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| SCRH.OB > SEC Filings for SCRH.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Overview
We were incorporated in Utah on September 21, 1981 under the name Adonis Energy, Inc. We are now in the business of sublicensing the "Scores" trademarks and other intellectual property to fine gentlemen's nightclubs with adult entertainment in the United States through our affiliate by common ownership, Entertainment Management Services, Inc., an entity owned by two of our former directors and employees ("EMS"), to whom we have given an exclusive, worldwide license to the "Scores" trademarks and the other related intellectual property. Pursuant to our license with EMS, which has been amended and restated (the "EMS Agreement"), we granted to EMS the right to sublicense the Scores trade name to nightclubs. These clubs feature topless female entertainers together with opportunities for watching sporting events, celebrating business transactions and private parties. There are four such clubs currently operating, one in New York City, and one in each of Baltimore, Chicago and New Orleans. Two additional clubs, in Los Angeles and Philadelphia, had signed licensing agreements with EMS but these agreements have been cancelled before becoming operative. The Philadelphia club license was cancelled because the operator of that club was unable to obtain zoning approval for the club's operation. The Los Angeles club license was terminated because that club licensee failed to obtain a liquor license within the two (2) year time period allowed for by the terms of the license.
We are affiliated through common ownership with two nightclubs in New York, New York ("Scores East" and "Scores West") which are owned, respectively, by 333 East 60th Street, Inc. ("333 East"), and Go West Entertainment, Inc. ("Go West"). Through EMS, we have sublicense agreements with each of these clubs pursuant to which they use the Scores intellectual property. Throughout this report, we refer to the New York clubs as our affiliated clubs. All other clubs are referred to as non-affiliated clubs or as "sublicensees", a term that may include the affiliated clubs when the context requires. Due to the revocation of its liquor license by the NYSLA (defined below), Scores West is currently closed. See Part II, Item 1 - Legal Proceedings below, for a further discussion of this matter.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenues:
Royalty revenues decreased sixty four percent (64%) to $33,660 for the third quarter of 2008 from $92,791 for the third quarter of 2007. This decrease was attributable primarily to the following factors:
· During the third quarter 2008, the economy experienced major setbacks in the stock markets which may have impacted our revenues. Management believes that business executives as well as blue collar workers are deciding to spend less on entertainment.
· In March of 2008, we were notified by our Las Vegas licensee that it would be canceling its license with EMS (see discussion below). Royalties for the third quarter of 2007 and 2008 under the Las Vegas license amounted to $56,000 and $0, respectively. In addition, total revenues earned from our Chicago licensee decreased $11,690 in the third quarter of 2008 from $20,646 in the third quarter of 2007.
In early March 2008, we received notice that D.I. Food and Beverage of Las Vegas ("DIF&B"), owner of the Las Vegas club, would be canceling its sublicense with EMS effective on or before May 6, 2008. We were notified that DIF&B would be making final royalty payments to EMS totaling $60,000 at the rate of $10,000 per week starting the first week of March 2008. To date, DIF&B is operating and EMS has received only one such $10,000 payment from DIF&B and is exploring its available remedies. We may not receive all royalties due from EMS with respect to the Las Vegas club sublicense if EMS is not able to collect all payments due from DIF&B and as a result, the Company reserved approximately $21,000 of unpaid royalties during the second quarter 2008. The Las Vegas club accounted for 0% and 59% of our total royalty revenues in the third quarter of 2008 and the third quarter of 2007, respectively.
Merchandise revenues decreased during the third quarter of 2008 to $0 from $806 during the third quarter of 2007. This decrease reflected the continuing trend of increases in our shipping costs and our sublicensees purchasing our branded products from local manufacturers (rather than directly from us) at lower cost to them.
On January 24, 2006, we licensed AYA International, Inc. ("AYA") the right to use our trademarks in connection with its online video chat website, "Scoreslive.com". In January 2007, AYA's website began operations and, for the second quarter of 2008, generated gross revenues of more than $5,000 per month resulting in minimal royalties to us. We believe that the Scoreslive.com website is still developmental will continue to generate minimal revenues for us during the rest of 2008.
General and Administrative Expenses:
General and administrative expenses decreased during the third quarter of 2008 to $89,553 from $158,130 during the third quarter of 2007. This decrease of $68,000 represents a 2008 third quarter net reduction in salaries, public relations, business development and legal costs amounting to $101,000 and an increase in insurance, rent and trade show costs amounting to $15,000 when compared to 2007 third quarter. The cuts in costs were due to the result of shortfalls in revenue based, in part, on the economic slowdown and the loss of revenues from our Las Vegas licensee which accounted for fifty nine percent (59%) of our royalty revenue during the three months ended September 30, 2007.
