Greetings, and welcome to RCI Hospitality Holdings conference call and webcast. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [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.

Thank you. For those of you listening to this call on the phone, you can find our presentation on the RCI website, click Company and Investor Information just under the RCI logo. That will take you to the Company and Investor info page, scroll down a little and you will find all the necessary links for this call or you could to go the webcast where you will see our slides. Now please turn to Slide 2. I want to remind everybody of our Safe Harbor statement it is posted at the beginning of our conference call presentation. It reminds you that you may hear or see Forward-Looking Statements that involve risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. 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. And please turn to Slide 4. Here are comparable GAAP versions of four charts and tables that we will be using in today's presentation. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric.

Thanks for joining us today. I'm here with our CFO Phil Marshall; and our Controller, Bradley Chhay. Before we start, I would like to thank our staff and our new auditors again, for the last two weeks they have worked long hours to get our first quarter 10-Q filed and bring us current with our filings. Please turn to Slide 5, for today's news. After the market close, we filed our 10-Q as we had expected to do during late February. We reported $48.4 million in total revenues that is up 9.9% year-over-year. GAAP EPS was $0.60 compared to $0.65, the year ago quarter including $1.1 million in pre-tax net gains on the sale of excess assets. On a non-GAAP basis EPS was $0.62 compared to $0.61. The star of the show was our Bombshells segment. Quarterly revenues hit $10.4 million up more than 72% year-over-year. Not only that, but the segment margin rebounded to 15.2%, based on that and other trends, I will discuss we expect performance to continue to grow. Nightclubs maintain their strong contribution despite an unusual calendar. We had one less holiday sales week during the important Thanksgiving to Christmas period, as we previously reported. Performance has also picked up due in part to a great second quarter sports calendar in markets where we have some of our largest clubs. Our Northeast Corridor acquisition continues on-track. Regarding our capital allocation strategy, we generated $9.3 million in free cash flow. That is in-line with our current $30 million run rate. We used $6.4 million in excess cash to buy back 333,000 shares in the first quarter that reduced weighted average shares outstanding 4% year-over-year, and we still ended the quarter with more than $13 million in cash. During and subsequent to the first quarter, we eliminated $10.8…

Thank you. We will now be conducting a question and answer session. [Operator instructions] Our first question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Hey guys thanks for taking my questions. Real quick, just wanted to circle on the accounting costs, the extra costs that you guys are expecting in Q2. Can you quantify how much you are expecting to be excessive, if you will?

I mean, I don't have the numbers yet obviously, because we are still in the queue. But several hundred thousand dollars of the auditing fees will be paid in this quarter for the 2019 audit.

Right, so I think you identified about a half a million in Q1 that was excessive. So, maybe another 200 to 300 in Q2?

Possibly. It could be little higher, like I said, it is just too early, we don't have all of the - I mean we just filed the case two weeks ago, I don't even think we have gotten all the bills in from the auditors from that period yet, from the January - to get even.

Understood. And then as it relates to Bombshells, just wondered if you might be able to help us understand and quantify some of the pre-opening costs associated with the ones you just opened here in the last couple quarters?

Sure, well I mean we have had to carry management, an average store has about 10 managers, our average manager go through a training process for four to six months. So, we have been carrying for almost a year and a half now an excessive amount additional managers, because we knew we were opening all these stores. So, we have had managers in training, we have had cooks in training - excuse me, kitchen managers and just other staff, we knew the stores are opening so we run our staff a little higher than average. And of course, pre-opening, we have our training teams, when our training teams are actually opening the stores. There is a lot of additional costs in the first month at a store is open associated with actually opening the store.

Got it. And last question, kind of a difficult one here, a big unknown. The Corona Virus, and a lot of the news has kind of come to the forefront here in the U.S., and obviously with all your locations in some pretty major cities. Just wondering kind of how are you guys were thinking about that. And then I know it is still very early days, but have you seen any sort of change in the traffic patterns at your places?

We are seeing nothing right now. Our numbers are fantastic. I mean, I guess people are going out more right now just in case they get locked up for two weeks after reading about some of those cruise ship quarantines. Like I said, so far we haven't seen any effect obviously the virus isn't in any of our markets at this time. So we will monitor it and basically follow the advice of the health officials at the time and do what we need to do.

Got it. Thanks a lot, guys. I appreciate your time.

[Operator Instructions] Our next question comes from the line of Jason Scheurer with Orchard Wealth. Please proceed with your question.

