Executive Summary / Key Takeaways

• Scores Holding Company (SCRH) operates a niche business model focused on licensing the "Scores" trademark to adult entertainment gentlemen's clubs, leveraging established brand recognition as its primary asset.
• Recent financial performance shows a significant decline in royalty revenue, from $414,000 in Q1 2022 to $73,500 in Q1 2023, primarily due to the timing of deferred revenue recognition under ASC 606.
• The company faces substantial liquidity challenges, evidenced by an accumulated deficit of $6.9 million and a working capital deficit of $233,195 as of March 31, 2023, raising substantial doubt about its ability to continue as a going concern.
• Management's strategy centers on expanding and maintaining licensing agreements to generate the necessary working capital, noting increased interest in the brand post-COVID-19 pandemic impacts.
• Key risks include the uncertainty of securing sufficient licensing revenue or external financing, deficiencies in internal financial controls, and potential impacts from ongoing or future litigation.

Setting the Scene: The Scores Brand in a Niche Market

Scores Holding Company, Inc. (SCRH) occupies a unique corner of the hospitality and entertainment landscape, operating not physical venues, but as a licensing entity. Since 2003, the company's core business has been the licensing of its well-known "Scores" trademarks and associated intellectual property to gentlemen's nightclubs across the United States. This model allows SCRH to generate revenue through royalty fees, which are structured either as a flat monthly rate or a percentage of the licensee's revenues. The value proposition for licensees lies in leveraging the established recognition and status of the Scores brand to attract customers and promote their own businesses.

The company's history includes shifts in ownership and licensing arrangements, notably the involvement of Robert M. Gans, who became a majority shareholder and CEO in 2009, and subsequent related-party licensing and management agreements. This structure highlights a degree of concentration risk and related-party influence within the business operations and financial arrangements.

Within the broader hospitality and entertainment industry, SCRH operates in a specific niche. While companies like RCI Hospitality Holdings, Inc. (RICK) are direct competitors operating their own adult entertainment venues, SCRH's model is distinct in its pure licensing focus. Other, less direct competitors exist in the form of casual dining and entertainment venues (like CBRL, BLMN, JACK, BH) that compete for consumer discretionary spending, and increasingly, online adult entertainment platforms pose an indirect threat by offering alternative forms of entertainment. SCRH's primary competitive advantage lies in the historical recognition and perceived premium status of the Scores brand, which can command licensing fees and potentially offer licensees a marketing edge. However, its smaller scale and lack of operational diversification, compared to larger, more integrated competitors like RICK, represent significant vulnerabilities.

Unlike many modern businesses that rely on proprietary technology for differentiation, SCRH's competitive moat is primarily built upon its brand equity and, to some extent, the regulatory licenses held by its licensees which can act as barriers to entry in specific markets. The company's strategic focus is on maintaining and expanding this licensing footprint.

Financial Performance: A Recent Downturn

Analyzing SCRH's recent financial performance reveals a challenging period. For the three months ended March 31, 2023, the company reported total revenue of $73,500. This represents a substantial decrease compared to the $414,000 in revenue generated during the same period in 2022. Management attributed this significant year-over-year decline primarily to the timing of recognizing previously deferred income under ASC 606 in the 2022 period. This suggests that the Q1 2022 revenue figure included a non-recurring boost from accounting adjustments, making the Q1 2023 figure potentially more reflective of the underlying run rate from current licensing agreements, albeit from a smaller base of licensees post-pandemic adjustments.

Operating expenses, primarily consisting of general and administrative costs, saw a slight decrease, falling from $98,036 in Q1 2022 to $96,008 in Q1 2023. This reduction was largely driven by a significant drop in legal expenses, from $32,013 to a mere $406, indicating a reduction in active litigation during the period compared to the prior year.

The net result of the revenue decline and modest expense reduction was a shift from profitability to a loss. The company reported a net loss of $22,900 for the three months ended March 31, 2023, a stark contrast to the net income of $311,442 reported in the comparable 2022 period. Again, this swing is largely explained by the accounting treatment of deferred revenue in the prior year.

Looking at the full year 2022, revenue was $634,500, resulting in net income of $262,084. This indicates that while Q1 2022 was strong due to the deferred revenue recognition, the subsequent quarters in 2022 likely saw lower revenue, bringing the full-year figure down significantly from pre-pandemic levels (e.g., $583,530 in 2019). The Q1 2023 revenue figure of $73,500, if annualized, would suggest a further decline in the underlying licensing revenue base compared to the full year 2022, absent any new agreements or changes in existing terms.

