Rci Hospitality Holdings, Inc. (RICK) Q3 2021 Earnings Call Transcript

Greetings. Welcome to The RCI Hospitality Holdings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles Investor Relations for RCI.

Thank you. For those of you listening on the phone, you can find our presentation on the RCI website, click Company and Investor Information just under the RCI logo. That will take you to the Company and Investor Information page, scroll down, and you will find all the necessary links. Please turn to Page 2 of our presentation. I want to remind everybody of our Safe Harbor Statement. It is posted at the beginning of our conference call presentation. It reminds you that you may hear or receive Forward-Looking Statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterward. Please turn to Page 3. I also direct you to the explanation of non-GAAP measurements that we use. Lastly, I would like to invite everyone listening in the New York City area to join us tonight at 7 o'clock to meet management at Rick's Cabaret New York, Manhattan's number one gentleman's club. You can also tour its sister club Hoops Cabaret and sports bar next door. Rick’s is located at 50 West 33rd Street between 5th Avenue and Broadway, around the corner from the Empire State Building. If you have an RSVP, please notify Eric Langan or me at the door. Now I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Thank you, Gary. Everyone please turn to Page 4. Thank you for joining us today. I’m here with our CFO, Bradley Chhay. After the market closed, we reported our third quarter numbers. We had an outstanding performance. We reported record total revenues based on nightclub and Bombshell segment revenues. We also reported record free cash flow, strong earnings per share, and a high cash balance. As always, we thank our loyal customers, dedicated team members, and steadfast investors for their support. We are working to continue these trends in the future. Currently, 36 of our clubs and all kinds of our Bombshells are open. We are also continuing to work on all fronts on our growth initiatives. Last week, we announced a major agreement to acquire 11 clubs in six states and the six related real estate properties. We are now in the process of closing and preparing to integrate these new units. Bradley and I will talk more about growth later. Now here's Bradley to review the financials.

Thanks, Eric. And good afternoon to all those who tuned into the call. We reported total revenues of $57.9 million for the third quarter. Bang! That is up tremendously from the year-ago quarter, but also 31% from the second quarter of the current fiscal year, and 23% from the pre-pandemic third quarter two years ago in 2019. Consolidated operating margin was 32%. EPS was $1.37 compared to a year-ago loss of $0.60, and we had $29.1 million in cash and equivalents at June 30. Net cash from operating activities was $50 million, and free cash flow was a record $13 million, the highest quarter in the company's history, even after we paid roughly $4 million in income taxes. Please turn to page 5. Nightclub segment revenues, operating margin, and operating income were all up significantly year-over-year. The increases reflect the fact that we had 36 clubs open the whole quarter compared to the June 2020 quarter when we were closed in April and with a limited number of locations that began to reopen in May and June with restrictions. As a result, third-quarter revenues this year rose to $41 million. Operating margin expanded to 44.7%, and operating income increased to $18.4 million. Looking at the results from the second to the third quarters of this current year, revenue rose 33%, operating margin expanded an additional 10.7 percentage points, and operating income increased 75%. We believe this reflected 36 clubs being open the whole quarter versus 29 in the second quarter, the elimination of restrictions on our northern clubs by the beginning of June, a 46.5% increase in the higher margin service revenue primarily from our northern clubs, the ongoing return of our loyal customer base, and overall general consumer confidence. Please turn to page 6; Bombshell segment. Similar to nightclubs, Bombshell segment revenues, operating margin, and operating income were all up significantly year-over-year. The increase reflects the fact that we have 10 locations open the whole quarter compared to the June 2020 quarter when all Bombshells were closed in April and began to reopen in May with restrictions. As a result, third-quarter revenues this year rose to $16.1 million. Operating margin expanded to 27.4%, and operating income increased to $4.4 million. Looking at the results from the second to the third quarters of this current year, revenues rose 22.4%, operating margin expanded an additional 3.5 percentage points, and operating income increased 40.2%. We believe this reflected three things; greater brand recognition in our markets, more sporting events that attract the guests, and overall consumer confidence. Please turn to page 7 to review these items in our third-quarter consolidated statement of operations. Note that we elected to showcase the change from 2019 as opposed to 2020, except that 2020 was an atypical year due to COVID. Cost of sales increased slightly due to a change in the sales mix, particularly a higher sales mix coming from the Bombshell segment and a lower proportion of service revenues within the nightclub segment. Major line items such as salaries and wages, SG&A, and depreciation and amortization, all improved as a percentage of sales compared to the third quarter in 2019. This primarily reflected much higher sales and reduced accounting and legal expenses. Interest expense decreased slightly primarily due to lower debt balances. And lastly, income taxes as a percentage of sales were higher due to the significant increase in pre-tax income. The effective tax rate was similar in both periods. Please turn to page 8. We included this slide to highlight our record-setting quarter. In total during the third quarter, we achieved a record level in 18 of our 30 key performance indicators. These are marked by the green cells. They are revenues on a consolidated basis and for our revenues for our nighttime segment and revenues for our Bombshell segment, income from operations on a consolidated basis and for a nighttime segment. And third, non-GAAP EPS net cash provided by operating activities and free cash flow. Please note that we've included much bigger metrics of these metrics for the third quarter of 2020 and 2019 on slide 17, towards the end of the presentation. Please turn to page 9. We ended the quarter with $29.1 million of cash on hand, almost twice as much as we did in December 2019 quarter before the pandemic began. During the third quarter, free cash flow continued to grow sequentially to $13 million. As a percentage of sales, free cash flow also improved sequentially. Our free cash flow to sales ratio was 12% in the fourth quarter of last fiscal year, 14.8% in the first quarter of this fiscal year, 20.4% in the second quarter, and 22.4% in the third quarter. We use free cash flow as a percentage of sales to measure how well we're doing at converting sales dollars to cash. Debt declined by $4.8 million from March 31 this year. This reflected scheduled paydowns and the $2 million paydown related to our sold property. We are now at our lowest debt level in almost two years. As for current liabilities at $32.1 million, current liability continues to be in the general range for the last two years. Please turn to page 10 for our debt pie chart. Our secured debt now consists of 65.1% of debt secured by the real estate, 17.2% listed as seller financing. This is secured by the respective club to which it applies, 6.4% secured by other assets, and lastly, less than 1% is represented by the Texas comptroller settlement. This is secured by the businesses and assets related to the settlement. The total dollar amount is $1.1 million roughly. Our unsecured debt consists of 10.3% that is listed as unsecured and 0.1% represented by our one remaining SBA loan of $124,000. Please turn to page 11 to review debt manageability. Occupancy costs continue to trend in the right direction. As a percentage of revenue, they were 5.7% in the third quarter compared to 23.6% in the year-ago quarter and 7.5% in the third quarter of 2019. This is primarily due to higher sales in the current quarter. We have continued to reduce our weighted average interest rate. Over the last five years, it has come down from 7.53% in the third quarter of fiscal 2016 to 6.68% in the third quarter of this current fiscal year. Our weighted average interest rate is two basis points higher than in the second quarter of this year, primarily due to the fact that of the debt paid down in the third quarter that was lower rate interest, lower rate real estate debt. As we've discussed, one of our strategic initiatives is refinancing our debt. We continue to work with our bank to refinance higher interest rate debt and increase the length of our amortization. Now, let me turn the call back over to Eric. Thank you.

