Gary Fishman - Investor Relations Eric Langan - President and Chief Executive Officer

Frank Camma - Sidoti Jason Kolbert - Dawson James Darren McCammon - Cash Flow Kingdom Doug Weiss - DSW Investments

Greetings, and welcome to RCI Hospitality Holdings Fiscal 2018 Fourth Quarter and Year-end Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles Investor Relations for RCI. Please go ahead.

Thank you, Hector. For those of you listening to this call on the phone, you can find our conference call 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 the fourth quarter. 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 a number of risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated, and we disclaim any obligation to update information disclosed on this call as a result of developments that occur afterward. Please turn to Slide 3. I also direct you to the explanation of non-GAAP measurements that we use and are included in our presentation and news release. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

All right. Thank you for joining us, everyone. Please turn to Slide 4. We are pleased to report that after the market closed today, we timely filed our 10-K and reported our fourth quarter and year-end results. Fourth quarter results were good for this time of the year. Total revenues were $40.7 million. That's up nearly 4% year-over-year. There was a loss of $0.27 per share, slightly higher than last year due to $5.5 million in pretax other charges, most of which were noncash. On a non-GAAP basis, EPS was $0.41. That's up close to 14% year-over-year. Free cash flow for the year totaled more than $23 million, in line with expectations. That was up more than 20% year-over-year. Looking ahead, in fiscal 2019, we expect to benefit from the Chicago and Pittsburgh Nightclub acquisitions, new Bombshells location in the Houston area, the sale or lease of several remaining nonincome-producing properties and same-store sales growth. As we announced earlier this month, our initial 2019 fiscal free cash flow target is $26 million. This represents a 13% year-over-year increase from our original fiscal 2018 target and is consistent with our corporate goals. Please turn to Slide 5. Sales benefited from a strong 6.1% year-over-year increase in Nightclubs comparable same-store sales. Bombshells sales were virtually level year-over-year, as new units offset a decline in same-store sales due to a number of quarter-specific events that we previously disclosed. While a small contributor, other segments increased nicely. This reflected the revitalizations of the Robust Energy drink business under our management. We also had a very strong revenues from the Gentlemen's Club EXPO in August in Las Vegas. Operating income was up a little. Improved sales and margins in Nightclubs and the Other segment more than offset lower Bombshells operating profit, year-end other charges and $1 million in state sales tax settlements. On a non-GAAP basis, which excludes other charges, we were down a little bit. That was entirely due to the sales tax settlements, which we do not exclude from non-GAAP calculations. Please turn to Slide 6 for a discussion of items that affected fourth quarter results. Other charges reflected $3.8 million in noncash impairments and other charges in the Nightclubs segment. This was due to slightly lower sales at three clubs in Texas and our plan to sell or lease the former Foxy’s Dallas location. Other charges also reflected $1.4 million in noncash impairments and other charges in the Bombshells segment. This relates to the Austin location and the canceled Willowbrook location. We are considering some changes to improve performance in Austin, and Willowbrook was where we had the conflict in 2015 with the landlord, which halted development of this location. We had three states sales tax settlements. New York was the largest at more than $800,000. What we encountered in 2018 was a retroactive application of sales tax on dance dollars for multiple years. Under a longstanding interpretation of the laws, we did not believe the collection of these taxes was required. But rather than engage in a drawn-out court fight, we opted to settle, as it's likely cheaper for us in the long run. The amount is not excluded from non-GAAP calculations, because sales tax audits have become fairly routine. However, we don't expect seeing recurring amounts anywhere near what we saw in the fourth quarter. You should also note our effective tax rates for the year and the fourth quarter. For the year, it was a benefit of 16.7%. This included $8.8 million in the final calculation of the reduction in deferred tax liability as a result of the federal tax reform. However, this resulted in a tax increase in the fourth quarter to adjust for the year. On the non-GAAP basis, we used 24.5% effective tax rate. Conversely, this resulted in a fourth quarter income tax reduction to adjust for the year. Please turn to Slide 7. The fourth quarter is typically our seasonally weakest quarter. Having said that, fourth quarter revenues were a record for the period, our fourth highest quarter ever and the tenth quarter in a row with same-store sales growth. As for margins, had the sales tax settlements from our non-GAAP calculations been excluded, operating margins would have been 30 basis points ahead of the year ago quarter. Please turn to Slide 8. Fourth quarter adjusted EBITDA came in at $9 million. For the year, it was more than $44 million, up close to 19%, compared with fiscal 2017. Cash on hand at September 30 was close to $18 million, up 35% from June 30 and up 79% from a year ago. Year-end cash included bank and other debt rates in anticipation of the Chicago and Pittsburgh acquisitions in November. As a result, free cash flow for the year totaled $23.2 million, exceeding our original target. This enabled us to achieve a free cash flow compounded growth rate of 16% since fiscal 2015, slightly ahead of our corporate objectives. Please turn to Slide 9. I'd like to take a minute and review some recent developments. During the fourth quarter, we borrowed $3 million from banks to buy out our partner in the Club Onyx real estate in Philadelphia and to finance Bombshells' expansion in Houston. We also borrowed close to $8 million from banks and third parties to help fund the cash portion of the Pittsburgh and Chicago acquisitions. I'd like to note that this was our first unsecured bank loan. In October, we sold the Philadelphia club business for $1 million and