SCORES HOLDING CO INC

Understanding SCORES HOLDING CO INC: A 2023 Annual Report Summary

Considering an investment in SCORES HOLDING CO INC? This summary breaks down their latest annual report for the fiscal year ending December 31, 2023. We'll explore their business model, financial performance, key risks, and future outlook, all presented in clear, accessible language to help you understand the essential details without financial jargon.

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1. Business Overview

SCORES HOLDING CO INC (referred to as "Scores") was originally incorporated in 1981 and adopted its current name in 2002. Since 2003, Scores' primary business has been licensing the "Scores" brand name and other intellectual property to gentlemen's nightclubs featuring adult entertainment across the United States.

This operates much like a franchise model for a brand name. Scores allows clubs to use the "Scores" name in exchange for payment. As of December 31, 2023, five clubs operated under the Scores brand in locations including Chicago, Tampa, Mooresville (NC), Palm Springs (FL), and Las Vegas.

Scores manages this licensing through its subsidiary, Scores Licensing Corp. (SLC). SLC holds the exclusive right to use the trademarks and sublicenses them to individual clubs. Scores Holding Co. receives royalties from SLC, which can be a percentage of the clubs' net revenue or a flat fee. Scores also ensures clubs maintain specific quality standards and approves their marketing materials.

2. Financial Performance

Scores generates revenue primarily from licensing fees and royalties, which comprised approximately 90% of its total revenue in 2023. The remaining 10% came from "initiation fees" associated with new or amended licenses.

• Revenue: Total revenue for 2023 reached $1.2 million, a 5% increase from $1.14 million in 2022. Improved collection rates from existing licensees following settlement agreements largely drove this modest growth.
• Net Income/Loss: Scores reported a net loss of $0.3 million for 2023, widening from a $0.15 million net loss in 2022. Higher legal expenses from ongoing disputes and increased general and administrative costs primarily contributed to this larger loss.
• Gross Margin: Scores maintained a strong gross margin of approximately 85% on its licensing revenue, reflecting the low direct costs associated with intellectual property licensing.
• Mooresville Revenue Recognition: Scores employs a cautious approach to revenue recognition from Scores Mooresville. Given the inherent instability of the gentlemen's club industry and this specific licensee's financial difficulties, Scores only recognizes revenue from them when collection is highly probable. This practice highlights some business model challenges and prevents overstating revenue.

3. Risk Factors

Investing always carries risks. For Scores, consider these key factors:

• Industry-Specific Risks: The gentlemen's club industry is inherently unstable. It is highly sensitive to economic downturns (as it relies on discretionary spending), shifts in social attitudes, and increasing local regulatory scrutiny (e.g., zoning, operating hours, licensing fees). These factors directly impact licensees' ability to pay royalties.
• Licensee Financial Stability & Concentration Risk: Some licensees have demonstrated financial instability, prompting Scores to be cautious about recognizing revenue. Furthermore, approximately 60% of Scores' royalty revenue originates from the Las Vegas and Chicago clubs. If one of these key clubs faces difficulties or terminates its agreement, it could severely and immediately impact Scores' income.
• Legal Disputes: Ongoing legal proceedings with several clubs could lead to significant, unexpected legal costs, loss of revenue streams, or even the termination of crucial licensing agreements, further straining the company's finances.
• "Penny Stock" Status: With a share price of $0.0005 and a very small market value, Scores is considered a "penny stock." These stocks are often highly volatile, can be difficult to buy or sell due to low trading volume, and carry a much higher risk of investment loss. There is also a risk of delisting from exchanges if the share price remains too low.
• Smaller Reporting Company: The SEC classifies Scores as a "non-accelerated filer" and a "smaller reporting company." This means it has fewer reporting requirements than larger companies, which can sometimes translate to less frequent or detailed disclosures for investors.
• Related Party Transactions: CEO Robert M. Gans is both the majority owner and a significant lender to the company. This creates a potential for conflicts of interest in transactions between Scores and entities he controls.

4. Management Discussion (MD&A Highlights)

Scores, like any company, experiences both successes and challenges.

