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 nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for any other
interim period or for the year ending December 31, 2016.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2. Summary of Significant Accounting
Principles
Going Concern
As of September 30, 2016 the Company has cumulative
losses totaling $(6,015,333) and working capital of $243,512. The Company had a net loss of $(191,171) for the nine months ended
September 30, 2016. 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 sale from 26 licensees.
With regards to 2016, concentrations of sales
from 5 licensees range from 10% to 16%, totaling 64%. There are receivables from 4 licensees ranging from 21% to 27% totaling 94%.
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 22%, 24% and 27%, most of which has been reserved.
With regards to 2015, concentrations of sales
from 7 licensees range from 10% to 14%, totaling 81%. There are receivables from 4 licensees ranging from 8% to 25% totaling 79%.
Included in these amounts for 2015 are sales from 1 licensee considered a related party representing 10% of sales. There are receivables
from these 3 licensees that are considered related parties of 21%, 25% and 25%.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Income per Share
Net income per share data for both the nine-month
periods ending September 30, 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 September 30, 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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-for profit 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.
In January 2016, the Financial Accounting Standards
Board (FASB) issued an Accounting Standards Update (ASU) “ASU 2016 – 01 Recognition and Measurement of Financial Assets
and Financial Liabilities” intended to improve the recognition and measurement of financial instruments. The ASU affects
public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial
liabilities. The new guidance makes targeted improvements to existing GAAP by requiring equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring
the fair value of financial instruments for disclosure purposes. Requiring separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet
or the accompanying notes to the financial statements. Eliminating the requirement to disclose the fair value of financial instruments
measured at amortized cost for organizations that are not public business entities. Eliminating the requirement for public business
entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet, and requiring a reporting organization to present separately
in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. The ASU on recognition and measurement will take effect for
public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU
permits early adoption of the own credit provision (referenced above). Additionally, it permits early adoption of the provision
that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial
instruments measured at amortized cost. 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)
In April 2016, the Financial Accounting Standards
Board (FASB) issued an Accounting Standards Update (ASU) “ASU 2016 – 10 Revenue from Contract with Customers (Topic
606): identifying Performance Obligations and Licensing.” The amendments in this Update do not change the core principle
of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying
performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic
606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration
and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s
intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which
is satisfied over time). The amendments in this update are intended render more detailed implementation guidance with the expectation
to reduce the degree of judgment necessary to comply with Topic 606.
The amendments in this Update affect the guidance
in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective
date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements
in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update2014-09 by one year. 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.
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
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 September 30, 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 $146,240 as of September 30, 2016 and December 31, 2015, of which all but $1,542 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 $0 and $0 in unpaid rents as of September 30, 2016 and December 31, 2015, 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 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 $0 and $0 in unpaid management services
as of September 30, 2016 and December 31, 2015, respectively.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company has accrued expenses of $54,446
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owes $54,446 and $0 as of September 30, 2016 and December
31, 2015, respectively.
During
the 2
nd
quarter, the Company had made advances to Starlin LLC and Metropolitan Lumber, Hardware & Building Supplies,
Inc. as short term loans. It should be noted both of the loans were repaid on July 29, 2016. Both of these entities are under
the common control of Mr. Robert Gans, our President and Chief Executive Officer. At September 30, 2016 amounts due from
these related parties amounted to $0 and $0, respectively. The Company accounted for and presented the advances due from related
parties as a reduction of stockholders' equity in accordance with the guidance of ASC 505-10-45. It is possible that these advances
by the Company to related parties could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. However,
the Company has not made a determination as of the date hereof if the advances resulted in a violation of that provision. If, however,
it is determined these advances violated the prohibitions of Section 402 from making loans to executive officers or directors,
the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved
favorably. The Company is unable to predict the extent of its ultimate liability with respect to these transactions. The costs
and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements,
judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company's financial
condition and operating results.
In December 2015, the Company accrued a $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 September 30, 2016 and December 31, 2015, which has been fully reserved. Starlight is currently closed and looking for a
new location in the same area.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 September 30, 2016 and December 31, 2015 was $54,446 and $180,000 respectively and the total amounts due to the
Company from the various related parties as of September 30, 2016 and December 31, 2015 was $398,349 and $396,807 respectively.
The Company has reserved $396,807 and $266,807 as of September 30, 2016 and December 31, 2015, respectively.
