Notes To Condensed Consolidated Financial
Statements
(Unaudited)
Note 1. Organization
Basis for presentation
Scores Holding Company, Inc. and subsidiary
(the “Company”) is a Utah corporation, formed in September 1981 and is located in New York, NY. Originally incorporated
as Adonis Energy, Inc., the Company adopted its current name in July 2002. The Company is a licensing company that exploits the
“SCORES” name and trademark for franchising and other licensing options.
The condensed consolidated financial statements
of the Company have been prepared in accordance with generally accepted accounting principles in the United States. The condensed
consolidated financial statements of the Company include the accounts of Scores Licensing Corp. (“SLC”).
Our condensed consolidated financial statements
include our accounts, as well as those of our wholly-owned subsidiary. Certain prior period amounts have been reclassified
to conform to the current period presentation. Our accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. The
condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the condensed
consolidated results of operations and financial position for the interim periods presented. All such adjustments are
of a normal recurring nature. These unaudited condensed interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in
our Annual Report on Form 10-K for the year ended December 31, 2013.
The preparation of financial statements
in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The results of
operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for any other
interim period or for the year ending December 31, 2014.
Note 2. Summary of Significant Accounting
Principles
Going Concern
As of March 31, 2014 the Company has incurred
cumulative losses (since the inception of its business) totaling $(6,207,197) and a working capital surplus of $16,106. The Company
had net income of $150,950 for the three months ended March 31, 2014. Because of these conditions, the Company will
require additional working capital to develop business operations. The Company intends to raise additional working capital through
the continued licensing of its brand with its current and new operators. There are no assurances that the
Company will be able to achieve the level of revenues adequate to generate sufficient cash flow from operations to support the
Company’s working capital requirements. To the extent that funds generated from any future use of licensing are insufficient,
the Company will have to raise additional working capital. No assurance can be given that additional financing will be available,
or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the
Company may not continue its operations.
These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Concentration of Credit Risk
The Company earns predominately royalty revenues and to a lesser
extent merchandise sales from 12 licensees.
With regard to the three months ended March 31, 2014, concentrations
of sales from 5 licensees range from 14% to 17%, which include receivables from 3 licensees ranging from 11% to 42% from these
licensees for the three months ended March 31, 2014. Included in these amounts for 2014 is 1 licensee considered a related party.
Sales from this licensee are 16%. There are receivables from 2 licensees considered related parties of 10% and 42%.
With regard to the three months ended March 31,
2013,
concentrations of sales from 5 licensees range from 18% to 22%, which include receivables from 4 licensees ranging from 17% to
29% from these licensees for the three months ended March 31, 2013. Included in these amounts for 2013 was 1 licensee considered
related party. Sales from this licensee were 22%. There are receivables from 1 related party licensee of 22%.
Revenue recognition
The Company records revenues earned as
royalties under its license agreements as they are earned over the term of the license agreements. The terms of the royalties earned
under these license agreements vary from a flat monthly fee to a percentage of the revenues of the licensee on a monthly basis.
If a license agreement is terminated then the remaining unearned balance of the deferred revenues are recorded as earned if applicable.
Principles of consolidation
The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. Inter-company items and transactions have been eliminated
in consolidation.
Cash and cash equivalents
The Company considers all highly liquid
temporary cash investments, with a maturity of three months or less when purchased, to be cash equivalents. There are times when
cash may exceed $250,000, the FDIC insured limit.
Income Per Share
Net income per share data for both the
three-month
period ended March 31, 2014 and 2013 are based on net income available to common shareholders divided by
the weighted average of the number of common shares outstanding. As of March 31, 2014, there are no outstanding stock options.
Fair Value of Financial Instruments
The carrying value of cash, trade receivables,
prepaid expenses, other receivables, related party payables and accrued expenses, if applicable, approximate their fair values
based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value.
The Company utilizes the methods of fair
value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based
on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair
value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are
described below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when
little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
New Accounting Pronouncements
All new accounting pronouncements issued
but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.
Note 3. Related-Party Transactions
Transactions with Common ownership affiliates
On January 24, 2006, the Company entered
into a licensing agreement with AYA International, Inc. (“AYA”) granting AYA the right to use our trademarks in connection
with its online video chat website, “Scoreslive.com.” The agreement with AYA provides for royalty payments to be made
directly to the Company at the rate of 4.99% of weekly gross revenues from all revenue sources within the AYA website. On December
21, 2009, AYA transferred all of its rights in Scoreslive.com and in its licensing agreement with us to Swan Media Group, Inc.,
a newly formed New York corporation whose majority owner is Robert M. Gans, who is also the majority shareholder and chief
executive officer of the Company. The Company is owed $111,254 and $95,899 in unpaid royalties and expenses as of March 31, 2014
and December 31, 2013, respectively.
