Scores Holdings (SCRH)

[badman]

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Only a matter of time now..............

http://seekingalpha.com/instablog/17977982-nicholas-bodnar/4879829-scores-holdings-back-alley-arm-pit-security-worth-speculative-bet

Scores Holdings- Back Alley Arm-Pit Security Worth A Speculative Bet 6 comments
May 6, 2016 11:11 AM | about stocks: SCRH


Made famous by Howard Stern and visited by popular culture celebrities, Scores New York, has been an iconic figure in tucked away in the armpit of society. Today Scores New York still exists, yet the infamous brand is now being used across the nation.

Scores Holdings (OTCPK:SCRH) provides licenses, trademarks and other intellectual property to fine gentleman's nightclubs across North America. The number of clubs have started to aggressively grow in the past few years.



Ticker

SCRH


Shares Outstanding

165.18M


Market Cap

1.65M


Enterprise Value

1.13M


Revenues

1.18M


EBITDA

131.37K


Net Income

83.83K


Cash

515.99K


Debt

0.00


EV/Revenues

0.95


EV/EBITDA

8.60


P/E

19.68


Auditor

RBSM LLP


All numbers taken from recent financials

Investment Thesis

Ethics and morals were created by men; the same men who participated in genocide, segregation, subjection and worldwide eradication. It can then be held true that ethics are relative to the individual and his or her own placement in time.- Anonymous

SCRH's business model is slimy, shady, and controversial, to say the least. However, if you can get over your personal morals, there may be opportunity in this sweaty armpit security. :) :) :)

In the past few years the company has experienced double digit top line growth, with high expectations of continual growth in market share. With the recent accumulation in cash, the company has enough monetary resources to hit the road running; branding back alley nightclubs with the famous Scores Trademark.

With at least five new clubs to be opened in 2016, and the recent employment of a Club License Director, there is probable inclination of future top line growth coupled with bottom line expansion. Additionally, with the recent 52-week low, pressurized from rickety governance decisions, an entry at the current price looks compelling.

Valuation

Worry about being better; bigger will take care of itself. Think one customer at a time and take care of each one the best way you can. - Gary Comer

The sole thesis for an investment in SCRH lies in rapid top line expansion, translatable into bottom line improvements; the simple keystone of many investment decisions.

Not only is the investment thesis relatively simple to understand, but so is the business model; the company sells the Scores Trademark and collects royalty revenues.

With the absolute low amount of nightclubs licensed, even a meager incremental increase has very real potential to translate into double digit top line growth.

(click to enlarge)

Source: Created By Nicholas Bodnar

Using elementary mathematics, taking the number of nightclubs licensed and dividing it by total revenues, we can see that the company earns around ~$59,000/licensed nightclub (does not take into consideration Scoreslive). With known plans of licensing at least five new nightclubs in 2016, revenues have a chance of growing by $295,000, to $1,475,064, or a 24.99% increase.

I have provided a valuation model below with assumptions of $295,000 in incremental growth per year, with a slight expansion of the FCF margin going forward.



Source: Created By Nicholas Bodnar

With having almost 99% of costs situated in G&A, a good chunk of future revenue growth will funnel directly into FCF. Remember, back in 2014, the company was pulling in 42% FCF margins. As long as G&A expenses stay relatively flat ( which is the key and one of the biggest risks), the value of the underlying business should continue to increase in value.

In support of further value, the company has $400,000 in NOLs, in which they can use $30,000/year, to somewhat shield their bottom line. Furthermore, the company has zero long-term debt, which helps to shield investors from balance sheet risk and absolute capital loss. At the current 52-week low, strong balance sheet (cash equals 31% of the market cap) and expected revenue and FCF growth, a small 1% position may be warranted.

Risks

The biggest risks in my opinion derive themselves from the underlying governance and managerial incentives. Before jumping into the related party transactions and governance concerns, let's back the story up a bit.

For the longest time, management did not pay themselves salaries, which helped keep G&A at basement levels. However, in the recent year, management decided it was time to start paying themselves…



Source: Recent Annual Report

These are respectable and modest salaries that do not damper management's integrity. However, looking deeper into the exponential rise of G&A, things start to get a little shady.

First, for as long as the financial eye can see, SCRH was paying Metropolitan Hardware a fee of $30,000/year (for Robert's and Howard's services). In 2015, this fee increased to $90,000/year. For investors who don't know, Metropolitan Hardware is a business owned entirely by Robert, the CEO. Interestingly, the company also leases office space from Westside Realty of New York for $2,500/month or $30,000/year. Robert owns 80% of Westside.

