Gary Fishman - Investor Relations Eric Langan - President and CEO

Frank Camma - Sidoti & Company Ishfaque Faruk - WestPark Capital Kevin Casey - Casey Capital Steven Gart - John Locke Darren McCammon - Proactive Financial Evan Tindell - Bireme Capital Terry Gardner - CJ Lawrence Steven Martin - Slater Robyn Banfield - Bancy Capital

Good day, ladies and gentlemen, and welcome to RCI Hospitality Holdings Fiscal 2017 Second Quarter Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Fishman who handles Investor Relations for RCI. Sir, the floor is yours.

Thank you, Kat. Please turn to Slide 2 everybody. Thank you. I want to remind you that our Safe Harbor statement is posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I encourage you read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. And please turn to Slide 3. I also direct you to the exploration of non-GAAP measurements that we use and are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area to join us tonight at 6 'o clock to meet management at Rick's Cabaret, New York, Manhattan's number one gentlemen's club and tour its sister club, Hoops Cabaret and Sports Bar next door. Rick's Cabaret is located at 50 West 33rd Street between 5th avenue and Broadway, around the corner from the Empire State Building. If you haven't RSVP-ed ask for me at the door. Now I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thank you, Gary. Good afternoon everyone and thanks for joining us. Please turn to Slide 4. After the market closed, we announced our second quarter results for fiscal 2017. We delivered another solid performance. On a GAAP basis, we earned $0.39 a share. That compares to a year-ago quarter when we earned $0.54, which included $1.75 million tax credit. On a non-GAAP basis, EPS increased 5.1% to $0.41 compared to $0.39 in the year-ago quarter. Free cash flow did very well. As of the 6 months, we've generated $10 million, nearly equal to what we did in the year-ago period, which again benefited from the tax credit. As a result, we are on track with our initial $18 million fiscal '17 target. We already reported some of our revenues, but I'd like to point out a few items. Same-store sales continued to be ahead of last year, up 2.7%. In particular, our high margin service revenues increased 7.3% year over year. Due to the disposition of underperformers in the fourth quarter of '16 similar to last quarter, total revenues were up less than 1%. In line with our capital allocation strategy, our share price has increased. We held back on share repurchases and renewed our focus on acquisitions in the second quarter of '17. This resulted in today's announcement of the purchase of Scarlett's Cabaret Miami, which we expect to meaningfully increase revenues, EBITDA and free cash flow. In addition, we announced April 26 acquisition of Hollywood Showclub cabaret and the real estate providing a low-cost entry into the Greater St. Louis market. Please turn to Slide 5. Our focus at RCI continues to be growing free cash flow. Thus our capital allocation strategy is critical. For those of you new to RCI, I'd like to take a minute to review the capital allocation strategy we've put in place going into fiscal '16. It is a mathematical formula that has fundamentally changed our approach to every decision we make and here is how it works. We have two major uses for cash. One is buying or opening new units. We target a hurdle rate of 25% to 33% cash on cash return to account for the risk of making a new investment absent an otherwise strategic rationale. Two is buying back shares. At $17 where the stock has been trading buying shares generates an after tax yield on free cash flow of 10.9%. As a result, at today's stock price, we are more inclined to find acquisitions that meet our hurdle rate and add to free cash flow versus buying back our shares. To be clear, this does not mean that we will stop buying shares. We certainly want to be prepared to step into the market aggressively should the stock price weaken or should the yield increases from our new acquisitions. There are two other parts of the strategy. If a unit is not performing in line with our strategy and efforts to improve it have not been successful, we will take action to free up as much capital as possible for more profitable use. Also, only at a much higher stock price does it makes sense on a tax adjusted basis to pay down our most expensive debt prior to maturity. Having said that, we are always looking for ways to refinance our higher interest debt at better rates. So please turn to Slide 6. This morning we announced the acquisition of Scarlett's Cabaret in Miami for $25.95 million. From a strategic point of view, Scarlett's is one of the best gentlemen's clubs in the country. It is complementary to our biggest club Tootsie's Cabaret Miami, which is only five miles away. And it significantly expands our position in South Florida, which has been a great market for us. Terms of the agreement, which has already closed, were as follows. We made an immediate payment of $5.4 million. We will make another $5 million payment in 6 months. For the balance we are giving the sellers 8% 12 year note that is fully amortizing. For tax purposes, the parties have elected to treat the transaction as an asset purchase, which under current law would enable us to lower future tax costs and enhance cash flow. From a financial point of view, we believe Scarlett's will become a major an immediate contributor. In physical size, it's the second to our largest club Tootsie's Cabaret. We anticipate revenues will rival Rick's Cabaret New York, our second largest revenue generating unit. And for the trailing 12 months, we estimate Scarlett's generated $13 million in revenue and $6 million in adjusted EBITDA. Based on these results and how we have structured the transaction, the club is expected to yield an initial cash on cash return in line with our capital allocation strategy. Please turn to Slide 7. Last month we announced the acquisition of Hollywood Showclub and other assets in the Greater St. Louis market. From a strategic standpoint, we saw this as a unique opportunity. It was a way to provide a low cost entry into another top 20 market and gain a foothold in the Midwest. Terms of the two agreements, which we've already closed are as follows. The first was $1 million for the assets of Hollywood Showclub, a 12,000 square foot venue currently in operation. The second was $3.2 million for three pieces of real estate, the Hollywood Showclub building and land, an adjacent property for opening another club and a nearby building and land, which we will either lease or enter into a joint venture with a third party club operator. From a financial point of view, Hollywood Showclub will be accretive, although it's relatively small. However based on financing the real estate, we anticipate the initial cash on cash return to be in line with our capital allocation strategy. Longer term, we believe we can grow the St. Louis market into another meaningful contributor to the company. Please turn to Slide 8. We also have five new units opening between this quarter and the beginning of next year. We have already opened two. The first was a Studio 80 dance club in Webster, the suburb of Houston. The first Studio 80 in Fort Worth is doing very well. The tables for Saturday nights are booked 6 weeks in advance. The concept capitalizes on renewed interest in music from the 1980s MTV era. The second was Foxy's Cabaret in Dallas. The first one in Austin is doing very well and Foxy's a late-night BYOB concept that is designed to attract a more upscale demographic. To be clear, Studio 80 Webster