SCORES HOLDING CO INC - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For fiscal year ended: December 31, 2018

OR

For the transition period from _______________ to _______________

Registrant’s telephone number, including area code: (212) 246-9090

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Exchange Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ¨    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes   ¨    No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ¨    No   x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   ¨    No   x

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. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No  x

On June 28, 2018, the last business day of the registrant’s most recently completed second 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 $762,859.14, based on the last sale price of $.01 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 January 27, 2020, there were 165,186,144 shares of the registrant's common stock, par value $0.001, issued and outstanding.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains “forward-looking information” within the meaning of the Private Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended. Such forward-looking statements involve risks and uncertainties, including, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “anticipates,” “intends,” “expects,” “projects,” “estimates,” “believes,” “seeks,” “could,” “should,” the negative thereof or comparable terminology. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, those discussed in the sections “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances taking place after the date of this document, except as required by law.

PART I

References to the terms “Scores,” the “Company,” “we,” “us,” and “our” refer to 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. 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 ten such clubs currently operating under the Scores name, in New York, New York; Chicago, Illinois; Tampa, Florida; New Orleans, Louisiana; Harvey, Louisiana; Mooresville, North Carolina; Palm Springs, Florida; Buffalo, New York; Atlantic City, New Jersey and Las Vegas, Nevada.

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.”

As further discussed below under “Change in our Ownership,” on January 27, 2009, Mitchell’s East LLC, wholly owned by Robert M. Gans, acquired a majority interest in our outstanding capital stock. I.M. Operating LLC (“IMO”), which is partially owned by Robert M. Gans who is also our majority shareholder, has signed a licensing agreement with the Company and commenced operations in New York of a new club (the “New York Club”) under the Scores name in May 2009. Effective September 1, 2017, IMO no longer owned or operated the New York Club and terminated its licensing agreement with the Company. IMO sold the New York Club to Club Azure LLC (“CA”) which is owned by Mark Yackow, an unrelated party, and the sole owner (100%) of CA and former Chief Operating Officer 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.

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 20% and 1% of our total royalty revenue during 2018 and 2017, respectively. IMO owes the Company a royalty receivable of $0 as of December 31, 2018 and $76,726, which had been fully reserved as of December 31, 2017, respectively. This entity was also subject to the terms of the Offset Agreement dated December 1, 2018 discussed further below.  

On August 31, 2017, IMO entered into an agreement to sell all of its assets to Club Azure LLC (“CA”). Effective September 1, 2017, IMO no longer operated Scores New York and terminated its licensing agreement with the Company. Mark Yackow is the sole owner (100%) of CA and former Chief Operating Officer of IMO. Effective September 1, 2017, the Company granted an exclusive, non-transferable license for the use of the “Scores New York” to CA for its gentlemen’s club in New York City. Royalties under this license are payable at a rate of $5,000 per month, commencing in September 2017, and the license is for a term of five years, with five successive five-year renewal terms.

The 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 27^th 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).

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 $0 as of December 31, 2018, and $93,422 as of December 31, 2017, which has been fully reserved. Star Light accounted for 0% royalty revenue in 2018 and 0% of royalty revenue in 2017. See “Item 3. Legal Proceedings” for information regarding our legal proceeding against this licensee. This entity was also subject to the terms of the Offset Agreement dated December 1, 2018 discussed further below.

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 0% of our total revenues in 2018 and 2017, respectively. The Company is owed $0 as of December 31, 2018 and $104,986 as of December 31, 2017 in unpaid royalties and expenses, which is fully reserved. This entity was also subject to the terms of the Offset Agreement dated December 1, 2018 discussed further below.  

Effective February 28, 2017 (the “Effective Date”), the Company entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees, IMO, Star Light and Swan, controlled by Robert M. Gans, the Company's President, Chief Executive Officer and a member of its Board of Directors.

As of the Effective Date, IMO owed the Company 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 the Company, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date.  This obligation was satisfied under the terms of the Offset Agreement as discussed further below.

As of the Effective Date, Starlight owed the Company 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 the Company $75,000, in full settlement of all claims the Company 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. This obligation was satisfied under the terms of the Offset Agreement as discussed further below. 

As of the Effective Date, Swan owed the Company an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan has agreed to pay the Company $50,000, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date. This obligation was satisfied under the terms of the Offset Agreement as discussed further below. 

On August 4, 2018, the Company settled the Plaintiffs claims in the Voronina matter for $1,310,000. See Note 7 for additional information. The Company had insufficient liquid resources to enable it to make a portion of the settlement payments called for by the Voronina Settlement Agreement. Metropolitan Lumber, Hardware and Building Supplies, Inc., a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director of the Company, made loans to the Company in the aggregate amount of $770,000 to enable the Company to make the payments under the Voronina Settlement Agreement. In addition to the aforementioned loan and as discussed further in Note 7, the Company filed a third party complaint against certain licensees. The amount of money paid to the Company by settling with Third-Party Defendants and the Company’s insurance carrier was $505,660.

The Company previously entered into the 3 Royalty Settlement Agreements noted above where Robert M. Gans is a majority owner of the equity of each of the Licensees. Robert M. Gans guaranteed the payment of each Licensee’s obligations under each of the 3 Settlement Documents. The Licensees were not current with respect to their obligations under the Settlement Documents and the Company did not call upon Mr. Gans to honor his Guaranties.

The past due amounts under the Royalty Settlement Agreements were $382,259.68 as of December 1, 2018. On this date the Company entered into an agreement to offset the Royalty Amount against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $400,470 pursuant to the terms of a certain Settlement and Offset Agreement made by and among the Company, Star Light, Swan, Metropolitan and Robert M. Gans.

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.

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 follows ASC 606 and only recognizes revenue when the collection of revenue is considered probable.

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 follows ASC 606 and only recognizes revenue when the collection of revenue is considered probable. 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 follows ASC 606 and only recognizes revenue when the collection of revenue is considered probable. 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. See “Item 3. Legal Proceedings” for information regarding our legal proceeding against this licensee.

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.

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, 2018, we had two full-time 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.

Available Information

Our Internet website is www.scoresholding.com. Information on our website should not be considered incorporated by reference into our filings with the SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available, free of charge, under the SEC filings tab of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, the SEC maintains a website located at www.sec.gov that contains the information we file or furnish electronically with the SEC.

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 $7,500 in unpaid rents as of December 31, 2018 and December 31, 2017, respectively.

ITEM 3. LEGAL PROCEEDINGS.