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 September 30, 2016 and December 31, 2015.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Licensees
The Company has 25 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. known as “Scores New Orleans”, I.M Operating
LLC known as “Scores New York”, Tampa Food and Entertainment Inc. known as “Scores Tampa”, Norm A Properties,
LLC known as “Scores Detroit”, Swan Media Group, Inc. (formerly AYA International, Inc.) known as “Scores Live”,
South East Clubs, LLC (which includes “Scores Savannah” and “Scores Jacksonville”), Starlight Events LLC
known as “Scores Atlantic City”, Scores Licensing Corp known as “SLC”, Houston KP LLC known as “Scores
Houston”, Parallax Management Corporation known as “Scores Gary”, Manhattan Fashions, LLC known as “Scores
Harvey”, TWDDD, Inc. known as “Scores Mooresville”, High Five Management Inc. known as “Scores Greenville”,
CG Consulting LLC known as “Scores Columbus”, Dick Shappy known as “Scores Providence”, Funn House Productions
LLC known as “Scores New Haven”, Palm Springs Grill LLC known as “Scores Palm Springs”, CJ NYC Inc, known
as “Scores Queens”, Cary Golf & Travel Inc. known as “Scores Raleigh”, 5111 Genesee St Inc. known as
“Scores Tiffany Buffalo”, Mustang Sally’s Spirits and Grill, Inc. known as “Scores Tonawanda Buffalo”,
Bonkers Space Coast, Inc. known as “Scores Green Bay” and NEW 4125 LLC known as “Scores Phoenix”. 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 7% of our royalty revenues for the nine months ended September 30, 2016 and 2015, respectively.
Mr. Gans is also the majority owner (80%) of Swan Media Group, Inc., which accounted for 0% and 1% of our royalty revenues for
the nine months ended September 30, 2016 and 2015, respectively. Mr. Gans is also the majority owner (92.165%) of Scores Atlantic
City, which accounted for 0% and 10% of our royalty revenues for the nine months ended September 30, 2016 and 2015, respectively.
Note 6. 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 7. 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 an 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 was unable
to collect on the judgement as the defendant, Norm. A. Properties, had no assets that could be found. The Company therefore filed
another action with in the US District Court in the Southern District of New York seeking to recover the unpaid royalties from
Scores Detroit, Inc., the company which is believed to have operated Scores Detroit and Majed Mike Dabish, its principal.
On June 29, 2016 the court transferred the case to the US District Court for the Eastern District of Michigan for further proceedings.
The case is currently in the discovery phase.
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 lawsuit is captioned
Taylor et al. v. I.M. Operating LLC, et al.
, Case No. 16cv1909 (ALC) (S.D.N.Y.)
(the “Action”). The defendants in the Action, in addition to us, included IMO, Robert Gans and Mark Yackow. The Action
alleged 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. The Action was withdrawn by Notice of Voluntary Dismissal, So Ordered on May
11, 2016, in favor of the Arbitrations discussed below.
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 merit. 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. The Company, along with all of the Defendants, intends to vigorously defend
themselves against the claims asserted against them in this lawsuit, including having filed a motion seeking dismissal of the complaint.
The Court has not yet issued a decision resolving this motion.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On or about July 22, 2016 three individuals,
Courtney Taylor, Heidi Swensen and Trace Byers, (collectively the “Claimants”) who formerly performed as adult entertainers
at Scores New York, owned in its entirety by I.M. Operating LLC, each brought individual and separate arbitrations (collectively,
the “Arbitrations”) against Scores NY as well as, among others, the Company. The American Arbitration Association
is administering the Taylor, Swensen and Byers Arbitrations, identified by case numbers 01-16-0003-1171, 01-16-0003-1170 and 01-16-0003-1169,
respectively. The Claimants allege that they were misclassified as independent contractors, that they should have been classified
as employees, and as a result the respondents, including the Company, violated,
inter alia
, applicable federal and state
wage and hour laws. The Arbitrations seek unspecified compensatory damages, liquidated damages, as well as attorneys’ fees
and costs.
Discovery demands in each of the Arbitrations
have either been served or will be served shortly.
Given that the Arbitrations are in their preliminary
stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable outcome. However, the respondents,
including the Company, intend to vigorously defend themselves against the claims asserted against them in the Arbitrations.
The Arbitrations follow the filing and subsequent
voluntary dismissal of the Action, as discussed above.
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 8. SUBSEQUENT EVENTS
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.