and Foxy's Cabaret Dallas are re-concepted units, taking advantage of an existing lease or real estate we already own. And then we have the 3 new Bombshells in Greater Houston area. The first open later this month will be on State Highway 290. It is designed to replicate the success of one of our top units located in another part of Houston. The next one is scheduled for August and the third for January of 2018. So please turn to Slide 9. Total revenues, total club and restaurant sales and same-store sales continued to outperform year-ago levels. Sales continue to benefit from positive trends developed in the second half of fiscal 2016. Revenue reflected a 2.7% increase in same store sales and a 1.5% increase from new units. In turn, this was partially offset by a 3.7% decrease from the elimination of under-performing units and the energy drink business in the fourth quarter of '16. Of note, higher margin service revenues continue to rebound making third quarter in a row of year-over-year and the fifth consecutive quarter of improvement. We expect these positive trends to continue in general over the balance of fiscal '17. Please turn to Slide 10. Non-GAAP operating margin was virtually level with year over year at 22.2%, compared to 22.7%. On the upside, gross profit margin continued to expand, growing to 85.6% of revenues, mainly due to increased share coming from higher-margin service revenues. We also saw an overall improved performance in our operating segments and had lower depreciation and amortization expense. On the other hand in preparation for growth through acquisition and new units, we added managers, recruited staff and initiated training programs. As the new clubs and restaurants come on line, we'll have the revenues that will go against these costs and we should begin to see increased operating leverage. Please turn to Slide 11. Here are the segment results for nightclubs. Sales were up 2.1% on one less club, while same store sales increased 2.7%. VIP spend continues to look like it has returned. We saw strong results from our 3 units in Minneapolis, even after the professional football season ended, Club Onyx Houston with Super Bowl being played in that city, and at premier clubs such as Tootsie's Cabaret in Miami, and Vivid Cabaret in New York. Non-GAAP operating income was up more than 8% with margin up 200 basis points. So please turn to Slide 12. Here are segment results for Bombshells. Revenues declined 5.5% on one less unit, although same store sales increased 3.2%. This continues to be pretty impressive considering most comparable change in the industry had soft result in the first calendar quarter. Our performance combined with the closing of the Webster unit in the fourth quarter significantly expanded bottom line segment results. Operating income increased more than 8%, while operating margin expanded 240 basis points. With regard to our franchise marketing program, we had an excellent reception at the Multi-Unit Franchising Conference in Las Vegas during the last week of April. It provided us with significant third-party verification of our concept. Operators from around the country liked our theme, design and economics, and the all-American, welcoming, female friendly approach. Most importantly, we developed some strong qualified leads. To support our marketing efforts, we produced a promotional video and brochure which are posted on our Bombshells franchising .com website. I encourage you to check it out and see what the concept is really about. Please turn to Slide 13. This slide reviews our cash generating ability. Adjusted EBITDA, this was down about $300,000 due to investments in people and training that I mentioned earlier. Free cash flow, at $10 million year-to-date, our free cash flow is actually up year over year, if you exclude the benefit of 2016's tax credit. Cash, at $13.2 million, cash was up more than 9% from December 31st. That reflects our performance even after payments of large routine tax bills in the second quarter. It also includes the sale of non-income producing property in January, net of paying down the related debt. And please turn to slide 14. Along with buying back shares over the past year, we have also paid off our convertible debt. As we reported on our last call, during the second quarter, we paid off the last tranche of convertible debt that we had outstanding of $400,000 seller finance note. This eliminated 40,000 potential shares. We now have no dilutive securities remaining in our capital structure. Please turn to Slide 15. Here's our long-term debt slide. There are three changes from the last quarter. Through the current mix of properties, the amount and percentage of our real estate debt declined slightly from the end of the first quarter. As I mentioned, we paid down the remaining balance of convertible debt, so that slice is gone. We looked at the debt slice that was labeled secured by the subsidiary stock and divided that into two pieces. The first reflects what is truly parent level debt, which totals less than $10 million. The second is non-real estate seller financing which is tied to the performance of the relevant unit or units sold to us. As of 03/31, the only finance we have like that was less than $10 million that related to Jaguars acquisition. Next quarter, you'll see the effects of three new pieces of debt, one of them temporary. We added $5.4 million to the parent company debt which we raised to help with the initial cash payment for acquisitions. This is from the issuance of 12% unsecured promissory notes that mature in three years. They pay interest only in equal monthly installments, with a lump sum principal payment at maturity. We had the second payment to Scarlett's of $5 million temporary on the balance sheet until the payment is made and then we'll have the Scarlett's seller financing. So please turn to Slide 16. Here we've updated our debt maturity schedule as of March 31. As you can -- you can see how it has become very manageable from our point of view. Annual debt amortization is around $8 million with a small $3.3 million non-realty balloon to take care of in 2019. And we have larger realty balloons in 2020, but based on the properties involved, we expect to be able to refinance or extend them. Please turn to slide 17 for our outlook. Our core plan for the balance of fiscal 2017 remains the same. Following through with what we started in fiscal 2016, we will continue our approach to capital location and everything that we do. Second half sales should continue to benefit from positive trend developed over the last 12 months. And the second half should also benefit from our two new clubs and our two new Bombshells and perhaps the sale of our first franchises. In addition, our recent acquisitions, in particular Scarlett's, should have a beneficial effect. In light of that I know that many of you want us to adjust our free cash flow target in particular. We plan to do that on our third quarter call. We like to operate the clubs for a little while before we commit to what we think the performance in the second half will be. In addition, during the first half, we sold one of our non-income producing properties at a price in line with our expectations. And during the second half, we anticipate the sale of some of the other non-income producing properties, although nothing can be pre-assured, we have three properties under contract. We expect the seven remaining pieces to generate an estimated $10 million. On behalf of RICK's management and our subsidiaries, I'd like to thank our loyal shareholders for their support. And let's open the line for questions, operator?