Provision for Income Taxes:
The provision for state income taxes relates primarily to average assets and capital which were not impacted by net operating losses for the third quarter of 2008.
Net (Loss):
Net (Loss) was $(76,594) or $(0.00) per share for the third quarter of 2008 compared to a net loss of $(63,916) or $(0.00) per share for the third quarter of 2007. Although there were reductions in administrative cost in (salaries, legal and business development and public relations) of $101,000, the Company did see unfavorable increases in insurance, rent and trade show cost of $15,000 during the third quarter of 2008 compared to the third quarter 2007. Management agreed that these reductions were a result of economic slowdowns and the discontinuance of our Las Vegas licensee which accounted for fifty nine percent (59%) of our royalty revenue during the three months ended September 30, 2007.
Net (Loss) per share data for both the 2008 and 2007 third quarter periods is based on net income available to common shareholders divided by the weighted average of the common shares.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Revenues:
Royalty revenues decreased fifty five percent (55%) to $ 157,116 for the nine months ended September 30, 2008 from $347,914 for the third quarter of 2007. This decrease was attributable primarily to the following factors:
· During the first quarter of 2008 we were notified by our Las Vegas licensee that it would be canceling its license with EMS. Royalties for the nine months ended September 30, 2007 and 2008 under the Las Vegas license amounted to $202,500 and $54,000, respectively. During the third quarter of 2008, the Company reserved the entire $54,000 to bad debt expense.
· As discussed above, to date, EMS has received only one $10,000 payment from DIF&B in connection with its closing of the Las Vegas club. The Las Vegas club accounted for 0% and 58% of our total royalty revenues for the nine months ended September 30, 2008 and the nine months ended September 30, 2007, respectively.
Merchandise revenues decreased during the nine months ended September 30, 2008 to $3,428 from $13,331 during the nine months ended September 30, 2007. This decrease was primarily due to increases in shipping costs and our sublicense's purchasing our branded products from local manufacturers at lower cost.
General and Administrative Expenses:
General and administrative expenses decreased during the nine months ended September 30, 2008 to $264,301 from $638,366 during the nine months ended September 30, 2007. The Company lost a major licensee (Las Vegas) which accounted for approximately fifty eight percent (58%) of our royalty revenue, and as a result, we reduced our rent, salaries, legal and business development costs by approximately $375,000 in the nine months ended September 30, 2008 from the nine months ended September 30, 2007.
Provision for Income Taxes:
The provision for state income taxes relates primarily to average assets and capital which were not impacted by net operating losses for the nine months ended September 30, 2008.
Net (Loss):
Net (Loss) was $(129,173) or $(0.00) per share for the nine months ended September 30, 2008 compared to a Net (Loss) of $(280,344) or $(0.00) per share for the nine months ended September 30, 2007. This decrease for the nine months ended September 30, 2008 is a result of administrative cost reductions made by the Company (rent, salaries, legal and business development) of approximately $375,000 for the nine months ended September 30, 2008. To help cover the cost of operations, the Company received cash advances from a related party (EMS) in the amount of $78,987 during the nine month period end September 30, 2008. Management agreed that these reductions were due primarily to the slowdown in the economy which may have impacted revenues and the loss of our major licensee (Las Vegas) who accounted for fifty eight percent (58%) of our total revenues for the nine months ended September 30, 2007
Net (Loss) per share data for both the nine months ended September 30, 2008 and for the nine months ended September 30, 2007 is based on net income available to common shareholders divided by the weighted average of the common shares.
Bad Debt Expense
During the fourth quarter 2006, the Company made significant provisions for bad debts in the amount of $3,391,126 applicable to amounts owed us by the respective owners of Scores East and Scores West. As of September 30, 2008, Scores East and Scores West owed us (indirectly, through EMS) $1,220,475 and $231,818, respectively, in accrued and unpaid royalties. The owners of both of these affiliated clubs have informed us that their ability to make payments on the amounts owed is impaired due to increased legal costs incurred during investigations by the City (defined below) and the NYSLA, together with revenue shortfalls. Due to the revocation of its liquor license by the NYSLA, Scores West is currently closed and has filed for Chapter 11 bankruptcy. We have concluded that if Go West's continuing appeal efforts fail to reverse the NYSLA revocation of the Scores West liquor license, we will not be able to collect from Scores West any of the royalties currently owed to us. Additionally, Scores East's ability to pay us royalties would be negatively impacted if the NYSLA is successful in its proceedings (begun in May 2, 2008) to revoke that club's liquor license due to the common ownership of both of these clubs. See Part II, Item 1 - Legal Proceedings below, for a further discussion of this matter.
