Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
¨
No
x
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
On September 30, 2016, the last business day
of the registrant’s most recently completed third fiscal quarter, 76,285,894 shares of its common stock, $0.001 par value
per share (its only class of voting or non-voting common equity) were held by non-affiliates of the registrant. The market value
of those shares was $480,601, based on the last sale price of $0.0063 per share of the common stock on that date. Shares of common
stock held by each officer and director and by each shareowner affiliated with a director have been excluded from this calculation
because such persons may be deemed to be affiliates. This determination of officer or affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 3, 2017, there were 165,186,144
shares of the registrant's common stock, par value $0.001, issued and outstanding.
PART I
Introduction: When we use the terms “Scores,”
the “Company,” “we,” “us” and “our,” we mean Scores Holding Company, Inc. and all
entities owned by us, except where it is clear that the term means only the parent company.
ITEM 1. BUSINESS.
Overview
Scores Holding Company, Inc. (“Scores,”
the “Company,” “we,” “us” or “our”) was incorporated in Utah on September 21, 1981
under the name Adonis Energy, Inc. We adopted our current name in July 2002. Since 2003, we have been in the business of licensing
the “Scores” trademarks and other intellectual property to fine gentlemen’s nightclubs with adult entertainment
in the United States. There are twenty-one such clubs currently operating under the Scores name, in New York, New York;
Baltimore, Maryland; Chicago, Illinois; Tampa, Florida; New Orleans, Louisiana; Savannah, Georgia; Jacksonville, Florida; Houston,
Texas; Harvey, Louisiana; Gary, Indiana; Mooresville, North Carolina; Greenville, South Carolina; Columbus, Ohio; Queens, New York;
Palm Springs, Florida; and Raleigh, North Carolina; Providence, Rhode Island; Buffalo, New York; Tonawanda, New York; New Haven,
Connecticut; and Manitowoc, Wisconsin. Atlantic City, New Jersey is currently closed and looking for a new location in the same
area. Denver, Colorado has terminated its agreement during the third quarter 2016. A club in Detroit, Michigan is no longer operating
and is in default and breach of contract (See the Notes to the Consolidated Financial Statements - Note 7 for more information).
Clubs in Phoenix, Arizona, Atlanta, Georgia and Las Vegas, Nevada are not yet operating.
Our trademarks and copyrights surrounding the
Scores trade name are critical to the success and potential growth of our business. On December 9, 2013, the Company entered into
a license agreement with its subsidiary, Scores Licensing Corp. (“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.
History and Development of our Business
On March 31, 2003, pursuant to the Amended
and Restated Master License Agreement (the “MLA”) by and between us and our former affiliate, Entertainment Management
Services, Inc. (“EMS”), an entity owned by two of our former directors and employees, we granted EMS an exclusive,
worldwide renewable 20-year license in our property to sublicense the Scores trade name to nightclubs (the “Licensing Rights”).
Under the MLA, EMS was required to pay us 100% of the royalties EMS received from the formerly affiliated clubs (defined below)
and 50% of the royalties received from non-affiliated clubs (the “Royalty Rights”). These clubs had license agreements
with EMS pursuant to which they typically paid EMS approximately 4.99% of their gross revenues from operations, including the sale
of merchandise. We depended on these royalties to operate our business and as our principal source of revenue.
On January 27, 2009 (as further discussed below
under “Nightclubs Currently Licensing our Scores Brand”), we terminated the MLA with EMS and EMS transferred to us
all of the Licensing Rights and Royalty Rights. Since termination of the MLA, our intellectual property is licensed through its
subsidiary, SLC, to the three remaining clubs that previously had been sublicensing our intellectual property from EMS, and, thus,
as of January 27, 2009, we are receiving 100% of the royalty payments made by these clubs rather than the 50% we were entitled
to under the MLA.
Until January 27, 2009, we were under common
control with two previously existing nightclubs in New York, New York (referenced herein as “Scores East” and “Scores
West”) which were owned, respectively, by 333 East 60th Street, Inc. (“333”), and Go West Entertainment, Inc.
(“Go West”). EMS is also owned by 333. Through EMS, we had sublicense agreements with each of Scores East and Scores
West pursuant to which they were entitled to use the Scores intellectual property. Throughout this report, we refer to Scores East
and Scores West as our “formerly affiliated clubs.”
On January 27, 2009, I.M. Operating LLC (“IMO”)
entered into a licensing agreement with us and commenced operations of a new club in New York using the Scores brand name “Scores
New York” in May, 2009 (“Scores New York”). The majority owner of IMO is Robert M. Gans (72%), our President
and Chief Executive Officer and a member of our Board of Directors as well as our majority shareholder. In addition, Howard Rosenbluth,
the Company’s Secretary, Treasurer and a Director, owns 2% of IMO.
Throughout this report, we refer to each of
Scores New York and Scores Atlantic City (as defined below) as our “affiliated club” because of the common ownership
by Mr. Gans. All of our clubs, with the exception of Scores New York and Scores Atlantic City (see discussion below under “Nightclubs
Currently Licensing our Scores Brand”), are referred to in this report as “non-affiliated clubs” or as “licensees”
(or “sublicensees,” as applicable), a term that may include the formerly affiliated clubs or the New York Club or Scores
Atlantic City when the context requires.
As further discussed below under “Change
in our Ownership,” on January 27, 2009, Mitchell’s East LLC, a New York limited liability company wholly-owned by Robert
M. Gans, acquired a majority interest in our outstanding capital stock.
Change in our Ownership
On January 27, 2009, pursuant to a stock purchase
agreement (the “SPA”), Mitchell’s East LLC (“Buyer”), purchased an aggregate of 88,900,230 shares
(the “Owned Shares”) of our common stock beneficially owned by Richard Goldring and Elliot Osher (collectively the
“Share Sellers”), as well as any rights Harvey Osher (the Share Sellers and Harvey Osher, together, the “Sellers”)
may have in 13,886,059 shares of our common stock (the “Decedent Owned Shares”) currently held of record by the estate
of William Osher, deceased, and any rights the Sellers may have in an additional 2,400,001 shares of our common stock (the “Expectancy
Shares”). Under the terms of the SPA, Harvey Osher is to deliver to the Buyer the Decedent Owned Shares that he
may receive and the Sellers are to deliver to the Buyer any shares of the Company underlying the Expectancy Shares that any such
Seller may receive. Additionally, pursuant to the SPA, each of the Sellers granted to Buyer an irrevocable
proxy enabling Buyer to act as his proxy with respect to any shares underlying the Decedent Owned Shares and the Expectancy
Shares, as applicable.
The Owned Shares represent approximately fifty
four percent (54%) of our outstanding capital stock and the Owned Shares together with the Decedent Owned Shares represent approximately
sixty two percent (62%) of our outstanding capital stock.
Changes in our Management
On August 6, 2010, we appointed Robert M. Gans
as our President and Chief Executive Officer and as a member of our Board of Directors. Robert Gans and Martin Gans, one of our
existing Board members, are brothers. Also on August 6, 2010, we appointed Howard Rosenbluth as our Treasurer and Chief Financial
Officer. Mr. Rosenbluth is also a director.
In May 2009, Stephen J. Sabbeth became our
director of acquisitions and licensing.
Nightclubs Currently Licensing our Scores
Brand
Pursuant to the Assignment Agreement between
us and EMS dated January 27, 2009, payments due to EMS under existing licenses with non-affiliated clubs were assigned to us. Since
this Assignment Agreement, we have retained 100% of the royalty payments from each of these clubs.
In 2003, EMS licensed the use of the “Scores
Chicago” name to Stone Park Entertainment, Inc. for its club in Chicago, Illinois. The license is for a term of five years,
with five successive five year renewal terms.
In 2004, EMS licensed the use of the “Scores
Baltimore” name to Club 2000 Eastern Avenue, Inc. for its nightclub in Baltimore, The license is for a term of five years,
with five successive five year renewal terms.
In April 2007, EMS licensed the use of the
“Scores New Orleans” name to Silver Bourbon, Inc. for a night club in New Orleans, Louisiana. The license is for a
term of five years, with five successive five year renewal terms.
On January 27, 2009, we entered into a licensing
agreement with IMO for the use of the Scores brand name “Scores New York.” IMO is owned in the majority by Robert M.
Gans (72%) who is also our majority shareholder. In addition, Howard Rosenbluth, the Company’s Secretary, Treasurer and a
Director, owns 2%. Royalties payable to us under this license agreement have been set at 3% of gross revenues of Scores New York.
Scores New York commenced operations in May 2009 and has accounted for 0% of our total royalty revenue during 2016 and 7% of our
total revenue during 2015. IMO owes the Company a royalty receivable of $144,698 and $144,698, which has been fully reserved as
of December 31, 2016 and December 31, 2015, respectively. The building occupied by IMO is the same as that of the former
Scores West nightclub, 533-535 West 27th Street, New York, NY (the “West 27
th
Street Building”). The West
27th Street Building is owned by Westside Realty of New York (“WSR”), which is majority-owned by Robert M. Gans (80%).
The Company also leases office space directly from WSR (see “Item 2. Properties” below).
On September 30, 2010, we entered into a licensing
agreement with Tampa Food & Entertainment, Inc. for the use of the name “Scores Tampa.” Upon signing the
contract, we received a non-refundable fee. The license is for a term of five years, with five successive five year renewal
terms.
On December 26, 2012, we entered into a trademark
license agreement with Norm A Properties LLC, granting it an exclusive license for the use of certain Scores trademarks in its
night club/restaurant in Detroit, Michigan. The license is for a term of five years, with five successive five year renewal terms.
During the first five years of the agreement, we are entitled to receive a fixed fee of $10,000 per month. We will be required
to designate a portion of that fee for advertising Scores Detroit. Pursuant to the written agreement, we also granted the licensee
a non-exclusive license to sell certain licensed products bearing our trademarks. See “Item 3. Legal Proceedings” for
information regarding litigations involving this licensee.
Pursuant to an oral arrangement, in September
2013 we granted an exclusive, non-transferable license for the use of the “Scores Atlantic City” name to Star Light
Events LLC (“Star Light”) for its gentlemen’s club in Atlantic City, New Jersey. This oral arrangement was memorialized
in a written license agreement between SLC and Star Light effective December 9, 2013. Royalties under this license are payable
at the rate of $10,000 per month, commencing in April 2014. The license is for a term of five years, with five successive five-year
renewal terms. Pursuant to the written agreement, SLC also granted Star Light a non-exclusive, non-transferable license to sell
certain licensed products bearing our trademarks, which Starlight will purchase from us or our affiliates at our cost plus 25%.
Robert M. Gans, our President, Chief Executive Officer, majority shareholder and a director, is the majority owner (92%) of Star
Light and Howard Rosenbluth, our Secretary, Treasurer and a director, owns 1%. Star Light owes the Company a royalty receivable
of $130,000 as of December 31, 2016, which has been fully reserved, and $130,000 as of December 31, 2015, respectively. Star Light
accounted for 0% royalty revenue in 2016 and 10% of royalty revenue in 2015.
On February 10, 2014, we (through our subsidiary
SLC) entered into a trademark license agreement with TWDDD, Inc., granting it an exclusive, non-transferable license for the use
of certain Scores trademarks in its night club/restaurant in Mooresville, North Carolina. The license is for a term of five years,
with five successive five year renewal terms. Pursuant to the written agreement, SLC also granted the licensee a non-exclusive,
non-transferable license to sell certain licensed products bearing our trademarks. As discussed in our Notes to the Consolidated
Financial Statements because of the tenuous nature of the gentlemen’s club industry in general and the resulting financial
instability of this licensee in particular the Company has implemented a policy of recognizing revenue for this specific entity
as it is received rather than when it is earned.
On July 1, 2014, we (through our subsidiary
SLC) entered into a trademark license agreement with Manhattan Fashions LLC, granting it an exclusive, non-transferable license
for the use of certain Scores trademarks in its night club/restaurant in Harvey, Louisiana. The license is for a term of five years,
with five successive five year renewal terms. Pursuant to the written agreement, SLC also granted the licensee a non-exclusive,
non-transferable license to sell certain licensed products bearing our trademarks.
On May 14, 2014, we (through our subsidiary
SLC) entered into a trademark license agreement with Parallax Management Corporation, granting it an exclusive, non-transferable
license for the use of certain Scores trademarks in its night club/restaurant in Gary, Indiana. The license is for a term of five
years, with five successive five year renewal terms. Pursuant to the written agreement, SLC also granted the licensee a non-exclusive,
non-transferable license to sell certain licensed products bearing our trademarks.
On May 2, 2014, we (through our subsidiary
SLC) entered into a trademark license agreement with Houston KP LLC, granting it an exclusive, non-transferable license for the
use of certain Scores trademarks in its night club/restaurant in Houston, Texas. The license is for a term of five years, with
five successive five year renewal terms. Pursuant to the written agreement, SLC also granted the licensee a non-exclusive, non-transferable
license to sell certain licensed products bearing our trademarks. As discussed in our Notes to the Consolidated Financial Statements,
because of the tenuous nature of the gentlemen’s club industry in general and the resulting financial instability of this
licensee in particular, the Company has implemented a policy of recognizing revenue for this specific entity as it is received
rather than when it is earned.
On July 18, 2013 we entered into a trademark
license agreement with Southeast Showclubs LLC, granting it an exclusive, non-transferable license for the use of certain Scores
trademarks in its night club/restaurants in Palm Beach, Florida, Jacksonville, Florida and Savannah, Georgia. The license is for
a term of five years with five successive five year renewal terms. Since executing this agreement the licensee has not honored
its terms and conditions and is in default. On November 24, 2014 a claim against them was begun to collect royalties due in the
amount of $147,000.00 and to terminate the agreement. 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. 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 December 31, 2016, the defendants have paid this settlement in full. As discussed in our Notes to the Consolidated Financial
Statements, because of the tenuous nature of the gentlemen’s club industry in general and the resulting financial instability
of this licensee in particular, the Company has implemented a policy of recognizing revenue for this specific entity as it is received
rather than when it is earned.
On April 20, 2015, we (through our subsidiary
Scores Licensing Corp.) entered into a trademark license agreement with High Five Management Inc., granting it an exclusive, non-transferable
license for the use of certain Scores Presents trademarks in its night club/restaurant in Greenville, South Carolina. The license
is for a term of five years, with five successive five year renewal terms. Pursuant to the agreement, SLC also granted the licensee
a non-exclusive, non-transferable license to sell certain licensed products bearing our trademarks
On June 17, 2015,
we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with the Cadillac Lounge LLC, granting it an exclusive,
non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Providence, Rhode Island. The
license is for a term of five years, with two successive five year renewal terms. Pursuant to the agreement, SLC also granted the
licensee a non-exclusive, non-transferable license to sell certain licensed products bearing our trademarks.
Effective June 15, 2015, we (through our subsidiary
Scores Licensing Corp.) entered into a trademark license agreement with CG Consulting LLC, granting it an exclusive, non-transferable
license for the use of certain Scores trademarks in its night club/restaurant in Columbus, Ohio. The license is for a term of five
years, with five successive five year renewal terms.
Effective July 24, 2015, we (through our subsidiary
Scores Licensing Corp.) entered into a trademark license agreement with Funn House Productions LLC, granting it an exclusive, non-transferable
license for the use of certain Scores trademarks in its night club/restaurant in New Haven, Connecticut. The license is for a term
of five years, with five successive five year renewal terms.
Effective August 31, 2015, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with Palm Springs Grill LLC, granting it an exclusive,
non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Palm Springs, Florida. The license
is for a term of five years, with five successive five year renewal terms.
On November 10, 2015, we (through our subsidiary
SLC) entered into a trademark license agreement with CJ NYC Inc., granting it an exclusive, non-transferable license for the use
of certain Scores trademarks in its night club/restaurant in Queens, New York. The license is for a term of five years, with five
successive five year renewal terms. See “Item 3. Legal Proceedings” for information regarding our legal proceeding
against this licensee.
Effective December 31, 2015, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with 5111 Genessee St Inc., granting it an exclusive,
non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Buffalo, New York. The license
is for a term of five years, with five successive five year renewal terms.
Effective December 31, 2015, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with Mustang Sallys Spirit and Grill, granting it
an exclusive, non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Tonawanda, New
York. The license is for a term of five years, with five successive five year renewal terms.
Effective March 22, 2016, we (through our subsidiary
Scores Licensing Corp.) entered into a trademark license agreement with Bonkers Space Coast Inc., granting it an exclusive, non-transferable
license for the use of certain Scores trademarks in its night club/restaurant in Manitowoc, Wisconsin. The license is for a term
of five years, with five successive five year renewal terms.
Effective February 17, 2016, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with Cary Golf & Travel, Inc, granting it an
exclusive, non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Raleigh, North Carolina.
The license is for a term of five years, with five successive five year renewal terms.
Effective May 19, 2016, we (through our subsidiary
Scores Licensing Corp.) entered into a trademark license agreement with New 4125 LLC, granting it an exclusive, non-transferable
license for the use of certain Scores trademarks in its night club/restaurant in Phoenix, Arizona. The license is for a term of
two years, with an additional two year renewal term.
Effective November 28, 2016, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with1715 Northside Drive, Inc., granting it an exclusive,
non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Atlanta, GA. The license is for
a term of five years, with five successive five year renewal terms.
Effective December 2, 2016, we (through our
subsidiary Scores Licensing Corp.) entered into a trademark license agreement with Southern Highland Centerfolds Inc. granting
it an exclusive, non-transferable license for the use of certain Scores trademarks in its night club/restaurant in Las Vegas, Nevada.
The license is for a term of five years, with five successive five year renewal terms.
Scoreslive.com
On January 24, 2006, we 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.” Our agreement with AYA provides for royalty payments to be made directly
to us at the rate of 4.99% of weekly gross revenues from all revenue sources within the AYA website. The license continues for
as long as the website is operational. Scoreslive.com piloted in January 2007. The Company began accruing royalties under the Scoreslive.com
license in the second quarter of 2012. 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. (“SMG”), a newly formed New York corporation whose majority owner (80%)
is Robert M. Gans. The Scoreslive.com license accounted for 0% and 1% of our total revenues in 2016 and 2015, respectively. The
Company is owed $122,109 in unpaid royalties and expenses as of December 31, 2016 and December 31, 2015, respectively, which is
fully reserved.
Competition
The adult nightclub entertainment business
is highly competitive with respect to price, service, location and professionalism of its entertainment. Sublicensed clubs will
compete with many locally-owned adult nightclubs. It is our belief, however, that only a few of these nightclubs have names that
enjoy recognition and status equal to the Scores brand. For example, there are approximately 25 adult entertainment cabaret night
clubs within the five boroughs of New York City; approximately six upscale located in the borough of Manhattan. We believe only
three (Rick’s Cabaret, Hustler and Penthouse) provide the most competitive adult entertainment experience to that of our
brand and our New York affiliate. Other localities where our “Scores” brand is licensed have similar competitive environments.
Penthouse is a related-party competitor due to the common control and ownership by our President and Chief Executive Officer, Robert
M. Gans, who owns 83% of Penthouse.
We believe the combination of our name recognition
and our distinctive entertainment environment allows our licensees to effectively compete within the industry, although we cannot
assure anyone that this will prove to be the case. The success of our licensees depends upon their ability to retain quality entertainers,
employees and to provide customer service to their customers. The inability to sustain quality entertainers, employees and customer
service could have a material or adverse impact on the ability of our licensees to compete within the industry.
Competition among online adult entertainment
providers is intense with respect to both content and subscribers’ capital. SMG’s competition for its Scoreslive.com
internet site varies in both the type and quality of offerings, but consists primarily of other premium pay services. The availability
of, and price pressure from, more explicit content on the Internet, frequently offered for free, also presents a significant competitive
challenge to SMG. The Internet is highly competitive, and Scoreslive.com will compete for visitors, subscribers, shoppers and advertisers.
We believe that the primary competitive factors affecting SMG’s Internet operations include brand recognition, the quality
of content and products, pricing, ease of use and sales and marketing efforts. We believe that SMG and Scoreslive.com have the
advantage of leveraging the power of our Scores brand across multiple media platforms.
Employees
As of December 31, 2016 we had two employees.
Government Regulation
Our licensees are subject to a variety of governmental
regulations depending upon the laws of the jurisdictions in which they operate. The most significant governmental regulations are
described below.
Liquor Licenses
Our licensees are subject to state and local
licensing regulation of the sale of alcoholic beverages. We expect licensees to obtain and maintain appropriate licenses allowing
them to sell liquor, beer and wine. Obtaining a liquor license may be a time consuming procedure. In New York, for example, a licensee
must make an application to the New York State Liquor Authority (the “NYSLA”) for a liquor license regarding its proposed
nightclub. The NYSLA has the authority, in its discretion, to issue or deny such a license request. The NYSLA typically requires
local community board approval in connection with such grants. Approval is usually granted or denied within 90-120 days from the
initial application date, but can take longer in certain circumstances. Other jurisdictions have their own procedures.
We cannot offer any assurance that our licensees
will obtain liquor licenses or that, once obtained, they will maintain their liquor licenses or be able to assign or transfer them
if necessary. A license to sell alcoholic beverages in many cases requires annual renewal and may be revoked or suspended for cause,
including any regulatory violation by the nightclub operating the license or its employees. Royalties for our business could decrease,
if one or more of our licensees fails to maintain its liquor license.
"Cabaret" Licenses
Although not a requirement, our licensees typically
request a cabaret license in connection with the operation of their nightclubs. Cabaret licenses are not a requirement in all states;
however, some states mandate that such licenses be obtained prior to the operation of an adult nightclub. For example, one of our
formerly affiliated clubs was granted a cabaret license for a nightclub by the City of New York’s Department of Consumer
Affairs (the "DCA"). We believe our licensees comply with all regulatory laws regarding cabaret or an adult entertainment
license; however, there is no assurance that any of their licenses will remain effective or that they could be assigned or transferred
if necessary. If one or more of our licensees failed to maintain a required license, this could have a material or adverse effect
on our cash flow and profitability.
Zoning Restrictions
Adult entertainment establishments must comply
with local zoning restrictions which can be stringent. For example, zoning regulations in the City of New York mandate that an
adult entertainment business operate in an area zoned as residential, or in areas that are commercially zoned, and devotes more
than either 40% or more of its space available to customers or 10,000 square feet for adult entertainment activities. Although
we expect our licensees to operate within "zoned" areas, we cannot make any assurances that local zoning regulations
will remain constant, or that if changed, our licensees will be able to continue operations under our Scores brand name trademark.
If zoning regulations were to restrict the operations of one or more of our licensees, this could have a material or adverse effect
on our cash flow and profitability.
We hold trademark and/or service mark registrations
for the following trademarks in the United States: SCORES (Stylized) trademark, SCORES NEW YORK (Stylized), and SCORES SHOWROOM
and Design. Such registrations were granted on various dates and are subject to renewal on various dates. Some of these trademarks
are also registered in other jurisdictions outside of the United States. Applications have also been filed in the United States
for other trademarks and/or service marks incorporating the SCORES word trademark, as well as others. It is too early to know whether
registrations will issue for these pending applications.
Our trademarks and service marks provide significant
value to us and are an important factor in our business. We believe that our trademarks and service marks do not infringe the intellectual
property rights of any third parties.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
As of July 1, 2008, WSR, the owner of the West
27th Street Building, became the new lessor of our 700 square feet office occupancy at that location. Since April 1, 2009, the
monthly rent, which includes overhead cost, has been $2,500. Robert M. Gans, the Company’s President, Chief Executive Officer,
and majority shareholder, is the majority owner (80%) of WSR. Rent for the property was fully paid as of December 31, 2016 and
December 31, 2015, respectively.
ITEM 3. LEGAL PROCEEDINGS.
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 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 parties are currently discussing
a possible settlement of this matter.
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 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. On January 5, 2017, the Court issued an Order granting in part, and denying
in part, the Defendants’ motion to dismiss the complaint. Following the issuance of this Order, the plaintiffs filed an amended
complaint and the Defendant filed an answer responding to same. The case is presently in the discovery phase. The Company, along
with all of the Defendants, intends to vigorously defend themselves against the claims asserted against them in this lawsuit.
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 has been exchanged in each of the
Arbitrations but depositions have not been taken.
Given that the Arbitrations are in their preliminary
stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable outcome.
The parties have exchanged written discovery.
The Arbitrations have stayed to allow the parties to pursue mediation, which is currently scheduled for May 3, 2017.
The Arbitrations follow the filing and subsequent
voluntary dismissal of the Action, as discussed above.
On or about December 20, 2016 three individuals,
Stacey Scott, Angelica Andrade and Dislenia Munoz (“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 against Scores NY as well
as, among others, the Company (the “Arbitrations”). The American Arbitration Association assigned the Scott,
Andrade and Munoz_Arbitrations case numbers 01-16-0005-5566, 01-16-0005-5565 and 01-16-0005-5563, 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
sought unspecified compensatory damages, liquidated damages, as well as attorneys’ fees and costs. The Company
intends to vigorously defend against the claims asserted against it in the Arbitrations. Given that the Arbitrations are in their
preliminary stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable ruling.
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 has scheduled a hearing on the motion for April 5, 2017.
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.
On or about February 22, 2017, Natalia Titova
(“Claimant”), who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M. Operating
LLC, brought an arbitration (the “Arbitration”) against, among others, the Company. The American Arbitration Association
assigned the Arbitration Case No. 01-17-0001-1232. The Claimant alleges that she was misclassified as an independent contractor,
that she should have been classified as an employee, and as a result the Respondents violated, among other things, applicable federal
and state wage and hour laws. The Arbitration seeks unspecified compensatory damages, liquidated damages, as well as attorneys’
fees and costs. The Company intends to vigorously defend against the claims asserted against it in the Arbitrations. Given that
the Arbitrations are in their preliminary stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable
ruling.
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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.
Executive Officers and Directors
The following table sets forth certain information,
as of March 22, 2017, with respect to our directors and executive officers.
Directors serve until the next annual meeting
of the stockholders, until their successors are elected or appointed and qualified, or until their prior resignation or removal.
Officers serve until the next annual meeting of the Board of Directors, until their successors are elected or appointed and qualified,
or until their prior resignation or removal.
|
Name
|
|
Positions Held
|
|
Age
|
|
Date of Election
or Appointment as Director
|
|
Robert M. Gans
|
|
President, Chief Executive Officer and Director
|
|
74
|
|
August 6, 2010
|
|
Martin Gans
|
|
Director
|
|
81
|
|
June 23, 2009
|
|
Howard Rosenbluth
|
|
Treasurer, Chief Financial Officer, Secretary and Director
|
|
70
|
|
April 21, 2009
|
|
Stephen J. Sabbeth
|
|
Head of Acquisitions and Licensing
|
|
69
|
|
N/A
|
The following is a brief account of the business
experience during the past five years or more of our directors and executive officers.
Robert M. Gans
. Mr. Gans became President,
Chief Executive Officer and director on August 6, 2010. For the past forty three years Robert M. Gans has owned and operated
companies in the building materials business, as well as gentlemen’s clubs, restaurants, and several commercial and residential
real estate properties. Mr. Gans has either been the President, Managing Member, or sole owner of all of the companies
in which he has been involved, including The Executive Club LLC, a company operating in the Gentlemen’s Club industry. None
of the companies was or is a public company. The Board concluded that Mr. Gans should serve as a director of the Company
because of his extensive experience in the management and operation of gentlemen’s clubs.
Martin Gans.
Martin Gans, who became
a director on June 23, 2009, has been retired since 2002. Prior to his retirement, Mr. Gans held managerial positions
with The Nassau County Board of Elections, from 1994 to 2002, and with the Metropolitan New York hospitals, from 1990 to 1994. Mr.
Gans has a MBA in Health Care Administration from George Washington University and a Bachelor’s degree in Economics from
Hunter College. Mr. Gans served in the United States Army where he reached the rank of SP4. The Board concluded that Mr. Gans should
serve as a director of the Company because of his managerial experience and the knowledge and experience he has attained through
his service as a director of the Company.
Robert Gans and Martin Gans are brothers.
Howard Rosenbluth.
Mr. Rosenbluth became
our Treasurer, Chief Financial Officer and Secretary on August 6, 2010, and became a director on April 21, 2009. Over the past
five years, Mr. Rosenbluth has been an executive officer overseeing the financial operations for Metropolitan Lumber Hardware and
Building Supplies, Inc., and The Executive Club LLC, a company operating in the Gentlemen’s club industry. Mr.
Rosenbluth received an MBA in Finance in 1975 from the University of Connecticut and has owned a consulting firm, a manufacturing
company and a restaurant and has worked in public accounting and consulting for more than 35 years. The Board concluded that
Mr. Rosenbluth should serve as a director of the Company because of his financial literacy and expertise, as well as his extensive
experience in the management and operation of gentlemen’s clubs.
Stephen J. Sabbeth
. Mr. Sabbeth
has served as a consultant to us as our Head of Acquisitions and Licensing since May, 2009. His services to us have included
leading the expansion of our licensing efforts throughout the U.S. and the Caribbean. As well, he assisted us in initiating
and implementing gift card and guest loyalty systems for our licensees (which services he also provided to other entities in
the hospitality industry). Over the past 9 years Mr. Sabbeth has provided management, marketing and administrative consulting
services to various organizations requiring assistance from a seasoned and experienced professional. His clients principally
have consisted of businesses involved in the restaurant, nightclub, adult entertainment, website, lumber and building
supplies and intellectual property rights industries. Mr. Sabbeth has assisted his consulting clients with the creation and
organization of Human Resource departments and ancillary employment related manuals and documentation. In addition, he has
analyzed industry trends and customer preferences in the adult entertainment industry and assisted his clients in determining
how best to allocate marketing and advertising resources. Mr. Sabbeth attended Hofstra University.
Board of Directors
None of our directors receives any remuneration
for acting as such. Directors may, however, be reimbursed for their out-of-pocket expenses, if any, for attendance at meetings
of the Board of Directors. Our Board of Directors may designate from among its members an executive committee and one or more other
committees. No such committees have been established to date. Accordingly, we do not have an audit committee or an audit committee
financial expert. Given the small size of the Company’s board of directors and the limited number of independent directors
over the Company’s history, the board has determined that it is appropriate for the entire board of directors to act as its
audit committee, which has resulted in the directors who are also executive officers serving on its audit committee. Similarly,
we do not have a nominating committee or a committee performing similar functions. We have not implemented procedures by which
our security holders may recommend board nominees to us, but expect to do so in the future.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires
our executive officers and directors and persons who own more than 10% of a registered class of our equity securities, to file
with the SEC initial statements of beneficial ownership on Form 3, reports of changes in ownership on Form 4 and annual reports
concerning their ownership on Form 5. Executive officers, directors and greater than 10% stockholders are required by the SEC regulations
to furnish us with copies of all Section 16(a) reports they file.
Based solely on the Company’s review
of copies of Forms 3 and 4 and amendments thereto received by it during 2015 and Forms 5 and amendments thereto received by the
Company with respect to 2015 and any written representations from certain reporting persons that no Form 5 is required, none of
our directors, executive officers, or greater than 10% stockholders failed to file a required report on Form 3, Form 4 or Form
5 during the fiscal year ended December 31, 2015, except that Stephen J. Sabbeth, our Director of Acquisitions and Licensing, did
not file a Form 3 upon becoming an executive officer during 2015.
Director Independence
We are not subject to listing requirements
of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the Board of Directors
be “independent” and, as a result, we are not at this time required to have our Board of Directors comprised of a majority
of “Independent Directors.”
Code of Ethics
Due to the scope of our current operations,
as of December 31, 2016, we have not adopted a code of ethics for financial executives, which include our Chief Executive Officer,
Chief Financial Officer or persons performing similar functions. Our decision not to adopt such a code of ethics results from our
having only a limited number of officers and directors operating as management. We believe that as a result of the limited interaction
which occurs having such a small management structure eliminates the current need for such a code.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information
concerning the total compensation paid or accrued by us during the two fiscal years ended December 31, 2016 and 2015 to (i) all
individuals that served as our chief executive officer and our chief financial officer or acted in similar capacities for us at
any time during the fiscal years ended December 31, 2016 and 2015 and (ii) all individuals that served as executive officers
of ours at any time during the fiscal year ended December 31, 2016 and 2015 that received annual compensation during such fiscal
years in excess of $100,000 (collectively, the “named executive officers”).
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
Name and
|
|
|
|
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
|
|
|
Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Total ($)
|
|
|
Robert M. Gans,
|
|
2016
|
|
|
168,923
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
168,923
|
|
|
Chief Executive Officer
|
|
2015
|
|
|
0
|
|
|
|
180,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Rosenbluth,
|
|
2016
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Chief Financial Officer
|
|
2015
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Sabbeth
|
|
2016
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
130,000
|
|
|
|
130,000
|
|
|
Director of Acquisitions and Licensing
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,000
|
|
|
|
130,000
|
|
We have not issued any stock options or maintained
any stock option or other incentive plans other than our 2010 Plan, which was adopted by our board but never approved by our shareholders.
(See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
– Securities Authorized for Issuance Under Equity Compensation Plans” above.) We have no other plans in place and have
never maintained any plans that provide for the payment of retirement benefits or benefits that will be paid primarily following
retirement including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified
deferred contribution plans and nonqualified deferred contribution plans.
Similarly, we have no contracts, agreements,
plans or arrangements, whether written or unwritten, that provide for payments to the named executive officers or any other persons
following, or in connection with, the resignation, retirement or other termination of a named executive officer, or a change in
control of the Company or a change in a named executive officer’s responsibilities following a change in control.
Effective January 1, 2013, we
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 us, including the
services of Robert M. Gans and Howard Rosenbluth to act as executive officers of the Company. In consideration of the
services, we pay Metropolitan Lumber Hardware and Building Supplies, Inc. a fee in the amount of $30,000 per year. The
agreement may be terminated by either party upon ten days’ written notice. Mr. Gans is the sole owner of
Metropolitan Lumber Hardware and Building Supplies, Inc.
On May 5, 2015, we entered into an
amendment, effective as of January 1, 2015, to our
management services agreement with Metropolitan Lumber,
Hardware and Building Supplies, Inc.
Pursuant to the amendment, the fee we pay MLH for the
management and other services it provides to us was increased from $30,000 per year to $90,000 per year, payable quarterly in
arrears. In addition, the agreement as amended provides that MLH will be eligible for a discretionary cash bonus based
on (i) MLH’s performance throughout the relevant fiscal year (or portion thereof) of the Company; and (ii) the
Company’s performance throughout such fiscal year (or portion thereof). 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. The Board
of Directors is responsible for establishing and implementing performance goals and a performance-based bonus plan, and the
amount of the bonus, if any, will be determined by the Board in accordance with such plan. The agreement as amended
does not guarantee MLH a bonus for any year (or portion thereof).
The Company owed Metropolitan Lumber Hardware and
Building Supplies, Inc. $0 and $0 in unpaid management services as of December 31, 2016 and December 31, 2015,
respectively.
In December 2015, the Company accrued $180,000 bonus to Robert Gans
which was paid in February 2016. The Company paid Mr. Gans a salary of $168,923 during 2016.
Mr. Sabbeth’s compensation of $130,000 per year represents
consulting fees. Mr. Sabbeth became an executive officer during 2015.
Outstanding
Equity Awards at 2015 Fiscal Year-End
As of the year ended December 31, 2016, there
were no unexercised options, stock that has not vested or equity incentive plan awards held by any of the Company’s named
executive officers.
Compensation of Directors
None of our directors receives any compensation
for serving as such, for serving on committees of the Board of Directors or for special assignments. During the fiscal years ended
December 31, 2016 and 2015 there were no other arrangements between us and our directors that resulted in our making payments to
any of our directors for any services provided to us by them as directors. The following table shows compensation earned by each
of our non-officer directors for the year ended December 31, 2016.
|
Name
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Martin Gans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information
with respect to the beneficial ownership of our common stock known by us as of March 22, 2017 by (i) each person or entity known
by us to be the beneficial owner of more than 5% of our common stock, (ii) each of our directors, (iii) each named executive officer
and (iv) all of our directors and executive officers as a group.
The percentages in the table have been calculated
on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on such date and all
shares of our common stock issuable to such holder in the event of exercise of outstanding options, warrants, rights or conversion
privileges owned by such person at said date which are exercisable within 60 days of such date. Except as otherwise indicated,
the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except
to the extent such power may be shared with a spouse. The addresses for our executive officers and directors are c/o Scores Holding
Company, Inc., 533-535 West 27
th
Street, New York, NY 10001.
Name and Address
of Beneficial Owner
|
|
Title of Class
|
|
Amount
and Nature
of
Beneficial Ownership
|
|
|
Percent of
Class
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert M. Gans (2)
|
|
Common Stock
|
|
|
88,900,230
|
(2)
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Rosenbluth
|
|
Common Stock
|
|
|
-0-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Gans
|
|
Common Stock
|
|
|
-0-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Sabbeth
|
|
Common Stock
|
|
|
2,000
|
(3)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (4 persons)
|
|
Common Stock
|
|
|
88,902,230
|
(2)
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Mitchell’s East LLC (2)
617 Eleventh Avenue
New York, NY 10036
|
|
Common Stock
|
|
|
88,900,230
|
(2)
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate of William Osher (4)
2955 Shell Road
Brooklyn, NY
|
|
Common Stock
|
|
|
13,886,059
|
(2)
|
|
|
8.4
|
%
|
|
|
(1)
|
Based upon 165,186,144 shares of Common Stock issued and outstanding as at March 3, 2017.
|
|
|
|
|
|
|
(2)
|
Robert M. Gans is the sole owner of Mitchell’s East LLC. The principal business address of Mr. Gans is 617 Eleventh Avenue, New York, NY 10036. Does not include 13,886,059 shares of Common Stock currently held of record by William Osher, deceased, of which Harvey Osher (“H. Osher”) claims title and which H. Osher has agreed to transfer to Mitchell’s East LLC pursuant to the Stock Purchase Agreement whereby Mr. Gans purchased any rights of H. Osher to such shares.
|
|
|
(3)
|
Mr. Sabbeth owns these shares directly.
|
|
|
(4)
|
William Osher passed away in August, 2007. H. Osher claims all right and title to and interest in these shares of Common Stock and has agreed to transfer them to Mitchell’s East LLC pursuant to the Stock Purchase Agreement.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
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 and $122,109 in unpaid royalties and expenses as of December
31, 2016 and December 31, 2015, which has been fully reserved.
On January 27, 2009, pursuant to a stock purchase
agreement (the “SPA”), Mitchell’s East LLC (“Buyer”), purchased an aggregate of 88,900,230 shares
(the “Owned Shares”) of our common stock beneficially owned by Richard Goldring and Elliot Osher (collectively the
“Share Sellers”), as well as any rights Harvey Osher (the Share Sellers and Harvey Osher, together, the “Sellers”)
may have in 13,886,059 shares of our common stock (the “Decedent Owned Shares”) currently held of record by the estate
of William Osher, deceased, and any rights the Sellers may have in an additional 2,400,001 shares of our common stock (the “Expectancy
Shares”). Under the terms of the SPA, Harvey Osher is to deliver to the Buyer the Decedent Owned Shares that he
may receive and the Sellers are to deliver to the Buyer any shares of the Company underlying the Expectancy Shares that any such
Seller may receive. Additionally, pursuant to the SPA, each of the Sellers granted to Buyer an irrevocable
proxy enabling Buyer to act as his proxy with respect to any shares underlying the Decedent Owned Shares and the Expectancy
Shares, as applicable.
The Owned Shares represent approximately fifty
four percent (54%) of our outstanding capital stock and the Owned Shares together with the Decedent Owned Shares represent approximately
sixty two percent (62%) of our outstanding capital stock.
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 December 31, 2016 and 2015, the settlement receivable is $0.
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 December 31, 2016 and 2015, the promissory note balance
is $0.
In connection with the settlement receivable
discussed above relating to the settlement of the Sari Diaz, et. al. litigation, Robert M. Gans, the Company’s President,
Chief Executive Officer, majority shareholder and a director, advanced $560,151 to settle the litigation and fund the $30,000 loan
to Mr. Goldring. As of December 31, 2016 and 2015 $0 was outstanding.
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 and $144,698 as of December 31, 2016 and December 31, 2015, 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 $0 and $0 in unpaid rents as of December 31, 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. 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 $0 and $0 in unpaid
management services as of December 31, 2016 and December 31, 2015, respectively.
The Company has accrued expenses of $9,074
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owes $9,074 and $0 as of December 31, 2016 and December
31, 2015, respectively.
During
the 2
nd
quarter of 2016, 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 December 31, 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. The Company paid Mr. Gans a salary of $168,923 per year commencing 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
and $130,000 as of December 31, 2016 and December 31, 2015, which has been fully reserved. Starlight is currently closed and looking
for a new location in the same area.
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 December 31, 2016 and December 31, 2015 was $9,074 and $180,000, respectively and the total amounts due to the Company
from the various related parties as of December 31, 2016 and December 31, 2015 was $396,807 and $396,807, respectively.
Penthouse is a related-party competitor due
to the common control and ownership by our President and Chief Executive Officer, Robert M. Gans, who owns 83% of Penthouse.
Effective February 28, 2017 (the “Effective
Date”), we entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees,
I.M. Operating LLC (“IMO”), Star Light Events LLC (“Star Light”) and Swan Media Group, Inc. (“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.
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.
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.
Mr. Gans personally guaranteed the obligations
of each of IMO, Starlight and Swan under their respective promissory notes.
The terms of the Settlement Agreements are
similar to the terms of a settlement we are currently negotiating with unaffiliated third parties with respect to amounts owed
to us by a former licensee. Accordingly, we believe the terms of the Settlement Agreements are fair to us, and are no less favorable
to us than we could have obtained in an adversarial proceeding.
Director Independence
Our Board of Directors has considered the independence
of its directors in reference to the definition of “independent director” established by the Nasdaq Marketplace Rule
5605(a)(2). In doing so, the Board has reviewed all commercial and other relationships of each director in making its determination
as to the independence of its directors. After such review, the Board has determined that none of our directors qualifies as independent
under the requirements of the Nasdaq listing standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed to us by RBSM LLP,
our independent registered public accounting firm, for services rendered during the fiscal years ended December 31, 2016 and 2015
are set forth in the table below:
|
Fee Category
|
|
Fiscal year ended December 31,
2016
|
|
|
Fiscal year ended December 31,
2015
|
|
|
Audit Fees (1)
|
|
$
|
37,000
|
|
|
$
|
30,000
|
|
|
Audit-Related Fees (2)
|
|
|
—
|
|
|
|
—
|
|
|
Tax Fees (3)
|
|
$
|
3,000
|
|
|
|
5,700
|
|
|
All Other Fees (4)
|
|
|
—
|
|
|
|
—
|
|
|
Total Fees
|
|
$
|
40,000
|
|
|
$
|
35,700
|
|
|
|
(1)
|
Audit fees consists of fees
incurred for professional services rendered for the audit of annual consolidated financial statements, for reviews of our interim
consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in
connection with statutory or regulatory filings or engagements.
|
|
|
(2)
|
Audit-related fees consist
of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated
financial statements, but are not reported under “Audit fees.”
|
|
|
(3)
|
Tax fees consist of fees
billed for professional services relating to tax compliance, tax planning, and tax advice.
|
|
|
(4)
|
All other fees consist of
fees billed for all other services.
|
Audit Committee’s Pre-Approval Practice
.
Inasmuch as we do not have an audit committee,
our Board of Directors performs the functions of an audit committee. Section 10A(i) of the Exchange Act prohibits our auditors
from performing audit services for us as well as any services not considered to be “audit services” unless such services
are pre-approved by the Board of Directors (in lieu of the audit committee) or unless the services meet certain de-minimis standards.
All audit services were approved by our Board of Directors.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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”).
Note 2. Summary of Significant Accounting
Principles
Going Concern
As of December 31, 2016 the Company has
cumulative losses totaling $(6,065,153) and working capital of only $209,733. The Company had a net loss of $(240,991) for
the year ended December 31, 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.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
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.
Licensee receivable and reserves
Accounts deemed uncollectible are applied
against the allowance for doubtful accounts. Allowance for doubtful accounts as of December 31, 2016 and 2015 were $506,807 and
$266,807 respectively. In reviewing any delinquent royalty or note receivable, the Company considers many factors in estimating
its reserve, including historical data, experience, customer types, credit worthiness, financial distress and economic trends.
From time to time, the Company may adjust its assumptions for anticipated changes in any of above or other factors expected to
affect collectability
.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
Stock Based Compensation
The Company accounts for the plans under the
recognition and measurement provisions of Accounting Standards Codification (ASC) Topic 718
Compensation – Stock Compensation
.
The standard requires entities to measure the cost of employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award.
There were no stock options or warrants issued
during the years ended December 31, 2016 and 2015, hence the Company has recorded no compensation expense. If the Company were
to issue equity rights for compensation, then the Company would recognize compensation expense under Topic 718 over the requisite
service period using the Black-Scholes model for equity rights granted.
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.
Income Taxes
The Company accounts for income taxes in accordance
with ASC 740-10-25, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled.
The Company has net operating loss carryforwards of approximately
$4,920,000, which expire in the years 2020 through 2028. The related deferred tax asset of approximately $400,000 has been offset
by a valuation allowance. The Company’s net operating loss carryforwards have been limited, pursuant to the Internal Revenue
Code Section 382, as to the utilization of such net operating loss carryforwards due to changes in ownership of the Company over
the years. We have determined the Company has lost cumulatively $1,780,000 of deferred tax assets attributed to net operating
loss carryforwards due to the change in ownership in 2001. The final section 382 limitation evaluation resulted in a $1,250,000
decrease of the deferred tax asset being recorded in 2015. Approximately $130,000 of the net operating loss carryforward deferred
tax asset was utilized against current earnings. The remaining $518,000 of deferred tax assets can only be utilized up to $30,000
per year through 2028.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
Allowance for doubtful accounts
|
|
|
223,000
|
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(623,000
|
)
|
|
|
(518,000
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of the Company’s
effective tax rate differs from the Federal income tax rate of 34% for the years ended December 31, 2016 and 2015, as a result
of the following:
|
|
|
2016
|
|
|
2015
|
|
|
Tax (benefit) at statutory rate
|
|
$
|
(82,000
|
)
|
|
$
|
46,000
|
|
|
State and local taxes
|
|
|
(25,000
|
)
|
|
|
14,000
|
|
|
Permanent differences
|
|
|
-
|
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
(107,000
|
)
|
|
|
(10,600
|
)
|
|
Tax due
|
|
$
|
0
|
|
|
$
|
49,400
|
|
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 years ended December 31, 2016 and 2015,
respectively, is the same for purposes of computing both basic and diluted net income per share for such years. As of December
31, 2016, there are no outstanding stock equivalents.
Concentration of Credit Risk
The Company earns predominately royalty revenues
and to a lesser extent initiation fees from 24 licensees.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
With regards to 2016, concentrations of sales
from 4 licensees range from 10% to 15%, totaling 49%. There are receivables from 4 licensees ranging from 20% to 26% totaling
92%. 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 77%. There are receivables from 4 licensees ranging from 12% to 25% totaling
64%. 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 22%, 24% and 26%, most of which has been reserved.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 December 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 December 31, 2016 and December 31, 2015, 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 $0 and $0 in unpaid rents as of December 31, 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 December 31, 2016 and December 31, 2015, respectively.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company has accrued expenses of $9,074
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owes $9,074 and $0 as of December 31, 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, the
Company 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, the Company 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 the Company or its affiliates at the Company’s 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 December
31, 2016 and December 31, 2015, which has been fully reserved. Starlight is currently closed.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 December 31, 2016 and December 31, 2015 was $9,074 and $180,000 respectively and the total amounts due to the Company
from the various related parties as of December 31, 2016 and December 31, 2015 was $396,807 and $266,807, respectively of which
$396,807 has been reserved as December 31, 2016.
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 December 31, 2016 and December 31, 2015.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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. known as “Scores New Orleans”, I.M Operating
LLC known as “Scores New York”, Tampa Food and Entertainment Inc. known as “Scores Tampa”, 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”, The Cadillac Lounge LLC 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”, NEW 4125 LLC known as “Scores Phoenix”, Southern Highland Centerfolds, Inc. known
as “Scores Las Vegas” and 1715 Northside Drive Inc. known as “Scores Atlanta”. See Note 8 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 years 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 years 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 years 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. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of
December 31, 2016 is comprised of professional fees of $12,800, accrued payroll and taxes of $3,487, legal fees of $2,000, filing
fees of $2,248, marketing fees and expenses of $1,041 and miscellaneous accruals and payables of $5,000. Accounts payable and
accrued expenses as of December 31, 2015 is comprised of accrued payroll and taxes of $189,742, professional fees of $22,050,
legal fees of $20,192, filing fees of $2,452, marketing and advertising fees of $6,900 and miscellaneous accruals and payables
of $5,000.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 8. 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 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
parties are currently discussing a possible settlement of this matter.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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. On January 5, 2017, the Court issued an Order granting in part, and denying
in part, the Defendants’ motion to dismiss the Complaint. Following the issuance of the Order, an amended complaint was
filed and the Defendants have interposed an answer with affirmative defenses. The case is currently in the discovery phase. The
Company, along with all of the Defendants, intends to vigorously defend themselves against the claims asserted against them in
this lawsuit.
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 has been exchanged in each of the
Arbitrations but depositions have not been taken.
Given that the Arbitrations are in their preliminary
stages; it is not possible at this juncture to ascertain the likelihood of an unfavorable outcome.
The parties have exchanged written discovery.
The Arbitrations have stayed to allow the parties to pursue mediation, which is currently scheduled for May 3, 2017.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Arbitrations follow the filing and subsequent
voluntary dismissal of the Action, as discussed above.
On or about December 20, 2016 three individuals,
Stacey Scott, Angelica Andrade and Dislenia Munoz (“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 against Scores NY as
well as, among others, the Company (the “Arbitrations”). The American Arbitration Association assigned
the Scott, Andrade and Munoz_Arbitrations case numbers 01-16-0005-5566, 01-16-0005-5565 and 01-16-0005-5563, 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 sought unspecified compensatory damages, liquidated damages, as well as attorneys’ fees and costs.
The Company intends to vigorously defend against the claims asserted against it in the Arbitrations. Given that the Arbitrations
are in their preliminary stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable ruling.
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 has scheduled a hearing on the motion for
April 5, 2017.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
On or about February 22, 2017, Natalia Titova
(“Claimant”), who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M. Operating
LLC, brought an arbitration (the “Arbitration”) against, among others, the Company. The American Arbitration Association
assigned the Arbitration Case No. 01-17-0001-1232. The Claimant alleges that she was misclassified as an independent contractor,
that she should have been classified as an employee, and as a result the Respondents violated, among other things, applicable
federal and state wage and hour laws. The Arbitration seeks unspecified compensatory damages, liquidated damages, as well as attorneys’
fees and costs. The Company intends to vigorously defend against the claims asserted against it in the Arbitrations. Given that
the Arbitrations are in their preliminary stages, it is not possible at this juncture to ascertain the likelihood of an unfavorable
ruling.
There are no other material legal proceedings
pending to which the Company or any of its property is subject, nor to our knowledge are any such proceedings threatened.
Note 9. SUBSEQUENT EVENTS
Effective January 1, 2017 the terms of
the Management Agreement with Metropolitan Lumber, Hardware & Building Supplies, Inc. have been amended to remove the reference
to services from Robert M. Gans.
Effective February 28, 2017 (the “Effective
Date”), we entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees,
I.M. Operating LLC (“IMO”), Star Light Events LLC (“Star Light”) and Swan Media Group, Inc. (“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.
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.
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.
Mr. Gans personally guaranteed the obligations of each of IMO,
Starlight and Swan under their respective promissory notes.
The terms of the Settlement Agreement
are similar to the terms of the settlement we are currently negotiating into with unaffiliated third parties with respect to
amounts owed to us by a former licensee. See “Item 3. Legal Proceedings” for additional
information regarding this matter. Accordingly, we believe the terms of the Settlement Agreements are fair to the
Company, and are no less favorable to us than we could have obtained in an adversarial
proceeding.
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.