On April 3, 2016, 50 individuals purporting to be professional models and/or actresses filed a civil suit in the United States District Court for the Southern District of New York against the Company, I.M. Operating, LLC, The Executive Club, LLC, and Robert M. Gans, alleging that images of Plaintiffs were used without their consent for commercial purposes on websites and social media outlets to promote gentlemen’s clubs operated by the Defendants or licensees of the Defendants. The Lawsuit further alleged that the unauthorized use of these images created, among other things, the false impression that these individuals either worked at, or endorsed, one or more of such clubs. The Lawsuit asserted causes of action under Section 43 of the Lanham Act, 28 U.S.C. § 1125(a)(1), premised on a theory of false endorsement and/or association; New York Civil Rights Law §§ 50-51; New York’s Deceptive Trade Practices Act, New York General Business Law § 349; as well as various common law torts, namely defamation, negligence, conversion, unjust enrichment and quantum meruit. The Lawsuit sought unspecified compensatory damages, punitive damages, as well as attorneys’ fees and costs. The Lawsuit also sought an injunction permanently enjoining the use of the individuals’ images to promote, via any medium, any of the clubs. On April 20, 2017, as a result of the claims asserted in the Lawsuit, we filed a third-party complaint (the “Third-Party Complaint”) against certain licensees, namely CG Consulting, LLC; Anthony Quaranta; High Five Management Group, Inc.; Club 2000 Eastern Avenue, Inc.; SCMD, LLC; David Baucom; Manhattan Fashion L.L.C.; Stone Park Entertainment, Inc.; Silver Bourbon, Inc.; Tampa Food & Entertainment, Inc.; Fuun House Productions, L.L.C.; Norm A Properties, LLC; Southeast Show Clubs, LLC; Michael Tomkovich; Palm Spring Grill LLC; Houston KP LLC; and Star Light Events LLC (collectively, “Third-Party Defendants”) asserting causes of action for breach of contract, breach of warranty, contractual indemnification, common law indemnification, contribution and breach of contract for failure to procure insurance. We maintained in the Third-Party Complaint, among other things, that pursuant to the Third-Party Defendants’ respective license agreements, each of the Third-Party Defendants are expressly obligated to indemnify, defend and hold the Company harmless in connection with the conduct giving rise to the claims asserted by Plaintiffs in the Lawsuit. Third-Party Defendants Club 2000 Eastern Avenue, Inc., Fuun House Productions, L.L.C., and Norm A Properties, LLC (collectively the “Defaulting Third-Party Defendants”) failed to respond to the Third-Party Complaint.

On January 5, 2017, the Court issued an Order granting in part, and denying in part, Defendants’ motion to dismiss the Complaint. The Court dismissed Plaintiffs’ claims sounding in negligence, conversion, unjust enrichment and quantum meruit. The remaining claims were not dismissed at that time. On August 4, 2018, the Court dismissed Plaintiffs’ claims against Defendants, including the Company, with prejudice, at Plaintiffs’ request following settlement with Defendants. During the year ended December 31, 2018, the Company paid $1,310,000 to Plaintiffs in connection with the settlement. Between August 4, 2018 and October 9, 2018, the Court dismissed with prejudice the Company’s claims against the Third-Party Defendants, other than the Defaulting Third-Party Defendants, at the Company’s request following settlement with those Third-Party Defendants. The total amount of money paid to the Company by the settling Third-Party Defendants, and the Company’s insurance carrier, is $505,660. Scores has obtained Default Orders against Fuun House Productions, L.L.C. and Norm A Properties, LLC. The value of the Company’s claims against Fuun House Productions, L.L.C. and Norm A Properties, LLC are all that remain to be determined in the action. The Company became aware the week of December 17, 2018 that Fuun House Productions, L.L.C. has filed for bankruptcy protection.

On January 3, 2017, we, together with our subsidiary SLC, filed an action against CJ NYC Inc in the United States District Court for the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an adult entertainment club in Woodside, New York. In this action we sought damages for breach of contract in the amount of $85,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and trademark with respect to the Woodside, New York club and all websites and social media sites controlled by Defendant. The defendant failed to appear and on February 27, 2017, we filed a motion for judgment by default. The court heard our motion on April 5, 2017, and on May 25, 2017, the court granted our motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $85,000 to SLC and $14,333.33 in damages and $529.99 in costs to us. All signage has been removed and we are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving it unable to collect on the default judgment.

On January 31, 2017, we, together with our subsidiary SLC, filed an action against Funn House Productions LLC in the United States District Court for the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an adult entertainment club in New Haven, Connecticut. In this action we sought damages for breach of contract in the amount of $45,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and trademark with respect to the New Haven, Connecticut club and all websites and social media sites controlled by Defendant. The Defendant failed to appear and on February 28, 2017, the Court granted Plaintiffs’ motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $60,000. The parties negotiated a settlement agreement, which included a payment schedule, but then Defendant did not sign the proposed settlement agreement. We are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving us unable to collect on the default judgment.

On July 25, 2017, plaintiff Dislenia Munoz, who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M. Operating LLC, commenced a putative class action lawsuit against the Company, I.M. Operating LLC, Robert Gans and Mark Yackow in the Supreme Court of the State of New York, County of New York. Plaintiff alleged that she and other similarly situated entertainers at Scores New York were misclassified as independent contractors, that they should have been classified as employees, and as a result, the Defendants violated, among other things, applicable state wage and hour laws. The Lawsuit sought unspecified compensatory damages, liquidated damages, as well as attorneys’ fees and costs. On June 22, 2018, Plaintiff (1) amended her complaint in the Lawsuit to excise her class allegations, and (2) discontinued the Lawsuit, without prejudice. Plaintiff has brought her claims in the Lawsuit in another forum against the Defendants, other than the Company, which is no longer a subject of Plaintiff’s claims.

The Company was served with a Summons and Complaint in the action entitled Luisa Santos de Oliveira v. Scores Holding Company, Inc.; Club Azure, LLC; Robert Gans; Mark S. Yackow; Howard Rosenbluth, Docket No. 1:18-cv-06769-GBD, in the United States District Court of the Southern District. Plaintiff claims that the Defendants violated the minimum wage and overtime provisions of the Fair Labor Standards Act (“FLSA”); violated the New York Minimum Wage Act and the overtime provisions of the New York State Labor Law (“NYLL”); violated the Spread of Hours Wage Order of the New York Commissioner of Labor; violated the Notice and Recordkeeping requirements of the NYLL; violated the wage statement provisions of the NYLL; recovery of equipment costs in violation of the FLSA and NYLL; and unlawful deductions from tips in violation of the NYLL. Plaintiff brought this action as a class action and seeks certification of this action as a collective action on behalf of herself and all other similarly situated employees and former employees of Defendants.

The Company has submitted an Answer to Plaintiff’s claims and the case is currently in the discovery phase. The Company, along with the Co-defendants, intends to vigorously defend itself against the claims asserted against it in this lawsuit. The likelihood of an unfavorable outcome is remote because the Company’s records show, inter alia, that the Plaintiff never worked more than 25 hours per week.

On October 10, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against SCMD, LLC. the former licensee of SCORES Baltimore, said license having been terminated effective October 1, 2018. The civil action seeks damages for unpaid royalties in an amount of at least $170,000. The action is pending. Defendant removed the case to the US District Court for the Southern District of New York, 1-18-cv-11364-PGG. Plaintiff then filed an amended complaint in federal court. Defendant has filed a request for leave to file a motion to dismiss. The Company had until January 5, 2020 to submit opposition and then the Defendant has until January 15, 2020 to serve a reply to the Company’s opposition. The motion has been fully submitted and we await a decision.

On September 14, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against New 4125 LLC and Mike Taraska, the licensee of SCORES Phoenix, for unpaid royalties in the amount of $47,500. The action is pending.