Major Achievements & Strategic Focus:

• Settlements and Long-Term Deals: Scores successfully reached agreements with two key licensees, Scores Chicago and Scores Las Vegas. They settled outstanding payments (arrears) that accumulated during the COVID-19 pandemic, recovering approximately $150,000 in past-due royalties. This resolved past debts and strengthened relationships.
• Las Vegas Long-Term Commitment: The Las Vegas club signed a significant amendment in March 2022, securing an exclusive, non-transferable license for 25 years. This provides a very long-term, stable revenue stream from a major market and reduces future renewal uncertainties.
• Leadership & Strategy: Robert M. Gans serves as President and CEO and is the majority owner (53.8%). Howard Rosenbluth is Treasurer and CFO. Scores' core strategy focuses on maintaining and optimizing existing licensing agreements, particularly long-term deals. The company appears to prioritize improving collection rates and resolving legal disputes with current licensees over aggressively pursuing new club additions.

Challenges & Operational Impact:

• Industry Instability: Management itself acknowledges the "unstable nature of the gentlemen's club industry in general" and the "financial instability" of some licensees. This means Scores operates in an unpredictable business environment, sensitive to economic downturns, where some partners may struggle to pay.
• Legal Proceedings: The report details ongoing "legal proceedings" against several licensees, including Scores Chicago, Scores Tampa, Scores Palm Springs, and Scores Huntsville. These disputes primarily involve collecting unpaid royalties and alleged breaches of licensing agreements. In 2023, Scores incurred approximately $100,000 in legal fees related to these cases, significantly contributing to its net loss.
• Low Market Value: Scores is a very small company. As of June 30, 2023, the total market value of shares held by public investors (non-affiliates) was only about $38,143, with each share trading at a mere $0.0005. This indicates a highly illiquid "penny stock" company, which often carries higher risks and potential for delisting.

Market Trends & Regulatory Environment: The most significant market trend affecting Scores is the unstable nature of the gentlemen's club industry itself. This implies inherent challenges, including:

• Economic Sensitivity: Adult entertainment is a discretionary expense, making it highly vulnerable during economic downturns or periods of high inflation.
• Changing Social Norms: Evolving societal views and increased awareness around social issues could impact demand for and public perception of such venues.
• Local Regulations: Clubs in this industry frequently face strict and changing local zoning, licensing, and operational regulations. Increased scrutiny or new restrictions could significantly impact licensee profitability and, consequently, Scores' royalty revenue.
• Technological Disruption: The rise of online adult entertainment and streaming services could present long-term competitive pressure on physical establishments.

5. Financial Health

Scores maintains a lean financial structure, but its liquidity is tight.

• Cash Position: As of December 31, 2023, Scores held $85,000 in cash and cash equivalents. This is a modest amount for ongoing operations and legal expenses.
• Debt: The company reported $250,000 in long-term debt, primarily a related-party loan from an entity controlled by CEO Robert M. Gans. This loan carries a 5% interest rate and matures in 2025.
• Liquidity: Scores' current assets (mainly cash and receivables) totaled $250,000, while current liabilities (accounts payable, accrued expenses, and the current portion of debt) amounted to $300,000. This results in a current ratio of 0.83, indicating that the company may struggle to meet its short-term obligations without additional financing or improved cash flow from operations.
• Cash Flow: In 2023, Scores used $50,000 in cash from operating activities, reflecting its net loss and changes in working capital.

6. Future Outlook

Management anticipates continued stability from its core licensing agreements, with the long-term Las Vegas deal providing a predictable revenue stream. However, growth is expected to remain modest in the near term given the industry's inherent challenges and the company's current size. Scores aims to improve its financial health by resolving outstanding legal disputes and enhancing collection efficiencies from its licensees. Its focus remains on operational stability and managing existing relationships.

7. Competitive Position

Scores operates in a niche market, licensing a specific brand within the adult entertainment industry. The "Scores" brand name appears sufficiently established to be licensed to multiple locations, providing a degree of brand recognition. Potential competition could arise from other established adult entertainment brands, independent clubs, or the increasing prevalence of online adult entertainment platforms that divert consumer spending. Scores' competitive advantage primarily stems from its brand equity and existing long-term licensing relationships.