[Operator Instructions] And our first question comes from Frank Camma from Sidoti. Frank go ahead.

Congratulations. A couple of questions, first on Scarlett's, since it's so meaningful. The EBITDA percentage that you're kind of indicating from the adjusted trailing 12 months, pretty high, obviously in the north of 40%. So when you compare that to your base business, I mean, granted it doesn't have any corporate allocation or anything, so could you just talk about like how much -- is it much of a premium above your existing high end clubs? Can you just like talk about that from purely from a margin basis?

Sure. Actually, it's a little lower. If you look at Tootsie's at 24 million, about 11.5 million in EBITDA and then Rick's New York at about 14 million in revenues, with about 7 million in EBITDA. So I think it's a little bit lower. I'm hoping that we will see a little bit of expansion there as we come in. We should be able to lower some of the cost with our national pricing or with some of the alcohol producers, the beer companies and other national pricing that we get. So I'm hoping that will help some. And then of course putting some of our cash handling and cash management systems into monitor the cash handling I'm hoping we'll see a little bit better margins out of that.

Okay, good. I think it seems pretty well, like it seems like it's a pretty well developed club. And is it my understanding right that you wouldn't have much incremental corporate G&A, given the fact that you have a club relatively close to that location?

We should have none because we have been preparing to go back into acquisition mode for a little while, which is why the salary and wages were up just a little bit. And it's in Miami, it's close to our other location. Our Director of Operations lives down there. So it should be absolutely minimal cost, if any, at all to bring this right into the fold.

My second question is just on Bombshells. Since in the press release, the quote is and the possible sale of our first Bombshells franchises. So, are you kind of hinting that you're getting close on that? Is that what we can.

I would say, we've met with several parties. We are in the due diligence phase, they are in the due diligence phase. But we really got excited at the Las Vegas franchise convention. We got some very solid leads of some very solid multi-unit operators that run other restaurants, full service restaurants. And there is a lot of interest. So I think it just kind of shows us that we're on the right path and that waiting, long term that waiting for this right first and second candidates for franchisees is going to pay off for us.

How long would it take them from when they execute a contract or what do you expect from that to when they actually open their first restaurant?

Depending on they do a convert or they do a ground-up build, it could be anywhere from six to 12 months.

And our next question comes from Ishfaque Faruk from WestPark Capital, go ahead.

A couple of questions, your service revenues have been doing very well off late. Do you think they can keep up the momentum?

They typically slow down a little in the summer, but I think that right now the trend for the high-end spend is great. We're in May. We really won't know until about mid-June when schools lets out and kind of go to that little bit of change how it's going to be. But I expect if it slows down a little, I think it will still be up year over year, but it may not be as strong as this quarter. Typically our first and second quarters are our strongest quarters and then we slow down a little bit June, July through the end of September and then, April, May, June quarters are a little slower. But I really think that with the way the things are trending right now that October through March of next year are going to be really fantastic for us.

In terms of big club acquisitions, I know you guys just announced Scarlett's. Do you guys have like similar sized ones in the pipeline in the upcoming months? I know you guys have talked about it multiple times and many different places. Do you have like similar negotiations going in place?

We have several targets that we're looking at and talking with right now. It really will depend on how the stock performs here and how quickly we want to move forward and of course the negotiations on down payment and owner financed paper, because obviously depending on how much cash we need. I think we have the ability to raise whatever cash we need if we could bring these in. I think most of the models are going to be better or similar. I don't see us paying more than four times for anything. This deal was basically a four times deal and then we cover some of the expenses associated with the -- they had to recapture depreciation in order to consider the stock purchase and asset purchase for tax purposes. And so we covered some of those cost worm which brought the price up a little bit, but it will save us a lot of money over the next 15 years.

And our next question comes from Kevin Casey. Kevin go ahead.

Couple of questions. First, Scarlett's, Can you talk about the different clientele from your other location that's kind of close to it?

Tootsie's Cabaret is more of like a vivid, from the New York standpoint, more of a Vivid type, more blue collar clientele, where the Rick's New York is the upper-end clientele. Scarlett's and Tootsie's are very similar to Vivid and Rick's in New York, at least Scarlett's has a little more upscale clientele, where Tootsie's…

And then can you talk about, is there any performance metrics on the seller note where it would change certain milestones?

No, it's a straight up 12-year amortization based on 4x trailing 12-month adjusted EBITDA.

