RCI Hospitality Holdings Inc (RICK) 2018 Q1 法說會逐字稿

Greetings, and welcome to RCI Hospitality Holdings Fiscal 2018 First Quarter Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles Investor Relations for RCI. Gary, please go ahead.

Thank you, Kevin. Now please turn to Slide 2, everybody. I want to remind you of our safe harbor statement. It's posted at the beginning of our conference call presentation, reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

Please turn to Slide 3. I also direct your attention to the explanation of non-GAAP measurements that we use and are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area who's listening to join us tonight at 6:00 to meet management at Rick's Cabaret New York, Manhattan's #1 gentleman's club. You can also tour its sister club, Hoops Cabaret and Sports Bar, next door. Rick's Cabaret is located at 50 West 33rd Street between Fifth Avenue and Broadway, around the corner from the Empire State Building and down the street from Madison Square Garden.

If you haven't RSVP-ed, ask for me at the door. And right now, looking out the window, the snow doesn't look that bad. So don't let that be an excuse.

Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thank you, Gary. Good afternoon, everyone. Please turn to Slide 4. I'd like to start this call again by thanking everyone for sticking with us, for believing in us, and for helping us to maintain the value of our stock. As we promised on our February 14 call, we have been working diligently to complete our first quarter 10-Q in order to get back on schedule by the second quarter. We're pleased to report that we filed the 10-Q after the market closed today, and we are now current with all of our SEC filings.

We're also pleased to report another quarter of strong quarter results. GAAP results were a profit of $1.47 per share. In line with previous announcements we've made, that included a $9.7 million tax benefit due to reduction in our deferred taxes as a result of the new tax bill. It also included $827,000 in added interest expense covering debt issuance cost and prepayment penalties related to our new debt refinancing. On a more comparable non-GAAP basis, EPS increased 71% year-over-year to $0.53 per share and free cash flow increased 47% to $7.5 million. Our outlook continues to be positive for the year. Favorable revenue trends have continued to date and with our first quarter performance, free cash flow is on track for our recently upwardly revised $23 million target.

Please turn to Slide 5 for an analysis of our first quarter operating performance. Total revenue increased 22% year-over-year. This reflected a 16% increase from new units and a 16.9% -- I'm sorry, a 6.9% increase in same-store sales. There was a lot of differences between -- or there's not a lot of differences between GAAP and non-GAAP operating income. So for consistency, I'll focus my comments on the non-GAAP results.

While revenues increased 22%, non-GAAP operating income increased 44%. That reflected increased operating leverages from higher sales and an overall improved portfolio of clubs and restaurants. As part of our operating results, we incurred about $500,000 in additional expenses. These are related to the cost of transitioning to our new financial management system and work towards completing our year-end audit. The end result was that non-GAAP operating margin expanded 340 basis points year-over-year to 22.5%.

Please turn to Slide 6. Sales have been performing very well. Same-store sales have now increased year-over-year for 7 straight quarters. Nightclubs -- total Nightclubs and Bombshells segment sales are also up 7 quarters in a row. The largest gains began in the third and fourth quarter of last year. That reflected the acquisitions of Scarlett's Miami and the St. Louis club in the third quarter and the opening of Bombshells 290 Houston in the fourth quarter. We are working very hard to continue growing sales year-over-year. Keep in mind, our seasonally strong periods are Q1 and Q2 and that business is generally softer in the third and fourth quarters. Also, keep in mind same-store sales increases go in waves. They go through a period of up quarters and then subside and then we grow again.

Please turn to Slide 7 to review our cash generation metrics. We continue to do very well in the first quarter. Adjusted EBITDA increased 39% year-over-year to more than $11 million. This was the highest quarterly level in the last 2 years. Actual cash on hand as of December 31, increased 21% to $12 million as compared to the end of September 2017. As noted on our opening slide, free cash flow increased 47% year-over-year to $7.5 million.

Please turn to Slide 8 to review our long-term debt. Last call, we showed estimates as to our December 31 debt positions and rates. At the time, we wanted to show the favorable impact anticipated from our new bank loan. This slide shows you the actual impact, which is very close to our estimate and continues to be highly favorable.

