RCI Hospitality Holdings Inc (RICK) 2020 Q3 法說會逐字稿

Greetings, and welcome to RCI Hospitality Holdings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Gary Fishman, who handles Investor Relations for RCI.

Thank you, Rob. Please, everybody, accept our apologies for the delay. We use -- obviously, use a third-party vendor to set up the call, and we will do our best to prevent 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 through the company and investor info page. Scroll down a little bit, 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 posted at the beginning of our conference call presentation. It reminds you that you may, here, receive 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 afterwards.

Please turn to Slide 3. I'll 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?

Thank you for joining us today. I'm here with our CFO, Phil Marshall; and our controller, Bradley Chhay. I hope that everybody and their 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 30. 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 '20 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 who 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 -- their team members after these extensive furloughs in March.

After more than 5 months, we have become more confident on 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. Though 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 adapt at -- I'm sorry, very adept at opening locations; closing them if necessary, due to changes in 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 following all mandatory health and safety regulations, including masks, 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 experiencing 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 months they were open. After the slower July 4 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 at 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 point 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 reached while 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 Bombshells 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 2 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 1/3.

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 costs to protect customers and staff from COVID at our subsidiaries and offices. Other charges reflected $1 million of additional noncash COVID-related impairment. This indicates we got most of it right in the second quarter and was particularly -- or sorry, 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 2/3 of that noncash. Interest expense was lower due to paydown -- debt paydowns 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, 3 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 controller 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 deferred 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 sell and 4 parcels listed to be sold.

Let's turn to Page 12. Here's our capital allocation strategy slide. 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 5 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 COVID restrictions.

Turning to Slide 13. To recap, we believe we have made the company and its operating subsidiaries more resilient over the last 5 months, acting quickly and with agility. We have significantly reduced our cost structure and cash burn. We have retained key personnel and rehired many furloughed team members. We have also a lot of -- gained a lot of confidence and become a lot more comfortable managing our business in the age of COVID. We have learned how to safely open, close and reopen 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 '20 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 efforts, hard work, long hours and dedication has been unbelievable. You are RCI's greatest assets.

Operator, let's open the call to questions.

(Operator Instructions) Our first question comes from Greg Pendy with Sidoti.

I know Bombshells you've been learning as the process goes along. Can you kind of give us any insight on to why you think the margins were even above your expectations? Maybe some initiatives that you had put in place in the past are 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 preopening costs, that our margins were going to be much better. We never separated out preopening costs for the Bombshells segment because it was a small segment of the overall company. So 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, in the 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 someplace else isn't opening -- 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 just one more. I think in the past, you guys mentioned sort of difference in behaviors of the 40 and -- under 40 and over 40 crowd. Any changes going on, on that?

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

Our next question is from [Vadim Perelman], a private investor.

Great job managing through this very difficult period. I want to go back in time. So when I think about your 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 $1 a share, and Bombshells was nascent. I think it made like $1.5 million. Today, it's a very different and much better business, although we have this temporary disruption. So obviously, $200 million-plus post-COVID in sales and free cash flow earnings power of probably $4 to $5. So given that setup, and given where the stock trades, like a 30%, maybe even higher free 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 when 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, Charlotte, Phoenix, some of our other states, Pittsburgh, Chicago, we get those locations open, that will 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 -- or I mean $90 million to $100 million is 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 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 capital allocation strategy.

If our stocks trade 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 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 out to the Gentlemen's Club Owners Expo. I've got a lot of meeting set up with a lot of club owners to be -- to talk 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…

So along those lines…

I think we're going to see a lot of opportunities.

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

Yes. Well, basically, want at least a 2x. I think depending on high risk, I'd want a 3x cash on cash. So it's really 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 said, "Hey, I want to see about opening one 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 will help with us.

But I think we need a 2 to 3x hurdle rate. We've always said 2x if it's -- depending on the risk. I mean I'm going to assess the risk. 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 change and stuff that aren't going to reopen, there's a lot less competitive -- there's 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 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 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 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.

Our next question comes from Douglas Weiss with DSW Investments.

Right. Could you talk a little bit about -- I think -- as I think you -- 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 revenues will be up, but service revenues will be down a little bit. They're just different -- it's just a different model right now in this COVID 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 we've got to get our big locations open. We've got to get open in New York. We've got to get open in Florida, Chicago, Pittsburgh, Arizona. Those are the locations that are really affecting that service revenue right now.