signed a 10-year triple net lease to rent out the real estate to the new club's owners. In November, we closed on Pittsburgh and Chicago acquisitions. Combined, we expect them to generate more than $5 million in EBITDA and a cash-on-cash return of 33% and 40%, respectively. This would be in line with our corporate objectives for acquisitions. Approximately two weeks ago, we opened a Bombshells on I-10 East in Houston. This is our seventh restaurant in the chain and the fifth in the Houston area. Please turn to Slide 10 for a review of our debt. Since June 30, total debt increased $10 million, while our average weighted interest rates remained relatively flat. Real estate debt increased a net $4 million from the new real estate I just mentioned plus some construction draws on existing Bombshells construction. Parent-level debt increased a net $6 million from raised funds used subsequent to the quarter to acquire the real estate related to the Chicago and Pittsburgh clubs. All other slices of debt declined. Please turn to Slide 11. While slightly higher, debt continues to be manageable. I'd like to point out fiscal 2019 amortizations include our $5 million bank line of credit installment loan that will be paid off by the end of April. We also moved a $3 million Scarlett's balloon in 2019 to 2020 after the end of the September quarter. And $1.5 million realty balloon in 2020 – I'm sorry, 2019 will become part of the new construction loan for the Katy's Bombshells before it is due. I'd also like to note that by the year-end fiscal 2019, we should see 65% or less loan to value on our large Centennial real estate loan. At that point, amortization will drop $250,000 a month, freeing up $3 million on an annualized basis. Occupancy cost, one of our largest areas of expense, continued to decline. It dropped to 7.8% in the fourth quarter and 7.7% for the year. Our ratio of total debt to trailing 12-month adjusted EBITDA increased to 3.17 from 2.95 at June 30. We'd like to keep this ratio below 3x. The increase was due solely to lining up borrowings in anticipation of the Chicago and Pittsburgh acquisitions. In the quarters ahead, we should see this ratio decline. Please turn to Slide 12. I'd like to give a little update on the first quarter of fiscal 2019. Total sales and same-store sales for Nightclubs were up in October and November compared to a year ago. Both the Chicago and Pittsburgh acquisitions are performing right in line with expectations. In early calendar 2019, we plan to rebrand both clubs as Rick's Cabaret. We're also working with potential tenants on the two clubs we closed in Dallas earlier this year, Foxy's and Onyx. We hope to have both properties, in addition to Philly, earning income for us very soon. Bombshells total sales for the first two months of Q 2019 are ahead of the first two months of fourth quarter 2018. Year-over-year same-store sales will be challenging, because a year ago quarter benefited big time from the Houston Astros. Last year, the Astros won the World Series. This year, they played significantly fewer postseason games. The new Bombshells sales are great for the first week. A delay in opening was due to rain which affected construction and then the scheduling of final inspections. We've updated the schedule for the three Bombshells in development. The US 249 should open in February. Katy’s location will open in April or May. And the US 59 location will open in May or June. There could be a swing of a month or two here or there due to factors beyond our controls. Will you please turn to Slide 13 for our capital allocation strategy? Since our last call, we've updated this slide to show free cash flow yield based on our initial fiscal 2019 target of $26 million. As you know, our strategy calls for repurchasing our shares in open market if the yield on our free cash flow rate relative to our market cap exceeds double digits. With the free cash flow rate of $26 million, that means we are a buyer at $27 a share or less. Please turn to Slide 14, where I'll discuss more about capital allocation in the context of our financial goals. We also simplified this slide. As stated previously, our objective is to grow cash flow at 10% to 15% per share annually through three strategies. Right now, we are focused on using as much accessible free cash flow to buy back stock at these prices based on our capital allocation strategy, given our current stock price, where we can get what we consider to be risk-free after-tax free cash flow yield of more than 13%. We are definitely more inclined to buy back stock rather than take on additional risk buying new clubs or opening new restaurants. Having said that, I believe this is a unique time in the gentleman's club industry. So, we will still be actively looking at acquisitions when and where appropriate, assuming they meet our corporate objectives for M&A. We are also focused on finishing our cleanup effort involving underperforming clubs this year. As you know, we have closed a number of locations over the last few years in line with our capital allocation strategy, which calls for being more aggressive in repurposing, selling or leasing properties that are not providing adequate return. We have pretty much divested all underperforming operations. Now and in the next quarter or so, any remaining non-income-producing locations should be leased, sold or under contracts to be sold. As for Bombshells, we will complete the three locations in development, giving us a total of 10 locations. Then we intend to spend time to assess where we are. We want to ensure they are working very well. We want to look at the market and growth trends, and we want to gauge return on our strategy of owning and developing the real estate ourselves. As for our stock price, while we are not happy it is this cheap, we believe the price will reward long-term holders as we buy shares when it's yielding over 10% or expand when it's not, following our capital location strategy. To keep open the lines of communication, we will hold a conference call Thursday, January 10 to discuss the first quarter sales figures we'll be releasing earlier that day. We'll also be available to answer questions for anyone who missed this call due to such short notice. Thanks to all our concerned investors for supporting us and for the advice during this period. It's truly appreciated. Operator, let's start the Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Frank Camma with Sidoti. Please proceed with your question.