Please turn to Slide 9. Here, we show you our debt maturity schedule along with our occupancy costs. The debt maturity schedule is similar to what we've showed you on our last call. As you can see, our amortizations and the few relatively small remaining debt balloons are very reasonable for us to handle given our cash flow. If you recall, we calculate occupancy expenses, one of our largest cost areas, as rent plus interest as a percentage of revenues. As you can see in the slide, although we have acquired additional clubs and underlying real estate with debt over the years, our occupancy costs have dropped dramatically. They were 9.4% in fiscal 2014 and as of the first quarter, they were down to 7.7%. As we sell off non-income-producing real estate and make the Scarlett's balloon payments, we should see occupancy expenses decline a little more.

If you'll please turn to Slide 10 to review our capital allocation strategy. As you know, there is a key metric we look at to determine whether to buy, open or close units, buy back shares or pay down debt. That is our free cash flow yield on market capitalization. At the target, $23 million free cash flow for fiscal 2018 and the recent $28 stock price, the yield works out to about 8.5%. According to our capital allocation strategy, if the yield is in double digits range, we would likely buy back shares. If it's below that, we would likely buy or open new units but only if we can achieve our cash-on-cash returns of 25% to 33% buying strategic rationale.

Now for the longest time, we have been saying that the stock would have to be trading at substantially higher prices for it to be worthwhile to pay down even our most expensive 12% debt. At a 37% effective tax rate, the after-tax yield on paying down 12% debt was 7.6%. With $23 million of free cash flow, that would be like buying back stock at $31, some $3 above our current market price. However, the new tax law changes that dynamic with our effective tax rate at 23%, the after-tax yield is 9.2%. That's like buying back shares at $26, $2 below current price, that's far more attractive. This is not to suggest that we'll necessarily pay down our debt faster, but it shows you the rationale fits with our capital allocation strategy.

If you'll please turn to Slide 11 for an update on how things are going so far this year. The second quarter is continuing to do well from a sales point of view. As we mentioned in the last call, January was good despite tough weather in some markets. February was good primarily due to traffic benefiting from the pro football championship in multiple markets. We are hopeful about March with something like half a dozen major college basketball tournaments in New York City and Charlotte, where we have a total of 4 clubs, including 2 of our largest ones. As I mentioned on previous calls, we have 3 new Bombshells in the works in the greater Houston area. The Pearland unit, which will be our largest Bombshells ever, is now just awaiting a gas line hook up. We continue to target opening it by the end of this quarter. The other 2 Bombshells, one on I-10 and one on the southwest freeway, continue to be slated for opening in the fourth quarter of this fiscal year and the first quarter of fiscal '19, respectively. For modeling purposes, all 3 are likely to open towards the end of their respective quarterly periods.

As for operating expenses, we still have some residual cost for IT transition and year-end audit. I continue to hope to see a more normalized operating expenses by the third and fourth quarters. Insurance costs were up 34% year-over-year in the first quarter versus 22% sales increase. We've already started to work on ways that we could potentially reduce this expense. We've also begun to see salary and wage pressures around the country, so we would have to be cognizant of that as well.

On the upside, the new tax bill is already helping the bottom line. During the first quarter, we had a gain of $9.7 million. Excluding that, our effective tax rate was 25.4%. Some of our analysts may still be using a higher effective tax rate. For the full year fiscal '18, we anticipate the effective federal tax rate of 24.5% and the total effective tax rate of 26.5%, which includes state and local taxes.

To wrap up, I'd like to review our 3-year goals for any new investors on the call, so please turn to Slide 12. One, we want to grow our free cash flow per share at a 10% to 15% on-year average and grow our total free cash flow to approximately $30 million. Two, acquire more great clubs in the right markets. On average, over the years, we have made more than one club acquisition per year, and we are currently in discussions with multiple potential candidates. Three, continue to expand the number of Bombshell company-owned stores. Our target is 3 per year over the next 3 to 5 years, which would give us a total of 14 to 20 units. And four, while we're in growth mode, we will not be pressured into the deals that we don't like for the sake of growth. We will work to make sure that each new acquisition of restaurant is right for us, that it meets our requirements and adds to achieving our long-term goals and not add undue risk or stress on our systems.

Thank you for listening and thank you to our staffs around the country for all their hard work and for all those that were involved in closing out the quarter and making us current with the SEC.

Now let's open the call for questions.