Hey guys. Quick question for you, just reiterate a little bit more if you can on the stock buybacks. So basically, you are saying you have got $13 million available for the buybacks as of today. And when can you commence doing that? And approximately how much of the average daily volume can you do?

Well, I mean, we buy within Safe Harbor, or we do block transactions which exempt us. So we follow those deals. Basically right now, we are current. So as long as we don't have any material, inside information we can purchase stock within three days from today. Is typically that the rules are for us.

Okay, and then in your free cash flow numbers that you are looking for the year, you are not including those numbers from the sale of these properties that are outstanding.

Correct.

Okay. So if anything, you know, it could be looking at like a $6 million surprise at some point throughout the year.’ A - Eric Langan Well, you got to remember, that is not all profit on those sales. We do have costs on those sales, but yes, there will definitely be some upside on the sales of the assets as we move through the year.

When you are looking at the Bombshells properties, do you find that actually, just by putting your location there, you may be at some point come up with an average that I guess what every time we buy a property, the subsequent property goes up by 30% or something. Because obviously, I love your idea about like making sure that the businesses that you are selling to are complimentary to the club itself, for those restaurants itself.

I mean, it is varied. We have basically done three of these developments. One is completely under contract, hopefully we had closed - I think we are scheduled to close in the next three weeks on the last piece of that property. We originally bought the property for about just under $9 a foot. We put about $2 a foot into developmental costs, bringing in utilities and retention and those types of thing. So we had just under $11 a foot into the property, after we built our store we have contracted the property. The first lot, I think we sold at $16 a foot and the second one we have got under contract $18 a foot. So obviously we had significant value as more places there, develop and build there. The other property we bought a considerable amount of property, we have got one piece sold for almost double what we paid for the property originally, which is the frontage piece. We have got a piece on the back under contract at about 40% over what we paid for the property. And we will have an additional piece there for sale. And we still have the [pair] (Ph) we still have both of those properties listed for sale. We do not have a contract either yet, but there is a lot of road construction going on right down there. And we knew it was going to be - we bought the land really cheap and we knew it was going to be conservative amount of time that we probably have to hold the land up to about 18 months. It has been about 12 so far. So I think in the next six months as that construction starts to complete, we will see activity on that property down there as well.

That is great. Alright. Well thank you very much guys. Awesome.

[Operator Instructions] Our next question comes from the line of Adam Wyden with ADW Capital. Please proceed with your question.

This is just a follow-up on the last question here. So I guess you have some real estate that is held for sale today that you expect to make a profit on in some capacity that will be in your free cash flow and then some real estate is kind of under development but not quite held for sale. I mean can you try and quantify like over the next call it 12 months to 18 months, how much cash you can take out of real estate sales maybe not just profit but actual cash.

Yes, I mean, it is really hard to say, because obviously I don't know when things will close, but if we sold everything, if we sold all $16 million or $15.7 million worth of property, and we got what I consider our kind of minimum asset price on it, probably an additional four million to six million in cash and we would eliminate another 10 million in debt or so.

Okay, so what you are saying is another $4 million above the carrying value?

Well, above the debt value. I don't know about the carrying value, but yes, but the level of debt. Remember we put cash down - the problems, we built some Bombshells on some of this property. So what happen is, let's say there is a loan on the property for $5.5 million and we sell the excess land. We, the way the note is written, we have to pay off 100% of the net proceeds to go against the loan. Even though the Bombshells is worth $7 million by itself, still the way the note is written, we have to pay off. Now what we will do is, come November, December of this year as Chicago and Pittsburgh become two years old. We will do a big refinance again, like we did in 2017 where we will take all of our existing Bombshells properties, the location in Pittsburgh, location in Chicago, and probably do a refinance into a large long-term 20 year real estate note, where we will be able to pull out some of that equity, probably on a 65% or 75% loan-to-value ratio. Eliminate these other loans and then pay out from there.

Right the higher interest loans that you have outstanding. Obviously the 15 million unsecured or something. You will be able to basically Refi that out and get more kind of -.

Right, and then turn them into real estate that against the existing real estate, kind of like we did in 2017. Very similar. And we will have made a whole bunch of note and come up with one - turn it into one note -.