Okay. And then on -- are you seeing any impact on a sort of day-to-day or week-to-week basis from COVID news? Because, I mean, obviously, it's been, I guess, would be the main market. Are you…

The fear is rampant. Yes, it does. Like the first 2 weeks of July were very trying. You got to remember, at 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've voluntarily closed a few locations. We would have an employee that reported a positive test. We'd close the location for 3 to 5 days. Get all of our employees tested. We are paying for rapid testing. So that's some of our cost increase as we pay for rapid testing, so we can have 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 location reopened. So we've come and gone with those types of things. But basically, we've been very quick to react anytime we've had incidences in our actual businesses. I think in the last 5 weeks, we're down to 0 instances in our establishments. I think the masks on both sides have really helped. I do believe that one-sided masks were an issue when only our employees wore masks from day 1, but we were not requiring it of all of our customers. Now that all of our locations require it of our customers, I think we've kind of put a quash on having any real issues at our locations now.

So really, it's about the fear, right? If they create a big fear factor -- media creates a big fear, then people start to stay home a little bit more. I'm seeing it on about a 2-week cycle, a new cycle, right? It's like a new cycle. The new cycle hits, the business slows down a little bit. New cycle gets old, people come back. And 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 masks and aren't following social distancing, and 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 are there clubs trying to -- some of your competitors are 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 -- that are 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 strategic strategy and go from there. I think October will be a real telltale sign for us as we -- throughout the convention and we see who's there, and we see what they're 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. A multi-club operator that I know very well that only has 5 locations of his 19 locations open, and he's struggling to make ends meet. But so far, he's making it. I think that's in any business, not just our business. I think you're seeing it in the restaurants. I think you're seeing it in the gyms. I think you're seeing it in the hair and nail businesses. They've seen 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 -- but we're going to be ready to do what's best for our shareholders and our company as opportunities present themselves to us.

Our next question comes from Steven Martin with Slater.

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 100% year-over-year. It's amazing. Some of the clubs are down 20%, 30%, but they haven't been consistently open. That's the real -- the real trouble is we -- very few locations have been consistently open. They've been open for 3 weeks, close for 2 weeks, open -- back open again. And we've had to consistently reinvent ourselves. We opened as clubs. Oh, 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. 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 that's -- I think that's what we've done a great job of at 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 and still make -- or at least make enough money to pay for -- 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 we're in the business for, it's to make money. So how can we do both? And that's really -- those were our 2 kind of marching orders. Get people back to work. Okay, now, let's figure 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 then 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 2 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 quarter is off just a little bit. And then hopefully, by that first quarter of '21, 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 $40 million to $50 million run rate. With comps at Bombshells 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 can duplicate the last 2 months for a 12-month period. We included April in the run rate because April -- but April was closed, so it had 0 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're saying we're a bar, that we can't operate as a restaurant. I think we have a hearing date coming up in about 8 or 10 days. So hopefully, we can be successful at that hearing to get that location back open here shortly, and then have all 10 locations open. So right now, we're operating on 9 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're 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 of negotiating a settlement for the 2 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 were 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 as 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 100% refund if we're successful in the appeals court.

And what are the -- what are your estimated -- what's the estimated amount you are going to pay or 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're closed, they're open, they're closed. So I can't tell you. I think this quarter, patron tax of $180,000 or something. It wasn't much.

Yes. The 2 quarters are about 670, I think.

Yes. Yes. Well, we were open most of the first quarter. So probably 4-something in the first quarter and 180-something in the second quarter.

Our next question comes from Adam Wyden with ADW Capital.

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 and away 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 1 Bombshells closed. You're comping 30 to 40. We're reading articles that their lines are out the door with 50% occupancy. So when I parse the numbers, you did about a 22% operating margin with 9 clubs -- sorry, with 9 Bombshells open at the end, with the entire month of April being closed and then some off and on with open and closing and kind of back for more.

