Note 2. Summary of Significant Accounting Principles

BASIS OF PRESENTATION

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company items and transactions have been eliminated in consolidation.

Cash and cash equivalents

The Company considers all highly liquid temporary cash investments, with a maturity of three months or less when purchased, to be cash equivalents. There are times when cash may exceed $250,000, the FDIC insured limit.

Fair Value of Financial Instruments

The carrying value of cash, trade receivables, prepaid expenses, other receivables and accrued expenses, if applicable, approximate their fair values based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value.

The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Licensee receivable and reserves

Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Allowance for doubtful accounts had a balance of $-0- and $-0- for the December 31, 2014 and 2013 periods. In reviewing any delinquent royalty or note receivable, the Company considers many factors in estimating its reserve, including historical data, experience, customer types, credit worthiness, financial distress and economic trends. From time to time, the Company may adjust its assumptions for anticipated changes in any of above or other factors expected to affect collectability.

Stock Based Compensation

The Company accounts for the plans under the recognition and measurement provisions of Accounting Standards Codification (ASC) Topic 718 Compensation – Stock Compensation. The standard requires entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award.

There were no stock options or warrants issued during the years ended December 31, 2014 and 2013, hence the Company has recorded no compensation expense. If the Company were to issue equity rights for compensation, then the Company would recognize compensation expense under Topic 718 over the requisite service period using the Black-Scholes model for equity rights granted.

Revenue recognition

The Company records revenues earned as royalties under its license agreements as they are earned over the term of the license agreements. The terms of the royalties earned under these license agreements vary from a flat monthly fee to a percentage of the revenues of the licensee on a monthly basis. If a license agreement is terminated then the remaining unearned balance of the deferred revenues are recorded as earned if applicable.

As a result of the tenuous nature of the gentlemen’s club industry in general and the resulting financial instability of several of our new licensees the company has implemented a policy of recognizing revenue for these specific entities as it is received rather than when it is earned. Once our relationship with them has been more firmly established and payments have been made regularly and on time we will report these revenues when earned.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10-25, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company has net operating loss carryforwards of approximately $4,675,000, which expire in the years 2018 through 2034. The related deferred tax asset of approximately $4,675,000 has been offset by a valuation allowance. The Company’s net operating loss carryforwards have been limited, pursuant to the Internal Revenue Code Section 382, as to the utilization of such net operating loss carryforwards due to changes in ownership of the Company over the years. We have determined the Company has lost $1,450,000 of net operating loss carryforwards or $635,000 of the deferred tax asset due to the change in ownership in 2001. The Company is currently undertaking a study to determine the value of the Company at a second ownership change in 2009. Upon finalization of the study we will determine how much of a deferred tax asset should be recorded from the remaining net operating loss carryforwards.

	2014		2013
Deferred tax assets:
Net operating loss carryforward	$	1,850,000	$	2,690,000
Temporary – legal accrual		-		-

Less valuation allowance		(1,850,000)		(2,690,000)
Net deferred tax asset	$	-	$	-

The reconciliation of the Company’s effective tax rate differs from the Federal income tax rate of 34% for the years ended December 31, 2014 and 2013, as a result of the following:

	2014		2013
Tax (benefit) at statutory rate	$	153,000	$	68,000
State and local taxes		46,000		21,000
Permanent differences		-		-
Change in valuation allowance		(199,000)		(89,000)
Tax due	$	-	$	-

The past three years of tax returns remain subject to examination by the relevant tax authorities.

Income per Share

Under ASC 260-10-45, “Earnings Per Share”, basic income (loss) per common share is computed by dividing the income (loss) applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted income (loss) per common share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Accordingly, the weighted average number of common shares outstanding for the years ended December 31, 2014 and 2013, respectively, is the same for purposes of computing both basic and diluted net income per share for such years.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

The Company is charged a monthly fee for operating expenses and overhead as a result of the use of a shared facility and employees of an affiliate.

Concentration of Credit Risk

The Company earns predominately royalty revenues and to a lesser extent merchandise sales from 14 licensees.

With regards to 2014, concentrations of sales from 6 licensees range from 11% to 18%, totalling 88%.There are receivables from 3 licensees ranging from 18% to 34%, totalling 71%. Included in theses amounts for 2014 were sales from 2 licensees considered related parties representing 11% and 13% of sales. There are receivables from 3 licensees that are considered related parties of 18%, 18% and 34%.

With regards to 2013, concentrations of sales from 5 licensees range from 16% to 21%, totalling 93%.There are receivables from 3 licensees ranging from 13% to 51%, totalling 79%. Included in these amounts for 2013 was 1 licensee considered a related party. Sales from this licensee were 21%. There is a receivable from 1 related party licensee of 51%.

New Accounting Pronouncements

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.