On April 22, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against 1715 Northside Drive, Inc., the former licensee of SCORES Atlanta. The action was settled and paid in full during the 3^rd quarter 2018.

On May 4, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Bonkers Space Coast Inc. and Ken Fees, the former licensee of the SCORES Green Bay, for unpaid royalties in the amount of $80,000. The Defendants have not appeared and Plaintiffs have filed a motion for judgment by default. A motion for default judgement was granted and judgement was entered on November 26, 2019. The Company has found real property owned by the Defendant and we are in the process of attaching same.

On April 20, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against The Cadillac Lounge LLC and Dick Shappy, the former licensee of SCORES Rhode Island for unpaid royalty fees. The action was settled for $50,000 and has been paid in full during the 2^nd quarter 2018.

On April 25, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against South East Show Clubs LLC and Michael Tomkovich, the license of SCORES Jacksonville and SCORES Savannah, for unpaid royalties in the amount of $60,000. The action was settled and has been paid in full during the 4^th quarter of 2018.

On August 3, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Silver Bourbon, Inc, the licensee of SCORES New Orleans, for unpaid royalties in the amount of $145,500. Defendant was served on September 19, 2018 and the parties are in the process of negotiating a settlement agreement.

On July 13, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Manhattan Fashions LLC, the licensee of SCORES Harvey for unpaid royalties in the amount of $84,000. Defendant was served on August 3, 2018 and the action is pending. A final notice of default was mailed on October 12, 2018 and was granted. The parties are in the process of negotiating a settlement agreement.

On September 5, 2019, the Company together with its subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Scores Alabama. A cease and assist letter was sent and we received a response from the licensee and are in the process of entering a written license agreement, but the negotiations are at a standstill. The parties have thus far not been able to reach an agreement of the basic terms and litigation will most probably ensue.

In July 2018, the Company entered into a confidential settlement agreement (the “Settlement Agreement”) in the Voronina litigation, and in August 2018, the Court entered an order dismissing the plaintiff’s claims against the defendants with prejudice. Metropolitan Lumber, Hardware and Building Supplies, Inc. (“Metropolitan”), a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director of the Company, loaned the Company an aggregate of $770,000 to enable the Company to make the payments called for by the Agreement.

As previously reported, in February 2017, the Company entered into settlement agreements (each, a “Royalty Settlement Agreement”) with Star Light Events LLC (“Star Light”), Swan Media Group, Inc. (“Swan”), I.M. Operating LLC (“IMO”) (Star Light, Swan and IMO are sometimes referred to individually as a “Licensee” and collectively as the “Licensees”) and Robert M. Gans. Robert M. Gans is the owner of a majority of the equity of each of the Licensees. Pursuant to the Royalty Settlement Agreements, the Company forgave the repayment of a certain portion of unpaid, past-due royalties in return for the respective Licensees’ agreements to pay the remainder (the “Royalty Settlement Amount”) of the unpaid royalties, plus interest, to the Company. The Royalty Settlement Amount for each Licensee was represented by a promissory note, and Robert M. Gans guaranteed the payment of each Licensee’s obligations under the Settlement Agreement.

The Licensees did not remain current with respect to their obligations under the Royalty Settlement Agreements, and the Company did not call upon Robert M. Gans to honor his guarantees. The past due amounts under the Royalty Settlement Agreements aggregated $382,259.68 (the “Aggregate Royalty Amount”) as of December 1, 2018. As of such date, the Company, the Licensees, Metropolitan and Robert M. Gans entered into a Settlement and Offset Agreement (the “Offset Agreement”) pursuant to which the Aggregate Royalty Amount was offset against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $400,469.86 (the “Net Voronina Amount”). The Net Voronina Amount is payable pursuant to a promissory note (the “Voronina Note”), which bears simple interest at the rate of 4% per annum, in 28 consecutive monthly installments of $15,000, and a final installment of $121.05, with the initial installment due and payable on January 1, 2019 (or the first business day thereafter). The Company may prepay the Voronina Note at any time, in whole or in part without premium or penalty. The Offset Agreement also provides for the immediate termination of the Royalty Settlement Agreements and the related promissory notes and guarantees.

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.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information.

Our common stock has been quoted on OTC Pink, a marketplace under the OTC Markets Group (formerly known as Pink OTC Markets and Pink Sheets) under the symbol “SCRH” since 2004.

Holders

As of January 27, 2020, there were 578 record holders of our common stock.

Dividends

We have never declared any cash dividends with respect to our common stock. Future payment of dividends is within the discretion of our Board of Directors and will depend on our earnings, capital requirements, financial condition and other relevant factors. Although there are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock, we presently intend to retain future earnings, if any, for use in our business and have no present intention to pay cash dividends on our common stock.

Recent Sales of Unregistered Securities

None.

Securities Authorized For Issuance under Equity Compensation Plans

The following table sets forth information about our equity compensation plans as of December 31, 2018.

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

The following is a discussion of the results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017.

Revenues:

Revenues decreased to $703,833 for the year ended December 31, 2018 from $722,948 for the year ended December 31, 2017.

Our licenses are structured such that we receive a percentage of revenues from our licensees, the foregoing decrease is a direct result of revenues at the licensee level or structured with a flat monthly rate. This marginal decrease was primarily due to the recognition of royalty income. In addition, the adoption of ASC 606 resulted in $171,500 of decreased revenue reported for the year ended December 31, 2018. This was due to the change in recognizing revenue only for probable collection and deferring revenue for cash collections from customers where the collection is probable. Since we elected to adopt ASC 606 using the modified retrospective approach, no changes were made to our previously issued financial statements, including the statement of income for the year ended December 31, 2017.

Other Income/(Expense)

Total other expense increased to $619,052 for the year ended December 31, 2018 from other income of $223,724 for the year ended December 31, 2017. Other income for the year ended December 31, 2018 included $258,744 of recovery of royalty revenue previously written off as bad debt and $10,076 of miscellaneous income and for the year ended December 31, 2017, the $221,654 represents a recovery of royalty revenue previously written off as bad debt. Other expense of $894,340 for the year ended December 31, 2018 represents the net amount of the $1,310,000 Litigation Settlement payment and the $415,660 recovery of the $1,310,000 Litigation Settlement payment paid to us by various Licensees. Other income also included interest income of $20,310 and $2,070 for the year ended December 31, 2018 and 2017, respectively.

General and Administrative Expenses:

General and administrative expenses for the years ended December 31, 2018 and 2017 were $755,576 and $1,175,917, respectively. These expenses were directly related to the maintenance of the corporate entity and regulatory filing of periodic reports under the Securities Exchange Act of 1934 (the “Exchange Act”). To comply with the requirements of the Sarbanes Oxley Act, we expect these regulatory costs to increase in future years. Virtually all of the 36% decrease in operating expenses can be attributed to our business development, legal costs, write offs of bad debt and other executive administrative costs that changed during the year ended December 31, 2018 as compared with 2017, and are expected to increase in future periods due to the expansion of our brand into emerging markets.

Provision for Income Taxes

The provision for income taxes relates primarily to the greater of average assets and capital taxable income. The average assets and capital are not impacted by net operating losses.