Now as it looks in Texas, look, the numbers are way down, it looks like you'll 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 asset 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've 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 Lt. Dan and he catches all the shrimp and goes and puts it into a fruit company. I mean you've got 35% of table service restaurants and small restaurants closing. You've got the only game in town. Lots of other things are 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 work capital and people that 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 highest short 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're 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're -- we have a lot of businesses that comprise that adult entertainment business. And our real estate equity has been a huge source for us of being 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. We're going to take all of our non, basically, bank-financed properties and even some of our newer Bombshells properties as we sold off those additional properties, enroll it into another refinance, put on a new 20-year loan and save us another $1.4 million a year in cash…

Let me ask you a separate question. I mean just looking at Bombshells, right? If you guys can do a 25% margin -- you're really probably doing close to 30% on $60 million. That's before you 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 you look at Tootsie's, man. 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 Tootsie's at 9:00 p.m. and they were standing in line at 11:00 a.m. I mean these short sellers on Twitter are saying they had this Boogeyman short thesis. There was this kid who worked in Chevron, and he was buying put option contracts and saying, "Oh my God, no one's ever going to go back to a strip club." I mean that's horse manure, right? The minute you opened Tootsie's, there was a line around the block, right? So like it's ridiculous to say that these trip clubs don't have any value. I mean, (expletive), Tootsie's used to be like a Costco or something. That thing's probably worth $30 million, $40 million, $50 million just as real estate. You're 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 award onto a franchise partner and say, "(expletive), we're going to value this at $200 million, $300 million, whatever it is, and we're going to sell you 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 -- there's 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 a Bombshells on every military base, right? And why not get a strategic or financial partner to take Bombshells nationwide while monetizing and allowing you to repurchase shares in the holding company. There's so much operating flexibility that you have, right? Yet you have these knuckleheads on Twitter saying, no one's 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 stand-alone 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 to give it away because it's the golden goose right now. And I think we're going to sign up franchisees soon. We've been in negotiations before in the past with smaller guys. But now we're 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 who 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 open.

I mean would we take a partner to help us franchise and that has done it before? Of course. We'd 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 on our own, like we always do. It may take us a little bit longer. So if 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. Why? So like just looking at Bombshells -- 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 Twin Peaks 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 what -- everything -- every number works better, right? So…

Yes I think people got to realize that Bombshells is not a Hooters or a 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 risqué after 10 p.m. at night, but we're not quite so risqué during the daytime, other than during theme weeks. We do have theme weeks in the summer and whatnot where we get a little more risqué and competitive, and we cater. But basically, our Twin Peaks, Hooters customers only 20% or 30% of our business. The rest of our business is a completely different customer base.

So if you just -- in a vacuum, assuming you have the right strategic operating partner, 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 reason…

No. I think 300 was our initial target of -- we could do 300 Bombshells units in the U.S. without much overlap.

And you're doing that, right? I mean, at this point, you've got proof of concept. I mean you could partner with a private equity firm or someone who's 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% stake in Bombshells to buy back half the company? I mean why do you have these knuckleheads on Twitter shorting these things? You got kids buying put options and tweeting. 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. It's insane.

I don't know if the real state was that high, but 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're going to start realizing that our business model is still solid, that people are going to come back to the clubs. They're not -- they 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 0 effectively, right, with this 2-sided mask marketplace. You get the 2-sided mask going. You're good. No one's getting COVID with the 2-sided mask, right? And you've got a market where indoor dining has been open and people are 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 of EBITDA right there. You open up Florida, there's close to almost $20 million of EBITDA. I mean these are red states where there are low unemployment -- well, certainly Texas isn't Florida. But we've shown that we've been able to contain it. I mean even Florida is sloping down. I mean it's -- 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 2020, right? I mean which I think is a reasonable expectation. Yet…

We could open by September 30, hopefully. That's kind of been the internal goal. So everything opens by October first.

Elon Musk said he thinks there's going to be 0 cases by April 2021. If I just run the math and Steve's running, let's say, sales 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're 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 $55 million to $60 million -- probably close to $60 million of free cash on $80 million of EBITDA. I mean those could be the numbers with everything opened in 2021. I mean it's incredible…

Everything would have to be absolutely a perfect world for that. And 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 reality, where we should end up at, in my opinion. Look, one thing's 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's 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 increase because the fixed costs are already all paid. So every time we do those dollars, that $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 -- the 35% of this 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 million of sales in the nightclubs, and let's say you get a 10% stack comp over 2 years. So your 35% of the whole -- your "competition" closes, you have a 10% stack comp, right? On a same-store basis, you're talking about, call it, at least $16 million in sales. And like 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 this is that when I call the clubs, people would tell, "Oh, well, we used to charge a $20 cover, and now, we're charging $50 to $100 or making it bottled service." I mean what business allows you to charge $100 night -- take the cover charge from $20 to $100, or make the mandate, you 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 60 EBITDA and 100 EBITDA. It's incredible.

It's definitely a way for us to control the number of people at the door, but we still have lines. And 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 will spend that kind of money not to wait in line. And that has been 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.