And then the focus in the pipeline and acquisitions, did that increase? I know you're very focused on that at the last trade show and did these, the two acquisitions in the quarter come about because of that or at least people you have been in talk with for a long time?

Well, we've been talking to, the St. Louis deal is definitely because of the stock price going up. What we really got interested is the stock price broke to 13, we really started realizing that we can find the right 3 times multiple deals we should be looking at them instead of continuously keep buying back more and more stock. The stock was, we still think the stock is cheap, but when we can get a 3 times EBITDA deal there. And we've definitely been looking at some of the larger acquisitions like Scarlett's. We've said all along, we want to buy premier clubs, we want to buy some of the top clubs and I think Scarlett's definitely one of those. It was very, very well ran prior to us buying it its operation for a long time at a great reputation. And I think it's just a fantastic fit for us being in that South Florida market.

And then is there any competition in buying the assets?

I'm sorry?

When you look at future acquisitions, is there any competition, other buyers?

I'm sure there's people out there. I don't know that they have cash. I don't think they have the track record we have. I think that's, we have a distinct advantage but I would never say there is no one else out there. I would just say that right now I think we're the preferred acquirer. I think that the guys are looking to sell their clubs, especially they are trying to create annuity, which is almost the only way they can sell. It's nice having a public company behind that annuity, especially with strong cash flow that we have.

And our next question comes from Steven Gart from John Locke. Steven go ahead.

Congratulations. Those are nice results. Having followed the company for about 12 or 13 years now, there's been some challenges when you've gone big on the acquisition costs. I suppose the nip and tucks you have proven really capable of integrating well. Now, I guess you are a lot bigger now. I guess Florida is also a market you know pretty well, but do you foresee any issues with this acquisition that you ran into with Vegas, anything on the regulatory front? And I am actually curious if it's already run so well. It seems like you're getting it at a pretty good price, now this might be market price but where are the current owners aging and if they wanted that annuity to exit?

There were 3 owners. I think, they all had different reasons for running out. I know the main guy that we're doing is going to, spends most of his time in Bahamas now. I think that as far as a Vegas style transaction for us. This is nowhere near of Vegas style transaction. Vegas was a very competitive market where South Florida may be competitive, but it's still grandfathered licenses. There is not much risk of new competitors. It's solid freeway location. You've got the casino expansion going on, the new tower will open in 2019, which is right up Hallandale road. I mean from that standpoint, I don't think that this ranks like any other acquisition that we've ever done other than Tootsie's. I think it's just such a rock solid market, it's got such a long history. One of the things with the Vegas transaction was they only had about three years history. I think what we're looking for now are, like I said, grandfathered locations with long operating histories and solid year after year cash flow generation.

All right. Thank you. Good luck with it.

Thank you.

And our next question comes from Darren McCammon from Proactive Financial.

You've answered some of my questions, but I got some housekeeping here. So the Scarlett's -- how I pronounce it, is it [Scarlott]?

Scarlett's, just Scarlett's Cabaret.

Okay, Scarlett's. So, Scarlett's, did that happen after the quarter was closed or before?

We just closed this morning or yesterday. So, yesterday afternoon, about 4 o'clock.

Okay. So you had $13.2 million in cash, when the quarter closed. The 5 point something million that you gave them, you took on debt for that or used cash?

We took on debt for the $5.4 million, because we used $4.2 million to close the St. Louis transaction on April 26th.

So, you're probably around $10 million now, something like that?

Yes, say somewhere around that. I'd have to pull it all out. Give or take $0.5 million, we're in the $10 million range in cash on hand.

Okay. That's where I was trying to get. Okay, thank you. And --

It would bring the $2 million back when we refinance the property. We're going to get a bank loan against the real estate in St. Louis. We paid cash for ease of closing the transaction. So it will take about 90 days or more to get the appraisals and everything that go to get the bank financing on that property. We're in the process. We're starting that process.

I'll make it $12 million again. And so you say you have other deals in the pipeline at 4x EBITDA?

We have deals that we're looking at between 3x and 4x times, some maybe a little under 3x.

Do you feel like you have access to cash to continue doing this?

We raised $5.4 million with a few phone calls. So I mean -- I think if we need -- from a debt standpoint, absolutely. From a free cash flow generation standpoint, obviously we've got to come up with $5 million. I don't want to borrow the $5 million for the second 6-month payment. I want to paid that out of cash flow. We are not going to look at equity at all. But I think right now with this transaction and the Bombshells, I'd just say we are at $34 million EBITDA on a trailing 12-month run rate, this adds $6 million and puts us at $40 million plus. I think as long as we stay at 3x EBITDA on our total debt then I'm comfortable with using debt to continue to do these types of deals.

That answers that question. So on the Scarlett's deal, you didn't buy the real estate, that's kind of a departure for you guys. Why is that?

Well, they have a 21 year lease. It's at a great price. We did talk to the owner about buying the property. We valued at one value he's got a little higher value on it. We have 21 years to sort it out. We didn't see any need to press the issue at this point. We've had to come up with 20% down payment on the real estate to get the bank financing or 25%. So we'd have to come up with more cash up front. With 21 years, it just didn't seem like the right timing to pursue the real estate. And I guess that we've got a long term block in lease. The grandfathered licenses is RCI Hospitality subsidiary, the only one that can operate a club there under the license. So we're pretty confident that we will work that out with the landlord down the road.

Okay. And, but the landlord is the seller of the club?

No, the landlord is not the seller of the club. No, it's a third-party landlord.

Okay. Also, I think you already answered it, but I'm just going to go ahead and ask it anyway. You've already done $10 million in the first half by my calculations, Scarlett's, is going to do another $1 million a quarter. I think the $18 million is a little low.