Adding the related party transactions and salaries, SCRH is funneling $430,000 out to its management in some way or another. These related party transactions are a risk, especially since we do not know management's incentive. However, let's bring in the devil's advocate for a minute.

First management did not take any type of salary since Robert took over in 2010, until 2015; which somewhat alludes to managements incentives. Secondly, Stephen Sabbeth, was recently hired in 2015, in order to bring in more licenses, thus more revenue for the company as a whole. Thirdly, with only three employees, the $430,000 being funneled out in G&A, really represents a $143,333 salary for each employee. Finally, Robert own 53.8% of the common stock. Given his majority position, it should be in his best interest to create shareholder value.

Overall, related party transactions are not really something I like to see. Although, when put into another perspective, the recent stock correction from ~$0.05/share to ~0.01/share, may have been overblown, by investors hoping management would continue to pay themselves practically nothing.

The other notable risk is that the company changed auditors recently.

Conclusion

With the recent employment of Sabbeth (first ever License Director) and a known expected five new clubs opening for 2016, revenues have a very probable outcome of growing at a double digit rate. Furthermore, the company has zero long-term debt and a strong balance sheet, which will help to protect against absolute capital loss. Finally, depending on how good Sabbeth is at bringin g new clubs in, I am expecting a 56-105% return in the next 24-36 months, based on the recent enterprise value.

Note: I have sent management several emails and several voicemails. Until I speak with them, and understand their incentives, a position in Scores cannot represent over 1% of my portfolio. If management is contacted, I can provide further updates on my thoughts.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

Disclosure: I am long SCRH.

Other Sources

Manager of Score's West FB page.

Scores Holding Company FB Page.

Scores West FB Page.

Scores Indiana FB Page.

Scores Houston FB Page.

Scores North Carolina FB Page.

Scores Jacksonville FB Page.

Scores Savannah FB Page.

Scores New York FB Page.

Scores Detroit FB Page.

Scores Chicago FB Page.

Scores Baltimore FB Page.

Scores Atlantic City FB Page.

Other Websites

Scores Baltimore Debut with Howard Stern Reference (2006).

3/18/16 Pure Gold Carry Club in North Carolina is rebranded Scores.

May 23 rd, 2012 Scores New Orleans Article/Review

March 7 th, 2008 Scores West gets liquor license taken due to prostitution.

Brief Scores Bio with popular culture references.

Feb 20 th, 2006, Scores Prior CEO (Goldring) charged with dodging taxes.

June 30 th, 2003, names of famous people who have attended Scores.

Scores performers on the Howard Stern show.

9/6/2008 USA Today Scores NY Shut Down, Mafia Kickbacks and Issues.

July 6 th, 2008, Confessions of an Ex Scores Stripper.

5/19/14, Robert Gans sues Observer and The Real Dad.

July 22 nd, 2013, Robert Gans interview over first strip club in a US cansion (Trump Taj Mahal)

July 22 nd, 2014, Robert Gans sues Deutsche Bank.

September 30 th, 2006, Robert Gans buys Chicago real estate.

Contacts

Robert Gans (Chairman, President and CEO)

Howard Rosenbluth (CFO

Stephen J. Sabbeth director of acquisitions and licensing

Martin Gans Director (Roberts brother)

Related Parties

Metropolitan Lumber Hardware and Building Supplies, Inc. Robert Owns

I.M. Operating LLC ("IMO"). Robert owns 72%

Swan Media Group, Inc. Robert Owns 80%

Mitchell's East LLC. Robert Owns (All of Roberts shares are held under this entity)

Westside Realty of New York, Inc. (NYSE:WSR) - Robert owns 80%. Company leases an office for $2,500/month from Westside.

Star Light Events LLC- Robert owns 92% and Howard owns 1%.

Penthouse is a related party competitor. Robert owns 84%.


Disclosure: I am/we are long SCRH.

Stocks: SCRH

Hey, I have been saying this for years. I am long SCRH, balls deep long in the SCRH. I will be repaid for my long term investment. Soon Soon Soon....................Soon lots of new investors will DISCOVER scrh and I can go back to doing what I do best, BUY SELL BUY SELL and BUY AGAIN, all for profit.....