Hi guys, good afternoon. Happy New Year’s Eve.

Happy New Year Frank.

HI. Obviously, the revenue, since you already reported, wasn't surprising or anything. And you gave a lot of detail before on the weakness in Bombshells, which I mean, it's pretty clear that you're not happy with. What's interesting when you look at the margins here, given the fact of what's – the same-store sales decline is, your cost of goods sold was actually good year-over-year when you look at it on a percentage of revenue, which I would have expected – you actually picked up 60 basis points. So, the question is like how are you able to manage costs in a scenario in that where you essentially had fairly sharp decline in restaurant business, which typically you would find not a negative operating leverage, if you will?

Yes, well – I mean, obviously, we're able to control kitchen staffing and stuff like that to help keep those costs in line. One of the biggest costs that affected margin, of course, is there were some of the legal bills associated with the [indiscernible] transactions as well. So, I think, this quarter, the October, November, December quarter is going to be a quarter where you're going to get a pretty good look at how those trends are going to play as we move forward. And then I think by March, I'm hoping with March Madness, that's kind of the first what I would call a big catalyst to really boost everything over a long period of time. Both the Cowboys and the Texans have made the playoffs. So, let's root for them next Saturday and hope that they can keep their playoff alive, because that definitely helps Bombshells considerably. We've had a really big weekend this weekend, and we're looking forward to moving towards Super Bowl. And hopefully, that will give us a good start. But I definitely think that once we get into March, March Madness is definitely going to help Bombshells a lot. Plus, the warmer weather will bring our patios back. I know our team is working on lots of different type of bike rides and car shows and things like that to really help pick up this spring. And hopefully, that will get us back to where we were before we had some of these unfortunate incidents. And the freeway construction should be done on 290 as well. We'll get a couple of these other locations opened, which gives us more exposure in the market. And I think we're going to see the Bombshells right back where we wanted.

But you haven't seen a shift – I guess, a follow-up to that. Have you seen a shift at all in the percentage of revenue at Bombshells as far as, I haven't got to the details yet, how much is alcohol versus food, et cetera? Because it would indicate you haven't, like you're still getting good margins there. So is that...

We're still doing a decent amount of alcohol, not what we were. But it seems like some of the food slowed down a little bit too. So, you're kind of getting a very similar mix.

Okay. And when do patios open up in Houston, just out of curiosity, from a weather standpoint? Like very early spring, late winter? I mean, when can you actually sit outside?

Well – I mean, they're open sometimes right now. I mean, it was in the 70s and 80s last week in Houston. So, it just depends. I mean, this week – it gets cold a couple of days, it gets warm a couple of days. So, we're still getting some use. But what you really want is that all days. At night time, it still cools off. We have to maybe close a couple of the doors. We want -- we need to get to that point. I'm hoping that we're there by mid-March. In Texas, we usually have two really cold weeks in February typically, and then it starts warming back up, it gets pretty normal. But it can extend into March sometimes. So, I'm hoping this year that we get a pretty nice spring, get started early. But I think March Madness, all those games, all those college games will make a big difference as well. They always do.

Okay. No, I know. Moving on to the Nightclubs, I know you're rebranding or maybe you've already done it lately, the two that you acquired. So, Rick's with more – I guess, a more premium name. And I know you extended the hours, correct? Is that for both or for just one?

Just for Chicago. Pittsburgh already has regular early hours. So, basically, just the Chicago. We've extended the Chicago hours at this point, opening at 4 p.m. instead of 7 p.m.