Net Loss per share:

Our net loss was $670,795 or ($.00) per share for the year ended December 31, 2018 as compared to net loss of $229,245 or ($.00) per share for the year ended December 31, 2017. The increase in net loss for the year ended December 31, 2018 was primarily due to the litigation settlement. For an explanation of this change, refer to the above discussion of revenues, other income and general and administrative expenses.

Net loss per share data for both the years ended 2018 and 2017 is based on net loss available to common shareholders divided by the weighted average of the number of common shares outstanding.

Liquidity and Capital Resources

At December 31, 2018, we had $7,662 in cash and cash equivalents compared to $33,457 in cash and cash equivalents at December 31, 2017.

Various conditions such as the decrease in revenue, accumulated losses, significant debt, and the results of litigation raise substantial doubt about the Company’s ability to continue as a going concern. 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. 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.

Cash:

At December 31, 2018, we had $7,662 in cash and cash equivalents compared to $33,457 in cash and cash equivalents at December 31, 2017.

Operating Activities:

Net cash used in operating activities for the 2018 year was $471,265 and net cash used in operating activities for the 2017 year was $195,385. The increase in cash used in operating activities is related to the recognition of ASC 606 revenue, increase in accrued expenses, deferred revenue and payment of the litigation settlement.

Financing Activities:

Net cash provided by financing activities for the 2018 year was $445,470 and net cash provided by financing activities for the 2017 year was $0.  The increase in cash provided by financing activities is related to $400,470 owed to Metropolitan Lumber Hardware and Building Supplies affiliate under the Offset Agreement and the increase of $45,000 of rent payments owed to our Westside Realty affiliate and Metropolitan Lumber Hardware and Building Supplies, Inc.

As of December 31, 2018, we owed $7,500 in rent to our Westside Realty affiliate and $67,500 to our Metropolitan Lumber Hardware and Building Supplies, Inc. affiliate. We also owed Metropolitan Lumber Hardware and Building Supplies, Inc. affiliate $400,470 under the Offset Agreement.

Future Capital Requirements: 

We have incurred significant losses since the inception of our business. Since our inception, we have been dependent on funding from private lenders and investors to conduct operations. As of December 31, 2018, we had an accumulated deficit of $(6,894,193). As of December 31, 2018, we had total current assets of $73,576 and total current liabilities of $231,496 or negative working capital of $157,920. As of December 31, 2017, we had total current assets of $119,947 and total current liabilities of $155,292 or negative working capital of $35,345. The decrease in the amount of working capital has been primarily attributable to the increase in payables and decrease in cash from non-paying clubs.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our audited consolidated financial statements as of, and for the years ended, December 31, 2018 and 2017 are included beginning immediately following the signature page to this report. See Item 15 for a list of the financial statements included herein.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES.

(a) Management’s Report on Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, consisting of Robert M. Gans, our chief executive officer, and Howard Rosenbluth, our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded, as of the Evaluation Date, that as a result of certain deficiencies in our internal over financial reporting identified below, our disclosure controls and procedures were not effective to ensure that the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer and secretary, as appropriate, to allow timely decisions regarding required disclosure

(b) Management’s Annual Report on Internal Control over Financial Reporting.

Management of Scores Holding Company, Inc. is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. In evaluating the effectiveness of our internal control over financial reporting, management used the criteria set forth in the framework in Internal Control—Integrated Framework and the Internal Control over Financial Reporting – Guidance for Smaller Public Companies both issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this evaluation, management concluded that, as of December 31, 2018 our internal controls over financial reporting were not effective for the following reasons:

Our management, including our chief executive officer and our chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

As set forth below, management has taken or will take steps to remediate the control deficiencies identified above. Notwithstanding the control deficiencies described above, we have performed additional analyses and other procedures to enable management to conclude that our consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial condition and results of operations as of and for the year ended December 31, 2018.

Management's Remediation Plan

In response to the deficiencies discussed above, we plan to continue efforts already underway to improve internal control over financial reporting, which include creating formal policies and procedures governing our financial statement close process, and control in the preparation, documentation, and review of journal entries and account reconciliations.

Management and our Board of Directors will continue to monitor these remedial measures and the effectiveness of our internal controls and procedures. Other than as described above, there were no changes in our internal control over financial reporting during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Changes in Internal Control over Financial Reporting.

Other than as discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the last fiscal quarter of the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Executive Officers and Directors

The following table sets forth certain information, as of January 27, 2020, 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.

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 2018 and Forms 5 and amendments thereto received by the Company with respect to 2018 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, 2018.

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, 2018, 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, 2018 and 2017 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, 2018 and 2017 and (ii) all individuals that served as executive officers of ours at any time during the fiscal year ended December 31, 2018 and 2017 that received annual compensation during such fiscal years in excess of $100,000 (collectively, the “named executive officers”).

Summary Compensation Table

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. $67,500 and $22,500 in unpaid management services as of December 31, 20178 and December 31, 2017, respectively.

The Company paid Mr. Gans a bonus of $280,000 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 2018 Fiscal Year-End

As of the year ended December 31, 2018, 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, 2018 and 2017 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, 2018.

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 January 27, 2020 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.

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 the Company's 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 the Company to Swan Media Group, Inc., (“Swan”) a newly formed New York corporation whose majority owner (80%) is Robert M. Gans, who is also the majority shareholder and chief executive officer of the Company. The Company is owed $0 and $104,986 in unpaid royalties and expenses as of December 31, 2018 and December 31, 2017, respectively.

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 $0 and $76,726 as of December 31, 2018 and December 31, 2017 respectively.

On August 31, 2017, IMO entered into an agreement to sell all of its assets to Club Azure LLC (“CA”). Effective September 1, 2017, IMO no longer operated Scores New York and terminated its licensing agreement with the Company. Mark Yackow is the sole owner (100%) of CA and former Chief Operating Officer of IMO. Effective September 1, 2017, the Company granted an exclusive, non-transferable license for the use of the “Scores New York” to CA for its gentlemen’s club in New York City. Royalties under this license are payable at a rate of $5,000 per month, commencing in September 2017, and the license is for a term of five years, with five successive five-year renewal terms.

The Company also leases office space directly from Westside Realty of New York, Inc. (WSR), the owner of the West 27th 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 $7,500 in unpaid rents as of December 31, 2018 and December 31, 2017, 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 $67,500 and $22,500 in unpaid management services as of December 31, 2018 and December 31, 2017, respectively.

The Company has accrued expenses of $18,949 due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owed $18,949 and $15,842 as of December 31, 2018 and December 31, 2017, respectively.

Effective July 1, 2018, after being having been closed from August 15, 2016 to June 28, 2018, the Company terminated the previous licensing agreement and granted an exclusive, non-transferable license for the use of the “Scores Atlantic City” name to Star Light Events LLC (“Star Light”) for its gentlemen’s club in Atlantic City, New Jersey. Royalties under this license are payable at the rate of $5,000 per month, commencing in July 2018, and the license is for a term of five years, with five successive five-year renewal terms. Pursuant to the written agreement, the Company also granted Star Light a non-exclusive, non-transferable license to sell certain licensed products bearing the Company's trademarks. Starlight will purchase the licensed products from the Company or its affiliates at cost plus 25%. Robert M. Gans, the Company's President, Chief Executive Officer and a director, is the majority owner (92.165%) of Star Light Events LLC and Howard Rosenbluth, the Company's Secretary, Treasurer and a Director, owns 1%. Starlight owes the Company a royalty receivable of $0 and $93,442 as of December 31, 2018 and December 31, 2017, respectively.

