RCI Hospitality Holdings, Inc. (RICK) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the RCI Hospitality Holdings 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, Rob. Please everybody accept our apologies for the delay. We use – obviously used a third-part vendor to set-up the call and we will do our best to present this from ever happening again. Thank you. For those of you listening to this call on the phone, you can find our presentation on the RCI website; click Company and Investor Information just under the RCI logo. That will take you to the Company and Investor info page. Scroll down a little and you'll find all the necessary links for this call. Please turn to Slide 2. I want to remind everybody of our safe harbor statement. It's posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve 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 afterward. Now please turn to Slide 3. I also direct you to the explanation of non-GAAP measurements that we use. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thanks for joining us today. I'm here with our CFO, Phil Marshall; and our Controller, Bradley Chhay. I hope that everybody and our loved ones have been able to get through this pandemic so far, and that you are following all the safety recommendations. After the market closed today, we reported our third quarter results for the period ended June 30th. Total revenues were just under $15 million. Keep in mind all of our locations remain closed in April, and the beginning of May and a limited number were able to stay open during the balance of the quarter. We had a net loss of $5.5 million or $0.60 per share. Looking at operating cash flow, we were slightly positive. We ended the third quarter 2020 with almost $15 million in cash and $5.5 million in accounts receivable, including a large income tax receivable. Operationally Bombshells was the star. The segment generated record revenue in May and June and quarterly operating margins that exceeded our original targets for all 10 locations. Nightclubs that were open performed well considering the environment. Most of our Nightclubs had to operate as restaurants with entertainment instead of our standard nightclub procedures requiring all guests to enter to eat food in order to be able to partake in drinking or entertainment. To give you an update on how well we're doing in the fourth quarter, we generated $7.6 million of revenue in July. We have 31 locations open today. Our subsidiaries have been able to bring back about half of our team members after this extensive furloughs in March. After more than five months, we’ve become more competent in how to manage our business and finances through the pandemic. We have been agile, innovative and acted quickly. We believe we have made the company more resilient. So cash flows are not as we anticipated at the start of the fiscal year, the near-term outlook for our business remains strong. We expect to generate adequate cash flow from operations over the next 12 months. Please turn to Slide 5. It's important to understand the progress we have made over the course of the quarter. We have become very adept at – I'm sorry, very adept at opening locations, closing them with necessary due to change in the state and local government regulations, and then reopening them if we can, while keeping costs as low as possible. While the number of open locations fluctuated over the course of the quarter, monthly sales went from virtually nothing in April to $5.7 million in May to $8.9 million in June. We have achieved this performance while falling all mandatory health and safety regulations, including math, social distancing, occupancy, and hourly restrictions. And we have developed effective ways to serve our guests and our market, our business in this new environment. As a result, we have had no problems. Attracting customers lines are common to get into our locations. We are expensing a steadier flow of business during operating hours compared to before the pandemic. A couple of our clubs actually posted year-over-year sales increases during the month they were open. After the slower July 4th weekend, these trends have generally continued into the fourth quarter. Please turn to Slide 6. The Bombshells team has done a terrific job under extraordinary circumstances based on our performance starting in May. We are operating an annual revenue run rate of $40 million to $50 million. That is in line with our goal, we set out earlier this year for having all 10 locations open. I am particularly pleased to out that our operating margin hit 22.3%. This exceeds our 18% to 22% target range. I would also like to note this achievement was [indiscernible] incurring fixed costs for locations closed in April and early May. Please turn to Slide 7. During the quarter, we were able to work on some of our longer term strategies. I'm talking about selling excess land at our own Bombshell sites and using the proceeds to pay down debt and increase the potential return on capital invested. We completed this during the quarter for Bombshells I-10; we sold-off the second of two available parcels for about $1.5 million. This is after selling the first parcel for close to $1 million. As a result, we reduced our bank debt on I-10 nearly half and our total investment by more than one-third. Please turn to Slide 8. I would like to go over a few remaining items in our statement of operations. Cost of goods as a percentage of sales were higher due to a greater proportion of food. Salaries, wages and SG&A dropped about 50%. This reflected cost-cutting partially offset by a month of no sales and added cost to protect customers and staff from COVID at our subsidiaries and offices. Other charges reflected $1 million of additional non-cash COVID related impairment. This indicates we got most of it right in the second quarter; and was partially offset by a gain on the sale of the Bombshells I-10 parcel. Bombshells had nearly 2 million in segment operating profit. Nightclubs had a $3 million segment operating loss, with about two-thirds of that non-cash. Interest expense was lower due to pay down, debt pay downs prior, and during the quarter. There was a tax benefit versus expense last year. The weighted average number of common shares outstanding declined 5% due to repurchases in the third quarter. Please turn to Slide 9. As you can imagine, we are very focused on cash generation and use. As I mentioned, we ended the quarter with $14.8 million of cash. Excluding the SBA loan, long-term debt declined to $137 million. That's the lowest it's been for some time. Current liabilities at $33 million are in line with past performance. Please turn to Page 10 for our debt pie charts. The key point that I'd like to communicate is that 85% of our debt is secured by assets, such as real estate, three of our clubs and equipment. Looking at the unsecured portion, 4% of the total debt is the SBA loan. This has a potential to be completely or partially forgiven, and 2% is the Texas comptroller's settlement. So less than 10% is unsecured in the traditional sense. Please turn to Page 11. As we reported, during the first half of the fiscal year, we moved or have converted about $11 million in near-term non-realty balloons to out years or to amortizing loans to give us more flexibility. We have continued this strategy in the third quarter, we would defer approximately $2 million in bank debt servicing in July. We deferred the payment of $2.1 million in debt due to the – debt due in the fourth quarter. For additional flexibility under the Bombshells build strategy, we have one more parcel under contract for sale – under contract to sale and for parcels listed to be sold. Turn to Page 12. Here's our capital allocation strategy slides, most of this is how we looked at the world pre-COVID. We put this in here to show you that using excess cash to buy back shares is still part of our core strategy. We are currently looking to grow cash on hand to more than $15 million. Then we will be able to pick-up with our capital allocation strategy. As we have been doing for the past five years, this will continue to be our way of allocating all excess capital for the foreseeable future. When more locations are allowed to open such as our larger South Florida or New York City Clubs, we believe our cost structure and marketing should generate greater free cash flow with even with potential cupboard restrictions. Turning to Slide 13. To recap, we believe we have made the company and its operating subsidiaries more resilient over the last five months, acting quickly and with agility; we have significantly reduced our cost structure and cash burn. We have retained key personnel and rehired many fellow team members. We have also a lot of competence and become a lot more comfortable managing our business in the age of COVID. We have learned how to safely open, closed and reopened businesses. We have developed effective ways to serve guests and market our business in a COVID safe manner. We have achieved important sales and margin milestones with Bombshells. Open clubs also did well given all the challenges and we are continuing to pursue long-term strategies. In the final analysis we ended the third quarter of 2020 with a small but positive operating cash flow and ample staying power. In closing, we would like to give a special thanks to all our team members. I know I called out Bombshells earlier, but our Nightclub teams have done a terrific job. Also everyone's effort, hard work, long hours, and dedication has been unbelievable. You are RCI’s greatest assets. Operator, let's open the call to questions.