Does that allow you to do anything on pricing? Or is pricing pretty much, in the short-term, an unchanged type of event?

It's pretty unchanged. We're doing a little happy hour. You're only allowed a certain amount of hours of happy hour in the State of Illinois where you can discount pricing. So, basically, it allows us 15 hours of discounted pricing Monday to Friday. From 4 p.m. to 7 p.m., we start bringing people in. What it really does is, by 7:00, 8:00, people start coming in, there's already a flow going. There's already a party going. Where – when you open at 7 p.m., everything is just getting started, so maybe the party isn't really going till 9:30, 10:00. And so, we're hoping that little happy hour push that we can basically pick up those early hours. And it's been working very well for us so far. So, we're very excited about it. We'll both – both will rebrand. We – right now, the signs are – still have the original names up. I think our new signs and actual rebranding other than from TV stuff and print stuff that we've done and as they enter a club, you get people used to the name change before it happens, will all happen in mid-January.

Okay. And you gave a lot of details on – from an EBITDA and the financing basis on the two clubs. Could you just – is there a way you could just give us, like, approximate what the LTM or projected either/or annual revenue of these clubs are, either separate or combined?

Yes. Basically between $10 million and $11 million combined. We're looking to do around – between $100,000 and $110,000 a week per location.

Okay, okay. And as of today, I assume the margins, are they lower than your base business, so those EBITDA margins you get over time?

It's still early. It's really hard for me to tell. I mean, December is the first full month and today is going to be the last day of that month. So basically, all I've seen so far are some partial financials from November. I just don't have enough data at this time. Maybe on – maybe by – on the January 10 call, I'll have some better information for you, if we can get the Pittsburgh December numbers finalized by then.

Okay. And like you said that really the reason why you're hosting the call January 10 is that short notice of this call, right? So, you can give us...

Yes, I mean, I just want – I know – I mean, I can tell you right now, we've about half the number of callers we normally have on this call that I can see right now. And I mean, it was just short notice. And it is New Year's Eve. So, I want people to have time to really dissect. I'm sure everybody didn't – people have plans and stuff, so I want people to be able to dissect the K and get the questions. Plus, I just think that this is going to be a significant revenue quarter for – because of the new locations. So, I think we – I want to have more information for you on those locations, but I just don't have available with me today, because we've really been working nonstop through Christmas Eve, through every weekend getting this K done.

Okay. Thanks guys. Appreciate it.

Thank you.

[Operator Instructions] Our next question comes from the line of Jason Kolbert with Dawson James. Please proceed with your question.

Great quarter. I just wanted to ask a couple of questions and understanding the growth aspects. And I think you kind of answered it around Houston versus Chicago, Philly and Pittsburgh. And what impact dose rising interest rates have when you look at how to arbitrage your free cash flow versus your debt? Thanks.

Yes. Well, I mean, the interest rates have been for us has declined, right? So, it was starting to head back up, but we just got bank financing less than two years ago. We did our first big note with Centennial. We got a couple of small notes with them before that. But most of our financing was individuals and whatnot. So, it's not going to have much effect for us, as we've basically locked our rates in for – in five-year increments. We'll get slight increases here or there maybe if the interest rates continue to go up. But I don't think it's going to have any real long-term effect for us. All of our short-term borrowing that we do is from individuals have typically been around 12% anyway, so I don't think we're going to have to raise those rates anytime soon. And actually, hopefully, we'll start to actually paying a lot of that down as we move forward. So, it shouldn't have too much effect on us.

And in the first quarter call coming up, I hope you'll spend a little bit more time kind of going through the difference between how we should be modeling Bombshells versus the gentleman's clubs in terms of just understanding the margins, the dynamics that drive those businesses.

Okay. Yes, we can work on that. Especially, our biggest problem right now is we just don't have enough data to see. So, I think we're going to get there by March. We'll get to January, February, March quarter in. So, I think we'll have a lot better idea in that quarter. We get some idea – we know that we're starting to see the rebound. So, the question is do we rebound all the way back or do we rebound in surplus where we actually start getting same-store sales growth over where we were prior to the incidents that we had and the freeway close. And those are the kind of things we're really unsure of for Bombshells at this time. That's the important thing for us. So...

Thank you. Happy New Year.

Thank you. Happy New Year.

[Operator Instructions] Our next question comes from the line of Darren McCammon with Cash Flow Kingdom. Please proceed with your question.

Good morning guys. Happy New Year’s Eve to you.

Happy New Year.

So, my first question revolves around that, what caused the delay in reporting and you having to announce on New Year's? And what can you do differently next year?