Yes, but we're not prepared to give you a new number yet. So we're going to continue to use the $18 million for our purposes right now and we'll probably -- we plan to adjust that for sure by August 4th and we may internally adjust that a little sooner, as we start seeing results from June and July. But I think we'll have our nice solid idea of where we're going to be. Given where we have our Bombshells opening at the end of this month, we just did the St. Louis location. We've got 2 new re-concepted locations that are open. So it's just really hard to kind of come up with a solid number. We know we've got a range in mind, but we don't have a solid number at this point. And we don't want to speculate what that number is going to be until we have a little more information. Definitely by August, by the next conference call, we will make the adjustments and probably give an estimated, go forward run rate as of August that will give you some insight into 2018, as well.

Fair enough. That's a good point about the other stuff you've got opening. Again, great quarter guys and at 4x times EBITDA, great purchase.

And our next question comes from Evan Tindell from Bireme Capital, Evan go ahead.

Congratulations on the deal.

Thank you.

One question I had was, it looks like Scarlett's got sued the couple of years back by the dancers, like -- the headlines said it was like a $6 million settlement having to do with whether they were contractors or employees, et cetera. Is that -- I think that issue is in the past and the dancers will have a similar kind of -- similar setup to your other clubs. Is that how you guys are looking at it?

Yes, they had the same issue we had back with Rick's New York. It's been handled and settled and they have treated the entertainers in a -- and the contract is going forward with contracts that we think are protective, very similar to the ones we use. And we're also indemnified from any claims prior to us taking over. So, we don't believe there's any risk there for us.

Okay. And when you said the South Florida market is a grandfathered market, does that mean basically -- does it mean that they haven't been granting any new licenses for a long time but Scarlett's is grandfathered, and basically?

Correct. It's actually -- they actually have a settlement agreement from a lawsuit with the city and it was modified to include also the operators as part of this transaction. So, we're very excited that to be able to -- to go in and build a purchase dislocation and bring our management team along with the management team that's existing there right now. So we really don't -- I mean, we really don't see us changing a whole lot, other than not being actually the owners. So I think the owners who were kind of asked as of late, I think they've made up their mind to sell awhile back. Do some minor remodeling, new carpet, update some chairs and some other stuff, it's just basic maintenance that has been -- probably let go a little longer than it should have been, as the owners were looking to sell. So we'll get all that stuff back up and have a first-class operation there.

It's actually not -- it's illegal to open, basically another company would not be allowed to -- not just operate Scarlett's, so like what would be the process of another --

Well, they have a new -- they have an ordinance in town that our settlement agreement, I think, exempts us from. I have to look at the whole situation. But it's very difficult, I'm not saying it's impossible, you might able to find a location. But I don't think you're going to find a location on 95, at Hallandale exit or anywhere you know. This is economically viable is this location.

And how does -- you guys have data on -- you have to look at like how they perform during the financial crisis like '07, '08, '09, that time period [indiscernible] performed pretty well. I mean that's one of the good things about your guidance.

Yes, I don't have their numbers, but I have ours from Tootsie's. We've only looked back about three years at their numbers and we're very confident that they will have no problem continuing with at least 13 million of revenue and 6 million in EBITDA. And we're hoping to expand on that a little bit, which we will have a better feel for by August.

Okay. And the seller financing -- 8% or so in financing, I mean that sounds like given the multiple you guys are paying and everything it sounds like not a bad deal. But did you guys consider -- or it seems like a good deal, actually. But did you guys think about or talked to any banks about just paying them in cash and maybe getting bank financing for that $50 million or is that just too much for the banks to start address? What do you guys think about that?

I don't think the banks are prepared to finance our clubs yet. We do have banks finance for the Bombshells, for our restaurants and our real estate. Now in fact, we just did a deal -- just closed a deal on the Bombshells in Pearland where we're financing 80% of the construction cost in FF&E. So I think we're getting there, but I don't think we're ready for the banks just yet to finance the club acquisitions for us yet. I think that's still -- there is still some headline risk there for them and I think they are still trying to get away from that. I think as we continue to grow and our cash flow gets stronger and stronger, if nothing else, we'll start tapping more of our real estate equity and using that real estate equity to make the acquisition of the clubs with. It's one of the -- one that's we're looking at right now.

That's probably one of the reasons why you guys can buy things at 4x EBITDA because the banks won't finance you guys or anyone else?

This is a high-priced deal for us. Three times to our typical purchase price. In fact, most of the offers we go out and make are at three times. This was a very unique situation and with the owner financing component it made a lot of sense even at four times for us on a cash-on-cash return basis. And so we were comfortable making it four times, especially with the licensing situation in that market. So it's a unique market for us as well.

One more question. At first I was looking at the breakdown of the segment's operating income, and it looks you guys had the kind of general corporate expenses were, I guess, negative 3.5 million versus the negative roughly 2 million last year's quarter. And operating income overall was pretty flat. I was just wondering was there kind of a move of expenses from the night clubs segment to the corporate segment? It looks like that might have been the case or was there any particular thing you'd call out?

We're working on an ERP system which adds a bunch of cost and also we moved into our new corporate office, which was moved from a 9,000 square foot building to a 39,000 square foot building. We're basically had about 150 feet per employee in our old office. So we definitely had to remedy that.

And our next question comes from Terry Gardner from CJ Lawrence. Go ahead.

Eric, just two questions, confirming on Scarlett's. One is 21-year lease on the property, that's 21 remaining years?