Thank you, Bradley. If everyone will turn to page 12, we continue to talk to new investors. So I'd like to review our capital allocation strategies. Our goal is to drive shareholder value by increasing free cash flow per share by 10% to 15% on a compounded annual basis. Our strategy is similar to those outlined in the book The Outsiders by William Thorndike. He studied companies that focused on generating cash per share and allocating that cash effectively to generate more cash. We've been applying these strategies since fiscal 2016 with three different actions, subject of course, to whether there's other strategic rationale to do otherwise. One is mergers and acquisitions, specifically buying the right clubs in the right markets. We like to buy good cash-generating clubs at three to five times adjusted EBITDA using seller financing, and acquire the real estate at market value. Another strategy is to use cash to grow organically, specifically expanding our successful Bombshells concept to develop critical mass, market awareness, and sell franchises. Our goal in M&A and organic growth is to generate annual cash-on-cash returns of at least 25% to 33%. The third action is buying back our shares when the yield on free cash flow per share is more than 10%. During the first quarter ended in December, we purchased and retired approximately 75,000 shares at a cost of $1.8 million. Please turn to slide 13. To further our M&A strategy, last week we announced definitive agreements to acquire 11 clubs in six states. The collective acquisition will be our largest and is anticipated to be accretive in year one. The locations expand our geographic footprint. They provide us with a major position in Denver with five clubs; they expand our position in the St. Louis market with two additional clubs and they provide entry into four new markets: Indianapolis, Louisville, Raleigh, and Portland, Maine. All the clubs are open and are well-established proven cash generators. Pre-pandemic and 2019, they did a combined $40 million in revenue and $14 million in adjusted EBITDA. We're paying $57 million for the clubs, $13 million for the intellectual property that results in a valuation of five times the clubs' 2019 adjusted EBITDA. We're also paying $18 million for the six related real estate properties. Payment will be in the form of $30 million in restricted stock valued at $60 per share, $26 million in cash, a good portion of which is likely to be borrowed, $21.2 million in 6% seller financing, and $10.8 million in 5.25% real estate commercial bank loan that we are working on. Multiple closing dates are anticipated. Based on our past successes, we believe our seasoned management team will be able to integrate the clubs using our time-tested industry best practices. And as I said in our news release, this is exactly the type of sizable transaction we were looking for. We believe the quality of the clubs, licenses, and locations enhance the value of the collective acquisition to us. Please turn to slide 14. There are two developments we want to tell you about. The first is Admire Me, a new social media platform we plan to launch that enables creators to post content and receive payment from their admirers. It's comparable to OnlyFans. We are looking to formally launch in the next fiscal year. The second is we have several properties for sale and under development. We have three properties under contract for sale in the Dallas-Fort Worth and Austin area. The total sales price is approximately $7 million. We're also working on other real estate land property developments. Please turn to page 15. We are continuing to execute on our growth initiatives. We continue to make progress on our efforts to refinance our real estate debt. We are just waiting on three surveys and a few final title commitments and zoning letters on the 46 properties that will be collateral on this loan. We are hopeful we will be able to close this loan relatively soon. Construction is underway at the first planned 10 Bombshells in Arlington, Texas, and our first franchise location in San Antonio. We're continuing to find other potential Bombshells locations. We are currently in negotiations on several other properties in the Dallas and Austin markets. Our goal is to build 10 new locations over the next 13 months. We also want to sign additional franchises and are in negotiation with several groups. Lastly, we continue to talk to other club owners interested in exploring opportunities with us. I look forward to telling you about some of the single club acquisitions soon. Our management and accounting, especially our employees at all the clubs and restaurants from our kitchen staff or our bartenders, wait staff, especially our entertainers. All of you are what make our company one of the best hospitality companies in the business. And our great investors are sticking with us as we continue to grow into a much larger and professionally run publicly trading company, especially those that have been with us through all the growing pains and continue to believe in our incredible team. I truly believe the best is yet to come. And with that, let's open the lines for questions. Operator?

