Entertainment company delays quarterly filing due to SEC investigation

RCI Hospitality Holdings (market cap $184 million) which has its head office in NW Houston, has announced that it will delay filing its quarterly 10-Q. It also received a delisting notice from Nasdaq.

RCI operates 39 adult nightclubs (including Rick’s Cabaret) and 7 restaurant/bars under the Bombshells brand name.

According to the SEC filing;

In mid- and late 2018, a series of negative articles about the registrant was anonymously published in forums associated with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of the registrant’s Audit Committee engaged independent outside counsel to conduct an internal review. The registrant and its management are cooperating with both the internal review and the SEC inquiry. Because the internal review is still ongoing, the registrant will be delayed in filing its Form 10-Q.

Anonymous allegations

That got me searching for the negative articles. They weren’t too difficult to find. You can read them here.

The anonymous author alleges, among other allegations

  • RCI made loans to the CEO, Eric Langan, that were not disclosed in SEC filings
  • One of RCI’s independent Directors is the brother of a senior executive. This is a violation of the SEC requirements for being an independent director
  • Another of the independent Directors represents RCI in lawsuits
  • CEO’s relative defaulted on a loan received from RCI – also not disclosed in SEC filings

Interestingly in the 10-K filed at the end of December for the year ended September 30, 2018, the company states that Nourdean Anakar is an independent director. Yet, under related party transactions, the company discloses that it borrowed $500,000 at 12% interest from Ed Anakar, an employee of the company and the brother of Nourdean. Ed Anakar is the Director of Operations at RCI.

Since the company disclosed the delay in filing the 10-Q, the stock price has dropped 15%.

Material Weaknesses

Unrelated to the allegations, the 10-K also disclosed material weaknesses in controls over

  • Revenues – segregation of cash counts
  • Complex accounting and management estimates
  • Financial statement close and reporting
  • IT – lack of controls to prevent unauthorized access to certain systems
  • Segregation of duties.

That’s the most comprehensive list of internal control weaknesses I have seen disclosed for a publicly-traded company. RCI did go live with a new ERP system in October 2017


SEC filing

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