Perfect. Let me ask something else. So you guys have about $15 million authorized on the buy back. Your free cash flow, I guess your run rate is about 30, but that probably on some level is burdened by your excess legal and accounting, which we will kind of get through. But I mean, when you think kind of forward in terms of closing for Boston and kind of getting out of the kind of in the back half, I mean your run rate free cash flow should be materially higher, right? As you kind of pro forma for these accounting costs in kind of Boston. I mean, how do you think about doing anything else with your money other than buying back stock? I mean this corona virus on some level, I guess is a gift, right? I mean, the stock went almost 30 bucks on you guys publishing your filings and now you are back at almost 20 and your free cash flow run rate at the end of the year will probably be closer to 40 than 30. I mean, I guess my kind of more philosophical question is, how do you think about doing anything other than buying back stock here. I mean, it seems like this is just a wonderful opportunity. I mean, can you think you can do more like in -.

As you have seen in the last quarter, that is all we did. We bought back $6.4 million worth of stock with all the cash flow regenerated and all the debt we paid everything else. We ended up with one million less than cash when we started the quarter with and bought $6.4 million of the stock back. As we move into this quarter, if the stock continues to sell off in the next week, and we will be out there buying it, I'm sure. So I mean if the market wants to continue to discount our assets, we are going to continue to buy them back.

So, is it fair to assume that next week to stock is at 18 bucks that you guys could, I mean within the guidelines of Safe Harbor and volume blocks, I mean, you could in theory execute against all 7% of that in whatever 14 million or 7% in the next kind of in this quarter I mean all things being equal.

Obviously, we have to have about, $8 million to $10 million in cash to operate. So, we are not going to get ourselves into a situation where we are short cash on hand for operations. But yes, I mean we would be extremely aggressive, it would depend on if blocks became available. In the last quarter, we had two major blocks come available, that we bought from a single investor. If those blocks become available, we are definitely going to look at them. We have now eliminated $10.8 million worth of balloons over the next few years. We have got a couple of smaller balloons out there still, we are dealing with now. We will decide whether we are going to try to push those or pay those off as we move forward. The real estate balloons will be paid off with the property sale. So, I'm not really worried about those. I mean, right now we are in a great position where we have the flexibility to basically do whatever we need to do or whatever we want to do depending on what the market allows us to do. If the market continues to allow us to buy our own assets at these prices, we will be very aggressive. If they get more expensive, we will slowdown. But unless they get fully priced, I don't see us doing a whole lot of stuff other than buying back stock. I mean, obviously, we are going to continue to grow the business that are 10% to 15% growth, but we are doing most of that through debt financing right now. And I think we will continue to do that. I think after debt service, even without the debt service right now we are probably in the $250,000 to $300,000 a week in free cash flow, after debt service that we can put into the stock, we are sitting on several million dollars of extra cash right now today and as we have closed on these other properties we are going to pick up - I think the first few properties, we pick up about $2.8 million in additional cash. So, right now cash is not a problem for us. So, it is just going to be a matter of whether we can find available shares for sale and what the prices continue to be.

Got it. Can you talk a little bit about the last three four openings of Bombshells and why you think they performed a lot better than the previous ones?

Sure, we have learned a lot, opening 10 stores, we have got a cookie cutter floor plan now so they are all almost identical. We have learned our demographics, we have learned the traffic flows and what is important. And the locations that we bought were very, very good locations, very high traffic locations, Class A restaurant locations. I think as we continue to look - the main things within the company the same amount to build a store, whether I build it in a Class A location, or Class B location. So before we were growing, we weren't really as I would say as wise as we are today, where we have really learned which locations and what traffic patterns we need to do $100,000 a week, $140,000 a week store. So you are doing, $5 million to $7 million store. I have looked at a lot of locations that we pass on that are probably $4 million $80,000 $90,000 a week stores, so they are doing for $4.5 million but it costs me the same amount of money to go back towards to build one that does $7 million. So, we are trying to really hold out and find the right locations right now. Build these stores that will do these higher numbers.

Got it. And, and in terms of - I mean you guys -I think more or less you probably committed to not building any new Bombshells this year kind of showing people the kind of the true earnings power of Bombshells and kind of showing people kind of a clean year with less legal and less accounting. I mean looking forward, I mean taking a step back I mean you have grown this thing from $2 million of EBITDA whatever it was gazillion years ago to maybe next year, exiting this year, you will be run rating close to 60. How do you think about the next move from 60 to 120 of EBITDA. I mean there are a lot of big strip club chains out there, but they are going to cost more than these smaller deals? I mean, how do you think about kind of getting your cost of capital to a level where you are not just buying the stock, but you are able to use it to kind of do more transformational deals? I mean, what do you think the market needs to see to kind of get you to that next level? I mean, obviously, you had to get your financials in order and all the rest and that was a prerequisite. But I mean, do you have confidence that you will be able to get back up? I mean I think for all the financial shenanigans with you guys were trading at 12, 13, 14, 15 times cash flow. Do you have confidence that if the numbers are in order and the financial performance in there that you will be able to get the stock back up to those types of levels where you can use it to do more transformational deals.