Thank you. The floor is now open for questions. It looks like the first question is coming from Adam Wyden from ADW Capital.

Hey, everyone, great job on the quarter and getting this acquisition completed. I remember when Troy took his company private years ago after the recession, which was my first real experience in the adult entertainment industry. I was always intrigued by the unit economics. I'm glad you found a way to work together; both of you have built impressive businesses. It's exciting to see two well-managed organizations come together to create economic value. I noticed he issued shares at $60, and the transaction is quite beneficial, with a valuation of around 4 to 4.5 times EBITDA. However, I'm concerned that there seems to be a prevailing sentiment that these numbers aren’t sustainable, that there aren’t more clubs to acquire, and that you won’t expand more Bombshells. There’s a worry that the current $110 million in EBITDA might be cut in half. We are in unprecedented times and it's uncertain if some of these figures might decrease. Can you share how you view valuation and ensuring your cost of capital is correct? As you pursue multi-club acquisitions, having equity readily available will be crucial. Can you discuss your outlook on the business today and explain why you’re confident in its future? You mentioned wanting to be a genuine public company, and having gone through the growth pains, what gives you confidence that you'll achieve the typical cost of capital for a public company? You've established all the necessary systems that make it resemble a public company, yet it doesn’t reflect that cost of capital. I believe your growth potential will greatly depend on this factor, so I’m curious about your perspective moving forward.

Well, I mean, I think we did a very large acquisition. We paid top dollar for but we're getting some top locations. Remember, VCG used to have 20 locations; these are the ones they have left, the 11 they have left, because they've sold off the locations that were underperforming to service debt or get rid of debt and do the things they needed to do, to focus on their top locations. So we come in, we're buying some of their top locations, top cash generators, which was important to us. So instead of paying, typically we've been paying three or four times on our recent deals, this is a five times transaction, but it had the size force, and we were able to use some equity. I think that if you look at our evaluation, we're getting a little premium. We're paying them five, I think we're creating probably closer to six on our trailing basis. So we will also get upside when we take over some of their clubs with our synergies and some of the things I think we'll be able to do to improve pre-results at those locations. And I think at the end of the day, this is going to look much closer to a four times a year from now we'll look back and go, Oh, we only paid four times for the EBITDA that we picked up. So that's my thoughts on it. As far as how are we becoming a real public company, I think we're out of the crazy days of trading. I think we've gotten through the shorts, I think we've gotten through the growing pains and audit issues. Now with Friedman with us for this year, and then moving forward from 2018 and 2019 our corporate office staff is in the best shape it's been in. We're ready to grow. Our ERP system is now set up in a way that we won’t even realize that there won’t be any stress on the system at all. We barely even notice that there are more clubs the way that we set things up in the office. And as far as our management team goes, I mean, we've attracted some of the best in the business. Everybody's calling us right now.

