies and gentlemen we have reached the end of our question and answer session. At this time I’d like the turn the call back to Gary Fishman for any closing comments.

Thank you Rob, and thank you Eric. Please turn to Slide 18, here's our reported calendar for the balance of the year. Again tonight you can meet management at Rick's Cabaret from 6 to 8 o' clock. Next week we'll be at the 23rd Annual Gentlemen's Club Expo in New Orleans and we'll be holding our annual meeting also in New Orleans. The second week in October we report fourth quarter club and restaurant sales, the third week of October we're planning to do some institutional meetings in Florida and then present at the [indiscernible] second annual small cap gross stock [ph] conference in Jupiter. The first full week of December we'll be at the Albie Micro investor conference in Los Angeles, and the following report we'll report fourth quarter and year end results. On behalf of Eric the company and our subsidiaries, thank you and good night. We'd also like to say a special thanks to our growing number of foreign investors in Brazil, Israel, Germany and Denmark. And as always please visit one of our clubs or restaurants, thank you everybody and good night.

This concludes today's conference call and webcast, we thank you for your participation, you may disconnect your lines at this time.