Yes. 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 sort 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. Airplane -- 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's wearing a mask. The people out 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 bottle, it's just -- it's insane. I mean I don't get it. I don't think there's a single restaurant or tourism company that generated positive operating cash flow in the quarter. And now, you guys are doing a tremendous job, and I look forward to staying on a couple of conference calls and seeing this thing at $50, $60, $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, Adam.

You're welcome.

(Operator Instructions) Our next question is from [Max Ellis], a private investor.

Eric, congrats on the great quarter. If you had asked me 2 years ago, or if you had told me 2 years ago, that one day, Bombshells would save the nightclub segment, I would've called you crazy. But you really…

Oh, don't -- 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 6 locations. We built those 6 locations over a 18-month period. There was a lot of costs involved that 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 5:00 in the afternoon, 5:30 in the afternoon, the line starts. It's pretty amazing.

I went to eat there the other day, and they only have the 2 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'd 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 liquidity. And I think everybody knows the story of the 6-foot tall man who drowned in a river that was, on average, only 5 feet deep, which is -- it doesn't matter how underpriced the stock is right now. If you can't -- if you get called out by any of your debtholders, it doesn't matter if in 5 years, it's worth $50 or $100, that matters. Can you maintain the liquidity to see it through?

Sure. And as you'll know, we -- our -- we have deferments for 3 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, which 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 15th is our next -- last payment. Now our next payment will become due after that on August 30. We have asked for deferments from the bank, but have not received deferment letters at this point. But we are working on deferments starting for the end of October -- end of August or due 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 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 at different periods of time throughout the quarter. But we paid all of our payments. I think what's really important for you to understand is we have paid all of our payments that have been required to be paid. We have 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- to 60-day float with our legal teams. Basically, everything's 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.

We did -- in 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. 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 and 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. Fingers crossed. And I did not mean to imply that things are running tight. I just -- first, 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 for the -- we're in a really good spot right now. We're very confident in our ability in where we're at right now. So…

Yes. 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 restrictive for public companies, and it's just not our cup of tea. The PPP worked out for us for the Bombshells and our shared services company, and of course, the one night club that we own. We did not take any PPP money on any of our adult entertainment clubs at all just because we didn't want the controversy of it. And we'll -- 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 that's -- and as you can see from the Bombshells results, it's paid huge dividends for us.

Yes, absolutely. Well, that's it on the questions I have. I just want to say congrats on a 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.

Our next question is from Adam Wyden with ADW Capital.

Yes, just as 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, it isn't mortgage debt, it's seller note financed. And all of your lenders are saying, shoot, pay me whenever you want. It's -- 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 that you can, in theory, take your cost to 0. So like the fact that people even ask me about liquidity is borderline laughable, right? You have tons of cash, you have real estate that you can sell that's not like a Bombshells real estate that 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 Uncle Sam, I mean you're floating in cash right now. I mean you're fine…

We have many, many options. Yes, 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 you could, I mean, you could squeeze these guys like it's going out of style. I mean it's -- the question shouldn't be -- the question -- in my mind, the question shouldn't be -- it's like these guys on Twitter, they don't understand your business. They're 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 the thing down and take cost to 0.

I mean the better question is, where are you going to find the cash so you can kill these guys? I mean it's just -- 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…

I don't think that's what he was saying. He was just asking, that's -- like you said, that's the concern out there. And I said earlier when I was talking to you and this other -- I think they just don't understand the overall company. It's more complicated than a typical restaurant company who leases all 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 this refinance, 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 to…

Well, look, I think, look, 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. When you look at GM, I mean GM sold a stake in cruise for a huge number. And now they're 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 for it for a lot of years. So I'm not asking you to sell it on the cheap. I'm saying, look, you're in this weird kind of predicament where you got a bunch of knuckleheads shorting your stock that can't do algebra or accounting, who don't understand what you own. And the only way you can -- they figure out what you own is when you sell -- give it to them where the sun don't shine. And the reality 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 give you a royalty and they give you $20 million, $30 million, $40 million upfront. I mean you can skin this cat six to seven different ways from Sunday. The reality is that you built it. You've got the business. It's an incredible business. No one understands it. And now we need to start counting our money because you've got the cards. I mean the fact that the guy asked the questions right before us tells me this guy still don't get it. But that's fine. You and I can count our money. I'm not worried about it.

They're going to figure it. They're going to figure it out.

So we're strong. All right. Sounds good.

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, we'd 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.

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