Houston hospitality company releases findings prompted by anonymous bloggers

RCI Hospitality has announced its findings following an SEC inquiry and allegations by certain anonymous internet bloggers. These involve related party transactions and undisclosed perks enjoyed by senior management. The company had delayed its quarterly filings due to the investigation.

RCI operates 39 adult nightclubs (including Rick’s Cabaret) and 8 restaurant/bars under the Bombshells brand name.

In short, Big Rick Invest & Detroit Bear, the anonymous bloggers, were substantially vindicated!



You can read Detroit Bear’s extensive article here.

Special Committee

An international law firm was hired to conduct a review and found the following;

  • RCI paid Ed Anakar, Director of Operations, between $471,154, $450,000 and $375,000 for the three years ended September 2018. Ed Anakar, his brother is a director and supposedly an independent one. (That wasn’t too difficult to figure out as company stated this in its 10-K!)
  • A company (Sherwood Forest Creations) owned by the brother of Eric Langan, the CEO, was hired to make furniture for the Bombshells locations. The company was paid $633,000 over 3 years.  (Big Rick made no mention of this company. Instead he alleged that the construction company (Tannos Construction) hired to build the Bombshell bars was part owned by the CEO. This is not mentioned in the review).
  • Personal use of aircraft by the CEO and CTO Travis Reese was incorrectly calculated for 2018 and not included in the 2017 and 2016 annual statements. The correct amounts for the CEO are $96,797, $79,748 and $55,101 respectively. (Big Rick nailed this one – he also stated that the CTO, the number 2 executive in the company, happens to be a pilot).
  • Not disclosed in the annual reports was that Steve Jenkins, a director, filed for Chapter 13 bankruptcy in Aug 2010 and October 2015 (the bloggers missed this one).

There was no mention of the allegations by Big Rick that another of the independent directors is an attorney who has represented the company in previous lawsuits. Nor did they cover the alleged loans to the CEO from the company, Ed Anakar ($90,000) or from an independent lawyer that does work for RCI ($38,500). (It could be that the scope of the independent investigation was somewhat limited).

Proposed Actions

The audit committee and the Board of Directors anticipate taking the following actions

  • Appoint at least one new independent director
  • Appoint a Chief Compliance Officer will report to the audit committee
  • Strengthen the related party transaction policy
  • Adopt an enhanced code of conduct policy
  • Adopt an airplane policy outlining personal use by employees
  • Sell three residential houses that the company owns in Houston (the bloggers got this one right).



Auditors resign

In addition, last week, the company also disclosed that the external auditors, BDO, were resigning as the company’s auditors as BDO believes that

” the company has not performed sufficient investigatory procedures and has not taken timely and appropriate remedial action in response to certain deficiencies that BDO thinks exist in the way the internal review has been conducted, including:

  1. undue restriction on the scope of the internal review;
  2. failure to initiate certain forensic procedures;
  3. refusal to provide BDO access to pertinent interview summaries and other documents;
  4. lack of assessment as to the impact of the matters identified to date on existing and future regulatory filings, including financial statements related footnotes;
  5. restrictions, based on privilege, hindering BDO’s ability to properly shadow and evaluate the adequacy of the internal review.”

The company disagrees with BDO’s assessment.

Personal guarantees from CEO

Eric Langan has been the CEO since 1999. He has a base salary of $1 million and owns 7% of the company. Unusually for a public company, he also personally guarantees all of the commercial bank indebtedness of the company. That probably makes it harder for an activist investor to get involved.

Big Rick vindicated!

Back in June 2018, when Big Rick Invest started publishing the allegations, the share price of RCI was $30.  He believed it was worth between $14.32 and $17.41 a share. The current share price is …$16.07.

SEC filing – RCI Hospitality

 

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