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 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, 2017.
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, 2018 are not necessarily indicative of the results to be expected for any other
interim period or for the year ending December 31, 2018.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 2. Summary of Significant Accounting
Principles
Going Concern
As of March 31, 2018 the Company has cumulative
losses totaling $(7,605,323) and negative working capital of $1,357,019. The Company had a net loss of $(1,381,925) for the three
months ended March 31, 2018. 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 initiation fees from 13 licensees.
With regards to 2018, concentrations of
sales from 4 licensees range from 15% to 24%, totaling 76%. There are receivables from 4 licensees ranging from 15% to 26% totaling
83%. Included in these amounts for 2018 are sales from 0 licensees considered a related party. There are receivables from these
3 licensees that are considered related parties of 19%, 23% and 26%, most of which has been reserved.
With regards to 2017, concentrations of
sales from 3 licensees range from 12% to 17%, totaling 47%. There are receivables from 4 licensees ranging from 20% to 26% totaling
85%. Included in these amounts for 2017 are sales from 0 licensees considered a related party. There are receivables from these
3 licensees that are considered related parties of 20%, 23% and 26%, most of which has been reserved.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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
Under ASC 260-10-45,
“Earnings Per Share”, basic income (loss) per common share is computed by dividing the income (loss) applicable to
common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation.
Diluted income (loss) per common share is computed using the weighted average number of common shares and, if dilutive, potential
common shares outstanding during the period. Accordingly, the weighted average number of common shares outstanding for the periods
ended March 31, 2018 and 2017, respectively, is the same for purposes of computing both basic and diluted net income per share
for such years. As of March 31, 2018, 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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.
Recently Issued Accounting Standards
Update
Revenue Recognition
The Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification is the source of authoritative generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative;
rather it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information
to help the user of GAAP understand how and why GAAP is changing and when the changes will be effective. In April 2016 the FASB
issued
Accounting Standards Update (“
ASU”) No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (“ASC 606”) to be effective January 1, 2018. It is a comprehensive new revenue
recognition standard that supersedes virtually all existing revenue guidance, including industry-specific guidance. Under
the new standard, revenue is recognized when control of the promised goods or services is transferred to customers in an amount
that reflects the consideration to which we expect to be entitled in exchange for those goods and services. The
standard creates a five-step model that generally requires companies to use more judgment and make more estimates than under the
previous guidance when considering the terms of contracts along with all relevant facts and circumstances. These include
the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially
includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing
revenue in line with the pattern of transfer. The revenue recognition standard explains step one of the five step model requires
contracts are to be identified with a customer. If each party to a contract has the unilateral enforceable right to terminate a
wholly unperformed contract without compensating the other party (parties) a contract does not exist for purposes of ASC 606. Inasmuch
as all the Company licensing agreements possess such a provision ASC 606 is not applicable. Accordingly, with regard to Royalty
Revenue the adoption of ASC 606 is not deemed to be relevant to us. See Note 3- Revenue Recognition for further detail.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
New accounting standards not yet adopted
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.
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. Revenue Recognition
Effective January 1, 2018, we adopted Financial
Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). ASC 606
was applied using the modified retrospective method. Accordingly, comparative periods have not been adjusted and continue to be
reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”). There was a cumulative effect of $71,000 to be
recognized as an adjustment to opening retained earnings at January 1, 2018 related to deferred revenue booked from initiation
fees that were received in prior years of $49,750 that would have been recognized at a point in time and revenues that would be
recognized on the accrual basis in the prior years based on collection probability assessment of $21,250. Under ASC 605, initiation
fee revenue was to be deferred and recognized over the life of the contract while most royalty revenues were recognized as collected.
However, under ASC 606, revenue from the initiation fees are recognizable when at a point in time (first month of the contract)
and royalty revenues are recognized over time for those contracts with probable collections.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Our license fee revenue is generated from
royalties earned through intellectual property licensing agreements which permit the licensee to use the recognition and status
of the Scores brand in order to promote their businesses. Under ASC 606, revenue is recognized throughout the life of the executed
licensing agreement. We measure revenue based on consideration specified in a contract with a customer. Furthermore, we recognize
revenue when we satisfy a performance obligation by transferring control over the service to our customer.
