Earnings Call Transcript - RICK Q3 2020

Operator, Operator

Greetings and welcome to the RCI Hospitality Holdings Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman who handles Investor Relations for RCI.

Gary Fishman, Investor Relations

Thank you, Rob. Please, everybody, accept our apologies for the delay. We obviously used 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 to the Company and Investor info page. Scroll down a little and you'll find all the necessary links for this call. Please turn to Slide 2. I want to remind everybody of our safe harbor statement. It's posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterward. Now please turn to Slide 3. I also direct you to the explanation of non-GAAP measurements that we use. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Eric Langan, President and CEO

Thanks for joining us today. I'm here with our CFO, Phil Marshall, and our Controller, Bradley Chhay. I hope that everybody and our loved ones have been able to get through this pandemic so far and that you are following all the safety recommendations. After the market closed today, we reported our third quarter results for the period ended June 30th. Total revenues were just under $15 million. Keep in mind all of our locations remained closed in April, and a limited number were able to stay open during the balance of the quarter. We had a net loss of $5.5 million or $0.60 per share. Looking at operating cash flow, we were slightly positive. We ended the third quarter 2020 with almost $15 million in cash and $5.5 million in accounts receivable, including a large income tax receivable. Operationally, Bombshells was the star. The segment generated record revenue in May and June and quarterly operating margins that exceeded our original targets for all 10 locations. Nightclubs that were open performed well considering the environment. Most of our Nightclubs had to operate as restaurants with entertainment instead of our standard nightclub procedures, requiring all guests to enter to eat food in order to partake in drinking or entertainment. To give you an update on how well we're doing in the fourth quarter, we generated $7.6 million of revenue in July. We have 31 locations open today. Our subsidiaries have been able to bring back about half of our team members after these extensive furloughs in March. After more than five months, we’ve become more competent in managing our business and finances through the pandemic. We have been agile, innovative, and acted quickly. We believe we have made the company more resilient. While cash flows are not as we anticipated at the start of the fiscal year, the near-term outlook for our business remains strong. We expect to generate adequate cash flow from operations over the next 12 months. Please turn to Slide 5. It's important to understand the progress we have made over the course of the quarter. We have become very adept at opening locations, closing them when 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 month they were open. After the slower July 4th weekend, these trends have generally continued into the fourth quarter. Please turn to Slide 6. The Bombshells team has done a terrific job under extraordinary circumstances based on our performance starting in May. We are operating 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 announce that our operating margin hit 22.3%. This exceeds our 18% to 22% target range. I would also like to note this achievement was accomplished 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 Bombshell sites and using the proceeds to pay down debt and increase the potential return on capital invested. We completed this during the quarter for Bombshells I-10; we sold the second of two available parcels for about $1.5 million. This is after selling the first parcel for close to $1 million. As a result, we reduced our bank debt on I-10 nearly half and our total investment by more than one-third. Please turn to Slide 8. I would like to go over a few remaining items in our statement of operations. Cost of goods as a percentage of sales were higher due to a greater proportion of food. Salaries, wages and SG&A dropped about 50%. This reflects cost-cutting, partially offset by a month of no sales and added cost to protect customers and staff from COVID at our subsidiaries and offices. Other charges reflected $1 million of additional non-cash COVID-related impairment. This indicates we got most of it right in the second quarter and was partially offset by a gain on the sale of the Bombshells I-10 parcel. Bombshells had nearly $2 million in segment operating profit. Nightclubs had a $3 million segment operating loss, with about two-thirds of that non-cash. Interest expense was lower due to 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, three of our clubs, and equipment. Looking at the unsecured portion, 4% of the total debt is the SBA loan. This has the potential to be completely or partially forgiven, and 2% is the Texas Comptroller's settlement. So less than 10% is unsecured in the traditional sense. Please turn to Page 11. As we reported, during the first half of the fiscal year, we moved or have converted about $11 million in near-term non-realty balloons to out years or to amortizing loans to give us more flexibility. We have continued this strategy in the third quarter; we deferred approximately $2 million in bank debt servicing in July. We deferred the payment of $2.1 million in debt due in the fourth quarter. For additional flexibility under the Bombshells build strategy, we have one more parcel under contract for sale and parcels listed to be sold. Turn to Page 12. Here's our capital allocation strategy slides, most of this is how we looked at the world pre-COVID. We put this in here to show you that using excess cash to buy back shares is still part of our core strategy. We are currently looking to grow cash on hand to more than $15 million. Then we will be able to pick up with our capital allocation strategy. As we have been doing for the past five years, this will continue to be our way of allocating all excess capital for the foreseeable future. When more locations are allowed to open, such as our larger South Florida or New York City Clubs, we believe our cost structure and marketing should generate greater free cash flow even with potential capacity restrictions. Turning to Slide 13. To recap, we believe we have made the company and its operating subsidiaries more resilient over the last five months. Acting quickly and with agility, we have significantly reduced our cost structure and cash burn. We have retained key personnel and rehired many fellow team members. We have also gained a lot of competence and become much 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 2020 with a small but positive operating cash flow and ample staying power. In closing, we would like to give a special thanks to all our team members. I know I called out Bombshells earlier, but our Nightclub teams have done a terrific job. Everyone's effort, hard work, long hours, and dedication have been unbelievable. You are RCI’s greatest assets. Operator, let's open the call to questions.