Well, main cause is, obviously, we put the new ERP system in last October, and so there was a massive amount of work to be done through the audit because of all the new systems, all the separation of duty issues that we had last year and with the new software and getting through all of those checks and rechecks to make sure that all the numbers were solid, that there were no errors. It was just a really intense audit, to say the least. We really had to pound it out to get filed by December 31. And I'm happy to say that between our staff and BDO staff, we were able to get that done.

Okay. Thanks. Well, the numbers show that you pretty well, so I guess, I don't need to worry about that. Have you ever considered like picking a different time to close so you can skip the holidays, in case there's an issue?

Well, normally, we were supposed to be filed by the 14th, so we would have skipped the holiday. It is the idea, right? And tax season, because if you start going to January 9, you're not filing till April. So, now you're going to be in tax season. So, I mean, I think we've got a pretty good quarter. This is really a slow time for most auditors at this point. I think it's just the new system – and we're still new to BDO. There are – it's – the cultures are – you have to work together. And like I said, it's just a very, very big undertaking when you talk about a full accounting software change like we've done. It was very significant – I mean, think about the [EPR system]. It took us almost two full years to implement. We really started to look at this ERP system in early 2016. We went live at the end of 2017 basically, which – for fiscal 2018. It was a big ordeal. But the new system is fantastic. You talk about being able to turn data and get things done. Under the old system with what we've gone through, we would've filed in February or March again. I mean, it would have been crazy. Luckily the new system, we're able to really do things much better, all the invoices are stored in the system, everything – I mean, the recall of this system is phenomenal.

Okay, fair enough. So, forgive me, I had – it's been kind of a short lead time here. I haven't had a chance to look at your cash flow. Did you buy back any shares? And if so – if not, why not consider your capital allocation?

Sure. We bought back a few shares in November when the stock went below $25. Then we got busy with the 10-K and everything going into December, we thought we were going to get filed. And then we started tying things up and whatnot, having to do final audit prep stuff. So, we got busy and didn't – weren't very active in December at all. But we will – once we've got – now we've got the K filed – I mean, we want to – we don't like to buy right around filing time. And then once we did file on the 14th, we were going to start buying before the end of the month. So, we waited just to get the K out. Now the K is out, we'll be back in the marketplace, I'm sure, with whatever excess free cash flow we can spare to buy back shares at these prices.

Okay. So that's actually my next question. I think you said you closed September with $17 million cash on hand. What's that figure now and – approximately? And how much of that would you consider using?

Well, we used a considerable amount of that for the acquisitions in Pittsburgh and Chicago. We typically carry around $8 million cash on hand that we like to have as kind of a minimum. So, when we're over those numbers and our need for that cash – it isn't needed, we'll be buying back stock. So, we currently are over $8 million right now. I don't know the exact number at this point, at the end of the quarter and whatnot. And like I said, we've been focused on the K more than really on cash on hand or anything like that.

Okay. In the past, there's been a question about your relationship with Tannos Construction. Can you outline that for us just real quick?

Tannos Construction is a contractor that does some contracting work for us. I've made investments in some of his projects personally, some shopping centers in Friendswood, Texas, where RCI has no business or no – we don't do anything in Friendswood, Texas basically. It's a smaller bedroom community in Houston, and yes, I've made some investments, but that's about the end of it. Other than that, there's nothing to tell.

Okay. So, you've never – just to be clear, you've never owned any property that was sold to RCI?

No. If I had, they'd be disclosed. Are you kidding? With BDO and they look at every related party transaction 50 times, trust me.

Okay. And sorry to have to ask it.

Yes, no problem.

So, you indicated a target of $26 million in free cash flow after maintenance cost. Is that meant as a current run rate or is that the 2019 target? And I guess, what I'm asking is does it include the free cash flow from the two-night clubs, and does it include that $3 million of additional cash flow amortization free up? Or how is that factored in there?

It includes everything that's in our conservative estimates for what we believe we will do as of the beginning of December when we put this out. Could we do better? Sure. Just don't have enough data at this point to say, yes, I think we'll be more – I guess, I don't think we'll do less. This is a number that, like last year, we said $23 million. At the beginning of the year, we said, look, we believe that we'll come in at $23 million even if – no matter what else happens throughout the year, we'll hit $23 million. We've done that. That's our number for 2019 at this point. In the past, we've raised our free cash flow targets if we realized and thought for sure, and we're very comfortable that we would beat those targets. And then at that point, we'll raise this target if that becomes necessary. As of today, I think $26 million is a respectable number for our growth for 2019. We've got a lot on our plate. We took on a lot of debt. We've got a lot of construction going on. We've got to get all these things lined out. We could have cost overruns. We could have certain little things. So, we've factored for all of the what-ifs. And until we know whether those what-ifs happen or don't happen, $26 million is our number.