A performance obligation is a promise in
a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance
obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. Our customers
typically receive the benefit of our services as they are performed. Substantially all customer contracts provide that we are compensated
for services performed to date. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Nature of goods and services
The following is a description of our products
and services from which we generate revenue, as well as the nature, timing of satisfaction of performance obligations, and significant
payment terms for each:
i. Licensing Revenue
Licensing fees represent the fees we receive
from the licensing of our Scores trademark. 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. The licensing rights are transferred to our customers over
time, and we recognize licensing revenue over time because the customer will simultaneously receive and consume the benefit from
the license as the performance occurs.
ii. Stand-Ready for Consulting and Club
Set-up Services
The Company offers an initial set-up and
consultation to new clubs in order to aid in the opening and operation. The services are provided within the first month of any
licensing agreements, and sometimes are not requested by the licensee and therefore never provided at all.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Disaggregation of revenue
In the following table, revenue is disaggregated
by major products/service lines, and timing of revenue recognition (in thousands):
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Major products/service lines
|
|
|
|
|
|
|
|
|
|
Licensing fees – royalty revenue
|
|
$
|
101,209
|
|
|
$
|
204,825
|
|
|
Initiation fees
|
|
|
0
|
|
|
|
3,000
|
|
|
Total revenue
|
|
$
|
101,209
|
|
|
$
|
207,825
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
0
|
|
|
$
|
3,000
|
|
|
Products and services transferred over time
|
|
|
101,209
|
|
|
|
204,825
|
|
|
|
|
$
|
101,209
|
|
|
$
|
207,825
|
|
Contract balances
The following table provides information
about receivables, assets, and liabilities from contracts with customers (in thousands):
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Trade receivables - including affiliates, net
|
|
$
|
66,510
|
|
|
$
|
73,943
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
25,000
|
|
|
$
|
14,000
|
|
|
Deferred revenue - long term
|
|
$
|
0
|
|
|
$
|
35,750
|
|
Contract receivables are recorded at the
invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition
and collateral is not required.
The contract liabilities primarily relate
to deferred revenue. Amounts billed in advance of performance obligations being satisfied are booked as deferred revenue.
Practical Expedients and Exemptions
The Company did not apply any practical
expedients during the adoption of ASC 606.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4. 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.,
(“Swan”) 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 $104,986 and $104,986 in unpaid royalties and expenses
as of March 31, 2018 and December 31, 2017, respectively 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 $76,726 and $76,726 as of March 31, 2018 and December 31, respectively which has been fully reserved.
On August 31, 2017 IMO entered into an
agreement to sell all of its assets to Club Azure LLC (“CA”). Effective September 1, 2017 IMO no longer operated Scores
New York and terminated its licensing agreement with the Company. Mark Yackow is the sole owner (100%) of CA and former
Chief Operating Officer of IMO. Effective September 1, 2017 we granted an exclusive, non-transferable license for the use of the
“Scores New York” to CA for its gentlemen’s club in New York City. Royalties under this license are payable at
a rate of $5,000 per month, commencing in September 2017, and the license is for a term of five years, with five successive five-year
renewal terms.
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 $15,000 and $7,500 in unpaid rents as of March 31, 2018 and December 31, 2017, respectively.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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. Effective January 1, 2017, the agreement was further amended to remove the requirement that
the services of Robert M. Gans be provided under the agreement. 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 $67,500 and $22,500 in
unpaid management services as of March 31, 2018 and December 31, 2017, respectively.
The Company has accrued expenses of $18,581
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owed $18,581 and $15,842 as of March 31, 2018 and December
31, 2017, respectively.
Effective July 1, 2018 after being having
been closed from August 15, 2016 to June 28, 2018, we terminated the previous licensing agreement and 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 $5,000 per month,
commencing in July 2018, 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 $93,442 and $93,442 as of
March 31, 2018 and December 31, 2017, respectively 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Effective February 28, 2017 (the “Effective
Date”), we entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees,
IMO, Star Light and Swan, controlled by Robert M. Gans, our President, Chief Executive Officer and a member of our Board of Directors.
As of the Effective Date, IMO owed us an
aggregate of $255,406 in unpaid royalties and other fees. Under its Settlement Agreement, IMO has agreed to pay the entire amount
owed to us, in full settlement of all claims we may have against it. The settlement amount is payable pursuant to a promissory
note in 22 consecutive monthly installments commencing March 1, 2017, and bears simple interest at the rate of 4% per year. Included
as an event of default under the note is a requirement that IMO remain current in its obligations to us under its license agreement
from and after the Effective Date.