Let me ask you a question now. Sorry to interrupt you. But I mean, if you think about how your lenders are financing you, you're able to buy real estate effectively financing it, depending on the property anywhere from 3% to 5%. Now, realistically, these real estate assets have operating businesses on adult entertainment. So to the extent that you're able to collect rent from yourself, you're basically the lender is effectively saying we're lending you money to buy real estate that's lending to adult entertainment. So like by that stretch of the imagination of the debt investors is smart enough to say, okay, this is the quality of the cash flows. Why do you think the equity investors are not able to underwrite to a similar cost of capital? When they're all they're doing effectively is buying these operating businesses with the real estate, right? I mean, if the debt is going to be, if the debt is going to trade at five, why should we trade at five?

I think we're having difficulty understanding why people perceive this as just a fluke, but I'm here to tell you that our July performance surpassed that of June. We're seeing continued improvements. Our northern clubs had excellent deals in July. New York is still slightly below expectations, while Chicago nearly reached an all-time high. The Minneapolis market is on the rise. In the south, we're up 2-3 points, which is typical for a summer decline, but there's no sign of a slowdown due to COVID or a reduction in consumer spending. The key reason for this is that many other operators are struggling with staffing issues. We have retained approximately 86% of our management team and nearly 60% of our total staff since 2019. In this industry, those retention rates are standard. Without COVID, we would likely have similar retention figures.

Let me ask a question. If you complete the Lowry deal and achieve your synergies, considering you achieved 20.4 in the quarter without everything fully operational, it seems to me that running the numbers suggests you're likely at 90-plus before Lowry is factored in. After incorporating Lowry, you're looking at another 20 of EBITDA. With the refinance, you'll see savings in free cash flow. If you consider the start of calendar 2022, this indicates a business projecting around 110 of EBITDA. Do you see a path to reaching 500? At 110, it feels more public, but at 500, it resembles a corporation. Is your plan to develop this into a corporation? If you set up all the necessary systems, you wouldn't truly encounter the public company cost of capital. Is your intention to grow this into a multi-hundred million cash flow business?

Yes, I mean, I think this acquisition shows that we can do that. Our goal is to grow at a 10% to 15% clip compounded.

That's organic without a deal.

No, that's not; we want free cash flow per share growth. To do 15% free cash flow growth when you're doing $1 you need $1.15 the next year, but when you're doing $100 million you need $115 million next year.

Okay, but you have been growing 15% to 20%.

Over 20%.

Lowry is the first significant deal you've made in a long time. While you've done some other purchases, you've mainly been operating without major acquisitions. Therefore, with Bombshells and future acquisitions, this 15% to 20% growth projection might actually be on the low side. That's your starting point, but it seems likely you could achieve more.

That's our minimum goal. We aim to under promise and over deliver. If I say 20% and we achieve 19%, there would be a lot of criticism. So, I prefer to stick with a 10% to 15% growth target and push for it, aiming for 22% to keep everyone satisfied. Currently, I don't foresee any challenges in our plan. With vaccinations, things are returning to normal. There are occasional new concerns, but vaccinated individuals seem unconcerned about going out to clubs or dining, and they don't appear worried about COVID. We are eager to resume our lives, and that's the sentiment in our clubs and restaurants. I believe this trend will persist in the near future unless something unexpected occurs. Based on all the available data I have, we will continue to grow and expand.

Great.

Well, look, obviously we own 10% of the company plus or minus. We're obviously on board. I mean, I would not have taken a position in this company if I didn't think that the combination of the acquisition strategy with the nightclubs, the organic growth strategy in franchising at Bombshells and now obviously, this is what we were playing for is obviously, if there's something that comes out this Admire Me, which you guys haven't talked much about. But I mean, obviously, we've seen the conflagration that is OnlyFans. And by definition, you have all of your adult entertainers if they can have another venue to go and you can work it and not to mention it also serves as lead generation marketing for your in-person. There's an enormous amount of synergies between Admire Me and your kind of traditional nightclub business. So obviously unlocking that value and intangible value you have in your enterprise, I think, is super exciting. So look, I am still on the belief that this is a 500 EBITDA for us, but this can be $8 billion, $9 billion, $10 billion in market cap. So look, Rome was not built in a day, but obviously, you guys are taking the right steps to build the corporation. So hopefully, we don't have other people on the conference call asking stupid questions about liquidity when our cash flow doubled through COVID. And we bought stuff.

I think we're going to get there. We just got to just stay the course and just keep pushing away on it. All right.