Operator, Operator

Thank you. Our first question comes from Greg Pendy with Sidoti. Please go ahead with your question.

Greg Pendy, Analyst

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

Eric Langan, President and CEO

Well, we always said once we opened all the locations and we didn't have all the pre-opening costs, that our margins were going to be much better. We never separated our opening costs for the Bombshell segment because it was a small component of the overall company. So that's part of it. The other thing 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; you come in for food and drinks, and then you go someplace else to finish your night. Since those other places aren’t 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.

Greg Pendy, Analyst

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

Eric Langan, President and CEO

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

Greg Pendy, Analyst

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

Eric Langan, President and CEO

Alright, thanks.

Operator, Operator

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

Vadim Perelman, Private Investor

Hey guys. 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 started to implement your capital allocation policy and got aggressive in your share buybacks, the company was very different. You were doing something like $127 million sales, EBITDA was $34 million, you're earning about a buck a share, and Bombshells was nascent. Today, it's a very different and much better business, although we have this temporary disruption; so obviously, $200 million plus a post-COVID in sales and free cash flow, earnings power probably $4 to $5. Given that setup and given where the stock trades like a 30%, maybe even higher for cash-flow yield, is there anything you can do to take advantage of it while those are the facts on the ground? Well, when the market doesn't give you credit for what has obviously been a very resilient and very healthy business?

Eric Langan, President and CEO

Well, like I said, I think if we get Florida or New York open, that's going to drastically change. Or if we just get some of the other cities that were open, you know, Charlotte, Phoenix, some of our other states, Pittsburgh, and Chicago, we can get those locations open. That’ll change our cash flow. Basically, I think our run rate right now is probably cash flow neutral at about $1.8 million or so, so $90 million to $100 million can kind of cash-flow neutral as we get to the $2 million plus range. We start having positive cash flow, and we'll begin increasing our cash on hand per week. Those are per week set numbers. And 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 stock trades 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. I think 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 for a lot of these smaller operators out there. If they don’t survive, we have seen a lot of restaurant closings, saying they're never going to reopen. If we can be in a position to take advantage of that, maybe find properties we can lease and retrofit cheaply because they were already full-service restaurants. We can expand Bombshells that way. We can also look at acquisitions from clubs that are coming online. Right now I think in October, we're going after the Gentleman's Club Owner’s expo. I've got a lot of meetings set up with a lot of club owners about the future of the industry, their future in the industry, and how they can monetize their assets if they decide they don't want to be in the industry anymore.

Vadim Perelman, Private Investor

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

Eric Langan, President and CEO

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

Vadim Perelman, Private Investor

Thanks a lot, and a shout-out to the chief for doing a great job. Thanks a lot.

Bradley Chhay, Controller

Yes. Thank you.

Operator, Operator

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

Douglas Weiss, DSW Investment

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

Eric Langan, President and CEO

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, while service revenues will be down a little bit. 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, and 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.