(Operator Instructions) Our first question today is coming from Frank Camma from Sidoti.

A couple of questions. If we could flip back to Slide 11. First, right at the top, the college basketball events, you're talking about the March Madness. Was it different last year, like as far as the timing? Is that why you're calling this out? Or is it -- wasn't in the New York market?

Yes. We picked up a few more in New York, the Big Ten. I think AFA is in Brooklyn this year, so there's a few more tournaments than we're normally used to.

Okay. I see. So you'll have a benefit of that.

Good for us, yes.

Got it. The second question is on Bombshells. How has the trend been with the one that you most recently opened? Did you go through that typical trend of the honeymoon period and then sort of sell -- I don't know if you call it selloff but like where the revenues sort of kind of slacked?

I'd call it a dropoff. Yes. And we're -- the dropoff compounded a little bit with freeway construction on the weekends. And I think once that freeway construction is completed, that we're going to get a, I think, a second little honeymoon period at that location. So I think we'll decline a little bit here, but I think we'll then pick up considerably as we move. I'm not sure when the road closures are going to be done, but I know they're moving traffic on the weekends, are flipping it from the old roads to the new roads right now to try to get it -- putting them -- tear down the old roads and rebuild and finally get it all done. But I think we should see some pretty strong return in probably May and June as that construction, at least, stops being on the new and move to the other side.

Okay. And when you're talking about insurance cost, is that property insured -- like is that liability insurance? Is that property insurance? I'm just trying to figure out what type of insurance we're talking about.

Yes. It's a little bit of everything. Mainly, we're seeing an uptick in our liability cost, cost per $1,000 of revenues. And so we're in a process of looking at a few other options, including some type of captive that we had operated ourselves. There are several...

So you would have like reinsurance behind it basically?

Exactly. Yes, we would basically. So basically, right now, we self-insure the first $100,000 of all claims. But what we would do is maybe form some kind of cap where we would maybe self-insure the first $1 million of all claims through the captive and then reinsure on top of that.

Okay. And my last question is to the salary and wages because -- I mean, the nice thing is exclusive of the Bombshells, you're somewhat insulated from this in the fact that a lot of your entertainers are not employees, right, for the most part. But does it put wage pressure on that group as well since there's competing forces here? Can you just talk about that?

I don't think it puts -- with our actual club level employees, there's not a lot of wage pressures, it's more upper management or office and clerical staff. A lot of our club employees work on tips. So obviously, our clubs are busier and we're grossing more money. Our employees are tending to make their share of the money as well. So their pressures are not directly related to us but more on the customer experience.

Okay. So it's not as extreme as other restaurant companies would have obviously, because that's a direct hit?

Like I said, it's just more management. It's more management based and non-tipped employee base.

Our next question today is coming from Marco Rodriguez from Stonegate Capital Partners.

This is Marco Rodriguez from Stonegate Capital Markets. Just wanted to kind of dive in a little bit more on the Nightclub side. The same-store sales obviously really strong here for the last few quarters for you guys. Are there any sort of clubs that are helping drive this that are showing some really strong same-store sales? Or is it kind of broad-based? Any sort of color there?

It's fairly broad-based, I'd say, in the 3% range. We're getting the bonuses. Our Tootsie's in Miami is doing extremely well for us and even a few other clubs here and there that are coming back a little bit stronger. Some of the Odessa club, for example, year-over-year. Oil's back up. So we're seeing some nice increase in that market year-over-year. But basically, it's just about everywhere. I mean, we're seeing some nice increases everywhere.

Got you. That's helpful. And are you seeing the spend in the Nightclubs? I mean, is the spend being driven more on the service side? Or you are seeing kind of a better mix from food and beverage? Any sort of color there?

We're seeing it everywhere. Obviously, the service revenues are higher, you can see in our breakdown an increase on year-over-year service revenues, which is our high end spin. But we're also seeing more bodies through the door in our blue-collar clubs, which helps their numbers. So overall, I think it's just generally people are feeling better about going out and having more fun and a little more secure with their -- that their paychecks are going to be bigger or they're going to have -- of course, we have more employment out there. So as that continues, I hope to see our numbers continue to grow and maybe we can keep a nice streak of same-store sales growth going. We're seeing a very strong quarter so far in January, February and March. So we'll -- typically, we run strong through about mid-April when tax time hits. And then we'll -- we get a little bit of a slowdown and, hopefully, we see a nice recovery in May like we're supposed to when we keep it running all the way through the summer.