I'm going to hop off the call if someone else jumps in and asks something stupid. I'll be back. Thank you.

Okay, your next question is coming from Jason Scherer from Orchard Health. Your line is live.

Hey, guys, how are you doing?

Good. How are you?

Just want to say I'm blown away by the numbers that you guys just posted on the board. Didn't expect anything that high. Congratulations. Absolutely took my breath away. A couple quick things. First of all, debt restructuring. What do you think the timeframe is going to be on this?

We have been working on it. Unfortunately, we added a bunch of out-of-state seals; the title companies have all been overwhelmed. And they're very slow. I mean we turned this over to a title company on June the third, we've got our first product comes back two weeks ago. We're down to three survey requests, which if they told us in June we needed to, we've already had them done. But like I said, we just started finding out about the stuff about two weeks ago. There were actually five surveys; we've got two of them completed. We've got three to go. It should be wrapped up here soon. I'm hoping to close by the end of August. Worst case the second week of September. The first week will be hard because of waiver day, so I guess we get into the second week of September, but definitely before the end of this quarter, I'd like to get this $104 million building.

Okay. The other question is with the new club that you guys are making the acquisition of the employee mix that you have and independent contractors, can you give us an idea of what that is? 1099?

I have no idea. I mean that we can run it, but I mean we have a lot of entertainers. Some are employees in certain markets. Some are not; it depends on the market, some states and whatnot. So, I mean, I'd probably if I had to guess, I'd say we probably have in a given period, pre-COVID 10,000-plus contracted entertainers today. I don't know what the number is.

He is asking about the 11 clubs and the employee model.

I don’t know. I have not gone deep into the 11 club. I think that based on the markets that are in, no, I'd say they're all independent contractors.

Okay, next question being this is going to be 11 clubs, that you guys are going to start to chew through here. How long do you think this process would probably take to get them on the board?

Which I don't understand that?

Well, the 11 club.

All the transactions.

Yes. I mean, like how long do you think it will be?

We could start closing first deals. First deal could close as early as I'd say mid-September, maybe a little earlier. There are seven clubs of licensing, it'll be very, very quick on. There's one state that could take up to 90 days. So it could be, we could be looking at this August, so November to close on the final transaction. So I'm going to guess it's going to be a series of transactions starting sometime in September and running through November to close all 11, to close on all 11 properties.

I got it. So January, February, March will they'll all be on the books, probably.

I think they'll all be on the books in the next quarter in our first quarter of '22, maybe not for the whole quarter, but in that quarter for sure.

Okay, and then with this, such a purchase like this in the integration, do you guys think you can handle another big purchase or other club purchases if somebody came along?

We're acquiring some excellent management with this, considering they're generating $40 million in revenue. We don't buy businesses with the intent of replacing all the management. Our goal is to acquire companies that already have capable managers who are producing solid cash flow. We aim to implement our systems, educate their management on our best practices, integrate our point-of-sale systems, and introduce cost control measures to reduce their operating costs and boost EBITDA from $14 million to around $17 million. This is our objective, and it won't be effective if we have to restructure management teams at every location, which is not our plan. Therefore, we require existing strong management teams, which is why we choose to acquire businesses with capable management.

Can you tell me a little bit about Admire Me? How long have you guys had this concept out or how long has it been in the works?

We have been working on it for several months. We had people contacting us wanting to invest with them, do stuff with them. We kind of looked at the process and one of the groups that we talked to was pretty near and had a very similar concept to what we wanted which is basically see a girl on the internet and come meet her and in real life at the clubs or meet her in the clubs but be able to learn more about her or talk in her more on the internet basically. And so we think it was just a nice interrogation. And the other thing is I look at some of these other websites and other than like the big stars that are, I call them the circuit stars that are coming around and hitting all the clubs and have big followings, those people are real. I just think there's a lot of canned material and so I wanted something that's much realer for the customer. And like I said, it takes the fantasy world and the real world and gives you a safe place to demand to meet and the girls continue to build their business at the club level and the club girls can build an internet business as well. It's kind of a cross between the internet and the brick-and-mortar businesses that I think will do very well. It's a very inexpensive, relatively inexpensive venture for us; we're going to own about 65% of it. A lot of the setup and program was done. We're going to be hopefully launching beta here in the next quarter and hopefully launch full live sometime in early 2022. And we'll see how it goes. One of the things that we can add value with is to these big circuit stars that we can, we're going to own 50-some clubs around the country where we can go and give you 20 weeks of featuring to our top influencers on our website, which is something other people can't do for the big for the girls and the big stars to draw more of them in. So I think this has a lot of synergies that made sense, as we started talking about it and looking at it and saying this can make a lot of sense. And I think our total investment from now to go live is probably under a million dollars. Currently, I think we've invested about $25,000 in programming making some changes, but these are changes we wanted to the website to integrate our ideas. And like I said, we'll start the beta testing; we're in the process of getting the credit card processing to go live here soon. And once we reach those milestones, the rest of us just put it out there and see what happens.