I mean, that is why I put Slide 13 in there to kind of show you or Slide 12 I'm sorry, Slide 12 to kind of show the progress of the capital allocation strategy. What we are going to do is we are going to keep taking it one year at a time. We are going to keep, growing at a 10% to 15% compounding rate of free cash flow. And eventually the market is going to have to recognize the consistency. I think once the market recognize the consistency, then we will get to multiple expansion, especially as we continue to prove ourselves over and over, or what is going to happen is there is going to be a few shareholders left that won't sell their stocks that have been with us for a long period of time that have seen the consistency. And so anybody else that wants to own part of this is going to have to pay up for it. I mean, that is kind of the reality of it.

Alright, well, I look forward to the buyback. Alright, and I will jump back in the queue.

Alright, thanks.

Our next question comes from the line of Douglas Weiss with DSW Investments. Please proceed with your questions.

Thanks, congrats on a good quarter. Most of the questions I had have been asked, but I guess on MNA a little more, could you talk a little bit about how many deals you have seen and whether the pricing is interesting at this point?

You know, we are seeing new ones every week. Price is not the issue on most, a lot of it has to do with where it is at and those types of things. But some of it is pricing, but we are just taking it easy right now. We have got this big acquisition; we are getting ready to close. We want to get that done. Our accounting team needs a breather, at least give them a couple of weeks. So we will let them relax for a couple of weeks through spring break, get them back to work in April. We are looking at quite a bit of stuff. There is new stuff every week I'm getting new e-mails, new text message and calls from people, stuff all over the country right now. So really it is just about finding what fits best for us next. That is kind of what we have been discussing internally at some of these acquisitions that we have on our plate. Like, which one do we want to really move on next.

Do you think it is better, or are you looking expanding in existing markets or are there advantages to - are there other new markets you would be interested in expanding into?

We are going to both. I mean, obviously existing markets are easier for us for the most part, or something that is - we want a new market that is close to an existing market that works out best for us. That way we have sports staff that is close, but we are also entering a new market, picking up new market shares in another market. That is why Pittsburgh and Chicago were both very good acquisitions for us. So those are the types of acquisitions we are looking at right now. Something that price range as well. Trying to stay in that probably $10 million to $15 million price range. It is easy.

Right. As far as your accounting and accountants, I know you brought in an outside consultant to help, remedy internal controls issues that were cited. Would you say that work is done at this point or have you kind of implemented their recommendations or is that still a work in process?

Well we are three, four out of five of our material weaknesses. I mean, it constantly evolving, right. Because the rules are constantly evolving and as we grow we have got to make sure our systems grow. The biggest problem we had is we grew so fast and we were in the process of doing our ERP system, but it hadn't been put in place, in 2016 and 2017, and we just grew so fast that the accounting system couldn't keep up. And as we converted from one accounting system to another, while our numbers all checked out every time there were no material changes to any of our financials or any material restatements of our financials, but we have to learn and the biggest problem you have as you get larger and larger is you don't know what you don't know. And, so we had to go through that learning process. The new ERP system is incredible. I think it gets better every quarter. We find something new that it can do and get better reports. And we are continuing to grow with and it is very scalable. So the nice thing is the go from where we are at now, the double in size or triple in size, this software won't even know - it won't even stretch it. I don't know what numbers, how high we have to get to in revenues before this offer has any problems. But hopefully someday we will find out.

Right. Oil prices have come down quite a bit and have you seen any impact in your Houston either in the Bombshells or in the clubs and as far as attendance?

Nothing, in January, February for sure. Were watching see through March. If we have any real effect, we only have really few locations that are affected by oil prices that is Odessa and Longview, Texas, Longview is a very small club anyway. You wouldn't even know if it is affected, we know - I mean, the market would never know it is too small. The Odessa market is a big market for us, two very large clubs out there, very profitable clubs for us. And so we watch that and we are definitely seeing some slowdown in that market on a year-over-year basis, but oil was I think $70 last year it is in the $50s this year and we will watch and see, I mean it is still very profitable club for us. Houston is not really affected by oil at all or really any of our other markets, I think the real market that are affected, if anything they are helped, because gas prices get cheaper so people have more disposable income.