Got you. Very helpful. And then in terms of Bombshells, just wanted to kind of clarify here the timing of the Pearland open. I think I heard you say in your prepared remarks that the 3 additional Bombshells that you will be opening will be end of quarter. So should we be thinking that there's really no impact in the quarter from a revenue standpoint?

Correct. I think our goal right now is to hope we'd be open around the 27, do a soft opening of -- in Pearland around the 27. So yes, you won't see any real revenue until the April, May, June quarter. And the other -- the way that everything's pushing now, we're wishing to go to the beginning of the quarters. Originally, we're going to open in January. But with the hurricane in Houston and the flood issues and, of course, amount of workers, not being able to get construction workers because of so many insurance companies spending so much money to have people tear out houses and do flood remediation, we basically, are pushing everything about 60 days. So instead of opening at the beginning of the quarters, we're probably going to be opening in the end of those quarters is what we're looking at right now.

Got it. Very helpful. And last quick question. I know on the last call, we talked a little about the franchise opportunity. I think in your response to one of my questions there, you thought you might have some more of an update in terms of the franchise opportunity going forward maybe now if not by end of May. Just kind of wanted to follow up to see if there was any changes there.

Yes. There's not really been much change and we're really cutting back our expenses, we're cutting our costs. We're not really spending much money pushing franchising right now. I think until we see restaurants as a whole and casual dining as a whole rebounding, that there's not going to be much interest for other groups to come in and open our restaurants at this time. We're going to focus on our own core operations, spend our money on that, maybe take some of the money we're spending on franchising, put in to some more marketing, especially in the Houston market where we're becoming very dominant as we open these next 4 -- or next 3 stores, I mean. And we're going to focus on that right now. We are still registered. We're going to stay registered to sell franchises. And if something comes along, we're definitely willing to talk to people. But I just don't think that's where our management's energy and focus should be right now. I think we should be focused on our core stores and opening our own new stores at this time.

Our next question is coming from Ish Faruk from WestPark Capital.

A couple of questions for me. In terms of Bombshells, the same-store sales were a very big uptick. Is it like seasonality? Was it like one time things?

If I had to blame it on any one thing, I'd have to blame it on the Houston Astros.

Yes. Just the Houston Astros or there's a little more to it?

Yes. Definitely made it a lot -- the Houston Astros definitely made a big difference. All those -- the home games and away games both were big for the restaurants. The city was definitely behind the Astros and out in force watching the games and what not. So I'm hoping as opening day hits, I think, April 2 in Houston, the restaurants will see a nice uptick coming in April again from the Astros being back to playing.

All right. My second question. Eric, you mentioned in your prepared remarks and the slides that you're looking at the right clubs in the right markets. Do you have a sense for geographical limitations in terms of acquisitions that you're looking at right now?

We're looking close to where we are -- we already operate, of course. And then just new markets that -- where we feel that -- where it can it buy the #1 or #2 clubs in the market and get a nice foothold in. That's really what we're looking at right now. But we're looking at everything. I mean, right now, it's about pricing and our management team is very, very strong. We've closed some underperforming locations and whatnot. So our guys aren't stressed right now. So really, we can do an acquisition anywhere provided that the numbers make sense.

Okay. In terms of the size of the club, are the clubs skewed primarily towards higher end clubs? Or is it like across-the-board?