Thank you. [Operator Instructions] Our first question comes from Greg Pendy with Sidoti. Please proceed with your question. Please proceed with your question.

I know Bombshells, you've been learning as the process goes along. Can you kind of give us any insight onto why you think the margins were even above your expectations? Maybe some initiatives that you had put in place in the past or paying off a little bit more, or just a little bit of color on that?

Well, we always said once we opened all the locations and we didn't have all the pre opening costs that our margins, were going to be much better. We never separated our opening costs, the Bombshell segment because it was a small segment of the overall company. So that's a, that's a part of it. The other thing that we're seeing is with so many other locations closed we're getting the business and it's – we used to have peak times and peak hours and pretty much we've got a nice flow all day long now and still have our peak time. So we're seeing more customers and they're staying longer. Bombshells was the meet and greet place, so you come in and evening and you have your food and your appetizer and a couple of drinks, and then you go someplace else to finish your night and drink well, since the someplace else has an open anymore. We're seeing those people stay at Bombshells and spend even more money and Bombshells is actually becoming even more popular because of it.

Great. That’s helpful. And then And then just one more, I think in the past, you guys mentioned that sort of differences behaviors of the 40 – under 40 and over 40 crowd, any changes going on that?

I think with masks, I think people are feeling safe to come out again with everyone wearing mask. I think we're seeing a much broader customer base especially at the clubs. The clubs are doing much better with an older clientele than they, than they were pre, you know, everyone wearing mass. The mass mandate, especially in Texas has been a big help for us. And of course that's when majority of our businesses are open now in the State of Texas. We have Taxes, Illinois and Minnesota right now. We are basically the only places we're operating.

Okay. Great. That's helpful. That’s I'll give some other people another chance. Congratulations on the quarter. Thanks.

Alright, thanks.

Our next question is from Vadim Perelman, a Private Investor. Please proceed with your question.

Hey guys. Great job managing through this very difficult period. I want to go back in time. So what I think about your sort of 2015, 2016 time period, which is when I think you instituted and starting to implement your capital allocation policy and got aggressive in your share buybacks. The company was very different. You were doing something like $127 million sales, EBITDA was $34 million, you're earning about a buck, a share, and Bombshells was nascent of I could made like $150 million today. Today, it's a very different and much better business, although we have this temporary disruption, so obviously $200 million plus a post COVID and sales and free cash flow, earnings power probably $4 to $5. So, given that set-up and, given where the stock trades like a 30%, maybe even higher for cash-flow yield, is there anything you can do to take advantage of it while those are the facts on the ground? Well, when the market doesn't give you the credit for, what's obviously been a very resilient and very healthy business?

Well, like I said, I think we get Florida or New York open, that's going to drastically change. Or if we just get the other, some of the other cities that were open you know, Charlotte, Phoenix, some of our other States, Pittsburgh, Chicago, we get those locations open. You know, that'll change our cash flow. Basically, I think our run rate right now is probably cash flow neutral at about $1.8 million or so, so 80 – I mean, $90 million to $100 million, it's kind of cash-flow neutral as we get to the 2 million plus range. We start having positive cash flow and we'll start increasing our cash on hand per week. Those are per week set numbers. I'm sorry. And then so basically once we can grow our cash on hand to $15 million plus. We're going to be back to having excess capital and we'll be applying it to our cap allocation strategy. If our stocks train at these prices, that's where we'll be putting it. If the stock recovers here and people start to understand that, our businesses aren't going anywhere when we open, we are immediately starting to see our customers come back and we're seeing new customers come in. We're starting to, now that I think that depending on what goes on with the unemployment situation, I think we're going to see more new hires as we continue to grow and expand at our existing locations it's really going to depend on who survives. I think this is definitely a survival story right now for a lot of these smaller operators out there. And if they for some reason don't survive the restaurants, I mean, we've seen a lot of restaurant closings and saying, they're never going to – they're not going to reopen. And so if we can be in a position to take advantage of that maybe find properties we can lease and retrofit cheaply, because they were already full service restaurants. We can expand Bombshells that way. We can also look at acquisitions from clubs that are coming online right now. I think in October, we're going after the Gentleman's Club Owner’s expo. I've got a lot of meetings set up with a lot of club owners to about the future of the industry, their future in the industry and basically how they can monetize their assets if they decide they don't want to be in the industry anymore. So along those lines, a lot of opportunities.