Right. And then I guess last question. Do you have any thoughts generally on comps looking out for the rest of the year. I guess it sounds like the sporting calendars might be helpful but anything you would said there?

Yes, this quarter I mean January for remarks going to be some really nice comps. I think our compos were a little weaker last year suitable with in Atlanta. So, we didn't get a big push from that. We got a huge push from that this year. The NBA All Star Game this year is big for us. So, I'm hoping that the solid backlog turn is going to be fantastic for us too. So, we will watch as we move forward. And the big fight - the fight last weekend was great. We had a really big, big weekend.

Okay. well thanks. Talk to you next quarter.

Alright. Thank you.

Our next question comes from the line of [Darren McCammon] (Ph), a Private Investor. Please proceed with your question.

Hi guys. Few of them are already been answered. I think you already partially answered this, but maybe I can hear it again. You had about a 2.5 million increase in SG&A cost could you detail out how much of that was non-reoccurring one-time?

Probably, not. I mean, to be honest with you, we have been too busy getting everything done, and not really looking at what everything costs. In the next quarter or two, yes we will be able to break it out, because we are going to be able to see the differences as the costs come down. But the reality of it is not, I don't really know. I mean I know a lot of it is accounting, a lot of it is legal, and a lot of it has been - it is overtime. I mean, our accounting staff has been in this office for about 8 AM to 10 PM six days a week and almost the entire month of January. So, Bradley says that the accounting legal is probably between 800,000 and a million of it just by itself just related to that getting the 10-Ks and stuff done yes.

Okay, that is helpful. Okay so it adds up to about $0.027 a share . So, maybe offline if I could get a little more breakdown, I would appreciate it, but that 800 to a million is pretty helpful all by itself. Actually so I'm going to ask the same thing I asked couple weeks ago, you are at a $90 million run rate on your free cash flow, which when I adds up to about $36 million. Why are you using $30 million for your stock buybacks?

Well you got to remember we did $9 million this quarter. So we don't have those kind of numbers in the fourth quarter typically. And the third quarter is usually down a little bit. Let's see how this January February March quarter goes. And maybe we will have some adjustment to it. But I still think pretty much we are pretty close to that $30 million actual run-rate. So and we will see. I mean, the second half of the year will have a lot to tell hard. It is just hard to tell with all these added expenses where, wherever share we are at.$30 millions just the number that we are most comfortable with right now.

Fair enough. So you didn't look at it again in your second quarter which is after the March quarter basically.

We should put our second quarter results out in May. So we have a better hopefully have a better idea of where we are at and how things are looking in May.

Okay.

If our run-rate is increasing we will let you know at that point.

Okay. I will just a comment. I get confused every time you guys say Q1 Q2, Q3. You guys use December quarter March quarter, September quarter December quarter, since it is easier to keep track of.

I know but then I get confused. And this is the December quarter. So and the March quarter which will results will come out in May. We will have a better idea of how these first six months have gone. How the concert is starting to get in line. And I think Definitely the June quarter will be the real tell tale. Because I think we will have no real outside costs other ordinary business talks, I think in that quarter hopefully. That should be an exciting quarter for us which will come out those results will be out in August.

You talked before about doing some ROI modeling or Bombshells? You think you will have that in May August timeframe also?

It is possible. We will see how these guys do. They are going to be centered around foot on their thumbs a lot compared to what they have had to do for the last two years. So maybe they will build a model some of that for us. Give us a good idea of what is it is looking like. I definitely want to see the actual cash outlays on all these new stores with a property purchases and whatnot, especially as we start selling off these added pieces. So we get a bunch of our cash back. It is going to be interesting to see the cash on cash returns on the stores.

You are going to share those kind of models with us to some extent both with the property sales and without.

If we get them all done we will put it out into a format that makes sense, certain. It is what it is, at the end of the day, I mean if it was great that is the more reason show, and if it is good. But it can't be bad. I can tell I can see the returns. I know what cash we spent. I think I think is going to be a lot better than we have anticipated as we sell out these properties. And the numbers are coming in so strong from these new stores. These stores are opening at about 150,000 to 170,000 a week in sales. At that rate, even after the honeymoon period is over. Those stores are $6.5 million half $7 million year stores what they hold out at. And we started 150 and 170 and we bounce down to 120, 110 and then and then climb and hold up, stead 130,000 to 140,000 a week, we are going to be just under seven million unit on those new stores which are very highly profitable.

I suspect kind of the same thing but the market's always going to assume the worst unless you give them something concrete. That is kind of why I would like to see it basically is to show the market that you know, whatever is true is what I want to see, but I suspect with true, Bombshells is a better business than they think it is.