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”), the Company entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees, IMO, Star Light and Swan, controlled by Robert M. Gans, the Company's President, Chief Executive Officer and a member of its Board of Directors.

As of the Effective Date, IMO owed the Company 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 the Company, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date. This obligation was satisfied under the terms of the Offset Agreement as discussed further below.

As of the Effective Date, Starlight owed the Company 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 the Company $75,000, in full settlement of all claims the Company 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. This obligation was satisfied under the terms of the Offset Agreement as discussed further below.

As of the Effective Date, Swan owed the Company an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan has agreed to pay the Company $50,000, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date. This obligation was satisfied under the terms of the Offset Agreement as discussed further below.

On August 4, 2018, the Company settled the Plaintiffs claims in the Voronina matter for $1,310,000. See Note 7 for additional information. The Company had insufficient liquid resources to enable it to make a portion of the settlement payments called for by the Voronina Settlement Agreement. Metropolitan Lumber, Hardware and Building Supplies, Inc., a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director of the Company, made loans to the Company in the aggregate amount of $770,000 to enable the Company to make the payments under the Voronina Settlement Agreement. In addition to the aforementioned loan and as discussed further in Note 7, the Company filed a third party complaint against certain licensees. The amount of money paid to the Company by settling with Third-Party Defendants and the Company’s insurance carrier was $505,660.

The Company previously entered into the 3 Royalty Settlement Agreements noted above where Robert M. Gans is a majority owner of the equity of each of the Licensees. Robert M. Gans guaranteed the payment of each Licensee’s obligations under each of the 3 Settlement Documents. The Licensees were not current with respect to their obligations under the Settlement Documents and the Company did not call upon Mr. Gans to honor his Guaranties.

The past due amounts under the Royalty Settlement Agreements were $382,259.68 as of December 1, 2018. On this date the Company entered into an agreement to offset the Royalty Amount against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $400,470 pursuant to the terms of a certain Settlement and Offset Agreement made by and among the Company, Star Light, Swan, Metropolitan and Robert M. Gans.

The total amounts due to the various related parties as of December 31, 2018 and December 31, 2017 was $93,949 and $45,842 respectively and the total amounts due to the Company from the various related parties as of December 31, 2018 and December 31, 2017 was $0 and $275,154, respectively.

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, 2018 and 2017 are set forth in the table below:

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.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statement Schedules.

The consolidated financial statements of Scores Holding Company, Inc. are listed on the Index to Financial Statements on this annual report on Form 10-K beginning on page F-1.

All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

Exhibits.

The following Exhibits are being filed with this Annual Report on Form 10-K:

ITEM 16.  FORM 10-K SUMMARY.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated .

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Scores Holding Company, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Scores Holding Company, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, cash flows and changes in stockholders’ equity (deficit) for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has cumulative losses totaling $6,894,193 and negative working capital of $157,920 as of December 31, 2018. The Company had a net loss of $670,795 for the year ended December 31, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RBSM LLP

We have served as the Company’s auditor since 2016.

New York, NY

January 31, 2020

SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

See notes to the consolidated financial statements.

SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

See the notes to the consolidated financial statements.

SCORES HOLDING COMPANY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

See the notes to the consolidated financial statements.

SCORES HOLDING COMPANY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2017 and DECEMBER 31, 2018

SCORES HOLDING CO., Inc. and Subsidiary
Notes to Consolidated Financial Statements

Note 1. Organization

BASIS OF PRESENTATION

Scores Holding Company, Inc. (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, 2018, the Company has cumulative losses totaling $(6,894,193) and negative working capital of $157,920. The Company had a net loss of $(670,795) for the year ended December 31, 2018. Because of these conditions, the Company will require additional working capital to develop business operations. The Company intends to raise additional working capital through the continued licensing of its brand with its current and new operators. There are no assurances that the Company will be able to achieve the level of revenues adequate to generate sufficient cash flow from operations to support the Company’s working capital requirements. To the extent that funds generated from any future use of licensing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not continue its operations.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 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.

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, 2018 and 2017 were $43,800 and $345,153 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, 2018 and 2017, 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.

Income per Share

Under ASC 260-10-45, “Earnings Per Share”, basic income (loss) per common share is computed by dividing the income (loss) applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted income (loss) per common share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Accordingly, the weighted average number of common shares outstanding for the periods ended December 31, 2018 and 2017, respectively, is the same for purposes of computing both basic and diluted net income per share for such years. As of December 31, 2018, there are no outstanding stock equivalents.

Concentration of Credit Risk

The Company earns royalty revenues from 12 licensees.

With regards to December 31, 2018, concentrations of sales from 4 licensees range from 14% to 21%, totaling 71%. There are receivables from 3 licensees ranging from 14% to 46%, totaling 89%. Included in these amounts as of December 31, 2018 are sales from 1 licensee considered a related party. There are no receivables from these licensees that are considered related parties.

With regards to December 31, 2017, concentrations of sales from 2 licensees range from 17% to 18%, totaling 35%. There are receivables from 4 licensees ranging from 17% to 25%, totaling 82%. There are no sales from licensees 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.

Recently Issued Accounting Standards Update

Measurement of Financial Assets and Liabilities

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 went into effect for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon review of the provisions of this ASU it has been determined there is no material effect on the Company's results of operations, cash flows or financial condition.

All new accounting pronouncements issued but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.

Note 3. Revenue Recognition

Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). ASC 606 was applied using the modified retrospective method. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”). There was a cumulative effect of $71,000 to be recognized as an adjustment to opening retained earnings at January 1, 2018 related to deferred revenue booked from initiation fees that were received in prior years of $49,750 that would have been recognized at a point in time and revenues that would be recognized on the accrual basis in the prior years based on collection probability assessment of $21,250. Under ASC 605, initiation fee revenue was to be deferred and recognized over the life of the contract while most royalty revenues were recognized as collected. However, under ASC 606, revenue from the initiation fees are recognizable when at a point in time (first month of the contract) and royalty revenues are recognized over time for those contracts with probable collections.

The Company's license fee revenue is generated from royalties earned through intellectual property licensing agreements which permit the licensee to use the recognition and status of the Scores brand in order to promote their businesses. Under ASC 606, revenue is recognized throughout the life of the executed licensing agreement. The Company measures revenue based on consideration specified in a contract with a customer. Furthermore, the Company recognizes revenue when it satisfies a performance obligation by transferring control over the service to its customer.

A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The Company's customers typically receive the benefit of its services as they are performed. Substantially all customer contracts provide that the Company is compensated for services performed to date. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

Nature of goods and services

The following is a description of the Company's products and services from which it generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

i. Licensing Revenue

Licensing fees represent the fees the Company receives from the licensing of the Company's Scores trademark. The terms of the royalties earned under these license agreements vary from a flat monthly fee to a percentage of the revenues of the licensee on a monthly basis. The licensing rights are transferred to the Company's customers over time, and the Company recognizes licensing revenue over time because the customer will simultaneously receive and consume the benefit from the license as the performance occurs.

ii. Stand-Ready for Consulting and Club Set-up Services

The Company offers an initial set-up and consultation to new clubs in order to aid in the opening and operation. The services are provided within the first month of any licensing agreements, and sometimes are not requested by the licensee and therefore never provided at all.