S
ince
its last payment during May 2017 IMO has not made any further payments under the terms of the note and is therefore in default
of this obligation.
As of the Effective Date, Starlight owed
us an aggregate of $250,000 in unpaid royalties and other fees. Starlight is currently inactive and has no revenue. Under its Settlement
Agreement, Starlight has agreed to pay us $75,000, in full settlement of all claims we may have against it. The settlement amount
is payable pursuant to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest
at the rate of 4% per year.
Since its last payment during May 2017 Starlight has not made
any further payments under the terms of the note and is therefore in default of this obligation
.
As of the Effective Date, Swan owed us
an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan
has agreed to pay us $50,000, in full settlement of all claims we may have against it. The settlement amount is payable pursuant
to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest at the rate of
4% per year. Included as an event of default under the note is a requirement that Swan remain current in its obligations to us
under its license agreement from and after the Effective Date.
Since its last payment during
May 2017 Swan has not made any further payments under the terms of the note and is therefore in default of this obligation.
On August 4, 2018 the Company settled the
Plaintiffs claims in the Voronina matter for $1,300,000. See Note 7 for additional information. The Company had insufficient liquid
resources to enable it to make a portion of the settlement payments called for by the Voronina Settlement Agreement. Metropolitan
Lumber, Hardware and Building Supplies, Inc., a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director
of the Company, made loans to the Company in the aggregate amount of $770,000 to enable the Company to make the payments under
the Voronina Settlement Agreement.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company previously entered into the
3 Royalty Settlement Agreements noted above where Robert M. Gans is a majority owner of the equity of each of the Licensees. Robert
M. Gans guaranteed the payment of each Licensee’s obligations under each of the 3 Settlement Documents. The Licensees were
not current with respect to their obligations under the Settlement Documents and the Company did not call upon Mr. Gans to honor
his Guaranties.
The past due amounts under the Royalty
Settlement Agreements were $382,259.68 as of December 1, 2018. On this date the Company entered into an agreement to offset the
Royalty Amount against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $399,139 pursuant
to the terms of a certain Settlement and Offset Agreement made by and among the Company, Star Light, Swan, Metropolitan and Robert
M. Gans.
The total amounts due to the various related
parties as of March 31, 2018 and December 31, 2017 was $101,081 and $45,842 respectively and the total amounts due to the Company
from the various related parties as of March 31, 2018 and December 31, 2017 was $275,154 and $275,154, respectively of which $275,154
has been reserved as March 31, 2018.
Note 5. Licensees
The Company has 13 license agreements which
were obtained between 2003 and 2018.
On
March 18, 2016, we (through our subsidiary Scores Licensing Corp.) entered into a Trademark License (the “Trademark License”)
with Michael Blutrich. The Trademark License grants Mr. Blutrich the non-exclusive use of the Company’s registered trademarks,
related logos and other intellectual property in connection with the development, production and distribution of a potential scripted
television series, mini-series or movie of the week (the “Series”). Under the Trademark License, we will receive three
percent of all fees, contingent compensation and other consideration that Mr. Blutrich receives in connection with the Series.
Mr. Blutrich is permitted to assign the Trademark License without consideration to third-parties. The term of the Trademark License
is for one year, which term may and has been extended. Effective March 18, 2016, the Company and Mr. Blutrich entered into an addendum
to the Trademark License, extending the license to a book about Scores.
See Note 7 for litigation relating to a
few of the Company’s license agreements.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 0% of our royalty revenues for the three months ended March 31, 2018 and 2017, respectively. Mr. Gans is also the majority
owner (80%) of Swan, which accounted for 0% and 0% of our royalty revenues for the three months ended March 31, 2018 and 2017,
respectively. Mr. Gans is also the majority owner (92.165%) of Starlight, which accounted for 0% and 0% of our royalty revenues
for the three months ended March 31, 2018 and 2017, respectively.
Note 6. Deferred Revenue
License agreements sometimes include Initiation/Inception
Fees. Please see Note 3 for a detailed discussion of this matter.
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.