We're looking at it. We're looking at everything right now. Like I said, right now, it's more about pricing and getting the return. Obviously, we favor the larger Scarlett’s type acquisitions. But the St. Louis acquisition, $4 million was still -- was a very good acquisition for us. So we'll look in all those price ranges. I think anywhere right now, we'd probably be looking in from $1 million to $40 million than -- acquisitions, whether it's multiclub or single club. Those are kind of the numbers we're kind of looking at that's easy for us to do right now. We have bank financing for the real estate side of it, and then some cash on hand right now to do the rest. And our debt's very easily manageable. If we sell off a few pieces of this non-income-producing real estate, hopefully, we can eliminate this additional $250,000 in payments, take our loan-to-value down to 65% of our existing real estate, which will free up $250,000 a month in cash as well. So there's a lot of opportunities over the next few months as we kind of get used to it. And I said, we just got to get back to normalized expenses, the 10-K being late and us -- the extra work and focus on all of that was a lot for our internal accounting people and for myself as well. And so we had management basically focus on operations, existing operations, and kind of put acquisitions on hold. But we've been talking with people, with candidates and we'll get very, very serious as we move in now that we're current again and we're back to a more normal flow, we're used to our new accounting system because even our accounting systems took management's time as well, changing systems and getting used to the new way we have to do things. Put all of that, I think it should normalized through the end of this month through the end of March. And as we move into April, I think, we're going to be ready to be back out there and getting very serious about new acquisitions. We've got 2 Bombshells under construction right now, Pearland's almost finished, the I-10, we're getting ready -- we're getting close to pouring foundation. We'll start putting the steel up here in the next few weeks. And the building permits are on second review, I think, first or second review. I think they're coming with a second review in the city for the 59 locations. And so if everything goes right, we'll start construction on that property in early April, which should put us open in November, but maybe December depending on weather this summer.

(Operator Instructions) Our next question is coming from Darren McCammon from ProActive Financial LLC.

Not to sound like a broken record, but congratulations on another fine quarter.

We're trying. We want to keep that broken record playing.

I want you to, too. Along those lines, okay, so you've had 7 in a row here. You talked a little bit about lapping yourself in Q3 and Q4. In other words, your numbers are getting a little tougher. What can you do to make sure that those are same-store sales increases also?

Well, like I said, hopefully, the Astros are going to help us in Q3, which will help with the Bombshells. We're just going to keep doing what we're doing and we hope the economy keeps -- stays strong and that the big customer spend continues. Obviously, if the big customers and spend dries up, there's not a lot we can do. To bring the big customer spend in, we can -- if we actually go to a recession, we can go into discounting and stuff we've done in the past. But right now, I think that everything's hitting on all cylinders. I just want everyone to be prepared. It's very rare that we just continue to blow it out and blow it out and blow it out. So I just want everybody to be prepared for that 1 quarter or 2 quarters where we step back a little bit. I don't think it will be this quarter. This quarter's -- this January, February, March quarter has been very strong for us. And I anticipate moving forward, I don't see anything. There's nothing out there that scares me right now but I just don't want everybody to think this is going to be the norm, that we're going to keep doing 6% or 7% same-store sales increases. It can easily fall back down to the 3% range, which is, I think, a little more normal. And we can have a hiccup here or there, depending on if there's a big sporting event or something in the past or a big fight or something we had in the past that we don't have in the quarter going forward. But overall, everything's been very strong. I think we're going to continue to do that. But I just don't want people to so get used to it that it shocks them if we have an off quarter.

Okay. So what I heard is you guys are expecting 8% to 10% increases going forward?

Yes, I wish. No. I mean, like I said, we'll return to a more normalized 3%. The Bombshells in this quarter will -- I don't think will be as strong as they were in the last quarter. I mean, the Astros definitely made a big difference. But as we open up the new store and we're going to start some new marketing in the Houston market that we've never done in the past, maybe we'll see some increases again going into the summer. We're going to try to make a pretty decent push going into the baseball season this year.

Okay, I heard you. I won't get too crazy on the modeling. So you have scheduled basically, the LD Micro conference and it got canceled because of the fires. Are you planning on doing any roadshows or conferences like that this year?

Well, we're doing Sidoti on March 29, so we'll be in -- of this month, in March in New York. We're still talking about whether we're going to go to LD in June or not. We don't normally do that summer conference, but we're thinking about it very seriously right now. I haven't had a chance to talk to Chris to find out exactly what the deal is going to be on the summer conference but I'm thinking about that one as well. And definitely, we'll probably be out in April and May on some non-deal roadshows, meeting some investors in specific markets. Just try to get the story out there again and get everything ready, especially as some of our acquisitions heat up, we want to make sure that we're keeping attention on the stock.

Okay, okay. And you had mentioned the 12% debt -- or 11.8% debt. Is there any reason why you couldn't pay that off early, if you wanted to?