That’s super helpful and agreed on all on all fronts. Along those lines, quick follow-up. What – How do you think about the hurry think about the hurdle rate for making investments? Like what you just mentioned, either buying distressed squads or buying clubs cheaply, or investing in growth in Bombshells retrofit or new build. How do you think about that versus the opportunity cost of deploying capital through the stock, a return that exactly what it is?

Yes. Well basically we want at least the two times, I think, depending on high risk, I'd want to three times cash on cash, so it really is going to depend on – that's why the franchise model for Bombshells is so appealing to us. Right now we are talking with some different groups about franchising in different areas around the country right now. I think as the numbers are coming out, people are getting, are going to get more excited about the Bombshells opportunities. We've had, I guess, just people that have been into bombshells in the last couple of months, here in Houston from out of town or from wherever they've called up and say, hey, I want to see about opening one of these in my city, and so we are getting those calls now. And I think I said, as the numbers become more public we're going to – I think we're going to continue to get more calls in that regard, so that'll help with us, but I think we need a two to three times hurdle rate. We've always said two times if it's – depends on the risk, I mean, I'm going to access the risk at risk reinvestment in our own stock is at those high returns that we're getting right now. If we use the $30 million run rate, which I think is probably low now, once we – if everything was open based on what I'm seeing out there and based on some of the restaurants that, chains and stuff that aren't going to reopen. There’s a lot less competitive, there is less competitive market in the overall entertainment market, right? Fans can't go to basketball games and football games and baseball games right now. So all that disposable income that was being spent on those types of entertainment is not being spent on those types of entertainment. So we're seeing those people who would go down to the Astros game, come to Bombshells and watch the Astros game a lot more. I think we're going to see more of those people visiting the clubs and hanging out – hanging out at the clubs to maybe pick up the game and hang out and get some food and drink and hang out with the girls at the clubs as well. That's, that's what kind of what we're seeing right now. So if that continues as we move forward for however long, there's less competition. There's no concerts, there's no – it's just amazing that all the entertainment choices that used to be out there, that aren't out there right now. I think that's going to have a very positive effect on the company as we move forward and get open.

Thanks a lot, and had off to the chief for doing a great job, while [indiscernible]. Thanks a lot.

Yes. Thank you.

Our next question comes from Douglas Weiss with DSW Investment. Please proceed with your question.

Thanks. Could you talk a little bit about, I think as, as I think you've as was expected, the service revenues are pretty low right now. Can you just talk about kind of what has to happen before those revenues start to come back?

We have to get more locations open. I mean, that's just the reality of it. A lot of the clubs were not really charging a cover charge. We're making you buy food instead. So those, so our food revenues are going to be up, but our cover charge is going to be down. So our food rebels will be up at service revenues will be down a little bit. It's just a different model right now in this code environment. So I'm not really concerned about as much where the revenues are hitting as far as the category service, food, liquor, whatever. I'm really concerned that we just have the revenues right now we'll probably have to iron the rest of it out, as we move forward and, and we've got to get our big locations and we've got to get open in New York, we've got to get open in Florida Chicago, Pittsburgh, Arizona. Those, those are the, those are the locations that that are really the affecting that service revenue right now.

Okay. And then are you seeing any impact on a sort of day-to-day or week to week basis from COVID news? You know, because I mean, obviously it’s in; I guess would be the main market?

Yes, it does. Like the first two weeks of July. We're very trying. You got to remember one point in June we had 40 locations open, a week later we had 29. I think we got down to a low of 23 or 24 locations. And then as of today we have 31 locations open. So yes, we are seeing it. In fact, we voluntarily closed a few locations. We would have an employee that reported a positive task. We'd close the location for three to five days; get all of our employees tested. We were paying for rapid testing. So that's some of our costs increase is we pay for rapid testing so we can have an instant test results for our employees. If no other employees test positive. Once we're comfortable that we have enough negative tested employees to reopen, we'll get the, we'll get the location reopen. So they've come and gone with those types of things. But basically we've been very quick to react any time. We've had incidences in our actual businesses. I think in the last five weeks, we're down to zero instances in our establishment. I think the mark on both sides have really helped. I do believe the one side is of the mark were an issue and only employees were warmer from day one. But we were not requiring it of all of our customers. Now that all of our locations required of our customers, I think we've, we've kind of put a, put a quash on, on having any real issues at our locations now. So really it's about the fear, right? If they create a big fear back, the media creates a big fear then people start to stay home a little bit more. I'm seeing it on about a two week cycle, news cycle, right? It's like a news cycle. The news cycle hits business slows down a little bit. New cycle gets old people come back. And that that's really what we've experienced through June. The first week of August has been one of the biggest weeks we've had other than the third week of June when we had 40 locations open. So I'm very optimistic going forward right now provided that people follow the safety recommendations, wear their masks and stay away from large groups with where people aren't wearing mask and are aren't following social distancing and that, that we can keep the new cases that are low and get everything back open.

Right. Okay. And then last question. What do you see happening with your competitors as far as other clubs? Are they kind of hanging in there or other clubs during the – some of your competitors not going to make it on the club side?