Cash flow from operating activities also saw a dramatic decrease, from providing $385,779 in Q1 2022 to just $5,645 in Q1 2023. This change is directly linked to the lower revenue collection in the 2023 period compared to the prior year, which benefited from the collection of deferred revenue and trade receivables.

Liquidity, Going Concern, and the Path Forward

The most critical aspect of SCRH's financial position is its liquidity and ability to continue operations. As of March 31, 2023, the company had an accumulated deficit of $6.90 million. Its current liabilities significantly exceeded its current assets, resulting in a working capital deficit of $233,195, an increase from the $205,795 deficit at December 31, 2022, primarily due to an increase in related party payables.

These conditions, specifically the accumulated losses and working capital deficit, have led management to conclude that there is substantial doubt about the company's ability to continue as a going concern within one year from the date the financial statements were issued (May 30, 2025). The financial statements do not include any adjustments that might be necessary if the company were unable to continue as a going concern.

Management's stated plan to address this critical situation is to raise additional working capital through the continued licensing of its brand with both current and new operators. The success of this strategy is paramount, as the company explicitly states there are no assurances that it will achieve the revenue levels necessary to generate sufficient cash flow from operations to meet its working capital requirements. If licensing efforts are insufficient, the company will need to raise additional financing, and there is no guarantee that such financing will be available on acceptable terms.

The company's outlook is therefore heavily dependent on its ability to secure new licensing agreements and ensure consistent royalty payments from its existing base of six licensees (as of June 17, 2024). Management notes a recent increase in interest from establishments in utilizing the Scores brand, which they believe is a positive sign following the lifting of COVID-19 gathering restrictions. However, this qualitative observation does not provide concrete guidance on expected future revenue or profitability.

Beyond licensing, the company may explore acquisitions or investments, but these would also necessitate raising additional funds, further highlighting the urgent need to improve its capital position.

Risks and Challenges on the Horizon

The primary risk facing SCRH is its ability to overcome the substantial doubt about its going concern status. This hinges directly on its success in generating sufficient cash flow through licensing or securing external financing. Failure on either front could severely impact its ability to continue operations.

Operational risks include the reliance on licensees to successfully operate their clubs and generate revenue, as royalty payments are often tied to their performance. While management believes the worst of the COVID-19 impact is over and licensees have reopened, the adult entertainment industry remains susceptible to economic downturns and changing consumer preferences, including the rise of online alternatives.

Furthermore, the company has identified deficiencies in its internal control over financial reporting, specifically related to the financial statement review process, journal entries, and account reconciliations. Management concluded these deficiencies constitute material weaknesses as of March 31, 2023. While a remediation plan is underway, ineffective internal controls can lead to errors in financial reporting and potentially impact investor confidence.

Litigation has also been a recurring challenge for SCRH, as detailed in the notes to the financial statements. While several specific cases mentioned in the Q1 2023 filing have been settled or dismissed subsequent to the reporting period (including cases related to the Tampa and New York clubs, and a dispute with Scores Alabama), the history of legal proceedings highlights the potential for future litigation to consume resources and impact the business.

Finally, the concentrated ownership structure and related-party transactions, while potentially providing access to financing in the past (as seen with the Metropolitan loans), also introduce potential conflicts of interest and may not always align with the interests of minority shareholders.

Conclusion

Scores Holding Company presents a high-risk, potentially high-reward investment proposition centered on the value of its brand within a specific niche market. The core investment thesis rests on the company's ability to successfully leverage the Scores trademark through licensing agreements to generate consistent and growing royalty revenue. The post-COVID environment, with reopened clubs and reported increased interest in the brand, offers a potential tailwind.

However, the significant financial challenges, including a substantial accumulated deficit and working capital deficit, coupled with the explicit going concern warning, underscore the precariousness of the current situation. The company's future is heavily reliant on the execution of its licensing strategy and its ability to secure the necessary working capital. Investors must weigh the potential for a turnaround driven by brand leverage against the very real risks of insufficient liquidity, internal control weaknesses, and the inherent volatility of the adult entertainment sector. The lack of specific quantitative guidance makes assessing the potential upside challenging, placing the focus squarely on management's ability to navigate the immediate liquidity crisis through successful licensing expansion and potentially external financing.