No, we can definitely pay it off. In fact, we used $2.9 million of the main loan to pay off -- $2.9 million of the 12% debt. And we kept the amortization schedules -- the payment is the same. So we shortened it. Rather than keeping amortization schedule long, we've shortened the amortization schedule by keeping the same payment on the debt as if we hadn't paid off the $2.9 million. So we are accelerating that 12% debt. It just make sense. It's not quite 10%, but it's close enough to 10% return on our money that we're definitely watching it and paying attention to it.

It also derisks the balance sheet, right?

Yes. And we run through a ton of cash. I mean, by the time we did the loan, we're sitting on almost $15 million in cash on hand. So I don't -- I think as long as we stay in the $12 million to $15 million range, we probably won't accelerate debt. But if we start getting more than $15 million cash on hand where it's sitting on the bank not earning us any interest at all, we will probably put that to work because we can always go borrow the money again.

Okay. So that actually leads to my next question. If you got $15 million now and you got $10 million coming in real estate sales and another $23 million in free cash flow, I mean, you're looking at $40 million plus by the time...

You're a little high on the free cash flow. You've got to remember, we got to service the debt. So we have a $3 million balloon payment in May and about $8 million a year that we service, so that's about $11 million in debt servicing we have to do out of that $23 million. So we're probably closer to -- and we got to sell the $10 million real estate and we have to pay off some debt against that $10 million in real estate. It's not all free and clear. We're probably -- you say $40 million. I've seen an article you did, and I think we're probably closer to $25 million year end if we do nothing just because we have to service that debt and we have some debt against that real estate. What we hope to do is sell that real estate, pay all of the -- 100% of the proceeds to the loan so that we can get down to 65% LTV and drop that payment from $870,000 or $25,000, whatever it is, down to that $500-some thousand so we free up that $0.25 million every single month on a go-forward basis. And then our debt service won't be $8 million, it will drop down to about $5 million, which will free up free cash flow on a go-forward basis, or give us that money to take on additional debt if we want to do acquisitions with without actually increasing our debt load. So those are the things we're looking at right now. But yes, to answer your question, we definitely are going to have to, by end of the year, consider paying off a considerable amount of our debt or making some acquisitions. And of course, the acquisitions are preferred -- is our preferred method to use that cash because I'm not going to sit around with $25 million cash in the bank. I mean, it just doesn't make a lot of sense for us when we have 12% debt, that give us almost a 10% yield.

Nice problem to have?

Exactly. And we've worked hard to get here and we've stayed the course. Trust me, there's a lot of deals popping up at me that are tempting but just not quite. They want a little too much money for them and they want me to stretch. And we'll just -- we're going to sit here and wait. And if they want to come to us and bid in our model, great. We're not really ready to stretch too much yet. We may start stretching a little, though. I mean, 3.5 may become a more norm than 3 if the market's rewarding us for the growth. But I don't see us getting to crazy numbers and which could put us to 4.5 if it's a very specific acquisition with great-grandfather licensed in and no competition, those type of things. So we may look at raising our prices, we're willing to pay a little bit but we're just not there just yet. The markets, they're going to have to -- we're going to have to see that there's a definite reward for that. Otherwise, I think we're just staying here, stay in our 3x model. There's plenty of stuff out there we're looking out right now in that price range. And we just been busy with the Q and the K and the new accounting systems and everything to go, okay, we just keep pushing them down the road a little bit. We're down the road. You're going to start seeing us be more active way, I think, through March, April, May. I don't know when we'll actually get something papered. It does take a little time, but we're actually going through financial statements of acquisitions now where we haven't been able to because our financial people have been very busy but that will start over the next few weeks. We've got several of them coming in over the next week or so that I finally have made request from the brokers and the sellers and said, give me the information, where you start looking. So we will start looking very hard. We'll start doing some negotiations. And in the past, we've been able to close several deals. So I'm sure we'll continue to do so as we move forward.

Our next question is coming from [Jason Slir], a private investor.

I just want to first compliment you on your capital allocation strategy. I pretty much feel like if you went out there, [as CEO] out there, I don't even think 1 in 10 would be as committed to what as you guys have been over these last couple of years.