Thank you very much. Got everything's fantastic.

Okay. Thank you.

Okay, the next question is coming from Darren McCammon from Cash Flow Kingdom. Darren, your line is live.

Hi, guys. It's Darren.

Hi Darren.

I was going to say.

How are you doing, buddy?

Good. Hey, any cash on hand? What are you comfortable with given COVID Delta going forward for cash on hand?

I mean, we are keeping $15 million - $20 million cash on hand. More than likely, I mean, we're sitting at $29. At the end of the period, I think we're a little over $30-something now, $32 maybe, or so $33. I have to go back and look. And when it gets that high, though, I'll have to look at it every day like I used to. I'm too busy trying to invest it. We've got access to debt financing still. Our debt is at a two-year low. Even with this new acquisition, because of the equity component on it EBITDA we're going to add, our debt to EBITDA ratio actually, I think, drop even with this transaction. So I'm not overly concerned. Like I said, $20 million - $25 million is probably too much. So $15 million, $20 million right now. We're generating over a million a week in cash.

I'm going to reiterate the same question as the previous guy. I'm sorry, my system is going in and out. Are you still there?

Yes. I'm here. I'm sorry. I didn't hear what you were saying. Something about the question from the last guy.

Yes. I'm just going to reiterate kind of the same question. Given that this is a pretty big purchase for you, I'm kind of wondering how long do you need for integration before you can really consider buying another big purchase.

We are considering another significant acquisition today. It's important to note that we began working on our current acquisition back in November, so it has taken us eight months to reach this stage with the definitive documents. If I were to start on another acquisition today, even with a faster process that could take four to five months to prepare definitive documents for a larger purchase, it will still require time. There is a comprehensive due diligence process that needs to be completed. By the time we reach the definitive documents, we will have already integrated this current acquisition. We expect the integration to be complete in the first quarter, with some additional work possibly extending into the second quarter. In around six months, everything will be fully integrated, and it will feel as if the acquisition was ours from the start. Our systems are now easily transferable; they work seamlessly together. The main task will be training the existing management teams to utilize our systems. We will upgrade their software and systems, and train them on how to operate it—all the fundamental elements will remain the same. Our systems enhance cash flow management, inventory control, cost tracking, and our national buying power helps to reduce costs. That's the value we add. Therefore, when we acquire and integrate, I anticipate this process will usually take about three to six months at most.

Okay, thanks for the additional color. That's all the questions I really have. I just like to say great quarter, and I really like the purchase too, fantastic purchase.

Yes, I mean, I'm very excited about the new locations. The Denver market is a fantastic market with unbelievable growth in Denver right now. I think we'll be able to go out there and do some great things in that market. And the other markets, some of those, they're the only club in the state of Maine, Raleigh, North Carolina capital city, just a great location as well. I think we'll do well there. Louisville is going to be a good market for us. We're excited about the management team there. And Indianapolis as well. So I mean, when you put it all together, it's going to be a good acquisition for us for sure. And I think it lays out the path for other big owners to go, I can do this. This seller wanted equity. They wouldn't we've had a hard time doing deals in the past because we just couldn't get them enough equity because he wants to avoid the taxes whether we know with the stock doing stock transfers and stuff. So it's about creating a tax benefit for the seller as well as an upside for RCI and our shareholders.

It makes sense to me. I think it also opens up other big purchases. So I think the great deal, congratulations.

Thank you.

Okay, the next question is coming from Greg Pendy from Sidoti. Greg your line is live.

Hey, guys, thanks for taking my question. Just wanting to shift over to Bombshells per se. before you've learned more and more about this concept over time, and I get that, but I think in the past, and this was well over a year ago, you put out this 19% to 22% segment level margins, and just kind of given what you've learned, can you kind of give comfort on saying even as things normalize, the higher end of that is more sustainable? And then also when you're talking to franchisees, I'm assuming they're looking at probably using the concept; they're probably going to go the lease route versus owning the real estate. That's just my assumption but, I mean, how are they thinking about it and kind of how are you framing it given the fact that the numbers are kind of all over the place right now?