On January 27, 2009, the Company entered
into a licensing agreement with its affiliate through common ownership I.M. Operating LLC (“IMO”) for the use of the
Scores brand name “Scores New York”. Robert M. Gans is the majority owner of IMO and is also the Company’s
majority shareholder. IMO owes the Company a royalty receivable of $27,201 as of March 31, 2014. IMO paid for various
years of administrative costs related to accounting, business development, insurance and legal services for the Company, which
a portion thereof in the amount of $6,275 remains a payable to this related party as of December 31, 2013. The Company
also leases office space directly from Westside Realty of New York, Inc. (WSR), the owner of the West 27
th
Street Building. The
majority owner of WSR is Robert M. Gans. Since April 1, 2009, the monthly rent has been $2,500 per month including overhead
costs. The Company owed WSR $115,000 and $107,500 in unpaid rents as of March 31, 2014 and December 31, 2013, respectively.
Effective January 1, 2013, the Company
entered into a management services agreement with Metropolitan Lumber Hardware and Building Supplies, Inc., pursuant to which Metropolitan
Lumber Hardware and Building Supplies, Inc. provides management and other services to the Company, including the services of Robert
M. Gans and Howard Rosenbluth to act as executive officers of the Company. In consideration of the services, the Company pays Metropolitan
Lumber Hardware and Building Supplies, Inc. a fee in the amount of $30,000 per year. The agreement may be terminated by either
party upon ten days’ written notice. Mr. Gans is the sole owner of Metropolitan Lumber Hardware and Building Supplies, Inc.
The Company owed Metropolitan Lumber Hardware and Building Supplies, Inc. $37,500 and $30,000 in unpaid management services as
of March 31, 2014 and December 31, 2013, respectively.
The total amounts due to the various related
parties as of March 31, 2014 and December 31, 2013 were $152,500 and $143,775 respectively.
Pursuant to an oral arrangement, in September
2013 we granted an exclusive, non-transferable license for the use of the “Scores Atlantic City” name to Star Light
Events LLC (“Star Light”) for its gentlemen’s club in Atlantic City, New Jersey. Royalties under this license
are payable at the rate of $10,000 per month, commencing in April 2014, and the license is for a term of five years, with five
successive five year renewal terms. This oral arrangement was memorialized in a written license agreement between SLC and Star
Light effective December 9, 2013. Pursuant to the written agreement, we also granted Star Light a non-exclusive, non-transferable
license to sell certain licensed products bearing our trademarks. Starlight will purchase the licensed products from us or our
affiliates at our cost plus 25%. Robert M. Gans, our President, Chief Executive Officer and a director, is the majority owner of
Star Light Events LLC.
On December 9, 2013, the Company entered
into a license agreement with its subsidiary, SLC, granting SLC the exclusive right to use certain trademarks, including the “Scores”
stylized trademark, in connection with certain goods and services. The grant of license also includes the right to issue
sublicenses to third parties, subject to the approval of the Company. Pursuant to the agreement, SLC shall pay to the Company
a royalty, as determined by the Company, such as a percentage of net revenue or a flat fee, received in connection with the provision
of services and/or sale of goods using the trademarks. SLC may also pay a percentage, as determined by the Company, of all
royalties received by SLC under any sublicense agreements. SLC and any sublicensees are to adhere to quality standards as
set by the Company, and the Company has the right to inspect all facilities and approve all promotional and marketing materials
as well as any related packaging. The agreement has a one-year term with automatic one-year renewals, subject to either party’s
election to terminate the agreement at least thirty days prior to such renewal. The Company also has the right to terminate
the agreement, with immediate effect, upon the occurrence of certain events. The license is subject to any pre-existing license
agreements as of the date of the agreement.
Note 4. Intangible
Assets
Trademark
In connection with the acquisition of SLC,
the Company acquired the trademark to the name “SCORES”. This trademark had a net recorded value at March 31, 2014
of $ -0-. This trademark has been registered in the United States, Canada, Japan and the European Community. The trademark has
been completely amortized by straight line methods over an estimated useful life of ten years. The Company’s trademark having
an infinite useful life by its definition was amortized over ten years due to the difficult New York legal environment for which
the related showcase adult club is operating. This intangible asset was fully amortized as of September 30, 2011.
Note 5. Licensees
The Company has ten license agreements
(encompassing eleven clubs and the Scoreslive.com website) which were obtained between 2003 and 2014; Stone Park Entertainment
Group, Inc. known as “Scores Chicago”, Club 2000 Eastern Avenue Inc. known as “Scores Baltimore”, Silver
Bourbon, Inc., I.M Operating LLC known as “IMO”, Tampa Food and Entertainment Inc., Norm A Properties, LLC, Swan Media
Group, Inc. (formerly AYA International, Inc.), Starlight Events LLC known as “Scores Atlantic City” and SLC and Houston
KP LLC.