I think we're seeing a little bit of both. I think you're seeing some guys that are out there working hard, hustling, trying to get open. I think you've got guys in certain states where nothing is open or they can't get open that are very – they're struggling. And I think some will make it and some won't. We're watching for that. We're going to look for opportunities that we think, play right into our long-term strategy and go from there. I think October will be a real telltale sign for us as we lock the convention and we see who is there. And we see what they are saying. I mean, I talk to a lot of guys around the country pretty regularly, like I said, some are doing very well, some are not multi-club operator that I know very well, that only has five locations of his 19 locations open. And he's struggling to make ends meet. But so far he's making it. And I think that's in any business, not just our business. I think you are seeing it in the restaurants. I think you are seeing it in the gyms. I think you are seeing it, you know, in the hair and nail businesses. You are seeing a lot of companies that were on the border that are just going to give up. And I hope that most people can survive this and know it, but we're going be ready to do what's best for our shareholders and our company as opportunities present themselves to us.

Okay, All right. Thanks.

Out next question comes from Steven Martin with Slater. Please proceed with your question.

Yes, I know it was impossible to calculate comps for the quarter, but when you look at it on a weekly basis or a monthly basis for the units that have stayed open consistently, how would you characterize your comps?

I would say most of the bombshells are up 30% to 40% year-over-year. I can give you a particular club in Houston is up about a 100% year-over-year. It is amazing. Some of the clubs are down 20%, 30% but they haven't been consistently open now. The real trouble is very few locations have been consistently open. They've been open for three weeks, closed for two weeks, back open again, and we've had to consistently reinvent ourselves. We opened as clubs. No you can't be a club. Okay, we got to close back down. We close back down. We study our licenses. We said, oh, wait, we have restaurant permits. Well, what if we opened as a restaurant that has entertainment, we start serving food, we make every customer buy food in order to be in the building, if you can't stand at the bars, you can't – how can we become COVID compliant, so to speak with the new regulations. And that's really what we've done. And, I think that's what we've done a great job of getting 31 locations open is that we've looked at the rules and said, okay, how can we follow these rules? And can we follow these rules and be open and still make money, or at least make enough money to pay our employees and keep people working. We really, in the beginning started out just trying to get people working again. I mean, we had 2,100 people that we laid off plus about 4,000 entertainers that contract with the company, some got unemployment, some didn't get unemployment. I mean, it was a mess. And so we try to do our best to get people back to work first. And then as we got people back to work, we said, okay, now how do we make money? Because that's what in the business for us to make money. So how can we do both? And that's really – those were our two kind of marching orders, get people back to work. Okay, now let's figure out how to make money with what we have. And I think as the quarter shows, we did a very successful job of that. If we can continue this through this quarter, this is going to be a profitable quarter for us. And I think as we move into October, November, December, hopefully we're open across the country and we're back to our normal deal. Typically when we have a downfall, we have two off quarters and then we get back to normal. And I'm hoping that that's kind of what we see with this. We have our off quarter and then maybe next quarters off just a little bit. And then hopefully buy back first quarter of 2021, October, November, December, because we're on a fiscal that we can get back to a more normalized run rate.

So focusing on bombshells for a second, you said a $40 million to $50 million run rate with comps at bombshell is up as much as you said, shouldn't that be the upper end of that range?

Yes, I think right now we're probably closer to $55 million to $60 million. If we could scale – if we can duplicate the last two months for a 12-month period, we included April in the run rate, but April was closed, so it has zero revenues. I think we're going to get a really good idea of what bombshells can do if we can keep all the locations open for this 13-week period. And that's really what we're trying to work for. We do have one location that's currently closed. We have some litigation going on with the State of Texas on that location. They are saying we are bar that we can't operate as a restaurant. I think we have a hearing date coming up in about eight or ten days. So hopefully we can be successful at that hearing to get that location back open here shortly. And then we’ll have all 10 locations open. So right now we're operating on nine of the bombshells locations.

All right. And with respect, I know you had put out that you want a court ruling on the Texas Patron Tax, where does that stand and what are the ramifications going forward?

Well right now that case is in appeal. It's on appeal. The court, of course, with COVID is extending a million months for everyone to answer. So that case is going to be on appeal for quite some time. We are in the process right now, we were not paying those fees because we just didn't have the money. And we didn't want to give up the money. We have not paid several of our taxes. We're in the process right now in negotiating a settlement for the two quarters that we didn't pay. We'll probably pay that tax on a go-forward basis until such time as the appeals court moves forward. Originally the plan was to not pay it because we thought we'd have an answer from the appeals court before collections would start. That just didn't – because of COVID that just didn't happen. The courts are not moving in a normal, timely manner. So we had to rethink our strategy there. So we're going to be paying that tax on a go-forward basis until such time the appeals court rules and then we'll obviously try to get our money back. We’re paying under protest. So we have a right to a hundred percent refund if we’re successful in the appeals court.

What is the estimated amount that you are going to pay on an annual basis that you may not have to pay in the future?

Well, pre-COVID, it was about $2.6 million to $3 million annually. But with COVID it's been totally inconsistent, right? I mean, clubs are open, they are closed, they are open, they are closed. So I can't tell you. I think this quarter Patron Tax, $180,000 or something wasn't much.

Yes, the two quarters both $670, I think.

Yes. Well we were open most the first quarter. So probably four something in the first quarter and 180 something in the second quarter.

All right, thanks a lot.

Yes, thank you.

Our next question comes from Adam Wyden with ADW Capital. Please proceed with your question.

