10-K: Scores Holding Co. Reports Revenue Decline, Going Concern Doubt

Scores Holding Company, Inc. reported a significant decrease in revenue and net income for 2023, alongside material weaknesses in internal controls and substantial doubt about its ability to continue as a going concern.

Summary

• Revenue decreased to $350,000 for the year ended December 31, 2023, from $634,500 in 2022, primarily due to a one-time recognition of $450,000 in deferred revenue in 2022.
• Net income significantly declined to $11,120 in 2023 from $262,084 in 2022.
• The company reported an accumulated deficit of $6,865,478 and a working capital deficit of $201,175 as of December 31, 2023, raising substantial doubt about its ability to continue as a going concern.
• Cash and cash equivalents increased to $46,624 at December 31, 2023, from $7,600 at December 31, 2022.
• Net cash provided by operating activities decreased to $39,024 in 2023 from $348,593 in 2022.
• Management identified material weaknesses in internal control over financial reporting, specifically regarding timely generation of financial reporting information and review of journal entries and account reconciliations.
• The company's common stock is quoted on OTC Pink and currently holds a 'Pink No Information' status with a 'stop sign' due to not making material information publicly available, having been delisted in September 2020.
• Several legal proceedings were settled during the period, including a $45,000 settlement for Scores Alabama and a $12,000 total settlement for Jessica Hall v. Scores Holding Company, Inc. et al.
• The company operates with no employees, relying on a Management Services Agreement with Metropolitan Lumber Hardware and Building Supplies, Inc., owned by the CEO, Robert M. Gans.

Sentiment

Score: 2

Explanation: StockSavvy.ai views this filing with a very negative sentiment due to significant declines in revenue and net income, persistent going concern doubts, and critical internal control weaknesses. The 'Pink No Information' status further exacerbates concerns about transparency and investor risk.

Positives

• Cash and cash equivalents increased to $46,624 at December 31, 2023, from $7,600 at December 31, 2022.
• The working capital deficit slightly improved to $201,175 in 2023 from $205,795 in 2022.
• Several legal proceedings, including the Jane Doe v. Scores Holding Company, Inc. (Tampa) sex trafficking case and the Luisa Santos de Oliveira case, are no longer pending against the company.
• Management believes the worst effects of the COVID-19 pandemic are over, with all royalty-paying licensees reopened and increased interest in the SCORES brand trademarks.
• Cash collections from licensees increased from $235,000 in 2020 to $270,500 in 2023.

Negatives

• Revenue decreased to $350,000 in 2023 from $634,500 in 2022, a 44.99% decline, primarily due to a one-time deferred revenue recognition in 2022.
• Net income significantly decreased to $11,120 in 2023 from $262,084 in 2022, a 95.76% decline.
• Net cash provided by operating activities decreased substantially to $39,024 in 2023 from $348,593 in 2022.
• The company has an accumulated deficit of $6,865,478 and a working capital deficit of $201,175, raising substantial doubt about its ability to continue as a going concern.
• Material weaknesses were identified in internal control over financial reporting, indicating a risk of material misstatements.
• The company's common stock is a 'Pink No Information' security with a 'stop sign' on OTC Markets, indicating a lack of publicly available material information and a prior delisting in September 2020.
• Related party payables increased to $135,000 in 2023 from $67,500 in 2022, primarily due to unpaid management services owed to an entity owned by the CEO.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to accumulated losses of $6,865,478 and a working capital deficit of $201,175.
• The company relies on raising additional working capital through licensing, with no assurance that sufficient cash flow will be generated or that additional financing will be available on acceptable terms.
• The adult nightclub entertainment business is highly competitive, and the success of licensees depends on their ability to retain quality entertainers, employees, and provide customer service.
• Licensees are subject to stringent governmental regulations, including liquor licenses, cabaret licenses, and zoning restrictions, which could materially impact cash flow and profitability if not maintained.
• The company's business is dependent on its trademarks and intellectual property, which could be challenged or infringed upon.
• The company's disclosure controls and procedures were not effective, and material weaknesses in internal control over financial reporting exist, increasing the risk of financial misstatements.
• The company's 'Pink No Information' status on OTC Markets and prior delisting indicate a lack of transparency and potential difficulty for investors to access material information.

Future Outlook

Management believes the financial effects of the COVID-19 pandemic will not have a substantial or long-term detrimental impact on the adult entertainment industry, despite operational changes. They note that all royalty-paying licensees have reopened and cash collections have increased since 2020. The company has observed a recent increase in interest from establishments looking to utilize the SCORES brand trademarks, and intends to raise additional working capital through continued licensing.

Management Comments

• "Upon management's evaluation of relevant hospitality industry conditions and events known as of the date that these financial statements are issued it is their belief the financial effects of the Covid 19 pandemic will not have a substantial or long term effect on the financial viability of the adult entertainment industry."
• "Although there are fewer licensees and some of the licensing fees have been re-negotiated management believes the worst of the effects the Covid 19 pandemic are over."
• "The lifting of many, if not all, gathering restrictions imposed by local government has vastly improved the appeal of adult entertainment-oriented establishments. Consequently, the Company has seen a recent increase in the number of such establishments interested in utilizing the SCORES brand trademarks."
• "Management believes the Company has adequate processes and systems to maintain the confidentiality of its communications and records. However, given our current business plan and lack of significant operations and employees, management does not believe that cybersecurity threats constitute a material risk for the Company."