Douglas Weiss, DSW Investment

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

Eric Langan, President and CEO

Yes, it does. Like the first two weeks of July were very trying. You've 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 as of today, we have 31 locations open. So yes, we are seeing it. In fact, we voluntarily closed a few locations if we had an employee that reported a positive test. We'd close the location for three to five days to get all of our employees tested. We were paying for rapid testing, so that's some of our increased costs; we pay for rapid testing so we can have instant test results for our employees. If no other employees test positive, once we are comfortable that we have enough negative tested employees to reopen, we'll get the location back open. They've come and gone with those types of things. But basically we've been very quick to react any time we've had incidences in our actual businesses. I think in the last five weeks, we're down to zero instances in our establishment. I think the mask mandates on both sides have really helped. I do believe the one side of the mask was an issue, and only employees were wearing them from day one. But we were not requiring it of all our customers. Now that all our locations require it from our customers, we’ve put a stop on any real issues at our locations now. So really, it's about the fear, right? If they create a big fear back, the media creates a big fear, then people start to stay home a little bit more. I'm seeing it on about a two-week cycle, news cycle, right? It's like a news cycle. The news cycle hits; business slows down a little bit. The news cycle gets old; people come back. 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 where people aren’t wearing masks and aren’t following social distancing, we can keep the new cases low and get everything back open.

Douglas Weiss, DSW Investment

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

Eric Langan, President and CEO

I think we're seeing a little bit of both. I think you've got some folks out there who are 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 struggling. I think some will make it and some won't. We're watching for that. We're going to look for opportunities that we think play right into our long-term strategy and go from there. I think October will be a real telltale sign for us as we look at the convention and see who's there and what they are saying. I talk to a lot of guys around the country pretty regularly; like I said, some are doing very well, some are not. I know a multi-club operator that has only five locations of his 19 locations open. 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. You're seeing it in the restaurants, gyms, hair, and nail businesses. You're seeing a lot of companies that are on the border that are just going to give up. I hope that most people can survive this, but we're going to be ready to do what's best for our shareholders and our company as opportunities present themselves to us.

Douglas Weiss, DSW Investment

Okay, all right. Thanks.

Operator, Operator

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

Steven Martin, Analyst

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?

Eric Langan, President and CEO

I would say most of the Bombshells are up 30% to 40% year-over-year. I can give you a particular club in Houston that is up about 100% year-over-year. It is amazing. Some of the clubs are down 20%, 30%, but they haven't been consistently open. The real trouble is very few locations have been consistently open. They've been open for three weeks, closed for two weeks, back open again, and we've had to consistently reinvent ourselves. We opened as clubs; now you can't be a club. Okay, we got to close back down. We close back down. We study our licenses and said, 'Oh, wait, we have restaurant permits.' Well, what if we opened as a restaurant that has entertainment? We start serving food; we require every customer buy food in order to be in the building; if you can't stand at the bars, how can we become COVID compliant with the new regulations? That’s really what we've done. I think that's what we've done a great job of getting 31 locations open; we looked at the rules and said, 'Okay, how can we follow these rules?' And can we follow these rules and be open and still make money, or at least make enough money to pay our employees and keep people working? We really, in the beginning, started out just trying to get people working again. I mean, we had 2,100 people that we laid off, plus about 4,000 entertainers that contracted with the company. Some got unemployment, some didn't get unemployment. I mean, it was a mess. We tried to do our best to get people back to work first. Once we got people back to work, we said, 'Okay, now how do we make money?' Because that's what we are in the business to do. So how can we do both? And that’s really – those were our two kind of marching orders: get people back to work; okay, now let's figure out how to make money with what we have. 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. As we move into October, November, December, hopefully we're open across the country, and we're back to our normal deal. Typically when we have a downfall, we have two off quarters, and then we get back to normal. I’m hoping that's kind of what we see with this. We have our off quarter; maybe next quarter is off just a little bit. Hopefully, by the first quarter of 2021, we can get back to a more normalized run rate.

Steven Martin, Analyst

So focusing on Bombshells for a second, you said a $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?

Eric Langan, President and CEO

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

Steven Martin, Analyst

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?

Eric Langan, President and CEO

Well, right now that case is in appeal. It's on appeal. The court, of course, with COVID is extending a million months for everyone to answer. So that case is going to be on appeal for quite some time. We are currently in negotiations for a settlement for the two quarters that we didn't pay. We'll probably pay that tax on a go-forward basis until such time as the appeals court moves forward. Originally, the plan was to not pay it because we thought we'd have an answer from the appeals court before collections would start. That just didn't happen because of COVID; the courts are not moving in a normal, timely manner. So we had to rethink our strategy there. We'll be paying that tax on a go-forward basis until the appeals court rules, and we’ll obviously try to get our money back. We’re paying under protest, so we have a right to a 100% refund if we’re successful in the appeals court.