Hi, Eric, terrific quarter. And look, this is not surprising you've invested 20 plus years in your life to create a flexible platform to basically survive any environment, including a global pandemic. So you should give yourself and your team a pat on the back in terms of the operating results. And it looks like it's up, up in a way from here. And look, we're very happy to have been able to acquire almost 10% of the company in this downturn. And we look forward to what's to come. We think that there's many multiples of our money here and many years of compounding ahead. But a couple of housekeeping issues here, so just building on what Steve said, you had this one bomb shells closed, you are comping 30 to 40 we're reading articles that their wives are out the door with 50% occupancy. So when I parsed the numbers, you did about a 22% operating margin with nine clubs – sorry with nine Bombshells open at the end with the entire month of April, being closed and then some off and ons with opening and closing and kind of whack-a-mole. Now, as it looks in Texas, look the numbers are way down, it looks like you will get the 10th Bombshells open. When I kind of run the math, it kind of feels like with all 10 Bombshells open you guys are running maybe $60 million of revenue or more, but more importantly, the operating margins are looking closer to like 30%, not 20%. Now, who knows whether we can sustain 30%, but, I think, it's fair to assume we could probably sustain 25%, given kind of what we're seeing in the market for other types of sports bar concepts. I mean, you've got an acid in there that's doing $15 million to $18 million of EBIT. And I kind of look at this a little bit like Forrest Gump. I don't know if you ever seen that movie, where Forrest takes the boat out and he can't catch any shrimp, and then all the boats are crashed into the docks, and he comes in with Lieutenant Dan and he catches all the shrimp and goes and puts it into a fruit company. I mean, you got 35% of table service restaurants and small restaurants closing. You've got the only game in town lots of other things aren't closed. I mean, it's entirely conceivable that you could have a $20 million EBIT asset out of Bombshells, I mean. And then if you think about where capital and people to buy these things, I mean, that could easily be worth $200 million to 400 million, depending on how you think about multiples. I mean, it's pretty incredible that the stock is trading here, you've got the high assured interest in the company's history, you have no corporate level debt, none of the assets are cross-collateralized. I mean, what do you think is going on? I mean, it's like borderline insane, the short interest and the market's valuation relative to just the sole value in Bombshells.

Adam, I think that we've always been misunderstood as a company. People just do not understand our business. They say, oh, you are in the strip club business. We understand the strip club business, but what they don't understand is we're in the real estate business, we're in the restaurant business. We have a lot of businesses that comprise that adult entertainment business. And our real estate equity has been a huge source for us, we have been able to since 2017 now prior to 2017, we couldn't tap that, but now we're able to. We're setting up our next refi, where we're going to take all of our non – basically bank finance properties and even some of our newer Bombshells properties as we've sold off these additional properties and roll that into another refinance, put it on a new 20-year loan and save us another $1.4 million a year in cash on debt.

Let me ask you a separate question. I mean, just looking at Bombshells, right if you guys can do a 25% margin 20%, well, you're willing, probably doing close to $30 million on $60 million that's before the open up any more locations and that's before you consider franchising. So you've got this mismatch between the value of the company, right, you've got tons of value of equity in the real estate, you've got strip clubs, which are arguably worth a lot, right. I mean, look at Tootsies, you opened it up. I'm here in Florida, now with my wife and son, I mean, there was a line around the block with, people used to go to Tootsies at 9:00 PM and they were standing in line at 11:00 AM. These short sellers on Twitter saying, they had this boogeyman short thesis, there was this kid who worked at Chevron and he was buying put option contracts and saying, oh my God, no one is ever going to go back to a strip club. I mean, that's worse manure, right. The minute you open Tootsies, there was a line around the block, right? So like it's ridiculous to say that these strip clubs don't have any value. I mean, shit, Tootsies used to be like a Costco or something. I mean that thing's probably worth $30 million, $40 million, $50 million just as real estate. You are not getting any value for it. And so my question to you is if I told you that you could, sell a small stake in Bombshells to a war, into a franchise partner and say, shit, we're going to value this at $200 million, $300 million, whatever it is. And we're going to sell you a 10%, 20% that can give you a ton of cash to go and buy back, a ton of shares in the strip club. Not only that you can probably gain a strategic partner to help you roll out Bombshells. I mean, think about it, Hooters those 420 Hooters in the United States right now, right. How many military bases do you think there are in the United States? I mean, we could have Bombshells on every military base, right. And why not get a strategic or financial partner to take Bombshells nationwide well monetizing and allowing you to repurchase shares in the holding company. I mean, there's so much, operating flexibility that you have, right. You have these knuckleheads on Twitter saying, no one is ever going to come back. I mean, people are coming back. I mean, it's just a question of getting open. I mean, how do you think about, doing something strategic with Bombshells?

I mean we are always open to all options on Bombshells. It's always been – we started it, we weren't really sure what we're going to do with it, we were hoping to expand the multiple of the whole company. And like you said, I think, we've created something that's worth, the Bombshells’ concept standalone is probably worth more than the market cap of the entire company today. And we said at some point, if we cannot recognize that value, that we would find another way to monetize the value of Bombshells. I don't know if that's right now. But I mean, we're always open. We're going to listen. If somebody had a proposal, we would sit down and look at it. We're not looking to sell it cheap, we're not looking at giving it away because, it's the golden goose right now. And I think we're going to sign up franchisee soon. We've been in negotiations before in the past with smaller guys, but now we are talking to what, I think, are what I call real operators, restaurant operators, restaurant franchisees that not only have the capital, but have the knowledge. In the past we've got guys with capital who don't have the knowledge, we've got guys with the knowledge, didn't have the capital. And I think for the first time we're actually talking to both, they have the capital and the knowledge. And we're opened, I mean, would we take a partner to help us franchise and done it before? Of course we've love to sit down and talk with somebody who can present us with a plan that's win-win for everyone. But at the same time, if not, we're going to figure it out on our own like we always do. It may take us a little bit longer, so we can speed the process, we're interested in that. There's actually value for our shareholders and for the company if we can speed the process up a little bit with the right partners.