I think it is certainly starting to show that, we just got bogged down with accounting stuff and didn't have the time to sit here and evaluate every little nuance as we built these new stores we just more importantly let's get them built, let's get them open. Everything will catch up with itself later. And I think that is where we are going to see. Like I said, we get into this June quarter and get into the end of this fiscal year. In September, you are going to start seeing those numbers. I think when we start hitting our margins, we are going to have 15% to 21% margins. That is our goal. I mean, obviously if these stores come in at 15% to 20% margins or 18 to 21% margins and we do 45 million in sales, all of a sudden you got Bombshell playing out 45 million in revenues and nine million in earnings. I think that is going to show they pay for themselves pretty quick.

Yes. So on the MNA front, just an addendum to the previous question, I have noticed that you tend to do most of your purchases towards the latter half of the calendar year. Is that just coincidence or is there something built into it that tends to happen?

No, everybody wants to sell their clubs in August. This is one of those businesses where in October to March they are going “this is the greatest business in the world.” Then in the summer you slowed down and like, “oh, oh” then of course you hit, you know, school starts back up in August and we are all dying. You see our fourth quarter. I mean even our numbers our four quarter is if you go back to history, our fourth quarter is our lowest revenue numbers. And so, you know, that is when guys start thinking, “Oh, I should get out of this business” it happens every year. Nobody wants to [Multiple Speakers] And so guys start getting really serious about selling their clubs in the summer, August, September starts coming around. They really get serious about it, and by the time we make a deal, do the due diligence, do all the paperwork, get it all closed. We close between November and February, typically.

Okay that is interesting. That is all I got. Thanks guys.

Alright. Thanks a lot.

Our next question comes from the line of Dan Boyle with Schwerin Boyle. Please proceed with your question.

Hi Eric, first. I want to compliment you on how you have handled yourself through this somewhat challenging period. We appreciate that. Secondly a question on the acquisition how it actually works. Are there many other bidders out there for clubs of the sort like Boston, Miami, or is that just how competitive are these sorts of deals?

I mean, I'm sure there is other people out there that would love to be in these markets and whatnot. The trick is coming up with the cash. I mean, if you look at our next acquisition, we are putting $11 million cash down to the buyer. Now we are borrowing that money from a bank, but the seller is still getting $11 million in cash. So as far as the seller is concerned, he is getting $11 million cash county. He is carrying a $4 million note. I don't think there are a lot of other buyers out there that have the where with all to pull up that $8 million, $10 million, $11 million cash down payments, like ours guys been able to do. Second, I think we have a great track record of closing transactions now which I think that the sellers are taking note of, our reputation on actually not only making the deal, but actually closing the transaction. And in all of the sellers they get paid and they are happy, which definitely helps I think our reputation and helps us to be able to buy just more clubs.

When you do the U.S. - you net the EBITDA that you kind of put out for the acquisitions. You are sort of netting out, as I understand it a rental expenses, that sort of net of a rental expense. Is that am I correct on that thought observation?

Yes. We use what is call adjusted EBITDA, and what we do is we take the revenues out of their earnings and let's say that the revenue earnings $3 million, and then we buy the real estate for appraised value, the real estate seven point some odd million, we would take an 8% cap rate, or about 630,000. We take that 630 off of that three million, which would give us an adjusted EBITDA of about $2.4 million, we pay three times multiple of that given us a $7.2 purchase price for the business. So, we pay three times adjusted EBITDA for the business. And then we buy the real estate in addition to that. So, if you want to do - I have seen people out there saying oh you are paying six times or you are paying five times, if you want to look at an overall deal sure we are buying $3 million and we are paying 15 million for it. But we are getting a 7.89 piece of real estate, people want to forget that that real estate has real value. And as we pay that real estate down because as we own it we pay those mortgages down, we are able to go out and re-borrow that money again at 5%, 5.5% and take and reinvest that money again in the next deal. And so each deal I think is a little bit better and a little bit better for us. Such as we are 100%, basically 100% financing. So, the reality of the company is not using a single dollar of its own cash and they are picking up three million in new dollars in EBITDA -.

Thanks for your hard work.

Alright. Thank you.

Our next question comes from the line of Yaron Naymark with One Main Capital. Please proceed with your question.