Steven Martin, Analyst

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

Phil Marshall, CFO

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

Eric Langan, President and CEO

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

Phil Marshall, CFO

Well, we were open most of the first quarter, so probably four something in the first quarter and 180 something in the second quarter.

Steven Martin, Analyst

All right, thanks a lot.

Bradley Chhay, Controller

Yes, thank you.

Operator, Operator

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

Adam Wyden, ADW Capital

Hi, Eric, terrific quarter. And look, this is not surprising you've invested 20 plus years of 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. We look forward to what's to come. We think that there's many multiples of our money here and many years of compounding ahead. But a couple of housekeeping issues here, so just building on what Steve said, you had this one Bombshells closed, you are comping 30 to 40. We're reading articles that there were lines out the door with 50% occupancy. So when I parsed the numbers, you did about a 22% operating margin with nine clubs – sorry with nine Bombshells open at the end, with the entire month of April being closed, and then some off and ons with opening and closing and kind of whack-a-mole. Now, as it looks in Texas, the numbers are way down; it looks like you will get the 10th Bombshells open. When I kind of run the math, it 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 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 ever seen that movie, where Forrest takes the boat out and he can't catch any shrimp, then all the boats are crashed into the docks, and he comes in with Lieutenant Dan and he catches all the shrimp and goes and puts it into a fruit company. You've got 35% of table service restaurants and small restaurants closing. You've got the only game in town; lots of other things aren't closed. I mean, it's entirely conceivable that you could have a $20 million EBIT asset out of Bombshells. If you think about where capital and people to buy these things, 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 assured interest in the company's history; you have no corporate level debt, and none of the assets are cross-collateralized. I mean, what do you think is going on? I mean, it's borderline insane, the short interest and the market's valuation relative to just the sole value in Bombshells.

Eric Langan, President and CEO

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

Adam Wyden, ADW Capital

Let me ask you a separate question. I mean, just looking at Bombshells, right? If you guys can do a 25% margin, well, you're probably doing close to $30 million 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, look at Tootsies; you opened it up. I’m here in Florida now with my wife and son. There was a line around the block, and people used to go to Tootsies at 9:00 PM, and they were standing in line at 11:00 AM. These short sellers on Twitter saying they had this boogeyman short thesis; there was this kid who worked at Chevron, and he was buying put option contracts and saying, 'Oh my God, no one is ever going to go back to a strip club.' I mean, that's manure; the minute you open Tootsies, there was a line around the block. It’s ridiculous to say that these strip clubs don't have any value. I mean, 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 a war or to a franchise partner and say, 'We're going to value this at $200 million, $300 million, whatever it is, and we're going to sell you a 10% or 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 has 420 Hooters in the United States right now, right? How many military bases do you think there are in the United States? I mean, we could have Bombshells on every military base, right? Why not get a strategic or financial partner to take Bombshells nationwide while monetizing and allowing you to repurchase shares in the holding company? I mean, there's so much operating flexibility that you have, right? You have these knuckleheads on Twitter saying, 'No one is ever going to come back.' I mean, people are coming back. I mean, it's just a question of getting open. How do you think about doing something strategic with Bombshells?

Eric Langan, President and CEO

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

Adam Wyden, ADW Capital

So let me ask you something.

Eric Langan, President and CEO

Okay.

Adam Wyden, ADW Capital

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

Eric Langan, President and CEO

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

Adam Wyden, ADW Capital

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

Eric Langan, President and CEO

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

Adam Wyden, ADW Capital

And you don't even have rights. I mean, at this point, you've got proof of concept. I mean, you could partner with a private equity firm or someone who has 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've got kids buying put options and tweeting. I mean, it's disrespectful. You've invested 25 years of your life building this thing. The value of your real estate equity is worth more than the entire market cap is insane.

Eric Langan, President and CEO

I don't know the reason; it's pretty close. I think what happens is with this COVID thing, people misjudged what our business model would be like after the fact. Hopefully, they will start realizing that our business model is still solid, that people are going to come back to the clubs. They might be wearing a mask, but as long as their eyes work, I think they're still in pretty good shape coming to a strip club.