We were looking at both. As far as what are the Bombshells numbers, I just knew that that because of all the pre-operating costs and reopening costs, and we were in government, we were basing everything on $5 million units. Our new units are closer to $7 million units, or higher. So we have to rethink the margins on those higher units. So as we expand, I guess it just depends on do we know if we're opening more $5 million units; we have a couple of $3.5 million units, or $4 million units, so we're at the end of the day it's going to depend on the mix of units and whether we're highly successful in picking $7 million units right. I mean, that's the real key right now. We've got to find the right locations. I've looked at a lot of properties that I'm very comfortable we would do $4.5 million to $5 million. It cost me the same amount of money to build a $4.5 million to $5 million across those $7 million units. So we're very focused on the demographics and the traffic needs of building these stores that will do $140,000 a week in sales. That's our focus right now. So that's what's changed. That's why the margins have gone from 22% to 27%. Is it sustainable? I don't see why not. I mean, maybe it's 25% or 24% sustainable number over the long haul if the sales mix changes for some reason or you remember Bombshells is now going on; they opened in May of '20 during the pandemic with restrictions. Unbelievable numbers, and we all kept saying there can we do this? How long can you do this for? I want to do this work? Why? I don't know, we're going on 18 months now. I mean, we're still doing the numbers. So I don't see a reason for a big drop-off in the numbers at this point. I think the brand is especially in the Houston market is an unbelievable brand in that market. There's name recognition. I mean, anywhere I go, people know Bombshells in that town now. And that was kind of the idea. When we built we said, Look, we're going to focus on one market, going to own that market. And then we're going to take the concept to other places. I think we've done that. And when people talk about, well it's Bombshell, anybody could build it sure. Anybody with $6 million can go out and build a store. The problem is, how many people are going out and building restaurants to be on a competitive nature at that price range? And if they don't spend the money they don’t have, they don't have what Bombshells has, because that's what it costs to build our concept and to do the things the way we do them. So I think we have while we don't have the motive of the adult clubs. I still think we have a cash, motor cost people money sort of amount of money, and they're going to have to throw an event, their concept, we're going to spend that kind of money on vendor concept. And so I think we've been very successful in our niche of what we do with Bombshells. As we expanded into the Dallas-Fort Worth market, we're looking to expand in Austin as well. And we're still working in Florida. It's just everybody in New York moved to Florida, and the prices went crazy. And I'm sorry, I just can't pay $8 a foot to lease a building. Even if I think it's going to $200,000 a week in sales. At the end of the day, the rent starts becoming 9%, 10%, 11% of revenues. And it's like, No, I can't; I can't do that. We'll just go stick with the model that we know. And we know it works, and will if those prices come back down to reality at some point at $60, I think we can make it work. Maybe we were looking in the high 40s in that market when we first got down there. And we were getting NOIs out, and we were getting close on negotiations. And I'm not kidding you. It literally seems like within a two-week period, the prices went up 50%. They went from 40 to 60 and then from 60 to 80 probably within a month from that time. And it's like, okay, let's just go back to Texas right now. We're looking in Arizona real hard right now. And we're really talking with franchisees, and know their markets and know their demographics. And we're able to teach them what kind of demographics they need. And we're running all the traps, and I think we'll sign up more franchisees here in the near future as well. And that's really we love that model too.

Right. Well, that's very helpful. Thanks a lot.

The next question is coming from Peter, he is a private investor, Peter, your line is live?

Well, I'm very disappointed that you've made me pull out 12-year-old spreadsheets.

I didn't make you do it. But yes, it's been a long time since they were public. I know, you were, I know, you guys were pretty big and instrumental in building their public company. So unfortunately, it's not the same company that it was when we tried to buy it in 2012. But the reality is, I think we're getting to cherry pick it now.

I just wanted to make a comment because I know all these clubs very well. With what I agree with you completely when you said it's going to be four, not five when I'm looking over my model and seeing what leverage is there and you have a whole bunch of really strong clubs in the Denver market and some of these other markets. They have good clubs, it should be very good. The question I wanted is when I look at similar kinds of industries, and a good example would be the automobile dealer industry. And let me tell you why I'm saying it's a similar thing. You'll have a lot of independence, a few small, you'll have five or six in the automobile industry, public companies in your industry you have one. You now have discussions of potentially new taxes coming that will make it less attractive if they pass for people to pass these kinds of assets on to their heirs. So one of the things I'm seeing in the automobile dealer industry is lots of deals. And I am thinking that there has to be a lot of people in your industry, who are calling you on a daily basis saying, I want to make the same kind of deal you made with Troy, am I wrong?