Disaggregation of revenue

In the following table, revenue is disaggregated by major products/service lines, and timing of revenue recognition:

Contract balances

The following table provides information about receivables, assets, and liabilities from contracts with customers:

Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required.

The contract liabilities primarily relate to deferred revenue.

Practical Expedients and Exemptions

The Company did not apply any practical expedients during the adoption of ASC 606.

Note 4. Related-Party Transactions

Transactions with Common ownership affiliates:

On January 24, 2006, the Company entered into a licensing agreement with AYA International, Inc. (“AYA”) granting AYA the right to use the Company's 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 the Company to Swan Media Group, Inc., (“Swan”) a newly formed New York corporation whose majority owner (80%) is Robert M. Gans, who is also the majority shareholder and chief executive officer of the Company. The Company is owed $0 and $104,986 in unpaid royalties and expenses as of December 31, 2018 and December 31, 2017, respectively.

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 $0 and $76,726 as of December 31, 2018 and December 31, 2017 respectively.

On August 31, 2017, IMO entered into an agreement to sell all of its assets to Club Azure LLC (“CA”). Effective September 1, 2017, IMO no longer operated Scores New York and terminated its licensing agreement with the Company. Mark Yackow is the sole owner (100%) of CA and former Chief Operating Officer of IMO. Effective September 1, 2017, the Company granted an exclusive, non-transferable license for the use of the “Scores New York” to CA for its gentlemen’s club in New York City. Royalties under this license are payable at a rate of $5,000 per month, commencing in September 2017, and the license is for a term of five years, with five successive five-year renewal terms.

The Company also leases office space directly from Westside Realty of New York, Inc. (WSR), the owner of the West 27^th Street Building.  The majority owner of WSR (80%) is Robert M. Gans.  Since April 1, 2009, the monthly rent has been $2,500 per month including overhead costs.  The Company owed WSR $7,500 and $7,500 in unpaid rents as of December 31, 2018 and December 31, 2017, 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 $67,500 and $22,500 in unpaid management services as of December 31, 2018 and December 31, 2017, respectively.

The Company has accrued expenses of $18,949 due to Metropolitan Lumber Hardware and Building Supplies, Inc. The Company owed $18,949 and $15,842 as of December 31, 2018 and December 31, 2017, respectively.

Effective July 1, 2018, after being having been closed from August 15, 2016 to June 28, 2018, the Company terminated the previous licensing agreement and granted an exclusive, non-transferable license for the use of the “Scores Atlantic City” name to Star Light Events LLC (“Star Light”) for its gentlemen’s club in Atlantic City, New Jersey. Royalties under this license are payable at the rate of $5,000 per month, commencing in July 2018, and the license is for a term of five years, with five successive five-year renewal terms. Pursuant to the written agreement, the Company also granted Star Light a non-exclusive, non-transferable license to sell certain licensed products bearing the Company's trademarks. Starlight will purchase the licensed products from the Company or its affiliates at cost plus 25%. Robert M. Gans, the Company's President, Chief Executive Officer and a director, is the majority owner (92.165%) of Star Light Events LLC and Howard Rosenbluth, the Company's Secretary, Treasurer and a Director, owns 1%. Starlight owes the Company a royalty receivable of $0 and $93,442 as of December 31, 2018 and December 31, 2017, respectively.

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”), the Company entered into separate Settlement Agreements (each, a “Settlement Agreement”) with three licensees, IMO, Star Light and Swan, controlled by Robert M. Gans, the Company's President, Chief Executive Officer and a member of its Board of Directors.

As of the Effective Date, IMO owed the Company 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 the Company, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date.  This obligation was satisfied under the terms of the Offset Agreement as discussed further below.

As of the Effective Date, Starlight owed the Company 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 the Company $75,000, in full settlement of all claims the Company 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. This obligation was satisfied under the terms of the Offset Agreement as discussed further below. 

As of the Effective Date, Swan owed the Company an aggregate of $166,000 in unpaid royalties and other fees. Swan is currently unprofitable. Under its Settlement Agreement, Swan has agreed to pay the Company $50,000, in full settlement of all claims the Company 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 the Company under its license agreement from and after the Effective Date. This obligation was satisfied under the terms of the Offset Agreement as discussed further below. 

On August 4, 2018, the Company settled the Plaintiffs claims in the Voronina matter for $1,310,000. See Note 7 for additional information. The Company had insufficient liquid resources to enable it to make a portion of the settlement payments called for by the Voronina Settlement Agreement. Metropolitan Lumber, Hardware and Building Supplies, Inc., a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director of the Company, made loans to the Company in the aggregate amount of $770,000 to enable the Company to make the payments under the Voronina Settlement Agreement. In addition to the aforementioned loan and as discussed further in Note 7, the Company filed a third party complaint against certain licensees. The amount of money paid to the Company by settling with Third-Party Defendants and the Company’s insurance carrier was $505,660.

The Company previously entered into the 3 Royalty Settlement Agreements noted above where Robert M. Gans is a majority owner of the equity of each of the Licensees. Robert M. Gans guaranteed the payment of each Licensee’s obligations under each of the 3 Settlement Documents. The Licensees were not current with respect to their obligations under the Settlement Documents and the Company did not call upon Mr. Gans to honor his Guaranties.

The past due amounts under the Royalty Settlement Agreements were $382,259.68 as of December 1, 2018. On this date the Company entered into an agreement to offset the Royalty Amount against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $399,139 pursuant to the terms of a certain Settlement and Offset Agreement made by and among the Company, Star Light, Swan, Metropolitan and Robert M. Gans.

The total amounts due to the various related parties as of December 31, 2018 and December 31, 2017 was $93,949 and $45,842 respectively and the total amounts due to the Company from the various related parties as of December 31, 2018 and December 31, 2017 was $0 and $275,154, respectively.

Note 5. 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 $6,067,000, which expire in the years 2019 through 2038. 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 $1,413,000 of deferred tax assets attributed to net operating loss carryforwards due to the change in ownership in 2008. The remaining $215,000 of deferred tax assets can only be utilized up to $21,500 per year (relating to the IRC382, limitation) through 2028.

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, 2018 and 2017, respectively as a result of the following:

Federal and State/Local tax years remain open by statute, generally three years. There are no open Statutory Federal or State/Local audits at December 31, 2018.

Note 6. Licensees

The Company has 12 license agreements which were obtained between 2003 and 2018.

On March 18, 2016, the Company (through its subsidiary Scores Licensing Corp.) entered into a Trademark License (the “Trademark License”) with Michael Blutrich. The Trademark License grants Mr. Blutrich the non-exclusive use of the Company’s registered trademarks, related logos and other intellectual property in connection with the development, production and distribution of a potential scripted television series, mini-series or movie of the week (the “Series”). Under the Trademark License, the Company will receive three percent of all fees, contingent compensation and other consideration that Mr. Blutrich receives in connection with the Series. Mr. Blutrich is permitted to assign the Trademark License without consideration to third-parties. The term of the Trademark License is for one year, which term may and has been extended. Effective March 18, 2016, the Company and Mr. Blutrich entered into an addendum to the Trademark License, extending the license to a book about Scores.