On April 3, 2016, 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, alleging that images of 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 alleged 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 asserted 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; as well as various common law torts, namely defamation, negligence, conversion,
unjust enrichment and quantum meruit. The Lawsuit sought unspecified compensatory damages, punitive damages, as well as attorneys’
fees and costs. The Lawsuit also sought an injunction permanently enjoining the use of the individuals’ images to promote,
via any medium, any of the clubs. On April 20, 2017, as a result of the claims asserted in the Lawsuit, we filed a third-party
complaint (the “Third-Party Complaint”) against certain licensees, namely CG Consulting, LLC; Anthony Quaranta; High
Five Management Group, Inc.; Club 2000 Eastern Avenue, Inc.; SCMD, LLC; David Baucom; Manhattan Fashion L.L.C.; Stone Park Entertainment,
Inc.; Silver Bourbon, Inc.; Tampa Food & Entertainment, Inc.; Fuun House Productions, L.L.C.; Norm A Properties, LLC; Southeast
Show Clubs, LLC; Michael Tomkovich; Palm Spring Grill LLC; Houston KP LLC; and Star Light Events LLC (collectively, “Third-Party
Defendants”) asserting causes of action for breach of contract, breach of warranty, contractual indemnification, common law
indemnification, contribution and breach of contract for failure to procure insurance. We maintained in the Third-Party Complaint,
among other things, that pursuant to the Third-Party Defendants’ respective license agreements, each of the Third-Party Defendants
are expressly obligated to indemnify, defend and hold the Company harmless in connection with the conduct giving rise to the claims
asserted by Plaintiffs in the Lawsuit. Third-Party Defendants Club 2000 Eastern Avenue, Inc., Fuun House Productions, L.L.C., and
Norm A Properties, LLC (collectively the “Defaulting Third-Party Defendants”) failed to respond to the Third-Party
Complaint.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On January 5, 2017, the Court issued an
Order granting in part, and denying in part, Defendants’ motion to dismiss the Complaint. The Court dismissed Plaintiffs’
claims sounding in negligence, conversion, unjust enrichment and
quantum meruit
. The remaining claims were not dismissed
at that time. On August 4, 2018 the Court dismissed Plaintiffs’ claims against Defendants, including the Company, with prejudice,
at Plaintiffs’ request following settlement with Defendants. The Company paid $1,300,000.00 to Plaintiffs in connection with
the settlement. Between August 4, 2018 and October 9, 2018 the Court dismissed with prejudice the Company’s claims against
the Third-Party Defendants, other than the Defaulting Third-Party Defendants, at the Company’s request following settlement
with those Third-Party Defendants. The total amount of money paid to the Company by the settling Third-Party Defendants, and the
Company’s insurance carrier, is $505,640.12. Scores has obtained Default Orders against Fuun House Productions, L.L.C. and
Norm A Properties, LLC. The value of the Company’s claims against Fuun House Productions, L.L.C. and Norm A Properties, LLC
are all that remain to be determined in the action. The Company became aware the week of December 17, 2018 that Fuun House Productions,
L.L.C. has filed for bankruptcy protection.
On
January 3, 2017, we, together with our subsidiary SLC, filed an action against CJ NYC Inc in the United States District Court for
the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership
and operation of an adult entertainment club in Woodside, New York. In this action we sought damages for breach of contract in
the amount of $85,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores”
name and trademark with respect to the Woodside, New York club and all websites and social media sites controlled by Defendant.
The defendant failed to appear and on February 27, 2017, we filled a motion for judgment by default. The court heard our motion
on April 5, 2017, and on May 25, 2017 the court granted our motion for a Judgment by default, granting a permanent injunction and
awarding damages in the amount of $85,000 to SLC and $14,333.33 in damages and $529.99 in costs to us. All signage has been removed
and we are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving it unable
to collect on the default judgment.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On
January 31, 2017 we, together with our subsidiary SLC, filed an action against Funn House Productions LLC in the United States
District Court for the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection
with its ownership and operation of an adult entertainment club in New Haven, Connecticut. In this action we sought damages for
breach of contract in the amount of $45,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant
from using the “Scores” name and trademark with respect to the New Haven, Connecticut club and all websites and social
media sites controlled by Defendant. The Defendant failed to appear and on February 28, 2017 the Court granted Plaintiffs’
motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $60,000. The parties negotiated
a settlement agreement, which included a payment schedule, but then Defendant did not sign the proposed settlement agreement
.
We are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving us unable
to collect on the default judgment.