So let me ask you something.

Okay.

So like, just looking at bombshell – looking at Hooters, right, is there any reason why we can't have 300, 400 Bombshells? Now, I'm not saying you're going to go and build them yourself, but I'm saying intuitively you've got 10 of them running at like 30% margins, right. Maybe 20 goes out of business, maybe Hooters goes out of business, the concepts are kind of crap, your food is good, you've got the right concept. I mean, everything, every number works better, right.

Yes, I think that people got to realize that Bombshells is not a Hooters or Twin Peaks. We are a cross generational, cross gendered, like everyone comes there, people bring their kids there. We are a female-friendly, I mean, a family-friendly restaurant. Yes, we have some girls, but our girls don't – they don't flaunt their stuff all day long. We might get a little risky after 10:00 p.m. at night, but we're not quite so risky during the daytime. Other than during themed weeks, we do have themed weeks in the summer and whatnot, where we get a little more risky and competitive. And we catered basically our Twin Peaks, Hooters customers, only 20% or 30% of our business the rest of our business is completely customer base.

So in a vacuum, but assuming you have the right strategic or operating partner and the right balance sheet to execute against it, is there any reason in your mind why this couldn't be 300 units? I mean, is there any…

300 was our initial – 300 was our initial target, we could do 300, 300 Bombshells units in the U.S. without much overlap.

And you don't even have rights. I mean, at this point, you've got proof-of-concept. I mean, you could partner with the private equity firm or someone who has got insane ability, and you can just monetize the IP and the concept that you built. It's absolutely incredible. The fact that this thing trades where it trades, I mean, it's almost criminal. I mean, I always kind of say to myself, like, why wouldn't you sell a 10% or 20% in stake in Bombshells to buyback half the company? I mean, why do you have these knuckleheads on Twitter shorting these things? You got kids buying, put options and tweeny. I mean, it's disrespectful. I mean, you've invested 25 years of your life building this thing. And the value of your real estate equity is worth more than the entire market cap is insane.

I don't know the real thing was that habit it's pretty close. It's just what happens, I guess, with this COVID thing and people just misjudged what our business model would be like after the fact. And I think hopefully they are going to start realizing that our business model is still solid, that people are going to come back to the clubs. That they're not – they might may be wearing a mask, but, as long as your eyes work, I think, you're still in pretty good shape coming to a strip club.

Let me ask you something. So you've seen Texas cases go down, you've seen Arizona go to zero effectively, right. With this two-sided mask marketplace, you get the two-sided mask going you are good. No, one is getting COVID with the two-sided mask, right. And you've got markets where indoor dining has been open and people wearing masks and it's working. I mean, de Blasio is not going to be able to keep New York closed forever. I mean, you open up New York, there's $10 million EBITDA right there. You open up Florida, there's close to almost $20 million of EBITDA. I mean, these are red states where they are low unemployment, well, certainly Texas and Florida. But we've shown that we've been able to contain it. I mean, even Florida is sloping down. I mean, you don't think – I mean, you think that this is a 2020 event. I mean, just working forward. Like assume you get everything open by the end of the 2020, right, I mean, which I think is a reasonable expectation, but yet…

You don’t get by September 30 hopefully, that's kind of been the internal goal. So you don’t have everything open by October 1?

Elon Musk said I think there's going to be zero cases by April, 2021. If I just run the math that Steve is running, let's say sales or are $60 million, $65 million in 2021 Bombshells assuming no new. And you're back at 200, right. You were doing 200 at the end of the first quarter, you get the incremental growth in Bombshells. I mean, I don't think we'll be looking at a $60 million EBITDA business, we're looking at something closer to $80 million, right. And if free cash flow was $40 million on $60 million, we're looking at a business that could have a $55 million to $60 million, probably close to $60 million of pre-cash and $80 million EBITDA. I mean, those could be the numbers with everything open in 2021.

Everything has to be absolutely perfect world for that. We know there's no such thing as a perfect world. But I think, somewhere in between where our original projections were and what you're talking is probably more – is probably a reality where we should end up at, in my opinion. Look one thing is for sure we're doing better at the locations that are open than they were doing pre-COVID. And if we can keep that type of momentum going forward, everything is going to grow because as we all know, and we've seen in the past, when we do these big events, we do really high quarter sales, our margins drastically increased because the fixed costs are already all paid. So every time we do those dollars at $0.60, $0.70 from every one of those dollars rolls all the way down to the bottom. And that's what we need to – that's why those extra dollars are so important. That's why we focus on each location maximizing the revenue each month, because that incremental revenue at the end of the month, that gets us over our average is very, very profitable revenue for us,

Right. I mean, that's the math, right? I mean, just think about it like this, if you think about it, right. If 35% of the table served – the 35% of the table, service restaurants are closing, right. And that manifests itself in a 10% comp just in the nightclubs, right? If you have $40 million in Bombshells, that's pre COVID and 160 of sales in the nightclubs, and let's say you got a 10% set comp over two years. So you're 35% of the whole new year, “your competition closes”, you have a 10% stack comp, right. On a same-store basis, you are talking about, call it, at least a $16 million in sales unlike, as you said, because of the nightclub margins, because you own the real estate and the variable margin you're talking about like, 80%, 90% flow-through because it's all liquor, it's all liquor and admittance. I mean, the other thing that I was so impressed with all of this is that what I call the clubs, people would tell all, well when you should charge a $20 cover and now we're charging $50 to a $100, or making a bottle service. I mean, what business allows you to charge a $100 a night, take the cover charge from $20 to $100 or make the mandate to can't get in on 25% occupancy, unless you pay $2,000 bottle service. I mean, it's incredible that top, dollar of incremental comp I mean, it all flows to the bottom line. I mean, it's the difference between this thing being a $60 EBITDA to $100 EBITDA that's incredible.

