Notes
To
Consolidated Financial Statements
(Unaudited)
Note
1:
Basis of Presentation
1.
The
accompanying unaudited consolidated financial statements of Scores Holding
Company Inc., formerly Internet Advisory Corporation and (the Company”) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals)
have
been included. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Operating
results expected for the nine months ended September 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB
for
the year ended December 31, 2006.
Note
2:
Summary of Significant Accounting Principles
Fair
Value of Financial Instruments
The
carrying amounts reported on the balance sheets for cash, accounts payable,
accrued expenses, licensee receivable and notes payable approximate fair value
based on the short-term maturity of these instruments
Inventory
Inventory
consists primarily of finished goods and is valued at the lower of cost or
market on a first-in first-out "FIFO" basis. In performing our cost valuation,
we consider the condition and salability of our inventory and may adjust the
valuation due to anticipated changes that may materially affect its
basis.
Concentration
of Credit Risk
During
the third quarter 2007, the Company earned royalties and merchandise revenues
from sub-licensees of which, five (Chicago, Las Vegas, Baltimore, AYA and New
Orleans) are unrelated to former management of the Company. For the nine months
ended September 30, 2007, royalties earned from these unrelated licensees
amounted to $94,791 of which $24,125 is due and outstanding as of September
30,
2007.
Forgone
royalties earned during the nine months ended September 30, 2007 from Scores
East were $289,394, and $283,541 from Scores West. At December 31, 2006, Scores
East owed us $1,230,263 in unpaid royalties and Scores West owed $293,552.
Scores West also borrowed $1,636,264 from the company, issuing a 7% promissory
note which is in default. At September 30, 2007, $1,867,310 (including $355,189
of accrued interest) remained due under the loan.
As
discussed in Item 2 Management Discussion and Analysis, a reserve for the entire
$1,524,602 and $1,867,310 was provided for due to both the unstable financial
conditions, bankruptcy, and government nuisance matters mentioned in Item 3
Legal Proceedings for both Scores East and Scores West. In addition, any future
cash received from these affiliates will result to a reversal of bad debt
expense in the period collected. Also, unless financial stability and collection
of these receivables can be reasonably assured by management, the Company
intends to suspend, for book purposes, all future recognition of royalties
and
interest income due by these affiliates. The Company has also made plans to
examine the books and records of these affiliates.
During
the current period 2007, the Company, for reporting purposes did not report
revenues from affiliates due to provisions made on these royalties in the prior
year 2006.
Any
future cash received from these affiliates will result in a reversal of bad
debt expense in the period collected. Also, unless financial stability and
collection of these receivables can be reasonably assured by management, the
Company will continue to suspend, for book purposes, all future recognition
of
royalties and interest income due by these affiliates. The Company has also
made
plans to examine the books and records of these affiliates.
Note
4:
New Accounting Pronouncements
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159), including an amendment
to FASB No. 115. FAS 159 gives entities the irrevocable option to measure
eligible financial assets, financial liabilities and firm commitments at fair
value, on an instrument-by-instrument basis, that are otherwise not permitted
to
be accounted for at fair value under other accounting standards. The election,
called the fair value option, will enable entities to achieve an offset
accounting effect for changes in fair value of certain related assets and
liabilities without having to apply complex hedge accounting provisions. SFAS
159 is effective as of the beginning of a company’s first fiscal year that
begins after November 15, 2007. We are currently evaluating the impact of
SFAS 159 on our consolidated financial statements.
Note
5 -
Related party Receivable
The
current and long term portions of notes receivable including accrued interest
amounts to $1,867,310. Such amount relates to a secured receivable from Scores
West which is partially owned and operated by a former President and
Chief Executive Officer. During the 2007 period, no payments have been made
on this outstanding balance through September 30, 2007.
The
Company received $35,819 in payments for royalties from Scores West and no
payments from Scores East during the 2007 period (See Item 2 Management
Discussion (Bad Debt Expense).
Included
in royalty receivable are $1,230,263 and $293,552 due from Scores East and
West,
which both are partially owned and operated by a former President
and Chief Executive Officer of the Company. Such receivables from
Scores West and Scores East have been fully reserved. Any future cash
received from these affiliates will result to a reversal of bad debt in the
period collected. Also, unless financial stability and collection of these
receivables can be reasonably assured by management, the Company will
continue to suspend, for book purposes, all future recognition of royalties
and
interest income due by these affiliates. The Company has also made plans to
examine the books and records of these affiliates.
Note
6 -
Sub-licensees
On
April
30, 2007, Scores New Orleans "D/B/A Silver Bourbon, Inc." commenced its
operations pursuant to an agreement made with Entertainment Management Services,
Inc. on April 2, 2007. No royalties were due during as of September 30,
2007.
Note
7 -
Commitments and Contingencies
As
a
result of the settlement agreement entered into in September 2006 between the
Company and affiliated parties and Scores Entertainment Inc. (“SEI”) and Irving
Bilzinsky (“Bilzinsky”) the Company is obligated to pay Bilzinsky, as sole
shareholder of SEI, $175,000 in 18 monthly installments, which commenced on
September 24, 2006, of $9,375 for each of the first 8 months and $10,000 for
each of the remaining 10 months. This amount is included in notes
payable.
During
the year the Company entered into a one year lease agreement with D. Ciarello
to
occupy office space in Ft. Lauderdale, FL. The lease approximates to 700 square
feet of office space at $1,000 per month. The Company has an option to renew
the
lease within 60 days of the June 15, 2008 expiration date.
On
October 9, 2007, former Go West bartender Siri Diaz filed a purported class
action and collective action on behalf of all tipped employees against the
Company and other defendants alleging violations of federal and state
wage/hour laws (
Siri
Diaz et al. v. Scores Holding Company, Inc.; Go West Entertainment, Inc.
a/k/a
Scores West Side; and Scores Entertainment, Inc., a/k/a Scores East
Side
,
Case
No. 07 Civ. 8718 (Southern District of New York, Judge Richard M. Berman)).
On
November 6, 2007, plaintiffs served an amended purported class action and
collective action complaint, naming dancers and servers as additional plaintiffs
and alleging the same violations of federal and state wage/hour laws. The
Company's response to the amended complaint is due December 21, 2007. The
amended complaint alleges that the Company and the other defendants
are “an integrated enterprise” and that the Company and the other
defendants jointly employ the plaintiffs, subjecting all of the defendants
to liability for the alleged wage/hour violations. The
Company disputes that it is an employer of the plaintiffs and intends to
vigorously contest the claimed liability as well as the violations
alleged.
On
March
30, 2007, the Company, along with several of its affiliates, were named in
a suit in connection with alleged assault by an employee of an affiliate
and one
of the Company's stockholders and former directors. The Company intends to
vigorously defend itself in this litigation and does not expect that the
outcome will be material.
In
February 2007, the City of New York (the “City”) sought to close Scores West
claiming that it presented a public nuisance. The City alleged that this
nightclub was used for purposes of prostitution; the case has been dismissed
by
the City of New York and no charges had been sought against Scores West or
the
Company. In March, 2007, the New York State Liquor Authority began a review
of
the license held by Scores West. The proceedings have been adjourned until
November 2007. If Scores West were to be closed, the Company would no longer
be
entitled to receive royalty revenues from them, which in 2006, amounted to
31%
of the Company's royalties. Also, if Scores West were to close, its ability
to
make payments under an outstanding note issued to the Company by Scores West
would be impaired. The note is currently in default.