“IMO’s” members are our
majority shareholder, Robert M. Gans, and Secretary and Director, Howard Rosenbluth hence making “IMO” a related party.
The building occupied by IMO is owned by Westside Realty of New York Inc., of which the majority owner is Robert M. Gans. The club
accounted for 16% and 22% of our royalty revenues during the first three months of 2014 and 2013, respectively. Mr. Gans is also
the majority owner of Swan Media Group, Inc., which accounted for 8% and 2% of our royalty revenues during the first three months
of 2014 and 2013. Mr. Gans is also the majority owner of Scores Atlantic City; royalties do not accrue until April 2014.
Note 6. Settlement/Note Receivables
On September 26, 2011, the Company, Richard
Goldring and Elliot Osher (Goldring and Osher were formerly two of the Company’s principal shareholders) (collectively the
“Defendants”) and Sari Diaz et al. (the “Plaintiffs”) entered into a Court approved Joint Stipulation of
Settlement and Release (the “Settlement Agreement”) relating to a purported class action and collective action on behalf
of all tipped employees filed by Plaintiffs, pursuant to which Defendants agreed to make a settlement payment of $450,000 to resolve
and settle awards to Plaintiffs and related Plaintiffs’ attorneys’ fees. Additionally, the Defendants agreed to pay
the employer portion of payroll taxes on approximately $300,000 in distributions, approximately $15,600.
In a settlement payment agreement among
the Company, Goldring and Osher, the Company agreed to advance all of the Defendants’ obligations under the Settlement Agreement
and to pay $64,500 of Goldring’s and Osher’s legal fees to their designated attorney. In consideration for the Company’s
payment of these obligations, Goldring and Osher agreed, jointly and severally, to pay the Company $440,000 plus interest at the
rate of 5% per annum on the unpaid balance of such amount, in 40 equal monthly payments of $11,965 per month. To secure his obligations
under this agreement, Goldring agreed to assign to the Company a portion of his interests in a promissory note dated September
14, 2009 in the principal amount of $2,400,000 made by a third party to Goldring (the “Note”) and to grant the Company
a security interest in the Note, which will remain in effect until his obligations under this settlement payment agreement are
paid in full. As of March 31, 2014, the settlement receivable is $128,383.
On December 29, 2011 the Company entered
into a Promissory Note with Goldring for $30,000 plus interest at the rate of 5% per annum on the unpaid balance. To secure his
obligations under this agreement, Goldring agreed to assign to the Company a portion of his interests in a promissory note dated
September 14, 2009 in the principal amount of $2,400,000 made by a third party to Goldring (the “Note”) and to grant
the Company a security interest in the Note, which will remain in effect until his obligations under this settlement payment agreement
are paid in full. Three payments of $11,965 are due beginning March 2015. As of March 31, 2014, this promissory note balance is
$33,564.
Note 7. Settlement/Note Payable
As discussed in the Note regarding the
settlement receivable it should be noted that Mr. Gans (the Company’s Chief Executive Officer and majority stockholder) advanced
$560,151 to settle the Sari Diaz et. al. litigation and fund the $30,000 loan to Mr. Goldring. As of March 31, 2014, $162,042 is
outstanding.
In March 2014, the Company filed a complaint
against various parties for trademark infringement. A settlement was reached in which the Company would receive $150,000 and the
defendants would cease and desist from further use of the trademarks. The first installment of $63,887 ($100,000 less legal fees)
was received in March 2014.The second installment of $50,000 is due in June 2014. This installment will be recorded when received
due to its unsecured nature.
Note 8. Commitments and Contingencies
The Company records $2,500 a month as rent,
overhead, and services dues to Metropolitan Lumber Hardware Building Supplies, Inc. for services rendered by the management of
the Company. Mr. Gans is the sole owner of Metropolitan Lumber Hardware Building Supplies, Inc.
The Company currently leases office space
from the Westside Realty of New York which is owned and operated by Robert Gans our majority shareholder, for $2,500 a month.
On June 14, 2011, Christina Maldonado,
a former front door receptionist/coat checker at Scores New York, located in New York NY filed a civil lawsuit against the Company
and IMO alleging violations of Title VII of the Civil Rights Act, New York State Human Rights Law, New York Executive Law, New
York City Human Rights Law and the New York City Administrative Code, based on allegations of sexual discrimination and sexual
harassment. The lawsuit further alleges that both the Company and IMO were her employers. The lawsuit seeks unspecified damages
for alleged loss of past and future earnings and emotional distress and humiliation. The Company disputes that that it was an employer
of the plaintiff and categorically denies all allegations of sexual discrimination and sexual harassment. The Company responded
to the complaint and later filed an amended complaint and asserted a cross claim against IMO. The Company is vigorously defending
itself in this litigation and does not expect that the outcome will be material.