Okay. And does – so that $3 million – I guess, I'm actually asking more of an accounting question, which we might have to take online, but – offline. But the $3 million in additional cash flow when the amortization steps down, I mean, is that actually considered additional cash flow? Or – I mean, I don't really...

That would be cash flow after debt service. You've got to remember, free cash flow is operating cash flow minus maintenance CapEx, okay? And then you would have debt service that would take out of there to get your total. So, any principal, we had to pay back. Then you get your total free cash flow for what I could basically consider for use for whatever use after debt service. So, what we will have – more – we have $3 million more of disposable cash flow that's not already targeted to pay out down debt service.

Got you. Okay. Thank you. That’s all my questions for now.

Okay. Thank you, Darren.

Our next question Doug Weiss with DSW Investments. Please proceed with your question.

Thanks. Good evening. I guess, just following up a little bit and I think you addressed this a little bit, but BDO had some comments in the last K and you guys sort of published what you are doing from a remediation standpoint and then they seem to have similar comments in this K, so I guess my question is just – are you working with them so that those issues are resolved this year?

I mean, we have been working on it. The problem is, in order for anything to be removed we have to satisfy it through the entire 12-month period. We hired a third-party internal auditing company, a controls company that came and helped us right of lot of controls. We saw some additional what they call [SOD] segregation of duty software that was installed and [indiscernible], so I mean we’ve been working on this throughout the year in order to get a clean bill of health on these internal controls requirements, if you look what the requirements call for, we have to meet those requirements for the entire 12-month period, so I think we are going to be much better off for next year, but as you see we have an [indiscernible] which means the numbers all have checked out and they just had to do a lot of already to get to that comfort level they needed to do with the duty. So, basically, they have to do a lot more standpoint so they have to do complete, we only get these samplings on a lot of items where they will do cash control – cash counts on every single [indiscernible] like there was a much larger audit in what we have been typically used in.

And you brought in a new consultant this year or in 2018 to just …

It is [indiscernible] I am not exactly sure how you say it, but they are an internal – they basically come in for companies and help write and set up all of your internal controls and your accounting or consultants basically except you need all the requirement to segregation of duty requirements.

Okay. I mean is BDO approving helpful, I mean when you originally hired them you referred to their experience working with restaurant, national restaurant chains, are they helping as you roll up Bombshells in terms of kind of helping you guys take it to the next level?

I’m unsure at this point. There has been a lot of cost added and we just got the K done and filed [indiscernible] with some board members and audit committee to discuss the cost we’re going to – we haven’t even put it altogether yet we have got their cost, now we are going to look at the third-party cost that have been generated. We are going to look at all these costs and we are going to have to wait out and say, are we getting a cost benefit on this to move forward. So, it is one of the things we are looking at. Now, I know the software change was a big part of some of those additional costs and we are going to have to look at those options and just put down everything and say okay, are we getting – are we trading value here and that is, I will know as we move forward and talk with certain board members and the accounting staff on a go forward basis on where we are at with all that. I hope we are. I just don’t have enough data in front of me right now to be 100% sure.

Yes. I mean as a shareholder I think it’s good that you brought in a higher profile auditor. I guess what, I am just scratching my head a little bit of those – it has been a long time since I have been in public accounting, but it just seems like they could be a little more – provide little more guidance in terms of – I mean they are sort of saying these are things you need to improve, but it seems like maybe you guys could use – just to kind of get in there or maybe not, maybe you are there at this point and so…

Yes, I just don’t know, exactly. We're going to be reviewing that over the next few weeks and I’ll have a better...

All right.

…understanding. I said, we've really, for the last four weeks, been confident nothing, but getting this 10-K filing. We're really helping to make support teams and then once we realize that, it wasn’t going to happen from their side, then we had to push everything and then we've got like this multiple more samplings requirements of – on certain things that they were tying things out and point through everything. I mean, if we wouldn’t [indiscernible] file it again this year. That’s two years in a row of very, very expensive audits of our systems, of our…

But – yes, I just – I'd like to think…

…how much accounting, everything, so…

Yes, I understand. I'd like to think that you're kind of [in] that you’re getting the hard work done now and you'll be that much better off when – as you expand your…?

That’s the plan, for sure.

So – and then – just my other question would be, I think, your target is to do two club acquisitions a year, plus the Bombshells. Is that still sort of the game plan for this year, even with the share price lower?