Yes , that's 21 remaining years.

And then it's an all-cash deal you wouldn't consider using any equity as part of the transaction.

No, we are not using any equity at these multiples. Our free cash flow yield on our equity is still 10.9%. So when you take the interest deduction that we get from financing at 8% it's just so much cheaper money to use debt than equity right now.

Sure. And then finally on Scarlett's. With the two clubs fairly close together, yes they are different brands, can you just discuss maybe what type of cost synergy you get out of having two facilities located so close together? Is there a potential that EBITDA climb just based on some cost benefit of having that geography so close?

Sure, we won't pick up any oversight management cost because they're so close. So there is no oversight management cost. I think we're going to pick up, like I said earlier, our national pricing so we'll get national pricing from our soda vendors, our liquor vendors, our beer vendors, which will help lower cost. I think we'll get the marketing budgets that we have, that we were able to go to radio stations and buy cheaper time because we're buying for two locations, instead of one. It has always worked very well for us, especially in the Dallas-Fort Worth market, having multiple locations. So we'll get those types of synergies. But the main thing, this club is already very profitable. So any incremental savings goes straight to the bottom line.

And then finally, just if you could remind me on the Bombshells slide you're down one unit versus last year. What was the circumstances surrounding the reduction in units? I know you're going to be opening new ones. But why did you go from five to four.

The second unit we open, we opened it in a B location and it was before we really move the restaurant business we were kind of still -- towards the gentlemen's club business and we thought, oh, these restaurants are just like the gentlemen's clubs, we can make them a destination location and we got really good rent and we learned really quick that restaurants are not necessarily destination locations. And they do much better when we're surrounded by other restaurants in the class A restaurant type environment. So we just decided that we weren't making money in that location. It was not something that was long-term going to be a successful restaurant for us. We only had a five year lease. We had 19 months left on it. It was cheaper for us to close the location than it would be to continue to operate it and since we had to pay the rent for the next 19 months anyway and Studio 80 was doing so well for us in Fort Worth our managing partner up there came down and kind of looked at and said, Hey, I think this west location would be a great Studio 80 and was relatively inexpensive to reformat it. I think around $100,000 to reformat. So we just reformatted it and reopened since we had to pay the rent anyway. And we're able to take off the furniture and fixtures out and use them in the Pearland location. So it saved us money there.

Our next question comes from Steven Martin from Slater. Go ahead. Steven L. Martin: Can you talk about what you think the new Bombshells are going to look like in terms of revenue? I mean it seems to be doing about $1 million per or $1.01 million per quarter per unit.

Yes, I think they're going to be very similar. The 290 location I think is going to be a rock star location for us. We've expand the patio there with a little about 3,100 square foot patio, incorporated giant oak tree that was on the property into the patio. We covered about half of it so we get use of it even when it rains and really it's just been a fantastic kind of -- we are taking everything we've learned from other ones and put it into this one. It's a ground-up build for us. Even though it's a land lease, we decided to go ahead and spend the money and do a ground-up build here. It's before we had the bank financing for the restaurants. But I think it's going to be a fantastic location for us. [indiscernible] location I think probably going to be an average $4 million restaurant for us. And then the I 10 which -- the third location, which won't open till January, I think based on the demographics is going to be another fantastic location for us. What we've learned on the restaurants is, we don't have to open up basic restaurants. We are swinging for the fences on every one of the ones we're doing right now because we know what the demographics of our restaurants are now. We know where we do the best with the best demographics. And so those are the locations, we're looking to open and we'll just go to a new market versus going into a location that we're not 100% sure of.

Can you talk about the Texas market and the related oil patch issues? I know you had some troubles when oil turned down and what is that looking like today?

Yes. We had trouble in Longview and Odessa. We've bottomed out in Longview. Odessa has been coming back for about eight months now. So we're seeing some nice numbers in the Odessa market again. The Longview market may take a little bit longer and East Texas crude has still got a little ways to go.

Going back to Miami, what is the competitive environment like now that you have sort of the two big clubs in the area?

There's a big late night club that's in downtown Miami in South beach that probably compete with our really late night business. Lunch is probably pretty standard lunch time market for us. Other than that I don't think we really have a lot of competition in that market.

Does that allow-- now that you have both of them, will that allow you a little pricing inflexibility?

I think it would. I mean I don't -- we don't -- we're not looking at increasing anything through price increases at this point. I think right now we are just looking at -- they really didn't compete with each other. Scarlett's and Tootsie's have two different demographic, two different entertainer bases and that's why it was so exciting when we are able to pick up this location because we already competed for totally different markets. When we go to Dallas, Fort Worth and bought clubs, we were buying clubs that are all competing for the same market and we had to go in and rebrand them and re-concept them and make them compete for different markets. Tootsie's and Scarlett's already did that on their own. So there was, there is really not much operational changes we have to make if any at all.

Okay. You made a comment about then not marketing very aggressively. Is that something you plan to change?

Yes, we'll definitely start working on building the lunch time and happy our business back up. We'll definitely work on the higher-end hotels and marketing program for the higher-end hotels. And of course, the late-night business, we'll be pushing for that late night business again and some of the dance club business. It's kind of dance club portion of the building as well. So we're going to work on those things that they've kind of let slide a little bit. And I think once the new casino tower opens up at the Hard Rock, we're going to see a significant amount of increase from that as well.

What's current, what are current business trends like?

In that market?

No, just in general.