Industry Context

StockSavvy.ai notes that Scores Holding Company operates within the highly competitive adult nightclub entertainment industry, where brand recognition and distinctive entertainment environments are crucial. The company's reliance on licensing its 'Scores' brand positions it as an intellectual property holder rather than an operator. Management's optimistic outlook on the post-COVID-19 recovery of the adult entertainment sector, citing increased interest in the brand, suggests a belief in the industry's resilience despite past challenges. However, the company's financial instability and 'Pink No Information' status contrast sharply with the transparency and robust financial health typically expected of publicly traded entities in any industry.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• Luisa Santos de Oliveira v. Scores Holding Company, Inc. et al.: Claims against the Company, Robert Gans, Mark S. Yackow, and Howard Rosenbluth were discontinued on March 26, 2021. Claims against Club Azure LLC were dismissed without prejudice on May 12, 2023.
• Scores Alabama: Civil action settled for $45,000, paid on May 23, 2023, with the licensing agreement terminated.
• Voronina Matter (50 individuals civil suit): Settled for $1,310,000 in July 2018. The company's debt to Metropolitan (a related party) was reduced by offsetting royalty amounts owed by other related party licensees. The remaining balance of $373,068 was paid in full on March 28, 2022.
• Jane Doe v. Scores Holding Company, Inc. et al (Tampa): Arbitrator found in favor of the Company and its subsidiary SLC. Plaintiff filed an Amended Complaint on July 19, 2023, that did not include the Company or SLC as defendants, effectively ending the proceeding against them.
• Jeremy Green v. Scores Holding Co., Inc. et al: Settled for $10,000, payable in two $5,000 installments. The first payment was made, the second is pending as of the filing date.
• Jessica Hall v. Scores Holding Company, Inc. et al: Settlement in principle reached on July 21, 2023, and a settlement agreement was signed on October 2, 2023, with payments totaling $12,000 (SCRH and Harvey each paying $6,000) made on October 5, 2023.
• Scores Chicago: Settlement Agreement and Amendment to the Licensing Agreement on January 21, 2022, to settle COVID-19 related arrears and change to a flat monthly licensing fee.
• Scores Las Vegas: First Amendment to the Scores Trademark Sublicense Agreement on March 23, 2022, to settle COVID-19 related arrears and grant a one-time payment for a 25-year exclusive license.
• Scores Sports Bar: First Amendment to Service/Trademark License Agreement on September 23, 2022, extending the term, establishing a new timeframe for licensing fee payments, and reducing the minimum number of new establishments due to COVID-19 impacts.

Related Party Transactions

• Robert M. Gans, CEO and majority shareholder, is the sole owner of Mitchells East LLC, which beneficially owns 53.8% of the company's common stock.
• Robert M. Gans is the majority owner (80%) of Westside Realty of New York, Inc. (WSR), the company's former landlord. Rent owed to WSR ($22,500) was abated and written off to additional paid-in capital in June 2023.
• The company has a management services agreement with Metropolitan Lumber Hardware and Building Supplies, Inc. (Metropolitan), solely owned by Robert M. Gans. Metropolitan provides management and executive officer services for an annual fee of $90,000.
• The company owed Metropolitan $135,000 in unpaid management services as of December 31, 2023, an increase from $45,000 in 2022.
• Royalty Settlement Agreements were entered into with IMO, Star Light, and Swan (licensees controlled by Robert M. Gans) to forgive a portion of unpaid royalties in return for promissory notes. These notes were later offset against a loan from Metropolitan to the company related to the Voronina litigation settlement.

Stakeholder Impact

• Shareholders face significant risk due to the company's going concern doubt, declining financial performance, and material weaknesses in internal controls. The 'Pink No Information' status limits transparency and liquidity.
• Licensees benefit from renegotiated terms and settlements related to COVID-19 impacts, but their operational success remains critical to the company's revenue stream.
• Creditors, particularly related parties like Metropolitan, are exposed to the company's financial instability, as evidenced by the increase in related party payables.
• Management and directors, particularly Robert M. Gans and Howard Rosenbluth, are deeply intertwined with the company's operations and finances through various related party entities and agreements.

Next Steps

• Management plans to continue efforts to improve internal control over financial reporting by creating formal policies and procedures for the financial statement close process and for the preparation, documentation, and review of journal entries and account reconciliations.
• The company intends to raise additional working capital through continued licensing of its brand with current and new operators.

Key Dates

Recommendation

The company's financial health is severely distressed, evidenced by significant revenue and net income declines, a substantial accumulated deficit, and a working capital deficit that raises 'going concern' doubts. Material weaknesses in internal controls indicate fundamental operational and financial reporting issues. Furthermore, the 'Pink No Information' status on OTC Markets, coupled with a prior delisting, signals a severe lack of transparency and liquidity, making the stock highly speculative and risky. The extensive related-party transactions also present potential conflicts of interest. Given these compounding negative factors, a seasoned investor would likely recommend a strong sell.

Keywords

Scores Holding Company, SCRH, adult entertainment, trademark licensing, nightclub industry, SEC filing, 10-K, financial performance, going concern, internal controls, related party transactions, legal proceedings, OTC Pink