See Note 9 for litigation relating to a few of the Company’s license agreements.

IMO’s members are the Company's 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 20% and 0% of the Company's royalty revenues for the years ended December 31, 2018 and 2017, respectively. The Company recognized $139,405 in royalty revenues under ASC 606 from IMO. Mr. Gans is also the majority owner (80%) of Swan, which accounted for 0% and 0% of the Company royalty revenues for the years ended December 31, 2018 and 2017, respectively. Mr. Gans is also the majority owner (92.165%) of Starlight, which accounted for 0% and 0% of the Company's royalty revenues for the years ended December 31, 2018 and 2017, respectively.

Note 7. Deferred Revenue

License agreements sometimes include Initiation/Inception Fees. Please see Note 3 for a detailed discussion of this matter.

Note 8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses as of December 31, 2018 is comprised of professional fees of $50,047, accrued payroll and taxes of $1,906, legal fees of $64,031, insurance of $5,595, filing fees of $4,496, marketing fees and expenses of $4,337 and miscellaneous accruals and payables of $7,135. 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.

Note 9. 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 the Company's majority shareholder, for $2,500 a month.

On April 3, 2016, 50 individuals purporting to be professional models and/or actresses filed a civil suit in the United States District Court for the Southern District of New York against the Company, I.M. Operating, LLC, The Executive Club, LLC, and Robert M. Gans, alleging that images of Plaintiffs were used without their consent for commercial purposes on websites and social media outlets to promote gentlemen’s clubs operated by the Defendants or licensees of the Defendants. The Lawsuit further alleged that the unauthorized use of these images created, among other things, the false impression that these individuals either worked at, or endorsed, one or more of such clubs. The Lawsuit asserted causes of action under Section 43 of the Lanham Act, 28 U.S.C. § 1125(a)(1), premised on a theory of false endorsement and/or association; New York Civil Rights Law §§ 50-51; New York’s Deceptive Trade Practices Act, New York General Business Law § 349; as well as various common law torts, namely defamation, negligence, conversion, unjust enrichment and quantum meruit. The Lawsuit sought unspecified compensatory damages, punitive damages, as well as attorneys’ fees and costs. The Lawsuit also sought an injunction permanently enjoining the use of the individuals’ images to promote, via any medium, any of the clubs. On April 20, 2017, as a result of the claims asserted in the Lawsuit, we filed a third-party complaint (the “Third-Party Complaint”) against certain licensees, namely CG Consulting, LLC; Anthony Quaranta; High Five Management Group, Inc.; Club 2000 Eastern Avenue, Inc.; SCMD, LLC; David Baucom; Manhattan Fashion L.L.C.; Stone Park Entertainment, Inc.; Silver Bourbon, Inc.; Tampa Food & Entertainment, Inc.; Fuun House Productions, L.L.C.; Norm A Properties, LLC; Southeast Show Clubs, LLC; Michael Tomkovich; Palm Spring Grill LLC; Houston KP LLC; and Star Light Events LLC (collectively, “Third-Party Defendants”) asserting causes of action for breach of contract, breach of warranty, contractual indemnification, common law indemnification, contribution and breach of contract for failure to procure insurance. We maintained in the Third-Party Complaint, among other things, that pursuant to the Third-Party Defendants’ respective license agreements, each of the Third-Party Defendants are expressly obligated to indemnify, defend and hold the Company harmless in connection with the conduct giving rise to the claims asserted by Plaintiffs in the Lawsuit. Third-Party Defendants Club 2000 Eastern Avenue, Inc., Fuun House Productions, L.L.C., and Norm A Properties, LLC (collectively the “Defaulting Third-Party Defendants”) failed to respond to the Third-Party Complaint.

On January 5, 2017, the Court issued an Order granting in part, and denying in part, Defendants’ motion to dismiss the Complaint. The Court dismissed Plaintiffs’ claims sounding in negligence, conversion, unjust enrichment and quantum meruit. The remaining claims were not dismissed at that time. On August 4, 2018, the Court dismissed Plaintiffs’ claims against Defendants, including the Company, with prejudice, at Plaintiffs’ request following settlement with Defendants. During the year ended December 31, 2018, the Company paid $1,310,000 to Plaintiffs in connection with the settlement. Between August 4, 2018 and October 9, 2018, the Court dismissed with prejudice the Company’s claims against the Third-Party Defendants, other than the Defaulting Third-Party Defendants, at the Company’s request following settlement with those Third-Party Defendants. The total amount of money paid to the Company by the settling Third-Party Defendants, and the Company’s insurance carrier, is $505,660. Scores has obtained Default Orders against Fuun House Productions, L.L.C. and Norm A Properties, LLC. The value of the Company’s claims against Fuun House Productions, L.L.C. and Norm A Properties, LLC are all that remain to be determined in the action. The Company became aware the week of December 17, 2018 that Fuun House Productions, L.L.C. has filed for bankruptcy protection.

On January 3, 2017, we, together with our subsidiary SLC, filed an action against CJ NYC Inc in the United States District Court for the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an adult entertainment club in Woodside, New York. In this action we sought damages for breach of contract in the amount of $85,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and trademark with respect to the Woodside, New York club and all websites and social media sites controlled by Defendant. The defendant failed to appear and on February 27, 2017, we filed a motion for judgment by default. The court heard our motion on April 5, 2017, and on May 25, 2017, the court granted our motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $85,000 to SLC and $14,333.33 in damages and $529.99 in costs to us. All signage has been removed and we are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving it unable to collect on the default judgment.

On January 31, 2017, we, together with our subsidiary SLC, filed an action against Funn House Productions LLC in the United States District Court for the Southern District of New York. Defendant utilizes the “Scores” name and trademark in connection with its ownership and operation of an adult entertainment club in New Haven, Connecticut. In this action we sought damages for breach of contract in the amount of $45,000 and the issuance of a preliminary and permanent injunction prohibiting the defendant from using the “Scores” name and trademark with respect to the New Haven, Connecticut club and all websites and social media sites controlled by Defendant. The Defendant failed to appear and on February 28, 2017, the Court granted Plaintiffs’ motion for a Judgment by default, granting a permanent injunction and awarding damages in the amount of $60,000. The parties negotiated a settlement agreement, which included a payment schedule, but then Defendant did not sign the proposed settlement agreement. We are attempting to collect on the default judgment, but we believe that Defendant no longer has any assets, leaving us unable to collect on the default judgment.