In general, they have been pretty positive. We're seeing steady same-store sales increase. We're seeing the same, we're seeing the service revenues increases. Obviously, June is always the time where we get seasonal, so I'd like to see how we, how the seasonal adjustment comes in June. But I think setup in most of our markets were very strong summer. So based on some of the marketing trends and some of the things we've been doing. Our teams are stronger than ever. We've brought in a new guy in February for Vice President of Operations to basically assist Ed in managing the Texas locations. He is now helping out in the St. Louis location as well. And I think we're going to see him do a little more traveling for us as the Dallas-Fort Worth market is gaining strength for us with some of the new management people he's brought in and we're very optimistic on the teams we put together over the last 4, 5 months.

One last question. Within your SG&A last year and I think earlier this year you had some insurance settlements. Where are you on the curve on those sort of going away or declining on a year-over-year basis?

Well, I think you've seen most of the settlements gone. I mean, we're always going to have little things here and there. We self-insure the first $75,000 of all of our GL risk now ourselves so that we can pick our own attorneys and kind of control our cases, so they're not just given $50,000 to every single person as they slipped and fill in our locations. We're actually going to get video and make sure people are telling the truth. So that's helped and we're hoping that that will help lower insurance cost as well. Most of the uninsured cases are gone. I think there's still a couple out there, but nothing, all fatality cases were gone. We've got some smaller crain cases that we're still dealing with. But overall you can see our legal costs are starting to come down a little bit, they're flattening out and I'm hoping that as we move forward we'll see that even come down a little more.

Our next question comes from Peter Siris. He is a Private Investor. Peter go ahead.

Peter Siris. Hi, Eric. I've a couple of questions. First on the Scarlett's, in the press release there was a comment about using the Scarlett's name to, in other locations. And so, I actually have, I'm asking about using the Scarlett's name in other location, but at the same time, do you see going forward over the next number of years, using other names more branding across your group of clubs or just keeping it pretty much the way it is?

We probably are going to change the St. Louis club into a Scarlett's. We've got a couple of other locations around the country that we have one off brand names on that we are contemplating using the Scarlett's name. We want to use the Scarlett's name as our party brand. Originally, when we talk with Vivid, that was kind of the idea to use the Vivid name as our party brand name. But since we have to pay for that name, when we own the Scarlett's name, I think we will -- are much more inclined now to use the Scarlett's name and rebrand some of our locations and kind of build the party club brand name out of that location and leaving the Rick's as our upscale brand. While Rick's -- while Scarlett's is an upscale brand compared to Tootsie's, it's still a party brand, because Miami is a party town. so it's a little different than some of the other markets that we do business in, even for the upscale market, because of the late night. I mean, they are up until 8 AM on Friday and Saturday. I don't say until 8 AM anymore.

I don't say until 8 PM anymore. The logic tells me that with the way people travel and do business that in addition to the -- that there should be brand leverage from developing a couple -- like Rick's, Scarlett's, a couple of these major brands. I mean, do you see brand, do you envision there could be brand leverage going forward?

I mean, I think so. I mean with the Internet and with the traveling customer, absolutely. I mean if you go to a place that you party at all the time in your hometown and you then end up in another town and you see the same name, you kind of know what to expect when you get there. So I think that definitely helps. One of the other things is club licensing is doing a little bit better than it was with scores in Penthouse both licensing their brand name, we may consider with the Scarlett's brand actually licensing the brand name to third-party operators as well and building a network -- a nationwide network of clubs that we use social media and the Internet to market and promote.

I want to come back to this 3x EBIT that you purchase things at. I guess, people who own these clubs, they really don't have -- there are a lot of those people -- it seems to me sort of like what happened in the automobile industry, a lot of those people are getting older and it seems to me they don't have a lot of places to go. Is that a reasonable view?

Yes. There is no exit strategy. I mean your exit strategy to talk to your managers and carry a note, there's no cash buyers out there. I mean even we are not really a cash buyer and we can come up with a significant down payment and we can buy out small guys like the St. Louis location, a single club operator there, we can buy out those clubs for cash, but there's just not a lot of cash buyers out there. And our business has changed. I was in the office the other day saying how do they get an office job where. A lot of our job is dealing with accounts, dealing with auditors and tax people and attorneys and it's become a corporate business. No different than the casinos, we've always talked and we've always compared for the last 15 years, the casino industry, if anything now are definitely becoming more and more like the casino industry and we're dealing in the real world.

Say the top five players in your industry own what share of the market?

Top five, revenues or locations? Revenues probably 15%, locations maybe in 10% -- it's not even 10%.

That's probably the lowest I could imagine. So do you see going forward that you would try to grow faster than your -- I mean I know you've just made two acquisitions. But do you see significant growth opportunities in terms of -- I mean if you can buy things or 3 times or even 4 times EBITDA, that's got to be highly accretive?

It all boils back down to keeping our debt level to a 3 times EBITDA or less and what our equity does. We're going to follow the strategy. I think the deals are out there, we're looking at them. But at the same, if all of a sudden our stock is giving us a 15% or a 13.9% or 15.9% yield, why do I need to take risk. I can just buy back my own stock and not take any risk. So we're watching those things. But I think overall there is definitely the growth is out there. The deals are out there. I think they are going to heat up even more now that we've made a serious acquisition of this size. We haven't really done a lot in two to three years. So basically everybody thought the opportunity to sell their locations and cash out to create a solid annuity, which is the way I look at -- the owner financing that we do is basically we're given them a 12-year annuity of 50%, 60% of their free cash flow is coming back to them for the next 12 years. While they figure out what they're going to do, I just think that we're the only ones that can do that at this time.