Hey guys, congrats another strong quarter. I guess just looking at your free cash flow. I mean, if we look at the current run rate, it looks I think previous - someone else asked on the call there. It looks like you are run rating closer to 36 million in free cash flow. We understand you are comfortably using the 30 million as a starting point, which is a lot of puts and take this year, but just thinking about that 30-ish million starting point, that number it sounds to me like is burdened by basically your pre opening expenses from Bombshells to the new Bombshells locations, you have training costs associated with those other pre-opening expenses, I guess, but you have the accounting charges this year and the legal, it sounds like that is a few million bucks. Your maintenance CapEx sounds like it is elevated this year, because you spent money on the Miami locations in anticipation of the strong Super Bowl, you are paying down debt associated with the asset sales that you earmark. When you sell those so interest expense to go down and you have the North Eastern corridor acquisition, as well as I guess next year, you are going to have the full year benefits of the new Bombshells locations that didn't open up until midway through Q1 of this year. So, just thinking I mean if I look at a $30 million run-rate that you are talking about, you are comfortable talking about for this year. Is there any reason to think that the run-rate entering next year assuming you don't do any more M&A or don't open any more Bombshells won't be higher than that - decently higher than that $30-ish million or the $36 million that you are run rating?

I agree, if we were giving 2021 run-rate yes, the 2021 run rate would definitely be higher than the, the $30 million 2020 run rate is. There is a lot of there is a lot of one-time stuff in 2020 that is should not carry over into 2021. So our run-rate going forward in 2021 is definitely going to be really harder than $30 million.

And then and then any M&A on top of that would be incremental. So you are going to be at a run-rate of thoughts this year, going into next year. And then if you do M&A that will be incremental correct?

Correct. And the ideas that we grow that at a 10% to 15% cliff, right. So we need to do enough acquisitions that we increase that that run-rate at a 10% to 15% annual growth rate.

Got it. Okay, and then just if you guys were able to get back to I think in 2018, you guys were trading or double-digit EBITDA multiple before all this stuff started to hit the stock price. I mean if you guys got that, I don't know 11, 12 times either where you were selling at 18 months ago, I mean, do you think it is possible to accelerate M&A and do potentially bigger deals if you are able to pay off for stock and if you are able to buy stuff at three to four times EBITDA by issuing a little bit of stock. Instead of paying three to four times you are willing to pay five or six times if you are selling for 11 or 12 times. I mean do you think that will help you accelerate M&A or if you are willing to pay a little more, it wouldn't necessarily.

Well it wouldn't hurt. Anytime we are willing to pay a little bit more we are going to more deals on the table. Number one, whether we want to use equity or not, I don't know. But if I didn't have to use my stock, if I didn't have to use my cash to buy back stock, my cash will be building up. So if I bought back $6.4 million with a stock because the stock was trading at $34 right now. And so my $6 million or $7 million in cash was sitting on the books, I can do a much larger deal where I use $10 million a company cash $10 million, worth of bank debt and $8 million or $10 million worth of owner financing that I could be doing $30 million transactions, right. And still not using the equity, but you get a much larger transaction. So, there is definitely benefits to our equity trading at a fair market value. [Multiple Speakers] They are out there. We want to come up with the cash. I mean, like I said, there is deals out there they are just going to require some of the larger I call multi-club operators. They are going to want a considerable more amount of cash down. They are going to want $20 million $30 million in cash down on a $40 million $35 million acquisitions. So close to 50% 60% cash down. And so those are the type of things we were looking at. And I think we are getting, we will get there. In the meantime, we found some, some nice basically one-off acquisitions. We are buying one club at a time. And in when we are continuing to get our growth rates. The only concern for me right now is do I have the next acquisitions lined up, so I can continue to grow at that 10% to 15% growth rate. I want to take Slide 12, and I want to run it out five more years and I want to continue to see that compounding growth rates growing where free cash flow is doubling in five years, every five years or so. And we can keep that going, we are doubling free cash flow every five or six years. Then I think the market cannot continue to ignore the opportunity that we have created. Now have to start rewording the share price work.

Okay. But I guess the follow up to that is, so you say there are $30 million acquisitions or even bigger where you need to put down more cash if your stock was at 12 times all time EBITDA do you think those sellers would be willing to accept equity as a down payment?

They want equity now. Yes. I don't think we'd have a problem using our equity. We used it for years. The problem is the math doesn't make sense, because our equity is the most expensive form of capital we have right now. I mean, and especially now we get back up there, we are going to get down to 32 is at 10% I'm borrowing money at 5%, 5.5% and I get a 22% tax benefit on that. So my true cost was 4.25% on the capital. So why would I want these equity its cost me 14% or 15% right now when I can use debt that cost me 4%. And then that is a real issue using equity. So, but it is like you said, we were trading at 12 times cash flow. Now all of a sudden it might make more sense and when we will look at, we will do the math. The beauty of it is, it is all fit right math. We just figured out the cost of capital and we use the cheapest capital we can because that is what gives us the highest return.