We're getting calls. Yes. I don't know if I'm taking them every day, but they're probably making them every day. We're getting lots of emails, texts; we're talking with brokers, we're obviously we want to get this one in; we're lining them up, so to speak down the road, give me a call. In two weeks, I'm calling in three weeks type deal. We're talking with people, we're looking at some of the, I'm calling it cherry-pick some of the someone-offs stuff, it's easy for us to operate close to our existing clubs. So like, that's very appealing to us or if we can find a deal where you can buy a home market like we did with Denver and St. Louis; basically, of the big clubs we now own three of the four, that's appealing to us to get that type of market presence makes things a lot easier for us. As far as we don't have to deal with what I call rogue operators, doing crazy things that get the input to the industry in a bad light or cause problems with local officials and stuff. We're not perfect in every market, but in most of them, we try to be so.

But going back to where Adam started, and I hope I'm not asking a stupid question I was going to get Adam, on my case. It looks to me that you could have the opportunity now using a combination of equity and debt in I'm leaving at Bombshells, but in the gentleman's club segment, to grow significantly faster than people are thinking, is that a reasonable point?

We understand the stock valuation and can begin to explore arbitrage opportunities. Reflecting on 2008, I made 11 acquisitions that year because our stock was valued at $25. If we consider that today's equivalent would be around $175, we recognize that faster movement is possible if the cost of capital decreases. At that time, our cost of capital was roughly 3% or 2%, making equity a practical option for us. This particular deal was nearly a deciding factor. I viewed the equity by considering that if we executed a significant transaction, the stock would rise, benefiting all stakeholders while maintaining the stock price at $60. We could view the acquisition as an interest-free loan over five years and potentially repurchase 500,000 shares, increasing our holdings significantly. I appreciate that analogy. I believe Steve’s concerns align with mine regarding securing larger deals; to acquire those larger businesses, convincing them solely with debt and stock may be challenging, as they demand higher valuations necessitating more capital. I agree with Steve about the opportunity to acquire smaller clubs, but I believe we possess exceptional negotiating leverage due to our unique ability to execute these transactions effectively. However, it's concerning that we haven't progressed with capital initiatives over time. Once we revisited the situation in 2008, it became evident that we traded at 30 to 40 times EBITDA. If you were trading at that multiple now, our stock could potentially value around 315, or possibly 175 at 20 times EBITDA, prompting a reevaluation of equity use at current price levels. I would be cautious about deploying significant equity at these valuations unless we acquire assets at a favorable multiple, which seems unlikely without a substantial price increase. I recognize that Troy's situation posed challenges, and although equity constituted around a third of the transaction, I believe the next 12 to 24 months will be crucial for the company in managing its capital. A stockholder once shared insights about the market fluctuations and how those risks can benefit investors. The company has demonstrated resilience during COVID, evolving into a growth-oriented enterprise and implementing strategies that align well with being a responsible entity. It's essential for investors with varying return expectations and risk profiles to recognize that our capital costs are significantly lower than current estimates. Over the next 12 to 24 months, it's imperative to remain highly responsive to our capital situation, maintaining awareness of available cash and considering our options moving forward. That's the easy part, right.

What?

I said that's the easy part. Buying back our stocks is the easy part. That is part of my job.

Yes. But we do got to find a way; I mean these conference calls are just Adam, Eric, Steve, it's the same cast of characters, right. I mean, we got to get guys like Fidelity and T Rowe Price and these large firms can know that RICK is one of these companies that consistently deliver results. I mean, if you think about it, your algorithm, your growth algorithm base and it fits the profile of most of these large kind of clubby institutional asset managers yet it's the same people talking on the conference call. So, my advice to you is I mean 90% of the time continue to do what you're doing but I think part of your strategy going forward is to kind of continue to go liaison hunting. And so, I'd love to see you guys get it to a point where you've got that cost of capital in your arsenal. And maybe in next conference call we have someone real on it. But obviously while the impressive results, Bombshells was a kind of knockout success, that was your brainchild, I have no reason to believe that Admire Me can follow suit. So, at some point people are going to have to value these assets. Me, hopefully before I'm 90-years-old. So, thank you again for the time, and I'll be done.

Alright, thanks Adam.

We have no remaining questions in queue. I'd now like to turn the call back to Gary Fishman for closing remarks.

Thank you, operator. And thank you Eric and Bradley. For those who joined us late, you can meet management tonight at Rick's Cabaret in New York from 7:00 to 9 o'clock at 50 West 33rd Street, between Fifth Avenue and Broadway. If you have an RSVP, you'd ask for Eric or me at the door. The next event on our calendars is our participation on Thursday, August 19th, at the Sidoti & Company Virtual Investor Conference. We'll be doing virtual 101s. Our presentation is at 12:15 PM Eastern Time. Registration is free for professional and retail investors. We'll issue a news release with the details. On behalf of Eric, Bradley, the company, and our subsidiaries: Thank you. Good night. Stay safe, stay healthy. And as always, please visit one of our clubs or restaurants.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation.