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 whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
¨
On September 29, 2017, the last business
day of the registrant’s most recently completed third fiscal quarter, 76,285,914 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 $389,058.06, based on the last sale price of $0.0051 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 June 4, 2018, 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. 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.) A club in Phoenix, Arizona is 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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding
against this licensee.
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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding
against this licensee.
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. See “Item 3. Legal Proceedings” for information
regarding our legal proceeding against this licensee.
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 1% of our total royalty revenue during 2017 and 0%
of our total revenue during 2016. IMO owes the Company a royalty receivable of $76,726 and $144,698, which has been fully reserved
as of December 31, 2017 and December 31, 2016, 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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding against 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 $93,422 as of December 31, 2017, which has been fully reserved, and $130,000 as of December 31, 2016, respectively. Star Light
accounted for 0% royalty revenue in 2017 and 0% of royalty revenue in 2016. See “Item 3. Legal Proceedings” for information
regarding our legal proceeding against this licensee.
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. See “Item 3. Legal Proceedings”
for information regarding our legal proceeding against this licensee.
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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding against
this licensee.
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. 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. 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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding against
this licensee.
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. See “Item 3. Legal Proceedings”
for information regarding our legal proceeding against this licensee.
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. See “Item 3. Legal Proceedings” for information
regarding our legal proceeding against this licensee.
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. See “Item 3. Legal Proceedings” for information
regarding our legal proceeding against this licensee.
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. See “Item 3. Legal Proceedings” for information
regarding our legal proceeding against this licensee.
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 $104,986 and $122,109 in unpaid royalties and expenses as of December 31, 2017 and December 31,
2016, 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, 2017 we had three 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. The Company owed WSR $7,500 and $0 in unpaid rents as of
December 31, 2017 and December 31, 2016, 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 subsequently settled this matter for $60,000, and the settlement agreement was filed with the court on April 28, 2017.
Defendant paid the $60,000, pursuant to the settlement agreement. A satisfaction of judgment was filed with the Court on or about
October 30, 2017.
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 Defendants 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; however, while discovery is ongoing, the parties are engaged in settlement discussions in
an attempt to resolve the claims asserted in the lawsuit.
On April 20, 2017,
as a result of the claims asserted in the above action, the Company filed a third-party complaint against certain current and former
licensees, namely CG Consulting, LLC; Anthony Quaranta; High Five Management Group, Inc.; Club 2000 Eastern Avenue, Inc.; SCMD,
LLC; David Baucom; Manhattan Fashion L.L.C.; Stone Park Entertainment, Inc.; Silver Bourbon, Inc.; Tampa Food & Entertainment,
Inc.; Funn House Productions, L.L.C.; Norm A Properties, LLC; Southeast Show Clubs, LLC; Michael Tomkovich; Palm Spring Grill LLC;
Houston KP LLC; and Star Light Events LLC (collectively, “Third-Party Defendants”) asserting causes of action for breach
of contract, breach of warranty, contractual indemnification, common law indemnification, contribution and breach of contract for
failure to procure insurance. The Company alleges, among other things, that the Third-Party Defendants breached their respective
license agreements by using promotional, marketing and advertising materials, including the images of the individuals implicated
in the above-action without obtaining the Company’s approval and utilizing, publishing and/or disseminating the images of
such individuals on their respective websites and/or social media accounts without all appropriate permissions, authorizations,
releases or licenses in violation of the rights of such individuals. Additionally, the Company has alleged that pursuant to the
Third-Party Defendants’ respective license agreements, each of the Third-Party Defendants are expressly obligated to indemnify,
defend and hold harmless the Company, among others, for the claims asserted by the individuals in the above-action, including any
resulting judgment, verdict or settlement obtained by such individuals based on the claims asserted in the amended complaint, as
well as all amounts the Company has expended, and will continue to expend, in investigating and defending the claims asserted in
the Amended Complaint. The Company is also seeking damages from the Third-Party Defendants for allegedly failing to procure insurance
for the Company’s benefit, as required by the Third-Party Defendants’ respective license agreements.
On January 3, 2017,
we, together with our subsidiary SLC, filed an action against CJ NYC Inc in the United States District Court for the Southern District
of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an
adult entertainment club in Woodside, New York. In this action we sought damages for breach of contract in the amount of $85,000
and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and
trademark with respect to the Woodside, New York club and all websites and social media sites controlled by Defendant. The defendant
failed to appear and on February 27, 2017, we filled a motion for judgment by default. The court heard our motion on April 5, 2017,
and on May 25, 2017 the court granted our motion for a Judgment by default, granting a permanent injunction and awarding damages
in the amount of $85,000 to SLC and $14,333.33 in damages and $529.99 in costs to us. All signage has been removed and the Company
is attempting to collect on the default judgment.
On January 31, 2017
we, together with our subsidiary SLC, filed an action against Funn House Productions LLC in the United States District Court for
the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership
and operation of an adult entertainment club in New Haven, Connecticut. In this action we sought damages for breach of contract
in the amount of $45,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores”
name and trademark with respect to the New Haven, Connecticut club and all websites and social media sites controlled by Defendant.
The Defendant failed to appear and on February 28, 2017 the Court granted Plaintiffs’ motion for a Judgment by default, granting
a permanent injunction and awarding damages in the amount of $60,000. The parties negotiated a settlement agreement, which included
a payment schedule, but then Defendant did not sign the proposed settlement agreement
.
The Company is attempting to collect
on the default judgment.
On or about July 25,
2017, plaintiff Dislenia Munoz (“Plaintiff”), who formerly performed as an adult entertainer at Scores New York, owned
in its entirety by I.M. Operating LLC (“I.M. Operating”), commenced a putative class action lawsuit (the “Lawsuit”)
against the Company, I.M. Operating, Robert Gans and Mark Yackow (collectively, “Defendants”) in the Supreme Court
of the State of New York, County of New York. Plaintiff alleges that she and other similarly situated entertainers at Scores New
York were misclassified as independent contractors, that they should have been classified as employees, and as a result, the defendants
violated, among other things, applicable state wage and hour laws. The Lawsuit seeks unspecified compensatory damages, liquidated
damages, as well as attorneys’ fees and costs. The Company, along with all of the Defendants, intend to vigorously defend
themselves against the claims asserted against them in the Lawsuit. At this time, the parties have reached a settlement in principle
to resolve the claims in the Lawsuit which is being memorialized in a written agreement to be submitted to the court for approval.
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 April 9, 2018, 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
|
|
75
|
|
August 6, 2010
|
|
Martin Gans
|
|
Director
|
|
82
|
|
June 23, 2009
|
|
Howard Rosenbluth
|
|
Treasurer, Chief Financial Officer, Secretary and Director
|
|
71
|
|
April 21, 2009
|
|
Stephen J. Sabbeth
|
|
Head of Acquisitions and Licensing
|
|
70
|
|
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 2017 and Forms 5 and amendments thereto received by the
Company with respect to 2017 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, 2017, 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, 2017, 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, 2017 and 2016 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, 2017 and 2016 and (ii) all individuals that served as executive officers
of ours at any time during the fiscal year ended December 31, 2017 and 2016 that received annual compensation during such fiscal
years in excess of $100,000 (collectively, the “named executive officers”).
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
Name and
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
|
Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Robert M. Gans,
|
|
|
2017
|
|
|
|
121,846
|
|
|
|
280,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
401,846
|
|
|
Chief Executive Officer
|
|
|
2016
|
|
|
|
168,923
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
168,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Rosenbluth,
|
|
|
2017
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Sabbeth
|
|
|
2017
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
130,000
|
|
|
|
130,000
|
|
|
Director of Acquisitions and Licensing
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. $22,500 and $0 in unpaid management services as of December 31, 2017 and December 31, 2016, 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, and a salary of $121,846 during
2017. As well, the Company paid a bonus of $280,000 to Mr. Gans with respect to 2017.
Mr. Sabbeth’s compensation of $130,000 per year represents
consulting fees. Mr. Sabbeth became an executive officer during 2015.
Outstanding
Equity Awards at 2017 Fiscal Year-End
As of the year ended December 31, 2017,
there were no unexercised options, stock that has not vested or equity incentive plan awards held by any of the Company’s
named executive officers.
Compensation of Directors
None of our directors receives any compensation
for serving as such, for serving on committees of the Board of Directors or for special assignments. During the fiscal years ended
December 31, 2017 and 2016 there were no other arrangements between us and our directors that resulted in our making payments to
any of our directors for any services provided to us by them as directors. The following table shows compensation earned by each
of our non-officer directors for the year ended December 31, 2017.
|
Name
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
|
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 June 4, 2018 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 June 4, 2018.
|
|
|
|
|
|
|
(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 $104,986 and $122,109 in unpaid royalties and expenses as of December
31, 2017 and December 31, 2016, 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, 2017 and 2016, 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, 2017 and 2016, 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, 2017 and 2016 $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 $76,726 and $144,698 as of December 31, 2017 and December 31, 2016, which has been fully reserved.
The Company also leases office space directly
from Westside Realty of New York, Inc. (WSR), the owner of the West 27
th
Street Building. The majority owner
of WSR (80%) is Robert M. Gans. Since April 1, 2009, the monthly rent has been $2,500 per month including overhead costs.
The Company owed WSR $7,500 and $0 in unpaid rents as of December 31, 2017 and December 31, 2016, 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 $22,500 and $0 in unpaid management services as of December 31, 2017 and December 31, 2016, respectively.
The Company has accrued expenses of $15,842
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owes $15,842 and $9,074 as of December 31, 2017 and
December 31, 2016, 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, 2017 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.
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
$93,442 and $130,000 as of December 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016 was $15,842 and $9,074, respectively and the total amounts due to the Company
from the various related parties as of December 31, 2017 and December 31, 2016 was $275,154 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. Since its last payment during May 2017 IMO has not made any further payments under the terms
of the note and is therefore in default of this obligation.
As of the Effective Date, Starlight owed
us an aggregate of $250,000 in unpaid royalties and other fees. Starlight is currently inactive and has no revenue. Under its Settlement
Agreement, Starlight has agreed to pay us $75,000, in full settlement of all claims we may have against it. The settlement amount
is payable pursuant to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest
at the rate of 4% per year. Since its last payment during May 2017 Starlight has not made any further payments under the terms
of the note and is therefore in default of this obligation.
As of the Effective Date, Swan owed us
an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan
has agreed to pay us $50,000, in full settlement of all claims we may have against it. The settlement amount is payable pursuant
to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest at the rate of
4% per year. Included as an event of default under the note is a requirement that Swan remain current in its obligations to us
under its license agreement from and after the Effective Date. Since its last payment during May 2017 Swan has not made any further
payments under the terms of the note and is therefore in default of this obligation.
Mr. Gans personally guaranteed the obligations
of each of IMO, Starlight and Swan under their respective promissory notes To date the Company has not sought to enforce Mr. Gans’
obligations under these personal guarantees.
In 2017, the Company paid a $280,000 bonus
to Robert Gans.
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, 2017 and
2016 are set forth in the table below:
|
Fee Category
|
|
Fiscal year ended
December 31, 2017
|
|
|
Fiscal year ended
December 31,
2016
|
|
|
Audit Fees (1)
|
|
$
|
40,000
|
|
|
$
|
37,000
|
|
|
Audit-Related Fees (2)
|
|
|
—
|
|
|
|
—
|
|
|
Tax Fees (3)
|
|
$
|
5,000
|
|
|
$
|
3,000
|
|
|
All Other Fees (4)
|
|
|
—
|
|
|
|
—
|
|
|
Total Fees
|
|
$
|
45,000
|
|
|
$
|
40,000
|
|
|
|
(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, 2017 the Company has
cumulative losses totaling $(6,294,398) and working capital deficit of $(35,345). The Company had a net loss of $(229,245) for
the year ended December 31, 2017. 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.
Reclassifications
The Company has made certain reclassifications
to prior period amounts to conform with the current year’s presentation.
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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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, 2017 and 2016 were $345,153 and
$506,807 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
.
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, 2017 and 2016, 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 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, 2017
and 2016, respectively, is the same for purposes of computing both basic and diluted net income per share for such years. As of
December 31, 2017, there are no outstanding stock equivalents.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
Concentration of Credit Risk
The Company earns predominately royalty
revenues and to a lesser extent initiation fees from 22 licensees.
With regards to 2017, concentrations of
sales from 3 licensees range from 9% to 18%, totaling 44%. There are receivables from 4 licensees ranging from 17% to 22% totaling
82%. Included in these amounts for 2017 are sales from 0 licensee considered a related party. There are receivables from these
3 licensees that are considered related parties of 18%, 22% and 25%, which has been fully reserved.
With regards to 2016, concentrations of
sales from 4 licensees range from 10% to 14%, 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 26%, which has been fully reserved.
New Accounting Pronouncements
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.
All new accounting pronouncements issued
but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 $104,986 and $122,109 in unpaid royalties and expenses as of December
31, 2017 and December 31, 2016, which has been fully reserved.
On January 27, 2009, the Company entered
into a licensing agreement with its affiliate through common ownership I.M. Operating LLC (“IMO”) for the use of the
Scores brand name “Scores New York”. Robert M. Gans is the majority owner (72%) of IMO and is also the Company’s
majority shareholder, and Howard Rosenbluth, the Company’s Treasurer and a Director, owns 2%. IMO owes the Company a royalty
receivable of $76,726 and $144,698 as of December 31, 2017 and December 31, 2016, which has been fully reserved.
The Company also leases office space directly
from Westside Realty of New York, Inc. (WSR), the owner of the West 27
th
Street Building. The majority owner
of WSR (80%) is Robert M. Gans. Since April 1, 2009, the monthly rent has been $2,500 per month including overhead costs.
The Company owed WSR $7,500 and $0 in unpaid rents as of December 31, 2017 and December 31, 2016, 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 $22,500 and $0 in unpaid management services
as of December 31, 2017 and December 31, 2016, respectively.
The Company has accrued expenses of $15,842
due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owes $15,842 and $9,074 as of December 31, 2017 and
December 31, 2016, respectively.
During
the 2
nd
quarter 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 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.
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
$93,442 and $130,000 as of December 31, 2017 and December 31, 2016, which has been fully reserved. Starlight is currently closed
and looking for a new location in the same area.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to 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.
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. Since its last payment during May 2017 IMO has not made any further payments under the terms
of the note and is therefore in default of this obligation.
As of the Effective Date, Starlight owed
us an aggregate of $250,000 in unpaid royalties and other fees. Starlight is currently inactive and has no revenue. Under its Settlement
Agreement, Starlight has agreed to pay us $75,000, in full settlement of all claims we may have against it. The settlement amount
is payable pursuant to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest
at the rate of 4% per year. Since its last payment during May 2017 Starlight has not made any further payments under the terms
of the note and is therefore in default of this obligation.
As of the Effective Date, Swan owed us
an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan
has agreed to pay us $50,000, in full settlement of all claims we may have against it. The settlement amount is payable pursuant
to a promissory note in 10 consecutive monthly installments commencing March 1, 2017, and bears simple interest at the rate of
4% per year. Included as an event of default under the note is a requirement that Swan remain current in its obligations to us
under its license agreement from and after the Effective Date. Since its last payment during May 2017 Swan has not made any further
payments under the terms of the note and is therefore in default of this obligation.
Mr. Gans personally guaranteed the obligations
of each of IMO, Starlight and Swan under their respective promissory notes. To date the Company has not sought to enforce Mr. Gans’
obligations under these personal guarantees.
In 2017, the Company paid a $280,000 bonus
to Robert Gans.
The total amounts due to the various related
parties as of December 31, 2017 and December 31, 2016 was $15,842 and $9,074 respectively and the total amounts due to the Company
from the various related parties as of December 31, 2017 and December 31, 2016 was $275,154 and $396,807, respectively of which
$275,154 has been reserved as of December 31, 2017.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 4. 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.
On December 22,
2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed into
law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to the reduction
of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest
expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of
current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward
without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination
of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead
of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes
to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective
in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax
law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The Company has
not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding
of the TCJA and guidance currently available as of this filing, but is reviewing the TCJA’s potential ramifications.
The Company has net operating loss
carryforwards of approximately $5,391,000, which expire in the years 2019 through 2037. The related deferred tax asset of
approximately $330,000 has been offset by a valuation allowance. Management has determined that it is more likely than not
that the net operating loss carryforward will not be fully utilized therefore a full valuation allowance has been provided.
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 remaining $435,000 of deferred tax assets can only
be utilized up to $21,759 per year (relating to the IRC382, limitation) through 2028.
|
|
|
2017
|
|
|
2016
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
283,000
|
|
|
$
|
400,000
|
|
|
Allowance for doubtful accounts
|
|
|
152,000
|
|
|
|
223,000
|
|
|
Less valuation allowance
|
|
|
(435,000
|
)
|
|
|
(623,000
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of the Company’s
effective tax rate differs from the Federal income tax rate of 21% and 34% for the years ended December 31, 2017 and 2016, respectively
as a result of the following:
|
|
|
2017
|
|
|
2016
|
|
|
Tax (benefit) at statutory rate
|
|
$
|
(48,000
|
)
|
|
$
|
(82,000
|
)
|
|
State and local taxes
|
|
|
(24,000
|
)
|
|
|
(25,000
|
)
|
|
Permanent differences
|
|
|
-
|
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
72,000
|
|
|
|
107,000
|
|
|
Tax due
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal and State/Local tax years remain
open by statute, generally three years. There are no open Federal or State/Local audits at December 31, 2017.
Note 5. Licensees
The Company has 26 license agreements which
were obtained between 2003 and 2017; 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.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
“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 1% and 0% of our royalty revenues for the years 2017 and 2016, respectively. Mr. Gans is
also the majority owner (80%) of Swan Media Group, Inc., which accounted for 0% and 0% of our royalty revenues for the years 2017
and 2016, respectively. Mr. Gans is also the majority owner (92.165%) of Scores Atlantic City, which accounted for 0% and 0% of
our royalty revenues for the years 2017 and 2016, 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, 2017 is comprised of professional fees of $40,300, accrued payroll and taxes of $2,255, legal fees of $8,911, insurance
of $9,414, filing fees of $2,248, marketing fees and expenses of $7,247 and miscellaneous accruals and payables of $5,075. 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.
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 subsequently settled this matter for $60,000, pursuant to the settlement
agreement. A satisfaction of judgment was filed with the Court on or about October 30, 2017.
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 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 Defendants 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; however,
while discovery is ongoing, the parties are engaged in settlement discussions in an attempt to resolve the claims asserted in the
lawsuit.
On April 20, 2017, as a result of the claims
asserted in the above action, the Company filed a third-party complaint against certain current and former licensees, namely CG
Consulting, LLC; Anthony Quaranta; High Five Management Group, Inc.; Club 2000 Eastern Avenue, Inc.; SCMD, LLC; David Baucom; Manhattan
Fashion L.L.C.; Stone Park Entertainment, Inc.; Silver Bourbon, Inc.; Tampa Food & Entertainment, Inc.; Funn House Productions,
L.L.C.; Norm A Properties, LLC; Southeast Show Clubs, LLC; Michael Tomkovich; Palm Spring Grill LLC; Houston KP LLC; and Star Light
Events LLC (collectively, “Third-Party Defendants”) asserting causes of action for breach of contract, breach of warranty,
contractual indemnification, common law indemnification, contribution and breach of contract for failure to procure insurance.
The Company alleges, among other things, that the Third-Party Defendants breached their respective license agreements by using
promotional, marketing and advertising materials, including the images of the individuals implicated in the above-action without
obtaining the Company’s approval and utilizing, publishing and/or disseminating the images of such individuals on their respective
websites and/or social media accounts without all appropriate permissions, authorizations, releases or licenses in violation of
the rights of such individuals. Additionally, the Company has alleged that pursuant to the Third-Party Defendants’ respective
license agreements, each of the Third-Party Defendants are expressly obligated to indemnify, defend and hold harmless the Company,
among others, for the claims asserted by the individuals in the above-action, including any resulting judgment, verdict or settlement
obtained by such individuals based on the claims asserted in the amended complaint, as well as all amounts the Company has expended,
and will continue to expend, in investigating and defending the claims asserted in the Amended Complaint. The Company is also seeking
damages from the Third-Party Defendants for allegedly failing to procure insurance for the Company’s benefit, as required
by the Third-Party Defendants’ respective license agreements.
SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements
On January 3, 2017, we, together with our
subsidiary SLC, filed an action against CJ NYC Inc in the United States District Court for the Southern District of New York. Defendant
utilizes the “Scores” name and trademark in connection with its ownership and operation of an adult entertainment club
in Woodside, New York. In this action we sought damages for breach of contract in the amount of $85,000 and the issuance of a preliminary
and permanent injunction prohibiting the defendant from using the “Scores” name and trademark with respect to the Woodside,
New York club and all websites and social media sites controlled by Defendant. The defendant failed to appear and on February 27,
2017, we filled a motion for judgment by default. The court heard our motion on April 5, 2017, and on May 25, 2017 the court granted
our motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $85,000 to SLC and
$14,333.33 in damages and $529.99 in costs to us. All signage has been removed and the Company is attempting to collect on the
default judgment.
On January 31, 2017 we, together with our
subsidiary SLC, filed an action against Funn House Productions LLC in the United States District Court for the Southern District
of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an
adult entertainment club in New Haven, Connecticut. In this action we sought damages for breach of contract in the amount of $45,000
and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and
trademark with respect to the New Haven, Connecticut club and all websites and social media sites controlled by Defendant. The
Defendant failed to appear and on February 28, 2017 the Court granted Plaintiffs’ motion for a Judgment by default, granting
a permanent injunction and awarding damages in the amount of $60,000. The parties negotiated a settlement agreement, which included
a payment schedule, but then Defendant did not sign the proposed settlement agreement
.
The Company is attempting to collect
on the default judgment.
On or about July 25, 2017, plaintiff Dislenia
Munoz (“Plaintiff”), who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M.
Operating LLC (“I.M. Operating”), commenced a putative class action lawsuit (the “Lawsuit”) against the
Company, I.M. Operating, Robert Gans and Mark Yackow (collectively, “Defendants”) in the Supreme Court of the State
of New York, County of New York. Plaintiff alleges that she and other similarly situated entertainers at Scores New York were misclassified
as independent contractors, that they should have been classified as employees, and as a result, the defendants violated, among
other things, applicable state wage and hour laws. The Lawsuit seeks unspecified compensatory damages, liquidated damages, as well
as attorneys’ fees and costs. The Company, along with all of the Defendants, intend to vigorously defend themselves against
the claims asserted against them in the Lawsuit. At this time, the parties have reached a settlement in principle to resolve the
claims in the Lawsuit which is being memorialized in a written agreement to be submitted to the court for approval.
There are no other material legal proceedings
pending to which the Company or any of its property is subject, nor to our knowledge are any such proceedings threatened.
Note 9. SUBSEQUENT EVENTS
Management evaluated
subsequent events through the date of this filing and determined that no additional events have occurred that would require adjustment
to or disclosure in the financial statements.
