SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1. Organization
BASIS OF PRESENTATION
Scores Holding Company, Inc. and subsidiary (the “Company”)
is a Utah corporation, formed in September 1981 and 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 utilizes the “SCORES” name and
trademark for 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 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, 2015.
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, 2016 are not necessarily indicative of the results to be expected for any other
interim period or for the year ending December 31, 2016.
Note 2. Summary of Significant Accounting
Principles
Concentration of Credit Risk
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company earns predominately royalty
revenues and to a lesser extent merchandise sales from 21 licensees.
With regards to 2016, concentrations of
sales from 4 licensees range from 13% to 16%, totaling 55%. There are receivables from 4 licensees ranging from 13% to 28% totaling
89%. Included in these amounts for 2016 are sales from 0 licensee considered a related party. There are receivables from these
3 licensees that are considered related parties of 23%, 25% and 28%, all which have been reserved.
With regards to 2015, concentrations of
sales from 6 licensees range from 10% to 15%, totaling 82%. There are receivables from 4 licensees ranging from 10% to 37% totaling
85%. Included in these amounts for 2015 are sales from 1 licensee considered a related party representing 14% of sales. There are
receivables from these 3 licensees that are considered related parties of 13%, 25% and 37%.
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.
As
a result of the tenuous nature of the gentlemen’s club industry in general and the resulting financial instability of several
of our new licensees the company has implemented a policy of recognizing revenue for these specific entities as it is received
rather than when it is earned. Once our relationship with them has been more firmly established and payments have been made regularly
and on time we will report these revenues when earned.
Principles of consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Income per Share
Net income per share data for both the
three-month
periods ending March 31, 2016 and 2015 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, 2016, there are no outstanding stock
equivalents.
Fair Value of Financial Instruments
The carrying value of cash 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
In August 2015, FASB issued Accounting
Standards Update (“ASU”) No.2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date” defers the effective date ASU No. 2014-09 for all entities by one year. Public business entities, certain not-forprofit
entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only
as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and
interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance
in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods
within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting
period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after
the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09. We are currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 (80%) is Robert M. Gans, who is also the majority shareholder and
chief executive officer of the Company. The Company is owed $122,109 in unpaid royalties and expenses as of March 31, 2016 and
December 31, 2015, which has been fully reserved.
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 (72%) of IMO and is also the Company’s
majority shareholder, and Howard Rosenbluth, the Company’s Treasurer and a Director, owns 2%. IMO owes the Company a royalty
receivable of $144,698 as of March 31, 2016 and December 31, 2015, respectively,
which has been fully reserved.
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 (80%) is Robert M. Gans. Since April 1, 2009, the monthly rent has been $2,500 per month
including overhead costs. The Company owed WSR $7,500 and $0 in unpaid rents as of March 31, 2016 and December 31, 2015.
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 paid Metropolitan
Lumber Hardware and Building Supplies, Inc. a fee in the amount of $30,000 per year. Effective May 5, 2015 the agreement was amended
increasing the annual fee to $90,000. In addition Metropolitan Lumber Hardware and Building Supplies, Inc. shall be eligible for
a discretionary cash bonus. 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. $22,500 and $0 in unpaid management services as of March 31, 2016 and December 31, 2015, respectively.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In December 2015, the Company accrued $180,000
bonus to Robert Gans which was paid in February 2016.
Effective December 9, 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. 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 (92.165%) of Star Light Events
LLC and Howard Rosenbluth, our Secretary, Treasurer and a Director, owns 1%. Starlight owes the Company a royalty receivable of
$130,000 as of March 31, 2016 and December 31, 2015, which has been fully reserved.
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.
The total amounts due to the various related
parties as of March 31, 2016 and December 31, 2015 was $30,000 and $180,000 respectively and the total amounts due to the Company
from the various related parties as of March 31, 2016 and December 31, 2015 was $396,807, which has been fully reserved.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4. Intangible Assets
Trademark
In connection with the acquisition of Scores
Licensing Company (“SLC”) as discussed above, the Company acquired the trademark to the name "SCORES". This
trademark had a gross recorded value at December 31, 2008 of $878,318 which had been increased for the purchase from SLC for $250,000
.