On July 25, 2017, plaintiff Dislenia Munoz, who formerly performed as an adult entertainer at Scores New York, owned in its entirety by I.M. Operating LLC, commenced a putative class action lawsuit against the Company, I.M. Operating LLC, Robert Gans and Mark Yackow in the Supreme Court of the State of New York, County of New York. Plaintiff alleged that she and other similarly situated entertainers at Scores New York were misclassified as independent contractors, that they should have been classified as employees, and as a result, the Defendants violated, among other things, applicable state wage and hour laws. The Lawsuit sought unspecified compensatory damages, liquidated damages, as well as attorneys’ fees and costs. On June 22, 2018, Plaintiff (1) amended her complaint in the Lawsuit to excise her class allegations, and (2) discontinued the Lawsuit, without prejudice. Plaintiff has brought her claims in the Lawsuit in another forum against the Defendants, other than the Company, which is no longer a subject of Plaintiff’s claims.

The Company was served with a Summons and Complaint in the action entitled Luisa Santos de Oliveira v. Scores Holding Company, Inc.; Club Azure, LLC; Robert Gans; Mark S. Yackow; Howard Rosenbluth, Docket No. 1:18-cv-06769-GBD, in the United States District Court of the Southern District. Plaintiff claims that the Defendants violated the minimum wage and overtime provisions of the Fair Labor Standards Act (“FLSA”); violated the New York Minimum Wage Act and the overtime provisions of the New York State Labor Law (“NYLL”); violated the Spread of Hours Wage Order of the New York Commissioner of Labor; violated the Notice and Recordkeeping requirements of the NYLL; violated the wage statement provisions of the NYLL; recovery of equipment costs in violation of the FLSA and NYLL; and unlawful deductions from tips in violation of the NYLL. Plaintiff brought this action as a class action and seeks certification of this action as a collective action on behalf of herself and all other similarly situated employees and former employees of Defendants.

The Company has submitted an Answer to Plaintiff’s claims and the case is currently in the discovery phase. The Company, along with the Co-defendants, intends to vigorously defend itself against the claims asserted against it in this lawsuit. The likelihood of an unfavorable outcome is remote because the Company’s records show, inter alia, that the Plaintiff never worked more than 25 hours per week.

On October 10, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against SCMD, LLC. the former licensee of SCORES Baltimore, said license having been terminated effective October 1, 2018. The civil action seeks damages for unpaid royalties in an amount of at least $170,000. The action is pending. Defendant removed the case to the US District Court for the Southern District of New York, 1-18-cv-11364-PGG. Plaintiff then filed an amended complaint in federal court. Defendant has filed a request for leave to file a motion to dismiss. The Company had until January 5, 2020 to submit opposition and then the Defendant has until January 15, 2020 to serve a reply to the Company’s opposition. The motion has been fully submitted and we await a decision.

On September 14, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against New 4125 LLC and Mike Taraska, the licensee of SCORES Phoenix, for unpaid royalties in the amount of $47,500. The action is pending.

On April 22, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against 1715 Northside Drive, Inc., the former licensee of SCORES Atlanta. The action was settled and paid in full during the 3^rd quarter 2018.

On May 4, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Bonkers Space Coast Inc. and Ken Fees, the former licensee of the SCORES Green Bay, for unpaid royalties in the amount of $80,000. The Defendants have not appeared and Plaintiffs have filed a motion for judgment by default. A motion for default judgement was granted and judgement was entered on November 26, 2019. The Company has found real property owned by the Defendant and we are in the process of attaching same.

On April 20, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against The Cadillac Lounge LLC and Dick Shappy, the former licensee of SCORES Rhode Island for unpaid royalty fees. The action was settled for $50,000 and has been paid in full during the 2^nd quarter 2018.

On April 25, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against South East Show Clubs LLC and Michael Tomkovich, the license of SCORES Jacksonville and SCORES Savannah, for unpaid royalties in the amount of $60,000. The action was settled and has been paid in full during the 4^th quarter of 2018.

On August 3, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Silver Bourbon, Inc, the licensee of SCORES New Orleans, for unpaid royalties in the amount of $145,500. Defendant was served on September 19, 2018 and the parties are in the process of negotiating a settlement agreement.

On July 13, 2018, we together with our subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Manhattan Fashions LLC, the licensee of SCORES Harvey for unpaid royalties in the amount of $84,000. Defendant was served on August 3, 2018 and the action is pending. A final notice of default was mailed on October 12, 2018 and was granted. The parties are in the process of negotiating a settlement agreement.

On September 5, 2019, the Company together with its subsidiary SLC filed a civil action in Supreme Court of New York, New York County against Scores Alabama. A cease and assist letter was sent and we received a response from the licensee and are in the process of entering a written license agreement, but the negotiations are at a standstill. The parties have thus far not been able to reach an agreement of the basic terms and litigation will most probably ensue.

In July 2018, the Company entered into a confidential settlement agreement (the “Settlement Agreement”) in the Voronina litigation, and in August 2018, the Court entered an order dismissing the plaintiff’s claims against the defendants with prejudice. Metropolitan Lumber, Hardware and Building Supplies, Inc. (“Metropolitan”), a company wholly-owned by Robert M. Gans, the Chief Executive Officer and a director of the Company, loaned the Company an aggregate of $770,000 to enable the Company to make the payments called for by the Agreement.

As previously reported, in February 2017, the Company entered into settlement agreements (each, a “Royalty Settlement Agreement”) with Star Light Events LLC (“Star Light”), Swan Media Group, Inc. (“Swan”), I.M. Operating LLC (“IMO”) (Star Light, Swan and IMO are sometimes referred to individually as a “Licensee” and collectively as the “Licensees”) and Robert M. Gans. Robert M. Gans is the owner of a majority of the equity of each of the Licensees. Pursuant to the Royalty Settlement Agreements, the Company forgave the repayment of a certain portion of unpaid, past-due royalties in return for the respective Licensees’ agreements to pay the remainder (the “Royalty Settlement Amount”) of the unpaid royalties, plus interest, to the Company. The Royalty Settlement Amount for each Licensee was represented by a promissory note, and Robert M. Gans guaranteed the payment of each Licensee’s obligations under the Settlement Agreement.

The Licensees did not remain current with respect to their obligations under the Royalty Settlement Agreements, and the Company did not call upon Robert M. Gans to honor his guarantees. The past due amounts under the Royalty Settlement Agreements aggregated $382,259.68 (the “Aggregate Royalty Amount”) as of December 1, 2018. As of such date, the Company, the Licensees, Metropolitan and Robert M. Gans entered into a Settlement and Offset Agreement (the “Offset Agreement”) pursuant to which the Aggregate Royalty Amount was offset against the Voronina Amount, thereby reducing the amount owed by the Company to Metropolitan to $400,469.86 (the “Net Voronina Amount”). The Net Voronina Amount is payable pursuant to a promissory note (the “Voronina Note”), which bears simple interest at the rate of 4% per annum, in 28 consecutive monthly installments of $15,000, and a final installment of $121.05, with the initial installment due and payable on January 1, 2019 (or the first business day thereafter). The Company may prepay the Voronina Note at any time, in whole or in part without premium or penalty. The Offset Agreement also provides for the immediate termination of the Royalty Settlement Agreements and the related promissory notes and guarantees.

There are no other material legal proceedings pending to which we or any of our property are subject, nor to our knowledge are any such proceedings threatened.

Note 10. SUBSEQUENT EVENTS

Please see Note 9 for events concerning legal matters.

Management evaluated subsequent events through the date of this filing and determined that no additional events have occurred that would require adjustment to or disclosure in the financial statements.