In connection with our divestiture of stock of Go West and its construction of Scores West we loaned Go West $1,636,264 in return for a note (the "Note") secured by Go West's leasehold interest on a building at 533-535 West 27th Street, New York, New York. The Note bears interest at 7% and is scheduled for maturity on October 1, 2008. Go West is currently in default under the Note, and as of September 30, 2008 owed us $1,867,310 which includes accrued interest of $355,189. As of September 30, 2008, we continued to carry the $1,867,310 of this amount as an impaired note and for the third quarter of 2008 and the nine months ended September 30, 2008, we have forgone accruing any interest.
Any cash received from these clubs (Scores East and Scores West) is applied as a reversal of the bad debt expense when received. For the third quarter of 2008 and the nine months ended September 30, 2008, we applied approximately $62,128 ($30,000 rent credit and $32,128 in cash) towards Scores West and $9,788 in cash towards the Scores East outstanding royalty balances. A reverse of bad debt expense was made to reflect these amounts. We did not collect any cash on the Note during the third quarter of 2008 and the nine months ended September 30, 2008. We have temporarily suspended the recognition of royalties due from Scores West and Scores East and interest earned on the Note until financial stability of these clubs can be reasonably assured.
We have discontinued our efforts to examine the books and records of Scores West and Scores East. Our planned examinations were designed to help provide assurance that collection on all outstanding royalties due and on the Note would be foreseeable; however, based on the current status of Scores West in Chapter 11 bankruptcy and the possible revocation of the Scores East liquor license by the NYSLA, we do not believe that collection of the amounts due will be possible.
Liquidity and Capital Resources
Cash:
At September 30, 2008, we had $173 in cash and cash equivalents compared to $173 in cash and cash equivalents at December 31, 2007.
Contractual Commitments:
On February 28, 2007, our then President, Chief Executive Officer and Director, Richard Goldring resigned from each of those positions, and terminated his employment with us under an employment agreement, dated April 16, 2003. The terms of such agreement provided that if Mr. Goldring terminated his employment without cause (which he did), we would become obligated to pay him $1 million. We had $173 in cash available at September 30, 2008. Given our lack of available cash to make such payment, we are currently in negotiations with Mr. Goldring regarding the terms of our payment to him.
Operating Activities:
Net cash provided by (used in) operating activities for the nine months ended September 30, 2008 and September 30, 2007 was $20,000 and ($160,484), respectively. The increase in cash provided by operating activities for the nine months ended September 30, 2008 compared to the same period last year primarily reflects the reduction of administrative expenses and an increase in related party cash advances to help cover cash short falls. These cash advances were due to the loss of our main sublicensee in Las Vegas who accounted for approximately fifty nine percent (59%) of our royalty revenue in 2007.
Financing Activities:
As discussed above, we loaned Go West $1,636,264 in return for the Note. We did not receive any interest payments on the Note during the nine months ended September 30, 2008. If Scores West remains closed permanently, it will not be able to make any payments to us under the Note.
Future Capital Requirements:
We have incurred losses since the inception of our business. Since our inception, we have been dependent on acquisitions and funding from private lenders and investors to conduct operations. As of September 30, 2008 we had an accumulated deficit of $(6,232,056). As of September 30, 2008, we had total current assets of $21,770 and total current liabilities of $266,683 or negative working capital of $(244,913). As of December 31, 2007, we had total current assets of $47,213 and total current liabilities of $207,743 or negative working capital of $(160,530). The decrease in the amount of our working capital was primarily attributable to our inability to collect on the outstanding receivables due from our Score East and Scores West affiliates due to the City proceedings and the pending NYSLA matters with Scores West and Scores East and the 50 percent retention of cash received from non affiliated clubs by EMS.
Due to the revocation of its liquor license by the NYSLA, Scores West is currently closed. If Go West's continuing appeal efforts fail to reverse the NYSLA revocation of the Scores West liquor license and, if the Score East license is revoked as a result of the NYSLA's proceedings against Scores East due to the common ownership of both of these clubs, operations at Scores East will, most likely, terminate as well and cash from these clubs to extinguish the receivables balance will not be available for payment to us. Given our lack of cash, we were able to control our outstanding debt during the third quarter of 2008 and the nine months ended September 30, 2008 by continuing to maintain significant reductions in our administrative costs.
We will continue to evaluate possible acquisitions of or investments in businesses, products and technologies that are complimentary to ours. These may require the use of cash, which would require us to seek financing. We may sell equity or debt securities or seek credit facilities to fund acquisition-related or other business costs. Sales of equity or convertible debt securities would result in additional dilution to our stockholders. We may also need to raise additional funds in order to support more rapid expansion, develop new or enhanced services or products, respond to competitive pressures, or take advantage of unanticipated opportunities. Our future liquidity and capital requirements will depend upon numerous factors, including the success of our adult entertainment trademark licensing business.
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