This trademark has been registered in the United States, Canada, Mexico, Costa Rica, Dominican Republic and the European Community.
The trademark has been completely amortized by straight line method over an estimated useful life of ten years. The Company's trademark
having an infinite useful life by its definition is being amortized over ten years due to the difficult New York legal environment
for which the related showcase adult club is operating. As of December 31, 2011 the cost of the trademark has been fully amortized.
The Company believes that the carrying
amount of the “Scores” trademark exceeds its fair or net present value as of March 31, 2016 and December 31, 2015.
Note 5. Licensees
The Company has 26 license agreements which
were obtained between 2003 and 2016; 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.), South East Clubs
(which includes Savannah and Jacksonville), Starlight Events LLC known as “Scores Atlantic City”, Scores Licensing
Corp known as “SLC”, Houston KP LLC, Parallax Management Corporation known as “Scores Gary”, Manhattan
Fashion, L.L.C. known as “Scores Harvey”, TWDDD, Inc. known as “Scores Mooresville”, Greenville, South
Carolina; Columbus, Ohio; Providence, Rhode Island; New Haven, Connecticut, Palm Springs, Florida, Queens, New York, Mideast Mountain
Communications, Inc., Cary Golf and Travel Inc., 5111 Genesee St Inc., Mustang Sally’s Spirit and Grill, and Bonkers Space
Coast, Inc. See Note 10 for litigation relating to a few of these clubs.
“IMO’s”
members are our majority shareholder, Robert M. Gans (72%), and Secretary and Director, Howard Rosenbluth (2%) 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 (80%). The club accounted for 0% and 8% of our royalty revenues for the three months ended March 31, 2016 and 2015, respectively.
Mr. Gans is also the majority owner (80%) of Swan Media Group, Inc., which accounted for 0% and 2% of our royalty revenues for
the three months ended March 31, 2016 and 2015, respectively. Mr. Gans is also the majority owner (92.165%) of Scores Atlantic
City, which accounted for 0% and 14% of our royalty revenues for the three months ended March 31, 2016 and 2015, respectively.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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, 2016 and December 31, 2015, the settlement receivable is $0 and $0 respectively.
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, 2016 and December 31, 2015, this promissory
note balance is $0 and $0, respectively.
SCORES
HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 7. Deferred Revenue
License agreements sometimes include Initiation/Inception
Fees. These fees are recorded as deferred revenue and amortized over the life of the agreements, usually five years.
Note 8. Settlement/Note Payable
As discussed in Note 6 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, 2016 and December 31, 2015
this note payable balance is $0 and $0, respectively is outstanding.
Note 9. Commitments and Contingencies
The Company records $7,500 a month as rent,
overhead, and services due 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 or about March 7, 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 60th 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 alleged 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
sought unspecified compensatory damages for plaintiff’s alleged loss of past wages and reimbursement of allegedly unlawful
deductions. Without any party admitting liability, the parties settled the referenced litigation for approximately $21,403.65.
The settlement was approved by the Court on April 13, 2015 and the case has been marked closed.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On February 13, 2015 we, together with
our subsidiary SLC, filed an action against Southeast Show Clubs, LLC and Michael Tomkovich in the Supreme Court of the State of
New York for the County of New York. Defendants had utilized the “Scores” name and trademark in connection with their
ownership and operation of adult entertainment clubs in Jacksonville and Palm Beach, Florida and in Savannah, Georgia. In this
action we sought damages for breach of contract in the amount of $900,000 plus interest, damages due to defamation and tortuous
interference in connection with the use of the “Scores” trademark in the amount of $500,000, issuance of a permanent
injunction prohibiting defendants from using the “Scores” name and trademark with respect to the adult entertainment
clubs they operate in Jacksonville and Palm Beach, Florida and Savannah, Georgia and all websites controlled by defendants, and
an accounting by defendants of all merchandise items sold by them containing the “Scores” trademark. As of April 17,
2015 the parties settled this matter. Pursuant to the settlement, defendants agreed to pay us $150,000, payable in 13 installments.