It is definitely – it's been definitely a way for us to control the number of people that door, but we still have lines. And then you don't have to spend that kind of money. It's just, if you don't want to wait in line, you have to spend that kind of money. And there's people that'll spend that kind of money not to wait in line. And that has been a, a big part of the success of the open locations on the club side, for sure, for certain. But the Bombshells we haven't done any price increases or anything at Bombshells, we're just busy all day long.

I mean, look, it's really incredible. I'm kind of stunned that people put RCI in the same bucket as Dave & Buster's or a cruise ship. I mean this whole boogeyman thesis of like, oh, first of all, I thought your customer isn't kids, and it's not senior citizens on Royal Caribbean either. Royal Caribbean, it's a walking Petri dish. Airlines are burning cash every single day. I mean, look, if I want to go into one of these things, I'm wearing a mask, everyone is wearing a mask, the people are up there there's good social distance. I mean, look, there's no difference between this and a restaurant. And the fact that, they're comping you to these restaurants that have onerous operating leases and you own all your real estate and you've got this variable model. It's just, it's insane. I mean, I don't get it. I don't think there's a single restaurant or a tourism company that generated positive operating cash flow in the quarter. And no, you guys are doing a tremendous job. And I look forward to staying stand on a couple of conference calls and seeing this thing at $50, $60, a $100. I mean, it's just insane that we're down here, but that's the opportunity that the market creates. So congratulations again on a great job. And I look forward to the ride, all right. I got 9.99% of this thing. So everybody needs to know I'm there with you.

I appreciate it. Thank you.

You're welcome.

[Operator Instructions] Our next question is from Max Ellis, a private investor. Please proceed with your question.

Hey, Eric, congrats on the great quarter. If you had asked me two years ago, or if you had told me two years ago, that one day Bombshells would save the nightclub segment, I have called you crazy, but you had hoped you really…

Don’t worry, lots of people did. Don't worry. I mean, I always believed in the concept, I mean, I wanted to prove it out to everybody, which is why we said, look, we're going to build these six locations. We bought those six locations over an 18-month period. There was a lot of cost involved, it really hurt the margins. And I understand from the outside it looks kind of crazy. But inside we – our team really believed in that concept. And I mean, look, even we're amazed at the numbers that we're able to do at those locations right now. The lines we have sometimes at 5 o'clock in the afternoon, 5:30 in the afternoon, the line start. It's pretty amazing. I went to eat there the other day and they only had the two sections open. And I said, look, I'll just go sit in the back up there. They're like, okay, go ahead we're getting ready to open that section anyway. And I went up there and sat down and before I got my food, there was no seating left in that section. I was like, man, where all these people come from. So it is remarkable how well the Bombshells are doing. We are having obviously when you get that busy, that quick, we have growing pains again. Some of our guys were laughing like, man, I thought we had all this down, but man, we never envisioned this many people this fast every day, all day long. So that team has been really, really putting in a lot of hours and we really appreciate all the efforts they've done. And they definitely bailed us out in this quarter.

Yes, absolutely. The whole team deserves a big round of applause. As a shareholder, I'm very happy. My biggest concern during this COVID pandemic, is it liquidity and I think everybody knows the story of the six-foot tall man who drowned in a river that was on average, only five feet deep, which is, it doesn't matter how criminally under priced the stock is right now if you can't – if you get called out by any of your debt-holders, it doesn't matter if in five years it's worth $50 or $100, it matters, can you maintain the liquidity to see it through?

And as you will know, our – we have deferments for three months for April, May and until June. Our first payments became due at the end of June. So we started paying our payments in June 30, was the first time we started making bank note payments. Again, we paid our June 30 payments. We paid all of our July payments. And we're paying all of our payments through August 15 is our next – last payment. Now our next payment will come due after that on August 30. We have asked for deferments from the banks, but have not received deferment letters at this point. But we are working on deferments starting for the end of October – end of August, we’ll do August 30, September, October, and our next payment will become due November 30 with the banks. We are working on that, which would free up between $1.8 million and $2.4 million depending on one bank or both banks to give us give us the deferments. And so we'll see how that progresses over the next few weeks. But even if they don't, I think, we'll manage to make the payments. Our cash could get really tight depending on what locations are open or closed it at different periods of time throughout the quarter. But we've paid all of our payments. I think what’s really important for people to understand is we have paid all of our payments that have been required to be paid. We've paid our vendors. We're current with our vendors, we're current with our attorneys again. We finally caught up with all the, through June 30. So we're back to within a 30-day to 60-day float with our legal teams. Basically everything is back to normal if there is a normal these days. But as far as our bill payments, we're all back to normal. And so I don't see any real issues. I mean we haven't missed a payment yet. So before we'd have to worry about any type of liens, or foreclosures, or issues like that. We'd have to be late on a payment for a while first, right. I mean, we don't even have late notices at this point. So we're in good shape there. We have plenty of cash. We have some – a big income tax refund coming back to us. That will probably hit either late this quarter, or sometime in the December quarter. We should get that money back from the IRS from our 2019 tax returns that we finally got filed. And like I said, I think, overall right now we're in a good position. On August, we did – for the first week of August, we did around just over $2 million in sales, which I think puts us at cash flow positive for the first week of August. And I think July pretty much we were a little cash flow negative, but it wasn't a significant amount with the $7.6 million in sales in July. So, we're just going to move forward get through September. And I think, like I said, hopefully by October school starts back up, everything starts going, hopefully we get more locations around the country open. And we'll be good to go.