It took a long time to get here, so it's a learning experience. But once you -- once we've gotten used to it -- and of course, we had to build the cash flow. We have so much cash flow, it's -- we have to be careful with it, right? Otherwise, we set like we did for 3 years where we kept growing and growing, but our stock kept going down and we -- we weren't -- we were doing deals to do deals, we weren't doing the right deals. And so now, we're very focused to make sure we do the right things. We want to add to the cash. Someone told me -- what really got me started on this, someone told me one time, take risk to get rich not to get poor. And I started looking at some of the things we were doing and we were taking risk, and we weren't making money from it. So to me, that's taking risk to get poor. We don't want to do those things. So I appreciate it. We're going to keep working on it.

That's great. Let me just circle back to this thing here. How many Scarlett's type of operations are out there in the space?

Gee, I don't know. I mean, Scarlett's type clubs, the new $15 million?

Yes.

50, 100, 150, I don't know. The problem is that none of the clubs do their data, so it's hard to tell. The data is not public. I didn't realize Scarlett's was doing as much money as they were until I got all their numbers, and they were doing considerably more a few years back. So I mean, there's more than we know about for sure. And we're starting to find out about a few more. And now that we've done an acquisition in that dollar -- that price range, we are getting guys with some bigger clubs that are getting older that are giving us calls and saying, hey, do you think we could do something on this club. I think there's a lot more clubs that are making $1 million to $3 million a year for sure that we can pick up for $3 million to $9 million, $10 million plus the real estate values. There's probably a lot more of those deals out there than the big Scarlett's deals. But I know there's more Scarlett's deals out there, for sure. I know a few of them, we've actually talked to owners that just aren't ready to sell yet. So we're definitely keeping our eye on it. I think the guys are getting ready. Hopefully, we'll be their first call.

I'm assuming with the Bombshells that you guys are being -- working on. I'm assuming all of them are out of the floodplains. So we don't have to worry about that again if there's another problem come a year from now.

Well, none of our Bombshells are flooded, that was the beauty. It did get right up to the doorsill on our southeastern location but nothing got in the building. Yes, I mean, where we are, we actually have flood insurance now because the new bank loan requires it on 4 of our properties and none of them are the Bombshells locations.

Okay. Do you see any limit to like how many Bombshells that you guys would actually be owner-operators of, as a head or...

No. I mean, I don't think we're going to do more than 3 or 4 a year. But at the same time, I don't think there's any limit to how many we can operate. I mean, when I think of the restaurant operations, there's a lot of restaurant management out there and a lot of guys we can hire to help us run restaurants. It's not as difficult. It's -- actually, it's more difficult and not as difficult. How's that? Because there are just so many more people. It's much more complicated business than our clubs are because of the food service and the quality of food and those types of things. And there's more employees, period, than, say, our typical club. But it's something we've learned over the last 5 years, and I don't think we'd have any problem. In fact, the more restaurants we have, I think, they become easier and easier to operate just like the clubs. And so if you lose a manager -- when you have 3 restaurants, you lose a manager, it's a 1/3 of your staff. When you have 30 restaurants, it's 3% of your staff, right. So you have plenty of other people to call on and step up when you're larger.

Our next question is coming from Steven Martin from Slater.

A couple of questions. The -- as you add the Bombshells, do you expect to get leverage within the Bombshells system because you're adding a high percentage of units?

We're already seeing that with some of our food purchasing. We're seeing some of that with our liquor purchasing, especially with the liquor combined with the clubs. So I would say, definitely we will pick up more and more leverage as we're selling more and more of a product and, hopefully, be able to negotiate better prices. And if we can't, then our menus may change up a little bit and we'll use products where we get that leverage. And definitely, I mean, we're paying a director of operations for our restaurants to oversee 5 restaurants right now where he can oversee 15 easily. And he needs staff underneath him, but I think that would indefinitely -- as we've done with the clubs, we'll continue to grow more and more free cash flow with less and less corporate overhead costs.

Great. And is there an update on the New York market? I know some clubs have closed and you had the 60-40 thing hanging around. What's going on in the New York market?

Everything is rumors. Like you said, it's fluid right now. There are clubs that are -- that have gone. I don't think anybody new is opening that definitely -- the city would definitely not allow that at this point on under a 60-40 deal. I've heard that they're going to give them until January, just coming up January to get in compliance through one group. And then I've heard another group say that city's going to do something sooner. I think their cases are out-of-court. And firstly, we're not involved in with legal aspects of it, so I don't know whether, from a legal aspect, where the lawyers are. I think they've got a federal case going now or something I've heard, a couple groups have -- or a couple of people have. But I don't know if that's the clubs or the bookstores or -- it's very hard to get information because everybody's being pretty hush-hush about it because obviously, they don't want competitors to know what's going on. So -- or their own employees and whatnot as well. I will say, I don't think that the 60-40s will -- 3 years from now, I don't think they'll still be around. I think they will, at some point, have to close their doors. The city definitely has got the legal power to do so. It's just a matter of now creating the willpower to do so.