We don't really have a target on the number of club acquisitions. It’s really more – club acquisitions are more, because we don't get to choose when to start or sell to it at a price we’re willing to pay. So, based up on we – the club acquisitions we’re really for the right acquisitions at the right prices that are in line with our demand visibilities to actually operate and run those, so that helps. As far as the Bombshells, we were planning to do three a year. Since we changed to this new format, we've done basically five locations that we now own the real estate on. I’m going to be a little more cautious through this summer, I think, for sure. We want to sit down and want to get all these stores opened, and I want to start seeing some hard numbers. I want to start seeing the returns on the stores, where we own them. Now the first five stores have basically already paid for themselves. We’ve spent about $13 million in capital out. We’ve got about $12.9 million from operations back. So, the least is one – the least locations are working out fairly decent work. I want to see how it works. Now that we are using bank financing, owning the real estate those types of things and how much value and how – what our cash and cash returns actually turn out to be on those as well. So, we will have a much better idea, I think, by the end of the summer into – or maybe even into the fiscal year or maybe we run it all into September before we really start looking at more Bombshells at this point. Unless, of course, something changes, I mean, we’re always optimistic when the right opportunity close itself. At this point, right now, I think, with our stock price – we're a lot less risk adverse than we were say, when our stock of $34 a share. And we’re looking at, you know our return on buying back our stock was low single digits, it wasn't as interesting. So, we had to put that cash to work. Right now, we have a pretty easy way of putting our cash to work and getting over 13% returns on a free cash flow. Q –Doug Weiss: All right. Okay. Well, I appreciate the answers and Happy New Year.

Yes, Happy New Year. Thank you.

[Operator Instructions] Our next question comes from the line of [Peter Cyrus], Private Investor. Please proceed with your question.

Hi, Eric.

Hi, Peter, how are you? Did we lose Peter.

I think we did.

Okay. [Indiscernible] able to drop.

[Operator Instructions] Our next question comes from Peter Cyrus, Private Investor. Please proceed with your question.

Hi, first I have a comment, which is somebody who has run audit committees for many public companies and has, in many instances, change from lower level accountants, auditors to big time auditors, it is a pain in the butt and is, I mean, the amount of time and energy that you would spend, once it gets to work, it's fine, but I understand the frustration that you're going through. And I just want to tell you, I’d lived it and everybody else who has done it has lived it?

We appreciate it. I don't know if I had done, and if would have known how hard it was going to be, but we have learned a lot. I will say, we have learned a lot. And I think, our ERP system is much, much stronger for a go-forward basis because of it, so…

I mean, all these things, nothing that's happened within an ERP system and a change in auditors is a surprise to me. This is against chapter and verse, this is standard operating procedure. Anybody who does – puts in an ERP system and upgrades the auditors goes through the same stuff. So…

I would recommend one at a time in the future to other people.

Absolute – oh, absolutely. Absolutely going through both at once is [hell]?

[Indiscernible] think the easy way.

I want to ask you a question about Bombshells and then about acquisitions. In Bombshells, if you went back to the beginning and sort of looked at what's happened, what mistakes have you made with Bombshells?

Well, obviously, the first one was Webster, where we went through a Class B, Class C locations, which we know does not work now. Restaurants are [indiscernible] clubs, they're not destination locations. They are like every other restaurant, but we have to be in topnotch restaurant Class A locations. And since we've done that, we're doing very, very well. Every location we’ve opened so far. Second, obviously, [indiscernible] if we do a lease, we will definitely make sure that our patio – the rights through our patio are actually 100% fell about in that lease, which was an early deal of most patio just are in leases. But in our lease, they’re most definitely prompt [indiscernible] because the patio plays us an important part of the overall concept, and without it is just, concept isn’t the same. So, those are two biggest ones. We might have at a couple of times, where we pushed a little fast, but overall, I think, we’re in a great shape. I probably would have started buying real estate sooner. But I didn't have the bank financing back then. So, it’s hard to say what we would or wouldn't, whether it was a mistake or whether we did we have to do to get to where we are.

The – now, I don’t – this is not meant to be a criticism since I've been around for a long time. But as you expanded your clubs, you also made mistakes and then you learned from them?

We did.

So, I mean, it's – mistakes are – if you don’t make mistakes, you aren’t trying?

Yes, of course. And then, like I said, we are – I think, we’ve learned a lot definitely on the club side. There’s no doubt there. And on the Bombshells, we’re learning as we go, but our sales are still strong. We’re still making money. Even our worst locations, which is probably an A - location in Austin. Today, I would go back to location of ours, -- if I was looking out at markets they have, that location -- exit south of where it is and my numbers will be 30,000 – 20,000, 30,000 a week higher than they are. And I know, because another concept built down there in a property that I saw and they’re doing fantastic. It's not the same concept as ours, but it's just a restaurant that's doing very, very well in that side. And like I said, we’ve learned from our early stores, which ones work and which ones don’t. And these five stores that we're building in Houston, all freeway locations, all very, very prime, high visibility and they’re opening up a huge startup numbers. And the numbers are starting out with, I mean, they’re going to run, I think 90,000 to 110,000 a week in average sales as they go on. So, you’re talking about restaurants doing $5 million a year.