Adam Wyden, ADW Capital

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

Eric Langan, President and CEO

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

Phil Marshall, CFO

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

Eric Langan, President and CEO

Everything has to be absolutely perfect in a perfect world for that. We know there's no such thing as a perfect world. But I think somewhere in between where our original projections were and what you're talking are probably more realistic. One thing is for sure; we're doing better at the locations that are open compared to what they were doing pre-COVID. If we can keep that type of momentum going forward, everything is going to grow. We all know that when we do these big events, we do really high quarterly sales. Our margins drastically increase because the fixed costs are already all paid. Every time we generate those dollars at $0.60, $0.70 from every one of those dollars rolls down to the bottom line. That’s why we focus on each location maximizing the revenue each month, because that incremental revenue at the end of the month is very, very profitable revenue for us.

Adam Wyden, ADW Capital

Right. That’s the math, right? Just think about it this way: if 35% of table service restaurants and small restaurants are closing, right, and that manifests itself in a 10% same-store comp just in the nightclubs, right? If you have $40 million in Bombshells pre-COVID and $160 in sales in the nightclubs, and let's say you got a 10% same-store comp over two years. Your competition closes; you have a 10% stack comp, right? On a same-store basis, you're talking about at least $16 million in sales. 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 and admittance. The other thing that I was so impressed with in all of this is that what I call the clubs, people would tell me, well, when you charge a $20 cover, and now we're charging $50 to a $100, or making a bottle service. What business allows you to charge a $100 a night, take the cover charge from $20 to $100 or make the mandate to not get in on capacity unless you pay $2,000 for bottle service? It's incredible that top dollar of incremental comp; I mean it all flows to the bottom line. It’s the difference between this thing being a $60 EBITDA to a $100 EBITDA; that's incredible.

Eric Langan, President and CEO

It has definitely become a way for us to control the number of people at the door; but we still have lines. You don’t have to spend that much money; it’s just if you don't want to wait in line, you have to spend that kind of money. There are people who will spend that kind of money to avoid waiting in line. That's 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.

Adam Wyden, ADW Capital

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

Bradley Chhay, Controller

I appreciate it. Thank you.

Operator, Operator

Our next question comes from Max Ellis, a private investor. Please proceed with your question.

Max Ellis, Private Investor

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

Eric Langan, President and CEO

Don’t worry, lots of people did. Don't worry. I mean, I always believed in the concept; I wanted to prove it out to everybody, which is why we said, look, we're going to build these six locations. We bought those six locations over an 18-month period. There was a lot of cost involved that really hurt the margins. I understand from the outside it looks kind of crazy. But inside, our team really believed in that concept, and look, even we're amazed at the numbers that we're able to do at those locations right now. The lines we have sometimes at 5 o'clock in the afternoon, 5:30 in the afternoon, the line starts; it's pretty amazing. I went to eat there the other day, and they only had the two sections open. 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. I went up there and sat down; before I got my food, there was no seating left in that section. I was like, man, where did all these people come from? It is remarkable how well Bombshells is 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 we never envisioned this many people this fast every day, all day long. That team has been really, really putting in a lot of hours, and we really appreciate all the efforts they've done. They definitely bailed us out in this quarter.

Max Ellis, Private Investor

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 six-foot tall man who drowned in a river that was on average only five feet deep, which is, it doesn't matter how criminally underpriced the stock is right now; if you can't – if you get called out by any of your debt-holders, it doesn't matter if in five years it's worth $50 or $100; it matters, can you maintain the liquidity to see it through?

Eric Langan, President and CEO

As you will know, we have deferments for three months for April, May, and 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. We paid our June 30 payments. We paid all of our July payments. And we're paying all of our payments through August 15, which is our next – last payment. Our next payment will come due after that on August 30. We have asked for deferments from the banks, but have not received deferment letters at this point. But we are working on deferments starting for the end of October. We’ll do August 30, September, and October; and our next payment will become due on 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 those deferments. We’ll see how that progresses; 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've paid all of our payments; we haven't missed a payment yet. 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 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. Overall, I think right now we're in a good position. 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 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.

Max Ellis, Private Investor

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

Eric Langan, President and CEO

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

Max Ellis, Private Investor

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?

Eric Langan, President and CEO

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

Max Ellis, Private Investor

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

Bradley Chhay, Controller

Alright, thanks so much.

Operator, Operator

At this time I’d like to turn the call back over to Gary Fishman for closing comments.

Gary Fishman, Investor Relations

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

Operator, Operator

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