On July 25, 2017, plaintiff Dislenia Munoz,
who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M. Operating LLC, commenced a putative
class action lawsuit against the Company, I.M. Operating LLC, Robert Gans and Mark Yackow in the Supreme Court of the State of
New York, County of New York. Plaintiff alleged that she and other similarly situated entertainers at Scores New York were
misclassified as independent contractors, that they should have been classified as employees, and as a result, the Defendants violated,
among other things, applicable state wage and hour laws. The Lawsuit sought unspecified compensatory damages, liquidated damages,
as well as attorneys’ fees and costs. On June 22, 2018 Plaintiff (1) amended her complaint in the Lawsuit to excise her class
allegations, and (2) discontinued the Lawsuit, without prejudice. Plaintiff has brought her claims in the Lawsuit in another forum
against the Defendants, other than the Company, which is no longer a subject of Plaintiff’s claims.
The Company was served with a Summons and
Complaint in the action entitled
Luisa Santos de Oliveira v. Scores Holding Company, Inc.; Club Azure, LLC; Robert Gans; Mark
S. Yackow; Howard Rosenbluth
, Docket No. 1:18-cv-06769-GBD, in the United States District Court of the Southern District. Plaintiff
claims that the Defendants violated the minimum wage and overtime provisions of the Fair Labor Standards Act (“FLSA”);
violated the New York Minimum Wage Act and the overtime provisions of the New York State Labor Law (“NYLL”); violated
the Spread of Hours Wage Order of the New York Commissioner of Labor; violated the Notice and Recordkeeping requirements of the
NYLL; violated the wage statement provisions of the NYLL; recovery of equipment costs in violation of the FLSA and NYLL; and unlawful
deductions from tips in violation of the NYLL. Plaintiff brought this action as a class action and seeks certification of this
action as a collective action on behalf of herself and all other similarly situated employees and former employees of Defendants.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company has submitted an Answer to
Plaintiff’s claims and the case is currently in the discovery phase. The Company, along with the Co-defendants, intends to
vigorously defend itself against the claims asserted against it in this lawsuit. The likelihood of an unfavorable outcome is remote
because the Company’s records show,
inter alia
, that the Plaintiff never worked more than 25 hours per week.
On October 10, 2018, we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against SCMD, LLC. the former licensee of SCORES
Baltimore, said license having been terminated effective October 1, 2018. The civil action seeks damages for unpaid royalties in
an amount of at least $170.000.00. The action is pending. Defendant removed the case to the US District Court for the Southern
District of New York, 1-18-cv-11364-PGG. Plaintiff then filed an amended complaint in federal court. Defendant has filed a request
for leave to file a motion to dismiss. That request is pending.
On September 14, 2018, we together with
our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against New 4125 LLC and Mike Taraska, the
licensee of SCORES Phoenix, for unpaid royalties in the amount of $47,500. The action is pending.
On April 22, 2018 we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against 1715 Northside Drive, Inc., the former
licensee of SCORES Atlanta. The action was settled and is awaiting withdrawal.
On May 4, 2018, we together with our subsidiary
SLC filed a civil action in Supreme Court of New York, New York County against Bonkers Space Coast Inc. and Ken Fees, the former
licensee of the SCORES Green Bay, for unpaid royalties in the amount of $80,000.00. The Defendants have not appeared and Plaintiffs
have filed a motion for judgment by default, which is currently awaiting decision. The default motion was recently denied on procedural
grounds and plaintiff will refile.
On April 20, 2018 we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against The Cadillac Lounge LLC and Dick Shappy,
the former licensee of SCORES Rhode Island for unpaid royalty fees. The action was settled for $50,000.00 and is awaiting withdrawal.
On April 25, 2018, we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against South East Show Clubs LLC and Michael
Tomkovich, the license of SCORES Jacksonville and SCORES Savannah, for unpaid royalties in the amount of $60,000.00. The action
was settled and is awaiting withdrawal.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On August 3, 2018, we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Silver Bourbon, Inc, the licensee of
SCORES New Orleans, for unpaid royalties in the amount of $145,500.00. Defendant was served on September 19, 2018 and the action
is pending.
On July 13, 2018, we together with our
subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Manhattan Fashions LLC, the licensee
of SCORES Harvey for unpaid royalties in the amount of $84,000. Defendant was served on August 3, 2018 and the action is pending.
A final notice of default was mailed on October 12, 2018.
There are no other material legal proceedings
pending to which we or any of our property are subject, nor to our knowledge are any such proceedings threatened.
Note 8. SUBSEQUENT EVENTS
Please see Note 4 for a detailed discussion
of the August 4, 2018 Offset Agreement and Note 7 for events concerning legal matters.
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.