That’s pretty good.

And we're having a $1.5 million, $2 million max cash in – including the land, building, everything in a retro financing over 20 years at 5.25% interest. I mean, I think, it’s going to be really nice as we’re opening some of these. The biggest problem, I think, we're seeing right now is, if you are seeing us brush-up against this three-time EBITDA-to-debt ratio, it is because we have a lot of money invested in these Bombshells that aren’t open yet. We had – you know, we’ve bought a lot of that money for the acquisitions at the end of September, but we didn’t close until November, but we had to because under the contract we had to close within five days of licensing being approved and those license could have been approved at any time, from like September, late September all the ways, I mean it could have been through December who knows, but we left out both literally were approved within about a week of each other, so in November, so that worked out really well for us.

And the expenses and the interest and all of that, that’s in these numbers and it’s not hidden away somewhere in pre-opening expenses, right?

Exactly. Now, all of our debt and all the interest expenses are all expenses as we create them, as we borrow.

I mean, you might, just as a suggestion, if you are ever in a position where you are doing a lot of opening and if you can [indiscernible] in a press release or something, indicate what the earnings would have been without pre-opening expenses?

Yes, we did that in the past when it was a significant amount of number, but the average Bombshell store’s just not [crossing it]. And we are doing such high sales the first week, it just – to give you an idea, I think we came in close to 140,000. We did 160,000 in the first week comparing now we did about 140,000 and we opened up six days before Christmas Eve. So, I think that store is going to do phenomenal as we move through the next few weeks towards Super Bowl. January is going to be a really big month for that new location.

Right. Last question, what’s going on in the acquisition – not what you are going to acquire, but what you are seeing as far as acquisition opportunities in the strip club business – gentlemen’s club business? Sorry.

We are seeing stuff everywhere, a lot of markets – a lot of new markets are opening up with clubs have been for sale in the past. We are doing a lot of, I call higher kicking on, now we are looking at a lot of stuff, we’re talking with a lot of people. We will get – I think by March we are going to – hopefully, we’ll see what the stock does, , but by March our financial side is going to be very, very good. It is March, April-ish, as we pay off the $5 million short-term notes, we’re going to be very close to having the other stuff paid off. We’ve got some properties under contract right now that we are selling as that property becomes sold. We are working on a couple of leases right now. To get those leases done that’s going to free-up cash flow on a go forward basis, so I think we will get very, very active on the club acquisition or we are going to be buying back a ton of stock within what the stock price does as we move into March, April, May and going forward and the Bombshells will be done so all of that upfront capital will be done going out as well. We are going to really change cash flow. The cash flow outlook is really going to change as we move into April, May, and June, I think.

Fantastic. Well you, Eric, you have a Happy New Year and it was good talking to you.

Our next question comes from the line of Joe Wang, Private Investor. Please proceed with your question.

Yes. My question is, you made a lot of emphasis on the stock buyback [bellow 27], but I saw in your earnings release that there is only roughly 3.1…

We typically – we’ve typically rundown pretty well, I mean it is a matter of just board meeting to increase it and it has become pretty regular for us. I think we’ve approved four or five buybacks in the last few years. As we run down the fact, it is actually on the agenda for my next board meeting to talk to the board members about it about increasing it. So, it is fairly simple process to increase the amounts of authorized buybacks.

Okay. Thank you. It just seemed kind of curious you didn’t have the board meeting before this earnings call.

We’ve been working on the K buddy. I mean, phone calls till 3 or 4 in the morning, 6 in the morning, back, you know back up back down, you know sending people on weekends to the corporate office pulling documents, pulling different stuff, I mean it has been very tiresome and long experience to get this out today.

Yes. Okay, thank you. It really shouldn’t be this hard to get K out…

It should and hopefully it won’t be…

I have heard all your answers…

It wasn’t for 21 years – 21 years we never had an issue and last two years have been a big learning experience for us to sure.

Yes, it shouldn’t be happening in a public company. Thank you.

Yes, thank you.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Gary Fishman for closing remarks.

Thank you and thank you Eric. We’ve included a couple of supplemental slides in our appendix Slide 19 as our preliminary calendar for the year. As Eric mentioned, the next event is our first quarter sales, and at the end of the day we will have a conference call that will be on Thursday, January 10. On behalf of Eric, the company and our subsidiaries thank you and good night. And as always, please visit one of our clubs or restaurants and best wishes to everybody for a happy healthy and prosperous New Year. Thank you.