And our next question comes from Robyn Banfield from Bancy Capital. Robyn, go ahead.

Yes, I am curious, why did you start -- why did you decide to start Bombshells instead of continuing to acquire businesses like Scarlett's.

Well, about four years ago or so we were in the heat of this lawsuit in York City and we were -- had financial advisor told us diversify, diversify, diversify. So, we opened up a few concepts, two of them are no longer around and Bombshells was a hit, and it seems to have legs. So we've really started a new business that's working very well for us.

And so do you anticipate starting any new concepts as well?

No, not at this point. We got lucky with Bombshells. We're not out trying to get lucky. We are following a capital allocation strategy. We're buying solid cash flow or we're building it through the Bombshells brand. I don't see us -- if we did something new, it would be because we see the long-term cash flow advantage to us, and we buy at the right multiple that meets our capital allocation strategy. But at this point, I don't know another business out there that we can buy other than the adult businesses at this 3 to 4 multiple and have the solid long-term cash flow.

And so how do you evaluate the economics of opening another Bombshells versus acquiring another club?

Well, we look at whether there are other clubs available at the right pricing at the time and really right now we're just -- we're limiting, we're going to try to open about three Bombshells, company store Bombshells, a year. So we are going to try to do those three stores with our cash, provided that we find the demographics that we believe will be in line with our cap allocation strategy and being able to line up the financing and buy the property now.

Don't you get a better return on your cash from acquisition versus opening a new Bombshells?

It really depends. With the parent location, probably not, we're only going to have about $750,000 cash into the location, because we're bank financing the remainder of the construction in FF&E. So with bank financing, we can open them up pretty cheap. If we can go in and open up a location that's similar to Dallas or our South Houston location it's generating 1.5 million in income, we can cash-on-cash return in 6 months. So the Bombshells are very exciting for us in that regard. In a worst case scenario, where cash-on-cash in 18 months.

One last question then. How big do you think is the market to acquire clubs, like do you have a sense of how long can you continue acquiring clubs?

We think there's 500 clubs out there out of the 3,500 that we'd like to own and operate. So, if you take that's what 16%, 17% of the total market. When you look at other industries 16% to 17%, you're not even a market dominator. So I think that -- no, there's years left of expansion for us, unless of course all of a sudden we wrap up four or five of the big operators at one time or something. But I think right now, we're going to -- you are going to continue to see us grow like we've been growing.

And our next question comes from Darren McCammon from Proactive Financial. Go ahead Darren.

Couple of follow-ups. Isn't Club 80 a new concept?

Actually, no. What it was -- we had the relaunch in Fort Worth and Studio 80 had been around for a long time that operated down the street from us. And they had a fire and burnt down. So when we were actually talking with them about selling them Vee Lounge beforehand. And so when their business burnt down, they said, hey, why don't we just turn Vee Lounge into Studio 80. And so that's kind of how the concept started. The concept has actually been around for a while. As far as opening the second location, our total investment was about $100,000. We were able to get about $300,000 worth of equipment that was tied to the lease out of the building to re-concept it. So it was a win-win for us either way.

Okay. But I'm assuming if this thing is a hit that if you could --

We could open more. Yes, I mean I guess we could. I mean, I don't know that we're looking to, but yes, they are relatively inexpensive to build and then you can open them up and you just find another club location that was a previous club, and you can actually do them -- we turned a restaurant into one for about $100,000. So kind of gives you an idea, it's not massively expensive to do. They're not big revenue generators, they're only open four days a week, but they are profitable, Vee Lounge is or Studio 80 is now profitable, now that it's being operated in our building that's profitable. Vee Lounge was a hit and miss for us from month to month. So, I mean there is definitely some possibilities there, it's not something we're looking at very hard, but I guess it's definitely out there.

Okay. So I guess what I'm hearing is that it's kind of a one-off opportunistic thing if it happen to be a hit, then, yes, of course you pursue it, but it's not something you're spending a lot of time on.

Yes, it's about cash flow for us. I mean we'll open this up, and we'll probably have our -- at $100,000, we would probably be cash-on-cash in four, five months. They will make about 25,000 a month, I think is what we're turning on. I might have to go look at the numbers again, but sounds about right off the top of my head.

Okay. Back to the synergies, so you talked about an analogy of gaming and in gaming the frequent player clubs are big deal. And then I can't help but think of Playboy and their old key clubs and kind of how that might relate to you. Have you considering anything like that?

I'll just say one word, divorce discovery. We've looked at doing some type of frequent deals. It's just long term doesn't look viable to us. A lot of our top VIPs, they don't want everyone to know they are in the clubs. It's more discretionary than a frequent flyer's card or the key club type concept in today's environment. We just don't see it working. I haven't seen anybody else make it work. I'd rather see somebody else make it work and then adapt the technology, to be honest with you.

Are there any final questions? This is the last chance for questions. It appears to be no questions at this time.

Okay. Thank you. Thank you, Eric. Thank you everybody for staying on for our call. It's just been pretty long tonight. On page 18, you'll see our calendar, the next two events, our third quarter club and restaurant sales, we will announce that July 11 and third quarter results on August 9. Those are preliminary dates. We'll tell you when we formalize them. Following that, the Annual Gentlemen's Club Expo will be held August 27 through the 30 in Las Vegas. On behalf of Eric, the company and our subsidiaries, thank you, and good night. We'd also like to say a special thanks to the new investors who have been in touch with us since our appearances at the Sidoti Conference in New York City and the Planet MicroCap conference in Las Vegas. And as always, please visit one of our clubs and restaurants. Thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a great day.