Got you. And one last one. When you look out at acquisitions now that you're sort of refocusing, when you look geographically and by type, what are you thinking about?

We're thinking East Coast, of course. We like the East Coast better. We're definitely not looking much in California at all. We're not looking in Texas a whole bunch. We're trying to -- we're basically trying to get out of Texas. We like to build more brand recognition, more revenues in Florida. Florida is a great market for us even though Tootsie's is a big portion of it, I think we would do definitely more in Florida. But we're really looking all of them down the East Coast. We're looking in Central U.S. right now at a couple of smaller locations similar to the St. Louis type locations. But basically, we're looking everywhere. We do have some West Coast, western United States stuff on the table that we're looking at. But basically, right now, we're going to look at what makes the most sense as far as cost, ability to finance using some of our cash that we're getting a really, really good deal on it, we'll put up more cash obviously. But obviously, the less attractive a deal is, the less of our actual cash we want to put up because we want to stick with that. Whatever cash we put in, we want to make that money back in 3 or 4 years so we can turn around and do it again.

All right. And just as an aside, I think you've done a great job on managing the cash. And I don't think any of us have a problem with you sitting with a little extra cash while you're waiting for the right pitch to swing.

We're not really sitting on too much extra right now. I mean, even at $15 million, we're up to about $8 million to operating cash now with Scarlett's. Scarlett's is a big cash operator and the New York clubs are big. Of course, we have -- we own all of our ATMs. So there's several million of float in the ATMs as well. So I mean, you're talking about $7 million in extra cash so we get to $15 million. But we've got the $3 million balloon payment coming up in May, so we want to make that out of cash flow without borrowing money again. And I call that kicking the can down the road, so to speak. Basically, we've taken over Scarlett's, we've only got $2 million in Scarlett's right now. That's the thing that we made in November because we borrowed 100% of the funds to buy Scarlett's with, the (inaudible) million dollar debt payment we borrowed. And so it's time to build some equity up in Scarlett's a little bit. So we're making the free cash flow out of it. So basically, we're going to use that cash flow to make those balloon payments. And I like those types of structured deals because we get a nice look at those deals and the leverage is fantastic for us. And if we get into a jam, we've got the free cash flow to cover any of these type payments that would come up. Especially now if you look at the debt schedule, you'll see that everything -- or all of our balloons until 2022, I think, are related to Scarlett's, the $5.4 million and the $3 million are both Scarlett's related.

And I'm betting that some of those debt holders will be very happy if you extended it.

Yes, they will. I'm sure. It's extending them but I do see us -- I don't see us hurrying to pay them off either. We're just going to ride it out and pay them when they become due and continue to build the company.

(Operator Instructions) If there are no further questions, I'll turn the floor back over for any further or closing comments.

Thank you, Eric. Thank you, Kevin. We've included a couple of supplemental slides in our appendix. Slide 14 is our calendar, a few things coming up. For those of you who dialed in a little bit later, tonight you can meet management at Rick's Cabaret New York from 6:00 to 8:00. This is 50 West 33rd Street between Fifth and Broadway. If you haven't RSVP-ed, ask for me at the door. We'll also be providing tours of Hoops Cabaret and Sports Bar next door.

And as Eric mentioned during the call, on March 29, we're scheduled to present at the Sidoti conference in New York City. Registration is free for professional investors and we encourage our tristate area professional investors to attend our presentation or sign-up for a one-on-one. For those based out of town, we'd like you to consider it as a reason to come into New York City to see us and other interesting small-cap companies. To make it worth your while, we're also considering having a meet management that night at Rick's. And on April 10, we'll be reporting second quarter Nightclub and Bombshell segment sales.

On behalf of Eric, the company and our subsidiaries, thank you and good night. And as always, please visit one of our clubs or restaurants. Thank you.

Thank you. That concludes today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.