Yes, absolutely. And I did not mean to imply that things were running tight. I just – I think we all agree that.

No, no I appreciate the question because I really wanted to make sure that not you, but everyone out there understands, we're in a really good spot right now. We're very confident in our ability and where we're at right now.

And actually to that point, have you looked into the main street loan program at all to potentially refi out some existing debt with even cheaper debt under the priority facility?

We've looked at some of the stuff, but a lot of it's very restricted for public companies and it's just not our cup of tea. The PVP worked out for us for the Bombshells and our shared services company, and of course the one nightclub that we owned we did not take any PVP money on any of our adults entertainment clubs at all, just because we didn't want the controversy of it. And we got what we needed to be where we are today. We were able to keep a lot of our employees paid and with the PPP money. And as you can see from the Bombshells results, it's paid huge dividends for us.

Oh yes, absolutely. Well, that's it on the questions I have. I just wanted to say congrats on the great quarter. For me, I think, it's a great quarter. It really is a testament. So keep up the good work. Look forward to continuing to follow the progress and really happy for you and the shareholders. Thank you.

Alright, thanks so much.

Our next question is from Adam Wyden with ADW Capital, please proceed with your question.

Yes, this is a follow-up. Look, I just wanted to point out and I think you’re building on the other guy's question, but I mean, look, your business model is incredibly unique in that you don't have a revolver, you don't have any liens against your business. I mean, you can basically decide whether you want to pay people or not like the debt that you have that isn't mortgage debt is seller note finance, and all of your lenders are saying, shoo, pay me whenever you want. They don't want to take real estate back. They don't want to take adult night clubs back. I mean, you don't have to pay people if you don't want to have to pay them. I mean, the reality is, is that you could in theory, take your cost to zero. So like the fact that people even asking about liquidity is borderline laughable, right. You have tons of cash. You have real estate that you can sell that's not, like Bombshells real estate from the parcels you can sell around. You could sell a stake in Bombshells I mean people – I mean, you've got – you're like a little salmon, I mean, you are floating in cash right now. I mean, you are fine.

We have many, many options – we have many, many options available.

The bigger question is what lever are you going to pull to take the cash away from it and put it up the rear end of the short sellers? I mean, come on. I mean, you can sell a stake in Bombshells, a tiny stake in Bombshells for $20 million, $30 million and I mean, you can squeeze these guys like it's going out of style. I mean, it's – the question shouldn't be – in my mind the question shouldn't be it's like these guys on Twitter, they don't understand your business. They are like, oh, you're not going to make it. You're burning tens of millions of dollars of cash a day. This isn't American Airlines. There's no capital intensity. You own the real estate. You can shut this thing down and take costs to zero. I mean, the better question is where are you going to find the cash? So you can kill these guys. I mean, it's borderline laughable that the guy right before us was saying that you didn't have liquidity, it's a freaking joke. It's a joke.

Well I don’t think that that's what he was saying. He was just asking that’s – like you said, that's the concern out there. And like I said earlier, when I was talking to you and said it right there, I think, they just don't understand the overall company. It's more complicated than a typical restaurant company who leases all of their property and doesn't own their real estate. You're right, we just have – because of how we've done things and how conservative we've been through all these years and the focus on owning all of our real estate so that our rent goes down every month, as I like to say, as we pay off the principal and then we're able to go borrow money against it again. And that's one of the things, I mean, we're looking at right now in these refinancers is how much cash can we pull out. Because as we move forward if the stock stays in these ranges and stays below our capital allocation target price, we will be back in the market, buying back stock. And that's what we're working for every day to get back.

Well look, I think, front and center, I think, Bombshells is the golden goose, and I think there's ways to monetize it and extract – I mean, look, there are plenty of companies, I mean, look at GM. I mean, GM sold a stake in cruise for a huge number. And now they are talking about maybe spinning off or selling their autonomous driving division. I mean, look, the reality is Bombshells was your brainchild. And you took a lot of heat from it for a lot of years. So I'm not asking you to sell it on the cheap. I'm saying, look, you are in this weird kind of predicament where you got a bunch of knuckleheads shorting your stock, that can't do algebra or accounting the owner says what you own. And the only way you can figure out what your own is when you solve – you give it to them when the sun don't shine. And the reality is, is that you've got a lot of levers that you can pull, whether it's subsidiary finance at Bombshells, partnering with a JV, maybe doing a master franchise deal and you give the franchise rights and you start selling franchise licenses. I mean, why couldn't someone buy the master franchise rights from you and you just collect royalties and they'd give you a loyalty and they give you $20 million, $30 million, $40 million up front. I mean, there's – you can skin this cat 67 different ways from Sunday. The reality is, is that you go with it, you've got the business, it's an incredible business, no one understands it and now when you just start counting our money because you've got the cards. I mean, the fact that the guy asked the questions like [indiscernible] tells me these guys still won’t get it. Well that’s fine. You can’t count our money. I’m not worried about.

They’re going to figure it out.

They are going to figure it out.

We’ve been showing.

You’re going to show them. All right sounds good.

All right I appreciate it. Thanks Adam.

There are no further questions. At this time I’d like to turn the call back over to Gary Fishman for closing comments.

Thank you, everybody. Thank you, Eric. And thank you everybody for joining us. Again I would like to apologize for the delay that people had in signing on earlier on the call, it will not happen again. On behalf of Eric, the company and our subsidiaries thank you and good night. Stay safe, stay healthy. And as always, please visit one of our clubs or restaurants. Thank you.

That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.