In mid-March 2010, the Company was named
by Nichole Hughes in a complaint filed with the SCNY. Ms. Hughes sued the Company for an unspecified amount of damages in connection
with an alleged unauthorized use of her image in the Company’s advertising materials. On June 20, 2010, the Company filed
a pre-answer motion to dismiss the complaint, which was denied on December 17, 2010. The Company then filed an answer and affirmative
defenses and a third party complaint against IMO, owner and operator of the club where Ms. Hughes was employed. Plaintiff’s
counsel was granted leave by the court to withdraw from representation in January 2013. Plaintiff failed to appoint new counsel
or further participate in the case and the case was dismissed on May 20, 2013.
On March 14, 2013, Miki Yamada, a former
bartender at the Scores New York nightclub located at 536 West 28
th
Street, New York, NY filed charges against the Company
and IMO with the EEOC claiming violations of Title VII based upon alleged sexual harassment, discrimination based on gender and
unlawful retaliation. Ms. Yamada also delivered a draft civil complaint to the Company containing similar allegations. Although
the Company disputed the issues of liability and damages asserted by Ms. Yamada, the Company and the other respondents settled
these matters for a payment of $90,000 (of which the Company paid $0) to Ms. Yamada pursuant to a settlement and release agreement
dated April 30, 2013. These matters were settled out of court.
On June 14, 2013, Elizabeth Shiflett, a
former cocktail waitress, filed a civil lawsuit against the Company in the S.D.N.Y. alleging violations of Title VII of the Civil
Rights Act of 1964 (“Title VII”), as amended, the New York State Human Rights Law (“NYSHRL”) and the New
York City Human Rights Law (“NYCHRL”) based upon allegations of sexual discrimination, creating a hostile work environment
based upon plaintiff’s sex and race and unlawful retaliation against plaintiff. The lawsuit further alleges that at all material
times the Company was the employer of the plaintiff. The lawsuit had been preceded by a Determination of the U.S. Equal Employment
Opportunity Commission (the “EEOC”) on January 25, 2013 that there was reasonable cause to believe that the Company
had violated Title VII as a result of the complained-of conduct. The lawsuit seeks a declaratory judgment that the practices complained
of violated Title VII, the NYSHRL and the NYCHRL, an injunction enjoining the Company from engaging in future unlawful acts of
discrimination, harassment and retaliation, unspecified compensatory damages for plaintiff’s alleged loss of past and future
earnings, emotional distress, humiliation and loss of reputation, punitive damages as a result of the Company’s alleged disregard
of plaintiff’s protected civil rights, and attorneys’ fees and costs. The Company disputes that it was an employer
of the plaintiff and categorically denies all allegations of sexual discrimination, sexual and racial harassment and retaliation.
In an order dated April 10, 2014, the Court dismissed all claims. In May 2014, Ms. Shiflett filed an appeal. The Company will vigorously
defend itself in this litigation and does not expect that the outcome will be material.
On or about February 28, 2014, Kiana Love,
a former entertainer and masseuse at The Penthouse Executive Club and Scores New York, both located in New York, NY, filed a civil
lawsuit in the SDNY against us, The Executive Club, LLC, Go West Entertainment, Inc., Scores Entertainment, Inc., Entertainment
Management Services, Inc., 333 East 60
th
Street., Inc., I.M. Operating, LLC, Richard Goldring, Elliot Osher, Robert
Gans and Mark Yackow (collectively “Defendants”), alleging, for the time during which she performed as a masseuse,
violations of the state and federal wage and hour laws, including the New York Labor Law and Fair Labor Standards Act, based upon
allegations of failure to pay minimum wage, uniform related expenses, and allegations of improper wage deductions and tip misappropriation
as well as record keeping violations. The lawsuit further alleges that at all material times Defendants were employers of Ms. Love,
the plaintiff, while she performed massage services at Scores New York as well as The Penthouse Executive Club. The lawsuit
seeks unspecified compensatory damages for plaintiff’s alleged loss of past wages and reimbursement of allegedly unlawful
deductions. We dispute that we were an employer of the plaintiff, who was at all material times an independent contractor, and
categorically deny all allegations of violations of law, including the wage and hour laws, improper tip taking, and violations
related to uniforms. The Complaint in the action has not yet been served and our answer therefore has not yet become due.
We have been presented with an initial demand for settlement in the amount of approximately $75,000 and, along with other defendants,
are actively trying to resolve the dispute with counsel for the plaintiff without a need to appear in the lawsuit.
There are no other material legal proceedings
pending to which the Company or any of its property is subject, nor to our knowledge are any such proceedings threatened.
Note 9. Subsequent Events
Management evaluated subsequent events
through the date of this filing and determined that no such events have occurred that would require adjustment to or disclosure
in the financial statements.