Alright. Thanks guys.

Our next question is a follow up question from the line of Adam Wyden with ADW Capital. Please proceed with your question.

Yes. Just a follow-up on Yaron’s question, I think, but I mean, I totally get your math in terms of - and it is like music to my ears. It is like when a CEO says, hey 5% debt money, with a 22%, tax yield. That is great. I think what Yaron might be getting in, perhaps what I'm getting at is that there is a balance in terms of optimal capital structure as it relates to investors like to see a certain amount of - they don't like to see companies accessible leverage. So there is - I mean there, even though you can borrow at 8% or 4%, there is a limit to the amount of transactions you can do as it relates to the gross amount of debt or net debt to EBITDA. So I think maybe the question is, and maybe the question I have is that like, if you can get your equity cost of capital, right, I haven't done the math on 12 times EBITDA but I can probably do its 8%. If you have no CapEx since roughly in 8% pre-tax yield and after tax, so if you could trade a 12 times EBITDA that is a 6%, equity yield and you were able to buy assets at a 10 or 10%, 12%, 15%, it would actually avail you the opportunity to buy things faster because you wouldn't have to wait for the deleveraging. So I guess the question is if you could access equity at a 8% and 9% and 10% pretax and after tax, whatever, that would allow you to, if you said, not have to wait for the cash, that you are kind of billing up on your books as it goes, right? You could buy something big and give equity to the seller, or more importantly, I don't know if you have ever done this, but go to a bank and say, Hey, you know, I want to raise $30 million to buy XY and Z club?

We did it in 2007 and 2008, we are very familiar with it, when our equity gets to the point where it is cheaper for us to use equity, we can use equity, we are not adverse to issuing equity, we are only adverse issuing equity at a high cost. And if we can find the right acquisition, of course, it would make a lot of sense. I mean, if we are getting a 22% or 20 super minus close to five times we are getting a 20% yield, and we are able to do equity at even at 8% cost, like you said we are still going to 12% spread there. And if we are doing it on a large scale transaction, $60 million acquisition or $70 million acquisitions, then yes, it makes a whole lot of sense. Because that is a lot of - that is a pretty big number. When you look at the spread.

So, and as you get larger, presumably, I'm sure the multiple - there is more diversity. You are more diverse geographically, I mean a $60 million business is worth more than a 10 and a 120 is worth more than a 60. So, the bigger you get, the more justification you have for a better cost of capital and multiple. So, taking a step back, how many large club chains are there in the United States. I mean, it is just how, how fragmented do you think this whole thing is and how many, your 10 plus million dollar EBITDA change that you would be interested in. I mean, how many of those exist in the United States right now?

I'm mean several I don't know off the top of my head, but I think there is probably 500 clubs that we would like to own, out of those 500 clubs 300 of them are owned by probably less than 40 people. So, there is definitely some significant acquisition targets out there when we get serious about it. But we got to have the cash.

You got to have cash?

Yes, we have that kind of cash available to us. We go start knocking on different doors, we knock on the doors that we can knock on, it doesn’t do any good to knock on a door if I can't consummate a transaction with the seller. So, I know that the seller would be interested in. so I haven’t really don't really talk to too many very, very large operators out there, because we are just not in a position, I think it is time to really close the transaction.

So, we got to figure out how you can practice trading at 12 times EBITDA again, that is the answer.

Consistency. Yes, but that is the answer. We have got to stay consistent.

Good. Alright. Well that is it for me. Thank you.

Yes. Thank you.

Are there any final questions? This is the last chance for questions. There are no further questions in the queue at this time. I would like to hand it back to management for closing remarks.

So, thank you, operator and thank you, Eric. And thank you to everybody who called in with their questions tonight. We have included a few supplemental slides in our appendix. We will also be meeting with investors and presenting on March 26th in New York at the Sidotti Spring Conference. If you are a professional investor, would like to have a one-on-one with management, please let me know, just e-mail me. We might also hold a meeting management that night at Rick's Cabaret in New York, that hasn't been decided yet. On behalf of Eric, the company and our subsidiaries, thank you very much for calling in and listening to us tonight. And as always, please visit one of our clubs or restaurants. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.