The first installment of $50,000 was paid upon finalization of the settlement, with 12 subsequent monthly payments of $8,333.33
commencing on May 1, 2015. The defendants also executed consents to the entry of a permanent injunction against them prohibiting
their continued use of the name and trademark “Scores” at their clubs if either or both of the defendants default in
their obligations under the settlement. In connection with the settlement, the parties entered into an amendment of the July 18,
2013 License Agreement between them. The amendment, among other things, (i) removes the Palm Beach club from the license agreement,
(ii) provides that the license agreement shall only apply to the Jacksonville and Savannah nightclubs, (iii) requires the licensees
to pay us a fixed royalty of $5,000 per month for each club, commencing May 1, 2015, and (iv) requires that the Savannah nightclub
and any related websites utilize the name “Scores Presents.” As of March 31, 2016 the defendants remain in compliance
with this settlement.
On February 19, 2015 we, together with
our subsidiary SLC, filed an action against Norm A Properties LLC in the Supreme Court of the State of New York for the County
of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of and
adult entertainment club in Detroit, Michigan. In this action we sought damages for breach of contract in the amount of $110,000
plus interest, and the issuance of a permanent injunction prohibiting defendant from using the “Scores” name and trademark
with respect to the Detroit club and all websites controlled by defendant. The defendant failed to appear and on August 31, 2015,
the court entered a judgment in favor of the Company (which order was amended on October 17, 2015), awarding a total of $117,646.92
to the Company. In addition, the court ordered defendant to render an accounting to the Company and enjoined the defendant from
using the “Scores” name and trademarks. The Company is currently seeking to enforce the judgment in Detroit, Michigan.
On March 14, 2016 three individuals purporting
to be adult entertainers who performed at Scores New York commenced a lawsuit in the SDNY on behalf of themselves and a putative
collective and class. The defendants in the action, in addition to us, include IMO, Robert Gans and Mark Yackow. The lawsuit alleges
violation of federal and state wage and hour laws, including,
inter alia
, failure to pay minimum wage, overtime, spread
of hours, uniform violations, and failure to provide wage notices and statements, arising from an alleged misclassification of
the plaintiffs as independent contractors. We believe these claims are without merit and we intend to vigorously contest this lawsuit.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 10. SUBSEQUENT EVENTS
On
April 3, 2016, fifty (50) individuals purporting to be professional models and/or actresses, filed a civil suit in the United States
District Court for the Southern District of New York against the Company, I.M. Operating, LLC, The Executive Club, LLC, and Robert
M. Gans (collectively, “Defendants”), alleging images of the plaintiffs were used without their consent for commercial
purposes on websites and social media outlets to promote gentlemen’s clubs operated by the Defendants or licensees of the
Defendants. The lawsuit further alleges that the unauthorized use of these images created, among other things, the false
impression that these individuals either worked at, or endorsed, one or more of such clubs. The lawsuit asserts causes of
action under Section 43 of the Lanham Act, 28 U.S.C. § 1125(a)(1), premised on a theory of false endorsement and/or association;
New York Civil Rights Law §§ 50-51; New York’s Deceptive Trade Practices Act, New York General Business Law §
349; defamation; as well as various common law torts, namely negligence, conversion, unjust enrichment and
quantum meruit
.
The lawsuit seeks unspecified compensatory damages, punitive damages, as well as attorneys’ fees and costs. The lawsuit
also seeks an injunction permanently enjoining the use of the individuals’ images to promote, via any medium, any of the
clubs. Given that this lawsuit is in its preliminary stages, it is not possible at this juncture to ascertain the likelihood
of an unfavorable outcome. However, the Defendants, including the Company, intend to vigorously defend themselves against
the claims asserted against them in this lawsuit.
Management evaluated subsequent events
through the date of this filing and determined that no additional events have occurred that would require adjustment to or disclosure
in the financial statements.